Stepan Company (SCL) Q4 2024 Earnings Call Transcript

Feb. 19, 2025 4:00 PM ETStepan Company (SCL) StockSCL

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Q4: 2025-02-19 Earnings Summary

EPS of $0.12 misses by $0.21 | Revenue of $525.61M (-1.23% Y/Y) beats by $4.64M

Stepan Company (NYSE:SCL) Q4 2024 Earnings Conference Call February 19, 2025 9:00 AM ET

Company Participants

Sam Hinrichsen – Vice President and Interim CFO
Luis Rojo – President and CEO

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. 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.

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 on the entire organization.

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. Surfactants 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 our 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. A 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 pre-tax 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 common stock of $0.385 per share, payable on March 14, 2025. Stepan has paid an increased dividend for 57 consecutive years.

Sam will now share some details about our fourth quarter and 2024 results.

Sam Hinrichsen

Thank you, Luis. My comments will generally follow this 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. The 63% decrease mainly due to $4.4 million of higher pre-operating expenses, our new alkoxylation investment in Pasadena, Texas, and $2.9 million related to a one-time tax proceeding reserve in Latin America. We previously announced CEO transition also impacted quarterly results by $2.8 million.

The 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 and 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 pre-tax savings out of the $48 million for the full year of 2024.

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 polyols volume with the 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 increased $9 million, or 44% versus the prior year, primarily due to the 9% decline in sales volume.

Luis Rojo

Thanks, Sam. I will focus my comment 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.

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. 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 solution 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 Polyols technologies that can increase the energy efficiency and cost performance of our customer insulation products. Additionally, we’re excited about the new products we’re introducing in the growing spray farm end market.

Cost and operational excellence remains as a key priority area. During 2024, the company recognized $48 million in pre-tax savings despite unfavorable one-time events. These savings were partially offset by pre-operating expenses on 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 plan to start up in the first quarter of 2025. We expect the full contribution run rate of the plan to be achieved within 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, delivering improved product and customer mix, and further progress our cost-out and cost-avoiding initiatives. We are optimistic that Polymer’s 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] (ph), please review the instructions for the questions portions of today’s call.

Dave Storms

Understood. Thank you. 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?

Luis Rojo

So good point, Dave. If you think about our 2024 performance and why 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 one-time 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 pre-tax. 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, with challenges in Europe. But we grew our specialty polymer business. We had a great year in China, despite all the issues in China. Our polymer 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. We believe that we have a good plan for 2025. As I said in my prepared remarks, we’re introducing in — we’re launching a spray for market, and we believe the market should grow — overall the market should grow in 2025 with all the backlogs that we have in re-roofing and remodels and all of that.

Kevin Holder

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.

Luis Rojo

Great question and what I would 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. So we are not exposed to the whole construction and residential issue that you see in China these days. We’re not exposed to that.

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