Stepan Co Q1 FY2025 Earnings Call

Good morning, and welcome to the Stepan Company's First Quarter 2025 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterward, we will conduct a question-and-answer session. As a reminder, this call is being recorded on Tuesday, April 29, 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, and thank you for joining Stepan Company’s first quarter 2025 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 risk and uncertainties that could cause actual results to differ materially, including, but not limited to, prospects for 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 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 are joining us online or 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 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 first quarter 2025 results. I plan to share highlights of the quarterly performance and will also share updates on our key strategic priorities while Sam will provide additional detail on our financial results. We are pleased with the start of 2025 and I'm proud of our team that is committed to further improving earnings going forward. The company reported first quarter adjusted EBITDA of $57.5 million, up 12% versus the prior year. Surfactant and Specialty Products delivered double-digit adjusted EBITDA growth while Polymers adjusted EBITDA decreased slightly year-over-year. Volume grew 4% and the growth was broad-based with Surfactants up 3%, Polymers up 7% and our MCT product line up 4%. We continue to experience double-digit volume growth within the agricultural and oil field end markets and with our distribution partners in Surfactants. North America and European Rigid Polyol volume grew single-digits while the Specialty Polyols and Commodity PA businesses delivered strong growth year-over-year. We believe that Rigid Polyol growth in North America and Europe continues to be restrained by global macroeconomic uncertainties and the high interest rate environment. We're encouraged by the broad-based volume growth across several of our key strategic end markets. We finished the first quarter of 2025 with $19.3 million of adjusted net income, up 32% versus the prior year driven by earnings growth in Surfactants and Specialty Products and a lower tax rate. We executed the safe startup of our new Pasadena, Texas site, which is now operational. During the first quarter of 2025, 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 June 13, 2025. Stepan has paid an increased dividend for 57 consecutive years. Sam will now share some details about our first quarter results.

Thank you, Luis. My comments will generally follow the slide presentation. Let's start with Slide 4 to recap the quarter. First quarter 2025 adjusted net income was $19.3 million or $0.84 per diluted share versus $14.7 million or $0.64 per diluted share for the first quarter of last year, a 32% increase. The increase was driven by broad-based volume growth, higher margins in Surfactants and a lower tax rate. Adjusted EBITDA for the quarter was $57.5 million, up 12% year-over-year driven by volume growth and improved Surfactant product and customer mix, which was partially offset by higher pre-operating expenses at our Pasadena, Texas site. Cash from operations was $6.9 million for the quarter and free cash flow was negative at $25.8 million. Slide 5 shows the total company net income bridge for the first quarter of 2025 compared to last year's first quarter and breaks down the increase in adjusted net income. Because this is net income, the figure is noted 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, partially offset by lower operating results in Polymers. The first quarter results benefited from a lower effective tax rate. The effective tax rate was 20% versus our normal range of 24% to 26%. This decrease was primarily attributable to favorable discrete items associated with the tax audit settlement in the U.S. Slide 6 shows the total company adjusted EBITDA bridge for the first quarter compared to last year's first quarter. Adjusted EBITDA was $57.5 million versus $51.2 million in the prior year, a 12% increase. We will cover each segment in more detail but to summarize, we delivered adjusted EBITDA growth in Surfactants and Specialty Products partially offset by global polymers. Adjusted EBITDA results also benefited from lower corporate expenses compared to the prior year. Slide 7 focuses on the Surfactant segment results. Surfactant net sales were $430.3 million for the quarter, a 10% increase versus the prior year. Selling prices were up 12% primarily due to the improved product and customer mix and the pass-through of higher raw material costs. Sales volume grew 3% year-over-year mainly due to double-digit growth within the agricultural and oilfield end markets along with our distribution partners. This growth was partially offset by lower demand within the commodity consumer product end markets. Foreign currency translation negatively impacted net sales by 5%. Reflect in adjusted EBITDA increased $4.5 million or 10% versus the prior year. This increase was primarily driven by the 3% growth in sales volume and improved product and customer mix, which was partially offset by pre-operating expenses at our Pasadena, Texas site. Now on Slide 8, Polymer net sales were $146.1 million for the quarter flat versus the prior year. Spending prices decreased 7% primarily due to the pass-through of lower raw material costs and competitive pressures. Sales volume increased 7% in the quarter. North American and European Rigid Polyol volume were low-single-digits despite the continued challenging overall environment. Specialty Polyols and Commodity Phthalic Anhydride volume delivered strong growth year-over-year. China polymers volume was up low-single-digits. Foreign currency translation had a nominal impact on net sales during the quarter. Polymer adjusted EBITDA decreased $0.3 million or 2% versus the prior year, primarily due to less favorable product mix and a high-cost inventory carryover, which was partially offset by the 7% volume growth. Finally, Specialty Product net sales were $16.8 million for the quarter, an 11% increase versus the prior year primarily due to higher selling prices. Specialty Product adjusted EBITDA increased $1.2 million or 21%. The increase in adjusted EBITDA was primarily due to margin recovery and volume growth within the medium-chain triglycerides product line. Next on Slide 9. Free cash flow was negative at $25.8 million for the first quarter, down $37.2 million year-over-year, reflecting typically higher working capital requirements during the first quarter as well as increased purchases of raw materials in anticipation of tariffs and to support business growth. We are cautiously optimistic in our ability to deliver positive free cash flow for the full year 2025. During the first quarter, we deployed $32.7 million against capital investments and $8.7 million for dividends. Now on Slide 10 and 11, Luis will update you on our strategic priorities.

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 Tier 1 customer base remains a solid foundation of our business. Continuing our new customer acquisition with Tier 2 and Tier 3 customer remains a key priority. This is an important and profitable growth channel within our Surfactant business. For the first quarter of 2025, our volume grew mid-single-digits year-over-year and we added over 400 new customers. Our end market diversification strategy remains a key focus area. For the first quarter, we grew double-digits in our agricultural and oilfield businesses. We are pleased to see our North America and European Rigid Polyol business return to year-over-year growth after a challenging 2023 and 2024. Insulation remains a critical enabler of a more sustainable and energy-efficient world and we are confident in the long-term growth prospect of this business. Our focus continue to be on developing the next-generation rigid polyol technologies that can increase the energy efficiency and cost performance of our customer insulation products. Additionally, we are excited about the new products we are introducing in the growing spray foam end market. Within Polymers, we were able to achieve a strong growth in our Specialty Polyol and our Commodity PA business. This will enable us to deliver earnings growth in 2025. Our supply chain operation and resiliency continue to improve and we deliver a solid quarter in all our key operational metrics. We're continuing to make the necessary investments in our new website to ensure reliable operations both today and in the future. Moving to Slide 11, we safely started up our new Pasadena, Texas site. We have made six different products today. We expect to achieve the full contribution rate of the plan during the second half of 2025. Our commercial teams continue to develop and deliver new specialty alkoxylation opportunities. Specialty alkoxylation volume grew strong double-digits in the first quarter. To conclude, we remain focused on accelerating our business strategy to improve execution to grow volume, improve product and customer mix and accelerate free cash flow generation. We believe Surfactant will experience continued growth in our key strategic end markets and that polymer demand will continue improving as we get more market certainty and we execute our innovation and growth plans. In addition, our Pasadena facility is now operational and as previously communicated, we believe this will enable us to deliver volume growth and supply chain savings during the second half of the year. Despite all the current market uncertainties including the impact of tariffs, we remain cautiously optimistic that we will deliver full-year adjusted EBITDA and adjusted net income growth and positive free cash flow in 2025. This concludes our prepared remarks. At this point, we would like to turn the call over for questions. Stephen, please give the instructions for the questions portion of today's call.

Thank you. At this time, we will conduct the question-and-answer session. First question comes from the line of Mike Harrison of Seaport Research Partners. Your line is now open.

Congratulations on the Pasadena alkoxylation startup. I was hoping that maybe you could answer a few questions about that facility and kind of the timing of how we should think about the contribution there. First of all, you said it; I believe you said it was producing six products. Is that kind of the limit or are there still some products that you're bringing online? And can you talk at all about how we should think about that the utilization and customer qualification ramp up process? Is that something that gets wrapped up in the next few months or is that something that's continuing kind of through the end of the year?

Great question, Mike. We are very excited with the news and with Pasadena starting up only six products; we have shared in the past that we're planning to produce more than 60 products in Pasadena. So we are in the process of qualifying one by one. This is going to take a few months, okay? So that's why we're saying the full contribution starting more in the second half of the year and of course, a full, full contribution from the plant in 2026. And as we have discussed in the past, we expect to fill up the plant pretty quickly in a few quarters, right? Because we have a lot of the volumes already. But of course, we want to continue growing. And if we can keep up some of that volume in the site for growth that is coming and keeping the other supply chain options that we have available, that will be even better for us. But we will see how the next few quarters develop. But as I said in my prepared remarks, especially alkoxylates are growing strong double-digits and to give you the exact number is 19% growth in Q1, so very, very strong growth. So it’s early days and we still spent $4 million in Q1 in pre-operating expenses in Pasadena. That's why if you exclude that we are above the $60 million EBITDA. But that's something of course that we will mitigate with the supply chain savings going forward in future quarters.

I appreciate that insight. It's helpful. Regarding the earnings contribution, it appears that in Q1, the impact on operating income or EBITDA was likely around $3 million to $4 million negative. Should we expect Q2 to still be negative but an improvement over Q1, with positive earnings contributions beginning to ramp up in Q3 and Q4?

Yes, I believe you are thinking in the right direction. We are just beginning Q2 and are still making investments, so you may not see the benefits just yet. However, it is certain that it won't be as negative as Q1.

Perfect. So moving on to a couple other questions that I had. One of them in Surfactants, you mentioned the weakness in the commodity consumer products portions of the business. And I'm just curious, how much of that decline is intentional shifting of business into higher margin and non-commodity product lines and kind of higher value applications? Or can you just help us understand what else is contributing to the decline in volumes in that commodity consumer piece?

Yes. Look, I mean we are not intentionally moving volume from consumer products to other applications. But of course, I mean, we will always optimize our assets in the future if we have to. We have really a sluggish demand from several of our consumer product customers. And if you see, if you read the reports from others, volumes are not growing, so that the challenging situation with inflation with everything that the consumer is experiencing, we are not seeing material volume growth in this segment as we expect.

All right. And then the last one for me is on the Polymers business. You mentioned that that high cost inventory that's still flowing through the P&L with a drag on margin, are most of those higher cost goods out of inventory right now or is there still more that needs to flow through? And I guess, my other question on polymers is, when might we expect to see pricing stabilize? I believe it was still a negative 7% year-over-year in the first quarter.

Great question, Mike. And that's the main issue in polymers in Q1 was the higher inventory cost that we were carrying on and we're getting out of that. We're getting out of that already in Q2. So margin should improve.

And pricing stabilizing?

Yes. I think again, when you think about pricing and raw materials, we should see improvement.

Thank you. Our next question comes from the line of Dave Storms of Stonegate. Your line is now open.

Good morning. Just hoping we can start with maybe…

Good morning, Dave.

Good morning. Hoping we could start with May weather scene in down channel inventory levels. The volume increase that you saw this quarter, was there any sense that this is from maybe a pull-forward in inventory levels as customers are trying to get ahead of some of the macro uncertainties?

Thank you for your question, Dave. We had a strong quarter in Q1 with volume growth, including 3% in Surfactants, 7% in Polymers, and 4% in MCT, which we are very pleased with. We don't think there is any overstocking in Q1 based on the volumes we shipped. We've also spoken with our customers, particularly in the polymers sector, to check for any potential inventory buildups, and so far, we haven't seen any signs of that. I can add that we're observing similar trends in April, with consistent strong performance in the Surfactant business, especially in the oil field and distribution. Additionally, we are noticing a boost in growth in the polymers sector, and we'll need to monitor how that develops in May, June, and Q3, particularly regarding any preemptive inventory accumulation due to tariffs or concerns over price increases. Overall, April shows promising growth in the polymers area, and that's something we'll assess in the upcoming months.

Understood, very helpful, thank you. And then you mentioned a couple times just the improved customer mix. I'm assuming this is referring to serve a more Tier 2 and 3 customers. Are you able to give us a sense of maybe of those Tier 2 and 3 customers, which are more spot buyers and maybe which are a little stickier using some of the additional services that you can provide for the Tier 2 and 3 customers?

Sure. The mix is coming from both, it's coming from Tier 2, Tier 3 and it's also coming from the end market diversification. So ag is growing very, very strong. Oil field is growing very nicely. So all of those are positive mix in our Surfactant business and actually when you think about it, you can see the public data. All your chemicals went up significantly in Q1. So actually that was a drag in our margins in Surfactants because all your chemicals went up and you always have a gap between raw material price increases and then how much you can pass-through and how fast you can pass-through some of that increases. So there is always a lag. So we are very pleased with the results in Surfactants driven by the customer and the product mix.

Understood. Thank you for taking my questions. I'll get back in queue.

Thank you, Dave.

Thank you. Our next question comes from the line of David Silver, C.L. King & Associates. Your line is now open.

Yes, good morning. A couple of questions, maybe a follow-up on kind of your double-digit sales growth in agricultural and oilfield Surfactants. And this would just go back to maybe the question about potential, I don't know, pipeline filling or overstocking. But you did note double-digit growth. And firstly, I just was trying to confirm that the bulk of the demand growth was on the agricultural side as opposed to oilfield. And then, secondly, I guess in the past couple of years there was a big run up in volumes on the agricultural Surfactant side and then there was a period of time to, I guess, for inventories to normalize. So I'm just thinking in the current environment it is the run up to the spring planting season, there are some tariff issues. I mean just on the agricultural side, what is your thoughts, your best thoughts about the level of any pre-buying or pipeline filling that may not be sustainable I guess, as the balance of the year goes on. Thank you.

David, you are 100% right that the majority of the growth is driven by our ag business instead of oilfield. I mean oilfield is a strong growth but ag was significantly higher. And of course, we have a bigger business in ag than in oilfield. We keep talking with our customers and we don't believe there is plenty of ag inventory increases. And if you think about where people are with interest rates, nobody's willing to put a lot of inventory and tie a lot of cash like what happened in 2022 where it was totally a different environment where with supply chain issues across the board, everybody wanted to have the material and interest rates were not where they are today. So all the data that we have from our customer is there is no significant inventory built up anywhere that we know and we continue seeing good orders for April and actually already a good book order for May on the ag business.

Thank you for your response. I would like to follow up on your comments regarding the Polymer division this quarter. You mentioned some inventory challenges that may have affected your margins, but I was curious about the less favorable product mix noted in the slide deck. Could you provide more detail on whether this mix was influenced by specific end markets or regions? Additionally, what is the outlook for this situation for the remainder of the year? Thank you.

Yes, that's an important observation, David. Here's the situation. We were clear about our performance. Our Rigid Polyol business in North America and Europe grew in the low single digits, while our Phthalic Anhydride business saw strong growth in the double digits. However, since Phthalic Anhydride is a commodity with lower margins, we are gaining substantial new business and market share due to various competitive factors. This is contributing to the mix impact in the Polymers business, which will persist as we continue to grow in the Phthalic Anhydride sector. The primary issue in the first quarter was the high inventory costs across the Polymers business, which significantly affected our margins, resulting in nearly flat EBITDA despite a volume increase of 7%. This was the main factor affecting our performance.

Thank you for that. The next question is about the current impact of tariffs. I understand that your operations are mainly local for local, particularly in the U.S. and Europe. However, could you provide insights on the current tariff situation, even though it is uncertain? Specifically, are there any pressure points in your operations in Mexico? Is all the production covered by the USMCA agreement, or could some products be sold in the U.S. and potentially be affected by the recently announced tariffs? Where do you see the greatest sensitivity and direct impact from potential tariff policies?

Sure. The question of the week and the month is indeed important. As you mentioned, David, things are changing every day. This is a very volatile and uncertain situation that we all need to navigate. The majority of our business is sourced, produced, and sold within the regions where we operate, so most of our volumes are located in those areas. However, we are still affected by tariffs since we import raw materials. There will always be some impact, and we are actively working to mitigate that by adjusting our sourcing strategy where possible. Additionally, we know that tariffs contribute to inflation, and many customers and competitors will adjust pricing accordingly. We are addressing this issue now because our goal is to recover any impact. Regarding Mexico and Canada, our products fall under the USMCA, so we are compliant there, but we still have other aspects to manage through pricing adjustments and supply chain modifications.

Okay. And then last one for me, maybe a question about the indirect effects that you've seen thus far from the tariff announcements or potential import tariff implementation. But this would have to do maybe with your R&D or your product development efforts where you're collaborating with customers and their tariff exposures may be a little bit different than Stepan's, than your company. But have you noted or can you speak to any pausing or any changes in the collaborative relationships, let's say, on new product developments that might be commercialized over the next year or two as a result of the tariffs? In other words, has anything changed with your R&D or technical collaborations with customers, let's say, since the beginning of the year or since April 2 with the tariff announcement? So kind of indirect effects on your customers from tariff issues that might be impacting your collaborative work with them? That would be my question. Thank you.

We will keep working closely with our customers. Our approach focuses on customer relationships and innovation, which I refer to as customer-centric innovation, as we are developing solutions together with them. Our goal is to align with their needs, desires, and project aspirations. I wouldn’t say there has been a notable change in recent days due to the tariff announcement, but we will remain attentive and continue to support our customers with their service needs and any formulation challenges arising from the tariff situation.

Okay. So no reduction in their willingness to work with Stepan, I guess, is what you're saying?

I'm saying we will continue working with our customers in all their innovation challenges and changes that they need to execute. And I'm sure more requests are going to come in the future when these tariffs situation also settles. I think people are also hesitant to make a lot of changes when the news are changing every day.

Right. Okay, great. Thanks very much. I appreciate all the color.

Thank you, David.

Our next question comes from the line of Dmitry Silversteyn of Water Tower Research. Your line is now open.

Thank you very much. Thank you, gentlemen for taking my call and congratulations on a strong start to the year. A couple of questions. They are related, I think, so let's start with the raw material situation here. You've seen an increase in pricing on raw material pass-through in your Surfactants business and a decline in pricing on raw material pass-through in the Polymer business. So what specific or at least families of raw materials that are still inflating in the Surfactants and are deflating in your Polymer business? And excluding the pass-throughs, what does the pricing environment look like in these businesses?

As I mentioned earlier, in Surfactants, we experienced significant increases across all our chemicals, which drove pricing actions at the end of the quarter and into early April to recover some of that. In Polymers, we made certain decisions in the first quarter and still have raw materials in our inventory that we need to manage over the next couple of months. However, I believe we are in a favorable environment regarding pricing and margins. It's a healthy situation, and we must remain attentive to how tariffs or any changes in raw materials may affect us in the coming months, as tariffs can have both direct and indirect impacts. Therefore, we need to stay vigilant, monitor the situation, and adjust pricing as necessary.

Okay. I understand that. I guess my question had more to do with the raw material cycle. Where are we or where you are in the raw material cycle? In other words, have raw materials stopped increasing for example in Surfactants and you're just catching up with the pass-throughs? Have they stopped declining or continue to decline polymers? So we can expect to see some more pricing pressure there?

Yes. They have stabilized, but again charges are coming. So things will keep changing in the next few months. So things stabilize versus what we saw at the beginning of Q1. But now we will have a new development in the next few months that we need to monitor.

Understood. And just to come back to the tariffs really briefly, you talked about direct and indirect impact, right? So the direct impact is if you have some raw material cost increases and then indirect impact would be if your end products or your customers' end products are being impacted in terms of demand by reciprocal tariffs going back and forth. So is there one area that you're more concerned or have a better visibility than another or are you monitoring both and you expect both of them to be somewhat impactful depending on how the situation actually comes out?

Yes, we need to monitor the indirect aspect, and we currently lack sufficient data because things haven't been fully executed yet. However, if there is a significant wave of inflation, it could affect demand in the construction industry and consumer products related to Surfactants. This is something we need to keep an eye on in the coming months. So far, we haven’t seen any impact, and as I mentioned earlier, we had a strong April. Nonetheless, it will take a few more months to assess the entire supply chain's effect on the consumer and the construction industry for our Polymers business. We will provide more updates in July.

Understood. For my final question, regarding base level demand, there has been strong interest in oilfield chemicals and consumer products. You also noted growth in your insulation products in North America and Europe, as well as the rollout of your spray foam products. Construction seems to be showing more consistent signs of stability in North America, possibly indicating a turning point. What are your thoughts on the construction aspect of your business, and what do you anticipate for 2025?

We reported single-digit growth in our Rigid Polyol business in North America and Europe. However, we believe demand is still constrained due to market uncertainties related to high interest rates. There is significant pent-up demand in this industry and we have yet to realize its full potential. With more certainty and lower interest rates in the future, we anticipate that our business will grow faster, similar to the high-single-digit growth we experienced over the past 10 to 20 years. Currently, we are not seeing that same growth in the markets, and it may take some time to return to those levels.

Okay, but the demand level you're seeing in the first quarter is better than what you saw in 2024 and 2023.

Yes, yes. We grew 7% volumes in polymers and we grew single-digits in Rigid Polyol.

Okay, okay. But okay, so the business is growing, but there's still more growth to come, assuming the interest rate environment and the economic environment improves. Understood. Thank you.

Thank you, Dmitry.

Thank you. We will welcome back Mike Harrison for our next question from Seaport Research Partners. Your line is now open.

Hi, I have a couple more questions. I know you've covered a lot regarding tariffs. My question pertains to the imports of competitor products. In the past, you've mentioned some competition from imports in the U.S., particularly regarding the Rigid Polyol side. I believe this has also been discussed concerning the medium chain triglycerides business within your Specialty segment. Given the current tariff situation, do you anticipate that import competition might decrease in any of your three segments?

Great question, Mike. The Polymers business faces constant competition in the region. However, you are correct that our MCT business is experiencing imported competition. We are currently exploring our options. To some extent, this also applies to the Surfactant business. We do notice some levels of Surfactants imported from China, particularly on the West Coast. While these volumes are not significant, there are always some imported products in the Surfactant business that we will evaluate as we aim to grow our business and increase our market share.

All right, very helpful. And then, last question for me is on the distribution piece of the Surfactant business and the growth that you're seeing there. Is that just underlying market growth? Are you seeing some broader shifts away from a direct-to-customer and more volume just naturally moving through distributors? Or is this part of a more concerted effort on your part to expand distribution relationships or partnerships? And if that is the case, is that a North America thing? Is it a global thing? What color could you provide on that? Thank you.

Look, we are continue working on our Tier 2, Tier 3 strategy globally. I wouldn't say this is a North America only focus. I mean, it's a focus area for all our regions in our Surfactant business. But of course, North America continues to be the biggest region. And what I would say is that you have both, you have market growth and you have our ongoing efforts to capture share, to capture more customers. I mentioned that we acquired more than 400 new customers in this space. So it's part of our core strategy as we continue developing this business and it continues to pay out.

Thank you. I am showing no further questions at this time. I would now like to turn it back to Sam Hinrichsen for closing remarks.

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

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