Stepan Co. 17th Annual Midwest IDEAS Conference

Thank you. Thank you. Can you guys hear me fine?

Perfect. Well, thank you very much for being here. I am Ruben Velasquez, CFO for Stepan Company. I joined the company a year ago. Before that, I worked 18 years at 3M Company in the headquarters in Minnesota. Before that, 10 years in the oil and gas industry. Originally from Colombia. That's why you may judge a little bit of my accent. Okay, so now in the next few minutes, I want to share Stepan with you. If there is one thing that I want you to maybe remember from the next few slides, it's Stepan is a 90-year-old company, specialty and intermediate chemicals. I would say, we are in the early innings of margin recovery. Our Q2 was a testament of that. Our EBITDA grew 45%. What I want to do today is give you a little bit of taste of what are the drivers of that growth, and what are some of the main components of our Stepan strategy.

Of course, the obligatory reminder, I will be making some forward-looking statements. So, of course, some of the things may not happen, but I'll give a few seconds for you to read this on your own. Perfect. You guys read fast. Okay, and this is not the deck. Oh. I think that this is not the deck. No? I'm so sorry, guys. Okay. Maybe. Yeah. Okay. Maybe that's why it was showing April instead of August.

Okay. There you go. Perfect. There's August. At one point in time, I thought that we were in April, but no, we are in August. Okay. For those of you who are maybe new to the Stepan story, so 90 years in the market, a leader in production formulation of intermediate and specialty chemicals.

We serve diverse markets. Mainly, our three lines of products are basically Surfactants, Polymers, and Specialty Products. When you think of the markets that we serve, if you think of our Surfactants business, it's mostly going into the consumer end segments. Yeah, so Surfactants, the ones that clean, the ones that generate the bubbles. I know many of our large customers are the big consumer companies of the world that use Surfactants in their cleaning products. Then Surfactants also go into the oil field services, and I will elaborate a little bit more on this further on. Then we have some construction and industrial applications.

And then within the personal care segments, everything like shampoos and cleaners, and a lot of laundry products as well. The Polymers business, that is around 25% of our total sales. Our Polymers business basically go into, it is the Polymers that go into these flat panels. The flat panels go mainly into the industrial applications like buildings. Then we have another application that is spray foam. Spray foam is what you probably see in your residentials because it basically goes into residential. Then we have Specialty Products that go mostly into some segments like beverages, nutraceuticals, and pharmaceuticals, so food industry and pharma. A little bit about our footprint. We have a global scale. We have 19 facilities across 11 countries, so we have a large presence. At the same time, we have a regional strength, meaning most of our facilities are located close to customers.

And I think that in today's world, this is a big advantage. We are not needing to freight product and send product across the continents and crossing oceans. It is more of a regional self-supply type of supply chain. Okay, let us get a little bit more into our sales and EBITDA. There you can see the pie on the left is the net sales and then the EBITDA. Then you can see how much is Surfactants, how much is Polymers, and how much is Specialty Products. You can see that Surfactants is the largest business with 70% of sales. But from an EBITDA perspective, it is only 60, while for example, Specialties is a small component of our sales, but a significant portion of our EBITDA. These six segments that you see in the bottom, this is basically what determines our day-to-day decisions.

These are the six places where we want to be. The reason why we want to be in those segments is because if you look at what are the drivers, the market drivers for those end segments, those are things that are permanent, are needs, are not nice to haves. When you think of crop productivity, it is about food security, it is about sustainability. Chemicals is about energy. The oil field is about energy efficiency. A lot of what we do in the personal care is about wellness, it is about energy conservation. So these are things that are there, that stick, that we do not expect that. It is not a fashion that happens in a year or 2. It is something that tends to stick, and it is needs from our customers and people in general. Okay, let me get a little bit into the strategy story for Stepan.

We have four main pillars. The main goal is, of course, to deliver superior total shareholder return. Let me start with the customer-focused solutions, because this is a very important piece of our strategy. We have innovation. We develop applications with our customers. This is a very significant component of how we grow. So it is connected to the diversification pillar that I will explain. We want to make sure that every dollar that we invest in innovation is targeting a need from a customer. I come from 18 years of experience in an innovation company like 3M, with unlimited budgets for innovation. And you can see how sometimes scientists love to develop a lot of new products that are super good, but sometimes product that nobody uses or needs.

At Stepan, we want to make sure that every investment in innovation is targeting a customer need and is targeting an application for a customer. That actually connects to the diversification strategy that I am mentioning. If you look at Stepan in the past or for many years, let's say, at the core customers and the core volumes have been going into these large consumer companies that go into consumer end segments. Those are still the core of the company. At the same time, we want to shift into faster-growing, better margin type of end segments. So that's why we call our diversification strategy, and that means going into what we call functional segments. That is basically oil field services and agriculture. It is also customers, what we call tier 2 or tier 3.

These tier 2 and tier 3 customers are customers we know with maybe smaller compared to the large consumer tier 1 customers, but customers that really need Stepan's technology, Stepan's innovation, customers that want to sit with us, work for a few months, develop an application. Then, once the chemistry of Stepan gets into a product of a customer, then it's a completely different dynamic. It's a specialty. It's something that the customers value, is more sticky, and it's a place where we, of course, can have better margins. So that's why we have purposely moved our strategy to make sure that we grow in faster segments and also higher margin segments. That is actually working nicely.

If some of you may have had the chance to look at our Q2 results, a lot of our growth is really coming from what we call the priority segments, priority growth segments. Which, in other words, when you think of priority for Stepan segments, it's like whatever is non-Surfactants commodities. It's working. Just to give you maybe another quick perspective, around 75% of our EBITDA generation is now coming from these priority segments. Of course, from a sales perspective, still the volumes going into the consumer world are very significant. But from an EBITDA perspective and margin generation, this shift into tier 2, tier 3, and functional products is helping. Then operational excellence, of course, as every company, that's our key initiative. I will elaborate more in a further slide when I will talk about Project Catalyst. Then financial strength. We have been purposely making sure that we have a very disciplined capital allocation, that we continue to deleverage the balance sheet.