Stepan Company (NYSE:SCL) disclosed a decrease in sales volume and a drop in earnings for Q3 2023 in the latest earnings call. The specialty chemicals manufacturer reported an adjusted net income of $14.7 million, a significant reduction compared to $46.3 million in the prior year. Despite the challenging macroeconomic environment, Stepan remains optimistic about its business and its capacity to generate cash.
Key takeaways from the call:
- The company's surfactant and specialty product unit margins experienced a downturn due to an unfavorable product mix, pricing pressure in Latin America, and high-cost inventory.
- Stepan made progress on its cash objectives, reducing inventory levels by $55 million.
- The company completed its low 1,4 dioxane capital investments and continued its alkoxylation project in Pasadena, indicating a focus on regulatory compliance and expansion.
- Stepan paid $8.2 million in dividends to shareholders during the quarter and declared a quarterly cash dividend of $0.375 per share.
- Despite challenges anticipated in Q4 2023, the company expects volumes and margins to improve in 2024 due to market recovery, strategic initiatives, and cost reduction activities.
During the call, Stepan offered updates on their 2024 capital forecast, the progress of their alkoxylation production facility in Pasadena, Texas, and their efforts to meet new regulatory limits on 1,4 dioxane. The Pasadena plant is expected to be 75% complete by year-end and to start up in mid-2024.
The company also discussed its positive trajectory in the Polymer space and its diversification strategy in China, which has resulted in strong double-digit growth in Q3. Stepan stated that most of the high raw material prices have washed out, except for the MCT business, which will still be impacted by lower fatty acid prices in Q4.
An analyst queried about the company's gross margin cadence and price cost, to which the company responded by explaining the lag in pricing and raw material activities. Stepan expressed confidence in their raw material costs, expecting more stabilization going forward, despite acknowledging market volatility.
The company anticipates challenges in Q4 2023 but remains confident in its ability to generate positive free cash flow and earnings growth in 2024. The call concluded with closing remarks by Scott Behrens.
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