Stepan Company

Good morning and welcome to the Stepan Company Second Quarter 2026 Earnings Conference Call. During the presentation, all participants will be in 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, please press star 11 again. As a reminder, this call is being recorded on Wednesday, July 29, 2026. It's now my pleasure to turn the call over to Mr. Ruben Velasquez, Vice President and Chief Financial Officer of Stepan Company. Mr. Velasquez, please go ahead.

Thanks, Marvin. Good morning and thank you for joining Stepan Company's second 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 filing. In addition, this conference call will include discussions of adjusted net income, adjusted EBITDA, pre-cash flow, net debt, and leverage-related metrics, which are non-GAAP measures. We provide reconciliations to the compatible GAAP 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 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 the 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 second quarter 2026 results. I will share the highlights of the quarter and an update on our key strategic priorities, and 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 on everything we do at Stepan. That focus was evident again this quarter, as we now have delivered the strongest safety performance on record in the last 12 months. Congratulations, team! The second quarter was a strong quarter of execution for Stepan. Growth-based volume growth and margin recovery, together with initial benefits from project catalyst actions, drove significant improvement in earnings. I want to highlight a few elements of our second quarter performance. Adjusted EBITDA was $74 million, up 45% versus the prior year, with all three levers contributing to the results. First, volume growth. Organic volume grew 6% with growth across all our end markets. We're growing share in many of our strategic end markets. Second, margin recovery. The pricing actions we are implementing, together with the discipline and execution of our contractual pass-through mechanisms, contributed to margin recovery during the quarter and helped offset higher raw material costs. Third, productivity and cost-out. Project Catalyst remains on track, with savings ramping up in line with our plan. We are on track to deliver our savings commitments for the year. Looking at the consolidated results, net sales were $684 million, up 15% versus the prior year, reflecting higher selling prices, higher volume, favorable product and customer mix, and favorable currency translation. Adjusted earnings per diluted share were $1.18, more than double the prior year. Finally, we remain focused on cash generation and balance sheet deleveraging. We finished Q2 with a net leverage ratio of 2.5 times. We continued to advance the previously announced agreement to sell a parcel of non-productive land adjacent to our plant in Joliet, Illinois, subject to customary closing conditions. We were pleased with the breadth of the growth during the quarter. We also believe a portion of the incremental demand we experience in the quarter reflects some customer pre-buying in response to the geopolitical and raw material uncertainty. We are considering that potential timing effect as we plan for the second half of 2026. We remain committed to a balanced approach to capital allocation. During the quarter, we invested significantly in working capital due to the escalation of raw material costs and higher sales. We executed flawlessly our capex plan across our site. And finally, the company paid $9 million in dividends. Last year, we increased our dividend for the 58th consecutive year. With that, I will turn back the call back to Ruben to walk you through the financial details for the quarter.

Thank you, Luis. As shared in our second quarter 2026 earnings release, reported net income was $22.9 million, or $1 per diluted share, up 102%, versus $11.3 million, or 50 cents per diluted share, in the prior year. Reported results include a $5.1 million pre-tax restructuring charge, or $4 million after tax. largely related to the previously announced closure of our Fieldsboro, New Jersey site and the decommissioning of select assets at our Millsdale, Illinois and Staley Bridge United Kingdom facilities. The cash impact associated with restructuring was approximately $6 million during the quarter. The plan to reduce our global salaried works as announced today is part of the previously announced Project Catalyst Efficiency Initiative. The majority of the expenses associated with these workforce actions is expected to be recognized during the second half of 2026. The company anticipates full-year restructuring charges in the range of $75 to $80 million, which is in line with prior communications. Let's now move to slide five, which shows the adjusted net income bridge for the second quarter of 2026 versus the second quarter of last year. Adjusted net income was $27.1 million, or $1.18 per diluted share, up 126%, versus $12 million, or $0.52 per diluted share, in the prior year. The increase in adjusted net income was primarily due to increased earnings in surfactants and in polymers, partially offset by higher corporate expenses and a higher tax provision and stronger earnings. Adjusted corporate expenses increased $2.7 million, or 17%, driven by normal inflation and higher incentive-based compensation associated with improved operating performance. Moving now to slide six shows the total company adjusted EBITDA breach. Adjusted EBITDA was $74.4 million, up $23 million, or 45%, versus the prior year. This increase was primarily due to higher surfactant and volume earnings driven by sales volume growth, margin recovery, and catalyst savings partially offset by the higher corporate expenses. I will now cover each segment in more detail. Turning to surfactants on slide seven, net sales were $484 million, up 18% versus the prior year. Selling prices were up 12%. primarily due to the pass-through of higher raw material costs, improved product and customer mix, and the practicing actions implemented. Reported volume grew 3% and organic volume increased 7%. Foreign currency translation positively impacted net sales by 4%. The organic growth was broad-based with all end market transregions delivering organic volume growth led by industrial cleaning, laundry, Construction and Industrial, and Oilfield. Our strategic and markets combined grew high single digits. Surfactant adjusted EBITDA was $55 million, up $20 million, or 59% versus the prior year. North America and Asia earnings improved on broad-based volume growth, catalyst savings, and the recovery of the production timing and absorption impacts that we discussed on our first quarter call. Latin America earnings increased on double-digit organic volume growth, pricing execution, and margin recovery. Europe was up modestly on organic growth anchored in laundry, household and institutional cleaning, and construction and industrial applications. Moving to polymers on slide eight, net sales were $178 million, a 9% increase versus the prior year. Selling prices were up 3%, primarily due to pricing actions and the pass-through of higher raw material costs. Sales volume increased 5% in the quarter. North American volume was up strong double digits, driven by rigid polyols and italic anhydride, including significant growth in our spray foam product line. This was partially upset by lower volumes in Europe and Asia. Foreign currency translation positively impacted debt sales by 1%. Polymer-adjusted EBITDA was $31 million, up 22% versus the prior year, primarily due to sales volume growth and margin recovery. North America EBITDA was up $5 million on strong volume growth and margin recovery. Europe improved modestly as margin recovery helped offset construction demand that remained soft. Asia was slightly lower on software demand in China. Specialty product net sales were $22 million, an 8% increase versus the prior year, and volume increase 4%. Adjusted EBITDA of $6.5 million was slightly down, primarily due to less favorable product mix within the medium chain triglycerides product line. Now turning to cash flow and the balance sheet on slide nine. Cash flow operations before working capital was $56 million in the second quarter. including a $6 million cash impact associated with restructuring activities. Excluding restructuring cash impacts and working capital investments, cash flow operations increased significantly. Pre-cash flow was a negative $15 million after capital expenditures of $23 million. Pre-cash flow reflected a $58 million working capital bill associated with stronger sales and higher raw material costs. We ended the quarter with net debt of $534 million and net leverage ratio of 2.5 times, versus the 2.7 times we reported in the first quarter and 2.9 times in the second quarter of last year. Improving cash generation and leveraging the balance sheet remains a key focus across the organization in the second half. With that, I will turn the call back to Luis for an update on our strategic priorities and project catalysts.

Thanks, Ruben. Our strategy continues to be anchored in four pillars. First, customer-centric innovation to drive top-line growth. Second, diversification of our markets and customers, accelerating growth in higher value and markets while extending our reach into Tier 2 and Tier 3 customers. Third, operational excellence. with a continued emphasis on the reliability and resiliency of our manufacturing network and supply chain, including ongoing improvements at our flagship Nosell site. And four, financial strength through a disciplined focus on free cash flow generation, leveraging the balance sheet, and prudent capital allocation. We continue to make progress against these priorities during the quarter. Sulfactant growth was broad-based across our strategic end markets and our Tier 2 and Tier 3 customer base. North America Polymers delivered double-digit growth in rigid polyols and PA, supported by significant growth in our spray foam initiative. We delivered this growth while recovering margin in an inflationary raw material environment, which reflects disciplined commercial execution. Finally, we continue to improve the reliability and resiliency of our manufacturing network. Our flagship Milsil 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 catalysts. Pasadena remains a critical enabler for strategic future growth in specialty acoxalates. Let's move to slide 11 for an update on Project Catalyst. As a reminder, Project Catalyst is our comprehensive plan designed to further optimize our asset base and create a more productive and agile organization to enable balanced growth. The program is expected to deliver approximately $100 million in pre-tax savings over two years, with around 60% of the savings expected in 2026. Savings are ramping up in line with our plan, and we remain on track to deliver the committed savings this year. On footprint optimizations, we completed the closure of our Fieldsboro, New Jersey site and the decommissioning of select assets at Mule Hill and Staley Bridge during the first half. We are consolidating those volumes into more efficient sites within our network. The transition remains on track, and we are delivering the expected savings. We continue to actively evaluate opportunities to further optimize our asset base and manufacturing footprint. This includes identifying additional ways to unlock value and monetize non-productive assets. We will announce future interventions and projects once they are finalized and approved. As part of the organization effectiveness component of Project Catalyst, we announced today a plan to reduce around 100 salary positions across the company. This will be implemented during the third quarter. During the past few quarters, we took a disciplined and deliberate approach to minimize the impact of this action through normal attrition, pausing external hiring, and emphasizing internal talent. We are committed to supporting our affected colleagues through this transition in line with our People First culture. Looking ahead, we are executing a balanced strategy focused on top-line growth, margin expansion, and disciplined cost-out initiatives. We believe we are positioned to continue delivering growth in our key strategic businesses, including crop productivity, oil field, Tier 2 and Tier 3 surfactants, and North America polymers. Despite the ongoing significant market uncertainties and challenges, the organization remains focused on executing our growth opportunities, productivity plans, and cash interventions. With these actions and our strong first half results, we believe we are well positioned to deliver full-year adjusted EBITDA growth, positive free cash flow, and continue the leveraging of the balance sheet in 2026. This concludes our prepared remarks. At this time, we would like to turn the call over for questions. Marvin, please review the instructions for the questions portion of today's call.

Thank you. At this time, we'll conduct a question and answer session. As a reminder to ask a question, you'll 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. And our first question comes from the line of Mike Harrison of Seaport Research Partners. Your line is now open.

Hi, good morning.

Good morning, Mike. Good morning, Mike.

Congrats on a strong quarter. I'm curious, as we look at the surfactants volume up 7% organically and polymers up 5% organically, I believe you referenced that you thought there might be some pre-buying embedded in there. And just looking at those two segment level volume numbers, I'm curious, how much of the volume strength that you saw this quarter do you think was related to pre-buying?

Great question, Mike. Look, so we are very pleased with the volume growth across our three segments, right? and of course, we are significantly pleased with the 74 million of EBITDA. But I want to be very clear that we believe probably between five and 10, so for the midpoint of five to 10 million EBITDA, is the effect of the pre-buying in Q2. So I agree that a couple of points of that is some of the pre-buying that we saw because of the Iran conflict. So call it at 5 to 10, between 5 and 10 million EBITDA from Q3 to Q2.

And then I was hoping maybe you could give a little bit more color on the opportunity in the polymers business for spray foam. I see in the slide deck here that the volumes were up 3x year on year. I understand you started from a relatively small number, but Where do you think that business can go in the next year or two as you presumably pick up some market share and kind of build out your position in that relatively new space?

Look, Mike, great question. And, you know, we are pleased with our initiative on spray foam. We are committed to this market. This is a wide space for us because, I mean, as you know, we were focused on the lamination. are a piece. And this market historically has been very strong and has been growing high single digits. So that's why we really want to participate in it. I'm not going to give you an exact forecast. I will say that I'm pleased with the 3X. Of course, it's a very low base, as you mentioned it. But the important piece here is to have a good portion of the market and grow with the market in the future. We all believe in the next five to ten years, spray foam will continue growing as a market, as it did in the last decade. And we want to participate out of that market growth.

All right, and then just in terms of the raw material environment and what you guys are seeing in pricing, I'm curious if you can help us understand the margin impact that you saw this quarter in both surfactants and polymers related to that raw material versus pricing. Is it possible that we still haven't seen the biggest impact of inflation flowing through the P&L yet, and maybe that's going to be happening in Q3. And I guess in terms of pricing, you mentioned in your comments, Luis, that there was disciplined execution on pass-through mechanisms. And I'm just curious if you've taken a different approach on that pass-through in this inflationary environment than you did a few years ago.

Great question, Michael. No, no, we are not taking any different approach than the past and what our contracts allow to execute. What I would say is that it's a mix of many items. There are things that are going up. There are things that are going down, like coconut oil. We talked about that a lot in the last few quarters, about the escalation of CNO. And CNO actually has come down significantly. So for example, CNO now is 13% lower than Q2 2025. But we saw the escalation in all the other oil-related raw materials. So, and we, of course, we still have inventory at the lower cost. So, at the end, at the end is a mix of things coming down, things going up, and what I would say is I don't think we are in a normal margin situation yet. But of course, oil goes down $10 and then goes up another $10. So we need to see how things normalize in... in Q3 and Q4. But on the other hand, of course, we are committed to improve our margins gradually, and we are committed to continue delivering cost savings so we provide the best value possible to our customers. That's our objective. Our objective is to always provide the best value to our customers. deliver the expected margins and return to our shareholders. So we will continue managing that balance. What I will say again is if you normalize Q2 and Q3, of course, you should expect a slightly lower Q3 versus Q2 because the 74 is inflated with volume and a little bit of margins.

All right. Well, I think you maybe anticipated my last question here, which is just trying to understand some of the puts and takes around earnings or EBITDA as we're thinking about the model for the second half. You mentioned the volume pull forward may have been $5 or $10 million. You know, cost savings and project catalysts probably is improving. Thank you very much.

No, good questions, Mike. As you know, we don't provide full guidance and full forecast. What I will say, again, is the 74, when you think about volumes and margin, we're saying $5 million to $10 million, a little bit ahead of our original expectations for the quarter. Catalyst Savings is a major component of what we are delivering this year. So this year is Volume, Margins, Catalyst Savings. It's not only volumes and margins. Catalyst Savings are playing a huge role We committed $60 million in pre-tax savings and we are delivering the $60 million in pre-tax savings, more than $60 million in pre-tax savings this year. So if you think the ramp up of that, We are in a situation now where we are delivering, you know, $18 to $20 million of savings from Project Catalyst on a quarterly basis. And we believe we can finish the year with all the interventions that we have announced in a, you know, call it a $22 million run rate savings per quarter. That doesn't take you to the full 100 yet, and we need to keep working on it. But the majority of the savings from Project Catalyst are already executed or announced. And we need to keep looking for the other opportunities to get to the full 100 on a run rate basis next year, as we promised, you know, since day one of Catalyst.

All right, thanks very much. Mike, this is Ruben. Maybe just to complement what Liz just said in terms of, you know, what it comes. So clearly in Q2, of course, we have customers looking to secure some raw materials. So that volume improvement, of course, volume helps us with the margins together with discipline and catalysts. That was a major component of the Q2 performance. At the same time, when we look at the future, you know, it's important to recall, you know, we have some maintenance turnaround that's happening in the company around every four to five years, particularly on the polymer side. And that is going to be an impact of $4 million, $4 to $5 million in the second half of the year, those special turnaround. So those are some of the dynamics that we will need to continue to monitor, of course. Uncertainty in raw materials is still there. I mean, it changes on a daily basis, as Luis mentioned. So, we will continue to manage as best as possible a good balance between, you know, the pricing and the raw material dynamics until the end of the year.

All right. Thanks for that additional call, Ruben.

Thank you. One moment for our next question. Our next question comes from the line of Dayton Storms of Stonegate. Your line is now open.

Morning, and thank you for taking my questions. I wanted to circle back to volumes. If I remember coming out of Q1, there was a bit of a timing issue given some of the cold in the US and some challenges in Asia. How much of the volume impact maybe was some of that timing issues getting sorted out in Q2 as well.

Yeah, Dave. So, yeah, you remember correctly in Q1, we mentioned some impacts that we had on a year-on-year basis, timing production in some of our assets in Asia. So, as expected and as we announced, knowing Q2, that reversed a little bit when you look at it on a year-on-year basis, and that's some of the benefits that we are mentioning in the in their release, just higher production in some of our assets in Asia, which creates a timing benefit. Of course, we do not quantify it, but that's a benefit that we saw.

Very helpful. Thank you. I appreciate that. And then I did want to ask maybe one more little one around the pre-buying. Volatility isn't necessarily coming down. Do you think that there's more, or are you seeing any more pre-buying in Q3, or do you believe that that should be pretty strictly isolated to Q2?

No, good question, Dave, but we need to see how things, of course, develop with all the uncertainty on geopolitical. As you know, I mean, the key question here is, are we going to go back to just in time? or are we going to continue in a just-in-case environment, right? Remember, before COVID, everybody managed their inventories and their logistics on a just-in-time basis. And when COVID hit, everybody moved to a just-in-case scenario. We are kind of in the middle of that right now. It is not the COVID and the pre-buying and the inventory stocking that we saw during the COVID times. But of course, people are scared about the raw material availability and people want to secure their business. So I think we are in a mix of just in time and just in case. I think it's still there and we'll see how long that mix of just-in-time and just-in-case continues. But for sure, it may take a few more months based on the conflict in Iran and all of that.

That's great commentary. I appreciate it. If I could sneak in here just one more. You had another strong quarter on Thank you for joining us today.

Yeah, absolutely. So we continue to be very disciplined with our capital allocation, and effectively during Q2, of course, given the raw material increases and given the increased sales, we did have an important investment in working capital of around $58 million. So that, of course, impacted our Q2 cash flow. On the other hand, of course, cash flow operations, when you exclude those net working capital, impact is strong because we had margin improvement, so that is going well. and we will continue to allocate capex in the best way possible to make sure that we optimize and that we get the right balance for cash. Cash is a priority. It has been a priority and it will continue to be a priority moving forward. You see how our leverage ratio has been improving consistently and we plan to continue having that trend on our debt.

Understood. Thank you for the commentary and good luck in third quarter. Thank you.

Thank you. One moment for our next question. Our next question comes from the line of David Silver of Equity Research Analysts. Your line is now open.

Thank you, Freedom Capital. I did want to maybe just ask for a little more color about your surfactants results this quarter. and in particular, it seems like a favorable product mix played a pretty significant role. Could you maybe just comment on progress in, I'll just call it your functional surfactants, so oil field, agriculture and other incremental end markets. Maybe just some color about the mix improvement there and in particular focused on your surfactant segment.

And David, happy to hear you. Look, we had a great performance in our surfactant business across many, many regions. It was not one. But of course, North America surfactants is our biggest business and continues and started to deliver significant growth and improvement. And when you think about the North America surfactant business, let me give you a very interesting statistic here. In the first half, we had 500 new customer product combinations. 500 new when you think about, you know, between new customers and new product with existing customers. That is driving very strong double digit growth in our tier two, tier three segment within surfactants. We are growing double digit as well in oil field. We grew significantly in Q1 in ag. We grew low single digits in Q2. I'm sure you have read all the challenges in the market with fertilizers and all of that because of the conflict in Iran. So that took the market a little bit down. But despite all of that, we were able to continue growing and our Ag business. So we are very pleased with our focus areas growing exceedingly well in functional, Ag, oil field, construction and industrial solution, and then growing significantly in Tier 2, Tier 3, especially, you know, H&I and I, so industrial cleaning with all those Tier 2, Tier 3 customers.

Okay, great. Thank you for that. And then I did just want to ask a question about the stage of development or progress with Pasadena. So the unit's been, I guess, mechanically complete for some time now, but there had been a kind of a series of startup costs and incremental expenses as that facility was ramping up. As of June 30, or as we sit here today, how close to full utilization or how close to targeted operating efficiency are you at Pasadena regarding your big new capital expansion project?

Sure, we are extremely happy with our team in Pasadena. They have done an outstanding job, you know, starting up the site, ramping up production, safety has been outstanding, you know, More than 10 years without any safety incident in Pasadena. With all the start-ups, we had more than 600 contractors at a point in time and no incidents. So we're extremely pleased with what the team has done. And when you think about the ramp-up in production and savings, we said in the prepared remarks that we are ahead on the polling savings that we were projecting for this year. Mostly because of mix of products. And when you think about the ramp up in production, we are almost 80% there. So between 75 and 80%. So we still need to inch up the production levels in the site in 2027. but we are already pretty full and of course we will make it 100% full in the next few quarters.

Okay, great. Thank you. I appreciate the call.

Thank you, David. David.

Thank you. This concludes the question and answer session. I'll now turn it back to Luis for 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 day.

Thank you for your participation in today's conference. To conclude the program, you may now disconnect.