Stepan Co. 2026 Q3 Earnings Call

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.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 the 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 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. Surfactant adjusted EBITDA was up 27%.

Polymers grew single digits, including one-time maintenance turnaround costs at our Germany site. 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 double the prior year. 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. 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 a strong double digits. 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 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 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 sites, 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.

Thank you, Luis. 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 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 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 seven 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 eight, 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 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 nine, 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 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, as North America's strong volume growth in rigid polyol, spray foam, and phthalic anhydride more than offset the five-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 margins. Specialty Product 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 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. Through 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 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% 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.