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Stepan Company (NYSE:SCL)
Q3 2021 Earnings Call
Oct 20, 2021, 10:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Greetings, and welcome to the Stepan Company, Q3 2021 Earnings Call. [Operator Instructions]. Afterwards, we will conduct a question-and-answer session. [Operator Instructions]. As a reminder, this conference is being recorded on Wednesday, October 20, 2021.
I would now like to turn the conference over to Luis Rojo, Vice President, and Chief Financial Officer. Please go ahead.
Luis E. Rojo — Vice President and Chief Financial Officer
Good morning, and thank you for joining Stepan Company, third quarter 2021 financial review. Before we begin, please note that information in this conference call contains forward-looking statements, which are not historical facts. These statements involve risks and uncertainties that could cause actual results to differ materially, including, but not limited to prospects for our foreign operations, global and regional economic conditions and factors detailed in our Security and Exchange Commission filings.
Whether you’re joining us online or over the phone, we encourage you to review the investor slide presentation, which we have made available at www.stepan.com under the Investors section of our website. We make these slides available at approximately the same time as was the earnings release is issued, and we hope that you find information and perspective helpful.
Now, with that, I would like to turn the call over to Mr. Quinn Stepan, our Chairman and Chief Executive Officer.
F. Quinn Stepan — Chairman and Chief Executive Officer
Good morning, and thank you all for joining us today to discuss our third quarter and year-to-date earnings. Although many parts of the world are slowly improving, the Delta Variant continues to spread, and vaccine rates in much of the developed world have stalled. Global supply chain disruptions are impacting commerce and many of the products we all use every day have been impacted. At Stepan, our team continues to navigate through the turbulent environment to help our customers serve the market.
Adjusted third quarter net income was $36.4 million flat with prior year. The negative impact of the global supply chain disruptions and inflationary pressures was offset by one-time tax benefits. Year-to-date adjusted net income was $121 million or $5.20 per diluted share. Both adjusted net income and adjusted earnings per share were up 22% versus the first nine months of 2020. Surfactants was also negatively impacted by lower consumer demand for cleaning, disinfection and personal wash products which have dropped since the pandemic peak in 2020.
In the third quarter, each of our Company’s three global business segments was negatively affected by raw material price inflation and significant supply chain disruptions including raw material shortages and logistics constraints. Surfactant operating income was down 16% largely due to higher North American supply chain cost, driven by inflation, higher planned maintenance costs and the $2.2 million insurance recovery related to the Millsdale plant in 2020.
Our Polymer operating income was down 12%, mostly due to the non-recurrence of the insurance recovery and the compensation received from the Chinese government in the third quarter of 2020. Global Polymer sales volume rose 27% and was largely driven by the INVISTA acquisition. Our Specialty Product business rose by 53%, and was mainly due to order timing differences within our food and flavor business.
Our Board of Directors declared a quarterly cash dividend on Stepan’s common stock $0.335 per share payable on December 15, 2021. With this 9.8% increase, Stepan has now increased and paid its dividend for 54 consecutive years.
The Board also authorized the Company to repurchase up to $150 million of its common stock, further demonstrating our commitment to deliver stockholder value through disciplined capital allocation. Our strong balance sheet and cash generation will allow us to invest in our current business and pursue strategic opportunities while we return capital to our stockholders.
Luis will now share some details about our third quarter and year-to-date results.
Luis E. Rojo — Vice President and Chief Financial Officer
Thank you, Quinn. My comments will generally follow the slide presentation. Let’s start with the Slide 4 to recap the quarter. Adjusted net income for the third quarter of 2021 was $36.4 million or $1.57 per diluted share, basically flat versus the third quarter of 2020. Because adjusted net income is a non-GAAP measure, we provide full reconciliations to the comparable GAAP measures. And this can be found in Appendix 2 of the presentation, and table 2 of the press release.
Specifically, adjustment to reported net income this quarter consists of adjustment for deferred compensation, environmental reserves increase, and minor restructuring expenses. Adjusted net income for the quarter exclude deferred compensation income of $1.1 million or $0.05 per diluted share compared to deferred compensation expense of $2.6 million or $0.11 per diluted share in the same period last year. The deferred compensation numbers represent the net expense related to the Company’s deferred compensation plan as well as cash-settled stock appreciation rights for our employees. Because these liabilities change with the movement in the stock price, we exclude these items from our operational discussion.
Slide 5 shows the total Company earnings bridge for the third quarter, compared to last year’s third quarter, and breaks down the increase in adjusted net income. Because this is net income, the figures noted here are on an after-tax basis. We will cover each segment in more detail. But to summarize, Surfactants and Polymers were down, while Specialty Product was up versus the prior year.
Corporate expenses and all others were slightly higher due to inflation. The Company’s effective tax rate was 20% for the first nine months of 2021 compared to 24% in the same period last year. This year-over-year decrease was primarily attributable to a favorable tax benefit recognized in the third quarter of 2021. The tax benefits are related to the merger of the Company’s three Brazilian entities into a single entity and more favorable R&D tax credits. We expect the full year 2021 effective tax rate to be in the 20% to 22% range.
Slide 6, focuses on Surfactants segment results for the quarter. Surfactant net sales were $388 million, a 16% increase versus the prior year. Selling prices were up 20% primarily due to improved product and customer mix as well as the pass-through of higher raw material costs. The effect of foreign currency translation positively impacted sales by 2%.
Volume decreased 6% year-over-year. Most of this decrease reflect the lower volume sold into the North America consumer product end market as demand for cleaning, disinfection and personal wash products dropped from the peak of the pandemic. This was partially offset by very strong growth in our functional product end markets and solid growth in the industrial and institutional cleaning market.
Surfactant operating income for the quarter decreased $6.7 million or 16% versus the prior year, primarily due to supply chain disruption impacts and the one-time insurance payment of $2.2 million recognized in the third quarter of 2020. We estimate the supply chain disruption had a negative impact of approximately $4 million during the current quarter. We implemented price increases in October to continue recovering our margins. Latin America operating results were lower due to planned maintenance and expansion activities. Europe results increased slightly due to higher demand in functional products, partially offset by a decrease in consumer products.
Now turning to Polymers on Slide 7, net sales were $199 million in the quarter, up 70% from prior year. Selling prices increased 44% primarily due to the pass-through of higher raw material costs. Volume grew 27% in the quarter driven by 33% growth in global rigid polyol. This volume growth is mostly related to the INVISTA acquisition. Global rigid polyol volume excluding INVISTA was flat, driven by supply chain disruptions. Higher demand within the Specialty polyol business also contributed to the volume growth.
Polymer operating income decreased $2.6 million or 12%, driven by one-time benefits of $4 million in the third quarter of 2020 and significant supply chain disruptions in the current quarter. We estimate the supply chain disruptions had a negative impact of approximately $3 million during the quarter.
North America polyol results decreased due to one-time benefit recognized in the third quarter of 2020 and supply chain disruptions, partially offset by higher volume. In October, we implemented price increases in the market to recover our margins. Europe results increased driven by the INVISTA acquisition. China results decreased due to the one-time benefit recorded in the third quarter of 2020 as well as higher supply chain costs.
The Specialty Product net sales were up 15% driven by volume up 9% between quarters. Operating income increased $0.8 million or 53% due to order timing differences within our food and flavor business and improved margins within our MCT product line.
Moving on to Slide 8. Our balance sheet remains strong, and we have ample liquidity to invest in the business. Our leverage and interest coverage ratios continues at very healthy levels. We had a strong cash from operations in the first nine months of 2021 which we have used for capital investments, dividends, share buybacks and working capital given the strong sales growth and raw material inflation. We executed a $50 million private placement note at a very attractive and fixed interest rate of around 2%.
We will use a new cash to fund our organic and inorganic growth opportunities and for other general corporate purposes. For the full year, capital expenditures are expected to be in the range of $200 million to $220 million. This new estimate includes today’s announced alkoxylation investment at our Pasadena, Texas facility.
Beginning on Slide 10, Scott will now update you on our 2021 strategic priorities.
Scott R. Behrens — President and Chief Operating Officer
Thank you, Luis. As we wrap up the first nine months of 2021, we believe our business will remain relatively strong despite the supply chain challenges we and our customers are experiencing.
We continue to prioritize the safety and health of our employees as we deliver products that contribute to the fight against COVID-19. Consumer habits have changed and these new behaviors include the higher use of disinfection, cleaning and personal wash products. We believe our Surfactant volumes in the consumer product end market will remain higher versus pre-pandemic levels, however, lower than peak pandemic demand in 2020.
We are seeing institutional cleaning and disinfection volumes grow as economies around the world reopen and people demand higher standards for cleaning and disinfection in public settings. Our diversification strategy into functional markets continues to be a key priority for Stepan. During the first nine months of the year, global agricultural volume increased double-digits. High commodity prices for corn and soybeans coupled with higher planted acreage in the 2021 growing season drove the demand for crop protection products in North America.
Latin America and Asia sales continue to grow in the post-patent pesticide segment with new products being launched throughout the world. Oilfield volume was up strong double-digits during the first nine months of the year due to higher oil prices and a depressed 2020 base. We remain optimistic about future opportunities in this business as oil prices have recovered to the $80 per barrel level, and we continue to promote…