Stepan Company (NYSE:SCL) Q4 2023 Earnings Call Transcript
Stepan Company (NYSE:SCL) Q4 2023 Earnings Call Transcript February 20, 2024
Stepan Company misses on earnings expectations. Reported EPS is $0.33 EPS, expectations were $0.37. 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: Greetings, and welcome to the Stepan Company Fourth Quarter and Full Year 2023 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterward, we will conduct a question-and-answer session. As a reminder, this call is being recorded on Tuesday, February 20, 2024. It is now my pleasure to turn the call over to Mr. Luis Rojo, Vice President, and Chief Financial Officer of Stepan Company. Mr. Rojo, please go ahead.
Luis Rojo: Good morning and thank you for joining Stepan Company’s fourth quarter and full year 2023 financial review. Before we begin, please note that information this conference call contain forward-looking statements, which are not historical facts. These statements involve risk and uncertainties that could cause actual results to differ materially, including but not limited prospects for our foreign operations, global and regional economic conditions, and factor detailing our Security and Exchange Commission filing. In addition, this conference call will include discussions of adjusted net income, adjusted EBITDA and free cash flow, which are noon-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 investor section of our website.
Whether you are 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 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 fourth quarter and full-year results. To begin, I will share our fourth quarter and full-year highlights. Luis will then provide additional details on our financial results, and I will finish up with comments on our strategic investments, and will also provide brief comments on 2024. For the full-year, adjusted net income was $50.7 million versus a record prior year of $153.5 million. Earnings for the full-year were significantly impacted by an 11% decline in volume due to a slowdown in demand across most end-use markets, including significant customer and channel inventory de-stocking. While we believe the negative impacts of de-stocking are mostly behind us, we continue to experience de-stocking within our agricultural business at the start of 2024.
The team did an excellent job controlling our cash expenses. Cash expenses were similar to the prior year due to proactive headcount and discretionary expense controls implemented earlier in the year and lower incentive-based compensation accruals. Additionally, we executed our voluntary early retirement program and other fourth quarter workforce productivity actions that will deliver savings in 2024. In 2023, our cash flow from operations increased to $175 million, representing growth of 9% or $14 million compared to the previous year. The improvement in liquidity was driven by reducing inventory levels while we continued with our significant level of investment in our strategic growth projects. In the fourth quarter, the company reported adjusted net income of $7.5 million versus $13.5 million in the prior year.
Volume was up 3% versus prior year, driven by double-digit growth in polymers and 1% up in volume in surfactants. Within surfactants, we delivered strong volume growth in Personal Care from our low 1, 4 Dioxane investments. We also grew volume in the industrial cleaning and market and with our distribution partners. Latin American surfactants volume also grew strong double digits as we continued recovering the business. These gains were partially offset by continued customer and channel de-stocking in the agricultural end market. Expenses were similar to prior year due to proactive headcount and discretionary expense controls implemented earlier in the year and lower incentive-based compensation accruals. Adjusted EBITDA for the fourth quarter was $37.5 million versus $40.0 million in the prior year.
The reduction of 6% in adjusted EBITDA was largely driven by surfactants and specialty products, partially offset by growth in polymers. Surfactants EBITDA was lower due to an unfavorable customer and product mix, lower income in agricultural chemicals, and lower revenues within our biocide product line. Latin American surfactants experienced lower volumes and margins due to competitive imports. Specialty products was down versus record results last year due to pricing pressure and higher cost raw materials. Adjusted EBITDA for polymers nearly doubled due to strong volume growth. We continue to make significant progress on our cash objectives, delivering another $19 million reduction in our inventory levels during the last quarter of the year.
We delivered $22 million of positive free cash flow during the quarter as we finished our heavy capital investment phase. In the fourth quarter, our board of directors declared an increase to the quarterly cash dividend of $0.01 per share or 3% marking the 56th consecutive year that the company has increased its cash dividend to stockholders. During the fourth quarter of 2023, the company paid $8.4 million in dividends to shareholders and $33 million in dividends to shareholders for the full year. The company did not repurchase any company stock during the year and has $125.1 million remaining under the share repurchase program authorized by the board of directors. We remain competent in the strength and diversity of our business and its ability to generate cash that will allow us to invest in our current business, pursue strategic M&A opportunities, and return cash to our shareholders.
In summary, 2023 was a very challenging year for the company. I am proud and grateful for the resilience and effort shown by our team in executing the two biggest growth projects in the company's history while concurrently delivering our productivity gains and workforce actions. Luis will now share some details about our fourth quarter and full year results.
Luis Rojo: Thank you, Scott. My comments will generally follow the slide presentation. Let's start with slide five to recap the quarter. Fourth quarter adjusted net income was $7.5 million or $0.33 per diluted share versus $13.5 million or $0.59 per diluted share for the fourth quarter of last year. Specifically, the adjusted net income for the fourth quarter excludes deferred compensation expenses and environmental reserve changes. Most items were similar to a prior year for a total of $2.7 million after tax. Finally, we recorded restructuring charges of $6 million after tax. This includes our workforce productivity program as well as non-cash asset and goodwill impairments. The deferred compensation figures represent the net income related to the company deferred compensation plan as well as cash-settled stock appreciation rights for our employees.
Because this liability is changed with the movement the stock price, we exclude this item from our operational discussion. Slide six 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 not adhered on an after tax basis. We will cover each segment in more detail, but to summarize, we deliver excellent operating income growth in polymers and lower operating results for surfactants and specialty products. Slide seven focuses on the surfactant segment result for the quarter. Surfactant net sales were $370 million for the quarter and 19% decreased versus the prior year. Selling prices were down 22% primarily due to the fast through of lower raw material costs, unfavorable product mix, and competitive pricing pressures in Latin America.
Volume increased 1% year-over-year primarily due to strong double digit growth in personal care from our low 1,4 Dioxane investments. We also grew volume in the industrial cleaning and market and with our distribution partners. Latin America's surfactant volume also grew a strong double digits as we continue recovering the business. This growth was largely 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%. Surfactant operating income for the quarter decreased $6.9 million, mainly due to the product mix and lower unit margins in Latin America due to competitive pressures. Now turning to polymers on a slide eight, net sales were $147 million at 1% decrease versus the prior year.
Volume increased 10% driven by a 12% increase in global rigid polyols and higher demand within the specialty polyol business. Rigid polyols experiences strong growth in all regions. Selling prices decreased 15% primarily due to the fast through of lower raw material costs. Foreign currency translation positively impacted net sales by 4%. Polymer operating income increased more than four times versus prior year, primarily due to the 12% increase in global rigid polyol volumes and margin improvements. Finally, specialty product operating income decreased $3.9 million. This decline was mostly due to lower unit margins and volume within the MCT product line. The lower unit margins were primarily due to the competitive pricing pressures. Turning to slide nine, for the full year, adjusted net income was $50.7 million or $2.21 per diluted share, a 67% decrease versus a record $153.5 million or $6.65 per diluted share in the prior year.
Total company volume declined 11% due to lower demand and significant customer and channel inventory destocking across most of the company end market. Adjusted EBITDA for 2023 was $180 million, a decrease of 40% versus a record year in 2022. The decrease was largely driven by the volume reduction and lower overhead absorption. The surfactant segment delivered operating income of $72 million, down 56% compared to prior year, driven by a 9% reduction in volume, the polymer segment delivered operating income of $61 million, down 27% versus the prior year, driven by a 14% reduction in volume. Finally, specialty product segment delivered operating income of $11.5 million, down 62% versus prior year, driven by lower volumes and margin contraction due to competitive dynamics.
The Company's full year effective tax rate was 17% in 2023, versus 22% in the prior year. This year-over-year decrease was primarily attributed to R&D tax credits and stock based compensation awards over a lower pre-tax base. We are projecting a higher effective tax rate for 2024, due to an anticipated disallowance of GILTI deduction and foreign tax credits, resulting from the expected election of bonus depreciation for our Pasadena capital investment. Moving on to slide 10, we continue making significant progress on our cash position. We have increased our efforts to lower working capital and reduce capital spending to adapt to the current business environment. For the year, cash flow operation was $175 million, up 9% versus prior year. During the year, we deployed $331 million against capital investment, debt payment, and dividends.
Finally, we reduced inventory by $102 million versus Q1, 2023. The company full year capital spending was $260 million versus $302 million in the prior year, inclusive of our low 1,4 Dioxane at Pasadena investments in the U.S. For 2024, we are projecting that our capital expenditures will return to historical levels, while still executing the final phase of our Pasadena project. Now, beginning on slide 11 and 12, Scott will update you on our safety priorities.
Scott Behrens: Thanks, Luis. I will focus my comments on our cost and cash management initiatives and on the progress of our major capital investments and strategic priorities. Despite continued pressure from general cost inflation and higher expenses related to our major growth investments in Pasadena and low 1,4 Dioxane investments, our cash expenses remain flat year-over-year. Throughout the year, we took proactive actions to control costs and also successfully executed a significant productivity program that led to a 9% increase in cash generated from operations. As you may recall from our October earnings call, we anticipate returning the positive free cash flow generation this year, now that we are approaching the end of our heavy investment phase.
The cost reduction activities initiated last year, along with additional productivity and cost out programs underway in 2024, which is centered around improved operational performance across our manufacturing network, are expected to deliver $50 million in pre-tax savings in 2024. Moving to slide 12, construction on our new alkoxylation production facility in Pasadena, Texas is approximately 80% complete, but we expect the plant to start up in the third quarter of 2024. The underlining alkoxylation business that supports the Pasadena investment continued its volume growth during 2023 and at a very attractive unit margin, despite the continued destocking activity happening within the agricultural chemicals market. As you know, we have increased North American capability and capacity to produce ether sulfates that meet new regulatory limits on 1,4 Dioxane.
Recently installed assets in our no-dale facility are now mechanically completed. New contracted low 1,4 Dioxane volumes have already started shipping from the site and should grow as we reach full installed capacity during the first quarter of 2024. Stepan now has the largest installed low 1,4 Dioxane production capacity serving the North American merchant market, which will enable Stepan to maintain and grow our North American sulfonation business in 2024 and beyond. In early 2024, our 1,4 Dioxane encountered operational interruptions due to a series of power disruptions from our external power provider, compounded by a period of extremely cold weather in January. The plant was able to successfully restart most unit operations. Our Phthalic Anhydride and Polyol unit operations were more significantly impacted by the unplanned outage than we expect to be back to full production in PA Polyols shortly.
Moving to slide 13, as we look to 2024, we believe volumes and margins will improve due to continued recovery in rigid Polyols demand, growth in surfactant volumes driven by new contracted business, along with the expected recovery of the agricultural business in the second half of the year, and lower overall raw material costs versus 2023. Our cost reduction activities are expected to deliver $50 million in pre-tax savings in 2024, which will help offset future inflation, increased expenses associated with the planned commissioning of our new Pasadena alkoxylation assets, and higher incentive-based compensation expenses. A combination of anticipated market recovery, executing our strategic initiatives and the aforementioned cost reductions should position us well to deliver adjusted EBITDA growth and positive free cash flow in 2024.
We remain confident in our long-term growth and innovation initiatives. This concludes our prepared remarks. At this time, I'd like to turn the call over for questions. Daniel, please review the instructions for the question portion of today's call.
See also 12 Best Blue Chip Stocks To Invest In According to Hedge Funds and 25 Most Cultural Cities in the World.
To continue reading the Q&A session, please click here.
