Urethane Highlights from Stepan’s Investors Call

Stepan Company (NYSE:SCL) Q1 2024 Earnings Call Transcript

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.

Scott Behrens: Thanks, Luis. I’ll focus my comments on our cost initiatives, business strategy and the progress of our major capital investments

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.

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