Participants

Luis Rojo; Chief Financial Officer, Vice President; Stepan Co

Scott Behrens; President, Chief Executive Officer, Director; Stepan Co

Vincent Anderson; Analyst; Stifel Financial Corp

Mike Harrison; Analyst; Seaport Global Holdings LLC

Dave Storms; Analyst; Stonegate Capital Markets Inc

Presentation

Operator

Good day and thank you for standing by, and welcome to the Stepan Company First Quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session to ask a question. (Operator Instructions) Again, please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Luis Rojo, CFO, please go ahead.

Luis Rojo

Yes, good morning, and thank you for joining the Stepan Company First Quarter 2020 for 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 Security and Exchange Commission filings.
In addition, this conference call will include discussion of adjusted net income, adjusted EBITDA and free cash flow, which are non-GAAP measures. We provide reconciliations to their 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 where you're joining us online and 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 perspectives 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 first quarter 2024 results. I plan to share highlights from our first quarter performance, and Ross will share updates at our key strategic priorities. While Luis will provide additional details on our financial results. 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 TA, 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 polyol, which 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 return 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 constellation facility in Pasadena, Texas during the first quarter of 2024, the company paid $8.5 billion in dividends to shareholders. The Company did not repurchase any Company stock during the first three months of 2024 and has $125 billion remaining under the share repurchase program authorized by our Board of Directors.
Yesterday, our Board of Directors declared a quarterly cash dividend on Stepan's common stock of $0.375 per share payable on June 14, 2024. Stephanie has paid and increased its dividend for 56 consecutive years with the volume performance in several of our end markets delivering strong growth. We remain confident in the strength and diversity of our business and its ability to generate cash that will allow us to continue to invest in our business and return cash to our shareholders.
Luis will now share some details about our first quarter results.

Luis Rojo

Thank you, Scott. My comments will generally follow the slide presentation. Slide 5 shows the total company net income bridge for the first quarter compared to last year first quarter and breaks down the decrease in adjusted net income because this is net income. The figures noted here are on an after-tax basis for first quarter 2020 for adjusted net income was $14.7 million or $0.64 per diluted share versus $16.4 million or $0.71 per diluted share for the first quarter of last year. Adjusted net income reduction was driven by a higher effective tax rate compared to 2023.
We are projecting a higher effective tax rate for 2024 due to the anticipated disallowance of rigidity reduction and foreign tax credit resulting from the specter of large election of bonus depreciation for our Pasadena capital investment.
Slide 6 shows the total company adjusted EBITDA bridge for the first quarter compared to last year. First quarter adjusted EBITDA was $51.2 million versus $48.7 million in the prior year, a 5% increase year over year. We will cover each segment in more detail. But to summarize, we delivered adjusted EBITDA growth in surfactants and specialty products, partially offset by global floor polymers. Lower corporate expenses also contributed to the adjusted EBITDA growth.
Slide 7, focus on Surfactant segment results. In fact, the net sales were $391 million for the quarter, a 16% decrease versus the prior year. Selling prices were down 18%, primarily due to the pass-through of lower raw material costs, less favorable product mix and competitive pricing pressures in Latin America and Europe volume was flat year over year.
We delivered a strong double digit growth in personal care from our low one for balancing investments and in the oilfield end markets, we also grew volume in the construction Industrial Solution business and with our distribution partners, Latin America surfactants volume also grew strong double digits as we continue recovering the business. This growth was offset by lower demand within our agricultural end market due to continued customer and channel inventory destocking.
Foreign currency translation positively impacted net sales by 2%. In fact, our adjusted EBITDA for the quarter increased $1.5 million or 4% versus a prior year. Increase was driven by margin improvement was partially offset by pre-operating expenses at the Company's newer Constellation production facilities being built in Pasadena, Texas and expenses associated with operational interruptions at the mutual fund side. Excluding these onetime expenses, adjusted EBITDA grew double digits in the surfactant business.
Now on Slide 8. Polymer net sales were $146 million for the quarter, a 10% decrease versus the prior year. Selling prices decreased 14%, primarily due to the pass-through of lower raw material costs. Volume increased 1% in the quarter, driven by a 4% increase in global rigid volumes and 7% increase in specialty volumes. Excellent volume growth was partially offset by lower PA volumes due to the Neotel operational interruption. Ed volumes experienced growth in all regions. Foreign currency translation positively impacted net sales by 3%.
Volume and adjusted EBITDA decreased $1.9 million or 10%, primarily due to a previous communicated higher expenses due to the Millsdale operational issue. Excluding these onetime expenses, adjusted EBITDA grew in the polymers business.
Finally, a specialty product. Net sales were $15 million for the quarter of 33% decrease versus the prior year. Volume was up double digits versus the prior year, while adjusted EBITDA increased $1.9 million or 49% increase in adjusted EBITDA was primarily due to both higher unit margins and volume within our MCT product line.
Turning to slide 9, we continue making progress on our cash position.
For the first quarter, cash from operations was $42 million and free cash flow was positive at $11.4 million, up $176 million versus 2023. We continue optimizing our inventory levels and we were able to reduce another $8 million. During the quarter, we deployed $38 million, again, CapEx investments and dividends.
Now on Slide 10 and 11, Scott will update you on our strategic priorities and capital investment.

Scott Behrens

Thanks, Louise. I'll focus my comments on our cost initiatives, business strategy and the progress of our major capital investments. The cost reduction program initiated last year, along with additional productivity and cost-out initiatives underway in 2024, centered around our improved operational performance across our supply chain network are expected to deliver $50 million in pretax savings in 2024. As of the first quarter, the company was on track to deliver $50 million cost out goal and recognized $18 million in pretax savings.
This was largely offset by the incremental expenses related to the Millsdale operational issue, commissioning expenses in our new Pasadena site, higher operating expenses related to the new loan, one for docs in manufacturing process and overall labor cost inflation. We are encouraged by the volume performance in several of our end markets delivering growth. Surfactants delivered strong volume growth in personal care, oilfield Construction & Industrial Solution end markets and with our distribution partners.
Latin American surfactants delivered strong double digit growth with record volumes in Mexico, rigid and Specialty Polyol volume grew 4% or 7% respectively, while specialty products volume was up double digits. Our large laundry and cleaning consumer and institutional cleaning businesses have stabilized and we expect gradual and modest growth in the future. Our customers will always remain at the center of our strategy and innovation.
Our long-standing Tier one customers, value our technical capacity and the ability to manufacture and deliver quality products at the scale they need we continue to diversify our customer base by expanding our reach to Tier two and Tier three customers who highly value the technical support and services that Stefan can provide during the first quarter of 2024, we added approximately 400 new Tier two and Tier three customers increasing the segment volumes versus the prior year.
Our technical collaborations are increasingly focused on helping our customers make their product portfolio transition towards a more sustainable future. And we are happy to be on this journey with them.
Our diversification strategy with tier two and tier three markets in functional markets, including agricultural and oilfield chemicals continues to be a key priority for Stepan. 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 customers' installation products.
Moving to slide 11, construction on our new constellation 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 our contractor delay. The underlining our Constellation business that supports the Pasadena investment, excluding the agricultural destocking, continued its volume growth during the first quarter 2024 at very attractive unit margins after completing a three-year capital investment program last year, step and now has the largest installed, low one for dock same 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 have been and are 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 product. In addition to the power of 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 will remain focused on delivering $50 million in pretax cost reductions to help offset inflationary pressures, the expenses associated with commissioning our new Pasadena Constellation assets, higher incentive based compensation and incremental expenses associated with the operational issues at Lowe's.
There free cash flow should continue to improve versus prior year as we finish construction on our Pasadena investments and benefit from higher agricultural volumes in the second half of the year.
Continued gradual growth in market volumes improved operational performance and our continued focus on cost reduction should position us to deliver full year adjusted EBITDA growth and positive free cash flow. We remain confident in our long-term growth and innovation initiatives.
This concludes our prepared remarks. At this time, we would like to turn the call over for questions. DD, please review the instructions for the question portion of today's call.

Question and Answer Session

Operator

(Operator Instructions) Vincent Anderson, Stifel.

Vincent Anderson

Yes, good morning. Gentlemen, thanks. And for events and holidays, apologies in advance. If you've answered any of this, you guys are moving a little bit faster than I am today, but I wanted to start with the operating income because it sounds like there is a lot of little issues here in the quarter, but the margins came in quite strong regardless.
So can you maybe just talk about what big positives were, whether it was all fixed cost leverage or raw materials? And then kind of second to that, are there Tier two, Tier three and oilfield games have those been enough to offset the mix headwinds from culture?

Luis Rojo

Our savings in this is very low as we as we said in our prepared remarks on adjusted EBITDA for the third factor was just slightly up 4% versus last year. And actually, if you exclude the one-time expenses, but we had because of the disruption in Millsdale, our adjusted EBITDA in fact, and it's actually up double digits up, which is a good testament of margin improvement.
So you saw volumes our flat in a in sort of fact that overall flat with several places growing double digits, but overall volumes flat. So the driver of the adjusted EBITDA growth is margin despite despite the fact that ag is a significant negative mix in the numbers. If you exclude the ACT destocking, our operating income and our adjusted EBITDA in this business will be of very, very strong double digits. So accuracy is a negative and.

Vincent Anderson

Okay. All right. Perfect. Thank you.
And then so I don't I'm not sure exactly how to ask this one, but yes, I appreciate that. Millsdale is a very large complex plant one of your older plants. I just I'm trying to understand what opportunities there are maybe with them have kind of scheduled turnarounds that you would have an opportunity to really go deep into that plant, trying to tie up some of these loose ends that seemed there crop up.
It feels like, you know, every year at this point, whether it's power now wastewater. I'm just trying to kind of understand where that plant is in cycle of your shorter-term maintenance needs and maybe longer term projects, you haven't had an opportunity to address.

Scott Behrens

Yes, great question, Vincent. First of all, we do have a long-term infrastructure reinvestment plan for that site, and we do follow and execute against that every year from the power disruptions that does seem to be more frequent over the last three or four years. That's a real issue that we're working on with our external power proprietors.
As you know, in this country. The energy infrastructure is aging and there is more reinvestment. So our primary focus is to improve the quality and reliability of the power that we get into our Millsdale site and that's actively being worked on.
With regards to our other infrastructure assets at the site, the wastewater treatment plants, I would say at Sun an unexpected maintenance outage, we do turnarounds on all of our infrastructure assets. This one kind of creeped up unexpectedly. We're managing it and it should be rectified here in the second quarter. So it is our one of our older sites in our global network. It is very large and it's a main focus for us to continue to improve in and reinvest for improved reliability for our customers.

Vincent Anderson

That's excellent. Thank you. And just one last one. I'm just trying to get a feel for -- your polyol volume or at the very least are demand indications given some of the disruptions this quarter. Do you feel like they're tracking what what you're seeing customers put out there in terms of installation volume? Or is there maybe still a little bit of a disconnect in terms of how they're managing inventory or timing of these projects?

Scott Behrens

I think directionally, the answer is yes. I think some of the customers that may have reported earlier, some of their growth may be a little disconnected from ours due to things that they're doing in the U.S. with their marketing programs. But overall, I think we're pleased that our volume is tracking. It's on a recovery path. There's there seems to be a lot of pent-up demand for reroofing projects. And I think if we can clear some of the operational issues we have you'll see our numbers track more closely to what the what you may be expecting from the customer base release.

Luis Rojo

And the growth of our business and the growth in polymers growth was broad-based with all regions growing and also specialty polyols growing at plus 7%, which is pretty strong.

Vincent Anderson

All right. Thanks.

Operator

Mike Harrison, Seaport Research Partners.

Mike Harrison

Hi, good morning. More like a moment, apologies if I missed this, but did you quantify the impact of the Millsdale outage in Q. one overall and how that was split between the polymers and surfactant segments?

Luis Rojo

Yes, Mike, remember in February, we said they were expecting around $5 million of pretax income. We included in the in the release. I know it's early, but we included the fact numbers, $5.8 million was an impact and call it, half and half between the businesses on us is, call it putting this remark what is baked in guidance, the same in Q2.

Mike Harrison

All right. Thank you for that. And then I was also curious just on the price mix and number that minus 18% was quite a bit weaker than we were anticipating. I guess what I'm trying to understand is when do you expect is price mix headwinds to stabilize?
And maybe how much of that 18% decline was price, how much was mix? And related to that, if you are expecting ag and demand to pick back up and destocking to run its course in that ag business in the second half. You know how much does mix recovery from ag helped that price mix number as we get into the second half?

Luis Rojo

Yes.
No, great question, Mike. As you said, 18%, of course, the majority of that is pricing and ag is still a big negative mix impact into that number. But you saw our cost of goods sold also down $100 million despite the increases in overhead. So raw material prices are going down significantly more. So on a percentage basis that the that the price reduction that you saw is all that. That's how we are. That's how we are.
We are improving margins in the three businesses, when you look at dollars per pound.

Scott Behrens

And Mike, I'll add here. We're coming off a record 2023 first quarter ag of business. So that price mix is definitely impacted this year from the ag destocking. And yes, it will be a significant improvement in the second half when the ag recovery restart.

Mike Harrison

And I guess just to follow up on that. Can you give a little bit of color on what your customers in the ag business are seeing right now? And just trying to get a better sense of what gives you confidence or how confident you are that those volumes are going to start to pick up in the ag business in the second half?

Scott Behrens

Yes. Like I'd say from a customer perspective, it's a little bit of a mixed bag, whether it will start in Q3 or Q4. But you know, what we have to remember is the world's demand for food and protein will always remain. So this inventory, once it gets through the destocking phase, the demand at the at the farmer level is still there. So it's I think it's a matter of when not if and I'd say right now, there's probably a 50-50 mix of Q3 versus Q4.

Mike Harrison

All right. And then last question for me. Is just in terms of the outlook, you're pointing to adjusted EBITDA growth versus last year. Obviously, last year was unusually weak, but looking at where you were in the first quarter this $51 million EBITDA number presumably would have been $6 million higher without the Millsdale outage.
Should we be modeling improvement from that level in Q2 and then further improve in '10 Q3 three as we get past the Bill Fairl issues. And I guess it just any additional color you're willing to provide on the earnings cadence from here? I think would be helpful given there are a lot of moving pieces in place.

Luis Rojo

So. Yes, yes, Mike and you know that we don't provide formal guidance for quarter for the quarter of a year. But but and that's why we are trying to provide some perspective on of the expenses that we are that we foresee in Q2.
So you can you can model that in your in your second quarter. And then, of course, we only expect some improvement in the second half because of the ad recovery. I mean, we cannot hide that. I mean we're saying we are expecting the recovery of that, and that is a good business for us and of course, should have a positive impact in our EBITDA are in the second half versus the first half.

Mike Harrison

All right. That's helpful. Thank you.

Dave Storms

Dave Storms, Stonegate.
Good morning.

Scott Behrens

All right.

Luis Rojo

Good morning.

Dave Storms

If we could touch on Latin America for a second, greatest volumes coming up there, can we expect pricing to follow or is there still more focus on defending and capturing market share there?

Scott Behrens

Yes. Great. Great question, Tom. Yes, Dave, the our priority was to recover the volumes. If you remember, we talked about competitive imports in the prior quarters, our goal is to recover the share. So that remains our priority. There's hope over time that the pricing will improve. But right now, it's really reestablishing the beachhead.

Dave Storms

Understood. Very helpful. And then just one more for me on the customer acquisition environment, great to see that you've picked up some more tier two and tier three customers. What is the contact to contract cycle. Is that improving? And how does that compare to? Trying to pick up obviously more tiers customers as well?

Scott Behrens

The Tier two Tier three customers though those tend to be the smaller customers around the world from a contracted basis, that's really not contracted business. It's more transactional type of relationships. But I think where we differentiate ourselves is the technical service.
So when we help these customers put new formulations on the self shelf, there is a sense of loyalty, but there's nothing that you can put under a contract umbrella saying that that's a fully stabilized business. But you know, we had record volumes in Q1 within that the customer segments, I would say we're pretty pleased with those results.

Dave Storms

Understood. Thank you for taking my questions and good luck in Q2.

Operator

Thank you. At this time, I'd like to turn it back to Scott Behrens for closing remarks.

Scott Behrens

Thank you, very much for joining us on today's call. We appreciate your interest and ownership in Stepan Company, and please have a great day.

Operator

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