Q1 2022 Stepan Co Earnings Call

April 26, 2022

Okay.

Hum.

Okay.

[music].

Greetings and welcome to the Stepan Company first quarter 2022 results. During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session at that time, if you have a question.

That's the one followed by the four on your telephone if at any time during the conference you need to reach an operator, Please press star zero.

As a reminder, this conference is being recorded Tuesday April 26 2022.

I would now like to turn the conference over to Luis Rojo, Vice President and Chief Financial Officer. Please go ahead.

Good morning, and thank you for joining a stable compared with first quarter 2022 financial review before.

Before we begin please note that information in this conference call contains forward looking statements.

Got it all historical facts please.

Those statements involve risks and uncertainties that could.

<unk> actual results to differ materially, including but not an easy process for our foreign operations.

Economic conditions and factors Daniela, Thank you and again from the supply.

Joining us online or over the phone we encourage you to review that based on our slide presentation.

<unk> available at Www <unk> com under the investors section of our website, we make these slides available at approximately the same time as when the earnings release is issued.

And we hold 75 informational perspective health.

With that I would like to turn the call over to Mr. Scott <unk>, our president and New Chief Executive Officer yesterday, we become the fourth CEO .

The first known followed and founding CEO Stefan company Congratulations Scott.

Good morning, and thank you for joining us today to discuss our first quarter results.

I will share our first quarter highlights and strategy outlook and Luis will provide additional details on our financial results.

The first quarter continuing to be a challenging operating environment.

<unk> raw material and transportation constraints cost inflation and the emergence of a new COVID-19 variant were all headwinds against the business. However, I am proud about how our team worked through these challenges to deliver solid results for the first quarter.

Reported net income was a record $44 8 million or.

Our $1 93 per diluted share while adjusted net income was $47 million or $1 76 per diluted share representing the third best quarter ever.

Adjusted net income basis.

Reported surfactant operating income reached a record of $53 $8 million led mainly by better product and customer mix, which offset inflationary cost pressures challenges imposed by global supply chain and the 1% decrease in surfactant volume.

Our polymer business was affected by external supply chain disruptions and a power outage in early January at our mill scale player that impacted operations and led to a force majeure declaration for select products.

Our operations team did a good job re establishing production in February .

Which allowed us to lift the force majeure in early April .

On a global basis polymer sales volume increased due to strong underlying base business and one extra month of sales from the <unk> acquisition, which closed at the end of January 2021.

Our specialty products business results were up due to order timing differences within our food and flavors business and a recovery of margins within our MCT product line.

Our board of directors declared a quarterly cash dividend on Stephens common stock of $33 five per share payable on June 15th 2022.

Stefan has increased its dividend for 54 consecutive years.

During the first quarter of 2022, the company paid $7 $5 million to shareholders in dividends and repurchased $10 million of Stephan stock comp.

The company has $140 $1 million remaining under the share repurchase program authorized by the board of directors.

We remain confident in the strength and diversity of our business and its ability to generate cash that will allow us to further invest in our current business pursue strategic M&A opportunities and return cash to our shareholders.

At this point I would like released to walk through a few more details about our first quarter results.

Thank you Scott My comments will generally follow the slide presentation at the start with slide four to recap the quarter.

Adjusted net income for the first quarter of 2022 were $47 million or $1 76 per diluted share versus $42 4 million.

$1 82 per diluted share for the first quarter of 2021.

Because adjusted net income is a non-GAAP measure we provide full reconciliations to their comparable GAAP measures can be found in appendix two of the presentation and table two of our press release.

Specifically adjusted net income this quarter excludes deferred compensation income of $4 $4 million compared to last year expanse of $1 $7 million.

So exclude minor changes what environmental reserves.

The deferred compensation figure representing the net income related to the company's deferred compensation plan as well as Scott said in his cell compensate sounds like for our employees.

Because these liabilities change with the movement in the stock price was glued this item from our operational discussion.

Slide five shows the total company's net income reached for the first quarter compared to the same quarter last year and breaks down the increase in net income.

Because this is net income the previous analyst year add on after tax basis.

We will cover each segment in more detail.

Summarize the fulfillment business was down while some factors on our specialty products offset slightly from the prior year.

Corporate expenses are no longer for lower during the quarter, mainly due to lower acquisition related expenses.

Company effective tax rate was 24, 6% in the first quarter of 2022 compared to 23, 6% in the same quarter a year ago.

This year over year increase was primarily attributable to a less favorable yogurt apical mix of income.

We expect the full year 2022 effective tax rate to be in the range of 24% to 26%.

Slide six focus on to the <unk> segment results for the quarter.

<unk> net sales were $468 million.

As 26% increase versus the prior year.

Prices increased by 29%, primarily due to the pass through of higher raw material costs and improved product and customer mix.

Foreign currency translation negatively impacted net sales by 2%.

Volume was down 1% due to lower demand for luxury products within the consumer products business.

This was mostly offset by a strong demand functional products institutional cleaning and personal care end market.

Volumes fall within tier two and tier three customer channel continues to perform well.

Both Brazil, and Europe results increased due to an improved product and customer mix driven by a foot all agricultural business.

It was partially offset by soft results in Mexican anomaly.

So in fact on operating income for the quarter was a record of $53 8 million slightly up versus prior year. This increase was driven by pricing and improved product and customer mix.

Which fully offset the effects of higher raw material prices and logistics costs supply chain challenges and a small volume decline.

Now turning to polymers on slide seven.

Net sales were $187 million up 24% from the prior year.

Enterprises was 26% higher primarily due to the pass through of higher raw material costs.

Foreign currency translation negatively impacted net sales by 4%.

Finally volume rose, 2% in the quarter, driven by 5% growth in global unit volume, which was partially offset by the 8% decline in PPA volumes. Following the power outage, we experienced on Vimeo plant.

Core net operating income decreased by $3 $8 million driven by North America.

This increase primarily reflects the power outage at our Neal plant.

Estimated negatively impacting operating income for a <unk> 5 million.

Europe results and could easily and by this acquisition and solid results in our base business.

The affordable business in China was essentially flat versus a comparable period, despite challenges with Goldman <unk> balance.

Turning to slide eight our balance sheet remains strong and we have ample liquidity to invest in the business our leverage and interest coverage ratio continues a very healthy level. The increase in cash reflects the increasing debt to fund our future growth project.

During the quarter, we deployed $138 million in cash via Capex investments dividend payments share repurchases and higher working capital requirements due to strong sales growth.

Beginning on slide nine as Scott will now update you on our 2020 to exit the priority.

Thank you Luis as we wrap up the first quarter of 2022, and despite unprecedented inflation and continued supply chain challenges, we managed to deliver a solid quarter.

The following two slides capture our strategic priorities and vision for a cleaner healthier and more energy efficient world with our customers' preferences in mind.

Our diversification strategy and our functional products continues to be a key priority for steffan.

Our global agricultural volumes increased high single digits in the first quarter.

High commodity prices for corn and soybeans, coupled with increased planted acreage drove a strong season for crop protection sales in North America.

Strong first quarter results in Asia are a result of continued growth as a post patent herbicide market and high commodity prices are driving increased planted acreage above major crops in Brazil.

Oilfield volumes increased mid single digits in the first quarter demand for our products used in oilfields, including bio sides remains robust as crude prices remained elevated at over $100 per barrel.

Raw material availability impacted our ability to deliver greater oilfield growth in the first quarter.

We continue the integration and supply chain planning of the kimco oil to multiply our product line, which we plan to relaunch in the second half of 2022.

We remain optimistic about future opportunities in this business as elevated crude prices should encourage increased oil production and the use of production and stimulation chemicals.

Our mills there continues to be one of our key priorities, we continue to accelerate investments in both expense and capex to improve productivity and increase capacity with debottleneck projects.

These investments will continue throughout the year.

We expect to see the benefits of our efforts and investments and build scale in the upcoming years.

Moving to slide 11, we have completed the integration of existing polyester polyol business and assets.

After closing the first full year full year of operations in January we delivered more than $23 million of EBITDA, achieving our third year financial target within the first year of ownership.

The acquired Investor site in Wilmington, North Carolina played a key supply continuity role during the first quarter build scale power outage. We are also evaluating potential investments at the Wilmington site to enable production of a broader range of products to support market growth and opportunities within our polymer business.

<unk>.

As discussed previously we are also increasing north American capability and capacity to produce either sulfates that meet new regulatory limits on one for the assay by the January 2023 deadline.

<unk> is a minor Brian byproduct generated in the manufacturer of these or sulfate surfactants, which are key cleaning and folding ingredients used in consumer product formulations step and we'll be prepared to supply customers with either sulfates that meet the new regulatory requirements.

I'm also pleased to share that in the first quarter, we broke ground on our new El constellation production facility at our site in Pasadena, Texas. This asset will be a flexible state of the art multi reactor facility with approximately 75000 tonnes of annual constellation capacity.

We expect plant startup in late 2023.

It will provide strategically located capacity and capability for long term specialty I'll Cox with growth across our strategic growth end markets, including agriculture, oilfield construction and household and institutional cleaning.

Full year capital spending is projected to be between 350 and $375 million inclusive of the one four dioxane constellation investments.

Given the strength of our balance sheet, we plan to continually identify and pursue acquisition opportunities that align with our growth and diversification strategy, including the addition of new platform Chemistries that can broaden our portfolio of sustainable offerings for our customers.

We continue to invest in our new fermentation product platform in February we opened our new fermentation laboratory to support and further accelerate our development efforts for <unk>, our first anticipated commercial Bios effective offering.

We believe this new bio based product family has significant opportunities and several important end markets for stepan, including agricultural chemicals consumer cleaning personal care and oilfield.

Our development and scale up activities remain on schedule.

Looking forward, we believe our surfactant volume and agricultural chemicals, and oilfield will remain strong as a result of high energy and crop prices we.

We see some improvement in supply chain constraints that should benefit consumer end use market demand.

However, consumer price inflation may negatively impact consumer cleaning and disinfection demand, particularly in the developing economies around the world.

Global demand for rigid polyol continues to recover from pandemic related delays and cancellations of re roofing and new construction projects. This recovery should position, our polymer business to deliver growth versus prior year.

We believe the long term prospects for rigid polyol remain attractive as energy conservation efforts and more stringent building codes are expected to continue.

We anticipate our specialty product business results will improve slightly year over year, but will be dependent on continued improvement in the availability of key raw materials.

In closing external supply chain challenges and inflationary pressures remain as headwinds within our business. However, we are cautiously optimistic about the balance of the year.

This concludes our prepared remarks.

At this time, we would like to turn the call over for questions to Jennifer. Please review the instructions for the question portion of today's call.

Thank you if you would like to register your question kindly press. The one followed by the four on your telephone you will hear three tome from to acknowledge your request. If your question has been answered and you would like to withdraw your registration. Please press the one followed by the Street.

Again, if you'd like to register a question. Please press the one followed by the four on your telephone keypad now.

Our first question comes from the line of Mike Harrison of Seaport Research Partners. Please go ahead Sir.

Hi, good morning, congratulations on a nice start to the year.

Thank you Mike good morning.

On a kind of a broad question to start with just trying to get a sense on the margin performance in the surfactants and polymers segment.

Are you feeling pretty good about where you are on the price cost dynamics and price costs going forward or as you look at how costs are progressed in March and into April or there is some additional inflationary pressures, so theyre going to be slow again.

We should think maybe create some margin pressure as we look at Q2 and Q3 compared to Q1 levels.

Yes, Mike I would say so far we've done a really good job with our pricing to stay.

Stay on top of the inflationary pressures.

But you bring up a great observation.

Inflation is continuing in Q2 and Q3.

We will continue to attempt to cover that with pricing.

And at some point as we said in our prepared remarks.

Consumer cleaning demand at some point may get impacted by the elevated pricing specifically in the developing world, but so far so so far we're doing a really good job in terms of covering the other cost inflation.

And let me itemize that.

You were also mentioning I mean, there is always lags right. So we are trying to capture all Bob but the inflation piece, it's not a stopping so we need to continue and we will always have some lag.

Also remember that there are some seasonality in some of our businesses throughout the year. So that also change the margin profile by quarter and so when you get to through Q4, you know that we have higher fixed costs on lower volumes typically in Q4, so margins by quarter.

Have certain seasonality that you can by year end is kind of the same pattern quarter after quarter.

Alright, and then in terms of the mills deal outage. It sounds like that's completely resolved and you're back up to full capacity.

Can you talk about the actions that you've taken there I know you talked a little bit about capacity increases are build sale.

Have you taken some actions to ensure that future power disruption don't lead to significant downtime again.

Yes, Mike So our team is actively now that production is back up and running at full rates.

Our team is focused on.

Making the necessary modifications and improvements in some of the infrastructure associated with the with the sites to ensure that power disruptions to <unk> steam disruptions do not impact operations to the to the extent that we were impacted in Q1. So it is a major priority for our site and we are investing the appropriate <unk>.

Ending two to make those improvements.

Let me add my that's why in our prepared remarks, we have been booking in the last few quarters about the investments that we have gone Niels both on Capex and expenses.

To insure.

That will fix everything that needs to be fixed amount and we are in pretty good shape. So as we said in the prepared remarks, most investments will continue throughout 2022.

Great and then in terms of the weakness that you guys saw in laundry within surfactant is that mostly an inventory work down or.

Starting to show some of the inflationary pressures are.

Impacting consumer demand and then I guess, maybe more broadly around inventory and surfactants do you feel like that inventory work down around some of the consumer particularly household cleaning products.

Has run its course at this point.

Yes, so Mike I would say that.

The softness that we're seeing in laundry is multifactorial in nature. One there still are significant raw material and transportation constraints that are existing in the.

The North American marketplace. So that's one element the second element is I do think some of the price inflation is impacting some of the consumers in the developing regions and having to make tough choices between.

Consumer products and fuel and food, so I think thats something that we need to watch out and then in terms of surfactant inventory levels across the.

China I chain I do agree with you Mike the we are seeing what I would call fairly robust demand.

From our customers and if you saw in our earnings release, our inventory values.

On our balance sheet or essentially flat.

Even though we've had significant cost inflation of raw materials. So inventories I think are well back in balance and from a step in perspective.

Not still where we need to get them up to.

Alright.

Question for me you kind of hinted that there could be some investments coming at this Wilmington side that you acquired with the deal.

Can you give us a sense of the scale of those investments that you're considering given that you have a number of other large projects that are in progress right now.

Yes.

Directionally, Mike not on the scale of the Pasadena and one for dioxane projects. What we're really trying to do is is make these site capable of producing the step in legacy polyol technology. So it's more more around storage tanks, and maybe some reactor modifications, but nothing on the <unk>.

Scale.

Pairing in Pasadena, and <unk> projects.

Alright, thanks very much.

Our next question comes from the line of Vincent Anderson with Stifel. Please proceed with your question.

Yes, thanks, and good morning.

So going back to Mike's question about Wilmington.

This thought earlier when I think about the <unk> assets are they are they producing.

<unk>.

<unk> portfolio that you would say is on par with the quality or functionality of your portfolio and then just looking past the Wilmington changes are there similar opportunities to make changes at the European plant.

Yeah. So.

Vince good morning.

The Investor technologies based off different raw materials than what the step and legacy is so what we're really trying to do is give the.

Business continuity across the asset so putting in additional storage tanks to handle the different raw materials that came from the step in legacy business versus the in Vista, So really trying to bake.

Wondered capabilities across both the north American and as well as the European manufacturing network with the <unk>.

That was purchased from investors as part of the acquisition. So it's really about giving more security of supply to our customers and the portfolio of complement very well he is different products with different functionality, but at the end is complementing the portfolio that we have and on providing our customers with more choices in terms of that point.

For Ya.

Okay alright, thank you.

Helpful.

Maybe just thinking about logistics for for a minute have you seen any outsized impact on your ability to move our ethylene oxide just given the more stringent transportation requirements or are your logistics issues continuing to just be more broad based and in line with what everybody is dealing with.

Yes, more and more broad based nothing specific to ethylene oxide.

Okay great.

Then.

Another quick one.

Do you have a lot of exciting products coming to market. You are also working on a couple of new operating assets.

Or was your ability to remain fully staffed or your experience in hiring additional skilled labor at least early on in these projects how has that been and how do you feel about the outlook for that.

Yes no.

No issues Vince that.

Come to mind.

We have a really engaged and motivated workforce aligned around our growth strategies and our ambitions and we're making great progress on both our innovation initiatives as well as our capital project execution.

Alright, excellent if I could ask just one more quick one we saw a pretty large.

Global chemical producer finish up and and deepen.

Announce some some additional debottlenecking and Theyre all conflict capacity.

Do you take that as an affirmation of your investment.

Or anything that you would be mindful of there may be fine tuning.

What do our plant can produce versus what they've invested in.

Yes, Mike It is an affirmation of the future growth of our constellation as a product line.

<unk>.

Stephens product line is I would say.

Not a significant overlap to the other announcements.

We are we are typically focused on the specialty and more niche products across a more specialty markets than the large commodity volume and products that I believe is driving the other investments.

Alright, perfect. That's all from me Thanks again.

As a reminder, if you wish to ask a question. Please press the one followed by the four on your telephone keypad.

Our next question comes from the line of Marco Rodriguez with Stonegate Capital Partners. Please proceed with your question.

Good morning, guys. Thank you for taking my questions.

For monarch, but I wanted to kind of good morning wanted to kind of a startup with a follow up on a prior question on the mills they plant work that Youre doing there.

Specific to the power disruption.

Hardening of the plant. If you will can you maybe talk a little bit more about any sort of specifics that youre doing around that how much of the capex spend that you've already outlined as related to that and if you can.

Kind of walk us through any sort of timelines or expectations on when that might be kind of completed and art. If you will.

Thank you Michael for the question look as we have said in the past the drivers of the Capex investment of <unk> <unk> from $375 million range that we have provided east Pasadena and low <unk> for dialysis.

We continue making investments in our infrastructure and meals zale and in other sites.

But those tend to be.

<unk> currently lower versus the older projects that we're talking so so we will keep we will keep making the changes.

Upgrading and improving our speed.

<unk>.

Sure.

Infrastructure assets in Melville, but nothing nothing today.

Nothing that we want to call out in terms of numbers.

Okay great.

And then if you can maybe talk a little bit more about your tier two and tier three customers. It sounds like you had some some pretty good strength in the quarter can you maybe talk about some of the drivers you may have seen in terms of that performance.

Yes, so once again I think driven.

Led by the agricultural and oilfield markets on a global basis.

It was a big big component of that 250, new customers acquired in the first quarter.

And then you've got the recovery of the China market as economies reopened around the world. So that hsni market can get very fragmented.

In some of the developing regions as well as in the developed regions are still good customer fragmentation, so thats, where most of the growth is being generated.

Got it and then switching here on the polymer side.

I know you've called out obviously, some disruptions in some of the carbon locked down but I was wondering if you can maybe help.

Help frame some of your expectations for the cold storage opportunities Youre seeing there given the kind of the near term and in that same vein. If maybe you can talk a little bit more from a granular standpoint.

What sort of demand picture or what you are hearing as it relates to the demand picture per kind of green buildings here in the shorter term not necessarily also long term. Thank you.

I would say Marco I would say as it relates to cold storage.

A lot of that.

Planned growth is in the China, China marketplace.

I think thats, a little bit uncertain right now with the Covid Lockdown and what China is experiencing with with Covid. So.

I think thats a pause for us at this point, we need to make sure China makes it through this.

This COVID-19 environment and those potential disruptions are not material.

As it relates to Green building, we're comfortable and confident that the infrastructure Bill passed here in the U S is going to drive additional demand for our rigid insulation materials.

Say at this point, we don't have a lot of details or specifics from our customers yet in terms of when they see when they could expect to see an uptick in <unk>.

And those.

<unk> Green energy driven <unk>.

Infrastructure build related.

Advancements, maybe a little bit too early to tell.

What I will add.

What I will add Michael is that we have spoken to in the past the backlog of projects in the region.

In the <unk> business, both in North America, and Europe continues to be very strong right our.

Our customers backlog projects are pretty good so that that vivo segment grew at our feeling about the demand going forward for the next few quarters and then we need to see how how the infrastructure Bill provides additional Delaware sorted out.

Very helpful and last quick one if I can squeeze it in here I know you made mentioned the fact that Youre cognizant youre watching.

Hi, Sherri pressures and how it relates to impact on consumer demand, but it was also kind of wondering given that sort of inflationary pressures that everyone seeing up there as well as some of the global macro uncertainties that are arising from the Russia, Ukraine or can you maybe talk a little bit if youre seeing any sort of changes in the.

Competitive dynamics in the surfactants business.

We have not seen any changes to the competitive dynamics.

I'd say the overall market demand to this point is holding up and with the supply chain constraints that offsets a lot of our industry is facing.

I think that's at the forefront of People's minds, so not seeing any changes really in the competitive dynamics.

Excellent great. Thanks, a lot guys I appreciate your time.

Thank you Michael.

And we're showing no further questions on the audio lines at this time.

I'll turn the conference back over to you.

Thank you very much for joining us on today's call. We appreciate your interest and ownership in Stepan company have a great day.

This does conclude today's conference call. We thank you for your participation and ask that you kindly disconnect. Your lines have a good day everyone.

[music].

Yes.

[music].

Yes.

Okay.

[music].

Good.

[music].

Okay.

Sure.

Yes.

Okay.

Sure.

[music].

Okay.

<unk>.

Yeah.

Okay.

[music].

Hum.

[music].

Okay.

Sure.

Okay.

Yes.

Okay.

[music].

Yes.

Okay.

[music].

Sure.

Okay.

[music].

Sure.

[music].

Okay.

Yes.

[music].

Yes.

Sure.

[music].

Okay.

[music].

Greetings and welcome to the Stepan Company first quarter 2022 results during the presentation, all participants will be in all.

Listen only mode. Afterwards, we will conduct a question and answer session at that time. If you have a question. Please press the one followed by the four on your telephone.

If at any time during the conference you need to reach an operator. Please press star Zero as a reminder, this conference is being recorded Tuesday April 26 2022.

I would now like to turn the conference over to Luis at all Vice President and Chief Financial Officer. Please go ahead.

Good morning, and thank you for joining a stable company first quarter 2020 to finance a review.

Before we begin please note that information in this conference call contains forward looking statements.

And our historical fact.

These statements involve risks and uncertainties that could cause actual results to differ materially, including but not limited to prospects for our foreign operations lower on reunite economic conditions and factors detailed in our securities and exchange.

Hi.

Well, Doug joining us online or over the phone. We encourage you to review that based on our slide presentation, which we have made available at www <unk> com under the investors section of our website. We make these slides available at approximately the same time as when the earnings release is issued.

We hold 75 informational perspective health.

With that I would like to turn the call over to Scott.

Our president and new Chief Executive Officer yesterday, we become the fourth CEO in the first non founding founding CEO Stefan.

Congratulation on that Scott.

Good morning, and thank you for joining us today to discuss our first quarter results I will share our first quarter highlights and strategy outlook and Luis will provide additional details on our financial results.

The first quarter continuing to be a challenging operating environment.

Reported net income was a record $44 8 million or $1 93 per diluted share. While adjusted net income was $47 million or $1 76 per diluted share representing the third best quarter ever on an adjusted net income basis.

Our polymer business was affected by external supply chain disruptions and a power outage in early January at our mills still plan that impacted operations and led to a force majeure declaration for select products.

Our operations team did a good job re establishing production in February .

Which allowed us to lift the force majeure in early April .

On a global basis polymer sales volume increased due to strong underlining based business and one extra month of sales from the <unk> acquisition, which closed at the end of January 2021.

Our specialty products business results were up due to order timing differences within our food and flavors business as a recovery of margins within our MCT product line.

Our board of directors declared a quarterly cash dividend at Stephens common stock of $33 five per share payable on June 15th 2022.

Stefan has increased its dividend for 54 consecutive years.

During the first quarter of 2022, the company paid $7 $5 million to shareholders in dividends and repurchased $10 million of Stephan stock.

The company has $141 million remaining under the share repurchase program authorized by the board of directors.

At this point I would like released to walk through a few more details about our first quarter results.

Thank you Scott My comments will generally follow the slide presentation at the start with the slide Port will recap the quarter.

Adjusted net income for the first quarter of 2022 were $47 million or $1 76 per diluted share versus $42 4 million.

$1 82 per diluted share for the first quarter of 2021.

Because adjusted net income is a non-GAAP measure we provide full reconciliations to their comparable GAAP measures can be found in our bank assortment presentation and table two of the press release.

Specifically adjusted net income this quarter excludes deferred compensation income of $4 $4 million compared to last year expanse of $1 $7 million.

Also exclude minor changes in our environmental reserves.

The FERC compensation figure representing the net income related to the company's deferred compensation plan as well as Scott said in his cell compensation for our employees.

Because these liabilities change with the movement in the stock price with Glu this item from our operational discussion.

Five shows the total company's net income bridge for the first quarter compared to the same quarter last year and breaks down the increase in adjusted net income.

Because this is net income the figures another add on an after tax basis.

We will cover each segment in more detail, but to summarize the fulfillment business was down while it's in fact up and specialty products were offset slightly from the prior year.

Corporate expenses were lower in the quarter, mainly due to lower acquisition related expenses. The company effective tax rate was 24, 6% in the first quarter of 2022 compared to 23, 6% in the same quarter a year ago.

This year over year increase was primarily attributable to a less favorable geographical mix of income.

We expect the full year 2020.

The factory to be in the range of 24% to 26%.

Slide six focus onto the <unk> segment results for the quarter.

<unk> net sales were $468 million.

26% increase versus the prior year selling prices increased by 29% primarily due to the pass through of higher raw material costs and improved product and customer mix.

Foreign currency translation negatively impacted net sales by 2%.

Volume was down 1% due to lower demand for luxury products within the consumer products business. This was mostly offset by a strong demand in functional products institutional cleaning and personal care end market.

Going forward in tier two and tier three customer channel continues to perform well.

Both Brazil, and Europe , resulting good easy with an improved product and customer mix driven by a strong agricultural business.

Was partially offset by soft results in Mexico.

So the fact that operating income for the quarter was a record of $53 $8 million slightly up versus prior year. This increase was driven by pricing and improved product and customer mix, which fully offset the effects of higher raw material prices and reduce the cost.

<unk> challenges and a small volume decline.

Now turning to polymers on slide seven.

Net sales were $187 million up 24% from the prior year prices were 26% higher primarily due to the pass through of higher raw material costs.

Currency translation negatively impacted net sales by 4%.

Core net operating income decreased by $3 $8 million driven by North America.

This increase primarily reflects the power outage at our <unk> plant.

Estimated negatively impacting operating income for a delta of $85 million.

Europe results and could easily and by this acquisition and solid results in our base business before.

The affordable business in China will essentially flat versus a comparable period, despite challenges with government lockdowns.

During the quarter, we deployed $138 million in cash via Capex investments dividend payments share repurchases and higher working capital requirements due to strong sales growth.

Beginning on slide nine as Scott will now update you on our 2020 to exit the priority.

Thank you Luis as we wrap up the first quarter of 2022, and despite unprecedented inflation and continued supply chain challenges, we managed to deliver a solid quarter.

The following two slides capture our strategic priorities and vision for a cleaner healthier and more energy efficient world with our customers' preferences in mind.

Our diversification strategy and our functional products continues to be a key priority for steffan.

Our global agricultural volumes increased high single digits in the first quarter.

High commodity prices for corn and soybeans, coupled with increased planted acreage drove a strong season for crop protection sales in North America.

Strong first quarter results in Asia are a result of continued growth in the post patent herbicide market and high commodity prices are driving increased planted acreage above major crops in Brazil.

Oilfield volumes increased mid single digits in the first quarter demand for our products used in oilfield, including bio sides remains robust as crude prices remain elevated at over $100 per barrel.

Raw material availability impacted our ability to deliver greater oilfield growth in the first quarter.

We continue the integration and supply chain planning of the kimco oil to multiply our product line, which we plan to relaunch in the second half of 2022.

We remain optimistic about future opportunities in this business as elevated crude prices should encourage increased oil production and the use of production and stimulation chemicals.

Our mills there continues to be one of our key priorities, we continue to accelerate investments in both expense and capex to improve productivity and increase capacity with debottleneck projects.

These investments will continue throughout the year.

We expect to see the benefits of our efforts and investments and build scale in the upcoming years.

Moving to slide 11, we have completed the integration of existing polyester polyol business and assets.

After closing the first full year full year of operations in January we delivered more than $23 million of EBITDA, achieving our third year financial target within the first year of ownership.

The acquired Investor site in Wilmington, North Carolina play the key supply continuity role during the first quarter build scale power outage. We are also evaluating potential investments at the Wilmington site to enable production of a broader range of products to support market growth and opportunities within our polymer business.

Louis.

As discussed previously we are also increasing north American capability and capacity to produce either sulfates that meet new regulatory limits on one for the oxy by the January 2023 deadline.

We expect plant startup in late 2023.

It will provide strategically located capacity and capability for long term specialty I'll Cox with growth across our strategic growth end markets, including agriculture oilfield construction and household institutional cleaning.

Full year capital spending is projected to be between 350 and $375 million inclusive.

Inclusive of the one four dioxane and our constellation investments.

We continue to invest in our new fermentation product platform in February we opened our new fermentation laboratory to support and further accelerate our development efforts for Rhonda lipids are first anticipated commercial <unk> and offering.

We believe this new bio based product family has significant opportunities and several important end markets for stepan, including agricultural chemicals consumer cleaning personal care and oilfield.

Our development and scale up activities remain on schedule.

Looking forward, we believe our surfactant volume and agricultural chemicals, and oilfield will remain strong as a result of high energy and crop prices we.

We see some improvement in supply chain constraints that should benefit consumer end use market demand.

However, consumer price inflation may negatively impact consumer cleaning and disinfection demand, particularly in the developing economies around the world.

We believe the long term prospects for rigid polyol remain attractive as energy conservation efforts and more stringent building codes are expected to continue.

We anticipate our specialty product business results will improve slightly year over year, but will be dependent on continued improvement in the availability of key raw materials.

In closing external supply chain challenges and inflationary pressures remain as headwinds within our business. However, we are cautiously optimistic about the balance of the year.

This concludes our prepared remarks.

At this time, we would like to turn the call over for questions to Jennifer. Please review the instructions for the question portion of today's call.

Thank you if you would like to register your question kindly press. The one followed by the four on your telephone you will hear three times from two acknowledged your request. If your question has been answered and you would like to withdraw your registration. Please press the one followed by the Street.

Again, if you'd like to register a question. Please press the one followed by the four on your telephone keypad now.

Our first question comes from the line of Mike Harrison Seaport Research Partners. Please go ahead Sir.

Hi, good morning, congratulations on a nice start to the year.

Thank you Mike good morning.

Alright.

A broad question to start with just trying to get a sense on the margin performance in both surfactants and polymers segment.

<unk> pressure as we look at Q2 and Q3 compared to Q1 levels.

Yes, Mike I would say so far we've done a really good job with our pricing too.

Stay on top of the inflationary pressures.

But you bring up a great observation.

So the inflation is continuing in Q2 and Q3, we will continue to attempt to cover that with pricing.

And at some point as we said in our prepared remarks.

<unk> consumer cleaning demand at some point may get impacted by the elevated pricing specifically in the developing world, but so far so so far we're doing a really good job in terms of covering cost inflation.

And let me add Mike that I.

As you were also mentioning I mean, there is always lag right. So we're trying to catch all fob plant.

Inflation piece is not a stopping so we need to continue and we will always have some lag on.

Have certain seasonality that you can take by year and in spite of the same pattern quarter after quarter.

Alright, and then in terms of the mills deal outage. It sounds like that's completely resolved and you're back up to full capacity.

Can you talk about the actions that you've taken there I know you talked a little bit about capacity increases to build sale.

Have you taken some actions to ensure that future power disruption don't lead to significant downtime again.

Yes, Mike So our team is actively now that production is back up and running at full rates.

Our team is focused on <unk>.

Making the necessary modifications and improvements in some of the infrastructure associated with the with the sites to ensure that power disruptions <unk> steam disruptions do not impact operations to the to the extent that we were impacted in Q1. So it is a major priority for our site and we are investing the appropriate <unk>.

<unk> two to make those improvements.

Let me add my Thats why in our prepared remarks, we have been booking in the last few quarters about the investments that we have gone Neil both on Capex and expenses.

To insure.

Now that we fix everything that needs to be fleets that now and we are in pretty good shape. So as we said in the prepared remarks, most investments will continue throughout 2022.

Great and then in terms of the weakness that you guys saw in laundry within surfactant is that mostly an inventory work down or is this.

Starting to show some of the inflationary pressures are.

<unk> has run its course at this point.

Yes, so Mike I would say that.

The softness that we're seeing in laundry is multi factorial and nature. One there still are significant raw material and transportation constraints that are existing in the.

Consumer products and fuel and food, so I think thats something that we need to watch out and then in terms of the surfactant inventory levels across the <unk>.

And I chain I do agree with you Mike the we are seeing what I would call a fairly robust demand.

From our customers and if you saw in our earnings release, our inventory values.

On our balance sheet or essentially flat.

Even though we've had significant cost inflation of raw materials. So inventories I think are well back in balance and from Stephan perspective.

Not still where we need to get them up to.

Alright, and then last question for me you kind of hinted that there could be some investments coming at this Wilmington side that you acquired with the <unk>.

Deal can you give us a sense of the scale of those investments that youre considering given that you have a number of other large projects that are in progress right now.

Yes.

<unk>.

Comparing pasadena or <unk> projects.

Alright, thanks very much.

Our next question comes from the line of Vincent Anderson with Stifel. Please proceed with your question.

Yes, thanks, and good morning.

So going back to Mike's question about Wilmington.

Had this thought earlier.

When I think about the <unk> assets are they are they producing a <unk>.

Product portfolio that you would say is on par with the quality or functionality of your portfolio and then just looking past the Wilmington changes are there similar opportunities to make changes at the European plant.

Yes so.

Vince good morning, the domain investor.

Invista technology is based off different raw materials than what the step and legacy is so what we're really trying to do is give the.

Business continuity across the asset so putting in additional storage tanks to handle the different raw materials that came from the step at legacy business versus the investors. So really trying to bake redundant capabilities across both the north American and as well as the European manufacturing network.

With the <unk>.

Site that was purchased from investors as part of the acquisition. So it's really about giving more security of supply to our customers and the portfolio of complement very well he is different products with different functionality, but at the end is complementing the portfolio that we have and on providing our customers with more choices in terms of that.

Portfolio.

Okay Alright. Thank you that's helpful.

Yes, more and more broad based nothing specific to ethylene oxide.

Okay, Great and then.

Another quick one.

You have a lot of exciting products coming to market. You're also working on a couple of new operating assets.

Was your ability to remain fully staffed or your experience in hiring additional skilled labor at least early on in these projects how has that been and how do you feel about the outlook for that.

Yes.

No issues Vince that.

That come to mind.

We have a really engaged and motivated workforce aligned around our growth strategies and our ambitions and we're making great progress on both our innovation.

<unk> as well as our capital project execution.

Alright, excellent if I could ask just one more quick one we saw a pretty large.

Global.

Michael producer finished shop and deepen.

Announce some some additional debottlenecking and Theyre all conflict capacity.

Do you take that as an affirmation of your investment.

Or anything that you would be mindful of there and maybe fine tuning.

What do our plant can produce versus what they've invested in.

Yes, Mike It is an affirmation of the future growth of <unk>.

Constellation is a product line.

Stephens product line is I would say not.

Not a significant overlap to the other announcements.

We are we are typically focused on the specialty and more niche products across a more specialty markets than the large commodity volume and products that I believe is driving the other investments.

Alright, perfect. That's all from me Thanks again.

As a reminder, if you wish to ask a question. Please press the one followed by the four on your telephone keypad.

Our next question comes from the line of Marco Rodriguez with Stonegate Capital Partners. Please proceed with your question.

Good morning, guys and thank you for taking my questions.

Good morning, Michael I wanted to kind of good morning wanted to kind of start up with a follow up on a prior question on the mills they plant work that Youre doing there.

Specific to the power disruption.

Hardening of the plant if you will could you maybe talk a little bit more about any sort of specifics that youre doing around that how much of the capex spend that you've already outlined as related to that and if you can kind of walk us through any sort of timelines.

Expectations on when that might be completed and harden if you will.

Thank you Michael for the question look as we have said in the past the drivers of the Capex investment of <unk> $375 million range that we have provided east Pasadena and low one for dialysis.

We continue making investments in network infrastructure, a meal zale and in other sites.

Those tend to be.

Significantly lower versus the older projects that we're talking so so we will keep we will keep making the changes and upgrading and improving.

Specific.

Infrastructure assets in <unk>, but nothing nothing today.

Nothing that we want to call out in terms of numbers.

Okay, Great and then if you can maybe talk a little bit more about your tier two and tier three customers. It sounds like you had some some pretty good strength in the quarter can you maybe talk about some of the drivers you may have seen in terms of that performance.

Yeah. So once again, I think driven and led by the agricultural and oilfield markets on a global basis.

<unk> was a big.

Big component of that 250, new customers acquired in the first quarter.

And then you've got the recovery of the China market as economies reopened around the world. So that hsni market can get very fragmented.

In some of the developing regions as well as in the developed regions. There is still good customer fragmentation, so thats, where most of the growth is being generated.

Got it and then.

Then switching here onto the polymer side.

I know you've called out obviously some disruptions in some of your current locked down but I was wondering if you can maybe.

Help frame some of your expectations for the cold storage opportunities Youre seeing there given the kind of a near term and in that same vein. If maybe you can talk a little bit more from a granular standpoint.

What sort of demand picture or what you are hearing as it relates to the demand picture per kind of green buildings here in the shorter term selling also the long term. Thank you.

Yes.

I would say Marco I would say as it relates to cold storage.

Lot of that.

Planned growth is in the China, China marketplace.

I think thats, a little bit uncertain right now with the Covid Lockdown and what China is experiencing with with Covid. So.

I think thats a pause for us at this point, we need to make sure China makes it through this.

This COVID-19 environment and those potential disruptions are not material.

As it relates to Green building, we're comfortable and confident that the infrastructure Bill passed here in the U S is going to drive additional demand for our rigid insulation materials.

Say at this point, we don't have a lot of details or specifics from our customers yet in terms of when they see when they could expect to see an uptick in the <unk>.

And those.

Green energy driven <unk>.

Infrastructure build related.

Advancements, maybe a little bit too early to tell.

What I would add Joe.

What I will add Michael is that we have spoken in the past the backlog of projects in the <unk>.

In the rehab business, both in North America, and Europe continues to be very strong right. Our our customers backlog projects are pretty good so that that vivo Rudolf feeling about demand going forward for the next few quarters and then we need to see how how the infrastructure Bill provides additional tailwind.

We started out.

Very helpful and last quick one if I can squeeze it in here I know you made mentioned the fact that Youre cognizant youre watching.

Inflationary pressures and how it relates to impact of consumer demand, but it was also kind of wondering given that sort of inflationary pressures that everyone is seeing out there as well as some of the global macro uncertainties that are arising from the Russia, Ukraine more can you maybe talk a little bit.

Seen any sort of changes in the competitive dynamics and this is in fact.

<unk> business.

We have not seen any changes to the competitive dynamics.

I'd say the overall market demand to this point is holding up and with the supply chain constraints that.

All said and done a lot of our industry is facing.

I think that's at the forefront of People's minds, so not seeing any changes really in the competitive dynamics.

Excellent great. Thanks, a lot guys I appreciate your time.

Thank you Michael.

And we're showing no further questions on the audio lines at this time I will turn the conference back over to you.

Thank you very much for joining us on today's call. We appreciate your interest and ownership in Stepan company have a great day.

This does conclude today's conference call. We thank you for your participation and ask that you kindly disconnect. Your lines have a good day everyone.

Q1 2022 Stepan Co Earnings Call

Request a DemoDemo

SCL

Stepan

Earnings