Stepan Company (SCL) Q3 2024 Earnings Call Transcript

Oct. 30, 2024 12:34 PM ETStepan Company (SCL) Stock

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Q3: 2024-10-30 Earnings Summary

EPS of $1.03 beats by $0.38 | Revenue of $546.84M (-2.74% Y/Y) misses by $30.39M

Stepan Company (NYSE:SCL) Q3 2024 Earnings Conference Call October 30, 2024 9:00 AM ET

Company Participants

Sam Hinrichsen – Vice President and Interim CFO
Quinn Stepan – Chairman
Luis Rojo – President and CEO

Quinn Stepan

Good morning. 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. 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 Stepan over his 30-year career with the company.

As you are aware, Luis has served as the CFO of Stepan for the past seven years. During his tenure, Luis has developed a deep understanding of all aspects of our business. 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.

He is a passionate leader who cares deeply about our customers, employees and shareholders. Together with the strong team we have at Stepan, he will drive our profit recovery and deliver value for our shareholders. The Board and I have great confidence in Luis and look forward to working with him in his new role.

With that, I would like to turn the call over to Luis. Congratulations, Luis.

Luis Rojo

Thank you, Quinn, and good morning. And thank you all for joining us today to discuss our third quarter 2024 results. 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.

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. Global sales volume was down 1%.

Double-digit growth in several Surfactant end markets was fully offset by demand weakness and competitive pressures in our Polymers business. We believe this sluggish demand in Polymers is related to global macroeconomic uncertainties, low overall construction activity, and the high interest rate environment.

Third quarter adjusted net income was up significantly, driven by improved Surfactant and Specialty Products results and a lower tax rate. Year-to-date, adjusted EBITDA was $152 million, up 7% versus the prior year, driven by improved volumes and margins.

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. The company is on track to deliver our $50 million cost reduction goal for 2024 through ongoing discipline efforts in supply chain and the workforce productivity actions taken in the last quarter of 2023.

During the third quarter of 2024, the company paid $8.4 million in dividends to our shareholders. Our Board of Directors declared a quarterly cash dividend on Stepan common stock of $0.385 per share, payable on December 13, 2024. This represents a 2.7% increase in our dividends. Stepan has paid an increased dividend for 57 consecutive years.

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. Volume declined 11% in the quarter.

Global Rigid Polyols volume was down 13% due to sluggish demand and competitive pressures. We believe the sluggish demand is related to global macroeconomic uncertainties, overall low construction activity and the high interest rate environment.

Specialty Polyols volume was up low single digits. Foreign currency translation positively impacted net sales by 2%. Polymer adjusted EBITDA decreased $6.3 million or 21%, versus the prior year, primarily due to the 11% decline in sales volume.

Our customers will always remain at the center of our strategy and innovation. Our longstanding 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. In the first nine months, our volume grew high single digits and we added over 1,200 new customers.

Our diversification strategy into more functional products remains a key focus area. In the first nine months, we grew double digits in Oilfields and Construction and Industrial Solutions. Our Agricultural business resumed growth and delivered 22% year-over-year volume growth in the third quarter after a difficult first half.

We remain optimistic Rigid Polyol demand will increase as the market gets more macroeconomic clarity and the interest rate environments improve. 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 are introducing in the growing Spray Foam end market.

Moving to slide 11, construction of our new alkoxylation production facility in Pasadena, Texas is 99% complete and we are excited to start the plant in December. We expect the full contribution growth rate of the plant to be achieved in the second half of 2025.

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. For the first nine months of 2024, margin contribution from Low 1,4-Dioxane produce grew versus the prior year.

To conclude, we remain pleased that several of our Surfactant businesses continue to deliver double-digit volume growth during the quarter. Third quarter Agricultural volumes grow in double digits, aligned with our expectations for a second half 2024 recovery. We remain optimistic Rigid Polyol demand will increase as the market gets more macroeconomic clarity and the interest rate environment improves next year.

Dave Storms

Congrats on the new role there, Luis. And I just kind of wanted to start with Rigid Polyol. You mentioned a couple of times that there’s obviously macro headwinds. 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?

Luis Rojo

Great question, Dave. Look, as we said, and you can see a lot of statistics out there, the construction activity, both residential and non-residential, is pretty weak. Now, if you look at has been very weak in the short-term, and the expectation is that with moderation in interest rates, we should see a pickup in activity in 2025.

Let me remind you guys that this is a market that has been growing high single digits over the last 10 years to 20 years. The need for better insulation is there. The new codes in different states and different countries in Europe continues changing. And we believe the market growth, even though it was 7%, 8%, 9% in the past, we believe it’s going to be that — we believe we are going to see this type of market growth 3%, 4%, 5% into the future.

So we are confident with our Rigid Polyol business in the next five years. When you think — when you look at trends in pent-up demand for re-roofing and all the construction that happens early 2000 that needs re-roofing in the next five years, all those things are very, very positive.

So we feel good about the lamination market growth opportunities going forward 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. But great question and we feel good about the Polymers business for the future.

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