Q3 2024 Stepan Co Earnings Call
Speaker Change: Good morning, so welcome to the Stephen Company third quarter Dylan 24 earnings conference calls. During the presentation, all participants will be in this and will be moved.
Speaker Change: after World War II that the question answers session.
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Speaker Change: Please visit my channel today's conference, it's Mary recorded.
Speaker Change: As a reminder, this call is being recorded on Wednesday, October 32, 2024. It is now much larger to turn the call over to Mr. Sam Hürickson by President and Interim Chief Financial Officer of Human Company. Mr. Hürickson, please go ahead.
Sam Hürickson: Good morning and thank you for joining Steffen Companies, third quarter 2024 financial review.
Sam Hürickson: Before we begin, do you know that information in this conference call contains forward-looking statements which are not as trial-class facts.
Sam Hürickson: He's taken into office with an uncertainties that could cause actual results.
Sam Hürickson: to differ materialy, including, but not limited or prospects for our foreign operations, global and regional economic conditions and factors detailed in our securities and exchange commission filings.
Sam Hürickson: In addition, this conference call would include discussions of the Justin Net income, adjusted EBITDA and free cash flow, which are non-gab measures. We provide recommendations to the Comparable Gab measures in the UN's presentation and press release, which we have made available at WWW-11.
Sam Hürickson: under the investor section of our website.
Sam Hürickson: Whether you are joining us online or over the phone, we encourage you to review the investor slide presentation. We make these slides available at approximately the same time as when the earnings release is issued, and we hope that you find the information and perspectives helpful.
Speaker Change: With that, I would like to turn the call over to Mr. Quinn Steppen, the Chairman of Steppen Company.
Quinn Steppen: Good morning.
Quinn Steppen: Today, we announce that our board of directors has appointed Luis Rojo as the company's president and CEO and a member of the board, effective immediately.
Quinn Steppen: Luis succeeds Scott Behrens, who has served in that role for the past three years. We thank Scott for his leadership and his many contributions to the growth and diversification of Steppen over his 30-year career with the company.
Quinn Steppen: As you are aware, Luis has served as the CFO of Stepin for the past seven years. During his tenure, Luis has developed a deep understanding of all aspects of our business.
Quinn Steppen: and while he naturally has a strong financial mindset that will serve him well in the CEO role, he is also a strategic thinker and will ensure we execute on present market and operational opportunities.
Quinn Steppen: He is a passionate leader who cares deeply about our customers, employees, and shareholders.
Speaker Change: Together, with the strong team we have at Stepin, you will drive our profit recovery and deliver value for our shareholders.
Speaker Change: The board and I have great confidence in Luis and look forward to working with him in his new role.
Speaker Change: With that, I would like to turn the call over to Luis. Congratulations, Luis. Thank you, Quinn, and good morning. And thank you all for joining us today to discuss our third quarter 2024 results.
Luis Rojo: I plan to share highlights from our third quarter performance and will also share updates on our key strategic priorities, while Sam will provide additional details on our financial results.
Luis Rojo: The company reported third-quarter adjusted EBITDA of $53 million, up 11% versus the prior year. This double-digit adjusted EBITDA growth was driven by improved volumes and margins in our surfactant business.
Luis Rojo: Global sales volume was down 1%. Double dip growth in several surfactant end markets was fully offset by demand weakness and competitive pressures in our polymers business.
Luis Rojo: We believe the sluggish demand in polymers is related to global microeconomic uncertainties, low overall construction activity, and a high interest rate environment.
Luis Rojo: Third quarter adjusted net income was up significantly, driven by improved surfactant and specialty products results and a lower tax rate.
Luis Rojo: Year-to-date adjusted EBITDA was $152 million, up 7% versus the prior year, driven by improved volumes and margins.
Luis Rojo: Free cash flow for the first nine months of the year was $7 million, and we remain confident that we will close 2024 with positive free cash flow.
Luis Rojo: The company is on track to deliver our $50 million cost reduction goal for 2024 through ongoing disciplined efforts in supply chain and the workforce productivity actions taken in the last quarter of 2023.
Luis Rojo: During the third quarter of 2024, the company paid $8.4 million in dividends to our shareholders.
Luis Rojo: Our Board of Directors declared a quarterly cash dividend on Stepan Comón's stock of $0.385 per share, payable on December 13, 2024.
Luis Rojo: This represents a 2.7% increase in our diggers.
Speaker Change: Esteban has paid and increased his dividend for 57 consecutive years. Sam will now share some details about our third quarter results.
Sam Hürickson: Thank you, Luis. My comments will generally follow the slide presentation.
Sam Hürickson: Slide 5 shows the total company net income bridge for the third quarter compared to last year's third quarter and breaks down the increase in adjusted net income. Because this is net income, the figures noted are an after-tax basis.
Sam Hürickson: Third quarter 2024 adjusted net income was 23.7 million dollars.
Sam Hürickson: $1.03 per diluted share versus $14.7 million or $0.64 per diluted share for the third quarter of last year, a 61% increase year over year.
Sam Hürickson: The adjusted net income increase was driven by higher surfactant volume and margins and a lower effective tax rate, partially offset by a polymer's operating income.
Sam Hürickson: In the third quarter, we executed tax projects that allowed us to reduce yielding income to zero, while still expecting to lack bonus depreciation for the Pasadena capital investment.
Sam Hürickson: Slide six shows the total company adjusted EBITDA bridge for the third quarter compared to last year's third quarter.
Sam Hürickson: Adjusted EBITDA was $53.1 million versus $48 million in the prior year, an 11% increase year-over-year.
Sam Hürickson: We will cover each segment in more detail, but to summarize, we delivered adjusted buprenorphine growth, interfections, and specialty products.
Sam Hürickson: partially offset by global polymers.
Sam Hürickson: Higher corporate expenses reflect 3.3 million dollars related to the Asia fraud event. The investigation is now closed and confirmed that this was an isolated and contained event.
Sam Hürickson: Slide 7 focuses on the surfactant segment results.
Sam Hürickson: So in fact, the net sales were $383 million for the quarter, a 2% increase versus the prior year. Selling prices were up 1%, primarily due to improved product and customer mix.
Sam Hürickson: Volume was up 3% year-over-year primarily due to double-digit growth within the agricultural oil field and the construction and industrial solution and markets.
Sam Hürickson: as well as sales with our distribution partners.
Sam Hürickson: Latin America surfactant volume who omits single digits
Sam Hürickson: as we add a new and recovered business in the consumer volumes in Mexico.
Sam Hürickson: Global Agriculture grew 22% in line with our expectation for a recovery in the second half of 2024.
Sam Hürickson: Foreign currency translation negatively impacted net sales by 2%.
Sam Hürickson: Surfactant-adjusted EBITDA for the quarter increased $12.6 million, or 40% versus the prior year. This increase was primarily driven by the 3% growth in sales volume and improved customer and product mix.
Sam Hürickson: This was partially offset by pre-operating expenses at the company's new facility in Pasadena, Texas.
Sam Hürickson: Now on slide 8, polymer net sales were $150 million for the quarter, a 12% decrease versus the prior year. Selling prices decreased 3%, primarily due to the pass-through of lower raw material costs and competitive pressures.
Sam Hürickson: Volume declined 11% in the quarter.
Sam Hürickson: Global rigid polyols volume was down 13% due to sluggish demand and competitive pressures.
Sam Hürickson: We believe this sluggish demand is related to global macroeconomic uncertainties, overall low construction activity, and the high interest rate environment.
Sam Hürickson: Specially polyols volume was up low single digits.
Sam Hürickson: Foreign currency translation positively impacted net sales by 2%.
Sam Hürickson: Polymer adjusted EBITDA decreased 6.3 million dollars or 21% versus the prior year, primarily due to the 11% decline in sales volume.
Sam Hürickson: Finally, specialty products net sales were $14.3 million for the quarter, a 24% decrease versus the prior year, primarily due to lower selling prices.
Sam Hürickson: Sales volume was down 5% versus the prior year, but adjusted EBITDA increased 1.3 million, or 33%.
Sam Hürickson: The increase in adjusted EBITDA was primarily due to higher unit margins within the median chain triglycerides product line.
Sam Hürickson: Turning to slide 9, for the first nine months of 2024, cash from operations was 94 million dollars or 11% lower than the same period last year due to the previously mentioned increase in inventory levels to prepare for the hurricane season and the two polymer plant turnarounds planned for the fourth quarter.
Sam Hürickson: We expect to return to lower inventory levels during the fourth quarter of 2024.
Sam Hürickson: Pre-cash flow was positive at seven million dollars for the first nine months as capital investments returned to historical levels.
Sam Hürickson: During the first nine months we deployed 87 million dollars against capital investments and 25 million dollars for dividends.
Luis Rojo: Now on slide 10 and 11, Luis will update you on our strategic priorities and capital investments. Thanks, Hans. I will focus my comments on our cost initiative, business strategy, and the progress of our major capital investments.
Luis Rojo: Year-to-date, the company recognized $34 million in pre-tax savings, despite the impact of incremental expenses related to the New Zealand Floor Event and the Asia Floor Event.
Luis Rojo: The Millsdale site continues to advance our water management initiatives. We will continue working on short-term improvements as well as our long-term infrastructure projects.
Luis Rojo: We remain pleased that several of our surfactant businesses continue to deliver double-digit volume growth during the quarter.
Luis Rojo: Our customers will always remain at the center of our strategy and innovation. Our long-standing Tier 1 customers value our technical capabilities and our ability to manufacture and deliver quality products at the scale they need.
Luis Rojo: Our Tier 1 customer base remains a solid foundation of our business. Continuing our new customer acquisition with Tier 2 and Tier 3 customers remains a key priority. This is an important and profitable growth channel within our surfactant business.
Luis Rojo: In the first nine months, our volume grew high single digits, and we added over 1,200 new customers.
Luis Rojo: Our agricultural business resumed growth and delivered 22% year-over-year volume growth in the third quarter after a difficult first half.
Luis Rojo: We remain optimistic rigid polio demand will increase as the market gets more macroeconomic clarity and the interest rate environment improves.
Luis Rojo: Insulation remains a critical enabler of a more sustainable and energy-efficient world.
Luis Rojo: Our polymers business continues to focus on developing the next generation of rigid poly technologies that can increase the energy efficiency and cost performance of our customer insulation products.
Luis Rojo: Additionally, we are excited about the new products we are introducing in the growing spray foam and market.
Luis Rojo: Moving to slide 11, construction of our new acosylation production facility in Pasadena, Texas is 99% complete, and we are excited to start the plant in December.
Luis Rojo: After completing a three-year capital investment program last year, Stepan now has the largest installed low-1,4-dioxane production capacity serving the North American merchant market.
Luis Rojo: For the first nine months of 2024, margin contributions from low-1,4-dioxin produce grew versus the prior year.
Luis Rojo: To conclude, we remain pleased that several of our surfactant businesses continue to deliver double-digit volume growth during the quarter.
Luis Rojo: Third quarter agricultural volumes grow in double digits, aligned with our expectations for a second half 2024 recovery.
Luis Rojo: We remain optimistic rigid polio demand will increase as the market gets more macroeconomic clarity and the interest rate environment improves next year.
Luis Rojo: Free cash flow should continue to improve versus the prior year, driven by the completion of our Pasadena investment, growth in market volumes, and our continued focus on cost reduction.
Luis Rojo: We believe we are positioned to deliver full-year adjusted EBITDA growth and positive free cash flow.
Luis Rojo: This concludes our prepared remarks.
Speaker Change: At this time, we would like to turn the call over for questions. Marvin, please review the instructions for the questions portions of today's call.
Marvin: Thank you. At this time, we'll collect the question and answer session. As a reminder to ask a question, you'll need to press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Please stand by while we compile the Q&A roster.
Speaker Change: And our first question comes from the line of Mike Harrison of Seaport Research Partners. Your line is now open.
Mike Harrison: Hi, good morning, congrats Luis on your new role.
Luis Rojo: Thank you.
Mike Harrison: I was hoping that you could answer a couple of questions for me on the surfactants business first
Mike Harrison: I'm very curious on the ag business.
Mike Harrison: Um, um,
Speaker Change: you set up double digits. Obviously, you've it's been a long road for that business to recover. Is your sense that you're seeing sustained improvement in demand as you're starting to look at Q4 and maybe orders, even for Q1 of next year? Or are there maybe some signs that there was a one time
Speaker Change: inventory replenishment that happened in Q3 and and maybe order patterns could be a little bit choppy as we look at the next couple quarters.
Speaker Change: Good question, Mike. No, we are very pleased with the performance in our agricultural business. As we said in our prepared remarks, the business grew 22% in the quarter.
Speaker Change: We were happy to declare
Speaker Change: the end of this talking and hopefully we won't talk any more about this talking in the future, but this is a hundred percent in line with how we communicated...
Speaker Change: and perspective in the first two quarters, right? We said we were expecting, we were expecting
Speaker Change: this talking in the first two quarters, and then we were expecting growth in the second half.
Speaker Change: We are delivering the growth in Q3. Q4 is looking okay. I mean, it's looking good. October is looking in the same proportion. And remember that this is the heavy season for North America on the ag business. So Q4 is going to remain a critical quarter for us.
Speaker Change: And we see good signs, and we're monitoring other ag companies. SMC reported yesterday, and other companies have been reporting, and we feel good about the ag business.
Speaker Change: All right, that's good to hear. And then I also noticed in the slide deck there that Europe looked like it was maybe the biggest driver of year-over-year improvement in surfactant earnings. And it seems like a lot of positive dynamics are going on in Europe. Can you talk about what you're seeing there?
Speaker Change: All right and then just in terms of the consumer side of the surfactants business it sounds like maybe that's where there was some weakening. I don't know if that's market driven or destocking driven. Any thoughts on what's going on on the consumer side and could that start to stabilize?
Speaker Change: Yeah, the global consumer business has a few ups and downs, and we were down on the personal care side, driven by some of our customers losing some business and some share.
Speaker Change: and impacting us sequentially because of that. But the good news is that when you think about the laundry and cleaning business, right, which is at the end, it's our biggest-volume business, it grew 4% in the quarter.
Speaker Change: So we are pleased that the laundry and cleaning business continues to do well.
Speaker Change: And that's a key indication of how the consumer continues spending in laundry and cleaning. So, ups and downs, but we're pleased with the cleaning business.
Speaker Change: All right, last question for me and then I'll turn it over is, you've talked a little bit about $60 million in quarterly EBITDA.
Speaker Change: being kind of the near-term earnings potential. You came in at $53 million this quarter. Can you talk about some of the areas that are maybe still dragging on your performance? I know there was a $3 million impact from the
Speaker Change: the cyber fraud situation. But just kind of curious, is $60 million a quarter still the type of level that you would expect to be able to reach as we start to look into early 25? Thank you.
Speaker Change: Thank you, Mike. As you know, we don't provide guidance, Mike, and let me remind you that my comment last quarter was about...
Speaker Change: We delivered last quarter with a lot of one-time impacts, and when you exclude those one-time impacts...
Speaker Change: You were rightly, as you mentioned, in the $60 million EBITDA.
Speaker Change: What I would say is that we are posting $53 million with a $3.3 million one-time event due to the fraud issue in Asia.
Speaker Change: and with a depressed volume business in the polymer side. As you saw, polymers' EBITDA went down $6.3 million, and we don't believe...
Speaker Change: All right, thanks very much.
Speaker Change: Our next question comes from the line of Dave Storms of Stonegate. Your line is now open.
Speaker Change: Good morning.
Speaker Change: Good morning, Dave.
Dave Storms: Congrats on the new role there Luis and just kind of wanted to start with Virgil Pali, you mentioned a couple times that there's obviously macro headwinds
Dave Storms: Are there any specific catalysts that you're keeping an eye on that might bring some clarity to the macro market and maybe how fast could we see a rebound there if any of those catalysts come to fruition?
Dave Storms: Great question, Dave. Luke.
Luke: As we said, and you can see a lot of the statistics out there, the construction activity, both residential and non-residential, is pretty weak.
Luke: Now.
Luke: Let me remind you guys that this is a market that has been growing high single digits over the last 10 to 20 years.
Luke: The need for better insulation is there, the new codes in different states and different countries in Europe continues changing.
Luke: We believe the market growth, even though it was 7%, 8%, 9% in the past, we believe we're going to see this type of market growth 3%, 4%, 5% into the future. So we are...
Luke: We are confident with our rigid polio business in the next five years when you think, when you look at trends in pent-up demand for re-roofing.
Luke: and all the construction that happened.
Luke: early 2000 that needs re-roofing in the next five years. All those things are very, very positive.
Luke: So, we feel good about the lamination and market growth opportunities going forward.
Luke: and we are heavily working on our diversification strategy to get into the high margin and growing spray foam business, which is critical for us as well to get into residential insulation and all of that.
Luke: But great question, and we feel good about the polymers business for the future.
Speaker Change: Understood, thank you for that. And then just turn over to the chieftain's, it's great to see some of the initiatives kind of take hold as you work on
Speaker Change: She's always better in your customer mix. Are there any, how much more room is there do you think to continue improving the customer mix and are there any initiatives to kind of highlight on that front?
Speaker Change: A great point, Dave. We have been talking a lot about tier two, tier three. This is an area where there are at least, I mean, there are 40,000 customers out there that we are not reaching all of them today.
Speaker Change: So that's why we have a big program and a big focus on Tier 2, Tier 3.
Speaker Change: when you have such a broad set of customers, right?
Speaker Change: that we either go direct or we either go with our distributors.
Speaker Change: These are thousands of thousands of customers, and when you see them growing strong mobile digits, that's a very good sign.
Speaker Change: that the demand is strong, and now we need to keep reaching more of those consumers. So our customer acquisition strategy in Tier 2, Tier 3 is key, is new customers. Then when you are in the customer, it's more products.
Speaker Change: because we are we still have a lot of customers where we only sell one or two products and then
Speaker Change: sweetening the mix within that customer to higher margin and to higher value type of product. So it's a three-step strategy on our Tier 2, Tier 3 and it's still a good opportunity for us to continue to work on.
Speaker Change: That's perfect, thank you. And then maybe just one more, a little more of a logistical question. As we're looking into Q4, should we expect any planned shutdowns at Plans for Maintenance or anything like that outside of what would be a normal cadence?
Speaker Change: Bye. Bye.
Speaker Change: Perfect question because we put it in the prepared remarks, we have two turnarounds in the polymers business now, that's why we built inventories in Q3, that's why free cash flow was only minus $4 million because we built a lot of inventory in Q3. Actually the impact of inventory you consider in the cash flow is $29 million.
Speaker Change: So, significant increase because of the hurricane season and also because of the polymers turnaround.
Speaker Change: So that's going to impact absorption, as you can imagine, in Q4. But, of course, this is just an absorption one-time impact, and it's nothing related to the long-term health of the business.
Speaker Change: We are executing those turnaround now, and they are going pretty well.
Speaker Change: That's perfect. Thank you for taking my questions and good luck in the fourth quarter
Speaker Change: Thank you. Bye-bye.
Speaker Change: Thank you. Thank you. Thank you. One moment for our next questions.
Speaker Change: Our next question comes from the line of David Silver of CL King & Associates. Your line is now open.
David Silver: Yeah, hi, thank you.
David Silver: I'll also send my congratulations to Luis and Samuel for the new roles.
David Silver: I'd like to maybe just start with a question on your CapEx outlook for next year.
David Silver: It was good to see that free cash flow has turned positive beginning this quarter, I guess.
David Silver: And the company is coming off of a period of elevated, I would say, spending on CapEx and some other things.
Speaker Change: When we are thinking about next year, Luis,
Speaker Change: higher return projects
Speaker Change: Thank you.
Luis Rojo: Thank you, David, for the question. And, look, we have been clear that after this heavy capex period behind...
Luis Rojo: Law 1-4 and Pasadena, that we will return.
Luis Rojo: to our normal capex level of around $120, $130 million, right? That's the range that we provided this year even though we spent some money still in Pasadena and that's what we are expecting going forward.
Luis Rojo: Now.
Luis Rojo: That's the base and we will continue looking for opportunities to grow.
Luis Rojo: and to invest capex that deliver a good return for our shareholders.
Luis Rojo: and there are still ideas that we are exploding and we will communicate them when we are...
Luis Rojo: you know, when they are confirmed.
Luis Rojo: But we still have opportunities to invest and to grow. I mean, when you think about the oil field business, this is a business where we're growing 30, 40% this year. We still have very low shares.
Luis Rojo: And the CapEx that we will need is not significant CapEx, a new plan, sort of things like that, right?
Luis Rojo: is blending capabilities, is one small reactor, is packaging, is things like that. So you are not going to see a major CAPEX cycle for Estefan in the short term with the opportunities that we have.
Luis Rojo: and that should allow us to continue delivering positive free cash flow for our shareholders.
Speaker Change: So, you know, your company's been very, you've been very clear over a multi-year period about, you know, trying to take advantage of your formulation capabilities and expand your share of Tier 2 and Tier 3.
Speaker Change: customers. You also mentioned here focus growth with the strategic tier ones. Could you share maybe one or two examples of where, you know, Stepin still sees growth with, you know, the tier one customers who I assume, you know,
Speaker Change: have a lot of formulation or a lot of development capabilities. Where does Stepin see the opportunities with their biggest strategic customers?
David Silver: Yeah, great question David, and Tier 1 remains a critical foundation of our business.
David Silver: Bye.
David Silver: and when you think about tier one, you need to think about two buckets. You need to think about consumer, which is true. And we are still investing with tier one customers. In Latin America, for example, we talk a lot about in the last few quarters, all the investments that we did in Mexico with new contracted business there.
David Silver: And you also need to think about the Tier 1 customers on the functional side. So when you think about ag and when you think those businesses.
David Silver: those are going to be extremely important. And then that's Latin America, that's functional. The third leg will be all our capacity and capabilities that we have in low one for dioxin in the North America market. We are the biggest.
David Silver: And we have the best capabilities and state-of-the-art assets, and we will continue leveraging those with our Tier 1 customers.
Speaker Change: Okay, great. And then the final question maybe for you, Luis.
Speaker Change: You know, you've been in place here at Stepin for a number of years, and you were with Procter & Gamble before that, and you know, you're now taking the reins here.
Speaker Change: I should have prefaced my remarks by saying I dialed in a few minutes late, so I apologize if you touched off on this already.
Speaker Change: But I was interested in your early thoughts about how a step-in company run by, you know, yourself
Speaker Change: is going to differ from how it was operated or the strategies that were employed under, you know, your recent predecessors and whatnot.
Speaker Change: What should we look for in terms of change in strategic direction or just overall philosophy? You know, with you in charge now, Luis. Thank you.
Luis Rojo: Thank you, David. Great question. And, of course, it's day one and we will continue adjusting our plans and strategy. What I will say is that I'm extremely honored and humbled for the opportunity. We have a very strong team in Stepan. It's not about Luis. It's about the team in Stepan.
Luis Rojo: This team, I know this team, I have been here for almost seven years.
Luis Rojo: and I know what this team can deliver. And I think working together and making sure that we are clear and we are focused on the biggest priorities and the biggest opportunities that we have in the short and mid-term is going to continue delivering profitable growth and shareholder value.
Luis Rojo: So, I mean, I'm extremely pleased with the team that I have and with the team that is going to help me to deliver what we need to deliver.
Luis Rojo: And we are not going to change the overall big, big strategic areas where we are focusing, but we are going to make...
Luis Rojo: surgical changes. We're going to make surgical investments in a few areas to accelerate the growth and to make sure that we are more focused on those activities instead of the, you know, a hundred opportunities that we may have today.
Luis Rojo: So, extremely happy with the team, and I'm sure the team is going to deliver the results.
Speaker Change: Very good. I appreciate all the color. Thanks, Luis.
Speaker Change: Bye-bye.
Speaker Change: Thank you.
Speaker Change: Thank you. This concludes the question and answer session. I would now like to turn it back to Luis Rojo for closing remarks.
Luis Rojo: Thank you very much for joining us on today's call. We appreciate your interest and ownership in Stepan Company. Have a great day.