雅虎香港財經 Stepan Company (NYSE:SCL) Q1 2024 Earnings Call Transcript
Stepan Company (NYSE:SCL) Q1 2024 Earnings Call Transcript April 30, 2024
Stepan Company beats earnings expectations. Reported EPS is $0.605, expectations were $0.35. SCL isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and thank you for standing by. Welcome to the Stepan Company First Quarter 2024 Earnings Conference Call. [Operator Instructions] Please 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.
Luis Rojo: Good morning and thank you for joining Stepan Company first quarter 2024 financial review. Before we begin, please note that information in this conference call contains forward-looking statements, which are not historical facts. These statements involve risks and uncertainties that could cause actual results to differ materially, including, but not limited to prospects for our foreign operations, global and regional economic conditions, and factors detailed in our Securities and Exchange Commission filing. In addition, this conference call will include discussion of adjusted net income, adjusted EBITDA and free cash flow, which are non-GAAP measures. We provide reconciliations to the comparable GAAP measures in the earnings presentation and press release, which we have made available at www.stepan.com under the Investors section of our website.
Whether you’re joining us online and 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 perspective helpful. With that, I would like to turn the call over to Mr. Scott Behrens, our President and Chief Executive Officer.
Scott 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 we’ll also share updates on 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. Global 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 Millsdale site, mostly offset the strong recovery in volumes across our other core markets. Global sales volume, excluding the impact of agricultural and PA 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 and Cleaning and our Institutional Cleaning businesses have stabilized and we believe destocking has run its course. Within Polymers, Rigid and Specialty Polyols 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 returned 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 Millsdale site and pre-commissioning expenses at our new alkoxylation facility in Pasadena, Texas.
During the first quarter of 2024, the company paid $8.5 million in dividends to shareholders. The company did not repurchase any company stock during the first 3 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 a quarterly cash dividend on Stepan’s common stock of $0.375 per share, payable on June 14, 2024. Stepan has paid and 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.
Luis will now share some details about our first quarter results.
Luis Rojo: Thank you, Scott. My comments will generally follow the slide presentation. Slide 5 shows the total company net income bridge for the first quarter, compared to last year first quarter and break down the decrease in adjusted net income. Because this is net income, the figure is not here on an after-tax basis. First quarter 2024 adjusted net income was $14.7 million, or $0.64 per diluted share versus $16.4 million, or $0.71 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 a GILTI deduction and foreign tax credits, resulting from the expected election of bonus depreciation for our Pasadena capital investment.
Slide 6 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 year, a 5% increase year over year. We will cover each segment in more detail, but to summarize, we deliver adjusted EBITDA growth in surfactants and specialty products, partially offset by global polymers. Lower corporate expenses also contributed to the adjusted EBITDA growth. Slide 7 focus on Surfactants segment results. Surfactants net sales were $391 million for the quarter, a 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 1,4-dioxane investments and in the oilfield end 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 within the agricultural end market due to continued customer and channel inventory destocking. Foreign currency translation positively impacted net sales by 2%. Surfactants adjusted EBITDA for the quarter increased $1.5 million or 4% versus the prior year. The increase was driven by the margin improvement that was partially offset by pre-operating expenses at the company’s new alkoxylation production facility being built in Pasadena, Texas and expenses associated with operational interruptions at the Millsdale plant site.
Excluding these one-time expenses, adjusted EBITDA grew double-digits in the Surfactants business. Now, on Slide 8, polymer 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. Volume increased 1% in the quarter, driven by a 4% increase in Global Rigid Polyols and 7% increase in Specialty Polyols. This excellent volume growth was partially offset by lower PA volumes due to the Millsdale operational interruption. Rigid Polyols experienced growth in all regions. Foreign currency translation positively impacted net sales by 3%. Polymer adjusted EBITDA decreased $1.9 million or 10%, primarily due to the previous communicated higher expenses due to the Millsdale operational issue.
Excluding these one-time expenses, adjusted EBITDA grew in the Polymers business. Finally, Specialty Products net sales were $15 million for the quarter, a 33% decrease versus the prior year. Volume was up double-digit versus the prior year, while adjusted EBITDA increased $1.9 million, or 49%. The increase in adjusted EBITDA was primarily due to both higher unit margins and volume within the MCT product line. Turning to Slide 9, we continue making progress on our cash position. For the first quarter, cash from operation was $42 million and free cash flow was positive at $11.4 million, up $176 million versus 2023. We continued optimizing our inventory levels and we were able to reduce another $8 million. During the quarter, we deployed $38 million again in CapEx Investments and dividends.
Now on Slide 10 and 11, Scott will update you on our strategic priorities and capital investments.
Scott Behrens: Thanks, Luis. I’ll focus my comments on our cost initiatives, business strategy and the progress of our major capital investments. The 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 Millsdale operational issue, commissioning expenses in our new Pasadena site, higher operating expenses related to the new low 1,4-dioxane manufacturing process, and 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 Polyols volume grew 4% and 7% respectively, while Specialty Products volume was up double-digits. Our large Laundry and Cleaning, Consumer and Institutional Cleaning 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 longstanding Tier 1 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 2 and Tier 3 customers who highly value the technical support and services that Stepan can provide. During the first quarter of 2024, we added approximately 400 new Tier 2 and Tier 3 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 in Tier 2 and Tier 3 markets and functional markets including agricultural and oilfield chemicals, continues to be a key priority for Stepan. Insulation remains a critical enabler of a 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’ insulation products. Moving to Slide 11, construction on our new alkoxylation 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 alkoxylation 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 3-year capital investment program last year, Stepan now has the largest installed low 1,4-dioxane 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 qualifications are completed. As already reported in our February earnings call, our Millsdale site was impacted by a series of power disruptions combined with below freezing temperatures in January with the main impact to the phthalic anhydride and polyol unit operations. All operations other than phthalic anhydride have been in our back in production and we were able to minimize supply disruptions to our polyol customers through our production network. The PA unit experienced several restart challenges but has since been restarted and is producing products. In addition to the power weather interruption, we also experienced unplanned maintenance and operational issues with the Millsdale wastewater treatment plant.
Our team has been actively addressing these issues through infrastructure and process improvements. 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 Polyols 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 in pre-tax cost reductions to help offset inflationary pressures, the expenses associated with commissioning our new Pasadena alkoxylation assets, higher incentive-based compensation and incremental expenses associated with the operational issues at Millsdale.
Free cash flow should continue to improve versus prior year as we finish construction on our Pasadena investment and benefit from higher agricultural volumes in the second half of the year. Continued gradual growth in market volumes, improved operational performance, and our continued focus on cost reductions should position us to deliver full-year adjusted EBITDA growth and positive free cash flow. 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. Didi please review the instructions for the question portion of today’s call.
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