Welcome, everybody. We have a great company with us here today, Stepan, and I'd like to introduce, oh, gosh, I'm not on the right page. We have Ruben Velasquez, CFO of the company. Thank you.
Thank you. Can you guys hear me fine? Perfect. Well, thank you very much for being here. I am Ruben Velasquez, CFO for Stepan Company. I joined the company a year ago. Before that, I worked 18 years at 3M Company in the headquarters in Minnesota. Before that, 10 years in the oil and gas industry. Originally from Colombia. That's why you may judge a little bit of my accent. Okay, so now in the next few minutes, I want to share Stepan with you. If there is one thing that I want you to maybe remember from the next few slides, it's Stepan is a 90-year-old company, specialty and intermediate chemicals. I would say, we are in the early innings of margin recovery. Our Q2 was a testament of that. Our EBITDA grew 45%.
What I want to do today is give you a little bit of taste of what are the drivers of that growth, and what are some of the main components of our Stepan strategy. Of course, the obligatory reminder, I will be making some forward-looking statements. So, of course, some of the things may not happen, but I'll give a few seconds for you to read this on your own. Perfect. You guys read fast. Okay, and this is not the deck. Oh. I think that this is not the deck. No? I'm so sorry, guys. Okay. Maybe. Yeah. Okay. Maybe that's why it was showing April instead of August.
Because there were two.
Yeah.
There were two, so
Okay. Okay.
There you go.
Perfect.
There's August.
At one point in time, I thought that we were in April, but no, we are in August. Okay. For those of you who are maybe new to the Stepan story, so 90 years in the market, a leader in production formulation of intermediate and specialty chemicals. We serve diverse markets.
Mainly, our three lines of products are basically Surfactants, Polymers, and Specialty Products. When you think of the markets that we serve, if you think of our Surfactants business, it's mostly going into the consumer end segments. Yeah, so Surfactants, the ones that clean, the ones that generate the bubbles. I know many of our large customers are the big consumer companies of the world that use Surfactants in their cleaning products. Then Surfactants also go into the oil field services, and I will elaborate a little bit more on this further on. Then we have some construction and industrial applications.
And then within the personal care segments, everything like shampoos and cleaners, and a lot of laundry products as well. The Polymers business, that is around 25% of our total sales. Our Polymers business basically go into, it is the Polymers that go into these flat panels. The flat panels go mainly into the industrial applications like buildings. Then we have another application that is spray foam. Spray foam is what you probably see in your residentials because it basically goes into residential. Then we have Specialty Products that go mostly into some segments like beverages, nutraceuticals, and pharmaceuticals, so food industry and pharma. A little bit about our footprint. We have a global scale. We have 19 facilities across 11 countries, so we have a large presence. At the same time, we have a regional strength, meaning most of our facilities are located close to customers.
And I think that in today's world, this is a big advantage. We are not needing to freight product and send product across the continents and crossing oceans. It is more of a regional self-supply type of supply chain. Okay, let us get a little bit more into our sales and EBITDA. There you can see the pie on the left is the net sales and then the EBITDA. Then you can see how much is Surfactants, how much is Polymers, and how much is Specialty Products. You can see that Surfactants is the largest business with 70% of sales. But from an EBITDA perspective, it is only 60%, while for example, Specialties is a small component of our sales, but a significant portion of our EBITDA. These six segments that you see in the bottom, this is basically what determines our day-to-day decisions.
These are the six places where we want to be. The reason why we want to be in those segments is because if you look at what are the drivers, the market drivers for those end segments, those are things that are permanent, are needs, are not nice to haves. When you think of crop productivity, it is about food security, it is about sustainability. Chemicals is about energy. The oil field is about energy efficiency. A lot of what we do in the personal care is about wellness, it is about energy conservation. So these are things that are there, that stick, that we do not expect that. It is not a fashion that happens in a year or two. It is something that tends to stick, and it is needs from our customers and people in general.
Okay, let me get a little bit into the strategy story for Stepan. We have four main pillars. The main goal is, of course, to deliver superior total shareholder return. Let me start with the customer-focused solutions, because this is a very important piece of our strategy. We have innovation. We develop applications with our customers. This is a very significant component of how we grow. So it is connected to the diversification pillar that I will explain. We want to make sure that every dollar that we invest in innovation is targeting a need from a customer. I come from 18 years of experience in an innovation company like 3M, with unlimited budgets for innovation. And you can see how sometimes scientists love to develop a lot of new products that are super good, but sometimes product that nobody uses or needs.
At Stepan, we want to make sure that every investment in innovation is targeting a customer need and is targeting an application for a customer. That actually connects to the diversification strategy that I am mentioning. If you look at Stepan in the past or for many years, let's say, at the core customers and the core volumes have been going into these large consumer companies that go into consumer end segments. Those are still the core of the company. At the same time, we want to shift into faster-growing, better margin type of end segments. So that's why we call our diversification strategy, and that means going into what we call functional segments. That is basically oil field services and agriculture. It is also customers, what we call tier 2 or tier 3.
These tier 2 and tier 3 customers are customers we know with maybe smaller compared to the large consumer tier 1 customers, but customers that really need Stepan's technology, Stepan's innovation, customers that want to sit with us, work for a few months, develop an application. Then, once the chemistry of Stepan gets into a product of a customer, then it's a completely different dynamic. It's a specialty. It's something that the customers value, is more sticky, and it's a place where we, of course, can have better margins. So that's why we have purposely moved our strategy to make sure that we grow in faster segments and also higher margin segments. That is actually working nicely.
If some of you may have had the chance to look at our Q2 results, a lot of our growth is really coming from what we call the priority segments, priority growth segments. Which, in other words, when you think of priority for Stepan segments, it's like whatever is non-Surfactants commodities. It's working. Just to give you maybe another quick perspective, around 75% of our EBITDA generation is now coming from these priority segments. Of course, from a sales perspective, still the volumes going into the consumer world are very significant. But from an EBITDA perspective and margin generation, this shift into tier 2, tier 3, and functional products is helping. Then operational excellence, of course, as every company, that's our key initiative. I will elaborate more in a further slide when I will talk about Project Catalyst. Then financial strength.
We have been purposely making sure that we have a very disciplined capital allocation, that we continue to deleverage the balance sheet. Right now, our leverage, it's around 2.5x, coming down from around 3x that we were before. It's not that we are concerned with the 2.5x, but we want to continue to go down. We want to make sure that we have enough flexibility to invest in the future if we need to. But for now, the strategy continues to be EBITDA generation in fastest growing and higher margin segments, and then deleveraging the balance sheet with efficient capital allocation. Okay. I will go faster into these ones. It's more related to our customer-focused solutions, what I said before.
We want to make sure that we embed our technical expertise into the customer needs so that we are developing exactly the products and the applications that the customers need, nothing else. Just some numbers related to innovations. We have around 230 scientists around the globe working on these customer-focused solutions with 14 application centers. Last year, we launched 41 new products. Just to have a perspective at Stepan, around 10% of our sales every year are coming from new products. Diversified growth. This is what I was telling before. If you look at the top section of the slide, those are our priority segments. So crop productivity, that is agriculture, oil field solutions, the Rigid Polyols, that is the flat panels for insulation, and then other growth drivers that are tier 2 and tier 3 customers.
Again, these smaller customer, medium to smaller customers that like Stepan's capabilities to develop with them any application that they would need. While in the bottom, and I already mentioned some of this before, in the bottom, you can see what is the contribution in terms of EBITDA for those priority segments versus the legacy consumer segments. What I mentioned before, although, for example, the Surfactants commodity are 52% of the volume and 43% of the net sales, it is only 20% of EBITDA. While most of the EBITDA is now coming from those priority platforms that I was mentioning before. Let's get a little bit more into the Surfactants world. So these are the four key segments that we play. I just want to highlight one thing from this slide.
If you look at the market shares, in most of them are low single digits or not even double digits. What that means is that, we have a significant opportunity to penetrate these markets. In many of the calls that I am getting from the sales analysts and from investors, they always ask me, "How the heck did you grow 6% volume in Q2? Nobody is growing 6%. What is going on? Is it a special thing? Was it a special customer?" No, the reality is that Q2 volume growth was broad-based, and it was in all of the geographies and in most of these priority segments. A lot of that is because of the fact that in many cases it is a wider space. So let us say, in many cases, it is easier to penetrate and to defend large market shares. So we have an opportunity there.
Also, of course, the innovation that we bring into the products is important for many of our customers. Many of them ask me, "Why are we penetrating oil field?" It is not like the oil segments are growing impressively. Well, in the case, for example, of oilfield chemicals, this is basically the Surfactants that some oil service companies need in order to extract more oil from a reservoir. We are not targeting the big service companies of the world, the Schlumbergers or the Halliburtons. We serve those, but those are not the primary.
We sell Surfactants, and we develop application with other customers, maybe tier 2, tier 3 national oil companies in emerging places where they need a Stepan too, and they need the lab that we have in Houston with nine scientists developing a specific application of the Surfactant that will work in a specific reservoir somewhere in the world. That capability, of course, help us to develop new customers, to create new customers. Once we work for five, six months with a customer in developing an application to extract more oil from a reservoir, then the business is sticky. Especially these days with oil prices at $90, $80, sometimes above $100. Oil customers, they want to make sure that they extract oil as fast as possible. The good thing is that this applies to the existing wells.
It's not like I need to do exploration of a well to be able to apply Surfactants. No. It's extracting more oil from the existing well. That's also some of the reasons why we are growing nicely into the oilfield chemicals sector. Let's keep moving. We can talk a little bit more also about Polymers. In Polymers, as I mentioned before, it's mostly what we call the polyiso business or the Rigid Polyols business that are those insulation panels that you see especially in industrial buildings. In the polyiso segment, we have been market leaders for many, many years. We have a significant market share. While on the rigid and spray foam piece, which is what goes into residential, that's practically a wide space for Stepan, and that's why we have been growing fast.
In Q2, we grew 3x, so growing faster and becoming every time a more significant and material component of our Polymers business. Why do we believe in these businesses? It's like energy conservation, it's there. Insulation and energy conservation is going to be there for the foreseeable future. I was just telling one of the investors in one of the meetings, my family live in Spain and in Barcelona, and I used to go to visit mom, typically in April, May or October so that the weather is nicer. Now, I went in May, and it was 100 degrees already. May. It's crazy. The need for energy insulation, the need for better regulations, is there, and that's why we are so positive, and that's why we're so excited about our Polymers portfolio, because we are ready to serve those segments.
Of course, it's a business that depends a lot on construction. You may say, "Well, but construction is depressed," and yeah, it's true. Construction is, let's say, particularly in geographies like Europe, we have not seen construction growing a lot. It has been flattish, in some cases negative. At the same time, interest rates are high. Everybody's expecting that they will come back to COVID times of 2%, 3%. Probably people are going to wait many, many years, and that will never happen again. At some point, residentials and industrial business will need to reroof, and we are ready for that cycle. Reroofing happens every 20, 25 years, and there is a significant reroofing cycle that has not happened in Europe and in the U.S. So it will depend how much patience people keep having in terms of waiting until interest rates come down.
My personal view is that it's not happening in the short term, but who knows? From an operational excellence perspective, I will probably jump into this. Some of you may have heard about Project Catalyst for Stepan. Have you? No idea what Project Catalyst is? At Stepan, we are in a mission. That mission is to improve our margins. The margin improvement has got to come from different places. Especially, we want to improve our margins with things that we can control. What we can control are things like cost out initiatives, and Catalyst is a cost out initiative. I want to make sure that you guys don't get the idea that all our margin improvement is coming from Project Catalyst, because actually a lot of the margin improvement is coming from better margins, of course, better absorption in our manufacturing facilities.
A lot of the margin is also coming from the shift into customers and products with better margins. So what I mentioned in the diversification strategy. Of course, cost out or self-help, as we call it, is a significant piece. At the beginning of this year, we announced Project Catalyst. That is an initiative to bring $100 million in savings in a two-year period, 60% of that in 2026, 40% of that in 2027. You can say that for a company of the size of Stepan, $100 million is a decent number. The three main components of this Project Catalyst initiative are footprint optimization. It's not a secret that in our industry, of course, there is a lot of utilization. We at least wanted to make sure that in Stepan, we have the right footprint.
The right footprint means making sure that the volumes that we have, we have them in the most efficient facilities, and making sure that if there are facilities that we don't need, then we shut down those facilities. With Project Catalyst, we actually announced the closure of one legacy big site that we had in New Jersey. That's already completed at the end of Q1. At the same time, we closed some units that we had in other large plants here in Illinois and one in the U.K. While we are moving some of those volumes into faster and more efficient facilities, some of you may have heard that Stepan did a significant investment in an alkoxylation plant in Pasadena, Texas. Somebody told me like Pasadena, California. No. Pasadena, Texas. Of course, not many people want to go to California these days, but Pasadena, Texas.
The importance of this Pasadena facility in Texas is that we are being able to, first of all, move volumes that we had in other less efficient plants into Pasadena. Also insourcing some tolling volumes. So we were doing quite a bit of tolling that we are now insourcing into Pasadena. Pasadena now has, by the end of the year, we expect an average utilization of 80%. So very good utilization. So, footprint optimization, a big component of this together with operational efficiencies. Operational efficiencies is making sure that sites like Pasadena, of course, are running at the rates that we need, that we have all of the savings that we need from that large investment that we did, plus insourcing of the tolling volumes that we had before. There is a third component related to organizational efficiency and effectiveness.
Yeah, we want to make sure that we have the right teams, the right size of teams everywhere. That is why we announced the 100 roles reduction in the last earnings call. I would say the impact in those $100 million that I am mentioning is according. They have been asking me, "Can you tell us how much is each?" Well, we don't publish that, but what we can tell you, that is the order of contribution, is footprint optimization, it is operational efficiencies, and then it is organizational design. Very quick on this, I want to reinforce, I get a lot of questions on this from analysts and from sales and from investors is, how are you dealing with this RM craziness? Well, now it is going the other way, but how do you deal with this whole RM situation? Especially with oil and gas prices going up.
Stepan Company, as most Surfactants companies, being a company that depends a ton on petrochemicals. A lot of our feedstocks are petrochemicals. We also have some components of oleochemicals, but petrol is a very important component of that. How do you deal with that? Well, we have something really good that some companies also have. That is, we have pass-through contracts, so we are able to pass through raw materials increases into our customers. Of course, that works in the way up and in the way down. We also pass through the reductions. But I would say the single most important competitive advantage for us has been the fact that we have regional centers of supply. So we serve customers in specific regions. We have manufacturing sites close to the customers.
In today's world, being able to not to have to send product one way or the other, especially if it is a lot of water, then that makes a big difference. Yeah. We are less exposed to tariffs, we are less exposed to RM shortages, and that has been one of the reasons why Stepan Company has been able to keep up with the current RM situation and supply chain instability. Okay. I want to shift very quick into the Q2. Already touched a little bit on this. So very nice EBITDA growth in the second quarter with 45% EBITDA growth. Volume, organic volume growth is 6%. So this is what I was mentioning before. It was a broad-based growth, so that is what is encouraging for us.
Is the strategy working? We are really growing broad-based. It is not like one large customer that decided to stock in a particular quarter. No, this is broad-based growth across all geographies and most priority segments. Of course, solid pricing and execution, pricing from the pass-throughs, and then, of course, pricing whatever is not pass-through volume is managing prices in a way that we can compensate inflation. Project Catalyst, that is what I mentioned before, it is on track. We have been delivering the savings that we promised in 2026. People ask me, "How do we quantify this Catalyst thing?" Well, what I always say is, "Well, if you think of $100 million in two years, you first need to think of what is the first quarter in which you start to see the benefit, and then the last quarter."
So before the project and after the project, you should be seeing $100 million divided by four quarters is $25 million of run rate improvement between beginning and end. What we said publicly is in Q2, we already saw $18 million-$20 million of those $25 million. A lot of the Catalyst savings are already showing in our margin, and that's why Q2 was also such a great quarter. Our cash and balance sheet continues to be a priority. The company is out of the large CapEx investments that we did in the past. We were investing hundreds of millions of dollars in expanding some of the facilities and capabilities, or like the Pasadena investment, that was the most recent one. Now we are stabilizing more in the range of $100 million-$110 million, and we expect that to be a normalized level of CapEx.
Disciplined capital allocation, EBITDA margin expansion, and then making sure that we repay debt. As I said before, I am not concerned for the 2.5x of our net leverage ratio, but we want to continue to take that down, because we want to have flexibility in the event that we need to get back to more of an investment mode. From a safety performance, I keep mentioning the company has been performing in the last few quarters with record performance. In this case, for the last 12 months, and this is in terms of reportable incidents. So very strong focus on making sure that we operate our plants not only efficiently but safely.
Well, maybe one more thing that I want to mention, because we were one of the few, or I don't know of any other company in our peer group that mentioned that actually in Q2, we saw some pull forward of customers who were trying to secure materials. By the way, we did it as well, right? As Stepan, we did it. It's very difficult to quantify how much of the Q2 performance was pull forward. We came to this $5 million-$10 million of EBITDA impact. But the point that I want to make is even if you exclude that potential impact of pull forward, still the EBITDA growth and the organic volume growth for the company was very significant, and it was coming from all segments.
The only segment in which the EBITDA was not growing year-on-year was Specialty Products, but this was just on purpose because we are penetrating some segments with lower tier customers with lower margins, but volumes in Specialty were growing. Maybe some final comments on cash. Stepan is a company that typically is more cash demanding from a working capital perspective at the beginning of the year, especially the first two quarters, then given the cycle, Q3 and Q4, we generate most of the cash. Q2 was a significant investment in cash for Stepan because funding 6% organic volume growth, that meant of course more receivables. We also wanted to secure some supply of materials, so we of course increased also our inventory positions. So that was an investment of around $58 million.
Even if you exclude that and you look just at the cash coming from operations, it was a very significant increase compared to the prior year. So that's why we are confident, as we said this publicly in the last call, we expect by the end of the year we will finish with positive cash as we did in 2025. Okay. Let's see. I think that on my end, those were some of the main things that I wanted to highlight. Now I will open to any questions you may have.
I wasn't sure if your growth in oil field chemicals was, if you saw much growth in the quarter. You mentioned the whole segment grew 6%, but I was kind of curious how that segment grew, and do you have any new technology in that business of yours, or are you simply taking market share in your area?
Got it. So the question is around oil and gas, oil field services, what were the drivers of Q2 performance, and if we have anything new that could be fueling that growth. So, yeah, priority segments including oil and gas grew high single digits in Q2. Okay? Oil and gas, given the current prices of oil, I think that they are seeing an additional incentive for companies to want to extract as much as possible from the existing reservoirs. Right? So let's say that we have been seeing that excitement from companies who, "Okay, let's" Because remember that at the end is for secondary recovery of an oil well, you just need to inject water or gas together with Surfactants and other chemicals, and then break down the components in the reservoir so that the oil flows.
We saw, let's say, more excitement during Q2, and I think unless oil prices come down in a significant way, you can expect that that will continue to happen. Right? That's for companies that, let's say, use Surfactants on a regular, consistent way. The reason why I'm mentioning this is because there is also this other set of companies that are looking to develop what is the right Surfactant, because not every Surfactant works into every reservoir. Right? Depending on the geological components of a reservoir, you may need one Surfactant or the other. And the companies, especially these tier 2, tier 3 companies, have been looking for Stepan a lot in terms of let's develop what is the right Surfactant for a specific field. Yeah, and that means doing testing, and that means, of course, working with our lab in Houston.
We have, again, nine scientists devoted to oil and gas, which are developing applications or testing applications, and sometimes that work takes four, five, six months. But once you are there, of course, for a company, and if you already cracked the code of what is the right Surfactant, then they want to keep applying that Surfactant into the ground. Maybe a long explanation for a short answer, but it's a combination of growth driven by existing wells with regular commodity Surfactants, and then new business coming from customers that are smaller but more sticky. And that tends to be more long-term. I think somebody else had a question.
A quick one.
Go ahead.
You mentioned in the slide about kind of lower tier, lower margin customers. Is that a customer for the long term in terms of your margin enhancement that you would consider maybe divesting, or are there certain areas in your business segments that you would consider divesting?
It's a great question, and the answer is no. Yeah, let's say we love our customers with high margins. We love our tier 2, tier 3 oil and gas. We also love our legacy large consumer end segments or tier 1 customers. The reason for that is because, of course, from a volume perspective, they are very significant. Yeah. Those are the ones that help us to keep the plants with a decent level of utilization. By the way, those large tier 1 customers, they also do innovation. By the way, they do more innovation, right? But the thing is that they have more capabilities to develop that innovation internally. But in the case of Stepan, we have had legacy, very meaningful relationships with all these large customers, the Procter & Gambles of the world, the Unilevers.
These large companies, they continue to work with Stepan whenever they are developing new applications. So let's say that for us, it's all important. Every volume, every ton, every pound, it's important. We just want to have the right balance. The right balance means not depending only on tier 1 big customers in the consumer segments. Yeah. So no, I think that they are integral part of Stepan, so we are not thinking in that sense. Mm-hmm.
Thank you. Your Catalyst plan, $100 million, is that gross savings? If it is, what do you have to spend in order to achieve those savings?
Yeah, great question. So Project Catalyst, those $100 million, not everything is flowing to the bottom line, if that's your question, right? Yeah. A piece of that, of course, it's to mitigate inflation. We have operational expenses. There is inflation every year. Yeah, we want to pay our people incentives, everything. So it's not everything flowing to the bottom line, but it's a significant piece of our margin expansion story. We are actually also reinvesting a little portion of that. We want to make sure that we keep investing in fast-growing segments. So it's a cost-out initiative, of course, to mitigate inflation and to help us invest in places where we want to invest. Did I leave you more confused or more clear on the Stepan story?