Stepan Co Q4 FY2022 Earnings Call

Good day, and thank you for standing by. Welcome to Stepan’s Fourth Quarter and Full Year Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference call is being recorded. I would now like to turn the conference over to your speaker today, Luis Rojo, Vice President and Chief Financial Officer. Please go ahead.

Good morning, and thank you for joining Stepan Company's fourth quarter and full year 2022 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're 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 made these slides available at approximately the same time as when the earnings release is issued. And we hope that you find the information and perspective helpful. With that, I would like to turn the call over to Mr. Scott Behrens, our President and Chief Executive Officer.

Good morning, and thank you all for joining us today to discuss our fourth quarter and full year results. To begin, I will share our fourth quarter and full year highlights and strategy outlook, while Luis will provide additional details on our financial results. Despite significant external supply chain challenges in a difficult macro environment, the business was able to deliver another record year. Significant inflation and raw materials, logistics, and other expenses were fully offset with pricing actions, mix improvements, and productivity efforts. Improved product and customer mix increased revenue by 30% in 2022 after delivering 22% growth in 2021. Surfactants' operating income was down slightly, primarily due to lower global commodity laundry demands, raw material constraints, and customer inventory destocking. Higher demand for products sold under the functional product and institutional cleaning end markets partially offset the above. Polymer operating income increased by 13% versus the prior year despite lower global sales volume due to customer and channel inventory destocking, reduced construction industry activity, and general economic concerns. Specialty Products delivered record operating income of $30 million, compared to $14 million in the prior year driven by improved margin and customer mix. Our Board of Directors declared a quarterly cash dividend on Stepan's common stock of $0.0365 per share payable on March 15, 2023. Stepan has paid and increased its dividend for 55 consecutive years. During the fourth quarter of 2022, the company paid $8.1 million of dividends to shareholders and repurchased $2.7 million of the company's stock. For the full year, the company paid $30.6 million in dividends and repurchased $25 million of company stock. The company has $125 million remaining under the share repurchase program authorized by the Board of Directors. 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. Luis will now share some details about our fourth quarter and full year results.

Thank you, Scott. My comments will generally follow the slide presentation. Let us start with slide five to recap the quarter. Adjusted net income was $13.5 million or $0.59 per diluted share versus $22.5 million or $0.97 per diluted share for the fourth quarter of 2021. 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 II of the presentation and table two of the press release. Specifically, the adjusted net income for the fourth quarter excludes deferred compensation expense of $2.2 million, compared to last year's expense of $2.4 million. It also excludes the minor changes in our environmental remediation reserve and restructuring expenses. The deferred compensation figures represent the net income related to the company's deferred compensation plan as well as cash-settled stock appreciation for our employees. Because these liabilities change with the movement in the stock price, we exclude this item from operational discussion. Slide 6 shows the total company's net income bridge 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 figure is not here on an after-tax basis. We will cover this segment in more detail, but to summarize, we delivered excellent operating income growth in specialty products and lower operating results for surfactants and some polymers. Corporate and all other expenses, which are not allocated to the business segment, went up $5.4 million, driven by higher interest expenses and overall inflation. The company effective tax rate for the quarter was slightly negative, which may lead to one-time favorable tax benefits. Slide 7 focuses on the surfactant segment results for the quarter. Surfactant net sales were $455 million for the quarter, an 8% increase versus the prior year. Selling prices went up 26%, mainly due to the pass-through of higher raw material and logistic costs as well as improved product and customer mix. Volume declined 15% year-over-year, primarily due to lower demand in commodity laundry and personal care. Lower volumes due to the transition of Low 1,4-Dioxane capabilities and polymer inventory destocking efforts. Higher global demand for products sold in the agricultural volumes, institutional cleaning, and markets partially offset the above. Foreign currency translation negatively impacted net sales by 3%. Surfactants' operating income for the quarter was $22 million, a decrease of $11 million versus the prior year. It's primarily due to the volume decline of 15% as mentioned before, and higher expenses associated with the company's transition of Low 1,4-Dioxane products. All Surfactant operating ratios decreased operating income primarily due to the lower volumes mentioned before. Now, turning to Polymer on slide 8, net sales were $148 million for the quarter, a 15% increase versus the prior year. Selling prices increased 14% mainly due to the pass-through of higher raw material costs. Global volume declined by 23%, primarily due to a 21% volume decline across specialty products and PA businesses. The decrease was driven by customer inventory destocking, reduced construction industry activity, and general economic concerns. Foreign currency translation negatively impacted net sales by 6%. Polymer operating income was $3 million versus $30 million in the prior year. The decrease is primarily due to the 23% decline in global volume and higher costs associated with planned maintenance activities in the company's PA plant located in the US. North America and Europe results were impacted by lower volume across all polymer segments, partially offset by margin recovery efforts. Asia results improved with increased demand following the easing of COVID lockdowns and restrictions in China. Finally, specialty products operating income was $6.6 million versus $2 million in the prior year. This increase was primarily due to improved margins and customer mix within the product line. Turning to slide nine, despite significant external supply chain challenges and a difficult macro environment, the business was able to deliver another record full year. Adjusted net income was a record $153.5 million or $6.65 per diluted share, a 7% increase versus $143.5 million, or $6.16 per diluted share in 2021. The company volume declined 7% versus the prior year, driven by lower demand as customer inventory destocking efforts in the second half of the year. The surfactant segment delivered operating income of $163 million, down slightly versus the prior year. Surfactant global volume was down 6% primarily due to lower global commodity laundry demand, the impact of the transition to low 1,4-Dioxane, and customer inventory destocking efforts. Higher demand for products sold in the functional products and institutional cleaning end markets partially offset the above. The polymer segment delivered $83 million of operating income, up 13% versus the prior year. Global polymer volume declined 7% versus the prior year due to customer and channel inventory destocking and lower construction-related activities in the second half of the year. Specialty product operating income was a record $30 million versus $14 million in the prior year, driven by improved margins and customer needs in our product line. Lastly, the effect of foreign currency translation negatively impacted net income by $5.6 million or $0.24 per diluted share versus the prior year. Earnings Per Share excluding FX grew 12% versus 2021. Slide 10 shows the total company's earnings split for the full year of 2022 compared to 2021 and breaks down the increase in adjusted net income. Surfactant was slightly down more than offset by polymers and specialty products. The company's full-year effective tax rate was 22% in 2022 versus 20% in 2021. This year-over-year increase was primarily due to non-recurring favorable tax benefits recognized in 2021. Moving onto slide 11, our balance sheet remains strong, and we have ample liquidity to invest in the business. Even with our increased CapEx investments, our leverage and interest coverage ratios continued at very healthy levels. During the year, cash from operations was $161 million and we deployed $466 million against CapEx investments, dividends and debt payments, share repurchases, and higher working capital requirements due to raw material inflation. The company's full-year capital spending was $302 million, inclusive of our 1,4-Dioxane project and Pasadena investments in the US. Now beginning on Slide 12, Scott will update you on our strategic priorities.

Thank you, Luis. In addition to delivering another record year of earnings, we made good progress on advancing our strategic priorities in 2022. The following slides capture our strategic priorities and a vision for a cleaner, healthier, and more energy-efficient world with our customers preferences in mind. Our diversification strategy and the functional products, including agricultural and oilfield chemicals continue to be a key priority for Stepan. Our global agricultural volumes increased double digits in 2022, supported by high commodity prices for corn, soybean and wheat, which incentivize growers to utilize the full breadth of crop protection options. In addition, Brazil continues to advance in agronomic practices, while favorable weather patterns in Australia increased demand for crop protection. We continue with the build-out of the Kymco KMCO Oilfield Demulsifier product line, having commercialized over half of the acquired product portfolio to date. We remain optimistic about future opportunities in this business as elevated crude prices should encourage increased oil production and the use of production and stimulation chemicals. Our polymer business continues to focus on developing the next generation advanced Rigid Polyols technologies, capturing the organic market growth driven by increasing global energy conservation efforts and delivering diversified growth in the spray foam market. We completed several significant infrastructure projects at our Millsdale manufacturing site, which will improve productivity and wintertime reliability. Our efforts to improve operational efficiency and bottleneck capacity continue across many of the production units at the site. We also look forward to commissioning new low 1,4-Dioxane investments at the site by midyear. Tier 2 and Tier 3 customers continue to be a focus of our surfactant growth strategy. We added 550 new net customers during 2022 and including functional products, we grew volumes in the mid-single digits. Despite the destocking efforts we observed in the fourth quarter across most markets and channels. We will continue serving and investing in the strategic market segment. In recognition of our ESG efforts, Stepan was named number one within the Specialty Chemical Sector of Investor's Business Daily’s 2022 best ESG company list. We also once again achieved the gold rating from EcoVadis, which places Stepan at the 96th percentile level within our industry. Moving to Slide 13, work continues at our new alkoxylation production facility in Pasadena, Texas. This asset will be a flexible state-of-the-art multi-reactor facility with approximately 75,000 metric tons of annual alkoxylation capacity. It will provide strategically located capacity and capability for long-term specialty alkoxylate growth across our strategic end markets, including agriculture, oilfield, construction, and household and institutional cleaning. We expect the plant will be up and running mid-2024. The underlying alkoxylation business that supports the Pasadena investment continues its strong double-digit volume growth and margins exceeding initial expectations. The recent acquisition of PerformanX Specialty alkoxylate business delivers additional baseload volumes for Pasadena and provides attractive market diversification opportunities for our alkoxylation product line. The integration of the PerformanX business is complete and we are delighted with the new customers we are now serving involved in existing markets and new markets to step in, such as pulp and paper and lubricants. As you know, we are increasing North American capability and capacity to produce ether sulfates that meet new regulatory limits on 1,4-Dioxane with network completion expected in the first half of 2023. 1,4-Dioxane is a minor byproduct generated in the manufacture of ether sulfate surfactants, which are key cleaning and foaming ingredients used in consumer product formulations. Stepan is working to supply customers with ether sulfates that meet the new regulatory requirements. Customers have made long-term commitments to low 1,4-Dioxane ether sulfates and we expect this transition to go through 2023 with our focus on generating value growth. Stepan will have the largest installed low 1,4-Dioxane production capacity for sales into the North American market, enabling Stepan to maintain and grow our North American sulfonation business. We are pleased with the progress in our fermentation product platform. Our priority remains the development and commercialization of Rondel lipids, our first anticipated biosurfactant offering. We believe this new bio-based product family has significant opportunities in several important end markets for Stepan, including agricultural chemicals, consumer cleaning, personal care, and oil field. Customer sampling has begun as development and engineering teams progress towards final process design. Finally, given the strength of our balance sheet, acquisition opportunities that align with our growth and diversification strategy remain a priority. Summarizing 2022, we delivered record earnings and I am proud of our team's effort and resiliency during what was a challenging market environment. We have now successfully delivered three consecutive years of record earnings. We made significant progress in several strategic areas including capital project execution, our sustainability and innovation programs, while also delivering continued diversification and growth of our customer base within our targeted end use markets. We also delivered double-digit operating income growth within our surfactants functional products business, within our polymers business, and within our specialty products business. Looking forward, we believe 2023 will be challenged by continued elevated inflation and high interest rates. We believe the macro environment could negatively impact consumer demand and construction-related activity, which will affect both our surfactant and polymer businesses. Additionally, we believe higher overall cost inflation, higher depreciation, and pre-startup expenses associated with our new Pasadena site will challenge our ability to deliver earnings growth in 2023. We are seeking to offset these 2023 headwinds with productivity improvements, pricing increases where possible, and furthering our efforts to improve product and customer mix. Despite this projected macro environment, we remain committed to executing our long-term growth strategy. This concludes our prepared remarks. At this time, we'd like to turn the call over for questions. Lisa, please review the instructions for the question portion of today's call.

Thank you. Our first question will be coming from Mike Harrison of Seaport. Please go ahead. Your line is open.

Hi, good morning.

Good morning, Mark.

Good morning.

I was hoping that you could discuss some of the factors that drove the 17% volume decline that you saw in Q4. Maybe help us understand how those split out between destocking, underlying market weakness, and other factors. And were there any key differences in the volume impacts, particularly from destocking, as you look between the Surfactants business and the Polymers business?

Thank you, Mike. Look, as you rightly said, so when you think about the minus 17%, you need to think about those three buckets, right. One is demand. One is destocking. And the other is the transition to low one 4-Dioxane product which we clearly communicated in October that we lost a tier one customer. And there are other impacts on the volume side related to the transition. So, if you think about those three big buckets, and you think about the minus 17%, roughly, each bucket is one-third. So think about 5%, 6% is the impact of each of them. And of course, when you think about Polymers, you don't have a low one 4-Dioxane transition. So you can see more than, you know, half and half situation between the other two buckets. That's how I would summarize the three big buckets that we saw in the minus 17% in Q4.

All right. And I guess in terms of destocking, that can't go on forever from your customers. Are you starting to see signs that order patterns are normalizing at some point here in Q1, maybe talk about what you're hearing from your customers in Surfactants, as well as in Polymers?

Yeah, Mike, I would say that it can't go on forever as well. But I would say, you know, incrementally, we may be seeing a little bit of an uptick versus what the pattern we saw in Q4. But I don't think we're done with destocking activities at this point. As you compare Surfactants versus Polymers, there are obviously two different channels to the retail end use. I would say on the Polymer side, once you get past the manufacturer of the rigid insulation panels that are poly all goes into. It's a highly fragmented market of distributors and contractors across the country. So, I think that destocking efforts will continue a while because I think that chain was pretty stuffed up. On the Surfactant side, I think as you look at consumer demand, I think the inventories got pretty full into Q4. And we may be further along in the destocking of the consumer product retailers in packaged companies. But I think Polymers may be a little bit behind Surfactants.

So Mike, I would summarize it as simple as you know, in Q1 versus what we're seeing already six weeks into it. We expect a similar demand condition versus what we saw in Q4. Everybody is facing a piece call in the second half right? That's kind of again at all. Theme and consensus that we're hearing from customers and suppliers people are both, Q1 or first half of the year and then picking up in the second half.

All right, very helpful. And then one of the asks about the Pasadena startup process, it sounds like there's going to be some P&L impact associated with expenses that you're taking on before you officially start commercial sales. And it does also look like the startup or commercial sales. Timing was pushed out a little bit, I believe you said previously, early 2024 now first half of 2024. So maybe just help us out with the timing and how we should think about modeling the impact of that startup?

Sure, I will let Scott later come in on the small delay that we're seeing on the construction phase. What I will tell you, look, we have—you have on the expense side, you have three big buckets as well, right. I mean, you have the Pasadena premier startup investments, right I mean, if we're going to produce full width – we're going to have a full production capacity in 2024. We need to hire, we need to train our people. You know, this is a chemical plant and we take this very seriously our training, ESNS, and everything so. With that, we are going to, as Scott mentioned it in the remarks that we're going to commission in also the low 1,4-Dioxane capabilities in the Millsdale plant we started last year in Georgia, this year in Millsdale. So between those two buckets, the net impact, because remember, we also had high expenses in 2022, with the Millsdale press event that we had in Q1. So when you net out the three, you are talking around $10 million of extra costs in our P&L, as we're commissioning low 1,4-Dioxane, and we invest to be ready on Pasadena. I will turn it over to Scott to talk a little bit more about the scheduled time.

Yeah. So Mike, as it relates to the construction of the startup schedule, we have slipped, maybe a month—maybe two max. We're about 20% complete with the construction. So it's in full swing. We had some raw material delays related to getting the civil construction done on the site. So nothing from just normal raw material constraints that were associated with the civil portion of the site project. So we should be mechanically complete, and up and running before mid-year.

For example, we have already made your equipment already on site. I mean, when you think about the reactors and all the major equipment that we need, they are all on site already.

All right. Thanks. I'll get back in queue.

Thank you for the question. The next question will be coming from Vincent Anderson of Stifel. Your line is open.

Yeah. Good morning. Thanks, guys. I just wanted to ask, given your existing alkoxylate portfolio and the PerformanX acquisition last quarter. How quickly do you think you can ramp and then fill the order book for the Pasadena facility once it's up and running?

Yeah. So good morning, Vincent. From an alkoxylation perspective, we have two existing alkoxylation facilities here in the US today. Pasadena will be our third. We also utilize a broad network of third-party tool manufacturers today that we have been using as capacity to continue to grow the product line, which has been doing very well, exceeding our expectations. So upon startup at Pasadena, we will have a very good opportunity to get that utilization up in balance with how we want to manage our external tolling that network. So, we have, I think, the ultimate flexibility to ensure the proper utilization of our internal assets and allow us to continue to grow using tollers as needed.

Perfect. I'm not going to ask you to predict the future on raw materials and all that. But, if we continue along this slow demand environment for at least the first half of the year, is there any reason that we wouldn't see a little bit of positive timing impact between price and raws, like we've seen in past down cycles?

It's hard to say, Vincent. I would say that raw materials kind of plateaued in Q4. So it's pretty stable right now. Whether it's going up or down from here, it's hard to predict. There are too many factors that play into that. Our focus is really—we will continue our pricing actions to cover any cost inflation that we have within the business and operations. So, I think it's wait and see. But we expect that we'll continue with our pricing strategy as needed.

Okay. Fair enough. And then I had a quick one on taxes of all things. The 2023 effective tax rate guidance is maybe a little bit higher than the last couple of years. But more importantly, maybe with all those capital spending, do either the Low 1,4-Dioxane projects or the Pasadena project qualify for bonus depreciation, and if so, how should we think about that impacting cash taxes over the next couple of years?

Yes. Great question, Vincent. The guidance is kind of similar. Remember, for example, the UK is moving to a 25% tax rate in April. So that's a key impact. And then you have country mix as well baking into that. So our normal tax rate if you go back to 2021 or 2020—2021, we had a lot of tax projects. But in 2020, you see our tax rate always in the 25%, 26%. So that's the guidance that we have right now. And you're totally right. On a cash basis, as soon as we commissioning all the Low 1,4-Dioxane assets, we will apply—those apply for bonus depreciation. Now remember, the bonus depreciation moved from 100%, last year to 80% this year per the new law is going down. And next year, we're going to be able to have Pasadena, but the bonus depreciation goes down to 60%. So unfortunately, we see that—I mean, it's not 100% like in the past, but of course, we are planning for that in our cash flow.

Okay, excellent. Thank you very much.

Thank you for your question. One moment while we prepare for the next question. And our next question will be coming from David Storms of Stonegate. Your line is open.

Perfect. Good morning, and thanks for taking my call. Just curious about some of the pacing with expenses for your 1,4 Dioxane and the Pasadena project.

David, could you repeat that question? We broke up on us.

No, sorry about that. Just curious about the pacing for the expenses. You've mentioned some of the expenses for 1,4 Dioxane projects and the Pasadena project. Just curious how we should think about the pacing of that through 2023 and beyond?

Yes. What I would say is—probably it’s more half-on-half. The first half is heavily loaded. It’s more loaded into Low 1,4-Dioxane, the back half is going to be more loaded with Pasadena.

Perfect. Thank you. The other thing, I know you guys won't give explicit guidance. But after companies like Exxon and Procter & Gamble released their earnings results, a lot of analysts raised their estimates for revenue and EBITDA. Do you think that's kind of directionally correct for the market going forward?

I can't comment on that, David? I don't know what's driving Exxon and their expectations.

Perfect. Thank you very much.

Thank you for your question. Please hold on while we get ready for the next one. Our next question will be from David Silver of C.L. King, and your line is open.

Yes. Hi. Thank you and good morning.

Good morning, David.

Good morning. This is kind of a qualitative question. But you did discuss the outlook for 2023 and some detail overall. I was wondering if you could maybe just highlight some thoughts regionally. In other words, of Europe, let's say, North America and South America, I mean, it would North America, in your opinion. And in your build up to a overall 2023 outlook. Is North America the strongest region, or are there some regional issues that we should kind of keep in mind as we think about the overall 2023 outlook? And of course, I'm thinking maybe geopolitical concerns in Europe or some broader regional issues in Latin America. But how does the regional outlook shakeout in your opinion at this point for 2023?

It’s a great question, David. Let me take a shot at first talking about kind of destocking and where the underlying demand is. I think everyone saw an earlier kind of slowdown in Europe, starting in maybe Q3 last year, whereas in North America, at least in our business, we didn't see the slowdown, really to start until Q4. So I think Europe's a little bit ahead in their demand pattern than North America. I think I said earlier, it's still a little uncertain right now six weeks into the year as to where the North American destocking will end. A really good demand profile going forward will be able to be established. So I think from that perspective, Europe's a little bit ahead, but I don't see any big macro differences between the two regions going forward. The one watch out is Latin America and the continued high inflation in those emerging economies where the average wage is much lower than in North America and Europe. I think they're going to be more exposed to continued prolonged inflation and could have a better impact or a bigger impact on underlying consumer demand.

Thank you very much. That's a great color, and I appreciate it. My next question would be kind of about new products or in particular, I think I've asked this question some time ago, but does Stepan track, I guess, there are calculate internally, a vitality index, in other words, the percentage of revenues from products that have been developed in the last three years, the last five years, something like that? And if not, I was just wondering if you could call out from a revenue or margin impact, however, you look at it internally, what are the one or two areas with the strongest new sales performance, you know, maybe in 2022. And if we look out another year or two beyond, I mean, I'm guessing the functional products areas is at or near the top of the list. But if you could just, you know, highlight some of the advances in your new product sales that would be helpful? Thank you.

Yeah. So I first start with, you know, where we are focused on strategic market growth. And that's within the agricultural chemicals space as well as specialty alkoxylate. So, you know, in agricultural chemicals – we are part of that development pipeline for new active pesticides. And that pipeline is anywhere from five years to 10 years long, for new products to come to market. So we're deeply embedded in those development pipelines with the large pesticide producers out there, which is a really great place to be and we have new products being launched in multiple regions. The other big focus for us is in specialty alkoxylate. You know, we're talking another double-digit volume growth year in 2022. We have a team dedicated to continuing to meet customers' needs for new and improved technical performance, but also broadening out our product portfolio. So those are daily or underlying activities that happen within our R&D organization on a global basis. The last area I would push is in Rigid Polyol. So we're really focused on innovation and delivering a more sustainable and better-performing board for the next generation of rigid panels. We're deeply embedded in those programs with our major customers in both Europe and North America.

What I would say, David is, we are investing and we're making good progress. Scott mentioned in the remarks spray foam also. So we are working with new products there. If you think we also talk about Chemco. We are relaunching that product line. And actually when you think about low 1, 4-Dioxane, that's, at the end, a significant investment that we're making to have a totally new ether sulfate portfolio. That means the new regulation, but that at the end—that does a lot of new volume that is going to be in a new product versus the past.

Thank you. I’d like to expand on Luis's last comment. Over the past few years, your business has been notably impacted by COVID and other issues that have shifted public perception regarding cleaning and disinfection. I have two questions. First, what do you believe will continue once the immediate COVID concerns diminish or become less prominent? Are there certain protocols for institutional cleaning or commercial spaces like arenas and stadiums that you expect to persist beyond the pandemic? Secondly, are there other initiatives or regulations, either internationally or nationally, that you think will present significant opportunities or necessitate adaptations within your business? What will remain important after the pandemic subsides, and what one or two regulatory issues should we consider in relation to opportunities for your business?

Yeah. Okay, David. As it relates to the COVID pandemic, I think if you look at North America, we've been pretty much open for about the last 12 to 18 months here in the US. So, we did see the spike while in the height of the pandemic around hand soaps and disinfectants, right, hand service disinfection. I think we reported back in 2021, the significant spike we saw in 2020, but felt that that was going to come back down, not to pre-COVID levels, but two levels above pre-COVID levels work. That is continuing today. So COVID provided an immediate spike in 2020. It's come down, but it's still running at 10% to 20% above pre-COVID levels due to new consumer behaviors associated with the pandemic. But that's been pretty much steady state for about the last 12 to 18 months. In terms of new regulations or initiatives. There's nothing on the horizon that we would say is a major headwind or a tailwind for demand related to COVID disinfection and cleaning. The biggest regulation that has impacted our company has been the 1,4-Dioxane regulatory environments started by the state of New York. That's why we've made the investments in 1,4-Dioxane to ensure our customers will be able to meet that new regulation going forward.

Okay, great. And I should have mentioned 1,4-Dioxane. And of course, last question, and this would be on your marketing. And it has to do with your strategy for Tier 2, Tier 3 customer development. But you did mention, I think, a net addition, customer base of about 550, for 2022. And I'm just wondering, if we should think about a particular target for next year, and more to the point, do you think you've kind of, I don't know, cherry picked or high graded the opportunities out there on the Tier 2, Tier 3 base of customers, or should we expect that there will be—that this will be a multi-year effort going forward? And you'll continue to kind of broaden the base of Tier 2, Tier 3 customers that you work with, and the products and services that you provide there. So, should we expect the growing portion of your revenue and earnings to come from Tier 2, Tier 3 going forward, or is the progress to date kind of a good measure what we should expect going forward?

Yeah, no. David, great question. We've been, I think, pretty clear that growing this Tier 2, Tier 3 segment is a major portion of our company's growth strategy. We continue to invest in sales, marketing, and R&D to support our continued growth with this segment on a global basis. We've identified that target for prospective customer list in Tier 2, Tier 3 around the world in the tens of thousands. Becoming more efficient in reaching and securing orders from these customers around the world is our focus. The 550 is a good number, we're proud of that, and that leads to improve profitability for our company, and that's our expectation going forward as our teams continue to execute and deliver those new customers on a net basis. That’s hundreds per year.

That's great. Thank you very much. I appreciate all the detail.

Thank you for your question. One moment, we have a follow-up question. Our follow-up question will be coming from Mike Harrison of Seaport. Your line is open.

Hi. Just a couple more for me. In terms of the Surfactants business, I'm curious if you're seeing any trading down happening within the laundry portions of the business or personal care? And if you are seeing that is it something that's happening in all regions, or is it maybe more, as you called out Latin America, maybe the consumers are under a little bit more pressure because of inflation. And I guess, are you seeing this trend around trading down? Is it getting worse as you look at Q1, or is it pretty stable?

Yeah, great question, Mike. I would, from my opinion, trading down in high inflationary environments is a universal trend. It's not geographic-specific. And yes, so consumers will trade down from premium to mid-tier to economy tiers, and the economy tiers and mid-tiers also include private label. So I do think there's been — that trend — we've seen that trend from our lens with sales to customers in multiple regions. Is it getting worse? I don't know if I can comment on whether it's getting worse or not. It's just, it's an uncertain view right now with destocking and everything in terms of what the trend is, but it definitely happened in Q4.

All right. And then just looking at the working capital numbers that you guys provided, it looks like working capital improved a little bit compared to Q3. It does look like your net debt went up, though. What was cash from operations in the fourth quarter, or the full year, whatever you can disclose on cash flow would be very helpful?

Great question, Mike. So what we're seeing is, we saw the peak of working capital kind of in Q3, and now we are our kind of stable versus that peak level. But yes, this has been roughly a $200 million increase, versus the base period versus 2020. We have seen a significant increase because of the inflation on raw material and everything. So as we delivered $161 million in cash from operations for 2022, that includes an impact of around $71 million of working capital. So if you exclude working capital, because this is a one-time, we're now stable, we generated $232 million in cash. And this was 100% in line with our plan. If you look at the $300 million CapEx, of course, the $300 million CapEx has too many of projects there. Pasadena and low 1,4, so it just ticks that out, you end up with a free cash flow productivity of around 85%, which is pretty good for us. So at the end, you have those three big drivers that I kind of want, I mean, $70 million working capital. And then of course, we're building Pasadena and low 1,4. If you remove that from the equation, we were happy with our cash flow. And as you know, we're very efficient on our working capital. We have less than 20% of our sales in working capital when the industry average is about 24% to 25%.

Alright. And I guess just maybe another cash flow-related question. Where did the depreciation and amortization end up for the whole year? I'm guessing it was around $95 million? And we're thinking about next year? Where should that D&A number go? I assume that goes up substantially as you start to bring on some of the new assets that you've discussed.

You're 100%, right. $95 million, we're estimating at least $112 million to $114 million next year can increase between $17 million to $20 million that of course will depend on the timing from when you just start the depreciation of some of these assets, but roughly, probably around $70 million.

Excellent. Thank you very much.

Thank you. That concludes our Q&A session for today and I would like to turn the call over to Scott Behrens for closing remarks. Please go ahead.

Thank you very much for joining us on today's call, we appreciate your interest in ownership in Stepan Company and have a great day.

This concludes today's conference call thank you all for joining. Enjoy the rest of your day.