2025 Earnings Call Contradictions: Surfactants Margins, Polymer Growth, and Spray Foam Outlook Diverge

Date of Call: October 29, 2025

Financials Results

• EPS: $0.48 per diluted share, down 54% YOY (vs $1.03 in Q3 2024)

Guidance:

• Forecast return to a normal effective tax rate range of 24%–26%.
• Pasadena alkoxylation plant fully operational and expected to achieve full contribution rate in 2026.
• Expect full-year adjusted EBITDA growth and positive free cash flow for 2025.
• Expect to close sale of Philippines site in Q4 2025 and are evaluating further global footprint/asset rationalization.
• Prioritizing free cash flow generation, disciplined capex, and supply-chain savings while growing alkoxylation volumes.

Business Commentary:

* Adjusted EBITDA Growth: - Stepan Company reported a 9% adjusted EBITDA growth through the first 9 months of 2025, bringing year-to-date adjusted EBITDA to $165 million. - The growth was restrained due to a significant increase in oleochemical raw material prices impacting Surfactant margins and higher start-up costs related to the new Pasadena, Texas facility.

• Segment Performance Variability:
• Specialty Products adjusted EBITDA increased significantly due to favorable order timing within the pharmaceutical business.
• Polymers experienced volume growth, particularly in rigid polyols and commodity PA, while EBITDA was slightly lower due to unfavorable mix and margin pressures, mainly in Europe and China.

• Surfactant adjusted EBITDA declined versus the prior year, driven by higher Pasadena start-up costs, oleochemical raw material cost inflation, and lower demand in the global commodity consumer products end market.

• Capital Investments and Facility Optimization:

• Stepan made significant investments in its Millville site to improve operational reliability and is proud of the new Pasadena site being fully operational.
• The company aims to optimize its global footprint and asset base, as evidenced by the planned sale of its site in the Philippines in Q4 2025.

• These investments and optimizations are part of Stepan's strategy to balance EBITDA and net income growth, along with productivity and top-line growth.

• Dividend and Financial Health:

• Stepan paid $8.7 million in dividends to shareholders during Q3 2025, with the Board declaring a quarterly cash dividend of $0.395 per share for December 15, 2025, representing a 2.6% increase.
• The company generated positive free cash flow of $40 million during the quarter, driven by reduced working capital and disciplined capital spending.

Sentiment Analysis:

Overall Tone: Positive

• Management reported adjusted EBITDA up 6% YOY to $56.2M and free cash flow of $40.2M, highlighted operational ramp of Pasadena and specialty volume gains, and stated: "we remain optimistic that we will deliver full year adjusted EBITDA growth and positive free cash flow in 2025."

Q&A:

• Question from Michael Harrison (Seaport Research Partners): Where are we right now in the process of recovering the oleochemicals cost run-up in surfactants? Do you expect that impact could be fully offset by Q4? Or could it take a little bit longer to recover?
  Response: Coconut oil prices peaked at $3,000/MT and averaged $2,500/MT YTD vs $1,500 in 2024; prices are coming down but margin recovery is expected to be realized by 2026.

• Question from Michael Harrison (Seaport Research Partners): 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? And does that mean that at some point, we could see you give some pricing back if that trend continues?
  Response: We will balance volumes and margins to maximize returns, remain competitive and avoid sacrificing share—pricing actions will be managed to optimize net income rather than automatically giving price back.

• Question from Michael Harrison (Seaport Research Partners): Do you have longer-term goals for where the Surfactants segment margin could reach over time? Historically operating margin got into the double digits—could that be achievable in 2–3 years?
  Response: On an EBITDA basis we believe Surfactants can be a healthy double‑digit margin business long term; today EBITDA is near 10% due to Pasadena investments and raw‑material pressure.

• Question from Michael Harrison (Seaport Research Partners): Do you believe there is pent-up demand in the commercial roofing and commercial insulation space? And could lower interest rates help stimulate additional activity?
  Response: Yes—management sees significant pent‑up reroofing demand over the next ~5 years and expects potential upside in 2026 if interest rates and inflation continue to ease.

• Question from Michael Harrison (Seaport Research Partners): From the margin side, with unit margins down, is your expectation that if demand recovers we would also see recovery in unit margins?
  Response: Margins should modestly improve as volumes scale, but no expectation of a large near‑term margin jump; focus is on inching margins up with higher volumes and scale.

• Question from Michael Harrison (Seaport Research Partners): On the Philippines asset sale and potential other footprint actions—could there be larger pieces of business targeted for divestment over time?
  Response: We are pursuing a balanced approach of top‑line growth, productivity and asset rationalization; further rationalization is possible and will be announced when ready.

• Question from David Storms (Stonegate Capital Partners, Inc., Research Division): How much more room for growth is there in spray foam and could we see a second wave if the European environment improves?
  Response: Spray‑foam is early stage with substantial upside; strong momentum in the U.S. and potential for a European growth wave over the medium term as conditions improve.

• Question from David Storms (Stonegate Capital Partners, Inc., Research Division): Regarding surfactants, lower demand in laundry and cleaning—is this substitution or a one‑time issue?
  Response: There is a shift toward lower‑active formulations and private label, but active levels have a floor; management expects stabilization and a decent demand environment into 2026–27.

• Question from David Storms (Stonegate Capital Partners, Inc., Research Division): Specialty has shown two quarters of strong YOY improvements driven by volume—how sustainable are these new volume levels?
  Response: Management views specialty growth (e.g., MCT +26% volume) as sustainable, will continue investing in the high‑margin business and pursue further growth over the next several years.

Contradiction Point 1

Surfactants Segment Margin Recovery

It involves differing expectations for the recovery of margins in the Surfactants segment, which impacts financial forecasts and investor expectations.

How far are we in recovering from the oleochemicals cost increase in surfactants? Will the impact be fully offset by Q4, or will it take longer? - Michael Harrison (Seaport Research Partners)

2025Q3: As of October 2025, coconut oil prices are around $2,500 per metric ton, down from a peak of $3,000. We have recovered 70% of the price increase, and our target is to recover margins by 2026. - Luis Rojo(President, CEO & Director)

How much runway remains in ag through 2025? - Dave Storms (Stonegate)

2024Q4: We expect typical seasonality in Q1 with a step up in Q2 as we expect to quickly recover to historical EBITDA margins. - Luis Rojo(President and CEO)

Contradiction Point 2

Polymer Business Growth

It involves differing expectations for the growth of the Polymer business, which impacts revenue forecasts and investor confidence.

What growth potential remains in spray foam? Is there potential for a second growth wave if the European market improves? - David Storms (Stonegate Capital Partners, Inc., Research Division)

2025Q3: We expect that our strategic growth initiatives will drive 2025 adjusted revenue growth of approximately 4.5% to 5.5% and adjusted EBITDA growth of approximately 6% to 7% for the year. - Luis Rojo(President, CEO & Director)

Are the challenges in polymers across the board or are there pockets of strength or green shoots? - Dave Storms (Stonegate)

2024Q4: We saw sluggish demand in our polymers business with high interest rates, slow construction activity, and challenges in Europe. However, we grew our specialty polymer business and had a great year in China, despite all the issues. - Luis Rojo(President and CEO)

Contradiction Point 3

Surfactants Segment Margins and Recovery

It involves differing expectations and timelines for the recovery of margins in the Surfactants segment, which is crucial for understanding the company's financial performance and strategic focus.

How much progress have we made in recovering from the oleochemicals cost increase in surfactants? Can the impact be fully offset by Q4? Or will it take longer? - Michael Harrison(Seaport Research Partners)

2025Q3: As of October 2025, coconut oil prices are around $2,500 per metric ton, down from a peak of $3,000. We have recovered 70% of the price increase, and our target is to recover margins by 2026. - Luis Rojo(CEO)

Can you provide details on the timing of raw material impacts, quantify the Q2 headwinds, and clarify when pricing adjustments will offset these costs? - Michael Harrison(Seaport Research Partners)

2025Q2: We have caught up around 80% of the price increase, but we still have some catch-up to do in the second half of the year. - Luis Rojo(CEO)

Contradiction Point 4

Spray Foam Market Growth Potential

It highlights differing perspectives on the growth potential of the spray foam market, which impacts the strategy and expectations for a key product segment.

What growth potential remains in spray foam? Is a second growth wave possible if European conditions improve? - David Storms(Stonegate Capital Partners, Inc.)

2025Q3: Spray foam is a high-growth market with significant potential. We are committed to expanding our share, and while the European environment remains uncertain, we are optimistic about future growth opportunities. - Luis Rojo(CEO)

What are your expectations for the Specialty Products segment in 12 months? Can it reach $500 million in revenue? - David Storms(Stonegate Capital Partners, Inc.)

2025Q2: Spray foam is in high demand, but it's also a bit of a challenge. It's growing faster than we're able to supply. - Luis Rojo(CEO)

Contradiction Point 5

Raw Material Pricing and Surfactants Segment Recovery

It addresses the company's strategy in responding to raw material cost fluctuations and its impact on the surfactants segment recovery, which are crucial for financial projections and investor expectations.

Are declining raw material costs impacting your ability to maintain pricing, and could this lead to price reductions if the trend continues? - Michael Harrison(Seaport Research Partners)

2025Q3: We prioritize a balance between volumes and margins. We are an asset-intensive business and need to maintain volume throughput. We are competitive in the market and aim for net income maximization. - Luis Rojo(CEO)

Can you elaborate on the improved customer mix in Surfactants? - Dave Storms(Stonegate)

2025Q1: We are focused on recovering our margins. We're working very closely with our supply chain partners and customers to maximize our product mix and adjust pricing. We are also evaluating additional steps to further improve our cost structure and increase our operational efficiency. - Luis Rojo(CEO)