Stepan Company Q2 FY2025 earnings call

• Delivered double-digit adjusted EBITDA growth in the first half of 2025, though restrained by significant increase in oleochemical raw material prices impacting Surfactant margins. • Polymers delivered double-digit adjusted EBITDA growth. Surfactant-adjusted EBITDA similar to prior year due to crop productivity growth offset by raw material inflation. Specialty Products adjusted EBITDA impacted by order timing changes but continued solid growth. • Volume grew 1% with Polymers up 7% and NCT product line up 49%, while surfactants volume was down 1%. Double-digit volume growth in crop productivity and oilfield end markets offset by lower demand in global commodity consumer products end market. • Production at new Pasadena, Texas site ramping up, expected to provide incremental benefits in the second half of the year. • Board declared a quarterly cash dividend on Stepan stock of $0.385 per share, payable on September 15, 2025.

Surfactant segment: Net sales were $411.5 million for the quarter, an 8% increase versus prior year. Surfactant adjusted EBITDA decreased $0.5 million or 1% versus the prior year. Polymer segment: Net sales were $162.8 million for the quarter, a 2% increase versus the prior year. Polymer adjusted EBITDA increased $3.8 million or 17% versus the prior year. Specialty Products segment: Net sales were $20.5 million for the quarter, a 22% increase versus the prior year. Specialty Products adjusted EBITDA decreased $2.1 million or 24%.

• Expect the full contribution rate of the Pasadena, Texas site to be achieved during the fourth quarter of 2025 with full year benefits in 2026. • Remain optimistic to deliver full year adjusted EBITDA and adjusted net income growth and positive free cash flow in 2025. • Believe Surfactant business will experience continued growth in key strategic end markets and polymers demand will continue improving as market certainty increases and innovation/growth plans are executed.

• Prospects for foreign operations. • Global and regional economic conditions. • Factors detailed in Securities and Exchange Commission filings including impact of tariffs. • Significant increase in oleochemical raw material prices impacting Surfactant margins. • Market uncertainties including impact of tariffs.

Q: Wanted to say congratulations, and welcome to Ruben. First question I have is, it sounds like there were some onetime impacts in the Surfactants business. You mentioned the Pasadena start-up costs. I believe you quantified that at about $6 million, but I was hoping you could quantify the remediation reserve adjustment, the EPA penalty, and I guess, any other onetime or unusual impacts. And then the next question is going to be on raw materials. So let's save the raw material discussion for a minute.

A: Thanks, Mike. The $6 million includes all the one-timers that we had. So it includes Pasadena, includes the EPA fine, which we are planning to recover. The EPA fine is around $1 million, and we are planning to recover that in the next few quarters. And -- but the majority of the impact was the Millsdale reserve for environmental remediation work and also the start-up of Pasadena. So all of those 3 items is the $6 million.

Q: In terms of the raw material impacts, can you just give us a little bit more color on what you're seeing in terms of the timing, I guess, if there's any way to help quantify the headwind that you saw in Q2 and also the timing of getting pricing to offset those higher raw material costs. Presumably, you expect to catch back up in the second half, but any greater detail on how that quarterly cadence goes would be helpful.

A: Yes. Great question, Mike. And let me start with, the first half of the year was a decent year, not -- I'm not happy with the first half. It could have been better, but it could have been significantly worse if you think about where the chemical industry is. But if you think of the first half, we are growing adjusted EBITDA in Surfactants, in Polymers and Specialty Products is only a timing thing. We shipped a lot of the pharma business last Q2 in 2024, and we are going to ship it now in the second half of 2025. So if you exclude that, we are growing adjusted EBITDA in the 3 businesses that we have, which is remarkable and it's a good base to start with. Now, let's go deeper into Surfactants because that's where your question was. And if you think about the $83 million of adjusted EBITDA in the first half for Surfactants, of course, we are not happy with $83 million and 5% growth. But if you think about the one-timers that we had as we were talking all the start-up of Pasadena and Millsdale and the EPA plus the raw material situation, 5% growth is a decent number. What I will tell you is when you think about the raw material impact, you see coconut oil at $3,000 per metric ton, which used to be $1,000 per metric ton 18 months ago. We are still catching up on our price execution. We had -- everybody knows we had another price execution at the end of the quarter in June. So that, of course, is not reflected in the quarter. So the true norm that I see instead of that $83 million that you saw for the first half in adjusted net income, I see $90 million, $93 million, right? That's where the Surfactant business should be. And of course, from that $90 million plus, that our challenge now is how we're going to grow from that $90 million plus with Pasadena savings with the pricing kicking in and all of that. So I feel good about what the team is delivering there are lags and we cannot execute and we cannot recover everything overnight, but I feel good about the trajectory that we had in the first half. And I think what we executed and what we are executing in the next few quarters with productivity, with pricing, with Pasadena will allow this business to get where the EBITDA needs to be. And you know we don't provide guidance, but you can see that I'm telling you 90 plus should be the number in the first half. And on top of that, we need to deliver more pricing and Pasadena savings.

Q: Last question for me is you mentioned the new collective bargaining agreement in Millsdale. What are the effects of that? Is that more of a comment on Q2 performance? Or is that a future impact related to presumably higher wages and benefits?

A: Look, we are extremely happy with our workforce in Millsdale. And this is an event that happens every 4 years. So the previous agreement was done in 2021. And we just executed the new agreement for the next 4 years. We're extremely happy with our workforce in Millsdale, and we will continue improving there in terms of productivity and all the efforts that we're doing. The plant is running better than previous years, but we still need to make improvement. And we made the comment because, of course, we always build inventory as part of that process. So that is kind of a cash impact in our inventories.

Q: I wanted to start with the AOS expansion that you announced mid-quarter. And I wanted to kind of get your thoughts on maybe who stands to benefit the most from this? Is this targeted at expanding capacity for Tier 1 clients, Tier 2 or 3 clients? What would you say are the long-term benefits from this?

A: Great question, Dave, and happy that you bring this topic up because we have talked a lot in the past about low 1, 4 and ether sulfate. The reality is we want to make sure, Stefan is a one-stop shop. We have all the technologies that you need in Surfactants to deliver the products that you want to deliver in the marketplace. AOS is an important building block for the sulfate-free business. We are -- we want to be more aggressive in the sulfate-free business in the future because it's an important growth element of the market. If you think about a lot of the beauty care industry continues, this is a trend that started many, many years ago and continues to be like that, is going through a lot of sulfate-free technologies. So we want to make sure that we offer all the options when you think about surfactants and when you think about feedstocks to our customers to get to the best performance and cost for what they need. AOS is an important building block. We have extra capacity, and we're going to grow in AOS in the near future, for sure.

Q: Just kind of switching gears, thinking about the Philippines asset sale that you mentioned is expected to close in 4Q. You also mentioned that you're continuing to look at other asset optimization opportunities. Just any sense of what those opportunities would look like? Any other levers you're going to looking at pulling? Would it take the form of more asset sales? Or do you have other things in mind?

A: Great question, Dave. And we will continue looking at our footprint. We will continue to look at all our assets, even within plants. We are looking our -- the productivity of each of our assets because we need to make sure that we get the return that we deserve from each of those assets. So there is no secret that there is overcapacity in the chemical industry overall. I'm not talking about a step-up, but overall, there is extra capacity, and that's where the whole industry needs to be more careful on making sure that we rationalize that capacity. In our case, we are looking at several options, and we will continue optimizing our asset base going forward, nothing concrete right now, but you will hear more from us in the future.

Q: The tax benefit that you saw in the quarter, that's expected to be a onetime benefit and tax rates going forward should return to the normal range.

A: Yes, you are totally right. We had a few IRS audit closures that provided benefits to us, discrete benefits. So we continue to believe that our normal tax rate is between 24% to 26%, and that's the normal going rate. Of course, we will continue working on projects. And if -- so -- but the normal going rate will continue to be the 24%, 26% effective tax rate.