Stepan Co (SCL) 2026 Q3 法說會逐字稿

Good morning, and welcome to the Stephens Company Third Quarter 2026 Earnings Conference Call.

(Operator Instructions)

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 2026 financial review.

Before we begin, please note that information in this conference call contains forward-looking statements, which are not historical facts. These statements involve risks and uncertainties that could cause actual results to differ materially, including but not limited to prospects for our foreign operations, global and regional economic conditions and factors detailed in our Securities and Exchange Commission filings.

In addition, this conference call will include discussions of adjusted net income, adjusted EBITDA, free cash flow, net debt and leverage-related metrics, which are non-GAAP measures.

We provide reconciliations to the comparable GAAP measures in the earnings presentation and press release, which we have made available at www.stephan.com under the Investors 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 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 2026 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 remains strong. The third quarter was another quarter of earnings growth for Stepan. The three 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 to the fact that adjusted EBITDA was up 27%. Polymers grew single-digits, including one-time maintenance turnaround costs at our Germany site. And 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 double 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 three segments. Surfacting 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 in 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 cost continues to increase in a volatile environment, including the disruption related to the 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 deleveraging. Our net leverage improved to 2.4 times. 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 mill sale 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 nine 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 continued to invest in working capital, we executed our capital plan across our site and we paid $9 million in dividends. 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.

As shared in our third quarter 2026 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 pre-tax restructuring charge. Largely related to the previously announced close of our Fieldsboro, New Jersey site, the decommissioning of select assets of our Milldale, Illinois and the Stelly Bridge United Kingdom facilities and the global salary workforce reduction we announced in July.

Let's move to Slide 6, which shows the adjusted net income bridge for the third quarter of 2026 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 with 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 top-up 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 the $1.6 million of higher corporate expenses reflecting higher incentive-based compensation.

I will now cover each segment in more detail. Turning to sufferance 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 and industrial and oil field 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, oil field 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 costs. Sales volume increased 3% in the quarter. North American volume was up double-digits, driven by rigid polyols and static anhydrates, including continued significant growth in our spray home product line.

This growth was partially offset by software 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, as North America's strong volume growth in rigid poly oil, spray foam and stallic anhydride more than offset the five-year regulatory mandated maintenance turnaround costs at the company's Germany site, lower rigid poly volume in Europe and software 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 polyols margins. Specialty product net sales were $27 million, a 12% increase versus the prior year and volume increased 20%. Adjusted EBITDA was $11.10 million, up 5% versus the prior year, primarily due to higher volume in the MCP 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 bill from accounts receivables, account payables and inventories, driven by stronger sales and higher raw material costs. 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 2.4 times from 2.7 times 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. September, we have recognized $76 million of pre-tax restructuring charges. The year-to-date cash impact of restructuring is $13 million.

Project Catalyst continues to deliver savings in life with our plan. The savings run rate increased to approximately $23 million in the third quarter. The savings were partially offset by inflationary pressures on operating expenses. For 2026, we expect to exceed the 60% two-year $100 million pre-tax 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 incurred in four 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 fourth, financial strength through the free cash flows generation, deleveraging the balance sheet and disciplined capital allocation.

We continue to make progress against these priorities during the quarter to the fact and show 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 delivered 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 volatility environment, which reflects disciplined commercial execution. The Middle East conflict has added volatility to fixed costs and supply chains, and we believe we are well positioned to manage that disruption.

Our regional manufacturing footprint keeps production close to our customers with a particular advantage in the United States. Our dual petrochemical and oleochemical raw material streams 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 Miokville 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 strategic future growth in specialty alkoxalates.

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 and create a more productive and agile organization to enable balanced growth while executing the program safely and in line with expectations.

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 with security 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 plans and cash intervention.

With these actions and our strong results through the first nine months of the year, we believe we will deliver full-year adjusted digital growth. Positive free cash flow and continue 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 questions portions of today's call.

Thank you.

(Operator Instructions)

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.

Really good to see all the pricing that you guys are getting across the three segments. I think we're trying to understand a little bit better the margin impact that you're seeing from raw material inflation and how much pricing is offsetting you across the three 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 you neutralize the impact of some of the higher raw material costs that you're 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. We did a pretty good job in Q2 and Q3.

I don't want to focus too much in quarterly numbers, but when you think about on a year-to-date basis and you look at our margins and you see surfactants, double-digit margins, I mean, EBITDA margins, we just see polymers in the 13% to 15% EBITDA margins.

Those are healthy margins and 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 several places. There are a few places where we are still.

Making some price adjustments, but in general terms, I think the majority have been done. And again, these assume the oil prices of Q3. We will see what happens in the next few weeks.

With the raw material environment. But so far, I think the margins for the year are going in the right direction and we're pleased with the work that our commercial team have done, not only to have decent margins, but to be able to grow our volumes 4%. 4% organic volume growth in the first nine months is almost a record, right? I mean, this is a significant amount of volume.

And we want to make sure that we -- I have talked a lot about balanced growth. And again, I want to continue balancing volumes, margins, and of course cash, but we need to keep our reactors full and that's what we are after.

All right. 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 '27.

I guess the way we were thinking about it is you'd 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 contribution to further earnings growth in '27 versus '26? 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 for 2026. So we are instead of the $60 million, we are more in the $66 million to $70 million range and we already are delivering $23 million run rate in the savings in Q3. We believe we can be ahead of the $25 million on average for 2027, right? So that means $2 million, $3 million more versus where we are today. Now that's going to be, again, on average for 2027, which means ahead of the '25 in the second half, slightly below the '25 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's the main. Component of the gradual savings increases in the next four to five 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 P&L that our fixed cost basis is roughly $800 million, that's public information and you can factor the normal 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 can to our customers.

All right. Thanks. Just a couple more for me.

Apologies if I missed this earlier, but what was the impact of.

The maintenance cost in Germany and the polymers business in Q3 and is that cost completely isolated to Q3 or is there some carryover into Q4 or next year?

Yes, Mike, as you mentioned, we have that turnaround.

In Europe, in our Germany side, that's a turnaround that happens every four years. It's regulated, it's mandated.

And the impact on the polymers business for Q2 was $2 million plus driven by that maintenance.

Remember, Mike, that we talked last quarter that we had $4 million, $5 million of heavy winds in turnaround maintenance costs, both Germany and the U.S. So Germany was more Q3. You will see the impact in Q4 in US with all the maintenance and turnaround costs that we need to do in our PA facility.

So it's 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 the $10 million impact to EBITDA.

Now that we're 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 the Q3?

Any color on that would be helpful. Thanks.

No, yeah, I agree, Mike, that we talk about the $5 million to $10 million 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 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 than that we had in Q2 as well and with a normalized cost position in our tanks and our inventory. So what I will say is that.

I think the best way to look at Q2, Q3 will be averaging both when you think about the $75 million and the $66 million, there was some swing for sure, but delivering $140 million in those two quarters shows the discipline.

Of our execution plan shows, 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're growing volumes 4% on an organic basis. That is still a very strong performance.

When these markets are basically not growing, right, these markets are 0% to 1% growth, so that 4% growth on volume 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 an outstanding year of volume growth for a step and company.

All right. Thanks very much. I'll turn it back.

Thank you. One moment for our next question.

And that will come from the line of Dave Storms with Stonegate. Your line is open.

Morning, and thank you for taking my questions. Louise, 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, giving 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?

When you're growing volume 7%, of course, you have the benefit of reducing all the fixed costs and improving the margins this way.

So again, we're 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 EBITDA in Latin America, actually even grew EBITDA very slightly, but grew EBITDA in Europe. So, the surfactant business continues to be strong based on shared growth.

Tier 2, Tier 3 strengths and actually a few very good quarters on the crop productivity business. Q3 was a little bit softer, but when you think about the year, crop productivity is still okay and still positive. 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're growing a lot of share in a spray phone and in PA. We have talked the PA business in the past, it's 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 4% or 6% or 7%. Again.

This is not related to one side of one customer or the others. I mean, this is across the board.

Understood. Appreciate that.

You also, in that answer, you mentioned North America polymer is growing strong, but Europe and Asia still remain weak on 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. It's 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, the car industry and a lot of our polymers products go there as well and that's 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 three to five years. There is plenty of work to be done to continue reducing energy consumption in Europe, which is the biggest issue there.

The building envelope can. Make a significant impact in reducing the energy consumption. So, that's where we play and we're happy to play in that industry and we're happy to play and help the Europe region to reduce the energy consumption in the building. So, we are all hopeful that the next three to five years, we will realize that end-top demand.

That's really great color.

Thank you. If I could ask one more, and it might be a quarter too early to ask this, but because you brought up productivity volumes decline in the quarter, when we're looking into the next couple of quarters with a developing El Nino, do you see any changes in customer purchase expectations as we start to get ready for the next six to nine months on the ag side?

Great question, Dave, because we're seeing and you guys are seeing a lot of struggle from some of the big ad companies. So it's not a secret. Now, what I will tell you is that our team 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 ad company. We still have plenty of opportunities, right? When you think about tank mix arguments, this is a $1 billion market in the US. This is a $700 million market in Brazil.

And we are still in the infant phase. Of developing our techniques adjuvants and growing in that space. So I agree with you that the macros are not there for the overall ag industry and fertilizer prices and all of that.

On the other hand, we will continue working on our innovation plan to continue growing in this space because it's a key strategic priority for Stepan Company to grow in productivity. We have the products, we have the team, we have the know-how and we will continue executing.

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

Thank you. One moment for our next question.

And that will come from the line of Gawshi Sri with Singular Research. Your line is open.

Good morning, gentlemen. Congratulations on a strong call. It's my first call covering seven, so thank you for taking my questions.

Thank you so much.

Welcome, Gawshi. Welcome to the team and happy to have you here.

Thank you.

Thank you.

My first question is the double-digit growth in the consumer products. I know you alluded that there's some share gains. And I just want to make sure, are these share gains that you can hold to? Because I think on a previous call you alluded to the fact that some of the competitors were short on raw materials. Any comment or color on that?

We continue executing our Tier 2, Tier 3 strategy, Gawshi, so that works in the consumer space, that works in many of our end market, but it's working especially in the America.

And we will continue growing with our Tier 1 multinational companies, 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 up incremental. So that's the good news about how the strategy is playing out.

Tier 1s represent a very important business for a step-on company. We are doing extremely well with Tier 1s and Tier 2s and Tier 3s are coming on top and we're happy to support them as they need formulation services and help.

On their products. So it's an H1st strategy. We're working on both.

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

Yeah, remember that we have pharma business that is very seasonal and that's why you see the EBITDA or the operating income on a specialty product this quarter because we ship a lot of the pharma business in Q3 and that was very similar to last year, right, that's why last year was also in the same level of $11 million of operating income in Q3. When I think about the MCT business, Jamil and the team in Maywood has done an extremely good job of expanding our offerings in MCT, we have developed a new innovation program. To go into different segments and different price tiers within the NCT business, not only on the top tier, but also on the mid-tier. That's why the mix effect and the margin is a little bit different, but that is showing up on the results and that is also filling up our reactors. And the reality is that this year, we had a lot of.

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's why we're not growing even faster, which we could in this NPP business. So that's our plan for next year. We will continue to filling up the reactors. We have extra capacity and we want to.

Deliver all the capacity that we have and margins that make sense.

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

Good point.

We are in the -- we have talked this in the past.

We are in the 75%, 80% range on utilization. And as we plan and as we plan next year, that's why I mentioned before that probably we will see more savings on tolling savings and things like that in the second-half and the first half as we continue ramping up production.

In Pasadena. Now when I say that 75%, 80% of course is very focused on the volume piece, we are very focused on maximizing Pasadena on the dollar front. Because at the end, every product is different, there are products that require 30 hours in a reactor and there are products that require way more or way less and what we need to maximize is the dollar return from our Casadina side and that's what the team is working, we are delivering more savings that we thought.

The tolling piece in 2026 from our Pasadena side, so we're happy with the development even at 75%, 80% capacity utilization.

And just one 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, Gosh, a great point, because for sure, Asia imports, especially Mexico, Brazil is more protected. Brazil have a lot more restrictions, but in Mexico is where we see a lot of the imports from Asia, and you're rightly so that.

That 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 two Jamils in the company, but the other Jamil in Brazil and the whole Brazil team for 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 I'll talk to you later.

I'm 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 Stephan Company. Have a great and safe day.

This concludes today's program.

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