Stepan Co (SCL) Q3 2026 Earnings Report, Transcript and Summary

Good morning, and welcome to the Stepan Company Third Quarter 26 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 the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, press star 1-1 again. As a reminder, this call is being recorded on Wednesday, October 28, 2026. It is now my pleasure to turn the call over to Mr. Ruben Velasquez. Senior vice president and chief financial officer of Stepan Company. Mr. Velasquez, please go ahead.

Thanks, Sherry. Good morning, and thank you for joining Stepan Company's third quarter 26 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 prospect of. 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, free cash flow, net debt, and leverage related metrics, 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 investor sections of our website. Whether you are joining us online or over the phone, we encourage you to review the investor 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 information and perspectives helpful. With that, I would like to turn the call over to Mr. Luis E. Rojo our President and Chief Executive Officer.

Thank you, Ruben. Good morning. And thank you all for joining us today to discuss our third quarter 26 results. I will share the highlights of the quarter and an update on our key strategic priorities. While Ruben will take you through the financial details. Before reviewing the quarter, I want to recognize our teams around the world for their commitment to safety. Safety remains our top priority and the foundation of everything we do at Stepan. Our safety performance over the last 12 months remain strong. The third quarter was another quarter of earnings growth for Stepan. The 3 segments delivered organic volume growth and increased earnings versus the prior year. Adjusted EBITDA was $66 million up 18% versus the prior year. Driven by global volume growth, margin recovery, and project catalyst savings. Surfactants-- adjusted EBITDA was up 27% Polymers grew single digit including 1 time maintenance turnaround cost at our Germany site. And our specialty products grew EBITDA single-digits. Driven by double-digit volume growth On a consolidated basis, adjusted earnings per diluted share were $0.94 nearly 2x the prior year. Now I want to highlight a few elements of our third quarter performance. First, volume growth. Organic volume grew 7% with growth in all 3 segments. Surfactant organic volume was up 8%, and the growth was broad based across most of the end markets. Polymers volume was up 3% with North America growing strong double digits. And specialty products delivered 20% volume growth behind a strong innovation plan in our MCT product line. We are pleased with the growth we achieved in several of our key strategic end markets despite ongoing global economic uncertainties and supply chain disruptions. Second, margin recovery and pricing discipline. Raw material costs continue to increase in a volatile environment. Including the disruption related to the meal Middle East conflict. Our pricing actions together with our disciplined execution of our contractual pass through mechanism offset those higher costs. Third, productivity and cost-out. Project Catalyst continues to deliver savings. And we are now projecting to exceed the 60% target for 2026. Finally, we remain focused on cash generation and balance sheet delivery. Our net leverage improved to 2.4x. Free cash flow was positive at $8 million despite a further investment in working capital. In October, we closed the sale of a parcel of land near our Millsdale site for $28.5 million The full cash proceeds will be used to pay down debt and continue to deleverage the balance sheet in November. Through the first 9 months of the year, adjusted EBITDA is up 15% and adjusted earnings per share are up 40% versus the prior year. We remain committed to a balanced approach to capital allocation. During the quarter, we continue to invest in working capital We executed our capital plan across our site and we paid $9 million in dividend. Finally, we increased our quarterly dividend by $0.01 per share. Or 2.5%. Marking the 59th consecutive year that Stepan has increased its dividend. With that, I will turn the call back to Ruben to walk you through the financial details for the quarter.

Thank you, Luis. As shared in our third quarter 26 earnings release, reported net income was $17.8 million or $0.78 per diluted share. Up 64% versus $10.8 million or $0.47 per diluted share in the prior year. Reported results include a $5.6 million pretax restructuring charge. Largely related to the previously announced closure. of our Hillsborough, New Jersey site the decommissioning of select assets at our Millsdale, Illinois and the Stalybridge United Kingdom facilities and the global salaried workforce reduction we announced in July. Let's move to slide 6, which shows the adjusted net income bridge for the third quarter of 26 versus the third quarter of last year. Adjusted net income was $21.7 million or $0.94 per diluted share. Up 98%. Versus $10.9 million or $0.48 per diluted share in the prior year. The increase in adjusted net income was primarily due to higher surfactant earnings additional contributions from polymers and specialty products, partially offset by higher corporate expenses and a higher tax provision on the stronger earnings. Adjusted corporate expenses increased by $1 million or 6% primarily due to higher incentive based compensation associated with the improved operating performance. Slide 7 shows the total company adjusted EBITDA bridge. Adjusted EBITDA was $66.3 million up $10.1 million or 18% versus the prior year. This increase was primarily due to higher surfactant earnings driven by sales volume growth and margin recovery. With polymers and specialty products also up, partially offset by $1.6 million of higher corporate expenses reflecting higher incentive based compensation. I will now cover each segment in more detail. Turning to surfactants on slide 8, net sales were $487 million up 15% versus the prior year. Selling prices were up 10% primarily due to the pass through of higher raw material costs and targeted pricing actions. Reported volume grew 3% and organic volume increased 8%. Foreign currency translation positively impacted net sales by 2%. The organic growth was led by double digit increases in consumer products including laundry, construction, industrial, and oilfield end markets. Partially offset by lower crop productivity demand. Surfactant adjusted EBITDA was $48 million up $10 million or 27% versus the prior year. North America and Asia earnings improved on organic volume growth in consumer products, oilfield and construction, and industrial, together with margin recovery. Latin America earnings increased on double digit organic volume growth pricing execution, and margin recovery. Europe was modestly lower as reduced crop productivity demand more than offset growth in our consumer end markets. Moving to polymers on Slide 9. Net sales were $179 million a 24% increase versus the prior year. Selling prices were up 22%. Primarily due to the pass through of higher raw material costss. Sales volume increased 3% in the quarter. North American volume was up double digits driven by rigid polyols and phthalic anhydride, including continued significant growth in our spray foam product line. This growth was partially offset by softer demand in Europe and Asia. Foreign currency translation negatively impacted net sales by 1%. Polymer adjusted EBITDA was $23 million up 4% versus the prior year. In North America, strong volume growth in rigid polyol spray foam, and phthalic anhydride, more than offset the 5-year regulatory mandated maintenance turnaround costs at the company's Germany site lower rigid polyol volume in Europe, and softer demand in China. North America EBITDA was up $3 million on volume growth and margin improvement. Europe was down $2 million primarily due to the maintenance turnaround at our Germany site. Asia was slightly lower on softer demand for specialty polyols in China. Partially offset by improved rigid polyol market. Specialty Products net sales were $27 million a 12% increase versus the prior year and volume increased 20%. Adjusted EBITDA was $11.7 million up 5% versus the prior year. Primarily due to higher volume in the MCT product line partially offset by less favorable product mix. Now turning to cash flow and the balance sheet on Slide 10. Cash flow from operations before working capital was $49 million in the third quarter. While free cash flow was $8 million after $21 million of capital expenditures. Free cash flow reflected a $32 million working capital build from accounts receivable, accounts payable, and inventories. Driven by stronger sales and higher raw material costss. Free cash flow included $6 million of restructuring related cash payments. We ended the quarter with net debt of $536 million. Our net leverage ratio improved to 2.4x from 2.7x a year ago, reflecting continued progress in deleveraging. Improving cash flow and further strengthening the balance sheet remain key priorities across the organization. Moving to slide 15 on project catalyst. Through September, we have recognized $76 million of pretax restructuring charges. The year to date cash impact of restructuring is $13 million. Project Catalyst continues to deliver savings in line with our plan. The savings run rate increased to approximately $23 million in the third quarter. These savings were partially offset by inflationary pressures on operating expenses. For 2026, we expect to exceed the 60% 2-year $100 million pretax savings target. With that, I will turn the call back to Luis for an update on our strategic priorities and project catalyst.

Thanks, Ruben. Our strategy continues to be anchored in 4 pillars. First, customer centric innovation to drive top line growth Diversification of our markets and customers with a focus on higher growth end markets and tier 2 and tier 3 accounts. Third, operational excellence. Including the reliability and resiliency of our manufacturing network and supply chain. And 4, financial strength. Through a free cash flow generation, deleveraging the balance sheet, and disciplined capital allocation. We continue to make progress against these priorities during the quarter. Surfactant showed consistent and broad based growth in the third quarter. Year to date, we have more than 300 new customers and we have delivered nearly 900 new customer and product combination in this business. With our global tier 2 and tier 3 customer base, growing double digits. Additionally, we deliver a strong double digit growth in North America polymers, and our MCT product line. We delivered this growth while continuing to recover margin in an inflationary product driven environment. Which reflect disciplined commercial execution. The Middle East conflict has added volatility to fixed cost and supply chain. And we believe we are well positioned to manage that disruption. Our regional manufacturing footprint keeps production close to our customer. With a particular advantage in United States. Our dual petrochemical and oleochemical raw material screen give us flexibility on feedstock management and maximize customer supply. Finally, we continue to improve the reliability and resiliency of our manufacturing network. Our flagship NeoGeld site had a great quarter in terms of production volumes, and improving all key operating metrics. Our Pasadena, Texas site continues to ramp up production, and deliver the expected supply chain savings embedded in Project Catalyst. Pasadena remains a critical enabler for a strategic future growth in specialty alkoxylates. Let's move to slide 12 for an update on Project Catalyst. As a reminder, Project Catalyst is our comprehensive plan to further optimize our asset base, create a more productive and agile organization to enable balanced growth while executing the program safely and in line with expectation. Third quarter run rate savings was approximately $23 million and we have identified actions that we believe will enable us to exceed the $25 million per quarter goal on average during 2027. We secured the organizational redesign phase of Project Catalyst, during the third quarter. This new organization design is a key enabler for us to deliver our balanced growth strategy. Which is focused on top line growth margin recovery, and disciplined cost-out initiatives. To conclude, we believe we are positioned to continue delivering growth in our businesses. Despite the ongoing and significant market uncertainties and challenges, the organization continues to be focused on executing our growth opportunities productivity plan, and cash interventions. With these actions and our strong result through the first 9 months of the year, we believe we will deliver full year adjusted EBITDA growth positive free cash flow, and continued deleveraging of the balance sheet in 2026. This concludes our prepared remarks. At this time, we would like to turn the call over for questions. Sherry,, please review the instructions for the question portion of today's call.

Thank you. As a reminder to ask a question, please press 1-1 on your telephone and wait for your name to be announced. To withdraw your question, press 1-1 again. And our first question will come from the line of Mike Harrison with Seaport Research Partners. Your line is open.

Hi. Good morning.

Good morning, Mike.

So really good to see all the pricing you guys are getting across the 3 segments. I think we are trying to understand a little better, the margin impact that you are seeing from raw material inflation, and how much pricing is offsetting you across the 3 segments Maybe help us understand where the margin pressure is still a factor from inflation? And should we see further pricing catch up in Q4 or maybe when do you neutralize the impact of some of the higher raw material costss that you are seeing?

Great question, Mike. What I will say is, this continues to be a very volatile environment. When you think about oil prices and raw materials. I think we did a pretty good job in Q2 and Q3. I do not want to focus too much in quarterly numbers, but when you think about on a year-to-date basis and you look at our margin, and you see surfactants, double digit margins, I mean, EBITDA margins where you see polymers in the, you know, 13% to 15% EBITDA margin. Those are healthy margins, and we will continue we will continue to work on productivity to make sure that we have the best value for our customers. Right? So right now, with the current oil prices, we believe we are in a good position. In, in several places. There are a few places where we are still making some price adjustment. But in general terms, I think the majority have been done And this assumes the oil prices of Q3, We will see what happens in the next few weeks with the raw material prices. But so far, I think the margins for the year are going in the right direction. And we are pleased with the with the work that our commercial team has done. Not only to have a decent margins, but to be able to grow our volumes 4% organic volume growth in the first 9 months is almost a record. Right? I mean, this is a significant amount of volume growth. And we want to make sure that we. I have talked a lot about balanced growth. And, I want to continue balancing volumes margins, and, of course, cash but we need to keep our reactors full and that is what we are after.

Alright. And then in terms of project Catalyst, it sounds like the savings there are running ahead of plan for both 2026 and maybe the longer term run rate, into 2027. I guess the way we were thinking about it is you would get about $60 million worth of savings this year and then the incremental $40 million coming next year. But how should we think about Project Catalyst's contribution to further earnings growth in 2027 versus 2026? Is $40 million still a good number, or could it be higher or lower than that No.

Look. Good question, Mike. But as we said today, we are ahead of the 60% target 2026. So we are. Instead of the 60, we are more in the $66 million to $70 million range. And we already are delivering a $23 million run rate. In the savings in Q3. We believe we can be, you know, ahead of $25 million on average for 2027. Right? So that means $23 million more versus where we are. Today. Now that is going to be, again, on average for 2027, which means ahead of $25 million in the second half, is slightly below $25 million in the first half. As we continue ramping up production in Pasadena as we continue implementing, other projects that we have in the pipeline. So that is the main, component of the gradual saving increases in the next in the next 4 to 5 quarters. And remember that we have been very clear that these are the savings from Project Catalyst We also have the normal inflation in our in our P&L. You know that our fixed cost base is roughly $800 million. that is public information. And you can factor, you know, the normal, you know, 2%-3% on the inflation piece on that base. And we will continue working on productivity as I said before, to provide the best value that we that we can to our customers.

Alright. Thanks. Just a couple more for me. I will Apologies if I missed this earlier, but what was the impact of the maintenance cost in Germany in the polymers business. In Q3? And is that cost completely isolated to Q3? Or is there some carryover Q4 or next year?

Yes, Mike. As you mentioned, we have that turnaround, in Europe, in our Germany site. that is a turnaround that happens every 4 years. it is regulated. it is mandated. And the impact on the polymers business for Q3 was, you know, $2 million-plus. Driven by that maintenance. Remember, Mike, that we talked last quarter that we had, you know, $4 million to $5 million of headwinds in turnaround maintenance costs. Both Germany and The US. So Germany was more Q3. You will see the impact in Q4. In US, with all the with all the maintenance and turnaround calls that we need to do in our PA facility. So it is coming in line as expected and as planned.

Alright. And then, last quarter, you had talked a little bit about some volume that you felt like was being pulled forward or some pre buying that might be happening I think at the time you expected that maybe that was as much as a $10 million impact to EBITDA Now that we are sitting here in October and maybe you have the numbers to fully understand how much impact you saw Is there any way to help understand how much stronger Q2 was than what might have been normal and how much weaker, I guess, that made Q3. Any color on that would be helpful. Thanks.

No. Yeah. Agree, Mike, that we talked about the $5 million to $10 million, you know, impact from Q3 to Q2 last call. I will say that some of that was expected on the volume side, but a lot of that was expected on the margin side as well. Right? I mean, we grew in Q2, you know, 6% volume. But the reality is that we grew with lower cost inventory in our tank. Now we are accelerating the growth actually to 7% with a different mix. With a different mix than the. That we had in Q2 as well and with the. With a normalized with a normalized cost position in our tanks and our inventory. So what I would say is that I think the best way to look at Q2, Q3 will be you know, averaging both. When you think about the 2075 and the 66, there was there was some swing for sure. But delivering, you know, $140 million in those 2 quarters shows the discipline of our execution plan, shows you know, a strong volume growth, which let's be clear. When you think about 6% volume, in Q2 and 7% volume in Q3, we are expecting a lower growth in Q4 for sure. When you think about the year, when you include also Q1, we are growing volumes 4% on an organic basis. That is still a very strong performance, when these markets are basically not growing. Right? So that 4% growth on volume These markets are, you know, 0% to 1% growth In the different is coming from a lot of new customers and share growth. in the different end markets. So we are happy with a 4% volume growth If we can continue that throughout the year, that will be that would be an outstanding year of volume growth for Stepan contract.

Alright. Thanks very much. I will turn it back.

Thank you. 1 moment for our next question. And that will come from the line of David Storms with Stonegate. Your line is open.

Good morning, and thank you for taking my questions.

Luis. I actually wanted to go back to kind of what you just mentioned around margin growth. Coming from both new customers and share growth. I was hoping know, given you mentioned approximately 340 new customers, 900 new combinations, Can you help us understand how much the margin growth came from new customers versus share growth?

No.

Look. When you are growing volume 7%, of course, you have the benefit of reducing all the fixed costs, and improving the margins this way. So, again, we are seeing very strong performance in the surfactants business when you think about especially The Americas, you can do the math. Right? On a year to date basis, our surfactant business grew EBITDA in all the regions. I mean, grew EBITDA in North America, grew EBITDAR in Latin America, Actually, even grew EBITDA very slightly but grew EBITDA in Europe. So the continue. The surfactant business continues to be a strong. Based on shared growth tier 2, tier 3 strength, and actually, you know, a few very quarters on the crop productivity business. Q3 was a little bit softer, when you think about the year, crop productivity is still is still okay and still So we feel good about the surfactant business. And when you think about polymers, again, very strong performance in North America, with a strong double digit growth. The rigid business is strong, and we are growing a lot of share in a spray foam. And in PA. We have talked to PA business in the past. it is not secret. We are growing significantly in the PA business. So we feel good about how the margin profile is going vis a vis the leverage that you have when you are growing volumes you know, 4% or 6% or 7%. Again, this is not related to 1 side of 1 customers or the other. I mean, this is this is across the board.

Understood. Appreciate that. You also. And in that answer, you mentioned North America Polymer is growing strong. Wait. Europe and Asia still remain weak. The polymer side. Any green shoots there? Any signs of improvements? Is that just a macro story? Anything we should keep an eye out for there?

Yeah. No. Totally right. I mean, this is a macro story for Europe and China. I. it is not a secret how the chemical industry is doing, and a lot of the end market demand are doing in Europe and in China. When you think about China, you know, the car industry and a lot of our polymers products goes there as well. And that is not robust. And then, of course, all the challenges that we see in Europe with the overall demand and with the overall construction environment there. Now there is a lot of pent up demand in Europe, that we believe and our customers believe we can capture in the next 3 to 5 years. There is plenty of work to be done to continue reducing energy consumption in Europe, which is the biggest issue there. And the building envelope can make a significant impact in reducing the energy consumption. So that is where we play. And we are happy to play in that industry, and we are happy to play and help and help the Europe region to reduce the energy consumption in the building. So we are all hopeful that the next, you know, 3 to 5 years we will we will realize that end of demand.

that is really great color. Thank you. If I could ask 1 more, and it might be a quarter too early to ask this. But because you brought up crop productivity volumes, decline in the quarter, when we are looking into next couple quarters with a developing El Nino, Do you see any changes in customer purchase ex. Expectations as we start to get ready, for the next 6 to 9 months on the ag side?

No. that is great. Great. Question, David, because we are seeing. I mean. And you guys are seeing a lot of a struggle from some of the, you know, big ad companies. So it is not a secret. Now what I will tell you is that our teams continues to do a great job in developing new products new formulations, to continue growing share with all our key multinational accounts in the ad business. And also growing with the middle tier 2, tier 3 ag company. We still have plenty of opportunities. Right? When you think about tank mix argument. This is a $1 billion market in The US. This is a $700 million market in Brazil. And we are still we are still in the infant phase of developing our tiny fragments and growing in that space. So agree with you that the macros are not there for the overall industry and fertilizer prices and all of that. On the other hand, we will continue working on our innovation plan to continue growing this space because it is it is a key strategic priority for a step up company to grow in crop productivity, We have the products. We have the team. We have the know how. And we will continue executing. Understood.

Thank you for taking my questions, and good luck in the next Thank you, David.

Thank you. 1 moment for our next question. And that will come from the line of Ghoshik Shree with Singular Research. Your line is open.

Good morning, gentlemen. Congratulations on a strong quarter. it is my first call covering Stepan, so thank you for taking my questions.

I got my. Thank you so much. Welcome, Ghoshik. Welcome to the team, and happy to have you here.

Hello, Ghoshik. Thank you, Ruben.

Thank you, gentlemen. On my first question is the double digit growth in the consumer product. I know you have alluded that there is some share gains. And I just wanna make sure are these share gains that you can hold to? Because I think in previous call, you alluded to the fact that some of the competitors were short on raw materials. Any comment or color on that?

Look. We continue executing tier 2, tier 3 strategy. Ghoshik. So that works in the consumer space. That works in many of our end market. But it is it is it is working. it is working in. Especially in the America. And we will continue we will continue growing with our tier 1 multinational companies. We have a strong we have a strong plan there. We have been doing extremely good with our tier 1 accounts. And on top of that, tier 2, tier 3 is coming is coming up incremental. So that. that is the good news about how the strategy is playing out. Tier 1 represents an very important business for a step up company. We are doing extremely well with tier ones. And tier twos and tier threes are coming on top. And we are happy to support them as they need formulation services and help on their products. So it is a. it is an analytics strategy. We are we are working we are working on both.

Awesome. On the specialty products in the MCT, how sustainable do you see this MCT volume growth heading into next year? And was there any kind of order timing benefit in the in the segment this quarter?

Yeah. Yeah. Remember that we have, pharmaceuticals business that is, very seasonal, and that is why you see the EBITDA of the operating income on a specialty product this quarter because we ship a lot of the pharma business in the. In Q3, and that was very similar to last Right? that is why last year was also at the same level of $11 million of operating income in Q3. When I think about the MCT business, Jamil and the team, at Maywood has done an extremely good job of expanding our offerings in MCT, and we have developed a new innovation program to go into different segments and different price tiers within the MCT business, not only on the top tier, but also on the mid tier. that is why the mix effect and the margin is a little bit different. But that is showing up on the result. And that is also filling up our reactors and the reality is that this year we had a lot of headwinds on the fatty acid pricing When you think about raw materials for fatty acids, we had a lot of challenges there. that is why we are not growing even faster. Which we could which we could in this in this MCT business. So that is our plan for next year. And we will continue to filling up the reactors We have extra capacity, and we want to, you know, deliver all the capacity that we have. And margins that make sense.

that is And then a little bit of color on the Pasadena utilization. Where is it running today in terms of utilization? And what does getting it to full utilization add to next year Good point.

We are in the. We have talked this in the past. We are in the, you know, 75%-80% range. On utilization. And as we plan and as we plan next year, that is why I mentioned before that probably we will see more savings on tolling savings and things like that in the second half than the first half. As we as we continue ramping up production in Pasadena. Now when I say the 75%-80%, of course, is very focused on the volume piece, We are very focused on maximizing on maximizing Pasadena on the dollar front. Because at the end, every product is different. There are products that require, you know, 30 hours in a reactor, and there are products that require way more or way less. And what we need to maximize is the is the dollar return from our Pasadena site. And that is what the team is working. We are delivering we are delivering more savings than we thought on the tolling piece in 2026 from our Pasadena site. So we are happy with the development even at, you know, 75%-80% capacity utilization.

that is and just speaking to 1 last question. Latin America, I think you mentioned there was a competition that left. And so how exposed is Latin America to the Asian imports coming back? And how much of this is recovery do you see it as structural?

Like a great point, Ghoshik. Great point because, for sure, Asia imports, especially in You know, Brazil is more protected. Brazil has a lot more restrictions. But in Mexico is where we see a lot of the imports from Asia. And you are rightly so that, you know, having local production in the environment where we were in 2026 is a significant advantage for companies like Stepan We need to continue making sure that we provide the right value for our customers in 2027 so we continue growing that business. We have an excellent footprint. In Mexico, in Colombia, in Brazil, I want to give kudos to the other Jamil. We have 2 Jamils in the company, but the other Jamil in Brazil and the whole Brazil team what they are delivering this year. Has been an outstanding performance from them and we believe a lot of that is sustainable. So we will continue our plan to grow share to fill up our reactors at the right margins and continue to provide the right value to our customers in the Latin America region.

Thank you again for taking my questions. Congratulations, and talk to you later.

Thank you. Thank you, Ghoshik, for joining. I am showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Rojo for any closing remarks.

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

This concludes today's program. Thank you all for participating. You may now disconnect.