Stepan Co. (SCL) Tops Q1 EPS by 26c, Revenues Beat

Stepan Co. (NYSE: SCL) reported Q1 EPS of $1.04, $0.26 better than the analyst estimate of $0.78. Revenue for the quarter came in at $449.99 million versus the consensus estimate of $448.7 million.

First Quarter Highlights

• Reported net income was $27.5 million, or $1.18 per diluted share versus $25.0 million, or $1.07 per diluted share, in the prior year. Adjusted net income* was $24.2 million, or $1.04 per diluted share versus $30.6 million, or $1.31 per diluted share, in the prior year. Reported and adjusted net income were negatively impacted by the previously disclosed Millsdale Plant power outage. All production lines were fully operational prior to the end of the first quarter. The Company's insurance provider has acknowledged this incident is a covered event and the Company is pursuing insurance recovery for incremental supply chain expenses and business interruption. Excluding this one-time event, our adjusted net income was higher than previous year.
• Surfactant operating income was $36.2 million versus $37.2 million in the prior year. These results were attributable to strong volumes in the global consumer product end markets driven by increased demand for cleaning and disinfection products as a result of COVID-19, and a $4.2 million operating income improvement in Mexico. This was fully offset by higher supply chain expenses and lost sales associated with the incident at the Company's Millsdale facility and lower demand in the agricultural and oil field end markets. Global Surfactant sales volume decreased 1% versus the prior year.
• Polymer operating income was $7.5 million versus $12.1 million in the prior year. This decrease was primarily due to the negative impact of the incident at our Millsdale facility. Global Polymer sales volume decreased 9% versus the prior year driven by a significant reduction in phthalic anhydride volume. Global rigid polyol sales volume was flat as growth in North America and China was offset by lower demand in Europe as a result of COVID-19.
• Specialty Product operating income was $4.0 million versus $3.1 million in the prior year. This increase was primarily attributable to improved volume and margins within our MCTs product line driven by strong demand and pantry loading in the infant nutrition market, as a result of the COVID-19 outbreak.
• The Company had negative net debt at quarter-end as cash balances of $254.3 million exceeded total debt of $222.1 million. The Company has access to a committed $350.0 million revolving credit agreement and has $23.6 million of debt maturity scheduled in 2020. The Company believes it has sufficient liquidity levels to operate in the challenging near term environment.

"Today we are living in a difficult and uncertain world. We are all concerned about our health and the health of those we love. At Stepan, we are fortunate that many of the products we sell contribute to the fight against COVID-19. Our plants are running and most importantly, we have been able to keep our employees safe and healthy. We want to thank all our employees, customers, suppliers, government agencies and local communities that are helping us maneuver in this challenging environment," said F. Quinn Stepan, Jr., Chairman, President and Chief Executive Officer.

"Excluding the impact of the Millsdale power outage, the Company had a solid start to the year. Surfactant operating income, excluding the Millsdale incident, was up significantly. Global Surfactant sales volume declined 1% due to strong volumes in the global consumer product end markets driven by increased demand for cleaning and disinfection products, as a result of COVID-19, offset by lower demand within our Functional Product end markets. Mexican operations delivered strong year-over-year earnings growth. The Polymer business was down primarily due to the Millsdale power outage, impacting mostly our phthalic anhydride business. Rigid Polyol volume was flat as growth within North America and China was fully offset by lower demand in Europe as a result of COVID-19. Global Specialty Polyols results were up with all regions growing operating income year-over-year. Our Specialty Product business results were higher due to improved volume and margins within our MCTs product line due to pantry loading and higher demand in the infant nutrition market, as a result of the COVID-19 outbreak."

Outlook

"2020 is going to be a difficult year for the world, our country, our industry and Stepan Company. However, we believe that in the current environment our business is positioned better than most," said F. Quinn Stepan, Jr., Chairman, President and Chief Executive Officer. "With empty store shelves around the world for disinfection and cleaning products, our surfactant volume in the Consumer Products end markets should remain relatively strong. Falling raw material prices may provide an opportunity for margin improvement. With dramatically lower oil prices, demand for surfactants within the oil field end-markets will be down. We anticipate our Agriculture business should approximate last year. Overall, we believe our Surfactant business should remain relatively recession resistant.

Our Polymer business most likely will face a reduction in demand as people defer or cancel re-roofing and new construction projects. We also anticipate higher North American costs due to the Illinois River lock closure scheduled during the second half of 2020. The long term prospect of this business remains attractive as energy conservation efforts and more stringent building codes should increase demand.

Our Specialty Product business should continue to benefit from higher MCT demand in the infant nutrition market as pantry loading and retail restocking occur. Our flavor and pharmaceutical product sales should be stable for the year.

We have a strong Balance Sheet with significant cash on hand. We have a $350.0 million revolver which is essentially untapped. Our debt maturity in 2020 is only $23.6 million. Given our balance sheet and available liquidity, we are well positioned to operate in the challenging near-term environment. We have paid a dividend for 62 consecutive years and expect to do so in the future. Despite the difficult current environment, we remain optimistic about the future at Stepan Company and our ability to deliver value for our customers and shareholders."

For earnings history and earnings-related data on Stepan Co. (SCL) click here.

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