Welcome to the 2024 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterward, we will conduct a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. As a reminder, this call is being recorded on Wednesday, February 19, 2025. It is now my pleasure to turn the call over to Mr. Sam Hinrichsen, Vice President and interim Chief Financial Officer of Stepan Company. Mr. Hinrichsen, please go ahead.

Good morning. Thank you for joining Stepan Company's fourth quarter and full year 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 filings. In addition, this conference call will include discussions of adjusted income, adjusted EBITDA, and free cash flow, which are non-GAAP metrics. 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 investor section of our website. Whether you are joining us online or over the phone, we encourage you to review the investor presentation. We make these slides available at approximately the same time as the earnings releases are issued, and we hope that you find the information and perspectives helpful. With that, I would like to turn the call over to Mr. Luis Rojo, our President and Chief Executive Officer.

Thank you, Sam. Good morning, and thank you all for joining us today to discuss our fourth quarter and full year 2024 results. I plan to share highlights of the full year performance and will also share updates on our key strategic priorities, while Sam will provide additional details on our financial results. The company reported fourth quarter adjusted EBITDA of $35 million, down 7% versus the prior year, and full year adjusted EBITDA of $187 million. While we are disappointed with our overall financial performance in 2024, we advanced our strategic investments and took the necessary steps to return the company to profitable growth. I am proud of the resiliency, hard work, and dedication of the entire organization. Full year adjusted EBITDA grew 4% versus the prior year, despite several one-time events that negatively impacted earnings and the pre-operating expenses on our new Pasadena site. Surfactant Specialty Products delivered strong double-digit adjusted EBITDA growth, partially offset by softer demand in polymers. Global volumes grew 1%, driven by 2.5% growth in the surfactant business. We are encouraged by the surfactant growth across several of our key strategic markets. We finished the year with $50.5 million of adjusted net income, which was flat versus the prior year. Strong earnings growth in Surfactant and Specialty Products was fully offset by Polymers. Free cash flow for the year was positive at $39 million and in line with our expectations and our operating plan. The company delivered $48 million in pretax cost out during 2024, mainly through disciplined efforts in supply chain and workforce productivity actions taken in the last quarter of 2023. During the fourth quarter of 2024, the company paid $8.7 million in dividends to shareholders. Our Board of Directors declared a quarterly cash dividend on Stepan common stock of $0.385 per share, payable on March 14, 2025. Stepan has paid and increased its dividend for 57 consecutive years. Sam will now share some details about our fourth quarter and 2024 results.

Thank you, Luis. My comments will generally follow the slide presentation. Let's start with slide five to recap the quarter. Fourth quarter 2024 adjusted net income was $2.8 million, or $0.12 per diluted share, versus $7.5 million, or $0.33 per diluted share for the fourth quarter of last year, a 63% decrease mainly due to $4.4 million of higher pre-operating expenses at our new Pasadena, Texas site and $2.9 million related to a one-time tax proceeding reserve in Latin America. The previously announced CEO transition also impacted quarterly results by $2.8 million. Adjusted EBITDA for the quarter was $35 million, down 7% year over year. Global sales volume was down 1% versus the prior year, as double-digit growth in several surfactant end markets was fully offset by softer demand in rigid polymers. Cash from operations was $68 million for the quarter, and free cash flow was $32 million. In the fourth quarter, the company recognized $13 million in pre-tax savings out of the $48 million for the full year of 2024. Slide six shows the total company net income bridge for the fourth quarter compared to last year's fourth quarter and breaks down the decrease in adjusted net income. Because this is net income, the figures noted are on an after-tax basis. We will cover each segment in more detail, but to summarize, we delivered operating income growth in surfactants and specialty products, fully offset by lower operating results in polymers. Corporate expenses increased primarily due to the higher expenses associated with the previously announced CEO transition in the fourth quarter of 2024. Slide seven shows the total company adjusted EBITDA bridge for the fourth quarter compared to last year's fourth quarter. Adjusted EBITDA was $35 million versus $38 million in the previous year, a 7% decrease year over year. We will cover each segment in more detail, but to summarize, we delivered adjusted EBITDA growth in Surfactant and Specialty Products, fully offset by global polymers. The lower corporate expenses reflect savings related to productivity efforts implemented at the end of 2023. Slide eight focuses on the surfactant segment. Surfactant net sales were $379 million for the quarter, a 3% increase versus the prior year. Selling prices were up 5%, primarily due to improved product and customer mix driven by double-digit growth. Sales volume was up 1% year over year within the agricultural and oilseed end markets, along with our distribution partners. This growth was partially offset by lower demand within the consumer products end markets. Foreign currency translation negatively impacted net sales by 3%. Surfactant adjusted EBITDA increased $3 million or 10% versus the prior year. This increase was primarily driven by higher sales volume, favorable product and customer mix, and margin recovery. Higher pre-operating expenses at the company's new constellation facility being built in Pasadena, Texas, and the tax proceeding reserve in Latin America partially offset these drivers. Now on slide nine, Polymer net sales were $130 million for the quarter, a 12% decrease versus the prior year. Selling prices decreased 4%, primarily due to the pass-through of lower raw material costs and competitive pressures. Sales volume declined 9% in the quarter, primarily due to an 11% decrease in global rigid polyurethanes volume due to sluggish demand and competitive pressure. We believe the sluggish demand is related to continued global macroeconomic uncertainties, overall construction activity, and a higher interest rate environment. Specialty Polyols volume was up year over year. Foreign currency translation positively impacted net sales by 1%. Polymer adjusted EBITDA decreased $9 million or 44% versus the prior year, primarily due to the 9% decline in sales volume. Finally, specialty product net sales were $17 million for the quarter, a 10% increase versus the prior year, primarily due to higher sales volume and higher selling prices. Sales volume was up 32% versus the prior year, and adjusted EBITDA increased 65%. The increase in adjusted EBITDA was primarily due to margin recovery and volume growth within the medium chain triglycerides product line. Turning to slide ten, which shows the total company adjusted EBITDA bridge for full year 2024 compared to full year 2023. Adjusted EBITDA was $187 million versus $180 million in the prior year, a 4% increase year over year. Despite one-time extra costs and higher pre-operating expenses associated with our new Pasadena site, we delivered adjusted EBITDA growth in surfactants and specialty products, partially offset by lower polymers. Polymer results decreased primarily driven by lower global rigid polyol demand and competitive pressures. Corporate expenses were higher mainly due to the Asia fraud event and the CEO transition. Excluding these events, other expenses were down year over year due to workforce productivity efforts implemented at the end of 2023. Overall, the company delivered $48 million in cost savings despite the flood event at Millville in the first half of 2024 and the Asia fraud incident. Next, on slide eleven, free cash flow was positive at $39 million for the year, up $125 million year over year as capital investments returned to normalized levels and working capital decreased. During the year, we deployed $123 million against capital investments and $34 million for dividends. Now on slides twelve and thirteen, Luis will update you on our strategic priorities and capital investments.

Thanks, Sam. I will focus my comments on our strategic priorities. Our customer will always remain at the center of our strategy and innovation efforts. Our long-standing tier one customers value our technical capabilities and our ability to manufacture and deliver quality products at the scale they need. Our tier one customer base remains a solid foundation of our business. Continuing our new customer acquisition with tier two and tier three customers remains a key priority. This is an important and profitable growth channel within our surfactant business. For the full year of 2024, our volume grew high single digits, and we added over 1,700 new customers. Our end market diversification strategy remains a key focus area. In 2024, we grew double digits in oilfield and in our construction and industrial solutions businesses. After a difficult first half of the year, our agricultural business grew volume 30% versus the prior year in the second half of 2024. Insulation remains a critical enabler of a more sustainable and energy-efficient world. Our polymers business continues to focus on developing the next generation of rigid polytechnologies that can increase the energy efficiency and cost performance of our customers' insulation products. Additionally, we are excited about the new products we are introducing in the growing spray foam end market. Cost and operational excellence remain a key priority area. During 2024, the company recognized $48 million in pretax savings despite unfavorable one-time events. These savings were partially offset by pre-operating expenses of our new Pasadena site, the CEO transition, and overall inflation. Within 2024, the company made significant expenses and cash investments to improve the resiliency of our supply chain network. These investments will improve our customer service levels and reduce potential production disruptions in the future. Moving on to slide thirteen, construction of our new constellation production facility in Pasadena, Texas, is nearing completion, and we expect the plant to start up in the first quarter of 2025. We expect the full contribution run rate of the plant to be achieved within the second half of 2025. To conclude, I am excited and energized to continue our focus on accelerating our business strategies through improved execution to drive consistent volume growth, margin improvement, and free cash flow generation. We believe adjusted EBITDA will improve in all our reporting segments. The surfactant team is executing on opportunities to grow volume, deliver improved product and customer mix, and further progress our cost-out and cost-avoidance initiatives. We are optimistic that Polymers volumes will increase as we execute our innovation and growth plans. We believe our Surfactant business will experience continued growth in our key strategic end markets. As previously announced, we expect our Pasadena facility will start up in the first quarter of 2025 and enable us to deliver volume growth and supply chain savings during the year. We believe we are positioned well to deliver full-year adjusted EBITDA and adjusted net income growth and positive free cash flow in 2025. This concludes our prepared remarks. At this time, we would like to turn the call over for questions. Gigi, please review the instructions for the questions portion of today's call.

Thank you. Our first question comes from the line of Dave Storms from Stonegate.

Morning. Hi, Luis. Good morning. How are you? Perfect. I appreciate that. Okay. Just wanted to start with Surfactants. Agriculture had a really strong quarter, and you've mentioned in the past that Denton kind of goes the way of agriculture. How much more runway do you see in agriculture through the pounds of 2025?

Great question, Dave. We had a very strong second half with our agricultural business, as I said in my prepared remarks. The agriculture business grew 30% in the second half, so 22% in Q3 and 37% in Q4. We are seeing acceleration of growth in the agriculture business after a difficult first half with destocking that we saw in that end market. Based on the low base in the first half of 2024, we expect double-digit growth to continue. We are positive that we should continue seeing double-digit growth in the first half of 2025.

Understood. Thank you. And then turning to Polymers, obviously a challenged quarter and year. Would you characterize the challenges in polymers as across the board or are there any pockets of strength or green shoots that we could look at there?

Good point, Dave. While we are disappointed with the overall financial results of the company, we can do better and we are capable of doing better. In surfactants, we still grew adjusted EBITDA despite investments in Pasadena and one-time events. I want to clarify that the reserve we created in Latin America for the tax item is an above-the-line reserve; it impacts operating income and pretax. Surfactants did well and Specialty Products had an outstanding year, nearly doubling operating income. The sluggish demand was in our polymers business, driven by high interest rates, slow construction activity, and challenges in Europe. However, we grew in our specialty polymer spaces and had a great year in China. Despite issues in China generally, our polymers business there is growing nicely. So there are pockets of strength in polymers. We need to focus on our core North America Poly business, and we have a good plan for 2025. We're introducing and launching products into the spray foam market and we believe the market should grow in 2025 given backlogs in re-roofing and remodels.

Understood. Thank you for that color, and I'll get back in queue.

Thank you. One moment for our next question. Our next question comes from the line of Mike Harrison from Seaport Research Partners.

Hi. Good morning. Can you hear me okay?

I can hear you, Mike. Perfect.

Great. Thank you very much. I was surprised to see the surfactants price mix positive at the 5% level. You mentioned that was mostly product mix and customer mix. Can you help us understand a little more of what you're seeing in that price mix number as we start to look into next year? Should price mix be flattish or could it be positive for full year 2025?

Good point, Mike. Our strategy continues to focus on growing with tier two and tier three customers while maintaining and expanding business with tier one customers. Tier two and tier three customers deliver a positive mix; we are growing high single digits in those segments, while total surfactant volume grew 2.5%. On the product side, we had a great agriculture second half—Q4 was very strong with 37% growth. Oilfield also continues to grow nicely and that provides positive price mix. We are pleased with the surfactant business returning to growth, and the areas where we're growing are contributing to the positive price mix you saw.

Very helpful. I was hoping you could help us level set the starting point for 2025 EBITDA. If we look at 2024, there were many unusual items: outages, CEO transition and a tax issue this quarter, Pasadena startup cost that presumably don't repeat. I also assume some incentive compensation may have been below normal and some discretionary costs could start to come back, and there may be FX headwinds. How might we think of a more normalized starting point as we look at 2025?

Great point, Mike. I won't provide guidance, but I will be transparent about the one-time items. You saw Millville was an $18 million impact in 2024. Adding Asia, the transition, and the Latin America tax reserve, we're talking about more than $30 million in one-time events. We have a strong cost avoidance and cost-out program in 2025 to ensure we don't repeat those. Pasadena costs are required: hiring, training, and some depreciation already began since areas of the plant are functioning. Those costs will continue, but over time you will see revenue and supply chain savings as the plant starts up and reaches full run rate in the second half of 2025. We have provided data around approximately $4 million per quarter in expected savings from the plant; that is the piece that should offset some of the extra cost. Excluding the one-time items, our performance suggested we were operating nearer to $60 million EBITDA per quarter; that indicates the company is capable of stronger performance without those one-time effects. The team is committed to improving profitability in 2025.

Thank you. Regarding the first quarter and the impact of Pasadena, you mentioned it's nearing completion and will start up, but presumably we'll still have another roughly $4 million EBITDA headwind from Pasadena while it's in early ramp stages. Are there any other one-time or unusual factors to keep in mind for Q1?

You are correct on the Pasadena comment; we expect to start up in Q1. We are about eight weeks into the quarter now and are seeing a good start to 2025: agriculture, oilfield, and our distribution partners continue to do well. However, it's still early in the year and there are many moving pieces, such as tariffs and other factors. So far, the only one-time item we expect in Q1 is Pasadena.

Perfect. Thank you very much.

Thank you. As a reminder, to withdraw your question, please press star one one again. Our next question comes from the line of Kevin Holder from CL King and Associates.

Hi. Good morning. Thank you for taking our question. This is Kevin on for Dave. I just wanted to start off with a few clarifications on the Pasadena facility. Can you give us guidance on how to look at interest expense and depreciation through 2025 as you ramp up production in Pasadena?

Thank you, Kevin. We provided guidance in the slides about our depreciation forecast for the year: $128 million to $132 million, with $130 million as the midpoint. The increase versus 2024 is mainly related to the Pasadena site. Timing can vary based on when each reactor comes online, so that can change a bit. Once the site is up and running and we have more clarity on SKU qualifications, likely in April, we can discuss the second half in more detail and any modeling adjustments you may need. You already see the depreciation in our forecast and we will update you more in April.

Great. That's helpful. Turning to current currency rates and the strengthening dollar, what is your sensitivity to movements in the euro, the Mexican peso, and the Brazilian real?

Good question. The majority of the currency impact could be the euro, which is nearer parity for some. That's our main risk because pricing in Europe is more sensitive to FX. Mexico and Brazil are less of a concern because our cost structure there is largely local currency, which provides some natural hedge in cost structure. Overall, the net impact from Mexico and Brazil is not material for our total numbers; the euro is the primary risk we continue to manage, and it is still manageable in our totals.

Great. Thank you. Lastly, regarding China and specifically your polymers business there, can you discuss expectations for the construction market in China and your plans for expanding spray foam into that market?

Great question. The China team has done an outstanding job. Our polymers business in China is diversified across many end markets, not just roofing or construction; it includes areas such as LNG ships and other industrial applications. That diversified exposure is why the business is growing at a nice rate—even though it is a smaller business overall. We are not heavily exposed to the broader residential construction issues in China.

Great. Thank you. I'll hop in the queue.

Thank you. At this time, I would now like to turn the conference back to Luis for closing remarks.

Thank you very much for joining us on today's call. We appreciate your interest and ownership in Stepan Company. Have a safe, productive, and great day. Thank you.

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