Stepan Q1 2025 Earnings Report

Stepan EPS Results

• Actual EPS: $0.84
• Consensus EPS: $0.51
• Beat/Miss: Beat by +$0.33
• One Year Ago EPS: $0.64

Stepan Revenue Results

• Actual Revenue: $593.26 million
• Expected Revenue: $562.77 million
• Beat/Miss: Beat by +$30.49 million
• YoY Revenue Growth: +7.60%

Stepan Announcement Details

• Quarter: Q1 2025
• Date: 4/29/2025
• Time: Before Market Opens
• Conference Call Date: Tuesday, April 29, 2025
• Conference Call Time: 8:00AM ET

Stepan (NYSE:SCL) Company, together with its subsidiaries, produces and sells specialty and intermediate chemicals to other manufacturers for use in various end products worldwide. It operates through three segments: Surfactants, Polymers, and Specialty Products. The Surfactants segment offers surfactants that are used in consumer and industrial cleaning and disinfection products, including detergents for washing clothes, dishes, carpets, and floors and walls, as well as shampoos and body washes; and other applications, such as fabric softeners, germicidal quaternary compounds, disinfectants, and lubricating ingredients. Its surfactants are also used in various applications, including emulsifiers for spreading agricultural products; and industrial applications comprising latex systems, plastics, and composites. The Polymers segment provides polyurethane polyols that are used in the manufacture of rigid foam for thermal insulation in the construction industry, as well as a base raw material for coatings, adhesives, sealants, and elastomers (CASE); polyester resins, including liquid and powdered products, which are used in CASE applications; and phthalic anhydride that is used in unsaturated polyester resins, alkyd resins, and plasticizers for applications in construction materials, as well as components of automotive, boating, and other consumer products. The Specialty Products segment offers flavors, emulsifiers, and solubilizers for use in food, flavoring, nutritional supplement, and pharmaceutical applications. Stepan Company was founded in 1932 and is headquartered in Northbrook, Illinois.

Stepan Q1 2025 Earnings Call Transcript

Presentation

[Operator]

Good morning, and welcome to the Stepan Company First Quarter twenty twenty five Earnings Conference Call. During the presentation, all participants will be in a listen only mode. Afterward, we will conduct a question and answer session. You will then hear an automated message advising your hand is raised. As a reminder, this call is being recorded on Tuesday, 04/29/2025.

[Operator]

It is now my pleasure to turn the call over to mister Sam Henriksen, Vice President and Interim Chief Financial Officer of Step and Company. Mr. Henriksen, please go ahead.

[Samuel Hinrichsen, VP & Interim CFO at Stepan Company]

Good morning, and thank you for joining Step and Company's first quarter twenty twenty five 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 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.steven.com under the Investors section of our website.

[Samuel Hinrichsen, VP & Interim CFO at Stepan Company]

Whether you're 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.

[Luis Rojo, President & CEO at Stepan Company]

Thank you, Sam. Good morning, and thank you all for joining us today to discuss our first quarter twenty twenty five 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 details 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 $57,500,000 up 12% versus the prior year.

[Luis Rojo, President & CEO at Stepan Company]

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 oilfield end markets and with our distribution partners in Surfactant. North America and European rigid polyol volume grew single digits, while the specialty polyols and commodity PA businesses delivered a 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.

[Luis Rojo, President & CEO at Stepan Company]

We're encouraged by the broad based volume growth across several of our key strategic end markets. We finished the first quarter of twenty twenty five with $19,300,000 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 start up of our new Pasadena, Texas site, which is now operational. During the first quarter of twenty twenty five, the company paid $8,700,000 in dividends to shareholders. Our Board of Directors declared a quarterly cash dividend on a step on a common stock of 38.5¢ per share payable on 06/13/2025.

[Luis Rojo, President & CEO at Stepan Company]

Stepan has paid and increased its dividend for fifty seven consecutive years. Sam will now share some details about our first quarter results.

[Samuel Hinrichsen, VP & Interim CFO at Stepan Company]

Thank you, Luis. My comments would generally follow the slide presentation. Let's start with slide four to recap the quarter. First quarter twenty twenty five adjusted net income was $19,300,000 or $0.84 per diluted share versus $14,700,000 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.

[Samuel Hinrichsen, VP & Interim CFO at Stepan Company]

Adjusted EBITDA for the quarter was 57,500,000 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 $6,900,000 for the quarter and free cash flow was negative at $25,800,000 Slide five shows the total company net income bridge for the first quarter of twenty twenty five compared to last year's first quarter and breaks down the increase in adjusted net income. Because this 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.

[Samuel Hinrichsen, VP & Interim CFO at Stepan Company]

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 six shows the total company adjusted EBITDA bridge for the first quarter compared to last year's first quarter. Adjusted EBITDA was $57,500,000 versus $51,200,000 in the prior year, a 12% increase.

[Samuel Hinrichsen, VP & Interim CFO at Stepan Company]

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 prior year. Slide seven focuses on the Surfactant segment results. Surfactant net sales were $430,300,000 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.

[Samuel Hinrichsen, VP & Interim CFO at Stepan Company]

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%. GERFACT and adjusted EBITDA increased $4,500,000 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.

[Samuel Hinrichsen, VP & Interim CFO at Stepan Company]

Now on slide eight, polymer net sales were $146,100,000 for the quarter, flat versus the prior year. Selling prices decreased seven percent, 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 grew low single digits despite the continued challenging overall environment. Specialty polyols and commodity metallic anhydride volume delivered strong growth year over year.

[Samuel Hinrichsen, VP & Interim CFO at Stepan Company]

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 $300,000 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 $16,800,000 for the quarter, an 11% increase versus the prior year, primarily due to higher selling prices. Specialty product adjusted EBITDA increased $1,200,000 or 21%.

[Samuel Hinrichsen, VP & Interim CFO at Stepan Company]

The increase in adjusted EBITDA was primarily due to margin recovery and volume growth within the medium chain triglycerides product line. Next on slide nine, free cash flow was negative at $25,800,000 for the first quarter, down $37,200,000 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 $32,700,000 against capital investments and $8,700,000 for dividends. Now on slide ten and eleven, Luis will update you on our strategic priorities.

[Luis Rojo, President & CEO at Stepan Company]

Thanks, Sam. I will focus my comment on our strategic priorities. Our customer will always remain at the center of our strategy and innovation efforts. Our Tier one customer base remains a solid foundation of our business. Continue our new customer acquisition with Tier two and Tier three customers remains a key priority.

[Luis Rojo, President & CEO at Stepan Company]

This is an important and profitable growth channel within our surfactant business. For the first quarter of twenty twenty five, 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.

[Luis Rojo, President & CEO at Stepan Company]

Insulation remains a critical enabler of a more sustainable and energy efficient world, and we are confident in the long term growth prospects of this business. Our focus continues 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.

[Luis Rojo, President & CEO at Stepan Company]

Our supply chain operation and resiliency continues to improve, and we delivered a solid quarter in all our key operational metrics. We're continuing to make the necessary investments in our Neosyles site to ensure reliable operations both today and in the future. Moving to Slide 11, we safely start off 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 twenty twenty five.

[Luis Rojo, President & CEO at Stepan Company]

Our commercial teams continues to develop and deliver new specialty oxalation opportunities. Specialty oxalation volume grew strong double digits in the first quarter. To conclude, we remain focused on accelerating our business strategy through improved executions 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.

[Luis Rojo, President & CEO at Stepan Company]

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. Steven, please review the instruction for the questions portion of today's call.

[Operator]

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

[Mike Harrison, Managing Director and Senior Chemicals Analyst at Seaport Research Partners]

Hi, good morning.

[Luis Rojo, President & CEO at Stepan Company]

Good morning, Mike.

[Samuel Hinrichsen, VP & Interim CFO at Stepan Company]

Good morning.

[Mike Harrison, Managing Director and Senior Chemicals Analyst at Seaport Research Partners]

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 the the utilization and customer qualification ramp up process?

[Mike Harrison, Managing Director and Senior Chemicals Analyst at Seaport Research Partners]

Is that something that gets wrapped up in in the next few months? Or is that something that's continuing kind of through the end of the year?

[Luis Rojo, President & CEO at Stepan Company]

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.

[Luis Rojo, President & CEO at Stepan Company]

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 the full, full contribution from the plant in 2026. And as we have talked in the past, we expect to fill up the plant pretty quick in a few quarters, right? Because we have a lot of the volumes already.

[Luis Rojo, President & CEO at Stepan Company]

But of course, we want to continue growing. And if we can keep 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 at consulates are growing a strong double digit. And to give you the exact number, it's 19% growth in Q1.

[Luis Rojo, President & CEO at Stepan Company]

So, very, very strong growth. So, it's early days. And we still spend $4,000,000 in Q1 in pre operating expenses in Pasadena. That's why if you exclude that, we had about the 60,000,000 EBITDA. But that's something of course that we will mitigate with the supply chain savings going forward in future quarters.

[Mike Harrison, Managing Director and Senior Chemicals Analyst at Seaport Research Partners]

I appreciate that color. That's helpful. So in terms of the how we should think about the earnings contribution, least directionally, it sounds like maybe in Q1, it was maybe 3,000,000 or $4,000,000 to the negative in operating income or EBITDA? And then should we assume that Q2 is still negative but better than that? And then it's Q3 and Q4 when we start to see the positive earnings contribution ramp up?

[Luis Rojo, President & CEO at Stepan Company]

Yeah. I think you are thinking that directionally the right way. I think Q2 is still again, we are just starting off, so we are still investing and you're not going to see the help in Q2. But for sure, you're not going to see such a negative like in Q1.

[Mike Harrison, Managing Director and Senior Chemicals Analyst at Seaport Research Partners]

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 higher value applications? Or can you just help us understand what else is contributing to the decline in volumes in that commodity consumer piece?

[Luis Rojo, President & CEO at Stepan Company]

No. Yeah. 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.

[Luis Rojo, President & CEO at Stepan Company]

And if you see, if you read the reports from others, volumes are not growing. So that's a challenging situation with inflation, with everything that the consumer is experiencing. We are not seeing material volume growth in this segment as we expect.

[Mike Harrison, Managing Director and Senior Chemicals Analyst at Seaport Research Partners]

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 and L was 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?

[Mike Harrison, Managing Director and Senior Chemicals Analyst at Seaport Research Partners]

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.

[Luis Rojo, President & CEO at Stepan Company]

Great question, Mike. And that 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.

[Mike Harrison, Managing Director and Senior Chemicals Analyst at Seaport Research Partners]

Pricing stabilizing?

[Luis Rojo, President & CEO at Stepan Company]

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

[Mike Harrison, Managing Director and Senior Chemicals Analyst at Seaport Research Partners]

All right. Thanks very much.

[Operator]

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

[Dave Storms, Director of Equity Research at Stonegate Capital Partners]

Good morning.

[Luis Rojo, President & CEO at Stepan Company]

Hoping we can start Good morning, Dave.

[Dave Storms, Director of Equity Research at Stonegate Capital Partners]

Good morning. Hoping we could start with maybe what you're seeing 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?

[Luis Rojo, President & CEO at Stepan Company]

Great question, Dave. Look, we had a good quarter in Q1 in volumes, right? I mean, when you think of 3% in surfactants, 7% in polymers, 4% in NCT, we're very pleased. And we don't believe there is any overstocking in Q1 with the volumes that we shipped. And actually, we have talked a lot about our customers, especially on the polymer side, to see if there is any potential inventory buildup.

[Luis Rojo, President & CEO at Stepan Company]

And we're not getting that perspective as of now. I will complement your question with we also are seeing the same dynamics in April, right? I mean, very similar dynamics in the surfactant business, very strong ag, very good oilfield, good distribution. So same dynamics in surfactants. And actually, we're seeing an acceleration of growth in the polymers business.

[Luis Rojo, President & CEO at Stepan Company]

And we need to see how that plays out in May, June, and Q3, and if there is any pre built in inventory because of tariffs or price increase concerns or something like that. But yeah, April is coming stronger on the polymer side, and that's the piece that we need to evaluate in the next few months.

[Dave Storms, Director of Equity Research at Stonegate Capital Partners]

Understood. Very helpful. Thank you. And then you mentioned a couple times just the the improved customer mix. I'm assuming this is referring to, you know, certain more tier two and three customers.

[Dave Storms, Director of Equity Research at Stonegate Capital Partners]

Are you able to give us a sense of, you know, maybe of those Tier two and three customers, are, more spot buyers and which maybe are a little stickier, using some of the additional services that you can provide for the Tier two and three customers?

[Luis Rojo, President & CEO at Stepan Company]

Sure. Mix is coming from both. It's coming from Tier two, Tier three, and it's also coming from the end market diversification. So ag is growing very, very strong. Oilfield is growing very nicely.

[Luis Rojo, President & CEO at Stepan Company]

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.

[Luis Rojo, President & CEO at Stepan Company]

So we are very pleased with the results in surfactants driven by the customer and the product mix.

[Dave Storms, Director of Equity Research at Stonegate Capital Partners]

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

[Operator]

Thank you, Our

[Operator]

next question. Moment please. Our next question comes from the line of David Silver, CL King and Associates. Your line is now open.

[David Silver, Senior MD & Director - Equity Research at C.L. King & Associates]

Yes, hi. Good morning. Thank you.

[Luis Rojo, President & CEO at Stepan Company]

Good morning, David.

[Samuel Hinrichsen, VP & Interim CFO at Stepan Company]

Good morning.

[David Silver, Senior MD & Director - Equity Research at C.L. King & Associates]

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 is 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, you know, 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.

[David Silver, Senior MD & Director - Equity Research at C.L. King & Associates]

So, you know, 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.

[Luis Rojo, President & CEO at Stepan Company]

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 is 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, so everybody wanted to have the material and interest rates were not where they are today.

[Luis Rojo, President & CEO at Stepan Company]

So all the data that we have from our customer is there is no significant inventory built up anywhere that we know. And we'll continue seeing good orders for April and actually already a good book order for May on the ag business.

[David Silver, Senior MD & Director - Equity Research at C.L. King & Associates]

Okay. Very good. Thank you for that. I did have a question, follow-up maybe on your comments on the polymer side this quarter. So, I think you did speak to some of the inventory issues that may have impacted your margins.

[David Silver, Senior MD & Director - Equity Research at C.L. King & Associates]

But I was hoping, not sure if you commented on this, but in the slide deck you did cite a less favorable product mix. And I'm just wondering if you could comment on that. Is that particular end markets? Is that a particular region? Just the less favorable product mix that maybe impacted your margin performance this quarter?

[David Silver, Senior MD & Director - Equity Research at C.L. King & Associates]

And what is the outlook for that for the balance of the year? Thank you.

[Luis Rojo, President & CEO at Stepan Company]

Yes. Good point, David. The issue is the following. We were very clear. We grew single digits.

[Luis Rojo, President & CEO at Stepan Company]

Our rigid polyole business, right, in North America and Europe combined low single digits. We grew very strong double digits in our phallic anhydride, our PA business. And of course, phallic anhydride is a commodity. It has lower margins. And we are capturing a lot of new business and new share in that end market because of other competitive dynamics.

[Luis Rojo, President & CEO at Stepan Company]

So that is what is driving the mix impact in the polymers business. That will continue because we continue growing in our PA business. But of course, I mean, we need the issue in Q1 was the high inventory cost that we had across the polymers business that really dragged the margins. And that's why we had basically flattish EBITDA with volumes of 7%. That was the main drag.

[David Silver, Senior MD & Director - Equity Research at C.L. King & Associates]

Okay, great. Thanks for that. Next question would probably be a two parter, but the topic would be, you know, tariff impacts as you see them currently and you know, I do think, you know, you're largely a local for local kind of structure right now, certainly in The US and Europe maybe, but I am wondering about if you could comment on how the tariff situation as it currently stands, which I recognize is uncertain. But are there any kind of pressure points maybe from in your Mexican production base in particular? Is any is all of that product covered by the USMCA agreement or might some of it be sold into The US and be subject to some of the, you know, tariffs that have recently been announced, but you know, and admittedly unsettled, where would you kind of characterize your greatest sensitivity, you know, direct impact from, potential tariff policies?

[Luis Rojo, President & CEO at Stepan Company]

Sure. Of course, the question of the week and the month, right? Look, as you said, David, things are changing every day. This is a very volatile and uncertain dynamic that we all have to navigate through right now. As you clearly said, the majority of our business is sourced, produced, and sold within the regions, right?

[Luis Rojo, President & CEO at Stepan Company]

So the majority of our volumes are in each of the regions that we compete. And so but of course, there are still impacts on the tariff because we import raw materials. And there's going to be always some impact that we are working right now to mitigate through changes on our sourcing strategy where possible and where it makes sense, and also pricing. We all know tariffs are inflationary. Many I believe many customers and many competitors will price for tariffs.

[Luis Rojo, President & CEO at Stepan Company]

And we're working on that right now because our objective will be to recover any impact. When you think about Mexico and Canada, our products are included in the USMCA. So we're good. We're good with Mexico and Canada. But we still have other things that we need to recover via pricing and via supply chain changes.

[David Silver, Senior MD & Director - Equity Research at C.L. King & Associates]

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 and D or your product development efforts where you're collaborating, you know, with customers and their tariff exposures may be a little bit different than step ins, than your companies. 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 you know, as a result of the tariffs?

[David Silver, Senior MD & Director - Equity Research at C.L. King & Associates]

In other words, has anything changed with your R and D or technical collaborations with customers, you know, 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.

[Luis Rojo, President & CEO at Stepan Company]

So, look, we will continue our collaboratively work with our customer. We have a customer intimacy strategy and our innovation, I call it customer centric innovation, because again, we are co developing things with them. We want to make sure that we're working on projects that they need, they want, and they aspire to launch. It's working with their objectives and their plans. So, I wouldn't say we have seen a significant change in the last few days with the tariff announcement.

[Luis Rojo, President & CEO at Stepan Company]

But we will stay diligent and we continue working with our customers to make sure that we are providing the service and we're helping them in all their formulation challenges and where things needs to be changed based on the tariff situation.

[David Silver, Senior MD & Director - Equity Research at C.L. King & Associates]

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

[Luis Rojo, President & CEO at Stepan Company]

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 this tariff situation also settles. I think people are also hesitant to make a lot of changes when the news are changing every day.

[David Silver, Senior MD & Director - Equity Research at C.L. King & Associates]

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

[Samuel Hinrichsen, VP & Interim CFO at Stepan Company]

Thank you, David.

[Operator]

Our next question comes from the line of Dmitry Silverstein Your line is now open.

[Dmitry Silversteyn, Senior Research Analyst at Water Tower Research LLC]

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 your raw material situation here.

[Dmitry Silversteyn, Senior Research Analyst at Water Tower Research LLC]

You've you've seen an increase in pricing on 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 or at least families of of raw materials that are still inflating in the surfactants and are deflating in your in your polymer business? And excluding the pass throughs, what does the pricing environment look like in these businesses?

[Luis Rojo, President & CEO at Stepan Company]

Look, as I mentioned before, in surfactants, we saw important increases in all your chemicals, and that was the driver of pricing actions at the end of the quarter and actually early into April to recover some of that. And in polymers, again, we made some decisions in Q1, and we still have the raw material that we had on our inventory. So, we know we have to flow through that for a few months, for a couple of months. So, but I don't I think we are in a good environment in terms of pricing and margins. I think it's a healthy situation.

[Luis Rojo, President & CEO at Stepan Company]

And we will need to continue working with how tariff or any other development on the raw material piece can impact us in the following months. Because, again, tariffs are going to have direct and are going to have indirect impacts, right? So, that's why we need to stay diligent and we need to monitor the situation and take pricing where it's needed.

[Dmitry Silversteyn, Senior Research Analyst at Water Tower Research LLC]

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 in in in the 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?

[Dmitry Silversteyn, Senior Research Analyst at Water Tower Research LLC]

Have they stopped declining or continue to decline in polymers so we could expect to see some more pricing pressure there?

[Luis Rojo, President & CEO at Stepan Company]

Yeah, they have stabilized. But again, tariffs are coming. So things will keep changing in the next few months. So, things have stabilized 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.

[Dmitry Silversteyn, Senior Research Analyst at Water Tower Research LLC]

Understood. And just to come back to the tariffs really briefly, you talked about direct and indirect impact, right? So the direct impact would be 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 situation actually comes out?

[Luis Rojo, President & CEO at Stepan Company]

Yeah, no, look, we need to monitor the indirect piece, and we don't have enough data yet because things have not, you know, been executed to the full extent. But, I mean, if there is a huge, you know, wave of inflation, you could argue that could have some, you know, demand impact in, you know, construction industry. Big consumer, right, on surfactants. So that's what we need to monitor in the next few months. We haven't seen anything.

[Luis Rojo, President & CEO at Stepan Company]

And as I said before, we have I mean, we have a strong April. And so but this will take a few more months to go through the whole chain all the way to the consumer, all the way to the construction industry for our polymers business. And we will provide more updates in July.

[Dmitry Silversteyn, Senior Research Analyst at Water Tower Research LLC]

Understood. Then final question just on sort of base level demand. We've seen you you've seen strong demand in oilfield chemicals and in consumer. You also mentioned that your insulation products are growing well in in North America and Europe, and you're rolling out your spray foam products. Construction seems to be, I don't wanna say starting to grow, but at least a little bit more uniform indications that the market is stabilizing, certainly here in North America and maybe beginning to turn the corner.

[Dmitry Silversteyn, Senior Research Analyst at Water Tower Research LLC]

How do you feel about the construction side of your business? And what do you expect to see in 2025?

[Luis Rojo, President & CEO at Stepan Company]

The comments that we made was we had single digit growth in our region polyol business in North America and Europe. And that we believe there is a stop that is still constrained demand because of the uncertainties in the market because of the high interest rate environment. So, we believe there is a lot of pent up demand in this industry and this end market. And we haven't seen the full potential of it. And hopefully with more certainty and lower interest rates in the future, that's where we will see this business growing faster like it did in the last, if you think of the last ten to twenty years, this business grew high single digits, the markets grew high single digits.

[Luis Rojo, President & CEO at Stepan Company]

And we are not seeing the markets growing high single digits now. So that will take some time to go back to those levels.

[Dmitry Silversteyn, Senior Research Analyst at Water Tower Research LLC]

Okay. But it is improving first, excuse me. The demand level you're seeing in the first quarter, is it better than what you saw in 2024 and 2023?

[Luis Rojo, President & CEO at Stepan Company]

Yeah. Yeah. We grew 7% volumes in polymers.

[Samuel Hinrichsen, VP & Interim CFO at Stepan Company]

And we grew

[Luis Rojo, President & CEO at Stepan Company]

single digits in rigid volume.

[Dmitry Silversteyn, Senior Research Analyst at Water Tower Research LLC]

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

[Dmitry Silversteyn, Senior Research Analyst at Water Tower Research LLC]

Thank you.

[Luis Rojo, President & CEO at Stepan Company]

Thank you, Dominik.

[Operator]

Thank you. As a reminder, to ask a question, you will need to press 11 on your telephone and wait for your name to be announced. We will welcome back Mike Harrison for our next question from Seaport Research Partners. Your line is now open.

[Mike Harrison, Managing Director and Senior Chemicals Analyst at Seaport Research Partners]

Hi, just a couple more for me. I know you've addressed a lot of questions on tariffs. My question relates to imports of competitor products. I believe in the past you guys maybe particularly in the rigid polyol side, you've talked about some competition from imports in The U. S.

[Mike Harrison, Managing Director and Senior Chemicals Analyst at Seaport Research Partners]

And I believe this has also come up in the context of the medium chain triglycerides business within your specialty business. So are you based on what you're seeing with the tariffs right now, are you expecting that maybe some import competition could decline because of the impact of tariffs in any of your three segments?

[Luis Rojo, President & CEO at Stepan Company]

Great question, Mike. And not in polymers. The polymers business is heavily source of some competition within the region. But But you are 100% right that our MCT business have imported competition and we are evaluating options and to some degree the surfactant business as well. I mean, we always see some levels of surfactants import from China, especially in the West Coast.

[Luis Rojo, President & CEO at Stepan Company]

These are not significant volumes, but there is always some imported products in the surfactant business that for sure we will evaluate and try to grow our business and grow our shares.

[Mike Harrison, Managing Director and Senior Chemicals Analyst at Seaport Research Partners]

All right. Very helpful. And then last question for me is on the distribution piece of the surfactants 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?

[Mike Harrison, Managing Director and Senior Chemicals Analyst at Seaport Research Partners]

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.

[Luis Rojo, President & CEO at Stepan Company]

Look, we are continuing working on our tier two, tier three 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.

[Luis Rojo, President & CEO at Stepan Company]

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 continues to pay out.

[Mike Harrison, Managing Director and Senior Chemicals Analyst at Seaport Research Partners]

All right. Thanks very much.

[Luis Rojo, President & CEO at Stepan Company]

Thank you, Mike.

[Operator]

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

[Luis Rojo, President & CEO at Stepan Company]

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

[Operator]

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

Participants

Executives

• Samuel Hinrichsen, VP & Interim CFO
• Luis Rojo, President & CEO

Analysts

• Mike Harrison, Managing Director and Senior Chemicals Analyst at Seaport Research Partners
• Dave Storms, Director of Equity Research at Stonegate Capital Partners
• David Silver, Senior MD & Director - Equity Research at C.L. King & Associates
• Dmitry Silversteyn, Senior Research Analyst at Water Tower Research LLC