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DATE
Wednesday, Oct. 29, 2025, at 9 a.m. ET
CALL PARTICIPANTS
- President and Chief Executive Officer — Luis Rojo
- Chief Financial Officer — Ruben Velasquez
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RISKS
- Adjusted net income fell 54% to $10.9 million in Q3 2025, driven by a higher effective tax rate, lower capitalized interest income, and increased depreciation from the Pasadena plant startup, all characterized as having "no cash impact" for the quarter, according to Luis Rojo.
- Surfactants adjusted EBITDA decreased 14%, or $6.2 million, in Q3 2025, primarily due to higher startup expenses at the Pasadena facility, significant oleochemical raw material cost inflation, and lower demand in global commodity consumer product end markets.
- Polymers net sales declined 4% in Q3 2025, while adjusted EBITDA decreased 4% versus the prior year, citing lower unit margins, unfavorable product mix, and demand weakness in Europe and China rigid polyols.
TAKEAWAYS
- Adjusted EBITDA -- $56.2 million adjusted EBITDA for Q3 2025, up 6% year over year compared to last year's third quarter, attributed to specialty products growth and the absence of prior-year social engineering expense.
- Adjusted Net Income -- $10.9 million adjusted net income for Q3 2025, a 54% decline versus the prior year, reflecting a higher effective tax rate of 23.8% in the first nine months of 2025 compared to 18.9% in the first nine months of 2024, with tax rate forecasted at 24%-26% going forward.
- Free Cash Flow -- Positive free cash flow of $40.2 million for Q3 2025, enabled by reduced working capital and disciplined capital spending.
- Total Sales Volumes -- Total company sales volumes grew 1% for Q3 2025; Polymers volume up 8%, while Surfactants volume declined 2%.
- Surfactants Segment Metrics -- Net sales reached $422.4 million (up 10%) for Q3 2025, with a 2% volume contraction; segment adjusted EBITDA down 14%, driven by input cost inflation and higher startup expenses.
- Oleo Raw Material Pricing -- Luis Rojo stated, Let me start with some background information. As you know, this is public information. Coconut oil prices averaged $2,500 per metric ton in the first nine months of 2025, a 70.7% increase versus 2024, when the average was $1,500. We are currently around $2,500, with a peak of $3,000 as discussed last quarter. The good news is that prices are coming down from the $3,000 per metric ton peak in the first nine months of 2025.
- Polymers Segment Metrics -- Net sales were $143.9 million (down 4%) for Q3 2025; volume increased 8%, while adjusted EBITDA decreased 4% year over year due to pricing and mix pressures.
- Specialty Products Segment Metrics -- Net sales $24 million (up 68%) for Q3 2025, adjusted EBITDA up 113% due to pharmaceutical order timing and strong MCT product line volumes.
- Dividend -- Dividend increased by 2.6% to $0.0395 per share, marking the 58th consecutive annual increase.
- Pasadena Facility -- Fully operational, production ramping up; management anticipates reaching targeted contribution in 2026.
- Customer Acquisition -- Over 350 new customers added year to date for the first nine months of 2025, with end-market diversification highlighted as a strategic focus.
- Asset Portfolio Actions -- Management reiterated intention to close the Philippines site sale in 2025 and continue with global footprint optimization.
SUMMARY
Management highlighted that the third quarter performance was shaped by margin pressure in Surfactants due to raw material inflation and Pasadena startup, while Specialty Products posted significant adjusted EBITDA profit expansion from order timing. The company reported that Polymers volumes grew despite pricing and mix headwinds, especially in international markets. Stepan Co. (SCL +0.75%) secured positive free cash flow for the quarter, with disciplined investment and working capital improvements supporting liquidity.
- Ruben Velasquez said, "Adjusted EBITDA results also benefited from lower corporate expenses compared to the previous year."
- North America rigid polyol and commodity PA volumes grew double digits, while European rigid polyol volume "continue to be impacted by macroeconomic uncertainties and low construction activity," according to management.
- Management committed to accelerating new customer acquisition within tier two and tier three as a "key priority" for future profitability in the Surfactant segment, according to Luis Rojo.
- Specialty oxalation volumes showed double-digit growth, indicating continued end-market diversification initiatives.
- Stepan Company expects to deliver both full-year adjusted EBITDA growth and positive free cash flow in 2025, subject to evolving market and tariff uncertainties.
INDUSTRY GLOSSARY
- Oleochemical: Chemical compounds derived from natural fats and oils, used as key raw materials in surfactant production.
- PA: Phthalic anhydride, an intermediate used in polyester resins and plasticizers, significant for the Polymers segment.
- MCT: Medium Chain Triglyceride, a high-margin product line within Specialty Products, used in nutritional and pharmaceutical applications.
- PIR Insulation: Polyisocyanurate insulation, a rigid foam used mainly in commercial roofing and insulation markets.
- Spray Foam: A polyurethane-based insulation material highlighted as an emerging growth driver in Stepan's Polymers business.
- Specialty Oxalation: Niche chemical process/product area referenced as a source of double-digit volume growth in the company's specialty surfactant production.
Full Conference Call Transcript
Mr. Luis Rojo, our President and Chief Executive Officer.
Luis Rojo: Thank you, Ruben. Good morning. And thank you all for joining us today to discuss our third quarter 2025 results. I plan to share highlights of the quarterly performance and will also share updates on our key strategic priorities, while Ruben will provide additional details on our financial results. We delivered 9% adjusted EBITDA growth through the first nine months of 2025, bringing year-to-date adjusted EBITDA to $165 million. These results were restrained by the significant increase in oleochemical raw material prices, which continue to impact Surfactant margin, and by higher startup costs related to our new Pasadena, Texas facility. We remain focused on gradually recovering our margin and keeping a healthy balance between volumes and margins.
Third quarter adjusted EBITDA was $56 million, up 6% year on year. Specialty Products adjusted EBITDA increased significantly, driven by favorable order timing within the pharmaceutical business. Polymers delivered volume growth across rigid polyols and commodity PA, while EBITDA was slightly lower due to unfavorable mix and margin pressures. Surfactant adjusted EBITDA declined versus the prior year, driven by higher Pasadena startup costs, oleochemical raw material cost inflation, and lower demand within our global commodity consumer products end market. Total company sales volumes grew 1%, with polymers up 8%, and our NCT product line up 26%, while surfactants volume declined 2%.
In surfactants, we continue to experience double-digit volume growth within the crop productivity business and mid-single-digit growth in the oilfield end market. This growth was offset by lower demand within the global commodity consumer products end market. North America rigid polyol and commodity PA volumes were both up double digits, while European rigid polyol volumes continue to be impacted by macroeconomic uncertainties and low construction activity. Despite a very challenging environment for the chemical sector, we remain encouraged by the volume growth across several of our key strategic end markets.
We finished the 2025 with $10.9 million of adjusted net income, down 54% versus the prior year, largely reflecting a higher effective tax rate, higher interest net, and higher depreciation, none of which had cash impact. Free cash flow was positive at $4.04 billion during the quarter, driven by reduced working capital and disciplined capital spending. During the 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 $0.0395 per share payable on 12/15/2025. This represents a 2.6% increase in our dividend. Stepan has paid an increased dividend for fifty-eight consecutive years. Ruben will now share some details about our third quarter results.
Ruben Velasquez: Thank you, Luis. My comments will generally follow the slide presentation. Let's just start with Slide four to recap the quarter. Third quarter 2025 adjusted net income was $10.9 million or $0.48 per diluted share, versus $23.7 million or $1.03 per diluted share for the third quarter of last year, a 54% decrease. The decrease was primarily driven by a higher effective tax rate resulting from the recently enacted U.S. Tax law, lower capitalized interest income, and higher depreciation due to Pasadena plant startup. These three net income unfavorable drivers had no cash impact. Consolidated adjusted EBITDA increased by $3.1 million or 6% compared to the prior year.
This growth is attributable to stronger specialty product results and the non-recurrence of expenses associated with the external criminal social engineering front event in 2024. Significantly higher local chemical raw material costs continue to impact softened margins, coupled with softer demand in global commodity consumer product end markets. Earnings growth was also impacted by higher startup expenses at our New York Constellation facility in Pasadena, Texas. Cash from operations was $69.8 million for the quarter, free cash flow was positive at $40.2 million driven by reductions in working capital. We will continue prioritizing free cash flow generation going forward.
Slide number five shows the total company net income bridge for the 2025 compared to last year's third 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 specialty products, fully offset by lower operating results in surfactants and polymers. The third quarter results were impacted by a higher effective tax rate. The company's effective tax rate was 23.8% in the first nine months of 2025, versus 18.9% in the first nine months of 2024. This increase was primarily associated with the recently enacted U.S. Tax law.
We are forecasting that we are returning to our normal effective tax rate range of 24% to 26%. Slide six shows the total company adjusted EBITDA bridge for the third quarter compared to last year's third quarter. Adjusted EBITDA was $56.2 million versus $53.1 million in the prior year, a 6% increase. We delivered adjusted EBITDA growth in Specialty Products, partially offset by lower earnings in surfactants and polymers. Adjusted EBITDA results also benefited from lower corporate expenses compared to the previous year. Slide seven focuses on the Surfactant segment results. Surfactant's net sales were $422.4 million for the quarter, a 10% increase versus the prior year.
Improved product and customer mix and the pass-through of higher raw material costs contributed 11% to sales growth. Sales volume declined 2% year over year due to lower demand within the global commodity consumer product end markets, mainly offset by double-digit growth within the agricultural segment and strong growth in oilfield. Net sales benefited 1% from foreign currency translation. Surfactant's adjusted EBITDA decreased $6.2 million or 14% versus the prior year. This decrease was driven by the 2% contraction in volume, higher Pasadena site startup expenses, and the significant rise in oleochemical raw material prices. This was partially offset by improved product and customer mix.
Moving to Slide eight, polymers net sales were $143.9 million for the quarter, a 4% decrease versus the prior year. Selling prices decreased 14% primarily due to the pass-through of lower raw material costs and competitive pressures. Sales volume increased 8% in the quarter. North America Region Polyol volume grew double digits and our commodity catalytic and hybrid business continued to deliver strong growth. Global specialty polyols volume grew mid-single digits despite the continued challenging overall environment. European and China rigid polyols volume was impacted by softer demand across their respective regional end markets. Foreign currency translation had a positive impact of 2% on net sales during the quarter.
Polymer adjusted EBITDA decreased $1 million or 4% versus the prior year, primarily due to lower unit margins and unfavorable mix, which was partially offset by the 8% volume growth. Finally, specialty product net sales were $24 million for the quarter, a 68% increase versus the prior year, primarily due to higher sales volume. Specialty Products adjusted EBITDA increased $5.9 million or 113%. The increase in adjusted EBITDA was primarily due to order timing fluctuations within the pharmaceutical business, as orders were moved from the second to the third quarter of the year.
Next on Slide nine, free cash flow was positive at $40.2 million for the third quarter, at $44.2 million year over year driven by working capital reductions and disciplined capital spending. We remain optimistic about our ability to deliver positive free cash flow for the full year 2025. During the third quarter, we deployed $29.6 million against capital investments and $8.7 million for dividends. Now, on Slide ten and eleven, Luis will update you on our strategic priorities and capital investments.
Luis Rojo: Thank you, Ruben. 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 one customer base remains a solid foundation of our business. Continuing our new customer acquisition within tier two and tier three customers remains a key priority. This is an important and profitable growth channel within our surfactant business. For the 2025, our volume grew low single digits year over year, and we added over 350 new customers. Our end market diversification strategy remains a key focus area. For the third quarter, we continued to see strong growth in our crop productivity and oilfield businesses.
We are pleased to see our North America rigid polyol business continues to deliver year over year growth. This growth was enhanced by our new product introduction in the growing spray foam end market. Our supply chain operation and resiliency continues to improve, and we delivered another solid quarter in all our key operational metrics. Thanks, Ruben. We continue making investments in our Millville site to improve operational reliability. Moving to slide 11, we're proud our new Pasadena site is fully operational and is currently ramping up production. We have made 41 different products to date. We expect that the full contribution rate of the plant will be achieved in 2026.
Our commercial team continues to develop and deliver new business opportunities and specialty oxalation volumes continue to grow double digits in the third quarter. Looking forward, we remain focused on accelerating our business strategies through enhanced operational excellence, improved product and customer mix, and accelerated free cash flow generation. We believe our Surfactant business will experience continued growth in our key strategic end markets, and that polymers demand will continue improving as we get more market certainty and we execute our innovation and growth plans. Our Pasadena facility is operational, and this should enable us to deliver volume growth in our solution product line and supply chain savings going forward.
We remain on track to close the sale of our site in The Philippines in the 2025, and we're analyzing opportunities to optimize our global footprint and nascent base. Despite the ongoing current market and tariff uncertainties, which change every day, we remain optimistic that we will deliver full year adjusted EBITDA 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. Jacinda, please review the instruction for the questions portions of today's call.
Operator: Thank you. At this time, we will conduct the question and answer session. And wait for your name to be announced. To withdraw your question, please press 11 again. Our first question comes from Mike Harrison at Seaport Research Partners.
Mike Harrison: Hi. Good morning. Good morning, Luis. I was hoping we could start out with a couple of questions on surfactants. First of all, where are we right now in the process of recovering the oleochemicals cost run-up in surfactants? Do you expect that input impact could be fully offset by Q4, or could it take a little bit longer to recover?
Luis Rojo: Good question, Mike. So let me start with some background information here. As you all know, you can track this. It's public information. Coconut oil prices, if you think about the first nine months of 2025, the average is $2,500 per metric ton. That's a 70.7% increase versus 2024. So 2024 average was $1,500. We are at around $2,500. The peak was $3,000 as we talked last quarter. The prices are coming down. That's the good news. Prices are coming down from the peak of $3,000 per metric ton. So, we have recovered a lot of the 70% increase, but we are still catching up. We had another price increase in North America in October 1, and that's the objective.
The objective is 2026 we have, we recover the margins that we saw on coconut oil prices, which again were significant and the prices are still coming down, which is the good news.
Mike Harrison: Alright. Just to follow-up on that, if we are seeing some of that raw material costs come lower, I guess, does that make it more challenging for you to get the pricing you need? And does that mean that at some point, we could see you give some pricing back if that trend continues?
Luis Rojo: No. Look. One thing that I was very clear on my prepared remarks was that we will continue driving the right balance between volumes and margins. This is an asset-intensive business. We need volume through our reactors. We will not lose share. We will be competitive in the market. We will be competitive in the market and balance volumes and margins to maximize net income, to maximize return for the company. And, again, that's the balance that the team is delivering. I'm pleased with what they have done in the last few months. And we need to continue that effort in the future months. Continue managing that balance between volumes and margins.
Mike Harrison: Alright. So that kinda leads into my next question, which is just about the overall margin performance of the Surfactants business. Obviously, still a lot of moving pieces with the Pasadena facility starting up, and we're probably not yet seeing the full benefit of bringing some of that alkoxylates production in-house. But do you have longer-term goals for where the surfactant segment margin could reach over time? Historically, operating margin in that segment got into the double digits, and it was pretty consistently there for a few years. And I'm just wondering if that type of double-digit operating margin could be achievable as we look out two or three years?
Luis Rojo: Great question, Mike, and that's of course, our belief as well. Look, EBITDA margins are restrained. I mean, call it a, you know, to 10% now. Because all the investments in Pasadena and still, you know, the impact on oleochemicals, but we believe this business as we continue growing in our functional markets, agrochemical, oilfield, construction, and industrial solutions, as we continue growing in tier two, tier three, we believe this is a healthy double-digit EBITDA margin business going forward. And, of course, we have made investments. We have made investments and everybody knows that.
So on an operating income with all the depreciation of Pasadena of low one four, people can see that in the numbers, but on an EBITDA basis, this business will continue performing at a decent, you know, margins level and that's what we are focusing on. Growing our high EBITDA margin businesses, and we continue growing those.
Mike Harrison: Alright. And then over on the polymers business, just a couple questions here. First of all, do you believe that there is pent-up demand in the commercial roofing and commercial insulation space? And I'm curious, do you think that lower interest rates could help to stimulate some additional activity there?
Luis Rojo: Full align, Mike. There is, we believe there is a lot of pent-up demand from all the construction that happened in the early 2000s. I mean, if you look at all the construction that happens in industrial construction, warehousing, plants, flat roofs, in early 2000s, which was a huge peak, a lot of those buildings need renovation in the next five years. We are, you know, we're aligned 100% with the belief from some of our customers that all that reroofing needs to happen. It's not gonna happen overnight, but it needs to happen. And it needs, and PIR insulation is the preferred choice for all those flat roof projects coming up.
And you are 100% right that, I mean, we should see another interest rate reduction today. 98% probability is now of an interest rate reduction in December. Fed meeting. So we believe 2026 will give us some upside on construction activity if the interest rate continues the way they are and, you know, inflation rate continues the way they are. Right? I mean, we need shelter and rental inflation to keep coming down so we can achieve, so the Fed can achieve their 2% inflation target.
Mike Harrison: Alright. And just to follow-up on polymers, from the margin side, I believe you mentioned that unit margins are down, the pricing was down quite a bit. You referred to some competitive dynamics that are challenging. Is your expectation that if we started to see some recovery in demand that we would also see recovery in unit margins as well?
Luis Rojo: Look. I mean, look. We always can improve our margin. Right? But if you look at the first nine months of the polymers business, we were able to grow, you know, EBITDA modestly, very little, but modestly, we were able to grow despite sales down. So EBITDA margins are improving slightly in the polymers business despite everything that is going on in Europe and, especially in Europe, which is a very tough situation. So we believe we want to grow, we want to grow the top line. We want to grow the volumes. And we need to keep inching up the margins as we drive scale.
The benefit of higher volumes and scale should improve our margins, but we are not planning a significant increase. But we are happy with the margins that we have and we need to continue inching those up as we grow our business. And, you know, we had a negative impact on margin as we grow PA and as we grow in some of the other markets. Because those are typically a impact to the overall polymers business.
Mike Harrison: Alright. And then my last question is you mentioned the Philippines asset sale, and it sounds like maybe you're contemplating some other actions to help optimize your footprint. Can you give us any sense of what those actions might involve? Are they other just one-off smaller facilities? Or could there be some larger pieces of business that you might be targeting for divestment over time?
Luis Rojo: Great question, Mike. And, we are committed to deliver a balanced, you know, EBITDA and net income growth going forward between productivity and asset rationalization and top line growth. Right? The industry needs both. You have seen a lot of, you know, announcements from other companies in the past six to twelve months. We have made the announcement on The Philippines. We will make more announcements in the future. We need a balanced approach between top line growth, productivity, and asset rationalization. We all know the chemical industry is over capacity and we need to, and we all need to make decisions on that overcapacity. And we will make those announcements whenever we're ready to make those.
Mike Harrison: Very helpful. Thanks very much.
Operator: Our next question comes from Dave Storms at Stonegate.
Dave Storms: Morning, and thank you for taking my questions. I wanted to start. You mentioned on the call, you know, spray foam has really been a nice driver for you in the poly section. Could we, I guess my question is how much more room for growth do you think there is there? And could we maybe see a second wave of growth if the European environment improves?
Luis Rojo: Great question, Dave. Look. We have talked about spray foam in the past few quarters. We're serious about this end market. We have developed great technologies and products to serve these high growth margin, and we started this year. So I'm pleased with what the team has delivered and with the benefits that we are starting to get. This is very early. This is very early. And it's a good market. It's a good market that has a lot of potential to grow not only in the US, eventually in Europe in the future, but we're happy with our participation and we need to grow more share. We are starting.
We are starting from almost zero share, and we are committed to continue investing and developing this business. When you think about Europe, of course, we had higher expectations of our European region to start growing more on the construction activity. And when you think about the war in Ukraine and all of those things, the reality is that construction activities are very muted still in the European region. Now, as interest rates come down, you know, they keep focusing on energy conservation, which is a huge issue in Europe and the biggest opportunity is to reduce the consumption of energies in the buildings. So we believe the market trends are there for the future.
It's not going to happen in the short term. For sure. But we believe this is a good industry for the next three and five years. And we are committed to continue investing and to continue growing our European polymers business.
Dave Storms: That's great commentary. Thank you. Switching to the surfactants segment. Just would love to ask about maybe the end user there. And what you're seeing from a demand perspective. It was noted that you're seeing lower demand in the laundry and cleaning end markets. Is this maybe early indications of a substitution effect? Or maybe is this more one-time in nature? Any commentary there would be great.
Luis Rojo: No. Great point, Dave. And, of course, we continue seeing a lot of changes in the consumer piece in terms of, you know, active levels switching down to lower active products. So this continues to be an evolving situation. But at the end, we believe going forward, again, I mean, you need certain levels for the products to work. Right? And at the end, those active levels are getting, I mean, up to the point where they, you know, you cannot go significantly lower. So we feel good about the cleaning and the laundry business going forward. That is gonna be always a mix between, you know, high active, low active products.
You know, consumer brands versus private label brands, but we believe we are in a decent spot now thinking about 2026 and 2027.
Dave Storms: Understood. And then one more if I could. Specialty has shown two quarters of strong year-over-year improvements. It seems like a lot of this is predicated on volume growth. We'd just love to hear your comments about how sustainable you think these potentially new volume levels are.
Luis Rojo: Look. We are extremely pleased with the performance of our specialty product business. Kudos to Jamil and the Maywood team for everything that they have done over the last few quarters. Excellent performance. We still have opportunities to grow. We love our MCT product line. As we said in the remarks, 26% volume growth and we're extremely happy with this business and with the performance. And, you know, it's a high margin business. So we will continue investing. We will continue investing to make sure that we maximize the return that we can get. It's a small part of the company in terms of revenue, but it's a huge part of the company in terms of operating income and EBITDA.
And we're extremely happy with what the team has done and we keep working on ideas for the next three years.
Dave Storms: That's fantastic. Thank you, and good luck in Q4.
Luis Rojo: Thank you, Dave.
Operator: This concludes the question and answer session. I would now like to turn it back to Mr. Rojo for closing remarks.
Luis Rojo: Thank you very much for joining us on today's call. We appreciate your interest and ownership in Stepan Company. Have a great day.