Earnings Call Transcript - SCL Q1 2026

Operator, Operator

Good morning, and welcome to the Stepan Company First Quarter 2026 Earnings Conference Call. The operator provided instructions on how to ask questions. As a reminder, this call is being recorded on Tuesday, April 28, 2026. It is 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.

Ruben Velasquez, Vice President and Chief Financial Officer

Thanks, Victor. Good morning, and thank you for joining Stepan Company's First 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 and free cash flow, 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.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 contained therein helpful. With that, I would like to turn the call over to Mr. Luis Rojo, our President and Chief Executive Officer.

Luis Rojo, President and Chief Executive Officer

Thank you, Ruben. Good morning, and thank you all for joining us today to discuss our first quarter 2026 results. I plan to share highlights of the quarter's performance and provide an update on our key strategic priorities, while Ruben will provide additional details on our financial results. Before reviewing the quarter, I want to recognize our teams around the world for their continued commitment to safety and operational excellence. Safety remains our top priority and the foundation for everything we do at Stepan. That focus was evident as we delivered the strongest safety performance on record during the first quarter of this year. Congratulations, team. Q1 2026 was an important quarter of execution for Stepan. We advanced our footprint and asset base optimization efforts, delivered net sales growth in a challenging macro environment and continued to generate strong volume growth across our strategic end markets. Organic net sales were up 4% year-over-year. Organic volume was flat with double-digit growth in Crop Productivity, Oilfield, Industrial Cleaning and in our Tier 2, Tier 3 customer base. This was offset by continued soft demand in European Polymers. Adjusted EBITDA was $50 million, down 14% versus the prior year, reflecting lower Surfactant results due to lower absorption and production timing issues in Asia, competitive pressures in Mexico, the impact of the U.S. cold snap and continued pressures from elevated oleochemical input costs. Polymers delivered an 8% increase in adjusted EBITDA, driven by 5% volume growth in North America and global margin improvement, which was partially offset by continued softness in Europe. Specialty Products delivered volume growth of 30%, reflecting strong demand and new business with our MCT product line. EBITDA was slightly down due to product mix and lag on raw material prices. We continue to execute Project Catalyst safely on time and on budget. These actions demonstrate our disciplined approach to cost optimization while ensuring we maintain the capabilities needed to serve our customers and deliver balanced growth across our higher value end markets. We remain committed to a balanced approach with capital allocation. During the first quarter, the company paid $8.9 million in dividends to shareholders. Consistent with our longstanding commitment to shareholder returns, our Board of Directors declared a quarterly cash dividend of $0.395 per share. Last year, we increased our dividend for the 58th consecutive year. This track record underscores our confidence in Stepan's cash flow durability and long-term outlook. With that, I will turn the call back to Ruben to walk you through the financial details for the quarter.

Ruben Velasquez, Vice President and Chief Financial Officer

Thank you, Luis. My comments will generally follow the slide presentation. As shared in our first quarter 2026 results release, reported net loss for the quarter was $41.4 million or $1.81 per diluted share versus reported net income of $19.7 million or $0.86 per diluted share in the prior year. The current year reported results include a $65.4 million pretax restructuring charge or $51.2 million after tax related to the previously announced closure of our Hillsborough, New Jersey site and the decommissioning of select assets at our Millsdale, Illinois and Stalybridge, United Kingdom facilities. The cash impact associated with this restructuring charge was less than $1 million during the quarter. Slide 3 summarizes our first quarter 2026 performance. Adjusted net income was $10.3 million or $0.45 per diluted share, down 47% versus adjusted net income of $19.3 million or $0.84 per diluted share in the first quarter of last year. The decrease in adjusted earnings was largely due to lower Surfactant earnings and higher interest expense. Consolidated EBITDA was $49.6 million compared to $57.5 million in the prior year, a 14% decrease. The decline was primarily due to Surfactant earnings driven by lower absorption and production timing differences in Asia, competitive pressures in Mexico, the severe cold snap in the U.S. and higher oleochemical raw material costs still working through our P&L. This was partially offset by strong polymers performance where adjusted EBITDA grew 8% versus the prior year. Cash from operations was $17 million for the quarter, and free cash flow was negative $14 million, driven by higher working capital requirements, which are typical during the first quarter of the year. We remain focused on deleveraging the balance sheet and maintaining our disciplined capital allocation. Slide 4 shows the total company pretax income bridge for Q1 2026 compared to Q1 2025. Because this is a pretax view, the figures shown reflect operating performance before the impact of income taxes. First quarter pretax income declined year-over-year, primarily driven by lower Surfactants operating income and lower capitalized interest income. These headwinds were partially offset by improved Polymers performance and a favorable effective tax rate. Important to note, the higher interest expense reflects lower capitalized interest income associated with the start-up of our Pasadena, Texas site. Importantly, several of these drivers, including higher depreciation and the declining capitalized interest associated with Pasadena start-up had no cash impact compared to the first quarter of last year. Slide 5 shows the total company adjusted EBITDA bridge for the quarter compared to last year. Adjusted EBITDA was $49.6 million, down $8 million versus the prior year. I will cover each segment in more detail, but overall, Surfactants and Specialty Products were down, partially offset by Polymers growth. Unallocated corporate expenses were higher due to normal inflation. Turning to Surfactants on Slide 8. Net sales were $454 million, up 8% on an organic basis. Selling prices were up 2%, primarily due to the pass-through of higher raw material costs, improved product and customer mix as well as pricing actions. Organic volume was up 2%, driven by double-digit growth within the Crop Productivity, Industrial Cleaning and Oilfield end markets. We also grew double digits in our Tier 2 and Tier 3 customer segments. The Surfactant business achieved volume growth in all global regions, except Asia. Foreign currency translation positively impacted net sales by 5%. Surfactants adjusted EBITDA for the quarter decreased $7 million or 15% versus the prior year, driven by North America and Asia down $5.6 million. The majority of this decrease was due to lower absorption and production timing differences in Asia. This P&L impact has no effect on free cash flow and represents a one-time event that we expect to recover in future quarters. The cold snap in the U.S. and higher input costs complemented North America and Asia EBITDA reduction. Latin America performance was negatively impacted by the competitive environment and high raw material prices in Mexico. Europe and Mercosur continue delivering solid performance anchored in our Crop Productivity franchise. Moving on to Slide 7. Polymer net sales were $130 million, an 11% decrease. Selling prices decreased 8%, primarily due to the pass-through of lower raw material costs and competitive pressures. Volume decreased 6% in the quarter. Volume in North America was up 5%, driven by Spray Foam and commodity Phthalic Anhydride growth. This was more than offset by a double-digit decline in Europe, driven by ongoing global macroeconomic uncertainty and a depressed construction market. Foreign currency translation positively impacted sales by 3% during the quarter. Polymer adjusted EBITDA increased 8% versus the prior year, primarily due to North America growing Spray Foam and commodity Phthalic Anhydride and global margin improvement. Specialty Products net sales were $21 million, a 24% increase versus 2025, primarily due to higher volume. Volume was up 30%, reflecting continued growth in our MCT product line. Specialty Products adjusted EBITDA decreased slightly due to product mix and the lag in raw material prices, which we expect to recover in future quarters. Now turning to Slide 8. Free cash flow generation remains a key focus across the organization. Cash from operations was $17 million in the first quarter and free cash flow was negative $14 million, reflecting typical first quarter working capital build. Capital expenditures were $31 million in Q1. Now turning to the balance sheet. We ended the quarter with a net debt of $511 million and a leverage ratio of 2.7x, which is lower than in Q1 2025. With that, I will turn the call back to Luis to discuss our strategic priorities and our progress on Project Catalyst.

Luis Rojo, President and Chief Executive Officer

Thanks, Ruben. I will provide a brief update on our strategic priorities before turning to the progress we're making on Project Catalyst. Our strategy continues to be anchored in four key pillars: First, continue focusing on customer-centric innovation to drive top line growth. Second, our diversification strategy, which is accelerating growth in higher value end markets while extending our reach into the Tier 2, Tier 3 customer segment. Third, we remain committed to operational excellence across our supply chain operations with a continued emphasis on strengthening the reliability and resiliency of our manufacturing network, including ongoing improvements in our flagship Millsdale site. Finally, we're strengthening our financial position through a disciplined focus on free cash flow generation, deleveraging the balance sheet and prudent capital allocation. During the first quarter, we continued to see momentum in our strategic end markets. We delivered double-digit volume growth within our Crop Productivity, Oilfield, Tier 2 and Tier 3 and Industrial Cleaning businesses and delivered volume growth in all Surfactant regions except Asia. Polymers delivered strong volume growth in North America. Specialty Products grew volume by 30%, reinforcing the strategic value of our MCT product line. These results validate that our strategy is working and that our diversified portfolio continues to create value for customers and shareholders even in a challenging macro environment. We also continue to ramp up our Pasadena, Texas facility, which is a critical enabler for strategic growth in specialty alkoxylates. We continue to expect Pasadena to reach approximately 80% utilization on average in 2026 and full utilization in 2027, which will drive supply chain savings and support future volume growth. Let's move now to Slide 10. Turning to Project Catalyst. I'm pleased to share that we have measurable progress. As a reminder, Project Catalyst is a comprehensive plan designed to further optimize our asset base and create a more productive, agile and accountable organization to enable growth. The program is expected to deliver approximately $100 million in pretax savings over the next two years, with around 60% of the savings expected in 2026. We are on track to deliver the committed savings this year. Project Catalyst is not a short-term cost reduction program alone. It is a strategic transformation designed to enhance the competitiveness of our cost base while preserving customer service and growth flexibility. During the first quarter, we executed our plans to close our Hillsborough site and decommission selected assets at our Millsdale and Stalybridge facilities. While these decisions are never easy, they are the right actions to consolidate our network into more competitive and productive assets while responding to the structural changes and market demands we continue to see in the global commodity consumer end market. The program continues to be built around three core value levers. First, footprint optimization, which includes the exit of underutilized or higher cost assets and improved utilization of our most competitive sites, including the ongoing ramp-up of Pasadena. Second, operational efficiency and cost optimization, including procurement savings and productivity improvement across our manufacturing and logistics network. Third, organizational effectiveness, where we are clarifying accountabilities, streamlining decision-making and aligning resources more tightly to our growth priorities. Today, we announced that we have entered into an agreement to sell nonproductive assets, especially land at our Millsdale site for $30 million. These transactions align with our focus on strengthening the balance sheet. We expect the transaction to close in the fall of 2026 after all due diligence and regulatory items are clear. We continue to actively evaluate opportunities to further optimize our asset base, organizational structure and operating model. These include identifying additional ways to unlock value and monetize nonproductive assets. Looking ahead, we are executing a balanced strategy focused on top line growth, margin expansion and disciplined cost-out initiatives. While we continue to navigate a dynamic macro and geopolitical environment, including a significant shock in the energy market, global tariffs, raw material volatility and uneven demand across our end markets, we remain confident in our path forward. With the continued execution of Project Catalyst, strong momentum in our strategic end markets, the ramp-up of Pasadena and a disciplined approach to capital allocation, we believe we are well positioned to deliver adjusted EBITDA growth, generate positive free cash flow and deleverage the balance sheet in 2026. This concludes our prepared remarks. At this time, we would like to turn the call over for questions. Victor, please review the instructions for the questions portion of today's call.

Operator, Operator

The operator provided instructions for the question-and-answer session. Our first question will come from the line of Mike Harrison from Seaport Research Partners.

Michael Harrison, Analyst, Seaport Research Partners

I wanted to say congratulations to the team on the safety achievements there. That's very important. I wanted to maybe just start with a couple of questions about — obviously, the Iran war is top of mind for investors right now. And I specifically wanted to understand what are you seeing in terms of raw material impact since the war began? Are you able to push through some higher pricing in response to higher raw material costs? And are there any situations in which you're encountering shortages or other difficulties in procurement?

Luis Rojo, President and Chief Executive Officer

Great questions, Mike. Of course, our raw materials depend a lot on the oil supply chain, and we are seeing escalation in raw material inflation. The good news is, as you know, we have a good process. We have a lot of pass-through contracts, and we have a disciplined process of increasing prices as well. In most of the businesses, we have been very successful in passing through the price increases in line with the raw material inflation. So that's working through the system. We see the whole market going up. It's not only us; it's the whole market going up, which gives us confidence that pricing will be sticky — more in some places than others, for sure. But in general, we feel pretty good. Raw material availability will continue to be a challenge because there are certain supply chains that are heavily impacted by the conflict in Iran, and there are some shortages in raw materials. The reality is that we could be growing faster than what we're growing now, but we don't have all the raw materials that we need. On the other hand, we have good contracts with our suppliers, everybody's hands on deck, and I think we're getting a fair share of what is needed. We will continue working with our suppliers to ensure that we can grow faster in the current environment.

Michael Harrison, Analyst, Seaport Research Partners

All right. Well, you kind of addressed a little bit my second question, which is related more to the demand impacts of the Iran war across your three segments. It sounds like you're saying you could have grown a little bit faster if not for maybe some inability to get key raw materials or supply. I'm curious, though: I would think that Stepan is relatively better positioned than some of your smaller or more regional competitors in terms of your ability to get inputs and raw materials. So maybe just talk a little bit about how you're expecting — obviously, consumer demand or consumer sentiment is a little bit weaker here. But are there situations where you might be able to pick up some market share because competitors simply don't have supply in certain product lines or certain regions?

Luis Rojo, President and Chief Executive Officer

No, for sure, Mike. You are right that we have the scale to win, especially in Tier 2 and Tier 3, which is a key segment that we keep focusing our resources on. We have the opportunity to keep growing in those segments. The consumer is still resilient. The consumer is still spending, and we haven't seen any demand issues from the consumer side. You have seen other companies reporting Q1 with volumes and pricing still pretty healthy. So we feel good about where we are right now. Things are changing every week and every month, and many are not providing very long-term guidance because of the volatility and uncertainty of the current situation. But when you think about Q2 where we have more visibility, we feel pretty good about our plan and our ability to grow in this environment.

Michael Harrison, Analyst, Seaport Research Partners

All right. Within the Surfactants business, particularly, you listed out a handful of issues that sounded like were negative to earnings and margins in the quarter. I was hoping you could provide a little bit more detail in terms of maybe helping to quantify these impacts and helping understand how those impacts are trending into the second quarter and the rest of the year. You mentioned lower absorption and some production timing issues in Asia. Is that something that was temporary in nature? Or is that something that's going to continue to be an issue for the rest of the year?

Luis Rojo, President and Chief Executive Officer

Great question, Mike, and it's temporary. We were clear that some items in Q1 are noncash and one-time in nature. For example, we had lower absorption, both in Asia and in North America, especially at the beginning of the quarter with the cold snap in the U.S. We expect some of that to reverse in future quarters. When you think about it, we're comfortable noting the 8% EBITDA growth in polymers, but the key issue in Q1 was the Surfactant business. When you think about the $7 million reduction in EBITDA in Surfactants, we should be able to recover at least half of that in the following quarters with timing and production normalization. That's why we view this $50 million EBITDA as not fully representative of the company's true performance.

Michael Harrison, Analyst, Seaport Research Partners

I guess just to finish up on that question about Surfactants and the margin pressure. What about the competitive pressure in Mexico and the higher oleochemical costs? Is that something that should improve as the year goes on? Or is that something that could be a lingering headwind?

Luis Rojo, President and Chief Executive Officer

Good point, Mike. We talked a lot about coconut oil (CNO) in the last few quarters because the delta between CNO and palm kernel oil (PKO) was significant. CNO reached levels that were unprecedented relative to PKO. The situation now is that prices are more similar, which helps the overall pricing environment. We still have some of the high CNO raw materials working through our P&L, but the pricing actions we are executing now should be more sticky because of the relationship between CNO and PKO. That should help margin improvement in the Surfactant business in Q2 and going forward.

Michael Harrison, Analyst, Seaport Research Partners

All right. And then last question I had is just on the Polymers business. Just curious for a better understanding of what drove the margin improvement there. I know you're calling out some spray foam volume, and I'm curious if that's contributing to better margin and mix. And really just trying to get a sense of whether we should expect continued margin expansion year-over-year in Polymers as the year goes on.

Luis Rojo, President and Chief Executive Officer

Our Polymers business is heavily influenced by the base we had in Q1 2025. You can see in the bridge how our European business is under pressure because construction demand is very soft. North America improved compared to a low base in Q1 2025. We saw growth in Spray Foam and commodity Phthalic Anhydride. The lamination market is flatter with construction still weak and higher interest rates. We are growing significantly in spray foam, which is a strategic priority for us, and we're improving our position in PA. We do not expect the lamination market to be significantly higher this year based on customer projections, but we expect to come out of the European situation a little stronger in the second half.

Operator, Operator

Our next question will come from the line of Dave Storms from Stonegate.

David Storms, Analyst, Stonegate

You mentioned in your prepared remarks that you're seeing growth in Tier 2, Tier 3 customers in Surfactants. Just curious as to what's working here, how sustainable it is, and what's the outlook going forward?

Luis Rojo, President and Chief Executive Officer

We continue to invest in this customer base as a strategic effort. We provide not only a product but also formulation support and problem solving. Many private label and value brands are growing share versus branded products in certain categories, particularly in the U.S. We help these customers achieve their targets, so it's a strong business. We're growing double digits. It's more than a product; we offer other elements that help us win in that space.

David Storms, Analyst, Stonegate

Another one for me: I know we spent time talking about the Iran war, but are there any impacts on agriculture specifically? I know this time of year we start thinking about that. Are you seeing any significant second-order effects from the Iran war as it pertains to the ag line?

Luis Rojo, President and Chief Executive Officer

Not really. As we said, we're growing double digits in Crop Productivity, which continues to be a key strategic area. We don't see an impact. The planting season in the U.S. is mostly executed, and we sold what we needed for the planting season. Brazil's season is starting now and is going well. We had great results in Mercosur. Our innovation program and new product launches with large agricultural companies are delivering very strong growth. We'll continue to monitor for 2027, but so far the ag business is performing well.

David Storms, Analyst, Stonegate

Great to see Project Catalyst is still on track. You gave a breakdown of cadence for 2026 versus 2027. Are there any nuances we should be aware of in quarterly cadence, or is it more a linear step-up through the year?

Luis Rojo, President and Chief Executive Officer

You'll start to see the majority of the savings from Project Catalyst now in Q2. We executed the footprint decisions at the end of March and beginning of April, so the bulk of the savings begin to ramp in Q2 versus Q1. The 60% that we're delivering this year is starting now, and a portion of that will cover inflationary pressures, but the majority of the savings are coming online this year.

Operator, Operator

Our next question will come from the line of David Silver from Freedom Capital Markets.

David Silver, Analyst, Freedom Capital Markets

I wanted to follow up on some of Mike's earlier questions and focus on demand. Apart from the very near-term geopolitical issues, the consumer generally has been under pressure. From your order book, could you talk about the health or trend in demand for your traditional book of business? You've invested in upgrading your product mix, including 1,4-dioxane-free products. Are you seeing the uptake on those products you anticipated? Or are we seeing a trading-down phenomenon from cost-conscious consumers? How are you looking at demand for your traditional portfolio and the value-added component of your business mix?

Luis Rojo, President and Chief Executive Officer

The consumer remains resilient and is still spending. We have seen some trade down in certain categories, which is why private label is growing faster than branded products in some areas, but that's not negative for Stepan. We serve Tier 2 and Tier 3 customers and many value businesses. We see opportunity in private label and lower-priced brands to grow, and our portfolio supports that. Overall, what we see is not radical and is not hurting Stepan's portfolio. Uptake on value-added products is proceeding, and our investments in product upgrades remain important.

David Silver, Analyst, Freedom Capital Markets

I wanted to ask about the Oilfield portion of Surfactants. My sense is demand should be strong going forward, particularly domestically. Could you discuss your positioning there and the medium-term opportunities to benefit from stronger drilling activity or increased demand for products that improve well productivity?

Luis Rojo, President and Chief Executive Officer

Yes. Oilfield is one of our strategic priorities, and we are growing double digits in that segment. Our oilfield business is not large, so growth opportunities are significant. In the U.S., the dynamic is often not about more drilling but about improving yield from existing wells. That requires more or better surfactants to improve productivity of current wells, and that's where our chemistry plays a role. We see continued demand to get more from existing assets, and local production in the U.S. is advantageous in the current environment.

David Silver, Analyst, Freedom Capital Markets

One last question on capital spending projections for this year. The midpoint of your 2026 forecast for CapEx is around $100 million. Can you remind me what the sustaining portion of that might be? And where is Stepan devoting discretionary CapEx this year beyond sustaining spending? Where is that incremental CapEx focused?

Ruben Velasquez, Vice President and Chief Financial Officer

David, yes. In the slides, we mentioned our range for CapEx, which is $105 million to $115 million. We continue to invest in CapEx as a priority for the company. We are fully committed to ensuring our operations operate safely. Much of this CapEx goes into our Surfactants operations and manufacturing to ensure plants run safely and reliably. We have been in the range above $100 million in recent years, and we will continue to prioritize investments into operations and supply chain. There is some CapEx for growth, but a significant portion targets operating safely and maintaining capabilities in our plants and supply chain.

Luis Rojo, President and Chief Executive Officer

Let me add: as we've discussed previously, approximately 75% to 80% of our typical CapEx is for base reliability and infrastructure. We have growth projects, IT and other investments within the total CapEx forecast, and we will continue with projects that show the right returns. The normal CapEx for the company without a major incremental growth item is around $100 million or less.

Operator, Operator

This concludes the question-and-answer session. I would now like to turn it back over to Luis for closing remarks.

Luis Rojo, President and Chief Executive Officer

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

Operator, Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.