Stepan (NYSE:SCL) is in the early stages of a margin recovery, supported by growth in higher-margin product areas, cost reductions and broader-based volume gains, Chief Financial Officer Ruben Velasquez said during a company presentation.
Velasquez said second-quarter EBITDA increased 45% year over year, while organic volume rose 6%. He described the volume performance as broad-based across geographies and most of the company’s priority growth segments rather than the result of activity from a single customer.
Strategy Focuses on Higher-Margin Markets
Velasquez said Stepan’s strategy centers on customer-focused innovation, diversification into faster-growing and higher-margin applications, operational excellence and disciplined capital allocation.
The company is seeking to expand in what it calls priority segments, including crop productivity, oilfield solutions, rigid polyols used in insulation panels, and smaller tier 2 and tier 3 customers that require more tailored technical support. Velasquez said roughly 75% of Stepan’s EBITDA now comes from these priority segments.
While legacy consumer customers remain important to plant utilization and sales volumes, the company is aiming for a more balanced customer mix. Velasquez said the company does not plan to divest lower-margin legacy consumer business, citing longstanding relationships with large consumer-product companies and continued innovation opportunities with those customers.
Stepan employs about 230 scientists globally and operates 14 application centers, Velasquez said. The company launched 41 products last year, and new products account for roughly 10% of annual sales.
Oilfield and Insulation Opportunities
Priority segments, including oil and gas, posted high-single-digit growth in the second quarter, Velasquez said. He attributed demand in oilfield chemicals partly to producers’ interest in extracting more oil from existing reservoirs, particularly when oil prices are elevated.
Stepan’s surfactants can be used in secondary recovery applications, where chemicals are used with water or gas to help oil flow from reservoirs. Velasquez said the company is also working with smaller oil companies to develop surfactant formulations suited to specific fields. That development work can take several months, but he said resulting business tends to be more durable once a formulation is adopted.
In Polymers, Stepan is a market leader in polyiso insulation products for industrial buildings, while its rigid and spray-foam activities are growing from a smaller base. Velasquez said the rigid and spray-foam business, which serves residential applications, grew threefold in the second quarter. He cited energy conservation and insulation needs as long-term drivers, while acknowledging that construction conditions remain soft in some markets.
Project Catalyst Targets $100 Million in Savings
Stepan’s Project Catalyst cost-reduction initiative is intended to generate $100 million in savings over two years, with 60% expected in 2026 and 40% in 2027. The program includes footprint optimization, operational efficiencies and organizational changes.
As part of the effort, Stepan completed the closure of a legacy site in New Jersey at the end of the first quarter, closed certain units at facilities in Illinois and the U.K., and announced a reduction of 100 roles. The company is moving some production to more efficient plants, including its alkoxylation facility in Pasadena, Texas.
Velasquez said Pasadena is expected to reach average utilization of 80% by year-end as Stepan shifts volume from less-efficient plants and brings certain previously outsourced production in-house. He said the company had already realized $18 million to $20 million of the initiative’s expected $25 million quarterly run-rate improvement in the second quarter.
He cautioned that the full $100 million of Catalyst savings will not all reach the bottom line, because some savings will offset inflation and some will be reinvested in growth areas.
Cash Generation and Balance Sheet Remain Priorities
Velasquez said Stepan has reduced net leverage to about 2.5 times from roughly 3 times previously and intends to continue deleveraging while maintaining flexibility for future investments. Capital expenditures are expected to normalize in a range of $100 million to $110 million after a period of larger investments, including the Pasadena facility.
The company invested about $58 million in working capital during the second quarter, driven by higher receivables associated with organic volume growth and inventory purchases intended to secure material supply. Despite that investment, Velasquez said Stepan expects to finish the year with positive cash generation.
He also said the company estimates that customer pull-forward activity contributed approximately $5 million to $10 million of EBITDA in the second quarter. Even excluding that effect, he said, Stepan’s EBITDA and volume growth remained significant and broad-based.
About Stepan (NYSE:SCL)
Stepan Company is a global manufacturer of specialty and intermediate chemicals, primarily known for its development and production of surfactants and related specialty products. The company’s portfolio includes a wide range of ingredients used to enhance the performance of consumer and industrial formulations, such as emulsifiers, foam control agents, odor control agents, antimicrobial products and performance additives. These products are integral components in cleaning solutions, personal care items, agrochemical formulations, coatings, oilfield treatments and polymer systems.
Serving a diverse set of end-markets, Stepan’s offerings address both consumer-facing and industrial applications.
