Executive Summary / Key Takeaways

• Stepan Company is positioned for earnings and free cash flow growth in 2025, building on a solid start to the year and leveraging strategic investments coming online.
• First quarter 2025 results demonstrated significant operating leverage, with an 8% increase in net sales translating into a 40% surge in operating income, driven by volume growth and improved mix in key segments.
• The new Pasadena, Texas specialty alkoxylation facility, now operational, is a critical catalyst expected to drive volume growth and supply chain savings, with its full contribution run rate anticipated in the second half of 2025.
• Strategic focus on end market diversification (particularly Agriculture and Oilfield) and expanding relationships with Tier 2/3 customers is yielding tangible volume growth and favorable product mix, offsetting softness in commodity consumer markets.
• While macroeconomic uncertainties and competitive pressures persist, particularly impacting the Polymers segment, cost control initiatives and the ramp-up of new, higher-margin capacity are expected to support overall profitability improvement.

Setting the Scene: Stepan's Foundation and Strategic Blueprint

Stepan Company operates as a key player in the intermediate and specialty chemical industry, providing essential ingredients used across a wide spectrum of applications, from everyday consumer cleaning products to specialized solutions for agriculture, oilfields, and construction. The company's business is organized into three main segments: Surfactants, Polymers, and Specialty Products. This diversified portfolio, manufactured across a global network of production facilities, forms the bedrock of Stepan's operations.

Stepan's overarching strategy centers on customer intimacy, end market diversification, operational excellence, and targeted strategic investments. The company aims to serve its long-standing Tier 1 customers while aggressively pursuing growth with Tier 2 and Tier 3 customers, particularly within its Surfactant business, recognizing this as a profitable channel. Diversification into more functional and higher-growth end markets like agriculture and oilfield solutions is a key pillar, aiming to reduce reliance on more cyclical or commoditized areas. Operational efficiency and supply chain resiliency are ongoing priorities, supported by continuous improvement initiatives and strategic capital expenditures.

This strategic direction is informed by Stepan's long history in the chemical industry, which includes decades of manufacturing experience and navigating various market cycles and regulatory environments. The company's commitment to returning value to shareholders is underscored by its impressive track record of increasing its dividend for 57 consecutive years as of the first quarter of 2025.

Competitive Positioning and Technological Edge

Stepan operates in a competitive landscape populated by large, diversified chemical giants like DuPont de Nemours (DD), Dow Inc. (DOW), and Celanese Corporation (CE), as well as numerous smaller, specialized players. While these larger competitors often possess greater scale, broader product portfolios, and more extensive R&D budgets, Stepan carves out its position through specialization, customer focus, and targeted technological advantages.

In the Surfactant market, Stepan is a leading merchant producer, competing on product performance, reliability, and service. Its strategy to grow with Tier 2 and Tier 3 customers allows it to capture market share in niches potentially underserved by larger competitors focused on high-volume Tier 1 accounts. While precise, directly comparable market share figures for all niche competitors are not publicly detailed, Stepan's reported high single-digit volume growth with Tier 2/3 customers in 2024 and the addition of over 1,700 new customers in that year underscore the effectiveness of this targeted approach.

In Polymers, particularly rigid polyols for insulation, Stepan competes with players like Dow. While Dow benefits from significant economies of scale and integrated operations, Stepan focuses on developing next-generation technologies aimed at improving the energy efficiency and cost performance of customer insulation products. The company is also strategically entering the growing spray foam market, seeking higher-margin opportunities. The Polymer segment has faced headwinds from macroeconomic uncertainty and high interest rates impacting construction activity, leading to competitive pressures on pricing.

Stepan's Specialty Products segment, including Medium Chain Triglycerides (MCTs), faces imported competition, which the company is actively evaluating options to address.

Stepan's technological differentiation is a critical component of its competitive moat and growth strategy. A significant recent achievement is the completion of a three-year capital investment program that established Stepan as the largest installed Low 1,4-Dioxane production capacity serving the North American merchant market. This technology addresses evolving regulatory requirements and customer demand for products with lower levels of this impurity, providing a competitive advantage and contributing to margin growth in 2024.

Even more impactful for future growth is the new specialty alkoxylation facility in Pasadena, Texas. This facility represents a substantial investment aimed at expanding Stepan's capabilities in producing high-value specialty alkoxylates used in various demanding applications, including agriculture and oilfield solutions. While specific quantifiable performance metrics for the Pasadena technology itself (e.g., efficiency gains vs. older processes) are not available, management emphasizes its strategic importance for enabling volume growth and achieving supply chain savings. The plant is designed to produce a wide range of products (over 60 planned, with 6 already in production as of Q1 2025), allowing Stepan to offer a broader and potentially more differentiated portfolio in the specialty alkoxylate market. This expanded capacity and product capability directly supports the company's strategy of diversifying into higher-growth, higher-margin end markets and strengthening its competitive position against rivals in these areas.

Compared to larger peers like DD and DOW, who invest heavily across a broader range of advanced materials and technologies, Stepan's technological focus appears more concentrated on enhancing its core Surfactant and Polymer offerings and addressing specific market needs (like Low 1,4-Dioxane). While Stepan's R&D spend (around 2-3% of revenue) may lag behind the larger players (DD and DOW often spend 5-7%), its targeted investments in areas like specialty alkoxylation and Low 1,4-Dioxane demonstrate a strategy to build specific technological moats within its chosen markets. The success of the Pasadena ramp-up and the market adoption of products from this facility will be key indicators of Stepan's ability to translate this targeted technological investment into sustained competitive advantage and financial performance.

Performance with Perspective: A Return to Growth Momentum

Stepan's first quarter 2025 results signal a positive shift, demonstrating a return to growth momentum after a challenging 2024 marked by operational disruptions and macroeconomic headwinds. Consolidated net sales increased by 8% to $593.3 million compared to $551.4 million in Q1 2024. This growth was fueled by a 4% increase in sales volume and a favorable impact from higher average selling prices, primarily reflecting the pass-through of increased raw material costs and a more favorable product mix. Foreign currency translation, however, presented an $18.5 million headwind to net sales.

The most striking improvement was in profitability. Operating income surged by 40% to $28.3 million in Q1 2025 from $20.2 million in the prior-year quarter. Adjusted EBITDA, a key metric for evaluating operational performance, rose by 12% to $57.5 million. This operating leverage highlights the impact of volume growth and improved mix flowing through the cost structure. Operating expenses decreased by 6% year-over-year, benefiting from lower administrative expenses (partially due to reduced environmental reserves) and a significant decrease in deferred compensation expense tied to market fluctuations.

Segment performance was varied but generally positive. The Surfactant segment, representing 72% of sales, saw net sales increase by 10% to $430.3 million. This was driven by a 3% volume increase and higher selling prices (up 12%), partially offset by unfavorable foreign currency translation. Surfactant operating income increased by 11%. Growth was particularly strong in the agricultural and oilfield end markets, as well as with distribution partners, demonstrating the success of the diversification strategy. However, North America Surfactant gross profit saw a 16% decrease, primarily attributed to higher expenses associated with the initial stages of the new Pasadena facility. Latin America Surfactants also faced a significant $15.1 million unfavorable foreign currency translation impact.

The Polymers segment (25% of sales) reported flat net sales at $146.1 million, despite a 7% increase in sales volume. Lower average selling prices, influenced by lower raw material costs and competitive pressures, offset the volume gains. Polymer operating income decreased slightly by 4%. While Rigid Polyol volumes grew single-digits in North America and Europe, growth was constrained by the macro environment. Strong volume growth in Specialty Polyols and commodity Phthalic Anhydride (PA) contributed to the overall segment volume increase, but the higher proportion of lower-margin PA volume negatively impacted segment mix and profitability, compounded by high-cost inventory carryover.

Specialty Products (3% of sales) delivered robust performance, with net sales up 11% to $16.8 million and operating income increasing by 29%. This improvement was largely driven by margin recovery and volume growth within the Medium Chain Triglycerides (MCT) product line.

From a liquidity perspective, cash from operations was a source of $6.9 million in Q1 2025, a significant decrease from the $41.6 million source in Q1 2024. This was primarily due to higher working capital requirements, with increased receivables (higher sales/prices) and inventories (higher quantities for growth/tariffs and unit costs) outweighing the source from accounts payable. Investing activities used $26.4 million, mainly for capital expenditures ($32.7 million). Financing activities were a source of $22.8 million, primarily from increased borrowings on the revolving credit facility, leading to a $33.9 million increase in consolidated debt. Net debt stood at $551.8 million at March 31, 2025, up from $525.7 million at year-end 2024.

Despite the increase in debt, the company believes it remains in compliance with its debt covenants.

Outlook and Guidance: Leveraging New Capacity for Future Growth

Management expresses cautious optimism for the remainder of 2025, anticipating full-year adjusted EBITDA growth, adjusted net income growth, and positive free cash flow. This outlook is heavily predicated on the successful ramp-up and contribution of the new Pasadena facility, continued volume growth in key strategic markets, and ongoing cost management.

The Pasadena specialty alkoxylation plant, which began operations in the first quarter, is a central piece of the 2025 growth story. While it incurred pre-operating expenses in Q1 (approximately $4 million EBITDA headwind) and is expected to be a drag in Q2 as well (though less so than Q1), management anticipates a positive earnings contribution to begin ramping up in the second half of the year, reaching its full contribution run rate during that period. This facility is expected to drive volume growth in specialty alkoxylates and generate supply chain savings, offsetting the initial startup costs and boosting overall profitability.

Stepan expects its Surfactant business to continue experiencing growth in strategic end markets like agriculture and oilfield, leveraging its expanded distribution network and Tier 2/3 customer focus. Polymer demand is expected to improve as macroeconomic conditions gain clarity and interest rates potentially moderate, supporting a recovery in the Rigid Polyol business. The company's efforts in the spray foam market are also expected to contribute to Polymer growth.

Cost control remains a priority, building on the $48 million in pre-tax savings achieved in 2024. Management aims to avoid the significant one-time operational and financial charges that impacted 2024 results.

Capital expenditures for 2025 are projected to be in the range of $125 million to $135 million, a more normalized level following the completion of major projects like the Low 1,4-Dioxane expansion and the substantial portion of the Pasadena build. This reduced level of growth CapEx, combined with expected earnings improvement and working capital management, supports the company's forecast for positive free cash flow in 2025.

Risks and Challenges

Despite the positive start to 2025 and the promising outlook from new capacity, Stepan faces several risks and challenges that could impact its performance. Global macroeconomic uncertainty and high interest rates continue to restrain demand in the Polymers segment, particularly in construction-related markets. Volatility in raw material costs, while often passed through, can impact margins in the short term due to timing lags.

The volatile and uncertain situation regarding tariffs presents a potential headwind, both directly through imported raw material costs and indirectly through potential impacts on customer demand if it leads to broader inflation or disruption in end markets like construction and consumer goods. Stepan is working to mitigate these impacts through sourcing and pricing adjustments, but the ultimate effect remains uncertain.

The company is also subject to ongoing environmental and legal liabilities related to historical operations at various sites. While reserves are established, the potential for additional costs exists due to inherent uncertainties in remediation and legal outcomes. A recent pre-filing notice from the USEPA regarding alleged FIFRA violations for certain biocide products highlights the ongoing regulatory risks, although the company expects to pursue indemnification from the licensed distributor.

Operational execution, particularly the successful and timely ramp-up of the Pasadena facility to its full contribution rate, is critical to achieving the 2025 outlook. Any delays or unforeseen issues could impact expected volume growth and cost savings.

Conclusion

Stepan Company has commenced 2025 with a strong first quarter, demonstrating its ability to drive significant operating leverage from volume growth and favorable mix. The core investment thesis for Stepan in the near term is centered on its ability to capitalize on strategic investments, particularly the new Pasadena specialty alkoxylation facility, to fuel growth and improve profitability in the second half of the year.

The company's focused strategy of diversifying into higher-growth end markets like agriculture and oilfield solutions and expanding its reach with Tier 2/3 customers is yielding tangible results, providing a buffer against softer demand in more commoditized areas. While the macroeconomic environment and competitive pressures, especially in Polymers, remain challenges, the expected contribution from new capacity and ongoing cost discipline are key levers for improvement.

Investors should monitor the ramp-up progress at the Pasadena plant, the trajectory of demand recovery in the Polymers segment, and the company's ability to effectively manage working capital and mitigate potential tariff impacts. Stepan's long history, coupled with its targeted strategic investments and focus on operational execution, positions it to unlock further value, provided it can successfully navigate the prevailing market uncertainties and fully realize the potential of its new capacity.