Good day, and thank you for standing by. Welcome to the Stepan Company First Quarter 2024 Earnings Conference Call. [Operator Instructions] 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.

Good morning, and thank you for joining Stepan Company first 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 to prospects for our foreign operations, global and regional economic conditions, and factors detailed in our Securities 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 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. Whether 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 the information and perspective helpful. With that, I would like to turn the call over to Mr. Scott Behrens, our President and Chief Executive Officer.

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…

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 break down the decrease in adjusted net income. Because this is net income, the figure is not here on an after-tax basis. First quarter 2024 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. The 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 a GILTI deduction and foreign tax credits, resulting from the expected 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 deliver adjusted EBITDA growth in surfactants and specialty products, partially offset by global polymers. Lower corporate expenses also contributed to the adjusted EBITDA growth. Slide 7 focus on Surfactants segment results. Surfactants 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 1,4-dioxane investments and in the oilfield end market. We also grew volume in the construction and industrial solution business and with our distribution partners. Latin America…

Thanks Luis. 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 improved operational performance across our supply chain network, are expected to deliver $50 million in pre-tax savings in 2024. As of the first quarter, the company was on track to deliver its $50 million cost out goal and recognized $18 million in pre-tax 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 low 1,4-dioxane 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 and 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 Polyols volume grew 4% and 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 longstanding Tier 1 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 2 and Tier 3 customers who highly value the technical support and services that Stepan can provide. During the first quarter of 2024, we added approximately 400 new Tier 2 and Tier 3 customers, increasing the segment volumes versus the prior year. Our technical…

[Operator Instructions] And our first question comes from Vincent Anderson of Stifel.

Yes. 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 and surfactants, because it sounds like there was 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 the big positives were, whether it was all fixed cost leverage, or raw materials? And then kind of second to that, are the Tier 2, Tier 3 and oilfield gains, have those been enough to offset the mix headwinds from agriculture?

Vincent, this is Luis. Look, as we said in our prepared remarks, adjusted EBITDA for surfactant was slightly up 4% versus last year. And actually, if you exclude the one-time expenses that we had because of the disruption in Millsdale, our adjusted EBITDA in surfactant is actually up double-digits, which is a good testament of margin improvement. So you saw volumes flat in surfactants, overall flat, with several places growing double-digits, but overall volumes flat. So the driver of the adjusted EBITDA growth is margins, despite the fact that Ag is a significant negative mix in the numbers. If you exclude the Ag destocking, our operating income, our adjusted EBITDA in this business will be up very, very strong double-digits. So Ag is a negative impact.

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

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. The power disruptions that seem to be more frequent over the last 3 or 4 years, that's a real issue that we're working on with our external power providers. 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 plant, I would say, it's an unexpected maintenance outage. We do -- do turnarounds on all of our infrastructure assets. This one kind of creeped up unexpectedly. We're managing it and should be rectified here in the second quarter. So it is 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 and then reinvest for improved reliability for our customers.

And just one last one, I'm just trying to get a feel for -- do your polyol volumes, or at the very least, your demand indications, given some of the disruptions this quarter, do you feel like they're tracking what you're seeing your customers put out there in terms of insulation volumes, or is there maybe still a little bit of a disconnect in terms of how they're managing inventory or timing of these projects?

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 -- with their marketing programs. But overall, I think we're pleased that our volume is tracking. It's on a recovery path. There seems to be a lot of pent-up demand for re-roofing 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 you may be expecting from the customer base [ release ].

And the growth -- Vincent and the growth in polymers was broad based with all the regions growing and also Specialty Polyols growing plus 7% which is pretty strong.

And our next question comes from Mike Harrison of Seaport Research Partners.

Apologies if I missed this, but did you quantify the impact of the Millsdale outage in Q1 overall and how that was split between the Polymers and Surfactants segments?

Yes. Mike, remember in February, we said that we were expecting around $5 million of pre-tax income, we included in the release, I know it's early. We included exact number, $5.8 million was the impact, and call it a half-on-half between the businesses. And as Scott put in his remark, we're expecting kind of the same in Q2.

And then was also curious, just on the price mix 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 those price mix headwinds to stabilize? Maybe how much of that 18% decline was price, how much was mix? And related to that, if you are expecting Ag demand to pick back up and destocking to run its course in that Ag business in the second half, how much does mix recovery from Ag help that price mix number as we get into the second half?

Yes, 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 where cost of goods sold also down $100 million, despite the increases in overhead. So raw material prices are -- are going down significantly more so on a percentage basis that the price reduction that you saw. So that's how we are -- that's how we are improving margins in the 3 businesses when you look at dollars per pound.

And, Mike, I'll add, we're coming off a record 2023 first quarter Ag 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 restarts.

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 saying right now? I'm 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 at the Ag business in the second half?

Yes, Mike, 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 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 farmer level is still there. So 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.

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 and presumably would have been $6 million higher without the Millsdale outage. Should we be modeling improvement from that level in Q2 and then further improvement in Q3 as we get past the Millsdale issues? I guess, 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.

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

And our next question comes from Dave Storms of Stonegate.

Just hoping we could touch on Latin America for a second. Great to see volumes coming up there. Can we expect pricing to follow, or is there still more focus on defending and capturing market share there?

Yes. Great question. Dave, the -- our priority was to recover the volumes. If you remember, we talked about competitive imports in the prior quarters. Our goal was to recover the share. So that remains our priority. There's hope over time that pricing will improve, but right now it's reestablishing the [indiscernible].

And then just one more for me on the customer acquisition environment. Great to see that you picked up some more Tier 2 and Tier 3 customers. What is the contact to contract cycle looking like there? Is that improving, and how does that compare to trying to pick up, obviously, more Tier 1 customers as well?

The Tier 2, Tier 3 customers, 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 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 we had record volumes in Q1 within that customer segment, which we're pretty pleased with those results.

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

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

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