Q3 2025 Stepan Co Earnings Call

Speaker #2: Good morning and welcome to the Step and Company . Third quarter 2020 Earnings Conference Call . During the presentation , all participants will be in a listen only mode .

Speaker #2: Afterward , we will conduct a question and answer session . To ask a question during the session , you will need to press star one one on your telephone .

Speaker #2: You will then hear an automated message advising your hand is raised . To withdraw your question , please press star one one again .

Speaker #2: 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. Rubin Velasquez , Vice President and Chief Financial Officer of Step Company .

Speaker #2: Mr. Velazquez, please go ahead.

Ruben Velasquez: Thanks, Jacinda. Good morning and thank you.

Speaker #3: Thanks , Jacinta . Good morning , and thank you for joining us . Stefan's company , 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 .

[Company Representative]: 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.

Ruben Velasquez: These statements involve risks and uncertainties that.

Speaker #3: These statements involve risks and uncertainties that could cause actual results to differ materially . Included 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 .

[Company Representative]: 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.

Speaker #3: In addition , this conference call will include discussions of adjusted net income , adjusted EBITDA and free cash flow , which are non-GAAP measures .

Ruben Velasquez: Free cash flow, which are non-GAAP measures, we provide reconciliations to the comparable GAAP.

Speaker #3: We provide reconciliations to the comparable GAAP measures in the earnings presentation and press release , which we have made available at w-w-w-what . Stepan Co under the investor section of our website .

[Company Representative]: 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.

Speaker #3: Whether you are joining us online or over the phone , we encourage you to review the investors slide presentation . We made these slides available at approximately the same time as when we as when the earnings release is issued .

Speaker #3: 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 .

Ruben Velasquez: Our President and Chief Executive Officer.

Speaker #3: Our President and Chief Executive Officer .

Luis Rojo: Thank you, Ruben. Good morning and thank you.

Speaker #4: Thank you . Ruin . Good morning , and thank you all for joining us today to discuss our third quarter 2020 results . I plan to share highlights of the quarterly performance and will also share updates on our key strategic priorities .

Luis Rojo: you all for joining us today to discuss our third quarter 2025 results.

Luis Rojo: I plan to share highlights of the.

Luis Rojo: Quarterly performance and will also share updates on our key strategic priorities, while Ruben will provide additional details on our financial results.

Speaker #4: While Reuben 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 .

Luis Rojo: We delivered 9% adjusted EBITDA growth.

Luis Rojo: 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 margins, 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 product adjusted EBITDA increased significantly, driven by favorable order timing within the pharmaceutical business.

Speaker #4: This results were restrained by the significant increase in Oleochemical raw material prices , which continue to impact surfactant margins and by higher start up costs related to our new Pasadena , Texas facility .

Speaker #4: 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 .

Speaker #4: Specialty products Adjusted EBITDA increased significantly , driven by favorable order timing within the pharmaceutical business . Polymers delivered volume growth across rigid polyols and commodity pay , while EBITDA was slightly lower due to unfavorable mix and margin pressures .

Luis Rojo: Polymers delivered volume growth across rigid polyols and commodity PA, while EBITDA was slightly.

Luis Rojo: 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 end market.

Speaker #4: Surfactant adjusted EBITDA declined versus the prior year , driven by higher Pasadena start up costs . Oleochemical raw material cost inflation and lower demand within our global commodity consumer products and 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 oil field and market .

Luis Rojo: Total company sales volumes grew 1% with polymers up 8% and our MCT product line up 26%, while surfactants volume declined 2% in surfactants.

Luis Rojo: We continue to experience double-digit volume growth within the crop productivity business and mid-single-digit growth in the oilfield end market.

Luis Rojo: This growth was offset by lower demand.

Speaker #4: This growth was offset by lower demand within the global commodity consumer products and market . North America portfolio and commodity PA volumes were both up double digits , while European Rigid polyol volumes continues to be by macroeconomic uncertainties and low construction activity .

Luis Rojo: Within the global commodity consumer products end market, North America rigid polyols and commodity phthalic anhydride volumes were both up double digits, while European rigid polyols volumes continue to be impacted by macroeconomic uncertainties and low construction activity.

Luis Rojo: Despite a very challenging environment for the chemical sector, we remain encouraged by the.

Speaker #4: Despite a very challenging impacted environment for the chemical sector , we remain encouraged by the volume growth across several of our key strategic markets .

Luis Rojo: Volume growth across several of our key strategic end markets. We finished the third quarter of 2025.

Speaker #4: 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 .

Luis Rojo: With $10.9 million of adjusted net income.

Luis Rojo: Down 54% versus the prior year, largely reflecting a higher effective tax rate, higher net interest, and higher depreciation, none of which had cash impact.

Speaker #4: Higher interest net and higher depreciation . None of which had cash impacts . Free cash flow was positive at $4,040 million during the quarter , driven by reduced working capital and disciplined capital spending .

Luis Rojo: Free cash flow was positive at $40 million during the quarter, driven by.

Luis Rojo: Reduced working capital and disciplined capital spending.

Luis Rojo: During the third quarter of 2025, the.

Speaker #4: 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 a step and stock of 39.5 cents per share , payable on December 15th , 2025 .

Luis Rojo: Company paid $8.7 million in dividends to shareholders. Our Board of Directors declared a quarterly cash dividend on Stepan common stock of $0.395 per share payable on December 15, 2025. This represents a 2.6% increase in our dividend.

Speaker #4: This represents a 2.6% increase in our dividend. Stepan has paid an increased dividend for 58 consecutive years. Rubin will now share some details about our third quarter results.

Luis Rojo: Stepan has paid and increased its dividend.

Luis Rojo: For 58 consecutive years, Ruben will now share some details about our third quarter result.

[Company Representative]: Thank you, Luis.

Speaker #3: Thank you Luis . My comments will generally follow the slide presentation . Let's start with the 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 .

Ruben Velasquez: My comments will generally follow the slide presentation. Let's start with Slide 4 to recap the quarter. Third quarter 2025 adjusted net income was $10.9 million or $0.48 per diluted share.

[Company Representative]: 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.

Speaker #3: A 54% decrease . The decrease was primarily driven by a higher effective tax rate , resulting from the recently enacted U.S. tax law .

Speaker #3: Lower capitalized interest income and higher depreciation due to Pasadena plant start up . This . Three net income . Unfavorable . Drivers had no cash impact .

Ruben Velasquez: Interest income and higher depreciation due to Pasadena, Texas plant startup. These three net income unfavorable drivers had no cash impact. Consolidated adjusted EBITDA increased by $3.1 million.

Speaker #3: Consolidated adjusted EBITDA increased by $3.1 million, or 6%, compared to the prior year. This growth is attributable to strong specialty product results and the non-recurrence of expenses associated with the external criminal social engineering fraud event in 2024.

[Company Representative]: Or 6% compared to prior year.

Ruben Velasquez: This growth is attributable to strong specialty.

[Company Representative]: Product results and the non recurrence of expenses associated with the external criminal social engineering fraud event in 2024. Significantly higher chemical raw material costs continue to impact surfactant margins, coupled with softer demand in global commodity consumer product end markets. Earnings growth was also impacted by higher startup expenses at our new Constellation facility in Pasadena, Texas. Cash from operations was $69.8 million for the quarter and free cash flow was.

Speaker #3: Significantly higher chemical raw material costs continued to impact surfactant margins , coupled with softer demand in global commodity consumer products and markets . Earnings growth was also impacted by higher start up expenses at our new Alkoxylation in Pasadena , Texas .

Speaker #3: 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 .

Ruben Velasquez: Positive at $40.2 million, driven by reductions in working capital. We will continue prioritizing free cash flow generation going forward.

Speaker #3: We will continue prioritizing free cash flow generation going forward . Slide number five shows the total company net income for the third quarter of 2025 , compared to last year .

[Company Representative]: Slide number five shows the total company net income bridge for the third quarter of 2025 compared to last year 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.

Speaker #3: In the third quarter, we will break down the decrease in adjusted net income. This is net income, and the figures noted are on an after-tax basis.

Ruben Velasquez: We will cover each segment in more detail.

[Company Representative]: Detail, but to summarize, we deliver operating income growth in specialty products, fully offset.

Ruben Velasquez: By lower operating results in surfactants and polymers.

[Company Representative]: 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.

Ruben Velasquez: Versus 18.9% in the first nine months of 2024. This increase was primarily associated with the.

[Company Representative]: Recently enacted U.S. tax law. We are forecasting returning to our normal effective tax rate.

Ruben Velasquez: Range of 24 to 26%. Slide 6 shows the total company adjusted EBITDA bridge for the third quarter compared.

[Company Representative]: To last year's third quarter, adjusted EBITDA was $56.2 million versus $53.1 million in the prior year, a 6% increase.

Ruben Velasquez: 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 previous year. Slide 7 focuses on the Surfactant segment results.

[Company Representative]: Surfactants net sales were $422.4 million for the quarter, a 10% increase versus the prior year.

Ruben Velasquez: Improved product and customer mix.

[Company Representative]: Pass through of higher raw material costs.

Ruben Velasquez: Contributed an 11% to sales growth. Sales volume declined 2% year over year.

[Company Representative]: 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 oil field.

Ruben Velasquez: Net sales benefited 1% from foreign currency translation. Surfactants adjusted EBITDA decreased $6.2 million.

[Company Representative]: 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.

Ruben Velasquez: This was partially offset by improved product and customer mix.

[Company Representative]: Moving to Slide 8, Polymers net sales.

Ruben Velasquez: Were $143.9 million for the quarter, a 4% decrease versus the prior year. Selling prices decreased 14% primarily due to.

[Company Representative]: The pass through of lower raw material costs and competitive pressures.

Ruben Velasquez: Sales volume increased 8% in the quarter. North America region Polyol volume grew double.

[Company Representative]: Digits and our commodities, Kalitica and hybrid business, continued to deliver strong growth.

Ruben Velasquez: Global specialty polyols volume grew mid single.

[Company Representative]: Digits despite the continued challenging overall environment. European and China rigid polyols volume was.

Ruben Velasquez: Impacted by softer demand across their respective regional end markets. Foreign currency translation had a positive impact.

[Company Representative]: 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.

Ruben Velasquez: Which was partially offset by the 8% volume growth. Finally, specialty product net sales were $24.

[Company Representative]: million for the quarter, a 68% increase versus the prior year, primarily due to higher sales volume.

Finally specialty product. Net sales were 24 million for the quarter, a 68% increase versus the prior year.

Ruben Velasquez: Specialty product adjusted EBITDA increased $5.9 million or 113%.

Primarily due to higher sales volume.

[Company Representative]: 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 and $44.2 million year over.

Specialty Products adjusted EBITDA increased $5.9 million, or 113%.

The increasing adjusted evida was primarily due to other time in fluctuations within the pharmaceutical business as orders were moved from the second to the third quarter of the year.

Next on a slide 9.

Free cash, flow was positive at 40.2 million for the third quarter.

Ruben Velasquez: Year driven by working capital reductions and disciplined capital spending.

At.

[Company Representative]: 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 investment and $8.7 million for dividends. Now on slide 10 and 11, Luis will update you on our strategic priorities and capital investments.

44.2 million year-over-year driven by working capital reductions and discipline Capital spending.

We remain optimistic about our ability to deliver positive pre cash flow for the full year 2025

during the third quarter, we deployed 29.6 million against Capital Investments and 8.7 million dollars for dividends

Luis Rojo: Thank you, Ruben. I will focus my comments on our strategic priorities.

Now, on a slide 10 and 11, which will update you on our strategic priorities and capital Investments.

Luis Rojo: 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. Our new customer acquisition within Tier 2 and Tier 3 customers remains a key priority.

Thank you, Reuben. I will focus my comments on our strategy, strategic priorities.

Our customer will always remain at the center of our strategy and Innovation efforts our Tier 1 customer base remains a solid foundation of our business.

Luis Rojo: This is an important and profitable growth channel within our surfactant business.

Continue our new customer acquisition within tier 2 and tier 3, customers remains a key priority.

Luis Rojo: For the third quarter of 2025, our volume grew low single digits year over year, and we added over 350 new customers.

This is an important and profitable growth Channel within our surfactant business.

Luis Rojo: Our end market diversification strategy remains a.

For the third quarter of 2025, our volume, grew low single digits year-over-year and we added over 350 new customers.

Luis Rojo: Key focus area for the third quarter. We continue to see strong growth in our crop productivity and oilfield businesses. We are pleased to see our North America rigid polyols business continues to deliver year over year growth.

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.

Luis Rojo: This growth was enhanced by our new.

We are pleased to see our North America, really polio business continues to deliver year-over-year growth.

Luis Rojo: 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.

This growth was enhanced by our new product introduction in the growing spray foam and Market.

Our supply chain operation and resiliency continue to improve.

Luis Rojo: Thanks, Rob. We continue making investments in our mill.

And we deliver another solid quarter, in all our key operational metrics. Thanks Rob.

Luis Rojo: Sales site to improve operational reliability.

Luis Rojo: Moving to Slide 11, we are proud.

We continue making investments in our meal sales side to improve operational. Reliability.

Luis Rojo: Our new Pasadena, Texas site is fully operational.

Luis Rojo: Production is currently ramping up. We have made 41 different products to date.

Moving to slide 11. We are proud. Our new Pasadena site is fully operational and is currently ramping up production.

Luis Rojo: We expect that the full contribution rate.

Luis Rojo: Of the plan will be achieved in 2026.

Luis Rojo: Our commercial team continues to develop and deliver new business opportunities, and specialty reconciliation volumes continue to grow double digits in the third quarter.

We have 41 different products today. We expect that the full contribution rate of the plan will be achieved in 2026.

Luis Rojo: Looking forward, we remain focused on accelerating.

Our commercial team continues to develop and deliver new business opportunities. And especially our consolation volumes continue to grow double digits in the third quarter.

Luis Rojo: Our business strategies through enhanced operational excellence, improved product and customer mix, and accelerated.

Luis Rojo: Free cash flow generation.

Luis Rojo: 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.

Looking forward we remain focused on accelerating our business strategies. Through enhanced operational excellence in improved product and customer mix and accelerated. Free cash, flow generation.

Luis Rojo: We execute our innovation and growth plans.

Luis Rojo: Our Pasadena, Texas facility is operational, and this should enable us to deliver volume growth in our application product line and supply chain savings going forward.

We believe our surfactant business will experience continued growth in our key strategic markets, and that polymers demand will continue improving as we gain more market certainty and execute our innovation and growth plans.

Luis Rojo: We remain on track to close the.

Our Pasadena facilities operational. And this should enable us to deliver volume growth in our account, sulation product line, and supply chain savings going forward.

Luis Rojo: 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.

We remain on track to close the sale of our site in the Philippines in the fourth quarter of 2025.

Luis Rojo: Despite the ongoing current market and tariff uncertainties, which change every day, we remain.

Our global food pin and accent base.

Luis Rojo: Optimistic that we will deliver full year adjusted EBITDA growth and positive free cash flow in 2025.

Luis Rojo: This concludes our prepared remarks.

Despite the ongoing current market and tariff uncertainties, which change every day, we remain optimistic that we will deliver full year, adjusted if the growth and positive free cash flow in 2025.

Luis Rojo: At this point, we would like to turn the call over for questions.

This concludes our prepared remarks.

Luis Rojo: Yashinda, please review the instructions for the.

At this point, we would like to turn the call over for questions.

Luis Rojo: Questions portions of today's call.

Operator: 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 11 on your telephone and wait for your name to be announced. To withdraw your question, please press Star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from Mike Harrison at Seaport Research Partners.

Just send that. Please review the instructions for the question for today's call.

Thank you. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you will need to press *11 on your telephone and wait for your name to be announced to withdraw your question. Please press *11 again. Please stand by while we compile the Q&A roster.

[Analyst 1]: Hi, good morning.

Our first question comes from Mike Harrison at C Port research partners.

Luis Rojo: Good morning, Mike.

Ruben Velasquez: Morning.

Hi, good morning.

[Analyst 1]: Mike was hoping we could start out with a couple questions on surfactants. First of all, where are we right now in the process of recovering the oleochemical 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?

Good morning, Mike. Um, I was hoping we could start out with a couple of questions on surfactants. Uh, first of all, uh, where are we right now in the process of recovering the oleo chemicals cost run-up? Uh, in surfactants, do you expect that that input impact could be fully offset by Q4, or could it take a little longer?

Luis Rojo: Good question, Mike. Let me start with some background information here. As you all know, you can track this. It's public information.

Bit longer to recover.

Uh good question, Mike. Uh so let me start with some uh

Luis Rojo: Coconut oil prices.

Luis Rojo: If you think about the first nine months of 2025, the average is $2,500 per Metatron, that's a 70% increase versus 2024. The 2024 average was $1,500. We are at $2,500. The peak was $3,000.

Luis Rojo: As we talked last quarter, the prices are coming down.

Luis Rojo: That's the good news.

Luis Rojo: Prices are coming down from the peak.

Luis Rojo: Of $3,000 per metric ton. We have recovered a lot of.

Luis Rojo: The 70% increase, we are still catching up.

Background information here. So as you all know, you can track. This is is public information, coconut oil prices. Uh, if you think about the first 9 months of 2025, the average is 2500, uh, dollars per minute, Throne, that's a 70 or 70%, increase versus 2024. So, 2024 average was 1500, we are at 2500, the peak was 3,000 as we talked last quarter. Uh, the prices are coming down. That's the good news. Prices are coming down from the peak of 3,000 per minute. So, uh, we, we have recovered a lot of the 70% increase.

Luis Rojo: We had another price increase in North America on October 1, and that's the objective. The objective is 2026. We recover the margins that we saw on coconut oil prices, which again were significant.

But we are still uh, we are still uh, catching up. We had another price increase in North America in October 1st.

Luis Rojo: The prices are still now.

Luis Rojo: Coming down, which is the good news.

Uh, and and that's the objective. The objective is 2026. Uh, uh, we have, uh, we recover, uh, we recover, uh, the margins that we saw on coconut oil prices, which again uh, were significant and the prices are still, uh, are now coming down, which is the good news.

[Analyst 1]: All right, just to follow up on that, if we are seeing some of that raw material cost 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.

I just to follow up on that. Uh, if we are seeing uh, some of the that raw material cost come lower, I guess. Does that make it more challenging for you to, uh, to get the pricing? You need? And does that mean uh that at some point we could see you give some pricing back. Uh, if if that Trend continues

Luis Rojo: Clear on my prepared remarks was that.

Luis Rojo: We will continue driving the right balance.

Luis Rojo: Between volumes and margin.

Luis Rojo: This is an asset-intensive business. We need volume through our reactors.

No look. Uh, I 1 thing that I was very clear on my, uh, prepared remarks was that we will continue driving the right balance between volumes and marketing.

Luis Rojo: We will not lose share.

This is an asset intensive business. We need volume through our reactors.

Luis Rojo: We will be competitive in the market and balance volumes and margins to maximize.

Uh, we will not lose share. We will be competitive in the market.

We will be competitive in the market.

And, uh, balance volumes and margins.

Luis Rojo: Net income to maximize return for the company.

Uh, to maximize.

Luis Rojo: 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.

Net income to maximize return, uh, for the company.

[Analyst 1]: All right, so 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, Texas 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.

And and again that's the that's the balance that the team is delivering uh and pleased with what they have done uh in the last few months and and we need to continue that effort in the future months. Continue managing that balance between volumes and markets.

Aware of their surfactant segment margin, uh, could could reach over time, uh, historically operating margin in that segment, got into the double digits. And and it was pretty consistently there for, for a few years, and I'm just wondering if that, uh, type of double digit operating margin, uh, could be achievable, uh, as we look out, uh, 2 or 3 years.

Luis Rojo: A great question, Mike. That's of course our belief as well. Look, EBITDA margins are restrained. I mean, call it close to 10% now because all the investments in Pasadena.

Luis Rojo: And still.

Luis Rojo: The impact on oleochemicals. 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. Of course, we have made investments.

A great question, Mike. And that's, of course, uh, uh, I would be believed as well. Uh, look, uh, EV the margins are restrained. I mean call it a, you know, close to 10% now, uh, because all the investments in Pasadena and still, uh, you know, uh, the impact on all your chemicals. But but we believe this business as we continue growing.

Luis Rojo: We have made investments, and everybody knows that.

Luis Rojo: On an operating income with all the depreciation of Pasadena of low 14.

Luis Rojo: People can see that in the numbers.

Luis Rojo: On an EBITDA basis, this business.

Luis Rojo: Will continue performing at a decent margins level. That is what we are focusing on.

In our functional markets agrochemical, Oil Field construction, and Industrial Solutions. As we continue growing in tier 2, tier 3. Uh, we believe, uh, this is a healthy, uh, double digit with a margin business, uh, going forward. And and of course, we have made Investments. We have made Investments. And everybody knows that. Uh, so on an operating income, uh, with all the depreciation of Pasadena of flow, 1 4, people can see that in the numbers, but on an Eva basis, this business will

Luis Rojo: Growing our high EBITDA margin businesses, and we continue growing those.

Will continue will continue performing at a at a decent uh uh you know, margins levels and that's what we are. Uh, focusing on growing our high EV. That margin businesses and we continue growing those

[Analyst 1]: Right. 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? I'm curious, do you think that lower interest rates could help to stimulate some additional activity there?

Luis Rojo: Fully lined, Mike.

Right. And then, uh, over on the, uh, polymers business, uh, just a couple of questions here. Uh, uh, first of all, do you believe that there is pent-up demand uh in the commercial roofing and commercial insulation space? And I'm curious, do you think that lower interest rates uh could help to stimulate some uh additional activity there?

Luis Rojo: We believe there is a lot of pent-up demand from all the construction.

Luis Rojo: That happened in the early 2000s.

Luis Rojo: I mean, if you look at all.

Luis Rojo: The construction that happens in industrial construction, warehousing plans, flat roofs in early 2000, which was a huge peak, a lot of those buildings need renovation in the next five years. We're aligned 100% with the belief from some of our customers that all that reroofing needs to happen, is not going to happen overnight, but it needs to happen. PIR insulation is the preferred choice.

Uh, full line, Mike. Uh, there is a, we believe there is a lot of pent up demand, uh, from all the construction that happened in the early 2000. I mean, if you look at all the construction that happens in uh, industrial construction, warehousing, uh plans, uh flat uh, roofs in early 2000, which was a huge Peak, uh, a lot of those, uh, uh, buildings need renovation in the next, uh, 5 years. We are, we are, uh, we uh, you know, we're aligned 100% with the

I believe from some of our customers that the all that re-roofing needs to happen. It's not going to happen overnight.

Luis Rojo: For all those flat roof projects coming up, you are 100% right that we should see another interest rate reduction today.

Luis Rojo: 98% probabilities now of an interest rate reduction in 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 rate continues the way they are.

[Analyst 2]: Right.

Luis Rojo: We need shelter and rental inflation to keep coming down so the Fed can achieve their 2% inflation target.

[Analyst 1]: 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?

But it needs to happen and it needs, uh, and PIR insulation is the preferred choice for all those flat roof, uh uh projects uh, coming up and and you are 100% right. That I mean, we should see another interest rate, uh, reduction today, uh, 98, uh, percent of abilities. Now of an interest rate, reduction in December, uh fed meeting. So we believe uh 2026 will give us uh some upside on the on the construction activity if the interest rate continues the way they are and you know inflation rates continues the way they are. Right? I mean we need we need shelter and Rental inflation to keep coming down so we can achieve uh so the FED can achieve their 2% inflation. Uh, Target

All right. And just to follow up on on polymers. Uh uh, from the margins side. Uh, I, I believe you mentioned that the unit margins are down the. The the pricing was down quite a bit. Uh, you referred to some competitive dynamics, that are challenging, uh, is your expectation. That if we started to see, uh, some recovery in demand that we

Luis Rojo: Look, I mean we're happy.

We would also see some recovery in unit margins as well.

Luis Rojo: Look, we always can improve our margin. 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, especially in Europe, which is a very tough situation. We believe we want to grow.

Luis Rojo: We want to grow the top line, we want to grow the volumes.

So Eva margins are improving, uh, a slightly in the, in the polymers business. Despite everything that is going on in Europe and and, and, and especially in Europe, which is a very, uh, tough situation. So, so we believe, uh, uh,

Operator: And.

Luis Rojo: We need to keep inching up, inching up the margins as we drive scale.

Luis Rojo: I mean the benefit of higher volumes.

Luis Rojo: Scale should improve our margins. We are not planning a significant increase, but we're happy with the margins that we have and we need to continue.

Luis Rojo: Inching those up as we grow our business.

Luis Rojo: We had a negative impact on margin as we grow phthalic anhydride and as we grow in some of the other markets because those are typically a mix impact to the overall polymers business.

[Analyst 1]: 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?

we want to grow. We want to grow the Top Line we want. We want to grow the volumes and, and we're, uh, and we need to keep inching up. Inching up the margins, as we drive scale, I mean, with the benefit of of higher volumes and and scale should improve our margins. Uh, but uh, but we are not planning a significant increase, but we're happy with the margins that we have. And, uh, and we need to continue inching those up as we grow as we grow our business. And, you know, we had a, we had a negative impact on margin as we grow PA, and as we grow, uh, in uh, in some of the other markets, uh, because those are typically, uh, a mix, a mix impact to the overall polymer business.

All right. Uh, and then my last question is you, you mentioned the Philippines asset sale and it sounds like maybe you're contemplating some other actions, uh, to help optimize, uh, your footprint. Uh, can you give us any sense of what those actions might involve are they, uh, other, uh, just 1 off smaller facilities or could there be some larger pieces of business that you might be targeting for investment over time?

Luis Rojo: Great question, Mike and Luke.

Luis Rojo: We are committed to deliver a balanced EBITDA and net income growth going forward.

Uh, great question. Mike and, uh, look.

We are committed to deliver.

A balance.

Luis Rojo: Between productivity and asset rationalization and top line growth.

Ruben Velasquez: Right.

Luis Rojo: The industry needs both.

Luis Rojo: You have seen a lot of announcements.

Uh, you know, EB dad, and net income growth, going forward between productivity and asset, rationalization and Topline growth, right? The industry needs both.

Luis Rojo: From other companies in the past six to 12 months, we have made the announcement on the Philippines.

Luis Rojo: We will make more announcements in the future.

Luis Rojo: We need a balanced approach between top.

Luis Rojo: Line growth, productivity and asset rationalization. We all know the chemical industry is over capacity, and we need to make decisions on that overcapacity. We will make those announcements whenever we're ready to make those.

Uh, you have seen a lot of you know, announcements from from other companies in the past 6 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 Topline growth productivity and asset rationalization. We all know the chemical. Uh the chemical industry is over capacity and and we need to and we all need to make decisions.

on that over capacity and we will make those announcements whenever we are ready to make those

[Analyst 1]: Very helpful. Thanks very much.

very helpful. Thanks very much.

Operator: Our next question comes from Dave Storms at Stonegate.

[Analyst 2]: Good morning and thank you for taking my questions.

our next question comes from Dave storms at Stonegate,

Good morning, and thank you for taking my questions.

Luis Rojo: I wanted to start.

[Analyst 2]: 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?

Um, I wanted to start more. 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. Um, 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? Uh, if the European environment.

Luis Rojo: Great question, Dave. Look, we have talked about spray foam in the past few quarters.

Uh, great question. Dave. Uh, Luke.

Luis Rojo: We're serious about this end market.

Luis Rojo: We have developed great technologies and products to serve these high growth margin and we started this year. I'm pleased with what the team has delivered and with the benefits that we're 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 U.S., eventually in Europe in the future.

We have talked about a spray Farm in the past few quarters uh, were serious about this end Market. We have developed, uh, great Technologies and products to serve, uh, these high growth uh, uh, margin and. And we started, we started this year. So I'm pleased with what the team has delivered. And, and with the with the benefits that we are starting to get. This is very early, this is very early and uh, and it's uh, and it's a good Market, it's a good Market that have a lot of potential to grow. Not only

Luis Rojo: We are happy with our participation.

Luis Rojo: 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 work.

Luis Rojo: In Ukraine and all of those things, the reality is that construction activities are.

Luis Rojo: Very muted still in the European region, now as interest rates come down.

In the European region, now as interest rates come down.

[Company Representative]: They.

Luis Rojo: Keep focusing on energy conservation, which is a huge issue in Europe.

As as you know.

Luis Rojo: The biggest opportunity is to reduce the consumption of energies in the buildings.

Luis Rojo: 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.

They, they keep focusing on energy conservation, which is a huge is issue in Europe. And the biggest, uh, uh, opportunity is to consume, is to reduce the consumption of energies in the buildings. Uh, so we believe, uh, the market trends and, uh, are there for the future is not going to happen in the short term, for sure, but we believe this is a good industry uh, for the next 3 and 5 years. And and we are committed uh to continue to continue investing and to continue growing our European uh polymers business.

[Analyst 2]: 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.

That's a great commentary. Thank you. Um, switching to the surfactants segment.

Luis Rojo: No, great point, Dave.

Just would love to ask about maybe the end user there, uh, and what you're seeing from a demand perspective, it was noted that, uh, you're seeing lower demand in the laundry and cleaning. Uh, and markets is this maybe early indications of a substitution effect? Or, uh, maybe it's just more 1 time in nature, any commentary. There would be great.

Luis Rojo: 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.

Luis Rojo: We believe going.

[Analyst 1]: Forward.

Luis Rojo: I mean you need certain levels for the products to work, right?

Luis Rojo: At the end those active levels.

Luis Rojo: are getting, I mean up to the point where you cannot go significantly lower. We feel good about the cleaning and the laundry business going forward.

Luis Rojo: There is going to be always a.

Luis Rojo: Mix between high active, low active products, consumer brands versus private label brands. We believe we are in a.

No, uh, great point there. And, uh, and of course, we continue seeing, uh, a lot of, uh, changes in the consumer piece, in terms of, uh, you know, active levels, uh, uh, switching down, uh, to lower active products. So this this continues to be an evolving, uh, uh, situation. But, but at the end, uh, uh, We believe We Believe going forward. Uh, uh, again, I mean, you need certain levels for the products to work, right? And, and at the end, those active levels, uh, are getting. I mean are to the point where they, you know, you cannot go significantly lower. So we feel good about uh the cleaning and the laundry business going forward. That is going to be always a mix between, you know, High active low active.

Luis Rojo: Decent spot now, thinking about 2026 and 2027.

[Analyst 2]: 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.

These products, uh, you know, consumer Brands versus, uh, private level Brands. Uh, but, but we believe, uh, we believe we are, we are in a decent spot. Now, thinking about 2026 and 2027,

Understood. And then what more, if I could, uh, specialty has shown two quarters of year-over-year improvements. Uh, it seems like a lot of this is predicated on buying growth. We would 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. 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. We're extremely happy with what the team has done, and we keep working on ideas for the next three years. That's fantastic.

Uh, look, we are extremely pleased with the performance of our specialty product business, uh, kudos to jam and the Maywood team, uh, for everything that they have done, uh, over the last few quarters. Excellent performance. We still, we still have opportunities to grow. We love our MCT, uh, product line, as we as we setting the uh uh, in the remarks 26% volume growth.

And uh, and we are extremely happy with this business and with the performance and and, you know, it's a high margin business. So, uh, so we, we, we will continue to investing. We will continue investing to make sure that we maximize the return that we can get. Uh, is a small part of the business, uh, of the company in terms of Revenue. But it's a huge part of the company in term of operating income. And I, that and we're extremely happy with what the team has done. And we keep working on ideas for the next, uh, for the next 3 years.

[Analyst 2]: Thank you, and good luck in Q4.

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.

Thank you, Dave.

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.

Luis Rojo: We appreciate your interest and ownership in Stepan Company.

Luis Rojo: Have a great day.

Thank you very much for joining us. On today's call, we appreciate your interest and ownership in a step and Company have a great day.

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

Thank you very much for for joining us. On today's call, we appreciate your interest and ownership and stepping company have a great day.