Stepan Company - Earnings Call - Q3 2025
October 29, 2025
Executive Summary
- Q3 2025 delivered slight top-line growth but missed consensus: revenue $590.3M vs $593.7M cons* and adjusted EPS $0.48 vs $0.615 cons*, while adjusted EBITDA rose 6% YoY to $56.2M; reported EPS was $0.47. Surfactants margin pressure and Pasadena start-up costs weighed on earnings despite Specialty Products strength.
- Segment mix: Surfactants net sales +10% YoY but adjusted EBITDA −14% on higher oleochemical costs and start-up expenses; Polymers volumes +8% but unit margins lower; Specialty Products EBITDA +113% on pharma order timing.
- Cash generation improved: Cash from operations $69.8M and free cash flow $40.2M on working capital reductions; capex $29.6M. Net debt fell to $537.0M (30% net debt ratio).
- Guidance tone: Management reiterated confidence in full‑year adjusted EBITDA growth and positive FCF in 2025; effective tax rate expected to normalize to 24–26% (call). Adjusted net income growth commentary from Q2 was not reiterated in Q3, a subtle guidance shift.
- Stock reaction catalysts: trajectory of coconut oil/oleochemical costs and speed of surfactant price recovery, Pasadena ramp into 2026, Specialty Products momentum, and portfolio actions (Philippines asset sale).
What Went Well and What Went Wrong
- What Went Well
- Specialty Products outperformance: Adjusted EBITDA up 113% YoY on pharma order timing; MCT volumes +26% (call). Quote: “Specialty Products adjusted EBITDA increased significantly, driven by favorable order timing within the pharmaceutical business” (CEO).
- Cash generation and balance sheet: Free cash flow $40.2M on $69.8M CFO; net debt down $32.1M vs Q2 to $537.0M; net debt ratio 30%.
- Polymers volume growth: +8% with double‑digit growth in North American rigid and PA; supports later-cycle recovery optionality despite margin pressure.
- What Went Wrong
- Surfactants margin pressure: Adjusted EBITDA −14% YoY due to −2% volumes, higher oleochemical raw materials, and Pasadena start‑up costs.
- Profitability compression vs prior year: Adjusted net income fell 54% YoY to $10.9M ($0.48/share) on higher taxes, depreciation and net interest (non‑cash impacts).
- Q3 execution vs expectations: Revenue and EPS were below consensus; EBITDA also modestly below, reflecting slower-than-modeled margin recovery despite pricing/mix tailwinds*.
Transcript
Operator (participant)
Good morning, and welcome to the Stepan Company Third 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. To ask a question during this session, you will need to press star, one, one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star, one, one again. As a reminder, this call is being recorded on Wednesday, October 29th, 2025. It is now my pleasure to turn the call over to Mr. Ruben Velasquez, Vice President and Chief Financial Officer of Stepan Company. Mr. Velasquez, please go ahead.
Ruben Velasquez (VP and CFO)
Thanks, Jacinda. Good morning, and thank you for joining Stepan Company's Third 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 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.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 investors' 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 (CEO)
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 oil chemical raw material prices, which continue to impact surfactant margins, and by higher startup costs related to our new Pasadena, Texas facility.
We remain focused on gradually recovering our margins, 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, oil chemical, raw material cost inflation, and lower demand within our global commodity consumer products and markets. Total company sales volumes grew 1%, with polymers up 8% and our MCT 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 oil field 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 third quarter of 2025 with $10.9 million of adjusted net income, down 54% versus the prior year, largely reflecting a higher effective tax rate, higher net interest, and higher depreciation, none of which had cash impacts.
Free cash flow was positive at $40 million during the quarter, driven by reduced working capital and disciplined capital spending. During the third quarter of 2025, the company paid $8.7 million in dividends to shareholders. Our Board of Directors declared a quarterly cash dividend on Stepan Company stock of $0.395 per share, payable on December 15th, 2025. This represents a 2.6% increase in our dividend. Stepan has paid an increase in dividends for 58 consecutive years. Ruben will now share some details about our third-quarter results.
Ruben Velasquez (VP and CFO)
Thank you, Luis. My comments will generally follow the slide presentation. Let's 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 prior year. This growth is attributable to strong specialty products results, and the non-recurrence of expenses associated with the external criminal social engineering front event in 2024. Significantly higher oil chemical raw material costs continue to impact surfactant margins, coupled with softer demand in global commodity consumer products and markets. Earnings growth was also impacted by higher startup expenses at our new alkoxylation facility in Pasadena, Texas. Cash from operations was $69.8 million for the quarter, and 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 third quarter of 2025, compared to last year's third quarter and breaks down the decrease in adjusted net income.
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 deliver 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 returning to our normal effective tax rate range of 24%-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 [crosstalk]. Adjusted EBITDA results also benefited from lower corporate expenses compared to the previous year. Slide seven focuses on the surfactants segment results. Surfactants 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 products and markets, mainly offset by double-digit growth within the agricultural segment and strong growth in the oil field. Net sales benefited 1% from foreign currency translation. Surfactants 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 oil or chemical 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 at 14%, primarily due to the pass-through of lower raw material costs and competitive pressures. Sales volume increased 8% in the quarter. North America rigid polyol volume grew double digits, and our commodity [crosstalk] 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 products 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, up $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 slides 10 and 11, Luis will update you on our strategic priorities and capital investments.
Luis Rojo (CEO)
Thank you, Ruben. I will focus my comments on our strategic priorities. Our customers 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 third quarter of 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 continue to see strong growth in our crop productivity and oil field 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 farm end market. Our supply chain operation and resiliency continue to improve, and we deliver another solid quarter in all our key operational metrics. Thanks, Rob. We continue making investments in our mill sales 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 the specialty accumulation 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 alkoxylation product line and supply chain savings going forward.
We remain on track to close the sale of our site in the Philippines in the fourth quarter of 2025, and we are analyzing opportunities to optimize our global footprint and asset 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 instructions for the questions portions of today's call.
Operator (participant)
Thank you. At this time, we will conduct the question-and-answer session. As a reminder, to ask a question, you will need to press star, one, one on your telephone and wait for your name to be announced. To withdraw your question, please press star, one, one again. Please stand by while we compile the Q&A roster. Our first question comes from Mike Harrison at Seaport Research Partners.
Michael Harrison (Analyst)
Hi, good morning.
Luis Rojo (CEO)
Good morning, Mike.
Ruben Velasquez (VP and CFO)
Morning, Mike.
Michael Harrison (Analyst)
Good morning, Mike. 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 oil chemicals cost run-up in surfactants? Do you expect that that impact could be fully offset by Q4, or could it take a little bit longer to recover?
Luis Rojo (CEO)
Good question, Mike. 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% increase versus 2024. The 2024 average was $1,500. We are at $2,500. The peak was $3,000, as we talked last quarter. The prices are coming down. That's tood nhe gews. Prices are coming down from the peak of $3,000 per metric ton. We have recovered a lot of the 70% increase, but we are still catching up. We had another price increase in North America on October 1st. The objective is 2026, we recover the margins that we saw on coconut oil prices, which again were significant and the prices are now coming down, which is the good news.
Michael Harrison (Analyst)
All right, just to follow up on that, if we are seeing some of that raw material costs come lower, does that make it more challenging for you to get the pricing you need? Does that mean that at some point we could see you give some pricing back if that trend continues?
Luis Rojo (CEO)
No. Look, one thing that I was very clear on in 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, and balance volumes and margins to maximize net income, to maximize return for the company. 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.
Michael Harrison (Analyst)
All right, that kind of 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. Do you have longer-term goals for where the surfactants 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. 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 (CEO)
Great question, Mike, and that's of course our belief as well. Look, EBITDA margins are restrained. I mean, call it close to 10% now, because of all the investments in Pasadena and still the impact on oil chemicals. We believe this business, as we continue growing in our functional markets, agrochemical, oil field, 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. Of course, we have made investments, and everybody knows that. On an operating income, with all the depreciation of Pasadena of low one four, people can see that in the numbers. On an EBITDA basis, this business will continue performing at a decent margin level, and that's what we are focusing on, growing our high EBITDA margin businesses and we continue growing those.
Michael Harrison (Analyst)
All right, and then over on the polymers business, just a couple of questions here. First of all, do you believe that there is pent-up demand in the commercial roofing and commercial insulation space? I'm curious, do you think that lower interest rates could help to stimulate some additional activity there?
Luis Rojo (CEO)
Fully aligned, Mike. We believe there is a lot of pent-up demand from all the construction that happened in the early 2000s. If you look at all the construction that happens in industrial construction, warehousing, plants, flat roofs, in early-2000, which was huge peak, a lot of those buildings need renovation in the next five years. We are aligned 100% with the belief from some of our customers that all that reroofing needs to happen. It is not going to happen overnight, but it needs to happen.
PIR insulation is the preferred choice for all those flat roof projects coming up. You are 100% right that we should see another interest rate reduction today. 98% probability now of our interest rate reduction in the December Fed meeting. We believe 2026 will give us some upside on the construction activity, if the interest rate continues the way they are and inflation rates continue the way they are, right? We need shelter and rental inflation to keep coming down so the Fed can achieve their 2% inflation target.
Michael Harrison (Analyst)
All right, just to follow up on polymers from the margin side, I believe you mentioned that the 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 some recovery in unit margins as well?
Luis Rojo (CEO)
Look, I mean, we're happy. Look, we always can improve our margins, right? If you look at the first nine months of the polymers business, we were able to grow EBITDA modestly, very little, but modestly, we were able to grow despite sales down. 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. We believe 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. I mean, the benefit of higher volumes and scale should improve our margins, but we are not planning a significant increase. We're happy with the margins that we have, and we need to continue inching those up as we grow our business. You know, we had a negative impact on margin as we grow commodity PA and as we grow in some of the other markets, because those are typically a mixed impact to the overall polymers business.
Michael Harrison (Analyst)
All right, 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 (CEO)
Great question, Mike. Look, we are committed to deliver a balanced 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 announcements from other companies in the past six to 12 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 overcapacity, and we all need to make decisions on that overcapacity. We will make those announcements whenever we're ready to make those.
Michael Harrison (Analyst)
Very helpful. Thanks very much.
Operator (participant)
Our next question comes from Dave Storms at Stonegate.
Dave Storms (Analyst)
Morning, and thank you for taking my questions.
Luis Rojo (CEO)
Hi, Dave..
Ruben Velasquez (VP and CFO)
Morning.
Dave Storms (Analyst)
Morning. I wanted to start, you mentioned on the call, spray foam has really been a nice driver for you in the poly section. I guess my question is, how much more room for growth do you think there is there? Could we maybe see a second wave of growth if the European environment improves?
Luis Rojo (CEO)
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 this high growth margin, and we started this year. I'm pleased with what the team has delivered, and with the benefits that we are starting to get. 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 U.S., eventually in Europe in the future. We're happy with our participation, and we need to grow more share. 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.
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, they keep focusing on energy conservation, which is a huge issue in Europe. The biggest opportunity is to reduce the consumption of energies in the buildings. 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. We are committed to continue investing, and to continue growing our European polymers business.
Dave Storms (Analyst)
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 (CEO)
Great point, Dave. Of course, we continue seeing a lot of changes in the consumer piece in terms of active levels switching down to lower active products. This continues to be an evolving situation. At the end, we believe going forward, again you need certain levels for the products to work, right? At the end, those active levels are getting up to the point where you cannot go significantly lower. We feel good about the cleaning and the laundry business going forward. There is going to be always a mix between high active, low active products, consumer brands versus private label brands. We believe we are in a decent spot now, thinking about 2026 and 2027.
Dave Storms (Analyst)
Understood. 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. Would just love to hear your comments about how sustainable you think these potentially new volume levels are.
Luis Rojo (CEO)
Look, we are extremely pleased with the performance of our specialty products 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. We are extremely happy with this business and with the performance. You know, it's a high margin business. 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. We are extremely happy with what the team has done, and we keep working on ideas for the next three years.
Dave Storms (Analyst)
That's fantastic. Thank you, and good luck in Q4.
Luis Rojo (CEO)
Thank you, Dave.
Operator (participant)
This concludes the question-and-answer session. I would now like to turn it back to Mr. Rojo for closing remarks.
Luis Rojo (CEO)
Thank you very much for joining us on today's call. We appreciate your interest and ownership in the Stepan Company. Have a great day.
Operator (participant)
Thank you very much for joining us on today's call. We appreciate your interest and ownership in Stepan Company. Have a great day.