Greetings. Thank you for standing by. Welcome to the Stepan Company Q4 full-year 2021 Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we'll have a question-and-answer session. [Operator Instruction]. As a reminder, this conference is being recorded Thursday, February 17th, 2022. And now I would like to turn the conference over to Luis Rojo, Vice President and Chief Financial Officer. Please go ahead.

Good morning. And thank you for joining Stepan Company fourth-quarter and full-year 2021 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 Investors section of our website. We make these slides available at approximately the same time as when the earnings release is issued. And we hope that you find the perspective helpful. Now with that, I would like to turn the call over to Mr. Quinn Stepan, our Chairman and Chief Executive Officer.

Good morning, and thank you all for joining us today. 2021 was another difficult year for our world, our country, and our industry as COVID-19 and weather events, created employee, raw material and transportation challenges, that impacted global supply chain. At Stepan, our employee’s commitment, and our team's agility allowed us to mostly meet customer requirements, and grow income while taking significant steps to build a better, stronger, more sustainable future. Our reported net income reached a record a $138 million or $5.92 per diluted share while our adjusted net income was also a record at a $143.5 million or $6.16 per diluted share. These record results were achieved despite the challenges affecting our operations. The estimated negative impact of the supply chain disruptions in our operating income for the three business segments totaled $21 million during 2021. In addition, global demand decreased for cleaning, disinfection, and personal wash products versus the pandemic peak in 2020. This impact was partially offset by higher demand within the institutional cleaning and functional product end markets. Although our base Polymer business was affected by supply chain disruptions, higher Polymer results were driven by the INVISTA acquisition. Specialty Product results were slightly ahead of those reported in 2020 but results were negatively impacted by raw material availability. Our Board of Directors declared a quarterly cash dividend on Stepan's common stock of $0.335 per share, payable on March 15, 2022. Stepan has increased its dividend for 54 consecutive years. During 2021, we returned $45 million to our shareholders via dividends and share buybacks. This represents an increase of 11% versus 2020. As previously communicated, our Board of Directors authorized another $150 million of share repurchases. We remain confident in the strength and diversity of our business, and its ability to generate cash, that will allow us to invest in our current business, pursue strategic M&A opportunities and return cash to our shareholders. At this point, I would like Luis to walk through a few more details about our fourth-quarter, and full-year results.

Thank you, Quinn. My comments will generally follow the slide presentation. Let's just start with a slide 5 to recap the quarter. Adjusted net income for the fourth quarter of 2021 was $22.5 million or $0.97 per diluted share, a 32% decrease versus $33.1 million or $1.42 per diluted share in the fourth quarter of 2020. Because adjusted net income is a non-GAAP measure, we provide full reconciliations to the comparable GAAP measures and this can be found in Appendix 2 of the presentation and Table 2 of the press release. Specifically, adjustment to reported net income this quarter excludes deferred compensation expense of $2.4 million. Additionally, it also excludes $3.1 million for business restructuring, the non-cash loss on the sale of a corporate building, and environmental remediation reserves. The deferred compensation numbers would present the net expense related to the company's deferred compensation plan as well as cash settled stock appreciation rights for our employees. Because these liabilities change with the movement in the stock price, we exclude these items from our operational discussion. Slide 6 shows the total company earnings bridge for the fourth quarter compared to last year fourth quarter and breaks down the decrease 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, Surfactants and Polymer are down mainly driven by the one-time benefits recorded in Q4, 2020 and specifically, the Millsdale insurance payment and the Chinese government reimbursement. Excluding those two items, our results are basically flat versus last year. Corporate expenses and all others were lower during the quarter due to lower acquisition-related expenses and incentive-based compensation expenses. The Company effective tax rate was 20% in 2021 compared to 25% in 2020. This year-over-year…

Thank you, Luis. As we wrap up 2021 and despite the supply chain challenges that we experienced together with our customers, we managed to deliver record net income. Our team delivered once again. Although cleaning, disinfection and personal wash volumes declined last year versus the 2020 pandemic peak, consumer habits have changed which has led to a sustained higher level of demand versus pre -pandemic levels. Published data shows consumers are spending up to 20% more time in their homes. Our diversification strategy into functional products continues to be a key priority for Stepan. Our global agricultural volumes increased strong double-digits in 2021. High commodity prices for corn and soybeans, coupled with more planted acreage in the year, drove a strong season for crop protection products in North America. In Latin America, crop prices and a favorable exchange rate had a positive impact on exports, driving higher planted acreage in Brazil. Oilfield chemicals experienced record sequential volume growth, as the price of oil increased 68% last year. We remain optimistic about future opportunities in this business, as oil prices remain high, and we continue to promote our new cost-effective product solutions, that will improve Oilfield Operator returns on investment and protect their wells. We increased our Biocide capacity last year and are investing to increase capacity and capability in certain product lines including sulfates, amphoteric and alkoxylates to ensure we can meet higher requirements from our customers. As discussed previously, we are increasing North American capability and capacity to produce sulfates that meet new limits on 1,4 Dioxane by the January 2023 regulatory deadline. 1,4 Dioxane is a minor byproduct generated in the manufacture of either sulfate surfactants which are key cleaning and foaming ingredients used in consumer product formulations. Through a combination of process optimization and additional manufacturing equipment,…

challenges. The integration of the business acquired from INVISTA was all done by our team and we delivered more than $20 million of EBITDA in 2021. The acquisition was accretive to both EPS and EBITDA margins. We are investing at both of the legacy INVISTA production sites to the bottleneck capacity and to add capabilities to produce a broader range of Stepan's product portfolio. Given the strength of our balance sheet, we plan to continue to identify and pursue acquisition opportunities that align with our growth and diversification strategy including the addition of new platform chemistries that can broaden our portfolio of sustainable offerings for our customers. I will now turn the call back to Quinn for closing comments.

Thank you, Scott. The company delivered record earnings in 2021. Looking ahead to 2022, we believe demand for our products will remain strong. But the company will continue to face, many of the same challenges that impacted our operations in 2021. In terms of segments, we are cautiously optimistic about the consumption of cleaning disinfection, and personal wash products within Surfactants. We believe volumes will not return to the pandemic peak lab of 2020 hope will grow versus 2021. We expect industrial and institutional cleaning volumes to increase, as economies open. Surfactant demand within the agricultural and oil field markets should continue to grow due to higher commodity prices and new Stepan technologies. The long-term prospects for our Polymer business remain attractive. We expect stronger demand linked to energy conservation efforts and more stringent building codes. Additionally, we believe that the new U.S. infrastructure bill should provide tailwinds for the installation industry. However, in January, we experienced production challenges in our Polymer unit at Millsdale and unfortunately, we had to declare force majeure. At Millsdale, we are producing polymers at reduced rates and we are using our global network including the inquired INVISTA, Wilmington, North Carolina site to deliver products to our customers and albeit at higher cost. We expect to resume full production in early March. We anticipate our Specialty Product business results will improve slightly year-over-year. Despite continued raw material sourcing issues and higher prices, as well as our higher first-quarter polymer supply chain cost, we believe underlying market demand across most segments remains strong and we are optimistic about delivering another good year. Finally, today we are announcing my retirement from Stepan Company effective April 25th, 2022. I'm extremely pleased that Scott will be our next CEO. No one is better suited to lead us into the future. Under his leadership, the business has diversified its market presence, delivered innovative, sustainable technologies, and completed multiple acquisitions which have contributed to record results. It has been an honor and privilege to serve as a third founding family CEO of Stepan Company. I am proud not only of the value of that we have created for our employees, customers, and you, our shareholders, but how we have delivered those results. I am grateful to the Stepan employees around the world whose unwavering commitment to our mission has allowed us to grow and will ensure our future success. This concludes our prepared remarks. At this time, we would like to turn the call over for questions. Scott, can you please review the instructions for the question portion of today's call.

Thank you. [Operator Instructions]. We do have a question from Mike Harrison with Seaport Research Partners. Please go ahead, you line’s open.

Hi. Good morning, and congratulations to Scott in the promotion, and Quinn on the retirement announcement.

Thank you, Mike.

Thank you, Mike.

We're both looking forward to that.

Understood. Was wondering if you can give a little bit more color on the inflationary and supply chain disruption impacts across the different segments. A little bit what we're trying to understand, you gave the $7 million total impact from disruption in the fourth-quarter. Trying to understand how much of that is price cost lag. How much of it is maybe related to limited raw material availability, or some other production inefficiencies? Are those issues getting better, as we get into Q1 and Q2? Or could they actually worsen in the first half of the year?

Thanks. Thanks, Mike for the question. This is Luis. Look, I'm not going to get into all the specific details as you can imagine, this is a broader number on the impact of Q4 and more importantly on the impact for total 2021. So, as I mentioned in my remarks, all the supply chain disruption that we saw in the marketplace because of raw material availability, because of logistics, lack of availability, was inject -- in total around $21 million in operating income on a pretax basis and I gave the numbers by business units. So, it's a sizable impact that prevented us to grow even further our business. If you look at -- let me, give you a little bit more perspective on the inflation and pricing. But if you look at our numbers, cost of goods sold are up 31% when volume is up 2%. So, we're seeing significant inflation in raw materials north of 30%, in logistics north of 25%. And as you have seen in our numbers, we have done a very good job managing our pricing and our mix. So, we closed the year with 22% price mix, but with gradual improvements quarter after quarter, right? 13% in Q1, 20% in Q2, 28% in Q3, 29% in Q4. So you always have a lag between cost and pricing, but the team has done a very good job of trying to recover all the inflation that we're seeing with pricing and mix. The 22%, as you can do the math, is $400 million in pricing and mix. We're pleased with the performance for -- from the team, and we will continue working on productivity and working on pricing and working on mix to gradually improve our margins.

If I could touch on raw material availability. Raw materials within our Surfactant business are generally significantly improved. There are still some issues with regard to propylene oxide and fatty acid availability, that we're still dealing with, that this whole supply chain is dealing with. But the other raw materials are present. The issue that we're still facing that is problematic is transportation availability, and that has a universal issue in the United States today. And I would say there's some gradual improvement in there but it's still a big issue and talking with our suppliers and our customers, we anticipate that that will be with us through the first half of the year.

I appreciate all the color there, Luis. So I guess I would just ask as a follow-up that you guys run on FIFO inventory. So, I guess I'm asking have we already seen peak raw materials run through to the P&L in Q4 or is Q1 going to be the peak for raw material costs?

We have a broad basket of course of raw materials and some are going North. Some are trying to stabilize, but oil is already at $93, so I don't think we're in the peak yet. Now, the slope of increase has significantly changed, right? The slope of the increases that we saw in Q2, Q3, and Q4, for the average of the 30% plus in 2021, that slope is significantly lower now. But with oil above $90, I don't think we're in the peak yet.

Alright, I appreciate that. In terms of the Millsdale facility, you mentioned some disruption there and declaring force majeure. How much lower is production now, or operating rates now, versus a 100% of where you’d expect to be? Can you also talk about the changes that are being recommended and implemented at that facility based on your work with consultants?

Yes. Thanks. So, we experienced a power disruption in early January that subsequently caused damage to our Polymer plant which we're in the process of getting back online. And as Quinn mentioned earlier, getting back to full production rates by March 1st. Today, we're running at about half capacity at the site but are supplementing supply from our global networks as Quinn mentioned earlier. So once we get the units back to full production rates in early March, we have a long list of items that we will be working on to get that reliability up so we can handle the power blips in the future. And that work will commence in, starting in Q2. $5 to $7 million impact is what we think we'll be seeing in Q1.

In Q1, '22, the $5 to $7 million that Scott just mentioned is on a pre-tax basis.

Perfect. That's very helpful. And then a couple of quick questions. First of all, Luis, on the tax rate, your guidance is quite a bit higher than the 20% you saw in 2021, what causes the variability in the tax rate? It seems like it's jumped around the past few years.

Yeah. Great Question, Mike. We have had the opportunity to deliver some [one-time[ (ph) tax projects in the last few years and especially in 2021. If you look at the tax rate in the U.S., the 21 plus state is an average tax rate for many companies of around 24%, 25%. And if you look at our country mix outside of the U.S., you get to an average tax rate of 26%. So roughly between 25% to 26%, that's our normal tax rate. We had the opportunity last year as we worked on tax projects. We did [emerge] (ph) in Brazil of our TAVRis acquisition that we did a few years ago. If you know the law in Brazil, you can amortize the goodwill for tax purposes. So that provided a nice one-time help in 2021. So, we're not expecting -- we don't have any of those type of projects in 2022, we will continue looking for opportunities. But at this point, we don't envision any critical project that is going to reduce our normal tax rate which is between 24% and 26%.

All right. And then I was also curious on the fourth quarter revenue contribution from INVISTA. I know you said about a $120 million in revenue for the full-year but what did it do in Q4? And maybe give you a chance to comment on how that business is performing relative to your expectations roughly a year since you acquired it. Thank you.

Yes, we provided a 120. As you know, we had the business for 11 months in 2021. So, you can easily see that it's around $10 million per month. But you know that this business has seasonality, right? I mean, Q4 is typically the lowest quarter of the year in the seasonality. So, I'm not going to give you the exact number. You can imagine that is below $30 million, below the normal average.

I would say, we're very pleased with the integration effort by our employees around the world. The volumes increase as a result of the underlying market growth, and the efficiency of which, we integrated that into our supply chain network. We were able to improve the margins on the European basis, and we're very pleased with the overall contribution of the business and it's right at early start, it's ahead of our plan. The business generated an excess of $20 million of EBITDA in 2021. That put us basically ahead of our target, like 2 years, right? We promise you guys 6.5 to 7.5 multiple after 2 years, we're basically delivering that in the first year.

Alright, thanks very much.

Thanks, Mike.

Our next question is from Vincent Anderson with Stifel, please go ahead. Your line is open.

Yeah. Thanks. Can you hear me, okay?

Yes. Good morning.

Good morning. And I'll let go, Mike. Congratulations to Quinn and Scott. Both. Quinn, I'm not sure when we can expect your [Indiscernible] line of skin and hair care products as you enter the next phase of your career. But I can't imagine you're just going to walk away completely. So sorry. Maybe a bit more granularity on where destocking was most concentrated between your Tier 1 and Tier 2, Tier 3 customers. And then how that might be impacting your broader expectations for mix impact on margins and Surfactants next year or this year, I should say.

Yes. Thanks Vincent, this is Scott. The destocking that we experienced in 2021 was really centered around biocides used in disinfection products both for home and in industrial applications. I'd say the other area was in liquid hand soap. So, I think as we've all witnessed in 2020 and 2021, the myriad of products that were available in the market and the store shelves did cause, I think, a fat spot in the supply chain which had to be worked through in 2021. And I will say that impacted both Tier 1 and Tier 2, Tier 3 customers equally. Where we see ourselves in 2022, we're hopeful that, most of that inventory has been flushed through the system, and that we will see more normal as demands going forward. Into Quinn's earlier point, we believe that we'll be above pre -pandemic levels, but not as high as the volumes we saw in 2020.

Okay. That’s helpful, thanks. Switching over to functional Surfactants. Just given the inherent volatility of those end markets, I was curious how you measure your own performance in areas like Ag and oil field, and if there are any kind of broad targets that you'd be willing to share with us heading into 2022?

No. You hit it on the head winds that these markets are volatile. I'd say Oilfield obviously more volatile than Ag. You do have a good underlining trend tailwind in the crop production market with the need to feed the planet and with renewable fuels taking a larger stage going forward. There are really bullish undertones for continued demand for crop protection products. Oilfield obviously, is more volatile. I think that's -- in terms of how we look at it in forecast going forward, it's not a science by any means. What I would say is one of the key metrics for us in terms of our R&D efforts within the Ag space. We're tracking fairly closely our wins at the customer interface in terms of, helping them formulate the next-generation pesticide products for the marketplace. Generally, there's registration lag that is two to three years after those products are fully developed. So, one of the key internal metrics that we carry out, is our anticipated product or customers anticipated product launches and we do have a window in terms of how our business is going to be impacted by those launches over the next couple of years. And what I would tell you is that we remain optimistic about our growth in crop protection segment as a result of those previous R&D activities and wins.

That's great. And actually, that was kind of leading into my next point, which was I do recall you reporting a couple of pretty -- for the Ag business, substantial wins a couple of years ago. Are you saying that you're pretty confident that we should be reaching the end of that registration window as we head into 2022?

One brief moment as we reconnect. And we're now reconnected. We may begin.

Sorry about that. It must be the new guy. No, we've lost connection and we're back on line. Vincent, I'm not sure exactly where we last dropped off but, I think it was as I was saying, that we believe we have some items left in our pipeline. Do you have another question?

Yes. Can you still hear me?

Yes.

Perfect. Alright. Well yeah, that does answer the last question. And so, for the last one from me, this one's a bit more anecdotal, but I've been noticing a lot more of these consumer cleaning products that are being sold in dried form and either re-hydrated at home like surface cleaners or used directly in dry form like these laundry detergent strips. They are all over my house right now. And the whole sales pitch appears to revolve around a more attractive environmental footprint by not having to ship water. Have any of these products come up on your radar yet? And if so, do they represent any meaningful change in their Surfactants requirements?

Yes. So, great question Vincent. I would say this is obviously from a sustainability push. There is a lot of water shift around the world today, and a lot of consumer products. So, getting concentrated formulations to them and then use consumer is, is a great way for due to have reduction in scope three emissions around product use. Stepan, we have a product line within Surfactants, at our solid Surfactants and highly concentrated Surfactant So we are working with the consumer product companies, and to help their journey towards a more sustainable product portfolio on the store shelf.

So that's helpful. If I can just ask a caveat, though. We used to use powdered laundry detergent and we determined that that was not optimal for our water supply. Are we going back to the old school sulfonates in this process, or is this just a completely new product line that still facilitates dry formulations?

I think there's a balance. I don't see us going back to powdered detergents from an environmental footprint perspective. That technology and their processing is not -- is attractive as other

new alternative processing technologies that consumer product companies have for producing highly concentrated and or some other alternative forms of solid detergent?

Yes. So, the active ingredient in traditional powders is -- was very low, quite frankly, and today's pods or strips that you're talking about are much more actively formulated.

Okay? Alright. Thanks very much. And again, best of luck to Quinn Scott.

Thank you.

And we have a question from Marco Rodriguez with Stonegate Capital Markets. Please go ahead, your lines open.

[Indiscernible] I want to thank you for taking my question. I have a quick follow-up. First off, on the supply chain issue disruptions that you guys saw, you obviously called out transportation issues. I was wondering if you can maybe provide a little bit more color in regard to that. Is that a function of not being able to find truck, the trucks just being too expensive? And then if you can -- I don't know if I missed this but can you comment on any labor availability impacts you may have seen there as well?

Thanks, Marco. With regards to transportation, the largest levered that's impacting the disruption is the availability of drivers. For these hazardous shipments, especially chemical industry it's hazardous this transportation. So, there is a significant driver shortage. That number's been published that greater than 80,00 across the North American or the U.S. marketplace. And the ability to close that gap is going to take longer than I think anyone initially anticipate. Marco, can you hear us?

Yes.

Okay. So, it's not in equipment availability, it's a driver issue. In terms of Stepan's impact from labor, we don't -- we're not impacted from a labor perspective ourselves with -- our attrition rates have remained relatively low throughout the pandemic and it is not impacting our ability to produce and service our customers.

Got it. And then in terms of the price increases that you've been pushing through to your pay customers, can you comment a little bit about -- obviously there's a lag, which you mentioned before in the past. When is it do you think you can recover the margin from this last quarter? And then obviously with the expectation that raw material prices are continuing to go up, how are you thinking about those potential prices increasing in the future?

Marco, this is Luis. What I would say is that the business model has pricing built into it in both situations when raw material goes up and when raw material goes down. So, we have a good track record of adjusting our prices depending on the environment. As I mentioned before, I don't think we are in the peak yet and that will require more diligence on pricing in 2022. But we believe the slope of both raw material and pricing are going to be significantly lower than 2021. So, we will -- we monitor these on a weekly basis, all raw material prices and adjust and talk with our customers so that we will continue doing the right thing and having the right balance between pricing and margins, right? I mean, we want to continue pricing and volume. So, we will continue making sure that we deliver the maximum return at the end looking at all those variables.

Understood. And then last quick question for me, I was just wondering if you can maybe provide a little bit more color on your commentary surrounding cleaning and disinfecting. You've provided guidance where your expectations that the consumer side, might see some growth in this new fiscal year, but you're somewhat cautiously optimistic and expectation is obviously the institutional cleaning side is also expected to continue to see growth. Can you maybe just talk about what is driving those expectations near level of confidence there?

I would say first and foremost, we do expect raw material availability to improve throughout the year. We believe outside of I would say, biocides and liquid hand soaps and across the market in general, inventory levels are probably below where most companies would want them at this point in time. So, we think the underlying demand is there. If we can get through and see the improvement in raw material availability and can reduce some of the transportation shortages, hopefully, on the second half of the year, we think that demand could be there.

Understood. Thank you, guys, very much for your time. I appreciate it.

Thank you, Marco.

[Operator Instructions]. And there are no further questions at this time.

Okay. Well, thank you very much for joining us on today's call. This is my last investor call. Scott is ready, the team is ready. I am confident that your Company is in good hands and that the best is yet to come for Stepan Company. Thank you and have a great day.

That concludes the call for today. We thank you for your participation. [Operator Instructions]