Good morning, and welcome to the Stepan Company Second Quarter 2024 Earnings Conference Call. During the presentation all participants will be in listen-only. Afterward we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded on Wednesday, July 31, 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 the 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, the prospects for our foreign operations, global and regional economic conditions and factors detailed in our Securities 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 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. Who are joining also online and 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 earnings release is issued, and we hope that you find the information 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 second quarter 2024 results. I plan to share highlights from our second quarter performance and will also share updates on our key strategic priorities, while Luis will provide additional details on our financial results. The company reported second quarter adjusted EBITDA of $47.7 million, up 4% year-over-year. Global sales volume was also up 4% 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 destocking and lower Phthalic Anhydride volumes due to operational issues at our Millsdale site. Global sales volume excluding the impact of Ag and Phthalic Anhydride was up 6%. Surfactants experienced double-digit volume growth within the Laundry and Cleaning, Construction and Industrial Solutions and Oilfield end markets and also within our distribution partners. Latin America 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 America 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 Phthalic Anhydride 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.…

Thank you, Scott. My comments will generally follow the slide presentation. Slide 5 shows the total company net income bridge for the second quarter compared to last year's second quarter and breaks down the decrease in adjusted net income. Because this is net income, the figure is not here at an after tax basis. Second quarter 2024 adjusted net income was $9.4 million, or $0.41 per diluted share versus $12.1 million or $0.53 per diluted share for the second 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 the GLT deduction and foreign tax credit resulting from the expected election of bonus depreciation for our Pasadena capital investment. Slide 6 shows the total company adjusted EBITDA bridge for the second quarter compared to last year's second quarter. Adjusted EBITDA was $47.7 million versus $45.8 million in the prior year, a 4% increase year-over-year. We will cover this segment in more detail. But to summarize, we delivered adjusted EBITDA growth in Surfactant and specialty products, partially offset by global polymers. Higher corporate expenses reflect the fraud incident mentioned before. Slide 7 focus on Surfactant segment results. Surfactant net sales were $380 million for the quarter, a 3% decrease versus the prior year. Selling prices were down 8%, primarily due to the pass through of lower raw material costs, less favorable product mix and competitive pricing pressures in Latin America. Volume was up 5% year-over-year, driven by double-digit growth in laundry and cleaning, construction and industrial solutions and oilfield end markets. We also delivered double-digit growth with our distribution partners. This was partially offset by lower agricultural demand due to the continued customer and channel…

Thanks, Luis. I will focus my comments on our cost initiatives, business strategy and the progress of our major capital investments. Our cost reduction program initiated last year along with the additional productivity and cost out initiatives underway centered around improved performance within our supply chain and are expected to deliver $50 million in pre-tax savings in 2024. As of the first half of the year, the company recognized $21 million in pre-tax savings despite the operational issues in Millsdale that led to $17 million in total expense at the site. These savings were also partially offset by pre-operating expenses of our new Pasadena site, higher operating expenses related to the new low 1,4-dioxane manufacturing process and overall labor cost inflation. We remain encouraged by the continued volume growth in several of our core end markets during the second quarter. As mentioned earlier, Surfactant experienced double-digit volume growth within Laundry and Cleaning, Construction and Industrial Solutions, within Oilfield and within our Distribution Partners. Latin American Surfactant volumes grew double digits. Rigid and Specialty Polyols also delivered volume growth that was partially offset by lower Phthalic Anhydride volumes due to the operational issues mentioned before. Global margins were aligned with expectations despite unfavorable mix. Our customers will always remain at the center of our strategy and innovation. Our long standing Tier 1 customers value our technical capacity and the ability to manufacture and deliver quality products at the scale they need. We were pleased with the continued strong second quarter volume growth within our distribution partners around the world. We continue to grow and diversify this important and profitable segment of our Surfactant customer base, having added over 800 new customers in the first half of the year. Our technical collaborations are increasingly focused on helping our customers make their product…

Thank you. At this time, we'll conduct a question-and-answer session. [Operator Instructions] Our first question comes from the line of Mike Harrison of Seaport Research Partners. Your line is now open.

Hi, good morning.

Good morning, Mike.

Good morning, Mike.

I was hoping that you guys could maybe provide a little bit more detail on what you guys are seeing in the agricultural space. It sounds like Latin America maybe showed some recovery, but North America and Europe were below your expectations that you had coming into the quarter. And understand you expect some more recovery in the second half, but maybe just help us understand across those key regions how things are tracking relative to normal?

Yes. So Mike, spot on. I think in our April call we said we expected the destocking in Ag to continue through the first half of the year with recovery in the second half. That story held true unfortunately in North America, and in Europe volumes remain soft. But the real highlight in the second quarter was the start of the recovery in the Latin American Ag market. So the Brazilian Ag market, our volumes were up strong double digits, which was a nice surprise. And our story and our expectations still holds true. We believe North America and Europe are right behind Latin America in that recovery.

Let me add something, Mike. As Scott mentioned, we were expecting destocking to continue hitting Q2, and that's exactly what we saw. And if you think about the quarter, we saw still destocking in April and May, but then in June we delivered similar numbers than last year. And looking here into July, we're starting to grow our Ag business. So actually the destocking is playing out as we thought and hopefully we won't talk about destocking in the future.

All right. And then, I was hoping you could give a little bit more color on what happened with the Asia fraud. I think kind of my -- other than understanding what was going on, I think what investors would like to know is, is this going to be fully resolved and no more charges after we have another $3.5 million impact in Q3? Or could there be some additional impacts going forward? And then also what kind of changes are you guys looking at in your processes to make sure that this doesn't happen again either in Asia or in another region or subsidiary?

Yes. Great question, Mike. As we mentioned in our release, the investigation is ongoing. I think the important message there is we believe that this incident is isolated and contained. And what we have shared at this point is our current evaluation of that isolated and contained event. And I think that's all we can comment at this time.

Okay. And then the last question for me is kind of more on the guidance or outlook front. You said you expect to show year-over-year EBITDA growth in the second half and for the full year. Obviously, we're looking at an unusually weak prior year. So just was wondering if you could provide any further granularity on where you see EBITDA shaking out for the full year? I know the consensus was previously around $240 million, the prior year was $180 million. Do you expect consensus to come down to something more like $220 million, is it closer to $200 million that makes sense? I think we'd appreciate any additional precision you can provide on the outlook.

Sure, Mike. As you know, we don't provide formal guidance. But look, look at what happened in the first half, right? We delivered, call it, $100 million EBITDA in the first half with a lot of one-time events. So if you think about the Millsdale full first half impact of $70 million, plus the fraud, plus the Ag destocking, plus the pre-operating expenses, we're spending a lot of money in Pasadena now without any benefits, right? I mean the site is going to be up and running in Q4. So that's the 35% EBITDA growth that Scott was mentioning. So, call it at $120 million, $125 million. We should be running at $60 million per quarter on an EBITDA basis without these special items. And of course, Q4, you know that we always have some seasonality in Q4, December tends to be low because of people reducing inventory levels and all of that. So I know you guys will be more careful with the number in Q4, but we should be running at $60 million plus per quarter. And that's what we need to deliver in the future without these special items and with Pasadena up and running.

All right, very helpful. Thanks very much.

Thank you. One moment for our next question. Our next question comes from the line of Dave Storms of Stonegate. Your line is now open. Good morning.

Good morning, Dave.

Just wanted to kind of get your thoughts on some of the geographical differences in Surfactants. I know you mentioned Ag growth was really strong in Brazil, not as strong as North America. But you also mentioned that laundry and cleaning had a strong growth quarter over quarter. Just wondering if you could break out what that growth looks like -- volume growth look like between your geographies?

Sure, Dave. Look, what we have provided in the remarks, a strong growth in laundry and cleaning behind very strong growth in Mexico. So we have acquired new businesses in our Mexico business, and that is driving a lot of this growth. And then when you think about, I mean, we had high single-digit growth in Colombia. We had very strong growth in Brazil. We had a strong growth in North America in many of the end markets. So we are very pleased with the 5% volume growth in Surfactant despite the double-digit Ag impact because of destocking. So Surfactant volumes are pretty strong across the board. Actually, Europe is also growing volumes, a more competitive environment there on pricing, but volumes are growing.

And David, I would just add, as we went through 2023 and saw the destocking that was general across all geographies, all end use markets, the recovery I would characterize as a similar reversal of that. It's not isolated. The only thing that's isolated right now is Ag. But as you think about distribution, laundry and cleaning, construction, we're seeing it kind of across the board.

Yes. We're very pleased with the numbers in distribution because these distributors touch thousands of customers and we're seeing a strong double-digit growth and having a strong double-digit growth in a set of thousands of customers is a good indication that the market is strong.

Understood, very helpful. And then just looking at your taxes, I know you've mentioned that you're expecting a higher tax impact for 2024. Just trying to put a finger in the wind. Is Q2 tax rate kind of a catch up from Q1 being normalized? Or is it reasonable to use the Q2 tax rate as kind of a run rate for the remainder of the year?

Yes. Look, our guidance right now for the year is similar to what we had before, 36% to 38% effective tax rate. It's going to have some fluctuations by quarter, depends on the discrete items that you have in each quarter. But again, let me remind you guys, 36% to 38% is the P&L rate. We are not going to pay any. If we apply at the end of the year the bonus depreciation of Pasadena asset, actually on a cash basis we're not paying any taxes. And we will return next year to the normal effective tax rate. This is just a P&L non cash number in the ETR. Use the 36% to 38% guidance that we have.

That's very helpful. I'll get back in queue. Thank you.

Thank you. One moment for our next question. [Operator Instructions] Our next question comes from the line of David Silver of CL King and Associates. Your line is now open.

Good morning. This is Kevin Holder on for Dave Silver this morning.

Hi, how are you? Good morning.

Hi. So my first question is related to the Millsdale facility and insurance recoveries regarding the disruptions. So do you guys expect to have any insurance recoveries from, I guess, the flood event and prior disruptions over the next few quarters at the from the Millsdale facility?

No. This is expense that we're taking on a quarterly basis. As we said in the comments, we believe the improvements that we've made to date through the first half of the year give us strong confidence that our expenses in the second half will be substantially lower, but nothing related to insurance.

Thank you. That's very helpful. And then my next question is more your strategy and goals in the pre-pandemic period versus the post pandemic period. So if you could please highlight two or three like high priority goals in the pre-pandemic period, and what your current progress is with those goals post pandemic? And you’re in the future how you plan to achieve those goals going forward?

Are you referring to 2020 as kind of your timeframe prior to 2020 and then since 2020?

So prior to 2020 and then since 2020, yes, please.

In terms of our strategy, our strategy -- our core strategy really has not changed. It remains the continued diversification and acquisition of new customers within the our Surfactant business, which is all about continuing to diversify and grow in Ag and oilfield and construction and with our Tier 2, Tier 3 customers. The impact of the pandemic had no impact on that strategy whatsoever. And I would say also as it relates to our Rigid Polyol franchise, energy efficiency driven by building code mandates around the world still remains as strong or even stronger now than it was pre-pandemic. So I don't see any impact from our strategy from the pandemic.

Awesome. Thank you. That's all for me. I'll hop back in the queue. Thank you.

Thank you.

Thank you. I'm showing no further questions at this time. I'd now 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 and ownership in Stepan Company, and please have a great day.

Thank you for your participation in today’s conference. This does conclude the program. You may now disconnect.