Stepan(SCL) - 2020 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Adjusted net income for Q2 2020 was a record $38.3 million or $1.65 per diluted share, a 9% increase from $35.1 million or $1.50 per diluted share in Q2 2019 [5][11][12] - The effective tax rate increased to 23.9% in the first half of 2020 from 21.8% in the first half of 2019, primarily due to lower tax benefits and a different country mix of income [14] Business Line Data and Key Metrics Changes - Surfactant net sales were $332 million, a 6% increase year-over-year, with a 10% increase in sales volume driven by higher demand for cleaning and disinfection products due to COVID-19 [15][17] - Polymer net sales decreased by 20% to $112.4 million, with a 13% decrease in sales volume primarily due to lower Rigid Polyol volumes in North America and Europe [19][20] - Specialty Product net sales were $15.8 million, a 17% decrease year-over-year, with operating income down due to order timing differences and lower margins [21] Market Data and Key Metrics Changes - Surfactant operating income increased by $16.4 million or 51% year-over-year, driven by strong sales volume growth and a record quarter in Latin America [17] - Mexican operations delivered year-over-year earnings growth, with a $5 million operating income improvement driven by 33% volume growth [17][26] - Europe saw higher results due to strong demand for consumer products and double-digit growth in agricultural chemicals [18] Company Strategy and Development Direction - The company continues to prioritize safety and health while delivering products that contribute to the fight against COVID-19, with a focus on Surfactant volume growth in consumer product end markets [25][26] - The diversification strategy into Functional Products remains a key priority, with agricultural business growing 6% despite a decrease in North America [26] - M&A is viewed as an important tool for delivering meaningful EPS and EBITDA growth, with a recent agreement to acquire Clariant's Mexican business to accelerate growth in that market [29][30] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the long-term prospects for the Polymer business despite current challenges, citing energy conservation efforts and stricter building codes as future demand drivers [28] - The company is committed to improving supply chain efficiency, targeting an additional $10 million of operating income in 2021 through external consulting [77][79] - Management highlighted the importance of maintaining employee health and safety during the pandemic, with minimal operational disruptions reported [65][66] Other Important Information - The company declared a quarterly cash dividend of $0.275 per share payable on September 15, 2020 [9] - Capital expenditures for the full year are expected to be in the range of $100 million to $120 million [22] Q&A Session Summary Question: Are customers looking for larger or longer-dated volume commitments for cleaning and disinfection products? - Management noted that the global market for disinfectant products is tight, with some inventory building but not enough material available to significantly impact commitments [33] Question: Can you provide more details on the Clariant acquisition? - The intent is to absorb the business and equipment into the Ecatepec facility, increasing capacity utilization [34] Question: How much of the Rigid Polyol growth in China is driven by cold storage and livestock activity? - Virtually all growth is driven by cold storage and livestock, with a 50-50 split between those end markets [35][36] Question: What drove the margin strength in Surfactants? - Volume growth and improved product mix contributed significantly to margin strength, with a focus on tier 2 and tier 3 customers [39][40] Question: How is the company managing raw material dynamics? - The majority of high-cost raw material inventory has been moved through the system, with minimal remaining vulnerability [43][44] Question: What is the status of the Illinois River lock maintenance project? - The project has started, with an anticipated closure of 3.5 to 4 months, potentially increasing costs by $3 million [46][48] Question: How is the company managing FX exposure? - The majority of FX impact was in Latin America, particularly Brazil, with a good hedging program in place to manage exposure [60][61] Question: What is the current status of the workforce in Mexico and Brazil amid the pandemic? - The company has been able to maintain operations with minimal disruptions, prioritizing employee health and safety [64][66] Question: How did the company manage to meet customer commitments while adding new customers? - The company was able to meet full contract requirements for existing customers while adding new tier 2 and tier 3 customers, with some allocation needed in specific product lines [82]