Stepan, a supplier of specialty chemicals including food and supplement ingredients, reported lower earnings in its second quarter statement. Among the reasons for missing revenue targets was a reported lower demand for the company’s flagship supplement ingredient Clarinol, a branded form of conjugated linolenic acid (CLA).
Stepan has seen its market share in its nutrition business erode for the past nine months, chief financial officer Scott Beamer said.
“Specialty products operating income fell by about the same amount as it fell in the first quarter, and was impacted by lower volumes and margins. Demand remained lower in our lipid nutrition business,” he said in an earnings call posted in transcript form on the site seekingalpha.com.
In its nutritional products inventory, in addition to Clarinol, Stepan, which is based in Illinois, also produces Marinol, an omega-3s concentrate, and Neobee, a medium chain triglyceride (MCT) product aimed at weight management and sports nutrition formulations and as a flavor carrier. Stepan’s principle business remains in surfactants, widely used in laundry detergents and other cleaning products. The company also makes a range of polyol and polymer products.
Beamer said income from lipid nutrition sales is expected to decline throughout the company’s fiscal 2015. In the first quarter, the company reported $2.2 million in specialty product operating income, off from $4 million in the same quarter in 2014.
“There are some fundamental demand problems for our nutraceutical product lines, the CLA in particular, where the demand is down in that marketplace today. So at this point, hesitant to say that we see an improvement in the forecast for demand for that product line,” said CEO F. Quinn Stepan Jr.
“Then if we look at our MCT product line, we’ve seen some pressure on margins in that space, so I don’t see a fundamental improvement in the short term in terms of ’15 or the first half of ’16 in terms of both the CLA and MCT product lines today,” Stepan said.
GNC disappointment
Stepan had higher hopes for the Clarinol and Marinol ingredients when it acquired them from Lipid Nutrition in 2011. (In that deal Stepan also acquired an appetite suppressant derived from Korean pine nuts branded as PinnoThin.)
“Our acquired products combined with our Neobee Medium Chain Triglycerides provide us with a unique patented portfolio of nutritional oils with a greater offering to our customers in the food, supplement, nutrition and pharmaceutical industries worldwide,” the company said at that time.
Stepan also sought to boost demand for Clarinol via a deal announced with GNC in 2013. GNC’s active product development pipeline was seen as an ideal fit with work that Stepan had already done on the ingredient after its acquisition.
“GNC is looking at new delivery forms, and we have lot invested already in application work,” global sales director Casper Ravesteijn told NutraIngredients-USA at the Vitafoods Europe trade show in 2013. That work included micronized forms of the ingredient that can function in clear beverages, Ravesteijn said, which is a big plus in the sports nutrition sphere as beverages, whether in ready to mix powder or ready to drink, form such an important part of the overall product mix.
Stepan also had announced a tie-in in 2013 with delivery forms specialist Virun to look at the clear functional beverage market, a deal which has failed to shore up demand for CLA.
The outlook for Marinol was clouded by the overall downturn in the omega-3s market. Stepan decided to bring Marinol into the US market around the time that the sales declines were starting to make themselves felt.
CEO Stepan Jr. did say that the nutritional products segment of the company is relatively small compared to the company’s overall volumes, and even with the margin pressure continues to be relatively high margin compared with the company’s other products.
Earnings details
While Stepan missed on earnings analysts’ predictions, the company did manage to maintain its profit margin in the face of headwinds. Reported net income was $16.9 million or $0.74 per diluted share versus $24.4 million or $1.06 per diluted share in the prior year, while adjusted net income was $20.9 million or $0.91 per diluted share versus $20.6 million or $0.90 per diluted share in the prior year.