Stepan Reports Fourth Quarter and Full Year 2023 Results

NORTHBROOK, Ill., Feb. 20, 2024 /PRNewswire/ — Stepan Company (NYSE:SCL) today reported:

Fourth Quarter Highlights

The Company incurred a reported net loss of $1.2 million, or negative $0.05 per diluted share, versus $10.8 million of reported net income, or $0.47 per diluted share, in the prior year.  Adjusted net income* was $7.5 million, or $0.33 per diluted share, versus $13.5 million, or $0.59 per diluted share, in the prior year.  Total Company sales volume increased 3% versus the prior year.
Surfactant operating income was $14.8 million versus $21.8 million in the prior year.  This decrease was primarily due to lower unit margins that were partially offset by a 1% increase in global sales volume.  The lower unit margins primarily reflect less favorable product mix.  Strong double digit volume growth within the Personal Care end market and to our Distribution partners was largely offset by lower demand within the Agricultural end markets in the Americas due to continued customer and channel inventory destocking. 
Polymer operating income was $12.6 million versus $3.0 million in the prior year. This increase was primarily due to a 10% increase in global sales volume.  Global Rigid Polyols grew 12% due to strong double digit growth in North America and Europe.
Specialty Product operating income was $2.8 million versus $6.6 million in the prior year.  This decrease was primarily attributable to lower unit margins and sales volume within the medium chain triglycerides (MCT) product line. 
The Company increased its quarterly cash dividend in the fourth quarter of 2023 by $0.01 per share, or 3%, marking the 56th consecutive year that the Company has increased its cash dividend to stockholders.
EBITDA** was $25.8 million during the fourth quarter of 2023 versus $36.6 million in the prior year.  Adjusted EBITDA** was $37.5 million versus $40.0 million in the prior year.   
The Company recorded $6.0 million of after-tax restructuring and impairment expenses in the quarter, inclusive of $2.3 million associated with workforce reductions and $3.7 million of non-cash asset and goodwill/intangible impairments.  As previously announced, the Company expects to realize $50.0 million of pre-tax cost savings in 2024 to help offset inflationary pressures, increased expenses related to the Company’s new Pasadena alkoxylation investment and higher incentive-based compensation expenses.
Free cash flow for the quarter was a positive $22.3 million and is comprised of $69.0 million of cash generated from operations less $46.7 million of capital expenditures (Free cash flow is a non-GAAP measure).

*  Adjusted net income and adjusted earnings per share are non-GAAP measures which exclude deferred compensation income/expense, cash-settled stock appreciation rights (SARs) income/expense, certain environmental remediation-related costs as well as other significant and infrequent/non-recurring items. See Table II for reconciliations of non-GAAP adjusted net income and adjusted earnings per diluted share.

**  EBITDA and adjusted EBITDA are non-GAAP measures.  See Table VI for calculations and GAAP reconciliations of EBITDA and adjusted EBITDA.

Full Year Highlights

Reported net income for the full year 2023 was $40.2 million, or $1.75 per diluted share, versus a record $147.2 million, or $6.38 per diluted share, in the prior year.  Adjusted net income* was $50.7 million, or $2.21 per diluted share, versus a record $153.5 million, or $6.65 per diluted share, in the prior year.  Total Company sales volume declined 11% versus the prior year primarily due to significant customer and channel inventory destocking across most of the Company’s markets.
Cash generated from operations during full year 2023 was $174.9 million, up $14.1 million or 9% versus 2022.  Free cash flow was negative due to $260.3 million of capital expenditures (Free cash flow is a non-GAAP measure and reflects net cash provided by operations less capital expenditures).

“The Company had a challenging 2023 due to a slow down in demand across most end use markets and significant customer and channel inventory destocking.  While we believe the negative impacts of destocking are mostly behind us, we continue to experience significant destocking within our agricultural business and expect this to continue through the first half of 2024,” said Scott Behrens, President and Chief Executive Officer.  “Specific to the fourth quarter, overall volume increased 3% versus the prior year driven by double digit growth in Rigid Polyols volumes at improved margins.  Surfactants experienced strong volume growth in Personal Care, Industrial Cleaning and to our Distribution partners.  Surfactant unit margins were lower versus the prior year due to a less favorable product mix and actions taken to recover share loss in Latin America due to lower priced imported products.  MCT unit margins within our Specialty Product segment were lower year over year as we worked through the remainder of our high-cost inventory in a competitive market environment.  We are pleased that actions to control expenses and lower inventories, coupled with lower sequential capital spending, led to $22.3 million of positive free cash flow in the quarter.”

Financial Summary

Summary of Fourth Quarter Adjusted Net Income Items

Adjusted net income excludes non-operational deferred compensation income/expense, cash-settled SARs income/expense, certain environmental remediation costs and other significant and infrequent or non-recurring items.

Deferred Compensation:  The 2023 fourth quarter reported net income includes $2.2 million of after-tax expense versus $2.0 million of after-tax expense in the prior year. 
Cash-Settled SARs:  These management incentive instruments provide cash to participants equal to the appreciation on the price of specified shares of Company stock over a specified period of time.  Because income or expense is recognized merely on the movement in the price of Company stock it has been excluded, similar to deferred compensation, to arrive at adjusted net income.  The current year fourth quarter reported net income includes $0.1 million of after-tax expense versus $0.2 million of after-tax expense in the prior year. 
Business Restructuring and Asset Impairments:  The 2023 fourth quarter reported net income includes $4.6 million of after-tax expense versus $0.1 million of after-tax expense in the prior year.  The 2023 fourth quarter includes $2.3 million of after-tax restructuring expense associated with workforce reductions and $2.3 million of non-cash after-tax expense associated with asset impairments. 
Goodwill and Other Intangibles Impairment:  The 2023 fourth quarter reported net income includes $1.4 million of non-cash after-tax goodwill/intangible impairment expense associated with the Company’s Colombia and Lipid Nutrition businesses.   
Environmental Remediation – Both the 2023 and 2022 fourth quarter reported net income include $0.4 million of after-tax expense. 

Percentage Change in Net Sales

Net sales in the fourth quarter of 2023 decreased 15% year-over-year primarily due to lower selling prices that were mainly attributable to the pass-through of lower raw material costs, less favorable product/customer mix and competitive pressures.  These lower selling prices were partially offset by a 3% increase in global sales volume and the favorable impact of foreign currency translation.

Segment Results 

Total segment operating income for the fourth quarter of 2023 decreased $1.2 million, or 4%, versus the prior year quarter.  Total segment operating income for full year 2023 was down $130.9 million, or 48%, versus the prior year.

Surfactant net sales were $369.5 million for the quarter, a 19% decrease versus the prior year.  Selling prices were down 22% primarily due to the pass-through of lower raw material costs, less favorable product/customer mix and competitive pricing pressures in Latin America.  Sales volume increased 1% year-over-year primarily due to strong double digit growth within the Personal Care and Industrial Cleaning end markets, largely attributable to our recent low 1,4 dioxane investments, and higher demand from our Distribution partners.  This growth was largely offset by lower demand within the Agricultural end markets due to continued customer and channel inventory destocking.  Foreign currency translation positively impacted net sales by 2%.  Surfactant operating income for the quarter decreased $6.9 million, or 32%, primarily due to lower unit margins.  The lower unit margins reflect less favorable product/customer mix and increased competitive pricing pressures in Latin America.  Higher pre-operating expenses associated with the Company’s new alkoxylation production facility that is being built in Pasadena, Texas were also a headwind during the quarter.
Polymer net sales were $147.3 million for the quarter, a 1% decrease versus the prior year.  Sales volume increased 10% in the quarter, including a 12% increase in global Rigid Polyols and higher demand within the Specialty Polyols business.  Rigid Polyols experienced strong growth in all regions.  Selling prices decreased 15%, primarily due to the pass-through of lower raw material costs.  Foreign currency translation positively impacted net sales by 4%.  Polymer operating income increased $9.6 million, or 322%, primarily due to the 10% increase in global sales volume.
Specialty Product net sales were $15.4 million for the quarter, a 37% decrease versus the prior year.  Sales volume was down 27% versus the prior year while operating income decreased $3.9 million, or 58%.  The decline in operating income was primarily attributable to lower unit margins and sales volume within the MCT product line.  The lower unit margins were primarily due to high-cost raw material inventory and competitive pricing pressures.

Consolidated EBITDA was $25.8 million for the quarter, a 30% decrease versus the prior year.  Adjusted EBITDA was $37.5 million, down 6% versus the prior year.

Corporate Expenses

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