Q4 2019 Earnings Call
Okay.
Greetings and welcome to the Q4 and full year 2019 earnings call. During the presentation, all participants will be not listen only mode. Afterwards, we'll conduct a question and answer session at that time. If you have a question pay supposed to one followed by the floor on your telephone [laughter] anytime during the conference you need to reach an operator. Please press star zero as a reminder, this constituted being added.
What is Thursday February Twentyth, Tony Tony I would now like to turn the conference over to do with Little Seattle. Please go ahead Sir.
Thank you good morning, and thank you for joining a step on company fourth quarter 2019 financial review.
Before we begin please note that information on this conference call contains forward looking statements, which are not historical facts.
He said the statements involve risk and uncertainties that could cause actual results to differ materially.
Loading, but not limited to prospects for out we're forging operations.
With all well I'm, sorry, you're not economic conditions and the fact that was the daily not was acuity Deanne Exchange Commission fighting.
Their joining <unk> online or over the phone we encourage you to reveal the investor Slide presentation, which we have made available at www dot they've been dot com on that of Investor Relations section of our website.
We make thesis that I saw that <unk> at approximately the same time, that's when the earnings release is issue.
We hope that you find information perspective helpful.
Now with that I will like just on the goal over to Mr., We know step on our chairman President and Chief Executive Officer.
Thank you look base a good morning. Thank you all for joining us today.
Despite significant challenges in 2019.
Stepan company exceeded its 2018 record full year adjusted net income and grew adjusted earnings per share 7%.
For the quarter surfactant earnings were up due to the insurance recovery in Mexico, and functional growth in Europe, and North America.
The polymer business had a good fourth quarter, driven by global rigid polyol growth of 7%.
Specialty product income was down slightly due to a.
Customer order patterns, but was up significantly on a full year basis.
The company had strong cash flows and negative net debt as cash balances of $315 million exceeded total debt of $222 million.
Adjusted operating income margin was eight.
Percent, an increase of 50 basis points versus 2018.
Adjusted EBITDA margin was 12.4% an increase of 90 basis points versus 2018.
Fourth quarter, adjusted net income was $25.7 million or $1.10 cents per diluted share versus $19.5 billion or 84 cents per diluted share in the prior year.
Full year, adjusted net income was $119.4 million or $5 in 12 cents per diluted share versus $111.7 million or $4 in 79 cents per diluted share in the prior year.
Surfactant operating results for the year were negatively impacted by lower volumes in the U.S.
The key drivers in the U.S. were lower personal care commodity volumes due to one key customer, losing an important piece of business and lower demand in year on inventory adjustments in the distribution channel.
[noise] polymer operating results improved during the fourth quarter and were up for the full year due to volume growth of 4% driven by double digit growth in rigid polyol sales.
Specialty product operating income for the year was up significantly compared to the prior year, primarily due to strong volume productivity and raw material reductions in our lippitt nutrition business.
The company increased its quarterly cash dividend in the first quarter of 2020 by two and a half cents per share or 10%, marking the 52nd consecutive year that the company has increased its cash dividend just stockholders.
Quarterly cash dividend on Stepans common stock is now 27, and a half cents per share payable on March 13 2020.
As a recognition to our strong dividend track record Stepan stock was recently added to the S&P high yield dividend aristocrat index.
Turning to 2020, a January 19th we experienced a power disruption that impacted millsdale our largest facility.
Although power.
Was restored after a period of time, the power outage and below freezing temperatures created significant production and operational challenges.
We have been able to run on a partial basis and have a use existing inventories to serve customers.
However on February 17th operational issues impacted the sites wastewater treatment plant and forced us to stop production at the site.
We have been able to restart polyol production using a temporary solution and are targeting to bring the wastewater treatment back into operation within the next few days.
Once the wastewater treatment plant is operational we expect that production of surfactants will resume.
We anticipate salkin hydrate production will remain down for approximately 30 days.
Because of the wastewater treatment plant being down and low inventory levels. We have declared force mature for the supply of Falcon hydride and certain surfactant product lines.
We are using our global production network and working with customers to minimize the supply disruption.
We're also working with our insurance provider to recover losses related to this incident.
This time, we are not able to quantify the extent of the impact from the event, but this incident creates a challenge for us in 2020, we're confident that the resources are in place to resolve the issue and move forward.
For more than 80 years, we have supplied our customers on a reliable basis and we are committed to do so in the future.
At this point I would like Luis to walk through a few more details about our fourth quarter and the full year 2019 results.
Thank you Queen My comments will generally follow the slide presentation.
Yes. It started with this slide five totally got the quarter.
Adjusted net income for the fourth quarter of 2019 was $25.7 million.
31% increase.
Was $19.5 million into fourth quarter of 2018.
Because I just didn't Netincome is a non-GAAP measure we put a wide full reconciliations to comparable GAAP measures and these can be found in appendix two of the present Asian and Dave will do what their press release.
Our judgmental reported net income for this quarter were made for deferred compensation restructuring expenses I mean could he says in the environmental remediation reserves.
Adjusted net income for the quarter exclude deferred compensation expense of $1.8 million.
Or seven cents per diluted share.
Compared to deferred compensation income of $4.7 million or 20 cents per diluted share in the prior year.
The deferred compensation numbers, we present, the net expense related to the company's deferred compensation plan I swear last cash settled stock appreciation rights, what I what I'm. Please.
Because these are not yet really this change with morphine in our stock price risk through these items from our operational discussion.
Adjusted net income for the quarter also exclude setup, an $8 million or four cents per diluted share of after tax business restructuring charges related to the ongoing decommissioning cost associated with the Canadian plant closure during 2017 and in Germany, So inflammation shutdown.
2018.
With respect an additional 1 million dollar of after tax decommissioning expense in 2000 on Duane.
In addition, adjusted net income for the quarter also excludes 1.1 million dollar or four cents per diluted share offering environmental remediation. We serve increases associated with the site, we usually owned by the company in Wilmington, Massachusetts.
It's like seeks show that total company earnings bridge for the fourth quarter compared to the fourth quarter of 2018.
Breaks down the increase in adjusted net income.
Because this is net income that feel good as noted here out on an after tax basis.
We will go but each segment in more detail, but to summarize sort of fact on some pretty much where all white space have deep rather was basically flat versus prior year.
Favorable net interest expense was related to how you think that its income in the U.S. after the company's cash repatriation in 2018.
Company effective tax rate was 18.1% in 2019 versus 19.4% in 2018.
These year over year, they could east, we'll see you do how your U.S. R&D docs gravy.
Partially offset by onetime favorable tax, but all your in 2018.
With that full year 2000, and the way any effective tax rate to be in the range of 20% to 25%.
Slide seven focus on sort of fact that segment results for the quarter.
So in fact, I hope, but any income in the quarter increased $4.8 million versus the prior year, primarily due to an insurance recoveries related to equipment failure, you got to bake Mexico.
Functional volume growth in Europe, and North America.
So the fact on net sales were 300 on $10 million for the quarter, a 4% degrees.
Volume was flat versus the prior year.
Global demand for broke sold into or agricultural an oilfield and markets was offset by lower volumes in that institution channel.
Selling prices went down 3% from I leave you do that back through lower raw material costs.
Translation impact <unk> strong Gotta U.S. dollar decreased net sales by 1%.
In their breach we show North American Asia in the same category, because I, what sort of fact them business Ignatius relatively a small.
Most of this would in fact on production in that region is used to support basis in the United States.
North America decrease was primarily driven by low what are the man and you are in inventory correction in the distribution channel, Singapore overhead impacts on product mix.
North America volume was up 5% driven by strong double digit growth in the functional and markets.
But you know maybe got resolves what all primarily due to an insurance week already related to the caught up in Mexico incident.
We'll be on results increased did even by how you are the mine cultural an oilfield end markets.
Now turning to body much on slide eight.
All of our quarterly operating income increased $1.9 million versus prior year. This was driven by read all your volume growth.
40 about net sales were 100 on 60 million dollar for the quarter down 5% versus the prior year.
Total volume increased 3% quarter over quarter Global I'd read you put your volume growth of 7% was partially offset by low where PPA volumes.
Selling prices declined 7% on the translation impact of a stronger us dollar negatively impacted net sales by 1%.
Global Polyol volumes increased 7% due to reduced volume growth in North America and Asia.
We continue to experience a store Saddam market demand, but even by energy conservation efforts on growth in construction.
North America polio results increased due to strong volume growth.
European we sold it could easily due to lower volumes, China results improved 70% volume go do you and by increased demand in the coldest storage insulation entities polyester polyol usage.
Finally be a results did get easier to lower volumes.
Specialty, but all quarterly operating income was $5 million basically flat versus prior year.
Especially the broke net sales were 18.6 million dollar for the quarter, a 9% decrease versus the prior year.
We will now take a moment on slide nine totally GAAP the full year 2019 financial performance.
Net income for the full year 2019 wells that hundred on $3.1 million.
Adjusted net income was again, a rack or off 100 on $19.4 million or $5 on 12 cents per diluted share.
A 7% increased from $4 on 79 cents per the boot that shedding 2018.
So in fact that operating income was $122.8 million down from 2018, you too low would've volumes in the U.S.
Thank you that I've ever seen the U.S., where lower personnel or get a commodity volume due to one key customer losing on import them business.
No what are the mine and year end inventory adjustments in the distribution in China.
The polymer segment delivered $69.6 million off about 18, Ingo up from the prior year due to volume growth of 4% driven by double digit good old ingredient volumes.
Especially if you broke up at 18 income was $16.4 million up 4.9 million dollar from the prior year due to strong volume, but other DVD on bromine price reduction in our lead nutrition business.
Slide 10 shows that thought that company burden is but each for the full year 2019 compared to 2018.
Like the quarterly breach the figures here are noted on an after tax basis.
Turning to slide 11.
Our balance sheet remains a strong we had negative net that at yearend as cash balances of $350 million exceeded total debt of $222 million.
We delivered a record year on cash we've cash from operation at a record $218 million, an increase of 27% versus 2018.
For the full year the company return at $36.3 million solar shareholders via dividends and share repurchases.
Beginning on slide 12, we will now update you on our strategic priorities and plan to increase shareholder value.
Thank you Louise.
As mentioned previously the first quarter of 2020 will be a challenge. In addition to the Millsdale incident, the direct and indirect impact the perona virus in China will negatively impact the quarter. The Chinese government asked step and many other company companies to temporarily shut.
Down manufacturing sites.
Our plant was shut down for 12 days in February and after startup logistics have been difficult and have limited production.
Despite these challenges we believe our continued focus on end market diversification tier two and tier three customers as well as our cost out activities will benefit our surfactant business. We also believe our polymer business will continue to benefit from the growing market for insulation materials and our optimal.
Mystic the business will deliver the volume growth in 2020.
After impressive growth year in 2019, we anticipate that are in 2020 specialty products business results will approximate 2019 results.
Turning to slide 13, we have made good progress at our market diversification efforts.
Which continues to be a key component of our strategy.
Volume to the functional product end markets increased 9% during the first.
Fourth quarter, primarily due to higher demand in agricultural and oilfield end markets.
Next our focus on customer intimacy continues to be a priority in order to deliver growth within our tier two and tier three surfactant customer base and to maintain our leadership position in several of our key businesses.
Volume in tier two and tier three customers was flat during the quarter, primarily due to higher demand and Latin America offset by a reduction in the U.S. due to lower demand and in yearend inventory adjustments.
Global rigid polyol volume increased 7% during the quarter due to strong market demand driven by increase installation standards and growth and construction.
We remain optimistic about continued growth of the rigid polyol market due to global energy conservation efforts.
This summer, we will experience extra cost to manage the shutdown of the Illinois River for planned maintenance activities.
Innovation is a key part of our strategy as a leader in the rigid polyester polyol market. We continue to work on developing the next generation of value added technologies for our customer base.
During the quarter, we continue to sell stepping quad Helio in North America, where customers are responding positively to this new hair care conditioner ingredient that is mild and safer for the environment.
We have also now introduce the product in Latin America in India.
Additionally, we continue to sell our nine all see a product with encouraging results. This new product is naturally derived and mild and as higher active levels for reduced transportation cost.
The product delivers multi functionality so our customers can reduce the number of products in their formulation.
This is a great product that delivers better performance for our customers and the environment.
Next up really operational excellence as an integral part of our strategy. We believe that the application of Sulfonation best practices network synergies and drive cost savings opportunities will create long term value primary caught effect Mexico acquisition.
We continue to deliver savings on the shutdown of our surfactant operations at the best selling Germany plant.
We will continue to examine our asset base for opportunities to further optimize and improved capacity utilization and to be more.
Efficient.
In terms of the way, we serve our customers around the world.
During 2019, we have made significant improve contributions from our financial team.
We have reduced net interest expenses by 45% delivered an effective tax rate and reduce past due receivables, all which have improved our bottom line and cash.
Physician.
Finally, M&A represents an important tool as a means to deliver meaningful EPS and EBITDA growth over the next few years.
Given the strength of our balance sheet, we will continue to identify and pursue M&A opportunities to fill gaps in our product portfolio and add new platform Chemistries.
During the fourth quarter, we acquired Camco LLC is the most emulsifiers product line, we acquired the product line process technology and their customer list.
Oilfield production requires the use of chemicals, largely l. Cox woods to help separate the oil and water before the crude oil goes to the refinery global market for de Emulsifiers is about $2 billion and is projected to grow at or slightly above GDP. This.
As an important opportunity for the future and complements our product portfolio in the oilfield market.
We expect expect this acquisition will be accretive just step in and 2022.
As a decade finishes I reflect back on the recent history.
And businesses our team has built.
In the last 10 years, we have become more diversified business, we increase adjusted net income, 80% and had record results seven over the last 10 years.
We have built a strong balance sheet with more cash than debt and most importantly, tripled our market cap from $700 million to $2.2 billion.
Not a bad decade.
Looking ahead, we have a great organization and three strong businesses with opportunities to grow.
We have the desire and capability to deliver another strong decade of growth.
We are the financial flexibility to make acquisitions that will complement our gannett growth and help us deliver shareholder value.
This concludes our prepared remarks, we understand that you may have more questions on the current situation and Millsdale. Please note that this event remains fluid and that we will provide more information as appropriate.
At this time.
We would like to turn the call over for questions. Melissa. Please review the instructions for the question portion of today's call.
Thank you, ladies and gentlemen, if you'd like to register for your question. Please Mr. one follow up with a floor in your telephone you will hear cetone come to the knowledge request. If your question has been answered any we'd like to withdraw your registration. Please mr. wonderful admittedly once again, ladies and gentlemen, and is the one floor to ask a question.
One moment please.
Our first question is from your line of Mike Harrison with Seaport Global Securities. Please go ahead. Your line is open.
Hi, good morning.
Good morning, Mike Mike.
When I know you mentioned that the Millsdale situation is still kind of involving are fluid situation, but maybe can can you help us understand which surfactants products are being affected there or maybe help us three them up how much of your north American volume.
Is served by this facility, maybe any metrics that you could share to help us.
I understand what the impact could look like.
Okay, Yes, if we take a look at.
Primarily three product lines that we have.
Called force majeure within our Surfaxin line, our fabric softeners.
Mittal profile based tertiary mean.
Based I mean oxides.
And our butane product line. So those are the three product lines that had been in fact and.
Those product lines from mills sale represent about 10% of our North American business.
And.
Which are currently on allocation and about 5% of our global business.
And then if we look at.
So where we hope will be a relatively short timeframe proportion merger.
But.
Those that's the sides of the business today.
On an Mike I I will add just tool.
Your comment on trying to understand saw it during during January we had ex that our cost for around $2 million.
We are still assessing what was that business interruption piece for identity.
Budding thermal cost due to all the maintenance on everything that we have to the meals sale.
They impact on exit our calls was around $2 million.
All right that's a that's for that'll folds those surfactant and polymer yes, yes, that's what a whole site.
Oh.
Understood.
And then counterparts.
Can you maybe give us an update on how that plan so running how the ramp up is progressing there.
Maybe what you're seeing more broadly in the surfactant market within Latin America.
And also can in in that so the questions can you quantify the insurance recovery that you saw in Q4.
Yes so.
Let me just to deal with the insurance upfront.
Probably $5 million on an after tax basis was the net impact of the insurance recovery.
If we take a look at the ramp up of our business in a caught up back. What we are seeing is on a sequential quarter basis. The volume is coming back from Q3 to Q4 volumes were up.
Proximately, 10%.
We're anticipating Q4 to Q1 that our volumes will be up at least another 10%.
As as.
We have restored production in the area.
And.
Generally we feel pretty good about the the Mexican market overall.
We are about a year behind in terms of our business case for the site, but overall our business, we believe will be up.
In 2020 from where it was when we acquired.
Order of magnitude probably by about 30%. So so we still feel good about the acquisition in Mexico, and we are hoping to get back on track with our business case in 2021, but we will make progress this year.
In terms of just overall Latin America, our biggest market today is Brazil, and we feel pretty good about the progress that we're making in Brazil are tier two tier three customer base is up our tier three customer base in particular was up about 15% last year and.
Brazil, and our AG business was up about 35% last year in Brazil. So so we feel pretty good about Latin America, and the opportunities that present for Stepan company.
All right that you referenced the Singapore overhead issue.
In the context of North America Asia surfactants up income be down.
In the fourth quarter or what was that issue and has that been addressed.
Yes, Mike This is just basically production timing differences.
Good day impact was around $2 million into quarter.
Yes, I mean that he's not going affect both of these.
No no problems as saying up on our I'll just the timing of.
Shipments from Asia to the U.S. and the end the year in which we absorb the overhead.
Okay, one more for me and then I'll get back into queue. Just just on M&A you referenced a a product blind acquisition I assume that was relatively small.
Obviously, not a accretive for for a couple of years, but it sounds like it.
Within the portfolio can you maybe give us an update I mean, obviously the balance sheet continues to be in a very strong position.
How are you thinking about maybe bigger M&A opportunities.
And other capital allocation opportunities, maybe some share repurchase as we get into 2020. Thank you.
So just from an overall perspective, we would look to continue the.
Slightly.
More aggressive share purchases.
That we've demonstrated that over the last two years.
In 2000.
22020, so we would continue to do that and.
Obviously, we're we're committed to to our dividend as well. So we anticipate returning money to shareholders in both of those the both of those cases of from a.
Acquisition.
Perspective, we are.
Have developed fairly extensive pipeline of opportunities that we're currently looking the pipelines generally are very consistent with our priorities in terms of.
AG oilfield.
Rigid polyol and personal care specialties or the four areas that we're looking at and we would hope to to make a few acquisitions in 2020.
Both some small as and some larger ones as well, but we'll we'll continue to work on that as an organization. We do want to be more acquisitive and have resources in place to to work on that yeah, I know, what I will that might gain on the point on resources. I mean, we have work a lot in that in the past few quarters.
To put more resources into their money area, especially on the business units not at the corporate level, but in the business you need.
People fully dedicated.
The way money, which is going to which is going to helped significantly.
Going forward were to be more.
What do we fast it until we more clear on our targets on what we want to the viewer.
All right thanks very much.
Thank you Mike.
Thank you and our next question is from the line of Vinson Anderson with Stifel. Please go ahead. Your line is open.
Okay.
MS centered on your line is open.
Hey, sorry, guys.
I was hoping that we could talk a little bit more about the volume.
In the fourth quarter and surfactant, if you'd be willing to give us an idea of how much contribution you saw from the products that you've watched over the last year and then on that topic should we interpret your comments in the press release around agriculture to demand that you were successfully specked into those uptake.
Good formulations that we've been discussing a in the past or was this more of a broad based increase in agricultural demand.
Oh.
Vincent as I mentioned in India in discrete we were very happy with with our volume results in North America sort of fact that he was up five or 5% that even biased but on a double D. Good old in our functional.
Markets saw.
We've we thought said as we mentioned on the on the distribution channels. So.
Solid first three quarters are not on.
Closing the year, we've we've our biggest business in the company, which is not that many goes with the fact that I mean growing volume, 5% we were very pleased.
When do you want a lot of something on X., Yes, just from an AG perspective, most of the volume growth that we've seen in the agricultural market is.
Is the at or is increased share as the result of being incorporated in new formulations around the world.
So we feel pretty good good about.
The R&D.
Resources that we have in the agricultural market in the great collaboration we have with the crop protection projection or production companies and and so we feel.
We feel thats, a real strength for step in and we're continuing to do that.
Okay.
Have our new Chief Technology Officer has come from the AG marketplace. We are investing in a new R&D facility at our Winder, Georgia facility and we continue to add resources on a regional basis to support our AG business growth. So so we feel we're well positioned in that space and look for continued contra.
Fusions from that in 2020 and beyond.
That's very helpful. You.
And then going over to the chemical acquisition.
Just hoping you could specify exactly where these complement your current portfolio and then any idea as to why camco. It had exited the L. Cox split the most of the emulsifiers, but not their polyol do most buyers.
So good camco had an explosion at their facility that was unreal about a year and a half go almost two years go at this point.
At their facility.
And although they did not added event did not directly involved the de emulsifiers products.
They have not been able to restart that facility and they needed to raise some cash.
Two.
To take care of some legal issues at the site so.
The product line today is not active or had not been active so we're excited about the opportunity to buy the the technology by the formulations and by the customer list associated with it.
So I don't know why they chose not to sell the other piece of the business yet at this point in time, they're also looking at trying to sell the site and an exit the business overall, the current onerous private equity owner. So we again, we're very happy with the with the the acquisition we are in the process.
Rebuilding the supply chain within Stepans that work and that's why the business won't be accretive for until 2022.
Alright, Thanks, and then just turning over to Capex, you've been investing consistently over the last few years and improving reliability efficiency.
What does your impression of your asset base.
Today.
Your long term reliability targets and when would you expect to kind of reach those goals and and any incremental spending associated with those initiatives, where where did that come down to in terms of the capex budget.
Our business is generally capital intensive.
Overall, we spend approximately $60 million to $70 million a year, maintaining our current infrastructure.
I don't know that we anticipate that number will decrease.
Significantly over the years as soon as a constant.
[music].
Requirement to maintain safe and reliable production.
It within the business that we're at.
We could see capital.
Go down slightly, but but not significantly from a maintenance perspective.
Sure. Thank you.
Sorry to clarify.
The 60 to 70 million, but the the difference between your current Capex budget and that.
Regular maintenance budget.
You're talking about.
The difference between.
Yeah 100 and.
But it may lend direct salt sub so as you know so while we are spending 19, I mean $106 million in Capex is that combination lost a basic maintenance on infrastructure out on your Chen asked I know that we also continue investing on good ultimate all JAKKS, especially on our polio a product line.
Putting more capacity on putting new capacity. These four four new innovations. So so that combination of that delight in these days basically what idle ships today will be 100 on 6 million, though with the with spanning now yeah. So we I mean, we would like to continue to have growth opportunities to.
Ill spend money on into to improve the our business and improve our product mix. So we would love to continue to invest in our growth opportunities both.
Inorganic from an acquisition perspective, but also organically.
And so as Luis is just mentioned.
Re positioning and adding additional flexibility and product capabilities for the future within our polyol business is capital intensive and as is where we're spending a fair amount of that differential today.
Okay understood. Thank you very much.
Yes.
Thank you. Our next question is from the line of Davidson Louis C.L. King and Associates. Please go ahead. Your line is okay.
Yeah, Hi, good morning Monoline David.
Yeah. So.
I had a couple of questions, but I mean, the first the primary area of interest here would be in your R&D.
Programs. So you do spend about 3% of your revenues on R&D each year.
And.
Yeah I was wondering if you could characterize the program and maybe across a couple of metric so.
I don't know if you.
Calculate this internally, but do you have a vitality index of sorts in other words what.
Percentage of your revenues might be derived from products that might be I don't know three years old last three years or developed in the last five years.
And internally, I mean, where might that be now versus where you're expecting that to move over.
A couple of a couple of years or however, you look at it internally.
And then secondly, maybe if you could characterize.
If you could break down the spending.
Maybe by how much is directed towards you know proprietary new products, such as step inquiries and methanol.
Versus I guess, you're supporting a large important private label business and that might be an instance, where maybe you're making or inventing around you know.
Products developed by other.
Suppliers, so just spoken to get kind of a big picture view of the significant ongoing R&D spend and how that might be reflected in your results over the next few years. Thanks.
Okay.
We don't have we don't look at this specific vitality index that that you that you have talked about.
But what I would tell you is the way we do look at our research and development, we kinda look at it and and.
For kind of different buckets.
One of one bucket is technical service.
And let me just tell you what the buckets are that I'll come back and talked about a couple of them. So if you look at it.
Nickel service as a bucket.
We look at cut our innovative or inventive.
Activities, we look at kind of plants support related activities.
And plant support could be helping us de bottleneck, our facilities and get more from our existing assets and then we kinda look at it then also the last bucket I would say is kind of regulatory compliance related. So those are the four buckets that we have.
And today.
The largest percent two of our our assets today are probably spent on technical surface service working very closely with our customer base, helping them try to be successful and a lot of that activity is providing.
And you talked about private label business or mimicking, but I would say, it's more delivering new formulation technology incremental improvement technology to customers around the world, We talk about tier three and tier.
Two customers many of those customers around the world don't have the sophistication to develop their own laundry products to develop their own dishwasher products through all of their own personal care products and it's taking a 80 year history that formulary that we've developed.
With old and new products to to that customer base.
So that that is a.
A significant part of our effort and Thats done not only in the U.S., but thats done our global basis.
And the other the other area that we've talked about in terms of innovation or invention activities and today I would say, we probably have about a 15, 10% to 15% of our R&D resources are kind of looking for those new molecules and today I would say we look at that.
That ratio.
We're not.
Happy with the productivity of that research and development spend.
And we are setting more aggressive goals to deliver new inventive inventive innovative technologies from those resources today. So.
And then the the third.
Buckets that I'll comment on is kind of the plant support we have been able to drive significant enhance productivity, particularly in our polymer area.
By having our plant people work with our R&D resources in our pilot plan resources to drive incremental.
Capacity improvements at our sites on a global basis and.
That helps us keep our manufacturing costs low in that area.
And.
Hello.
[music].
Our profit improvement so.
Okay. Then thank you for that and then I have a question for Luis.
And.
In the appendix.
Slides.
Where you're listening or some some guidance for the future years.
You indicate that your overall tax rate is due to step up.
From the high teens into the.
Low to mid well as much as the mid twenties next year.
So couple of things, but I was wondering if you could maybe highlight the source of that.
From wide increase.
And then also whether that's in your opinion to one or a shorter term.
But in your effective tax rate or whether we should be.
The modeling that.
Higher rate on into the future.
Yes sure David.
Actually what I would say they that range.
You see for 2020 to 20% to 25% ease actually how were going range. What you saw in the last two years the 19% on the 18% was driven by a lot of one time backs, but all year that lever bioware.
Tax group. So for example, we mention in discrete that in 2019. These low tax rate of 18% did even by R&D tax credits that we would able.
To claim on to go ahead.
For seven out of the last few years. So so that's why they 18 on day, 19% east not I wouldn't automatic.
Yes rate includes a specific tax, but all JAKKS data that I don't know whenever you're not going basis. We will continue looking always for opportunities in compliance, we've we've laws and regulations.
On on Eve during the year, we see we see on additional probably we will always communicate that myself. Now. This is this is our normalized tax rate for ongoing basis.
I'm not you know very docs that tax rate also depends on auto mix. Because every company has a different tax rate. So again I mean, if you are growing factoring Mexico without 30% tax rate on Meeks, our place plays a role in the numbers as well.
Interesting. So so you were able to claims from reasonably significant.
Discrete tax benefits each in the last couple years.
Okay.
Okay, and then last question.
You've talked about growth and development of your aggregate cultural products business.
You know I'm familiar with the use of surfactants for ads your brands.
That go into pesticide formulations of all types.
Is that the guts of your agricultural product business or does your kick to your Chemistries you know.
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Apply to other types of additives or other types of formulation ingredients in the in pesticide formulation. Thank you.
Our our products for use as a month and most of fires and solvent.
And in some applications were an AD defense, but.
Most of it is to the large crop protection companies around the world where were helping them.
Okay.
Combine active ingredients and deliver those more effectively to the plants. So it's not agile Vince per se that that's that's an area, where we participate but it's not a big part of our portfolio today.
Okay No that's very helpful. Thank you.
Thank you David.
Thank you.
Our next question is a follow up question from the line of Mike Harrison with Seaport Global Securities. Please go ahead. Your line is open.
Hi, just a couple of additional ones in terms of the distributor.
Inventory actions that have I believe that was kind of expected.
And is typical at yearend, but where do you see distributor inventory levels now in a in surfactants and is the inventory reduction something that's going to extend into the first quarter or maybe first half of 2020.
Mike what we saw US we mentioning discrete was low what are the mine over at all in the in the channel and then in a few places we saw bay the inventory adjustment on bubbles in.
In general the lower demand.
As we have stalled guy in the past I mean, these decided to can you speak on areas, where we see where we were what we thought it seemed anticipation of a slowdown in the economy, the beacon leasing that distribution channel and P. Eight.
Our business. So yeah, I mean, not distribution was will stop soft in the in the U.S. threw out on 19.
And I would say the distribution business in Latin America.
Particularly Brazil in Europe.
Pretty healthy, but I would echo what Luis said and.
When we start seeing small customers stopped buying gives me some pause about the economy going forward. So so we'll see where that goes but I am a little concerned about about the economy in the economy in my mind is not the stock market.
It's actually at people that are make things and.
Provide services for people around the world and I see them starting to slow down and.
Their purchases and willing to commit less capital to there to the products that they make.
Thanks.
Got it and then over on the polymer side.
It looks like pricing was down about 7% in the fourth quarter or can you give us some additional color on what's going on with raw materials pricing or within the polymers business, maybe how we should think about.
Pricing dynamics and margins as we move into 2020.
Sure Mike asked us as we have talked building.
During 2019 was not only was not only be Q4, but but of course, we sole raw material price reductions in especially on the re you pulled us I mean across would factor some volume are spot on renewed volumes.
We saw significant reductions in seven of materials, the GE et cetera. So that's why that's why of course, we wanted to be competitive while improving outwear, where margins. So let us as you saw what operating margins.
Ian.
In polymers went up 100 basis points.
We feel we feel good about the margins in this business on now we want to make sure that that we've got all under we enjoy.
The market good old in and we don't lose on we don't lose business on we don't lose share. So we will continue so.
Striking that right balance between top line on margins and we feel good about about where we are now.
And just couple of comments on Pollo polymer raw materials. So we have seen significant softening of the DG market, particularly in China are not yet lower demand in China is how we're seeing.
That impact the dialing glycol prices, particularly in Asia, but.
But potentially on a global basis as well and then we did mentioned in the script that the Illinois River is going to be down for the first time ever maintenance.
In 2020, when I say first time ever maintenance, that's first time ever in a 125 years of locks.
So so we will have some incremental costs associated with the delivery of both ortho side lean and dialing glycol to our facilities and and Millsdale. During the summer of this year. So not a Q1 issue, but begin the impact us late Q2 and into Q3.
Yeah.
Yep.
Both on calls on cash.
Got it and then.
In terms of the specialty polyol business. Your recent commentary there is not really been positive or the volume seem to be under pressure. There is that more market related or is there something going on in your approach to the market or the competitive environment, that's leading to the weakness in spec.
I will be polyols.
Yeah, I would say that the.
The true answer is probably a combination of both.
Both of those things the market is is down for that a lot of the products that are used in that space are tied to the auto market.
We are seeing.
We are seeing.
A decrease in demand in that space across the market.
Particularly North America, I mean, our our specialty polyol business in Europe, the salt on how we.
We had a good year.
With key customers with key global customers in decent space, yes.
Oh he stops.
I mean, North America was down by Europe was up.
All right thanks very much.
Yeah.
Thank you and I'm showing no further question at this time.
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Okay. Thank you very much for joining us on todays call. We appreciate your interest and ownership in Stepan company.
We look forward to reporting to you on our first quarter 2020 call. Thank you very much.
Thank you, ladies and gentlemen that does conclude today's call. Thank you for your participation and Astra. Please disconnect your lines.
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Okay.
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