Greetings and welcome to the Q4 and Full Year 2020 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, Thursday, February 18, 2021. It is now my pleasure to turn the conference over to Luis Rojo, Vice President and Chief Financial Officer. Please go ahead.

Good morning and thank you for joining the Stepan Company’s fourth quarter 2020 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. Whether you are joining us online or over the phone, we encourage you to review the investor slide presentation, which we have made available at www.stepan.com under the Investor Relations section of our website. We make these slides available at approximately the same time when the earnings release is issued, and we hope that you find the information and perspective helpful. Now with that, I would like to turn the call over to Mr. Quinn Stepan, our Chairman and Chief Executive Officer.

Thank you, Luis. Good morning and thank you all for joining us. We hope you and your families are safe and healthy. As the world continues to be challenged by the global pandemic, we at Stepan remain committed to doing our part by supporting customers that supply essential cleaning, disinfection and personal wash products to the market. We are extremely grateful to our employees for their passion and commitment to get the job done for our customers through throughout what was a challenging year. Overall, COVID opportunities in the consumer product segment of our business outweighed the negative impacts elsewhere, and the company delivered record fourth quarter and full year earnings. Fourth quarter adjusted net income was $33.1 million, or $1.42 per diluted share up 29% from $25.7 million, or $1.10 per diluted share last year. Adjusted net income for the full year was a record $132 million, up 11% from last year. For the quarter, Surfactant operating income was up significantly and volume growth, which was mostly attributable to continued strong demand for cleaning disinfection and personal wash products. Mexican operations delivered strong volume growth versus the prior year quarter. Our Polymer business was up significantly during the quarter due to the Millsdale insurance recovery. Our rigid polyols volumes are gradually improving. We had a good fourth quarter and finished strong with double digit growth driven by increased demand and customer inventory Brexit build in Europe. Our specialty product business results were up slightly in the fourth quarter. Board of Directors declared a quarterly cash dividend on Stepan’s common stock of $0.305 per share payable on March 15, 2021. Stepan has paid higher dividends for 53 consecutive years. As recently announced Stepan acquired investor’s aromatic polyester polyol business and associated assets. The acquired business has global sales of approximately $100 million per year. We are excited to add in business polyester polyol business and believe that in this is available spare capacity, combined with debottlenecking opportunities in both plants will allow Stepan to support future market growth in a capital efficient way. At this point, I'd like Luis to walk through a few more details about our fourth quarter results.

Thank you, Quinn. My comments will generally follow the slide presentation. Let's start with a slide five to recap the quarter. Adjusted net income for the fourth quarter of 2020 was $33.1 million or $1.42 per diluted share, a 29% increase versus $25.7 million, or $1.10 per diluted share in the fourth quarter of 2019. Because adjusted net income is a non-GAAP measure we provide full reconciliations to the comparable GAAP measures, and these can be found in appendix two of the presentation and table two of the press release. Specifically adjustment to reported net income this quarter consists of adjustments for deferred compensation and cash-settled SARs and saw minor restructuring expenses. Adjusted net income for the quarter exclude deferred compensation expense of $2.4 million or $0.10 per diluted share, compared to deferred compensation expense of $1.8 million or $0.07 per diluted share in the same period last year. Deferred compensation numbers represent the net expense related to the company's deferred compensation plan, as well as cash settled stocks appreciation rights for our employees. Because these liabilities change with the movement in the stock price, we exclude these items from operational discussion. Slide six shows the total company earnings breach for the fourth quarter compared to last year's fourth quarter and breaks down the increase in adjusted net income. Because this is net income, the figures noted here are on an after tax basis. We will cover each segment in more detail, but to summarize, Surfactant and Polymers were up significantly, while Specialty Products were slightly up versus the prior year. Corporate expense and all others were higher during the quarter due to higher acquisition-related expense and incentive based compensation. The company's full year effective tax rate was 25% in 2020 compared to 18% in 2019. This year-over-year increase was…

Thank you, Luis. As we wrap up a challenging, but rewarding 2020 we continue to believe that Stepan’s business remains better positioned to perform the most as we demonstrated in the fourth quarter and full year 2020. We continue to prioritize the safety and health of our employees as we deliver products that contribute to the fight against COVID-19. Our EPA approved biocidal formulations kill the specific novel virus that causes COVID-19 and allow our customers to provide the public with additional tools to protect their families and fight the pandemic. We believe Surfactant volume and consumer product end markets should remain strong as a result of changing consumer habits and increase use of disinfection, cleaning and personal wash products. We are increasing capacity in certain product lines, including biocides and amphoterics to ensure we can meet our customer’s higher requirements. We are increasing North American capability and capacity to make low 1,4-Dioxane surfactants. As explained in our previous calls, recent regulations passed in New York will require reduced levels of 1,4-Dioxane in a number of consumer products by January 1, 2023. 1,4-Dioxane is a minor by-product generated in the manufacturer of ether sulphate surfactants, which are key ingredients in consumer products. Through a combination of process optimization and additional manufacturing equipment, Stepan will be prepared to supply customer’s ether sulphates that meet the new regulatory requirements. This project is the driver of our increased CapEx forecast for 2021 of $150 million to $170 million. We are working with our customers to ensure these projects deliver our financial return targets. Tier 2 and Tier 3 customers continue to be the center of our strategy. We grew Tier 2 and Tier 3 volume by 28% in the fourth quarter, and added 405 new customers. Our diversification strategy into functional products continues…

My pleasure. [Operator Instructions] The first question comes from Vincent Anderson of Stifel. Please go ahead.

Yes, good morning and very impressive into the year everyone.

Thank you, Vincent.

Yes, absolutely. Given we were in many ways far removed from the panic buying of the second quarter, I was hoping you could maybe go into a bit more detail on what the main drivers were of the strong surfactant sales performance in the fourth quarter.

I think generally the increase in disinfection and hand wash has continued to change consumer habits have changed. So we have that has sustained our growth in the surfactant market. And as we look at our customer comments, and we just finished our annual global meeting or American chemistry or cleaning institute conventions, and all the customers remain bullish about their long term prospects that sort of sustained increased demand for full for their products. So we have, so we fundamentally believe that we are going to continue to see increased demand in the consumer product segment. We've got better availability of our raw materials to support those growths in those end markets. We as I've said have debottlenecked and are expanding our capacities, both in the buyer side in the amphoteric market. So we think overall it's, it's the markets will continue to grow, and we'll be able to support our customers.

Perfect. That's helpful. Thank you. And, so with so many Tier 2, Tier 3 accounts added this year, how should we think about the ramp up in dollar sales for those accounts, for example, maybe to be more clear, maybe you got in the door selling 10% of their total surfactants needs, but you believe you can serve this say 25%. Any color you'd be willing to give around there and how much we can maybe expect to see that contribute over the next one to two years?

So fundamentally, we think we can grow our share of their wallet, we do use metrics in terms of the number of products that we're selling to each of these customers. And generally speaking, the penetration that we have varies around the world. And depending on the markets that we're in. For example, in Brazil, we're actually selling on average, over probably 5000 customers today in Brazil in the Tier 2, Tier 3 segment. And we're selling on average less than two products per customer. And so we do fundamentally believe there is an opportunity to expand the number of products that we're selling to the smaller Tier 2, Tier 3 customers on a global basis. Now, our penetration in the U.S. tends to be a little bit higher than it is in Brazil. But we still have an opportunity to expand the number of products we sell and continue to add more customers on a global basis.

Yes Vincent, if you remember what we have talked in the with the IR presentation, we believe that is an universe of around 20,000 customers out there today that we're not serving. And so as Quinn was mentioning, the strategy is twofro [ph] or actually three is acquiring more customer, selling more products to the customers that we already have, and improving the mix. So it’s the three legs that we are after with our Tier 2, Tier 3. And as you saw, we added almost more than 1000 customers in 2020, which is, which is the first part of the strategy. So we will continue focusing on the three on the three elements.

Perfect. If I could sneak in maybe a little bit of a curveball. As you look at the options for adding platforms for new surfactant chemistries, has this surge in call it traditional Oleochemical feedstock prices kind of related to all this biodiesel demand. Has that changed your thoughts on potential M&A targets? Or would you say that you're largely feedstock agnostic?

So we are still somewhat feedstock agnostic. But there is a strong demand for more bio based surfactants in the consumer product industry in particular. So you will see a move over a period of time to more bio based products and/or vegetable based feedstocks, or products derived from vegetable feedstocks over a period of time. You also have in the vegetable space. So you also have people that want to make sure that the rainforests are not being destroyed, to supply those products. So it's a complex mix. We do think rhamnolipids, and other biosurfactants will be a large part of our portfolio over a period of time. I fundamentally, personally believe that in 10 years to 20 years biosurfactants will represent a very large percent of our portfolio. And as we looked at making the acquisition of the plant in Louisiana, that helps position us to make large scale quantities for our customers. And I think, in our meetings with them over the last couple of weeks, I think they were enthusiastic about the size and scale that we were bringing to the marketplace eventually.

All right, thank you very much. Good luck to you’ll. Let somebody else have a turn.

Thank you.

Thank you. The next question comes from Mike Harrison of Seaport Global Securities Please go ahead.

Hi, good morning. I wanted to start out with a couple of questions on the INVISTA acquisition. I think if I do the math here around the EBITDA contribution, you said 100 million in revenue six and a half to seven and a half times EBITDA. It sounds like eventually expect about a $24 million a year type of EBITDA contribution. What can that contribution look like in 2021? I assume there's probably some initial investments and maybe some ramp up costs, especially as you maybe do some debottlenecking.

Thanks, Mike, for the question. Look, we were very clear on providing guidance after full synergies as you can expect, the first year is a transition year, but we're going to have one time cost of integration etcetera. So we don't want to -- we don't want to provide any specific guidance for the short term. However, as you see in the numbers it's a business that is accretive to grow our business. We actually at this stage believe that it's going to be even accretive to EPS as the purchase price allocation work takes several months, and up to a year in some cases. So we will see how that turns out. But fundamentally, you're 24 million in a few in a few years and a couple of years is a very good number, as you can see, and we're committed to deliver that or more.

Right. And wanted to also understand the impact of INVISTA and this acquisition on your phthalic anhydride business. Does the amount of merchant commodity phthalic that you're selling decline as you start to funnel some of that production out of Millsdale to be used as a raw material for the Wilmington location, but in just a half?

Yes. So the short answer is, yes, a little bit. But INVISTA is primarily based on an alternative assets so most of their business is based on PTA versus PA. So PA derivatives are part of their portfolio, relatively small in the big picture. But I will make a comment that last year was a difficult year for our phthalic anhydride business. This year, we've been able to recapture some lost market share, and we anticipate that that business will perform significantly better in 2021, then 2020.

All right, that's, that's very helpful. Wanted to ask also on the CapEx front your elevated number for 2021. I think you mentioned the 1,4-Dioxane capacity addition, but maybe talk about what are some of the other key projects that are involved in your CapEx number? And what would normalized CapEx look like, I guess, going forward after 2021?

Yes, so let me say that there are kind of three different drivers for the increase capital expenditure. The investments in 1,4-Dioxane are kind of the largest component of it today. And as we said in the script that we were looking, are working with our customers to make sure that we get an adequate return on those investments and, and so but there is in 2021, and 2022, there is a spike in terms of our CapEx associated with 1,4-Dioxane reduction projects. The second thing I would say is because of the increased demand that we have on a global basis, particularly for some of the specialty surfactants that we manufacture in the amphoteric and the biocide line, we have additional growth projects that we are looking at implementing in, in the United States in Mexico and potentially in France as well to support our higher margin specialty product lines. So we're excited about those opportunities. And then the third category, I would say that there's an infrastructure spend that we're working on. And one of the things I wanted to comment on is that the Chicago area is been labeled as a potential serious non-attainment zone for the country. And so as a result of that, we are going to be spending some money to reduce our emissions at our Millsdale site. And so there's a there's a peak-ins of some investments at our Millsdale site as we look to reduce emissions, so we can continue to support that site with future growth projects as we go forward.

All right. And then the last question I had is on the raw material front, maybe some of your thoughts on what kind of inflation you could be seeing and pricing dynamics. As you look at each segment, it seems like the pricing is up pretty nicely and surfactants, at least in Q4, and still under some pressure in polymers. So how should we think about raw material versus pricing progression during early 2021?

And so what I'd like to do is answer two questions. One, prior to the freeze that we're experiencing down in the Gulf Coast region, and specifically Texas in Louisiana, what we've seen with the increase in the oil prices are rocky raw materials, orthoxylene Diethylene glycol and our polymer business, linear alkylbenzene and ethylene derivatives in our surfactants business, we've seen an increase in those in those prices. We did announce a price increase in North America to try to recapture those in early January, mid-January. And I would say that our objective in there is to maintain or increase our margins as we as we look at raw material movements. We do, we are experiencing the country is experiencing a number of force measures as a result of the freeze that we currently are in. We typically build inventories prior to the hurricane season. Every year, we have a very disciplined process in which we build significant amount of inventories that are produced in the Gulf Coast, in anticipation of a potential problem. And that strategy over the years has benefited our business. We were not anticipating this freeze in Texas and nor was anybody else. So what we seen is a number of our customers our suppliers have declared forged [Ph] measure. Not sure exactly how that's going to impact our business yet in the quarter. We are also experiencing transportation delays throughout the country as a result of the freeze as well. So I feel very comfortable in terms of our ability to recover the raw material price increases in our base business, not sure currently how the current situations can impact our business in February and March.

All right, appreciate the color there. Thanks.

Tina. Tina, we're having a hard time hearing you. I don't know if you can hear us clearly. Tina, you want to call us on that other line please that we gave you?

Yes. Hey, Quinn, this is Dave. Go ahead. I'm sorry.

Yes, no Dave, we can hear you fine.

Yes. I am like you. I can't make out. I could barely make out what the operator saying. But no, I'll just jump in it. Thanks very much. And I'll just preface my remarks by saying I've been dealing with what I would consider Tier 2 or Tier 3 internet service this morning. So if I make you cover off things that you've already addressed, I apologize in advance. First, a point of clarification. So you did have the $13 million of insurance recoveries reflected in the fourth quarter results. Did you call out I guess the EPS benefit from that? That's in the reported results. I mean back in the envelope. It seems like it could be, $0.40 a share or more. And then if you could just remind me what were the expectations for insurance recoveries in the fourth quarter? That'd be my first question. Thank you.

David. So we had two particular one timers in the fourth quarter. One was the insurance recovery, the 30 million number that we mentioned was on a pre-tax basis. So you are right, that EPS is around $0.40. And we also had an impact a negative impact on the tax rate, because of the cash repatriation project that we did for the investor acquisition, so that that had a roughly $0.12 EPS impact. So you have the net of the two call it at $0.28, or roughly $0.28 EPS help in the quarter.

Okay, great. I appreciate that, that that helps a lot. My next question would be more of a marketing oriented question. And, this has to do with, given the time of year, I'm pretty sure you have your business plan set for initial plans in place for 2021. And I guess I was going to ask if you could characterize customer behavior? In other words, for your surfactants business, I mean, there were periods of shortage. I would say, and maybe some panic buying at times during 2020. And I'm just wondering, is this the kind of market where your customers are extending or expanding their purchase commitments to you over the course of 2021? Or are they looking at -- or alternatively, are they kind of looking at the vaccination deployment and the progress there? And they're saying, well, the situation, might change dramatically, three to six months on. And I was just wondering from the purchase orders and the customer behavior how would you characterize the demand for your core array of surfactants, in 2021?

I think demand for our core Surfactant products, we believe is fundamentally going to be up. In terms of purchasing behavior by our customers it's really, it is customer dependent. There are many customers that want to ensure that they have long term products available. And we have worked with those customers and have contracted with customers. And in some cases back that up with raw material contracts that we've made to ensure that those customers will be supplied product, not only in 2021, but as we go forward. There are other customers that choose to buy more on the spot basis. So as we look at our business going forward, we believe that there are that we have significant commitments from customers, not only in the biocide area, but also for 1,4-Dioxane surfactants that are used in the personal wash categories, where customers have made firm commitments to us as we go forward.

Okay, no, that's great. Thank you for that. And then and then I do have one more question maybe for Quinn and more of the philosophy or maybe some background on the INVISTA purchase. So, just briefly, but I'd say Quinn, your company, and you in particular under your leadership I mean, your company's done a wide array of acquisitions. And I would credit you with kind of being unusually effective at kind of being both opportunistic and strategic, as you kind of build, build your company and in different areas. And as you said, the INVISTA purchase is kind of, in some respects, I consider it kind of a step out for your company, you mentioned, it's the biggest in your 89 years. But, it's just, a couple of things, but I'm kind of scratching my head and I was saying, this is this is not in your surfactants business, at least principally, this is going to be for, your polymers business and maybe I'm just wondering if you could comment on how important you consider it to, have a second strong leg, as opposed to currently where your revenues are dominated more by one segment. And then secondly, and, the seller Coke is certainly a very frequent buyer of assets themselves. Not -- I don't recall them selling too many things that they had purchased. But it may be just a, comment on how the transaction came about. In other words, how does it fit into your strategic priorities? And, were you looking at that business for a while? Or did they come to you? I mean, just some thoughts about how the, the transaction unusual transaction scale from your side and unusual transaction, maybe a little bit just from being a seller, on the other side, just to and anything you could add color wise, and how the transaction came to be would be helpful? Thank you.

Yes. So what I would say is, the acquisition is, fits very well with our strategy. Fundamentally, we believe in energy conservation, we believe in that insulation is the lowest cost way to reduce energy. We believe that aromatic polyester polyol enables the most effective insulation product on the marketplace. So that's those are the fundamental beliefs that we have. And we believe that the market is growing today. And then we believe it will continue to grow in the future. And this acquisition provides capital efficient way for us to supply future market growth. If we look at the next required investments at our historic sites, they would have been fairly expensive. So we have an opportunity to buy some, some business. They also have some different technology, and they got a slightly different market position than we have. So we think there's some benefits for us in that regard. So we have an opportunity to enhance our product portfolio, both from a product perspective, and from a customer perspective. And then we also have an opportunity to supply and debottleneck their sites, as we go forward in a cost effective manner to support our customers and their growth in the marketplace over a period of time. Relative to the acquisition process, we identified and initially approach coke a number of years ago. And we're able to work with them and come up with a transaction that met their needs and met our needs as well. So we are happy and pleased to work with them. They were they were a good entity to work with and they've done a nice job growing the business over the last couple years. And again, we're pleased to have it in our portfolio.

Okay, great. That's it for me. I appreciate all the color. Thank you.

And that was our final phone question. I'll turn the call back over to our speakers.

Okay, thank you very much. And thank you all for joining us on today's call. We appreciate your interest and ownership in Stepan Company. Please stay safe and healthy. Wash your hands frequently. And use disinfectants to clean surfaces at home and your workspaces. Have a great day. Thank you.

That does conclude the conference call for today. We thank you for your participation and also to please disconnect your lines. Thank you and have a good day.