Stepan Company Reports Decline in Sales Volume and Earnings, Foresees Recovery in 2024

Stepan Company’s Q3 2023 Earnings Call Highlights

Stepan Company, a leading specialty chemicals manufacturer, recently announced a decrease in sales volume and earnings during their Q3 2023 earnings call. The company’s adjusted net income for the quarter was $14.7 million, a significant drop compared to the previous year’s $46.3 million. Despite these challenges, Stepan remains optimistic about its business and its ability to generate cash.

Key Takeaways from the Call

• The company’s surfactant and specialty product unit margins experienced a downturn due to an unfavorable product mix, pricing pressure in Latin America, and high-cost inventory.
• Stepan made significant progress in reducing inventory levels by $55 million, aligning with their cash objectives.
• The company successfully completed its low 1,4 dioxane capital investments and continued its alkoxylation project in Pasadena, emphasizing their focus on regulatory compliance and expansion.
• During the quarter, Stepan paid dividends of $8.2 million to shareholders and declared a quarterly cash dividend of $0.375 per share.
• Despite challenges anticipated in Q4 2023, the company expects volumes and margins to improve in 2024, attributing this to market recovery, strategic initiatives, and cost reduction activities.

Capital Forecast and Expansion Efforts

During the call, Stepan provided updates on their 2024 capital forecast, the progress of their alkoxylation production facility in Pasadena, Texas, and their efforts to meet new regulatory limits on 1,4 dioxane. The Pasadena plant is expected to be 75% complete by the end of the year and is scheduled to commence operations in mid-2024.

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Positive Growth Trajectory and Diversification Strategy

The company also discussed its positive trajectory in the Polymer space and its diversification strategy in China, which resulted in strong double-digit growth in Q3. Stepan highlighted that most of the high raw material prices have stabilized, except for the MCT business, which will still be impacted by lower fatty acid prices in Q4.

Addressing Gross Margin Cadence and Market Volatility

An analyst inquired about the company’s gross margin cadence and price cost, prompting Stepan to explain the pricing and raw material activities lag. Despite acknowledging market volatility, the company expressed confidence in their raw material costs, expecting more stability moving forward.

Stepan is bracing for challenges in Q4 2023; however, they remain confident in their ability to generate positive free cash flow and achieve earnings growth in 2024. The call concluded with closing remarks by Scott Behrens.