Stepan Company (SCL) Earnings Call Transcript & Summary

Good morning, and welcome to the Stepan Company Fourth Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded on Wednesday, February 19, 2025. 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.

Good morning, and thank you for joining Stepan Company's Fourth Quarter and Full Year 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 filings. In addition, this conference call will include discussions of adjusted 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 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. With that, I would like to turn the call over to Mr. Luis Rojo, our President and Chief Executive Officer.

Thank you, Sam. Good morning, and thank you all for joining us today to discuss our fourth quarter and full year 2024 results. I plan to share highlights of the full year performance and we will also share updates on our key strategic priorities, while Sam will provide additional details on our financial results. The company reported fourth quarter adjusted EBITDA of $35 million, down 7% versus the prior year and full year adjusted EBITDA of $187 million. 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. I'm proud of the resiliency and work and dedication of the entire organization. Full year adjusted EBITDA grew 4% versus prior year despite several onetime events that negatively impacted earnings and the preoperating expenses at our new Pasadena site. Surfactant and Specialty Products delivered strong double-digit adjusted EBITDA growth, partially offset by softer demand in polymers. Global volumes grew 1%, driven by 2.5% growth in Surfactant business. We are encouraged by the surfactant growth across several of our key strategic end markets. We finished the year with $50.5 million of adjusted net income, which was flat versus the prior year. The strong earnings growth in Surfactant and Specialty Products was fully offset by Polymers. Free cash flow for the year was positive at $39 million and in line with our expectations and our operating plan. The company delivered $48 million in pretax cost out during 2024, mainly through disciplined efforts in supply chain and workforce productivity actions taken in the last quarter of 2023. During the fourth quarter of 2024, the company paid $8.7 million in dividends to shareholders. 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 and increased its dividend for 57 consecutive years. Sam will now share some details about our fourth quarter and 2024 results.

Thank you, Luis. My comments will generally follow the slide presentation. Let's start with Slide 5 to recap the quarter. Fourth quarter 2024 adjusted net income was $2.8 million, $0.12 per diluted share versus $7.5 million or $0.33 per diluted share for the fourth quarter of last year, a 63% decrease mainly due to $4.4 million of higher preoperating expenses, our New York oxylation investment in Pasadena, Texas and $2.9 million related to a onetime tax proceeding reserve in Latin America. The previously announced CEO transition also impacted quarterly results by $2.8 million. Adjusted EBITDA for the quarter was $35 million, down 7% year-over-year. Global 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. In the fourth quarter, the company recognized $13 million in pretax savings out of the $48 million for the full year of 2024. Slide 6 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. Because this is net income, the figures noted are on an after-tax basis. We will cover each segment in more detail, but to summarize, we delivered operating income growth in Surfactants and Specialty Products, fully offset by lower operating results in Polymers. Corporate expenses increased primarily due to the higher expenses associated with the previously announced CEO transition in the fourth quarter of 2024. Slide 7 shows the total company adjusted EBITDA bridge for the fourth quarter compared to last year's fourth quarter. Adjusted EBITDA was $35 million versus $38 million in the previous year, a 7% decrease year-over-year. We will cover each segment in more detail, but to summarize, we delivered adjusted EBITDA growth in Surfactants and Specialty Products, fully offset by Global Polymers. Lower corporate expenses reflect savings related to productivity efforts implemented at the end of 2023. Slide 8 focuses on the Surfactant segment results. Surfactant 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. 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. This growth was partially offset by lower demand within the consumer products end markets. Foreign currency translation negatively impacted net sales by 3% Surfactant adjusted EBITDA increased $3 million or 10% versus the prior year. This increase was primarily driven by higher sales volume, favorable product and customer mix and margin recovery. Higher preoperating expenses at the company's new alkoxylation facility being built in Pasadena, Texas and the tax proceeding reserve in Latin America partially offset these drivers. Now on Slide 9, Polymer net sales were $130 million for the quarter, a 12% decrease versus the prior year. Selling prices decreased 4%, primarily due to the pass-through of lower raw material costs and competitive pressures. Sales volume declined 9% in the quarter, primarily due to an 11% decrease in global rigid polyol volume due to sluggish demand and competitive pressure. We believe the sluggish demand is related to continued global macroeconomic uncertainties, overall lower construction activity and a higher interest rate environment. Specialty Polyols volume was up year-over-year. Foreign currency translation positively impacted net sales by 1%. Polymer adjusted EBITDA decreased $9 million or 44% versus the prior year, primarily due to the 9% decline in sales volume. 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. Sales volume was up 32% versus the prior year and adjusted EBITDA increased to 65%. The increase in adjusted EBITDA was primarily due to margin recovery and volume growth within the medium chain triglycerides product line. Turning to Slide 10, which shows the total company adjusted EBITDA bridge for full year 2024 compared to full year 2023. Adjusted EBITDA was $187 million versus $180 million in the prior year, a 4% increase year-over-year despite onetime extra costs and higher pre-operating expenses associated with our mills Pasadena site. We delivered adjusted EBITDA growth in Surfactants and Specialty Products, partially offset by lower polymers performance. Polymer results decreased primarily driven by lower global rigid polyol demand and competitive pressures. Corporate expenses were higher mainly due to the Asia fraud event and the CEO transition. Excluding these events, property expenses were down year-over-year due to workforce productivity efforts implemented at the end of 2023. Overall, the company delivered $48 million in cost savings despite the flood event at Millsdale during the first half of 2024 and the Asia fraudulent. Next, on Slide 11, free 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. During the year, we deployed $123 million against capital investments and $34 million for dividends. Now on Slide 12 and 13, Luis will update you on our strategic priorities and capital investments.

Thanks, Sam. I will focus my comments on our strategic priorities. Our customer will always remain at the center of our strategy and innovation efforts. Our long-standing Tier 1 customers value our technical capabilities and our ability to manufacture and deliver quality products at the scale they need. Our Tier 1 customer base remains a solid foundation of our business. Continue our new customer acquisition with Tier 2 and 3 tier customers remains a key priority. This is an important and profitable growth channel within our Surfactant business. For the full year of 2024, our volume grew high single digits, and we added over 1,700 new customers. Our end market diversification strategy remains a key focus area. In 2024, we grew double digits in oilfield and in our Construction and Industrial Solutions businesses. After a difficult first half of the year, our agricultural business grew volume 30% versus prior year in the second half of 2024. 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 customer insulation products. Additionally, we are excited about the new products we're introducing in the growing spray foam end market. Cost and operational excellence remains as a key priority area. During 2024, the company recognized $48 million in pretax savings despite unfavorable onetime events. These savings were partially offset by preoperating expenses at our new Pasadena site, the CEO transition and overall inflation. 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. Moving on to Slide 13. Construction of our new alkoxylation production facility in Pasadena, Texas is nearing completion, and we expect the plant to start up in the first quarter of 2025. We expect the full contribution run rate of the plant to be achieved during the second half of 2025. 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. We believe adjusted EBITDA will improve in all our reporting segments. The Stepan team is executing on opportunities to grow volume, deliver improved product and customer mix and further progress our cost-out and cost avoidance initiatives. We are optimistic that polymers volumes will increase as we execute our innovation and growth plans. We believe our Surfactant business will experience continued growth in our key strategic end markets. 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. We believe we are positioned well to deliver full year adjusted EBITDA and adjusted net income growth and positive free cash flow in 2025. This concludes our prepared remarks. At this time, we would like to turn the call over for questions. Gigi, please review the instructions for the questions portions of today's call.

[Operator Instructions] Our first question comes from the line of Dave Storms from Stonegate.

Just kind of wanted to start with surfactants. Ag had a really strong quarter, and you've mentioned in the past that kind of goes the way of ag. How much more runway do you see in ag through the balance of 2025?

Great question, Dave. So look, we had a very strong second half in our Ag business. As I said in my prepared remarks, 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 in the ag business after a difficult first half with all the destocking that we still saw in that end market. We believe based on the low base that we have in the first half of 2024, 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.

Understood. And then just turning 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?

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. You saw that in surfactants, we still grew 15% adjusted EBITDA in the year despite all the investments that we did in Pasadena and despite all the onetime events that we have. I just want to clarify that 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 pretax. So Surfactants did okay. Specialty Products had an outstanding year, almost -- you saw it almost doubling the operating income. And really where we saw a sluggish demand was in our polymers business with high interest rate with a slow construction activity 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. So there are pockets of strength in our polymers business. And we need to, of course, grow the core, which is North America polymers. And we believe that we have a good plan for 2025. 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 backlog that we have in reroofing and remodels and all of that.

Understood.

Our next question comes from the line of Mike Harrison from Seaport Research Partners.

I was surprised to see the surfactants price mix positive in the 5% level there. You mentioned that was mostly product mix and customer mix. 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?

Good point, Mike. And as we said, our strategy continues to be growing with Tier 2, Tier 3 customers and of course, getting as much business as possible with Tier 1s. Everything is a priority. But Tier 2, Tier 3 delivered a positive mix, and we're growing high single digits 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 faster the Tier 2, Tier 3 segments. And then on the product side, we had a great -- as I mentioned before, we had a great second half and Q4 was stellar, growing 37%. Oilfield continues growing very nicely, and that provides a positive price mix. So we are very pleased with how we are returning the surfactant business, which is at the end, 70% of the company to growth. and to grow levels that are pretty healthy. And those places where we're growing provide that positive price/mix that you saw.

All right. Very helpful. And then I was hoping, Luis, that you could help us level set the starting point for 2025 EBITDA. If we look at 2024, as you referenced, there were a lot of unusual items. There were some outages, the CEO and the tax issues this quarter and the Pasadena start-up costs that presumably don't repeat. 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 and maybe some FX headwinds. So a lot of different moving pieces I was hoping that you could just help us bridge the -- call it, $185 million or $190 million of EBITDA you did in 2024. How might we think of a more normalized starting point as we look at 2025?

Great point, Mike, and thanks for pushing me for guidance, which I'm not going to provide. So -- but let me say something because we have been trying to be very, very clear and very transparent with the numbers and the one-timers that we had. You saw that Miller Zell was an $18 million impact in 2024. And when you think about all the other items, Asia, the transition, the taxes in Latin America. So we're talking about more than $30 million in onetime events that we really -- we have a strong cost avoidance and cost-out program in 2025 to ensure that we don't repeat those. So if you think about our performance and the $187 million, of course, we are very disappointed about those $30-plus million. At Pasadena, of course, we had to spend all this money. We had to hire the people. We had to train the people before the site is up and running. We started some of the depreciation already because there are a lot of areas of the plants that are functioning. So those costs will continue, but then you will see the revenue and the supply chain savings from the plant as the plant start up and we get to full run rate in the second half of 2025, you are going to see the savings 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. 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? And we need to avoid the $30 million issues that we had. 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 that's where this team should be capable of doing without those onetimer effects. 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.

All right. And then last question for me is just in thinking about the first quarter, 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 $4-ish million EBITDA headwind from Pasadena still being in its very early ramp stages. And I was curious, are there any other kind of onetime or unusual factors we need to keep in mind as we're thinking about Q1?

No, you're fully correct on the Pasadena comment. We're expecting to start up in Q1. What I will say is that Q1 -- I mean, we are, what, 60% into the quarter, where at week 8 from the 13 weeks of the quarter. And as I said before, ag continues to do well. Oilfield continues to do well. Our distribution partners continues to do well. So we are seeing a good start of 2025. But of course, this is only 7, 8 weeks, and we still have 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. And the only onetimer will be Pasadinos.

[Operator Instructions] Our next question comes from the line of Kevin Holder from C.L. King & Associates.

This is Kevin I am in for Dave Silver. 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, Kevin, for the question. We have provided guidance in the slides about our depreciation forecast for the year. We provided $128 million to $132 million guidance, so call it $130 million in the midpoint. So that's mainly the increase versus 2024 is mainly the Pasadena site. And again, I mean, all of that can vary a little bit based on timing and based on when each reactor is going online or not. So that can change a little bit. But what I'm planning to do is once the site is up and running and once we have more clarity on the qualification of the new SKUs, et cetera, in April, we can talk a little bit more about how we see the second half and what should be any savings or any modeling that you need to do 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.

Great. That's very helpful. And then maybe kind of I wanted to switch gears kind of towards current currency rates and the strengthening dollar. What is your sensitivity to recurrencies in the Euro, the Mexican Peso and the Brazilian Real?

Yes. No, good point. Look, we have -- the majority of the impact could be the euro. I mean, euro is sitting at 103 or 104 or 102. Some people are already talking about parity. That's our main risk, right? I mean it's very hard to do pricing 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 help in the cost structure as well. So the net-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 it is still manageable in our total numbers.

Great. 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?

No, great question. And what I will say is that the China team has done an outstanding job in diversifying the business. So when you think about our polymers business in China, it's not really focused 100% in roofing or construction. I mean it's a very diversified polymers business going into many end markets, including LNG ships and including many other end markets. So that's what the team has been able 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. we are not exposed to the whole construction and residential issue that you see in China these days. We're not exposed to that.

Great. That's very helpful.

At this time, I would now like to turn the conference back to Luis for closing remarks.

Thank you very much for joining us in today's call. We appreciate your interest and ownership in Stepan Company. Have a safe and productive and great day. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.