Q1 2024 Stepan Co Earnings Call
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Good day, and thank you for standing by and welcome to the Stepan Company first quarter 'twenty 'twenty four earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one.
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Be advised that today's conference is being recorded.
I would now like to hand, the conference over to your Speaker today Luis Rojo CFO. Please go ahead.
Hi, good morning, and thank you for joining Stepan company's first quarter 2020 for a financial review.
Before we begin please note that information in this conference call contains forward looking statements, which are not historical facts.
The statements involve risks and uncertainties that could cause actual results to differ materially.
Clothing, but not limited to prospects.
Voting operations, we don't want on regional economic conditions.
Doctors do not want security other exchange Commission filings.
In addition, this conference call will include discussion of adjusted net income adjusted EBITDA and free cash flow, which are non-GAAP measures. We've provided reconciliations to comparable GAAP measures in the earnings presentation and press release.
We have made available a bowling alley.
Staples com under the investors section of our website.
Joining us online or over the phone we encourage you to review the Investor Slide presentation.
These slides available at approximately the same time the earnings release the Fisher.
And we hope that you find information and perspectives helpful.
With that I would like to turn the call over to Mr. Scott bass, our president and Chief Executive Officer.
Scott R. Behrens: Good morning, and thank you all for joining us today to discuss our first quarter 2024 results I plan to share highlights from our first quarter performance and also share updates at our key strategic priorities, while Luis will provide additional details on our financial results.
The company reported first quarter, adjusted EBITDA of $51 $2 million up 5% year over year.
Mobile sales volume was up 1% year over year.
Volume weakness in the agricultural market due to continued inventory destocking and lower phthalic anhydride volumes due to ongoing operational issues at our <unk> site, mostly offset the strong recovery in volumes across our other core markets.
Global sales volume, excluding the impact of agricultural NPA was up 4%.
Surfactants experienced double digit volume growth in personal care and oilfield end markets and with our distribution partners.
As expected Latin American surfactant volumes grew strong double digits as we recovered volumes in Mexico.
First quarter sales volume in Mexico was a record.
Overall volumes in our global consumer laundry cleaning and our institutional creating businesses have stabilized and we believe the stocking has run its course.
Within polymers rigid and specialty polyol grew mid single digits, while specialty products volume was up double digits.
From a company perspective margins were in line with expectations, despite unfavorable product mix.
Net sales in the first quarter of 2024 decreased 15% year over year, primarily due to lower selling prices that were mainly attributable to the pass through of lower raw material costs and less favorable product mix.
These lower selling prices were partially offset by a 1% increase in global sales volume as mentioned above and the favorable impact of foreign currency translation.
We generated positive free cash flow of $11 $4 million as capital expenditures return to historical levels and these results give us confidence that we will close 2024 with positive free cash flow.
The company is on track to deliver our $50 million cost reduction goal for 2024 through disciplined efforts in supply chain and workforce productivity actions taken in the last quarter of 2023.
We expect these reductions to help offset higher operating costs related to operational interruptions at our low sales site and pre commissioning expenses at our new our constellation facility in Pasadena, Texas.
During the first quarter of 2024, the company paid $8 5 billion in dividends to shareholders. The company did not repurchase any company stock. During the first three months of 2024 and has $125 million remaining under the share repurchase program authorized by our board of directors.
Yesterday, our board of directors declared accordingly quarterly cash dividend on step of this common stock of 37 five cents per share payable on June 14th 2024, Stefan has paid an increased its dividend for 56 consecutive years.
With the volume performance in several of our end markets delivering strong growth, we remain confident in the strength and diversity of our business and its ability to generate cash that will allow us to continue to invest in our business and return cash to our shareholders Louie.
Luis will allow share some details about our first quarter results.
Thank you Scott My comments will generally follow the slide presentation.
Slide five shows the total company net income bridge for the first quarter compared to last year first quarter and breaks down the decrease in adjusted net income.
Because this is net income the figures noted here.
Tax basis.
First quarter 2024, and adjusted net income was $14 7 million or 64 cents per diluted share versus $16 $4 million or <unk> 71 per diluted share for the first quarter of last year.
The adjusted net income reduction was driven by a higher effective tax rate compared to 2023.
We are projecting a higher effective tax rate for 2024 due to the anticipated disallowance of agility reduction in foreign tax credits, resulting from the expected large election of bonus depreciation for our Pasadena capital investments.
Slide six shows the total company adjusted EBITDA Bridge for the first quarter compared to last year first quarter.
Adjusted EBITDA was $51 2 million.
Versus $48 7 million in the prior.
Our year to year, a 5% increase year over year.
We will call at each segment in more detail up to summarize we delivered adjusted EBITDA growth in surfactant and specialty products, partially offset by global polymers.
Lower corporate expenses also contributed to the adjusted EBIT liquid alts.
On slide seven focus also factor on segment results.
Fact that net sales were $391 million for the quarter.
16% decrease versus the prior year.
Selling prices were down 18%, primarily due to the pass through of lower raw material costs.
Less favorable product mix and competitive pricing pressures in Latin America and Europe.
Volume was flat year over year, we delivered a strong double digit growth in personal care from our low one for valves in investments and in the oil field and market.
We also grew volume in the construction and industrial solution business and with our distribution partners.
Latin America Surfactants volume also grew a strong double digit as we continue recovering the business.
This growth was offset by lower demand, we can develop agricultural end market due to continued customer and channel inventory destocking.
Foreign currency translation positively impacted net sales by 2%.
The fact that on adjusted EBITDA for the quarter increased $1 5 million or 4% versus the prior year.
The increase was driven by the market improvement that was partially offset by three operating expenses at the company's New York Constellation's total term facility <unk>.
<unk> built in Pasadena, Texas unexpected associated with operational interruptions at the mill Self fund site. Excluding these one time expenses adjusted EBITDA grew double digits in the surfactant business.
Now on slide eight polymers net sales were $146 million for the quarter, a 10% decrease versus the prior year selling prices decreased 14%, primarily due to the pass through of lower raw material costs.
Increased 1% in the quarter driven by a 4% increase in global volumes and a 7% increase in our specialty volumes.
This excellent volume growth was partially offset by lower volumes due to their meal sale operational interruption.
<unk> growth in all regions.
Foreign currency translation positively impacted net sales by 3%.
<unk> adjusted EBITDA decreased $1 9 million or 10%, primarily due to the previously communicated higher expenses due to the mill sell operational issue.
Excluding these one time expenses adjusted EBITDA grew in the polymers business.
Finally, our specialty products net sales were $15 million for the quarter up 33% decrease versus the prior year volume was up <unk> <unk> versus the prior year, while adjusted EBITDA increased $1 9 million or 49%, increasing adjusted EBITDA was primarily due to both higher unit margins and volume within the NCD product line.
Turning to slide nine we continue making progress on our cash position for the first quarter cash from operations was $42 million.
And free cash flow was positive at $11 $4 million.
<unk> hundred $76 million versus 2023.
We continue optimizing our inventory levels, and we were able to reduce another $8 million.
During the quarter, we deploy a $38 million again, capex investments and dividends now on slide 10, and 11 as Scott will update you on our strategic priorities on capital investment.
Thanks, Luis I'll focus my comments on our cost initiatives business strategy and the progress of our major capital investments.
Cost reduction program initiated last year, along with additional productivity and cost out initiatives underway in 2024 centered around improved operational performance across our supply chain network are expected to deliver $50 million in pre tax savings in 2024.
As of the first quarter. The company was on track to deliver its $50 million cost out goal and recognized $18 million in pre tax savings.
This was largely offset by the incremental expenses related to the mills Dale operational issue commissioning expenses in our new Pasadena site higher operating expenses related to the new low onboard vaccine manufacturing process and the overall labor cost inflation.
We are encouraged by the volume performance in several of our end markets delivering growth surfactants delivered strong volume growth in personal care oilfield construction and industrial solution end markets and with our distribution partners.
Latin American surfactants delivered strong double digit growth with record volumes in Mexico.
Rigid and specialty polyol volume grew four 7%, 7%, respectively, while specialty products volume was up double digits.
Our large laundry and cleaning consumer and institutional cooling businesses have stabilized and we expect gradual and modest growth in the future.
Our customers will always remain at the center of our strategy and innovation, our long standing tier one customers value, our technical capacity and the ability to manufacture and deliver quality products at the scale they need.
We continue to diversify our customer base by expanding our reach to tier two and tier three customers, who highly value the technical support and services that Stefan can provide.
Scott R. Behrens: During the first quarter of 2024, we added approximately 400, new tier two and tier three customers, increasing the segment volumes versus the prior year.
Our technical collaborations are increasingly focused on helping our customers make their product portfolio transition towards a more sustainable future and we are happy to be on this journey with them.
Our diversification strategy with tier two and tier three markets and functional markets, including agricultural and oilfield chemicals continues to be a key priority for Stefan.
Installation remains a critical enabler over more sustainable and energy efficient world. Our polymers business continues to focus on developing the next generation rigid polyol technologies that can increase the energy efficiency and cost performance of our customers' installation products.
Moving to slide 11, construction at our new El calculation production facility in Pasadena, Texas is approximately 90% complete and we now expect the plant to start up in the fourth quarter of 2024 due to a contractor delay.
The underlining our constellation business that supports the Pasadena investment excluding the agricultural Destocking continued its volume growth during the first quarter of 2024 at very attractive unit margins.
After completing a three year capital investment program last year stepping now has the largest installed low one for Doc same production capacity, serving the north American merchant market. Our first quarter volumes grew strong double digits versus prior year and volumes should continue to ramp throughout the year as more customer and product qualification.
They are completed.
As already reported in our February earnings call. Our loan sale side was impacted by a series of power disruptions combined with below freezing temperatures in January with the main impact to the Falcon hydride and polyol unit operations.
All operations other than phthalic anhydride.
Have been have been and are back in production and we were able to minimize supply disruptions to our polyol customers through our production network.
The <unk> unit experienced several restart challenges, but has since been restarted and is producing product.
In addition to the power weather interruption, we also experienced unplanned maintenance and operational issues with the mills Dale wastewater treatment plant.
Scott R. Behrens: Our team has been actively addressing these issues through infrastructure and process improvements. These.
These operational issues impacted first quarter results, primarily from higher maintenance and operational expense and higher tolling costs, we anticipate second quarter expenses related to these issues to be similar to the first quarter expenses.
We anticipate to go back to normal and lower spending levels in the second half of the year.
Looking forward, we believe sales volumes will continue to gradually improve due to the ongoing recovery in rigid polyol and growth in surfactant volumes, including the expected recovery of the agricultural business in the second half of this year.
We remain focused on delivering $50 million and pre tax cost reductions to help offset inflationary pressures the expenses associated with commissioning, our new Pasadena constellation assets higher incentive based compensation and incremental expenses associated with the operational issues that no sale.
Free cash flow should continue to improve versus prior year as we finish construction at our Pasadena investment and benefit from higher agricultural volumes in the second half of the year.
<unk> gradual growth in market volumes improved operational performance and our continued focus on cost reduction should position us to deliver full year, adjusted EBITDA growth and positive free cash flow.
Scott R. Behrens: We remain confident in our long term growth and innovation initiatives.
This concludes our prepared remarks at this time, we would like to turn the call over for questions. DD. Please review the instructions for the question portion of today's call.
DD: Thank you.
Remind you ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby, while we compile the Q&A roster.
And our first question comes from Vincent Anderson of Stifel. Your line is open.
Yes, good morning, gentlemen, thanks.
Good morning visit.
Apologies in advance if you've answered any of US you guys are moving a little bit faster than I am today.
Vincent Alwardt Anderson: I wanted to start with the operating income in surfactants, because it sounds like there was a lot of.
A lot of little issues here in the quarter, but the margins came in quite strong regardless. So can you maybe just talk about what the big positives were whether it was all fixed cost leverage or raw materials, and then kind of second to that are there tier two tier three and oilfield gains have those been enough to offset the mix headwinds from <unk>.
<unk> culture.
Hi, Vincent this is Luke asked we as we said in our prepared remarks adjusted EBITDA for the surfactant was.
<unk>, 4% versus last year and actually if you exclude the onetime expenses that we had because of the disruption in neil's ale, our adjusted EBITDA guidance in fact, it's actually up double digits.
Which is a good testament of margin improvement so you saw volumes.
Flat.
In surfactants overall flat with several of places are growing but were beads.
But overall volumes flat so the driver of the adjusted EBITDA growth is margin despite.
Despite the fact that <unk> has a significant negative mix in the numbers if you exclude that destocking.
Sure.
But are you getting gone out of our adjusted EBITDA in this business will be up very very strong double digits. So active is a negative.
Okay Alright.
Perfect. Thank you and then.
So I.
I don't I'm not sure exactly how to ask this one but.
I appreciate that mill is build a very large complex plant one of your older plants.
Just I'm trying to understand what opportunities there are maybe within.
Yes.
Scheduled turnarounds that you would have an opportunity to really go deep into that plant and.
Try to tie up some of these <unk> that seem to crop up it feels like.
No.
Year at this point, whether it's power now wastewater I'm, just trying to kind of understand where that plant is in that that kind of cycle.
Shorter term maintenance needs and maybe longer term projects that you haven't had an opportunity to address.
Yes, great question Vincent.
Speaker Change: First of all we do have a long term infrastructure reinvestment plans for that site.
And we do follow and execute against that every year.
Power disruptions that seem to be more frequent.
Over the last three or four years, that's a real issue that we're working on with our external power providers.
Speaker Change: As you know in this country the energy infrastructure.
Is is aging and there is more reinvestment. So our primary focus is to improve the quality and reliability of the power that we get into our <unk> site and Thats actively being worked on.
With regards to our other infrastructure assets at the site.
Water treatment plants.
I would say it's.
An unexpected maintenance outage, we do do turnarounds on all of our infrastructure assets. This one kind of creeped up unexpectedly, we're managing it and and should be rectified here in the second quarter. So.
It is our one of our older sites and our global network. It is very large and it's a main focus for us to continue to improve and then reinvest for improved reliability for our customers.
Alright, Thats excellent. Thank you and just one last one.
Just trying to get a feel for deere.
Do your polyol volumes.
Speaker Change: Leisure demand indications given some of the disruption this quarter.
Do you feel like they're tracking what what youre seeing your customers put out there in terms of installation volumes or is there may be still a little bit of a disconnect in terms of how they're managing inventory or timing of these projects.
But I think directionally the answer is yes.
I think some of the customers that may have reported earlier.
Some of their growth, maybe a little disconnected from ours due to things that they're doing in the.
With their marketing programs, but overall I think we're pleased that our volume is tracking.
On a recovery path.
There seems to be a lot of pent up demand for re roofing projects and I think if we can clear some of the operational issues, we have youll see our numbers.
Track more closely to what what you may be expecting from the customer base release.
And there are good all things said on developing polymers was broad based with all regions growing and also our specialty polyol, so growing plus 7%, which is pretty strong.
Excellent alright, thanks, that's all from me guys.
Thank you one moment for our next question.
And our next question comes from Mike Harrison of Seaport Research Partners. Your line is open.
Yes.
Hi, good morning.
Good morning, Mike.
<unk>.
Apologies if I missed this but did you quantify the impact.
The mills sale outage in Q1 overall.
<unk>.
How that was split between the polymers and surfactant segments.
Yes.
Remember in February we said, we were expecting around $5 million of pre tax income. We included in the in the release I know it's early with.
Included the fact number $5 $8 million was there any impact on call it at half on half between the businesses.
Scott, putting these remarks, we're expecting kind of the.
Same in Q2.
Alright. Thank you for that and then also curious just on the price mix.
Speaker Change: Number that that minus 18%.
Quite a bit weaker than we were anticipating I guess, what I'm trying to understand is when do you expect.
So as price mix headwinds to stabilize.
Maybe how much of that 18% decline was price how much was mix.
And related to that if you are expecting.
Demand to pick back up in Destocking to run its course in that AG business in the second half.
How much does this mix recovery from from egg.
It helped that price mix number as we get into the second half.
Yes, no great question Mike.
You said, 18% of course, the majority of that is is pricing in <unk> is still a big negative mix impact into that number but you saw what it cost of goods sold also down $100 million. Despite the increases in overhead so raw material prices are going down significant.
Lee.
More so on a percentage basis that that price reduction that you saw.
That's how we are that's how we are improving margins in the three businesses. When would you look at dollars per pound.
And Mike I'll add we're coming off.
Our record 2023 first quarter AG.
Business.
So that price mix is definitely impacted this year from the Destocking and yes, it will be a significant improvement in the second half when the agriculture.
Restarts.
And I guess just to follow up on that.
Can you give a little bit of color on what your customers in the AG business are saying right now I'm, just trying to get a better sense of.
What gives you confidence or how confident you are.
Speaker Change: Those volumes are going to start to pick up in the AG business in the second half.
Yes, Mike I would say.
From a customer perspective, it's a little bit of a mixed bag, whether it will start in Q3 or Q4, but what we have to remember is.
So this inventory once it gets through the Destocking phase the demand that at the farmer level is still there so.
I think it's a matter of when not if.
Speaker Change: And.
I would say right now there is probably a 50 50 mix of Q3 versus Q4.
Alright, and then last question for me is just in terms of the outlook, you're pointing to adjusted EBITDA growth versus last year.
Obviously last year was unusually weak.
But looking at where you were in the first quarter this $51 million EBITDA number and presumably what about $6 million higher.
Without the mills data outage should we be modeling improvement from that level in Q2, and then further improvement in Q3, as we get past the doe's deal issues.
I guess just any additional color you are willing to provide.
Earnings cadence from here I think would be helpful. Given there are a lot of moving pieces in place.
Yes, Mike and you know that we don't provide formal guidance for quarter for the quarter or for the year, but but.
And Thats why we are trying to provide some perspective on.
The expenses that we that we foresee in Q2. So you can you can model that in Europe in your second quarter, and then of course, we all.
I expect some improvement in the second half because of the act recovery.
We cannot hide that we're saying we are expecting the VAT recovery of Anarchy, Scott. It's a good business for US and of course should have a positive impact in our EBITDA in the second half versus the first half.
Alright Thats helpful. Thank you.
Thank you one moment for our next question.
<unk>.
And our next question comes from Dave storms of Stonegate. Your line is open.
Good morning.
Good morning, good morning, just.
Dave Storms: I just wanted to touch on Latin America for a second great to see.
Volumes coming up there and we expect pricing to follow.
Is there still.
More focus on defending and capturing market share there.
Yes, great Great question.
Yes, Dave.
Our priority was to recover the volumes if you remember we talked about competitive imports and the prior quarters. Our goal is to recover the share.
So that remains our priority there is hope over time that.
Pricing will improve but right.
Right now, it's really reestablishing the beecher.
Understood very helpful. And then just one more from me on the customer acquisition environment, great to see that you've picked up some more tier two and tier three customers.
What is the contact to contract cycle looking like there is that improving and how does that compare to.
Trying to pick up obviously more tier one customers as well.
The tier two tier three customers those are those tend to be the smaller customers around the world from a contracted basis, that's really not contracted business. It's it's.
More transactional type of relationships, but.
I think where we differentiate ourselves as the technical service. So when we help these customers put new formulations on the self shelf there is a sense of loyalty, but there's nothing that you can.
Put under a contract umbrella, saying that thats, a fully stabilized business.
But we had record volumes in Q1 within that.
Dave Storms: That customer segments, which we're pretty pleased with those results.
Understood. Thank you for taking my questions and good luck in Q2.
Thanks.
Dave Storms: Thank you at this time I would like to turn it back to Scott Behrens for closing remarks.
Thank you very much for joining us on today's call. We appreciate your interest and ownership in Stepan company and please have a great day.
This concludes today's conference call. Thank you for participating and you may now disconnect.
Dave Storms: Okay.
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