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spk01: Greetings and welcome to the STEP and Company first quarter 2022 results. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star 0. As a reminder, this conference is being recorded Tuesday, April 26, 2022. I would now like to turn the conference over to Luis Rojo, Vice President and Chief Financial Officer. Please go ahead.
spk03: Good morning, and thank you for joining Esteban Company's first quarter 2022 financial review. Before we begin, please note that the 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 processes for our foreign operations, global and regional economic conditions, and factors detailing our Security and Exchange Commission filings. Whether you are joining us online or over the phone, we encourage you to review this investor slide presentation, which we have made available at www.stephan.com under the Investor section of our website. We make these slides available at approximately the same time as when the earnings releases issue. and we hope that you find the information and perspective helpful. With that, I would like to turn the call over to Mr. Scott Barrett, our President and new Chief Executive Officer. Yesterday, he became the fourth CEO and the first non-founding family CEO of the Stephan Company. Congratulations, Scott.
spk05: Good morning, and thank you for joining us today to discuss our first quarter results. I will share our first quarter highlights and strategy outlook and Luis will provide additional details on our financial results. The first quarter continued to be a challenging operating environment. Continued raw material and transportation constraints, cost inflation, and the emergence of a new COVID-19 variant were all headwinds against the business. However, I am proud about how our team worked through these challenges to deliver solid results for the first quarter. Reported net income was a record $44.8 million, or $1.93 per diluted share, while adjusted net income was $40.7 million, or $1.76 per diluted share, representing the third-best quarter ever on an adjusted net income basis. Reported surfactant operating income reached a record of $53.8 million, led mainly by a better product and customer mix, which offset inflationary cost pressures challenges imposed by global supply chains and the 1% decrease in surfactant volume. Our polymer business was affected by external supply chain disruptions and a power outage in early January at our Millsdale plant that impacted operations and led to a force majeure declaration for select products. Our operations team did a good job reestablishing production in February which allowed us to lift the force majeure in early April. On a global basis, polymer sales volume increased due to strong underlining base business and one extra month of sales from the Invista acquisition, which closed at the end of January 2021. Our specialty products business results were up due to order timing differences within our food and flavors business and the recovery of margins within our MCT product line. Our board of directors declared a quarterly cash dividend on Steppen's common stock of 33.5 cents per share, payable on June 15th, 2022. Steppen has increased its dividend for 54 consecutive years. During the first quarter of 2022, the company paid $7.5 million to shareholders in dividends and repurchased $10 million of Steppen's stock. The company has $140.1 million remaining under the Share Repurchase Program authorized by the Board of Directors. We remain confident in the strength and diversity of our business and its ability to generate cash that will allow us to further invest in our current business, pursue strategic M&A opportunities, and return cash to our shareholders. At this point, I would like Luis to walk through a few more details about our first quarter results.
spk03: Thank you, Scott. My comments will generally follow the slide presentation. Let's start with slide four to recap the quarter. Adjusted net income for the first quarter of 2022 was $40.7 million, or $1.76 per diluted share, versus $42.4 million, or $1.82 per diluted share, for the first quarter of 2021. Because adjusted net income is a non-GAAP measure, we provide full reconciliations to the compatible GAAP measures. This can be found in Appendix 2 of the presentation and Table 2 of the press release. Specifically, adjusted net income this quarter excludes deferred compensation income of $4.4 million compared to last year's expense of $1.7 million. It also excludes minor changes in our environmental reserves. The deferred compensation figures represent the net income related to a company's deferred compensation plan, as well as cash settled stock appreciation right for our employees. Because these liabilities change with the movement in the stock price, we exclude this item from our operational discussion. Slide five shows the total company's net income reached for the first quarter, compared to the same quarter last year, and break down the increase in adjusted net income. Because this is net income, The figure is not a year out on an after-tax basis. We will cover each segment in more detail, but to summarize, the polymers business was down, while surfactants and specialty products were up slightly from the prior year. Corporate expenses and all others were lower during the quarter, mainly due to lower acquisition related expenses. The company effective tax rate was 24.6% in the first quarter of 2022. compared to 23.6% in the same quarter a year ago. This year-over-year increase was primarily attributable to a less favorable geographical mix of income. We expect the full year 2022 effective tax rate to be in the range of 24 to 26%. The slide six focuses on surfactant segment results for the quarter. Surfactant net sales were $468 million, a 26% increase versus the prior year. Selling prices increased by 29%, primarily due to the path of higher raw material costs and improved product and customer mix. Foreign currency translation negatively impacted net sales by 2%. Volume was down 1% due to lower demand for laundry products within the consumer product business. This was mostly offset by a strong demand in functional products, institutional cleaning, and personal care and markets. Volume sold within Tier 2 and Tier 3 customer channels continues to perform well. Both Brazil and Europe results increased due to an improved product and customer mix driven by a strong agricultural business. This was partially offset by soft results in Mexican laundry. Surfactant operating income for the quarter was a record of $53.8 million, slightly up versus prior year. This increase was driven by pricing and improved product and customer mix, which fully offset the effect of higher raw material prices and logistic costs, supply chain challenges, and a small volume decline. Now, turning to polymers on slide 7. Net sales were $187 million, up 24% from the prior year. Selling prices were 26% higher, primarily due to the path through of higher raw material costs. Foreign currency translation negatively impacted net sales by 4%. Finally, volume rose 2% in the quarter, driven by 5% growth in global rigid volume, which was partially offset by the 8% decline in P.A. volume following the power outage we experienced at the Mielzel plant. Polymer operating income decreased by $3.8 million, driven by North America. This decrease primarily reflects the power outage at our Mielzel plant, The estimated negative impact in operating income for the Middlesex event is $5 million. Europe's results increased even by this acquisition and solid results in the base business. The portfolio business in China was essentially flat versus a comparable period despite challenges with COVID lockdowns. Turning to slide A, our balance sheet remains strong, and we have ample liquidity to invest in the business. Our leverage and interest coverage ratio continues at a very healthy level. The increase in cash reflects the increase in debt to fund our future growth projects. During the quarter, we deployed $138 million in cash via capex investments, dividend payments, share repurchase, and higher working capital requirements due to strong sales growth. Beginning on slide nine, Scott will now update on our 2022 HPE priorities.
spk05: Thank you, Luis. As we wrap up the first quarter of 2022, and despite unprecedented inflation and continued supply chain challenges, we managed to deliver a solid quarter. The following two slides capture our strategic priorities and vision for a cleaner, healthier, and more energy-efficient world with our customers' preferences in mind. Our diversification strategy in the functional products continues to be a key priority for STEPN. Our global agricultural volumes increased high single digits in the first quarter. High commodity prices for corn and soybeans coupled with increased planted acreage drove a strong season for crop protection sales in North America. Strong first quarter results in Asia are a result of continued growth in the post-patent herbicide market and high commodity prices are driving increased planted acreage above major crops in Brazil. Oilfield volumes increased mid-single digits in the first quarter. Demand for our products used in oilfield, including biocides, remains robust as crude prices remain elevated at over $100 per barrel. Raw material availability impacted our ability to deliver greater oilfield growth in the first quarter. We continue the integration and supply chain planning of the Kimco Oil Demulsifier product line, which we plan to relaunch in the second half of 2022. We remain optimistic about future opportunities in this business, as elevated crude prices should encourage increased oil production and the use of production and stimulation chemicals. Our Millsdale plant continues to be one of our key priorities. We continue to accelerate investments in both expense and CapEx, to improve productivity and increase capacity with de-bottleneck projects. These investments will continue throughout the year. We expect to see the benefits of our efforts and investments in Millsdale in the upcoming years. Moving to slide 11, we have completed the integration of Invista's polyester polyol business and assets. After closing the first full year of operations in January, we delivered more than $23 million of EBITDA. achieving our third-year financial target within the first year of ownership. The acquired INVISTA site in Wilmington, North Carolina, played a key supply continuity role during the first quarter Millsdale power outage. We are also evaluating potential investments at the Wilmington site to enable production of a broader range of products to support market growth and opportunities within our polymers business. As discussed previously, we are also increasing North American capability and capacity to produce ether sulfates that meet new regulatory limits on 1,4-dioxane by the January 2023 deadline. 1,4-dioxane is a minor byproduct generated in the manufacture of ether sulfate surfactants, which are key cleaning and foaming ingredients used in consumer product formulations. Stepan will be prepared to supply customers with ethersulfates that meet the new regulatory requirements. I am also pleased to share that in the first quarter, we broke ground on our new alkoxylation production facility at our site in Pasadena, Texas. This asset will be a flexible, state-of-the-art, multi-reactor facility with approximately 75,000 tons of annual alkoxylation capacity. We expect plant startup in late 2023. It will provide strategically located capacity and capability for long-term specialty alkoxalate growth across our strategic growth end markets, including agriculture, oil field, construction, and household and institutional cleaning. Full-year capital spending is projected to be between $350 and $375 million, inclusive of the 1,4-dioxane and alkoxylation investments. Given the strength of our balance sheet, we plan to continually identify and pursue acquisition opportunities that align with our growth and diversification strategy, including the addition of new platform chemistries that can broaden our portfolio of sustainable offerings for our customers. We continue to invest in our new fermentation product platform. In February, we opened our new fermentation laboratory to support and further accelerate our first anticipated commercial biosurfactant offering. We believe this new biobased product family has significant opportunities in several important end markets for STEPN, including agricultural chemicals, consumer cleaning, personal care, and oil field. Our development and scale-up activities remain on schedule. Looking forward, we believe our surfactant volume in agricultural chemicals and oil field will remain strong as a result of high energy and crop prices. We see some improvement in supply chain constraints that should benefit consumer end-use market demand. However, consumer price inflation may negatively impact consumer cleaning and disinfection demand, particularly in the developing economies around the world. Global demand for rigid polyols continues to recover from pandemic-related delays and cancellations of reroofing and new construction projects. This recovery should position our polymer business to deliver growth versus prior year. We believe the long-term prospects for rigid polyols remain attractive as energy conservation efforts and more stringent building codes are expected to continue. We anticipate our specialty product business results will improve slightly year over year, but will be dependent on continued improvement in the availability of key raw materials. In closing, external supply chain challenges and inflationary pressures remain as headwinds within our business. However, we are cautiously optimistic about the balance of the year. This concludes our prepared remarks. At this time, we would like to turn the call over for questions to Jennifer, Please review the instructions for the question portion of today's call.
spk01: Thank you. If you would like to register a question, kindly press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. Again, if you'd like to register a question, please press the 1 followed by the 4 on your telephone keypad now. Our first question comes from the line of Mike Harrison, Seaport Research Partners. Please go ahead, sir.
spk02: Hi, good morning. Congratulations on a nice start to the year.
spk05: Thank you, Mike. Good morning.
spk02: Kind of a broad question to start with. Just trying to get a sense on the margin performance in the surfactants and the polymer segments. Are you feeling pretty good about where you are on the price-cost dynamics and price costs going forward? Or as you look at how costs have progressed in March and into April, are there some additional inflationary pressures that are going to be flowing in that we should think maybe create some margin pressure as we look at Q2 and Q3 compared to Q1 levels?
spk05: Yeah, Mike, I would say, you know, so far we've done a really good job with our pricing to stay on top of the inflationary pressures. But you bring up a great observation, you know, the inflation is continuing in Q2 and Q3. We will continue to attempt to cover that with pricing. And at some point, as we said in our prepared remarks, You know, consumer cleaning demand at some point may get impacted by the elevated pricing, specifically in the developing world. But so far we're doing a really good job in terms of covering that cost inflation.
spk03: And let me add, Mike, that as you were also mentioning, I mean, there is always lag, right? So we are trying to catch up, but the inflation piece is not stopping. So we need to continue and we will always have some lag. And also remember that there are some seasonality in some of our businesses throughout the year. So that also changed the margin profile by quarter. So when you get to to Q4, you know that we have higher fixed costs and lower volumes typically in Q4, so margins by quarter have certain seasonality that you can check by year, and it's kind of the same pattern quarter after quarter.
spk02: All right, and then in terms of the Millsdale outage, it sounds like that's completely resolved and you're back up to full capacity. Can you talk about the actions that you've taken there? I know you talked a little bit about capacity increases at Millsdale, but have you taken some actions to ensure that future power disruptions don't lead to significant downtime again?
spk05: Yes, Mike. So our team is actively, now that production is back up and running at full rates, our team is focused on the making the necessary modifications and improvements in some of the infrastructure associated with the site to ensure that power disruptions and or steam disruptions do not impact operations to the extent that we were impacted in Q1. So it's a major priority for our site, and we are investing the appropriate funding to make those improvements.
spk03: And let me add, Mike, that that's why in our prepared remarks, we have been talking in the last few quarters about the investments that we have done in Millsville, both on capital and expenses, to ensure that we fix everything that needs to be fixed and that we are in pretty good shape. So as we said in the prepared remarks, those investments will continue throughout 2022.
spk02: Great. And then in terms of the weakness that you guys saw in laundry with insurfactants, is that mostly an inventory workdown, or is this starting to show some of the inflationary pressures or impacting consumer demand? And then I guess maybe more broadly around inventory insurfactants, do you feel like that inventory workdown around some of the consumer, particularly household cleaning products, has run its course at this point?
spk05: Yeah. So, Mike, I would say that, you know, the softness that we're seeing in laundry is multifactorial in nature. One, there still are significant raw material and transportation constraints that are existing in the North American marketplace. So that's one element. The second element is I do think some of the price inflation is impacting some of the consumers in the developing regions. and having to make tough choices between, you know, consumer products and fuel and food. So I think that's something that we need to watch out. And then in terms of surfactant inventory levels across the HINI chain, I do agree with you, Mike. We are seeing what I would call fairly robust demand from our customers. And if you saw in our earnings release, our inventory values, on our balance sheet are essentially flat, even though we've had significant cost inflation on raw materials. So inventories, I think, are well back in balance and from a Steppen perspective, not still where we need to get them up to.
spk02: All right. And then the last question for me, you kind of hinted that there could be some investments coming at this Wilmington site that you acquired with the Avista deal. Can you give us a sense of the scale of those investments that you're considering, given that you have a number of other large projects that are in progress right now?
spk05: Yeah. Directionally, Mike, not on the scale of the Pasadena and 1,4 dioxane projects. What we're really trying to do is make the site capable of producing the step and legacy polyol technology. So it's more around storage tanks and maybe some reactor modifications, but nothing on the scale that you're comparing Pasadena or 1,4-dioxane projects.
spk02: All right, thanks very much.
spk01: Our next question comes from the line of Vincent Anderson with Stiefel. Please proceed with your question.
spk06: Yeah, thanks, and good morning. So going back to Mike's question about Wilmington, you know, I had this thought earlier. When I think about the Invista assets, you know, are they producing a product portfolio that you would say is on par with the quality or functionality of your portfolio? And then just looking past the Wilmington changes, are there similar opportunities to make changes at the European plants?
spk05: Vince, good morning. The Invista technology is based off different raw materials than what the Stepin Legacy is. What we're really trying to do is give the business continuity across the assets. Putting in additional storage tanks to handle the different raw materials that came from the Stepin Legacy business versus the Invista. really trying to make redundant capabilities across both the North American and as well as the European manufacturing network with the glycogen site that was purchased from Invista as part of the acquisition. So it's really about giving more security of supply to our customers.
spk03: And the portfolio complement very well. different products with different functionalities, but at the end, it's complementing the portfolio that we have and providing our customers with more choices in terms of that portfolio.
spk06: Okay. All right. Thank you. That's helpful. Maybe just thinking about logistics for a minute, have you seen any outsized impact on your ability to move EO or ethylene oxide just given the more stringent transportation requirements or are your logistics issues continuing to just be more broad-based in line with what everybody's dealing with?
spk05: Yeah, more broad-based, nothing specific to Ethylene Oxide.
spk06: Okay, great. And then another quick one, you have a lot of exciting products coming to market. You're also working on a couple of new operating assets. How is your ability to remain, you know, fully staffed or your experience in hiring additional skilled labor, you know, at least early on in these projects. How has that been and how do you feel about the outlook for that?
spk05: Yeah, no issues, Vince, that come to mind. You know, we have a really engaged and motivated workforce aligned around our growth strategies and our ambitions and we're making great progress on both our innovation initiatives as well as our capital project execution.
spk06: All right. Excellent. If I could ask just one more quick one. You know, we saw a pretty large, you know, global chemical producer finish up and even announce some additional de-bottlenecking in their alcoholic capacity. you know, do you take that as an affirmation of your investment or anything, you know, that you would be mindful of there in maybe fine-tuning what your plant can produce versus what they've invested in?
spk05: Yeah, no, Mike, it is an affirmation of the future growth of alkoxylation as a product line. And Steppen's product line is, I would say, not a significant overlap to the other announcements. We are typically focused on the specialty and more niche products across more specialty markets than the large commodity, the volume and products that I believe is driving the other investment.
spk06: All right, perfect. Well, that's all from me. Thanks again.
spk01: As a reminder, if you wish to ask a question, please press the 1 followed by the 4 on your telephone keypad. Our next question comes from the line of Marco Rodriguez with Stonegate Capital Park. Please proceed with your question.
spk04: Good morning, guys. Thank you for taking my questions. Good morning, Marco. I wanted to kind of start up with a follow-up on a prior question on the Mills Bay Plant work that you're doing there specific to the power disruption hardening of the plant, if you will. Can you maybe talk a little bit more about any sort of specifics that you're doing around that? How much of the capex spend that you've already outlined is related to that? And if you can kind of walk us through any sort of timelines for expectations of when that might be kind of completed and hardened, if you will.
spk03: Thank you, Marco, for the question. Look, as we have said in the past, the drivers of the CAPEX investment of this year, the 350 to 375 million range that we have provided is Pasadena and low 1.4 dioxin. We continue making investments in our infrastructure in Milldale and in other sites, but those tend to be significantly lower versus the other projects that we're talking. So we will keep making the changes and upgrading and improving specific infrastructure assets in Muleville, but nothing that we want to call out in terms of numbers.
spk04: Okay, great. And then if you can maybe talk a little bit more about your Tier 2 and Tier 3 customers. It sounds like you had some some pretty good strength in the quarter. Can you maybe talk about some of the drivers you may have seen in terms of that performance?
spk05: Yeah. So, once again, I think driven and led by the agricultural and oil field markets on a global basis was a big component of that 250 new customers acquired in the first quarter. And then you've got, you know, the recovery of the HINI market as economies reopened around the world. So that HINI market can get very fragmented in some of the developing regions as well as in the developed regions. There is still good customer fragmentation. So that's where most of the growth is being generated.
spk04: Got it. And then switching here onto the polymer side, I know you've called out obviously some disruptions in China, the COVID lockdown, but I've learned if you can maybe help frame some of your expectations for the cold storage opportunities you're seeing there here in the kind of the near term. And in that same vein, if maybe you can talk a little bit more from a granular standpoint. What sort of demand picture or what you're hearing as it relates to the demand picture for kind of greening buildings here in the shorter term, not necessarily also the long term? Thank you.
spk05: I would say, Marco, I would say as it relates to cold storage, a lot of that planned growth is in the China marketplace. And You know, I think that's a little bit uncertain right now with the COVID lockdown and what China is experiencing with COVID. So I think that's a pause for us at this point. We need to make sure China makes it through this COVID environment and those potential disruptions are not material. As it relates to green building, you know, we're comfortable and confident that the infrastructure bill passed here in the U.S. is going to drive additional demand for our rigid insulation materials. I'd say at this point we don't have a lot of details or specifics from our customers yet in terms of when they could expect to see an uptick in those green energy driven infrastructure build related advancements. Maybe a little bit too early to tell.
spk03: What I will add, Marco, is that we have talked in the past, right, the backlog of projects in the rigid business, both in North America and Europe, continues to be very strong, right? Our customers' backlog projects are pretty good, so that gives us a good feeling about the demand going forward for the next few quarters, and then we need to see how the infrastructure bill provides additional tailwinds or not.
spk04: Very helpful. And last quick one, if I can squeeze it in here. I know you may mention the fact that you're cognizant, you're watching inflationary pressures and how it relates to impact of consumer demand. But I was also kind of wondering, given that sort of inflationary pressures that everyone's seeing out there, as well as some of the global macro uncertainties that are arising from the Russia-Ukraine war, can you maybe talk a little bit, if you're seeing any sort of changes in the competitive dynamics in the surfactants business?
spk05: We have not seen any changes to the competitive dynamics. I'd say the overall market demand to this point is holding up, and with the supply chain constraints that us and a lot of our industry is facing, I think that's at the forefront of people's minds. So not seeing any changes really in the competitive dynamics.
spk04: Excellent. Great. Thanks a lot, guys. I appreciate your time. Thank you, Michael.
spk01: And we are showing no further questions on the audio lines at this time. I'll turn the conference back over to you.
spk05: Thank you very much for joining us on today's call. We appreciate your interest in ownership and step in company. Have a great day.
spk01: This does conclude today's conference call. We thank you for your participation and ask that you kindly disconnect your lines. Have a good day, everyone.
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