Q4 2024 Stepan Co Earnings Call
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Speaker Change: As a reminder, this call is being recorded on Wednesday, February 19th, 2025.
Speaker Change: It is now my pleasure to turn the call over to Mr. Sam Hinrichsen, Vice President and Interim Chief Financial Officer of Stepan Company. Mr. Hinrichsen, please go ahead.
Speaker Change: Good morning and thank you for joining Stepan Company's fourth quarter and full year 2024 financial review.
Speaker Change: Before we begin, please note that information in this conference call contains forward-looking statements which are not historical facts.
Speaker Change: These statements involve risk and uncertainties that could cause actual results to differ materially, including but not limited to prospects for foreign operations, global and regional economic conditions, and factors detailed in our Securities and Exchange Commission files.
Speaker Change: In addition, this conference call will include discussions of adjusted net income, adjusted EBITDA, and free cash flow, which are non-GAAP matters.
Speaker Change: We provide reconciliations to the comparable gap measures in the earnings presentation and press release, which we have made available at www.stepan.com under the investor section of our website.
Speaker Change: Whether you are joining us online or over the phone, we encourage you to review the Investors Live presentation.
Speaker Change: We make these facts available at approximately the same time as when the earnings release is issued, and we hope that you find the information and perspective helpful.
Speaker Change: With that, I would like to call over to Mr. Luis Rojo, President and Chief Executive Officer.
Luis Rojo: Thank you, Sam. Good morning, and thank you all for joining us today to discuss our fourth quarter and full year 2024 results.
Luis Rojo: I plan to share highlights of the full year 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 fourth quarter adjusted EBITDA of $35 million, down 7% versus the prior year, and full year adjusted EBITDA of $187 million.
Luis Rojo: While we are disappointed with our overall financial performance in 2024, we advanced our strategic investments and took the necessary steps to return the company to profitable growth.
Luis Rojo: I'm proud of their resiliency and work and dedication on the entire organization.
Luis Rojo: Full year adjusted EBITDA grew 4% versus prior year, despite several one-time events that negatively impacted earnings and the pre-operating expenses on our new Pasadena site.
Luis Rojo: Sulfactant specialty products deliver a strong double-digit adjusted EBITDA growth, partially offset by softer-demanding polymers.
Luis Rojo: Global volumes grew 1%, driven by 2.5% growth in surfactant business.
Luis Rojo: We are encouraged by the surfactant growth across several of our key strategic end markets.
Luis Rojo: We finished the year with $50.5 million of adjusted net income, which was flat versus the prior year.
Luis Rojo: A strong earnings growth in surfactant and specialty products was fully offset by polymers.
Luis Rojo: Pre-cash flow for the year was positive at $39 million, and in line with our expectations and our operating plan.
Luis Rojo: The company delivered $48 million in pre-tax costs out during 2024, mainly through disciplined efforts in supply chain and workforce productivity actions taken in the last quarter of 2023.
Luis Rojo: During the fourth quarter of 2024, the company paid $8.7 million in dividends to shareholders.
Luis Rojo: Our Board of Directors declared a quarterly cash dividend on Stepan's common stock of $0.385 per share, payable on March 14, 2025.
Stepan has paid an increased dividend for 57 consecutive years.
Sam Hinrichsen: Sam will now share some details about our fourth quarter and 2024 results.
Sam Hinrichsen: Thank you, Luis. My comments will generally follow the slide presentation.
Let's start with slide 5 to recap the quarter.
Sam Hinrichsen: Fourth quarter 2024 adjusted net income was 2.8 million dollars, 12 cents per diluted share versus 7.5 million dollars, or 33 cents per diluted share for the fourth quarter of last year.
Sam Hinrichsen: A 63% decrease, mainly due to $4.4 million of higher pre-operating expenses, LMU approximation investment in Pasadena, Texas, and $2.9 million related to a one-time tax proceeding reserve in Latin America.
Sam Hinrichsen: He previously announced CEO transition also impacted quarterly results by $2.8 million.
Sam Hinrichsen: Adjusted EBITDA for the quarter was $35 million, down 7% year-over-year. Google Sales volume was down 1% versus prior year, as double-digit growth in several surfactant end markets was fully offset by softer demand in rigid polymers.
Cash from operations was $68 million for the quarter.
and Free Cash Flow was $32 million.
Sam Hinrichsen: In the fourth quarter, the company recognized $13 million in pre-tax savings out of the $48 million for the full year of 2024.
Sam Hinrichsen: Slide six shows the total company net income bridge for the fourth quarter compared to last year's fourth quarter and breaks down the decrease in adjusted net income.
Sam Hinrichsen: Because this is net income, the figures noted are on an after-tax basis.
Sam Hinrichsen: We will cover each segment in more detail, but to summarize, we delivered Operating Income Growth, Interfections, and Specialty Products.
fully offset by lower operating results in polymers.
Sam Hinrichsen: Corporate expenses increased primarily due to the higher expenses associated with the previously announced CEO transition in the fourth quarter of 2024.
Sam Hinrichsen: Slide 7 shows the total company-adjusted EBITDA bridge for the fourth quarter compared to last year's fourth quarter.
Sam Hinrichsen: Adjusted EBITDA was $35 million versus $38 million in the previous year, a 7% decrease year-over-year.
Sam Hinrichsen: We will cover each segment in more detail, but to summarize, we delivered adjusted EBITDA growth, interfacting, and specialty products, fully offset by global polymers.
Sam Hinrichsen: Lower corporate expenses reflect savings related to productivity efforts implemented at the end of 2023.
Slide 8 focuses on the surfactant segment results.
Sam Hinrichsen: The fact that net sales were $379 million for the quarter, a 3% increase versus the prior year, selling prices were up 5%, primarily due to improved product and customer mix.
Sam Hinrichsen: Sales volume was up 1% year-over-year, driven by double-digit growth within the agricultural and oilfield end markets, along with our distribution partners.
Sam Hinrichsen: This growth was partially offset by lower demand within the consumer products and markets.
Foreign Currency Translation Negatively Impacted Net Sales by 3%
Thank you.
Sam Hinrichsen: Perfect and Adjusted EBITDA increased $3 million or 10% versus the prior year.
Sam Hinrichsen: This increase was primarily driven by higher sales volume, favorable product and customer mix, and margin recovery.
Sam Hinrichsen: Higher pre-operating expenses at the company's new encapsulation facility being built in Pasadena, Texas, and the tax proceeding reserve in Latin America partially offset these trials.
Sam Hinrichsen: Now, on Slack 9, PolymerNet sales were $130 million for the quarter, a 12% decrease versus the prior year.
Sam Hinrichsen: Selling prices decreased 4% primarily due to the pass-through of lower raw material costs and competitive pressures.
Sam Hinrichsen: Health volume declined 9% in the quarter, primarily due to an 11% decrease in global rigid polyols volume due to sluggish demand and competitive pressure.
Sam Hinrichsen: We believe the sluggish demand is related to continued global macroeconomic uncertainties.
overall lower construction activity and a higher interest rate environment.
Specially Paul York's recording was upbeat over here.
Our currency translation positively impacted net fares by one percent.
Sam Hinrichsen: Polymer adjusted EBITDA decreased $9 million of 44% versus the prior year primarily due to the 9% decline in sales volume.
Sam Hinrichsen: Finally, specialty product net sales were $17 million for the quarter, a 10% increase versus the prior year, primarily due to higher sales volume and higher selling prices.
Sam Hinrichsen: Their volume was up 32% versus the prior year, and adjusted EBITDA increased 65%.
Sam Hinrichsen: The increase in adjusted EBITDA was primarily due to margin recovery and volume growth within the medium chain triglycerides product line.
Sam Hinrichsen: Turning to slide 10, which shows the total company adjusted EBITDA bridge for 4-year 2024 compared to 4-year 2023.
Sam Hinrichsen: Adjusted EBITDA was $187 million versus $180 million in the prior year. The 4% increase year-over-year, despite one-time extra costs and higher pre-operating expenses associated with our new Pasadena site.
Sam Hinrichsen: We delivered adjusted EBITDA growth in surfactants and specialty products, partially offset by lower polymers performance.
Sam Hinrichsen: Automa results decreased primarily driven by lower global rigid polyurethane demand and competitive pressures.
Sam Hinrichsen: Corporate expenses were higher mainly due to the Asia fraud event and the CBO transition.
Sam Hinrichsen: Excluding these events, corporate expenses were down year-over-year due to workforce productivity efforts implemented at the end of 2023.
Sam Hinrichsen: Overall, the company delivered $48 million in cost savings despite the flood event at Miltsville during the first half of 2024 and the Asia fraudulent.
Sam Hinrichsen: Next, on slide 11, pre-cash flow was positive at $39 million for the year, up $125 million year-over-year, as capital investments returned to normalized levels and working capital decreased.
Sam Hinrichsen: During the year, we deployed $123 million against capital investments and $34 million for dividends.
Sam Hinrichsen: Now on slides 12 and 13, Luis will update you on our strategic priorities and capital investments.
Luis Rojo: Thanks, Sam. I will focus my comment on our strategic priorities. Our customers will always remain at the center of our strategy and innovation efforts.
Luis Rojo: Our longstanding 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.
Luis Rojo: Continue our new customer acquisition with tier 2 and 3 if your customer remains a key priority. This is an important and profitable growth channel within our Surfactant business.
Luis Rojo: For the full year of 2024, our volume grew high single digits and we added over 1,700 new customers.
Luis Rojo: Our end market diversification strategy remains a key focus area. In 2024, we grew double digits in oil field and in our construction and industrial solution businesses.
Luis Rojo: After a difficult first half of the year, our Agricultural Business Group volumed 30% versus prior year in the second half of 2024.
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 polytechnologies that can increase the energy efficiency and cost performance of our custom insulation products.
Luis Rojo: Additionally, we are excited about the new products we are introducing in the growing spray foam and market.
Cost and operational excellence remains as a key priority area.
Luis Rojo: During 2024, the company recognized $48 million in pre-tax savings despite unfavorable one-time events.
Luis Rojo: These savings were partially offset by pre-operating expenses on our new Pasadena site, the CEO transition, and overall inflation.
Thank you.
Luis Rojo: During 2024, the company made significant expenses and capex investments to improve the resiliency of our supply chain network. These investments will improve our customer service levels and reduce potential production disruptions in the future.
Luis Rojo: Moving on to slide 13, construction of our new acosylation production facility in Pasadena, Texas is nearing completion, and we expect the plant to start up in the first quarter of 2025.
Luis Rojo: We expect the full contribution run rate of the plan to be achieved within the second half of 2025.
Luis Rojo: To conclude, I'm excited and energized to continue our focus on accelerating our business strategies through improved execution to drive consistent volume growth, margin improvement, and free cash flow generation.
Luis Rojo: We believe adjusted EBITDA will improve in all our reporting segments.
Luis Rojo: The Stepan team is executing our opportunities to grow volume, deliver improved product and customer mix, and further progress our cost-out and cost-avoidance initiatives.
Luis Rojo: We are optimistic that polymers volumes will increase as we execute our innovation and growth plans.
Luis Rojo: We believe our surfactant business will experience continued growth in our key strategic end markets.
Luis Rojo: As previously announced, we expect our Pasadena facility will start up in the first quarter of 2025 and enable us to deliver volume growth and supply chain savings during the year.
Luis Rojo: We believe we are positioned well to deliver full-year adjusted EBITDA and adjusted net income growth and positive free cash flow in 2025.
Luis Rojo: This concludes our prepared remarks. At this time, we would like to turn the call over for questions.
Speaker Change: Gigi, please review the instructions for the questions portions of today's call.
Gigi: Thank you. As a reminder to ask a question, please press star 1 1 on your telephone and wait for your name to be announced.
To withdraw your question, please press star 11 again.
Please stand by while we compile the Q&A roster.
, . . . .
Speaker Change: Our first question comes from the line of Dave Storms from Stonegate.
Hi, Dave. Morning.
Lewis, and Erwin.
We cannot hear you.
Speaker Change: We cannot hear you well, can you speak louder? Is that better?
Perfect. Yeah, now it's better.
Speaker Change: Appreciate that. Okay, just kind of wanted to start with surfactants. Ag had a really strong quarter and you've mentioned in the past that Stepan kind of goes the way of Ag. How much more runway do you see in Ag through the balance of 2025?
Speaker Change: Great question, Dave. So look, we had a very strong second half in our business, as I said in my prepared remarks.
Speaker Change: The ag business grew 30% in the second half, so 22% in Q3 and 37% in Q4, so we are actually seeing the acceleration of the growth.
Speaker Change: in the ag business after, you know, a difficult few first half with all the de-stocking that we still saw in that end market.
Speaker Change: We believe, based on the low base that we have in the first half of 2019.
Speaker Change: and 24, we expect that double-digit growth to continue, and clearly the ag business is coming back. So we are positive that we should continue seeing the double-digit growth in the first half of 2025.
Speaker Change: Understood, thank you. And then just turn to polymers, obviously a challenged quarter and year. Would you characterize the challenges in polymers as across the board or are there any pockets of strength or green shoots that we could look at there?
Speaker Change: Good point, Dave. If you think about our 2024 performance, and while we are disappointed with the overall financial results of the company, we can do better, and we're capable of doing better.
Speaker Change: in the year despite all the investments that we did in Pasadena and despite all the one-time events that we have. I just want to clarify that
Speaker Change: The reserve that we created in Latin America for the tax item is an above-the-line reserve. It's not in the tax line, so that's actually above the line and impacting operating income and pre-tax.
So, so, uh,
Speaker Change: So surfactants did okay, specialty products had an outstanding year, almost, you saw it, almost doubling the operating income, and really where we saw sluggish demand was in our polymers business with high interest rate, with a slow construction activity.
Speaker Change: with challenges in Europe. But we grew our specialty polymers business. We had a great year in China. Despite all the issues in China, our polymers business in China is growing nicely.
Speaker Change: So, there are pockets of strength in our polymers business, and we need to, of course, grow the core, which is North America polymers.
Speaker Change: and we believe that we have a good plan for 2025.
Speaker Change: As I said in my prepared remarks, we're introducing, we're launching a spray foam market and we believe the market should grow, overall the market should grow in 2025 with all the backlogs.
Speaker Change: that we have in re-roofing and remodels and all of that.
Speaker Change: Understood, thank you for that caller and I'll get back in queue.
Thank you. One moment for our next question.
Speaker Change: Our next question comes from the line of Mike Harrison from Seaport Research Partners.
Hi, good morning. Can you hear me? Okay.
I can hear you, Mike. Perfect.
Mike Harrison: Great. Thank you very much. I was surprised to see the surfactant price mix positive in the 5% level there. You mentioned that was mostly product mix and customer mix.
Speaker Change: But maybe help us understand a little bit more what you're seeing in that price mix number as we're starting to look into next year. Should price mix be kind of flattish or could it be positive for the full year 25?
Thank you. Thank you. Thank you.
Speaker Change: Good point, Mike, and as we said, our strategy continues to be growing with Tier 2, Tier 3 customers, and of course,
Speaker Change: getting as much business as possible with Tier 1s, everything is a priority, but Tier 2, Tier 3 deliver a positive mix of well-growing high single digits.
Speaker Change: in the Tier 2, Tier 3 space, while Total Surfactant, you saw that the volume grew 2.5%. So when you think about it, from a customer point of view, we continue having a positive mix by growing.
Speaker Change: faster, the Tier 2, Tier 3 segments. And then on the product side.
Speaker Change: We had a great, as I mentioned before, we had a great second half and Q4 was stellar, growing 37%. Oil field continues growing very nicely and that provides a positive.
Price, Meeks.
Speaker Change: So, we are very pleased with how we are returning the surfactant business, which is at the end 70% of the company, to growth.
Speaker Change: and to growth levels that are pretty healthy. And those places where we're growing provide that positive price mix that you saw.
Speaker Change: All right, very helpful. And then I was hoping, Luis, that you could help us.
Speaker Change: Level set the starting point for 2025 EBITDA. If we look at 2024, as you referenced, there were a lot of
Speaker Change: Unusual items, there were some outages, the CEO and the tax issues this quarter and the Pasadena startup costs that presumably don't repeat.
NASA Jet Propulsion Laboratory, Caltech
Speaker Change: I also assume, though, that there's maybe some incentive comp that was running below normal, maybe some discretionary costs that start to come back.
Speaker Change: and maybe some effect headwinds. So a lot of different moving pieces. I was hoping that you could just help us bridge the 100, call it 185 or 190 million.
Speaker Change: Aviv Adayi did in 2024, how might we think of a more normalized starting point as we look at 2025?
Great point, Mike, and thanks for...
Speaker Change: pushing me for guidance, which I'm not going to provide. But let me say something, because we have been trying to be very, very
Speaker Change: are clear and very transparent with the numbers and the one-timers that we had.
And when you think about all the other items, Asia,
Speaker Change: the transition, the taxes in Latin America. So we're talking about more than $30 million.
in one-time events that are, that, that we really...
We have a strong cost avoidance and cost out program.
in 2025.
Speaker Change: to ensure that we don't repeat those. So if you think about our
performance on the 187.
Of course, we are very disappointed about those.
Speaker Change: $30 million plus. Pasadena, of course, we have to spend all this money. We have to hire the people. We have to train the people before the site is up and running.
Speaker Change: We started some of the depreciation already because there are a lot of areas of the plants that are...
that are functioning.
Speaker Change: So, those costs will continue, but then you will see the revenue and the supply chain savings.
Speaker Change: from the plant as the plant starts up and we get to full run rates in the second half of 2025.
you are going to see the savings that can...
Speaker Change: you know, that can compensate the extra cost that you saw in 2024. And we have been very clear, I mean, around $4 million per quarter.
So we have provided that data.
Speaker Change: and that's the piece that we need to offset in the future with the revenue of the plant and the supply chain savings from the plant, right?
Speaker Change: and we need to avoid the $30 million issues that we have.
Speaker Change: I think I was clear in a few calls previously that when you saw 2024 and you excluded some of those items, we were actually performing at the $60 million EBITDA per quarter. I'm not saying that's my guidance. I'm saying...
Speaker Change: That's where this team should be capable of doing without those.
Speaker Change: a one-timer effect. So the team is committed to turn around the profitability of the company in 2025 and we are working hard and the whole team is working hard to make that happen.
Speaker Change: Alright, thank you for that. And then the last question for me is just in thinking about the first quarter,
Speaker Change: and the impact of Pasadena. You've mentioned that it's nearing completion and going to be starting up, but presumably we're still going to have another four-ish million dollar
Speaker Change: Iveta Hedwin from Pasadena, still being in its very early ramp stages. And I was curious, are there any other kind of one-time or unusual factors we need to keep in mind as we're thinking about Q1?
Speaker Change: No, you are fully correct on the Pasadena comment. We are expecting to start up in Q1.
Speaker Change: What I would say is that Q1, I mean, we are, what, 60% into the quarter, week number eight.
from the 13 Weeks of the Quarter.
Speaker Change: And as I said before, Ag continues to do well, oil field continues to do well, our distribution partners continue to do well. So we are seeing a good start of 2025, but of course.
This is only seven, eight weeks and we still have...
Speaker Change: to deliver the quarter and the year. There are a lot of moving pieces with tariff and many, many other moving pieces as you can imagine, but so far we have a good start for the year.
Speaker Change: Support for Outdoor Nevada comes from Land Rover Las Vegas and Jaguar Land Rover Reno, inspiring the spirit of adventure through adventure.
Speaker Change: And the only one timer, Mike, the only one timer will be Pasadena.
Perfect. Thank you very much.
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Speaker Change: Thank you. As a reminder, to ask a question, please press star 1 1 on your telephone and wait for your name to be announced.
To withdraw your question, please press star 11 again.
Speaker Change: Our next question comes from the line of Kevin Holder from CL King & Associates.
Kevin holder: Hi, good morning. Thanks for taking our question and having me on for days. It's over. Good morning.
I just wanted to start off with a few clarifications.
Good morning, Louise.
Speaker Change: I just want to start off with a few clarifications with the Pasadena facility. Can you maybe give us a bit of guidance on how to look at interest expense and depreciation through 2025 as you kind of begin to ramp up production kind of in the Pasadena facility? Thank you.
Speaker Change: Thank you, Kevin, for the question. We have provided guidance in the slides about our depreciation forecast for the year. We provided a...
128 to 132.
guidance or call at a 1-30 in the midpoint.
So that's mainly.
Speaker Change: The increase versus 2024 is mainly the Pasadena site, and again, I mean, all of that can vary a little bit based on timings and based on when each reactor is going online or not, so that can change a little bit.
Speaker Change: But what I'm planning to do is, one, the site is up and running, and once we have more clarity on the qualification of the new SKUs, etc., in April, we can talk a little bit more about how we see the second half.
Speaker Change: and what should be, you know, any savings or any modeling that you need to do in your...
Speaker Change: in your models about the second half. I want to see the plant up and running, and I want to have a little bit more details before we can talk about the implications for the second half. You see the depreciation already in our forecast.
and we will update you more in April.
Speaker Change: Great, thank you for that. That's very helpful. And then maybe kind of, I want to switch gears kind of towards current currency rates and.
Speaker Change: the Strengthening Dollar. What is your sensitivity to recurrences in the euro, the Mexican peso, and the Brazilian Rei?
Yeah, no, good point. Good point. Look, we have...
Speaker Change: The majority of the impact could be the euro, I mean euro sitting at 1.03 or 1.04 or 1.02 some people are already talking about parity.
Speaker Change: That's our main risk, right? I mean, it's very hard to do pricing.
Speaker Change: in Europe just because of FX. That's not the dynamic in that environment. I'm not worried about Mexico and Brazil. Our cost structure is a lot based on local currency, so you see the health.
in the cost structure as well.
Speaker Change: So, the net impact is really not material when you think about Brazil or Mexico. The only risk that we need to continue managing is the euro, and I believe this is still manageable in our total numbers.
Speaker Change: Great, thank you for that. And then maybe my last one, kind of turning to China and maybe kind of your polymers business there. Can you maybe talk about your expectations in the construction market in China and maybe kind of your expectations in terms of growing spray foam into that market as well? Thank you.
Speaker Change: No, great question and what I would say is that the China team has done an astounding job in diversifying the business. So when you think about our polymers business in China, it's not really focused.
a hundred percent.
Speaker Change: in roofing or construction. I mean, it's a very diversified polymers business going into many end markets.
Mark: and Mark. So that that's what the team has been able.
Speaker Change: to do. And that's why we keep growing at a very nice rate. Albeit it's a small business, but we're growing very nicely in China. So we are not exposed.
Mark: to the whole construction and residential issue that you see in China these days. We're not exposed to that.
Mark: Great. Thank you. That's very helpful. I'll hop back into the queue.
Luis Rojo: Thank you. At this time, I would now like to turn the conference back to Luis for closing remarks.
Luis Rojo: Thank you very much for joining us in today's call. We appreciate your interest and ownership in Stepan's company. Have a safe and productive and great day. Thank you.