Stepan Company

Good morning and welcome to the STEP and Company second quarter 2024 earnings conference call. During the presentation, all participants will be in listen-only mode. Afterward, we will conduct a question and answer session. To ask a question during the session, you'll need to press star 11 on your telephone. You will then hear automated message advising your hand is raised. To withdraw your question, please press star 11 again. As a reminder, this call is being recorded on Wednesday, July 31st, 2024. It's 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.

Good morning, and thank you for joining Stepan Company's second quarter 2024 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 prospects for foreign operations, global and regional economic conditions, and factors detailing our Security and Exchange Commission filing. 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 the compatible GAAP measures in the earnest presentation and press release. which we have made available at www.stepan.com under the investor section of our website. Whether you're joining us online or over the phone, we encourage you to review the investor site presentation. We have made this available at approximately the same time as when the earnest release is issued, and we hope that you find the information and perspective helpful. With that, I would like to turn the call over to Mr. Scott Berens, our President and Chief Executive Officer.

good morning and thank you all for joining us today to discuss our second quarter 2024 results i plan to share highlights from our second quarter performance and we'll also share updates at our key strategic priorities while luis will provide additional details on our financial results the company reported second quarter adjusted ebita of 47.7 million dollars up four percent year over year global sales volume was also up four percent on a year-over-year basis We saw strong volume recovery across most core markets, except for weakness in the agricultural market due to continued inventory to stocking and lower phthalic and hydride volumes due to operational issues at our Millsdale site. Global sales volume, excluding the impact of ag and phthalic and hydride, was up 6%. Surfactants experienced double-digit volume growth within the laundry and cleaning, construction and industrial solutions, and oil field and market. and also within our distribution partners. Latin American surfactant volumes grew double digits as we continue to recover consumer volumes in Mexico. We also experienced strong volume growth in several end markets in Brazil, inclusive of double-digit volume growth within our agricultural business. However, North American and European agricultural volumes remained soft in the second quarter. Rigid and specialty polyols also delivered volume growth during the quarter that was partially offset by the lower falcon hydride volumes due to the production issues at Millsdale. Overall, global margins were in line with expectations despite unfavorable product mix. On July 18, 2024, we determined that one of our company's Asia subsidiaries had been the victim of a criminal social engineering scheme, which resulted in fraudulently induced outbound payments. The company launched an investigation led by outside counsel to determine the full extent of the fraud scheme and the related potential exposure. We are limited in what we can disclose because of the ongoing investigation. We initiated contact with our banks as well as our appropriate U.S. and local law enforcement authorities in an effort to, among other things, recover the transferred funds. To date, the company has not found any evidence of additional fraudulent activity, and we believe this event is isolated and contained. This incident did not result in any unauthorized access to our information systems or any confidential customer information or other data that we maintain. While this matter will result in some additional near-term expenses, the company does not expect this incident to otherwise have a material impact on its business. The company recognized a $3.5 million pre-tax charge for the quarter ended June 30, 2024, and while the investigation is ongoing, the company expects to record a pre-tax charge of a similar amount in the third quarter of this year. We do not expect this incident to otherwise have a material impact on our business or our ability to serve our customers. From an earnings perspective, we delivered adjusted EBITDA growth of 4% during the second quarter, despite higher operating costs at our Millsdale site, higher pre-commissioning expenses at our new alcoxylation investment in Pasadena, Texas, the negative effect of agricultural destocking, and the impact of the fraud event mentioned before. Excluding the second quarter special events, our adjusted EBITDA grew more than 50% versus prior year. Net sales in the second quarter of 2024 decreased 4% 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 4% increase in global sales volume, as mentioned before. For the first half of 2024, adjusted EBITDA of $98.9 million was up 5% versus the prior year, as global sales volume grew 2% year over year. Excluding the declines in our agricultural and commodity falcon hydride businesses, volume was up 5% when compared to the first six months of 2023. Free cash flow in the second quarter was close to zero due to a seasonal increase of $13 million in inventory. We generally build inventories in the second quarter in preparation for hurricane season, We also have two upcoming biannual planned turnarounds within our polymers business where inventory builds assist in meeting our customers' demand during the turnarounds. Free cash flow for the first half of the year was $11 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 the ongoing disciplined efforts in the supply chain and the workforce productivity actions taken in the last quarter of 2023. We expect these reductions to help offset higher operating costs at our Millsdale site and pre-commissioning expenses at our new epoxylation facility in Pasadena, Texas. During the second quarter of 2024, the company paid $8.4 million in dividends to shareholders. The company did not repurchase any company stock during the first half of 2024 and has $125 million remaining under the share repurchase program authorized by our Board of Directors. Yesterday, our Board of Directors declared a quarterly cash dividend on Steffen Commons stock of 37.5 cents per share, payable on September 13, 2024. Steffen has paid and increased its dividend for 56 consecutive years. First half volume growth within several of our core markets at healthy margins is a testament to the strength and diversity of our business, which in turn supports our continued investment in our business and the return of cash to our shareholders. Luis will now share some details about our second quarter results.