Q4 2022 Stepan Co Earnings Call
Good day, and thank you for standing by walking through the stepping.
Fourth quarter and full year.
Earnings Conference call.
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The speaker's presentation, there will be a question and answer session to asking the question. During the session you will need to press star one one on your telephone you.
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Please be advised that today's conference call is being recorded.
I'd now like to turn the conference over to your Speaker today, Luis Rojo, Vice President 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 fact, 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.
Doug joining us online or over the phone we encourage you to review the Investor Slide presentation, which we have made available a dull.
<unk> com under Investor section of our website.
This is available at approximately the same time as when the earnings release is issued and we hope that you find information and perspective helpful.
With that I would like to turn the call over to Mr. Scott <unk>, 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 in raw materials logistics and other expenses were fully offset with pricing actions mix improvements and productivity efforts.
Improved product and customer metrics increased revenue by 30% in 2022 after.
Over a 22% growth in 2021.
Surfactant operating income was down slightly primarily due to lower global commodity laundry demand raw material constraints and customer inventory destocking.
Higher demand for products sold into the functional product in institutional cleaning end markets, partially offset the above.
Polymer operating income increased 13% versus 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 and stop at Stephens common stock of 36, and a half cents per share payable on March 15th 2023, Stefan has paid an 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 two $7 million of the company's stock for.
For the full year, the company paid $36 million in dividends and repurchased $25 million of company stock.
The company has $125 million remaining under the share repurchase program authorized by our 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's start with slide five to recap the quarter adjusted net income was $13 5 million.
59 cents per diluted share.
<unk> was $22 $5 million or 97 cents per diluted share for the fourth quarter of 2021.
Adjusted net income is a non-GAAP measure we provide full reconciliations to the comparable GAAP measures and these can be found in appendix two of the presentation and table two of the press release.
Specifically the adjusted net income for the fourth quarter exclude deferred compensation expense of $2 2 million.
Compared to last year expense of $2 $4 million. It also excludes minor changes in our environmental remediation reserve and restructuring expenses.
Deferred compensation figures represent the net income related to the company's deferred compensation plan as well as cash settled stock appreciation rights for our employees because.
Because these liabilities change with the movement of the stock price, we exclude this item from operational discussion.
Slide six shows the total company net income 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 frequency is not a hit on an after tax basis.
We will cover each segment in more detail, but to summarize we delivered excellent operating income growth in our specialty products.
Lower operating result for surfactants and 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 mainly due to one time favorable tax benefits.
Slide seven focus on the surfactant segment results for the quarter. So in fact, our net sales were $455 million for the quarter and 8% increase versus the prior year.
Selling prices were up 26%, mainly due to the pass through of higher raw material and logistics cost as well as improved product and customer mix.
Volume declined 15% year over year, primarily due to lower demand and commodity laundry and personal care end market lower volumes due to the transition of low one for dialysis related.
Customer inventory Destocking efforts.
Higher global demand for products sold in the agricultural institutional cleaning end market, partially offset the above.
Foreign currency translation negatively impacted net sales by 3%.
So in fact us operating income for the quarter was $22 million.
Greece of $11 million versus the prior year.
Driven by a volume decline of 15% like mentioned it before and higher expenses associated with our company transition of low one for dioxin products.
Also the fact that reporting Regal saw decrease operating income primarily due to the lower volumes mentioned it before.
Now turning to polymers on slide eight net sales were $148 million for the quarter, a 15% decrease versus 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 declining project volumes.
And lower demand across our specialty volumes MBA businesses.
The decrease was driven by customer inventory destocking reduced construction and industrial activity and general economic concerns foreign currency translation negatively impacted net sales by 6% oil.
Polymer operating income was $3 million versus.
<unk> was $13 million in the prior year. The decrease is primarily due to the 23% decline in global volume.
Higher cost associated with the planned maintenance activities in the Companys PVA plant located in the U S.
North America, and Europe results were impacted by lower volume across all polymer segments, partially offset by margin recovery efforts.
Asia results improved on increased demand following the easing of Covid lockdowns and restrictions in China.
Finally, our specialty product operating income was $6 6 million.
Versus $2 million in the prior year. This increase was primarily attributable to improved margins and customer mix within the <unk> product line.
Turning to slide nine despite significant external supply chain challenges and are deep in 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 eight 7% versus the prior year, driven by lower demand as customer inventory destocking efforts in the second half of the year.
This effect on segment delivered operating income of $163 million.
Down slightly versus the prior year. So in fact on global volume was down 6%, primarily due to lower global commodity laundry demand the impact of the low one for dialysis transition and customer inventory destocking efforts higher demand for products sold in the functional products and institutional cleaning end market partially.
Offsetting the above.
The polymer segment delivered $83 million of operating income up 13% versus the prior year below our polymer volume declined 7% versus the prior year due to consummate our channel inventory destocking and lower construction related activities in the second half of the year.
Specialty products operating income was a record $30 million versus $14 million in the prior year driven by improved margins in our customer mix and our <unk> product line.
Lastly, the effect of foreign currency translation negatively impacted net income by $5 6 million or 24 cents per diluted share versus the prior year.
Earnings per share, excluding FX grew 12% versus 2021.
Slide 10 shows the total company earnings bridge for the full year of 2022 compared to 2021 and breaks down the increase in adjusted net income. So in fact that was a slightly down more than offset by polymers and specialty products.
Company full year effective tax rate was 22% in 2022 versus 20% in 2021. This year year over year increase was primarily due to nonrecurring favorable tax benefit recognized in 2021.
Moving on to 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 continues at very healthy levels during.
During the year cash from operations was $161 million and we deployed $466 million again, capex investments dividends and debt payments share repurchases and higher working capital requirements due to raw material inflation.
A company full year capital spending was $302 million inclusive of our one for dioxin project and Pasadena investments in the U S.
Now beginning on slide 12, as 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 continues to be a key priority for Stepan.
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 and agronomic practices, while favorable weather patterns in Australia increased <unk>.
<unk> for crop protection.
We continue with the build out of the Kimco oilfield Demulsify, our product line, having commercialized over half of the acquired product portfolio to date, we remain optimistic about future opportunities. In this business is 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 polyol 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 mills sale manufacturing site, which will improve productivity and winter time reliability.
Our efforts to improve operational efficiency and debottleneck capacity continue across many of the production units at the site.
We also look forward to commissioning new low 100, <unk> investments at the site by mid year.
Tier two and tier three 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 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 segments.
In recognition of our ESG efforts stepping was named number one within the specialty chemical sector of Investor's business Daily as 2022, Best ESG Company list.
We also once again achieved a gold rating from eco virus, which places to step in at the 96 percentile level within our industry.
Moving to slide 13 work continues on our new our calculation production facility in Pasadena, Texas. This asset will be a flexible state of the art multi reactor facility with approximately 75000 metric tons of annual constellation capacity. It will provide strategically located capacity and capability for long term specialty.
<unk> growth across our strategic end markets, including agricultural and oilfield construction and household institutional cleaning.
We expect the plant will be up and running mid 2024.
Underlining our constellation business that supports the Pasadena investment continues at strong double digit volume growth and at margins exceeding initial expectations.
The recent acquisition of performance <unk> specialty our cockpit business delivers additional base load volumes for Pasadena and provides attractive market diversification opportunities for our constellation product line.
The integration of performance <unk> business is complete and we are delighted with the new customers. We are serving in both existing markets and new markets to Stepan, such as pulp and paper and lubricants.
As you know, we are increasing north American capability and capacity to produce either sulfates that meet new regulatory limits on one four dioxane with network completion expected in the first half of 2023.
One four dioxane as a minor byproduct generated the manufacturer of ether sulfate surfactants, which are key cleaning and folding ingredients used in consumer product formulation.
Stefan is working to supply customers with either sulfates that meet the new regulatory requirements.
Customers have made long term commitments to low one four dioxane, either sulfates and we expect this transition to go through 2023 with our focus on generating value growth.
Stefan will have the largest installed LOE <unk> production capacity for sales into the North American market, enabling step in 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 Ramadan lipids are first anticipated by our surfactant offering we believe this new bio based product family has significant opportunities in several important end markets for steffan, including agricultural chemicals consumer cleaning personal care and oilfield.
<unk> 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.
Summary, summarizing 2022, we delivered record earnings and I am proud of our team's effort in 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 surfactant functional products busy.
<unk> 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 in 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 <unk>.
Despite this projected macro environment, we remain committed to executing our long term growth strategy.
This concludes our prepared remarks at this time, we would like to turn the call over for questions. Lisa. Please review the instructions for the question portion of today's call.
Thank you as a reminder, if you would like to ask a question. Please press star one one on your telephone one moment, while we compile the Q&A roster.
Our first question will be coming from Mike Harrison of Seaport. Please go ahead. Your line is open.
Alright, good morning.
Good morning, Mike Good morning.
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.
When you think about the minus 17% you need to think about those three buckets right. One is demand one is destocking and the order is that transition to low one four and proud of which we clearly communicated in October that we lost our 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 56% is.
Is the impact of each of them.
And of course, when you think about <unk> you don't have a low one 4000 transition. So you can see modern app.
Half on half situation between the two buckets, but that's how I will summarize.
The three big buckets that we saw in the minus 17% in Q4.
Alright, 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 Youre hearing from your customers in surfactants as well as in polymers.
Yes, Mike I would say that it can't go on forever as well.
But I would say incrementally we may seem to be seeing a little bit uptick versus what the pattern. We saw in Q4, but I don't think we are done with destocking activities at this point.
As you compare of surfactants versus polymers, obviously, two different channels to the retail and use.
I would say on the polymer side.
Once you get past the manufacturer of the rigid insulation panels at our polyol goes into it's a highly fragmented market of distributors and contractors across the country. So I think the 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 pretty full in the Q4 and.
We may be further along in the destocking of the consumer product.
Retailers.
Packaged companies, but I think powers may be a little bit behind surfactants.
So Mike I would summarize it as simple as.
In Q1 versus what we're seeing already six week into it we expect a similar demand conditions versus what we saw in Q4, but everybody suspecting that piece caught up in the second half right that's kind of the game at all.
And consensus that we're hearing from customers and suppliers to the Polish bank.
<unk> Q1, or first half of the year and then picking up in the second half.
Alright very helpful.
And then wanted to ask about the Pasadena startup process. It sounds like there's going to be some.
P&L impact associated with expenses that youre taking on.
Before you officially start commercial sales and it does also look like the start up our commercial sales timing was pushed out a little bit I believe you said previously early 2024 now first half of 2004, so so maybe just.
Help us out with with the timing and how we should think about modeling the impact of that startup.
Sure I will I will let Scott later to comment on this more on the various small delay that we're seeing on the 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 pre startup investments right I mean, what are going to produce.
Full.
We're going to have a full production capacity in 2024, we need to hire we need to train our people.
This is this.
This is a chemical plant and we take this very seriously our training <unk> on everything so.
Yes.
That we're going to as Scott mentioned it in the remarks that we're going to commission and also the low one four dioxane capabilities in Mill Hill are planned we started last year in Georgia, DC, adding mill zale, so between those two buckets.
The net impact because remember we also had high expenses in 2022.
With the mill Zelle.
Freeze event that we had in Q1, so when you when you net out the three you are talking around $10 million of extra costs in our P&L as we commission in low one for dioxin and we invest to be ready.
I will turn it to Scott to talk a little bit more about the scheduled time, yes, so Mike as it relates to the construction and startup schedule.
We have slipped maybe.
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 <unk>.
Just normal raw material constraints that were associated with the civil portion of the.
The site projects, so we should be mechanically complete and up and running before midyear and for example, we have all the major equipment already on site I mean, where do you think about the reactors in all the major equipment that we need.
Is that all on site already.
Sure.
Alright, Thanks, I'll get back in queue.
Thank you for your question. The next question will be coming from Vincent Anderson.
Your line is open yes. Good morning, Thanks, guys.
I just wanted to ask.
Given your existing <unk> portfolio and the performance pro forma ex acquisition last quarter.
How quickly do you think you can you can ramp and then fill the order book for the Pasadena facility once it's up and running.
Yes so.
Good morning visit from a constellation perspective, we have two existing our constellation facilities here in the U S. Today Pasadena will be our third we also utilize a broad network of third party toll manufacturers today that we have been using.
As capacity to continue to grow the product line, which is.
They are 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 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 toddlers as needed.
Perfect.
And I am not going to ask you to predict the future on raw materials and all of that but.
If we continue along the slow demand environment through at least the first half of the year is there any reason that we wouldnt see.
A little bit of a positive timing impact between price and raws like we've seen in past down cycles.
It's hard to it's hard to say I would say that.
Raw materials kind of plateaued in Q4, so it's.
It's pretty stable right now and whether it's going up or down from here, it's hard to predict there's too many factors that play into that.
Our focus is really we will continue our pricing actions to cover our continuing any cost inflation that we have within the business and operations. So.
I think it's wait and see but we expect that will continue with our pricing strategy.
Neither.
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 this capital spending do you do.
Either the low one four 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.
It's kind of similar remember for example, UK is moving towards 25% tax rate in April so that that's that's that's a key impact and then you have country mix as well.
Baking into that so.
Our normal tax rate if you see if you go back to 2021.
Or 2020.
While we had a lot of tax but are you expecting 2020, you'll see our tax rate always in the $25, 96%. So that's the guidance that we have right now and you are totally right on a cash when our cash basis as soon as we commissioning or the low one four dioxane assets, we will apply.
Those apply for bonus depreciation now remember that bonus depreciation moved from a 100% last year to 80% this year per day for the new law.
Going down next year, we're going to be able to have Pasadena by Dol, but then the bonus depreciation goes down to 60%. So so fortunately, we see that out DSS is not 100% like in the past but of course, we are planning for that in our cash flow.
Okay excellent. Thank you very much.
Okay.
Thank you for your question one moment, while we prepare for the next question.
And our next question will be coming from.
David Storm.
Of Stonegate your line is open.
Perfect Good morning.
Thank you for taking my call.
Just curious about some of the key thing with.
<unk> expenses for your core at auction project and the <unk>.
Absolutely in our projects.
David could you repeat that question, we broke up on us.
Sorry about that just.
Just curious about the pacing for the expenses.
You've mentioned some of the expenses for the wallboard out some projects in the passive data projects.
I'm curious, how we should think about the cases that through 2023 and beyond.
Yes, no what I would say is probably is more of a half on half. The first half is heavily load is more loaded into low one for dioxin. The back half is going to be more loaded with Pasadena.
Perfect. Thank you.
The other thing.
I know you guys don't give explicit guidance.
But after companies like Exxon and Procter and Gamble released earnings we saw lot of analyst estimates for revenue and EBITDA do you think that's kind of Directionally correct.
The market going forward or.
Can't comment on that David I don't know whats driving Exxon in their their expectations.
Perfect. Thank you very much.
Yes.
Thank you for your question one moment, while we prepare for the next question.
If you had if you would like to ask a question. Please press star one on your telephone.
Our next question will be coming from.
David Silver of C. L. King your line is open.
Yes, hi, Thank you and good morning.
Dave.
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.
Europe , Let's say North America, and South America.
With North America, and Euro opinion.
And in your your buildup to our overall 2023 outlook as North America, the strongest region.
Or are there some <unk>.
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, how does how does.
The regional outlook shakeout in your opinion at this point for 2023.
Alright, Great question, David and let me take a shot at first talking about kind of Destocking and where the underlying demand as I think everyone saw a.
A earlier, it's kind of a 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 there.
And their demand pattern than North America, and I think I said earlier I think it's still a little uncertain right now six weeks into the year as to where the North American Destocking will end and.
A really good demand profile going forward, we 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 are going to be more exposed to continued prolonged inflation and could have a better impact or bigger impact on underlining consumer demand.
Okay.
Thank you very much.
Great color I appreciate it.
My next question would be kind of about new products.
And in particular I think I've asked this question a.
Some time ago, but.
Does step in.
Track, I guess or calculate internally a vitality index in other words 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 from a margin impact. However, you look at it internally.
What are the one or two areas with the strongest new sales performance.
Maybe in 2022, and if we look out another year or two beyond I mean im guessing the functional products area is at or near the top of the list, but if you could just highlight.
Some of the advances in your new product sales that would be helpful. Thank you.
Yes.
I'd first start with where we are focused on strategic end market growth and that's within the agricultural chemical space as well as specialty <unk>. So.
In agricultural chemicals, we're part of that development pipeline for new active pesticides and that pipeline is anywhere from five 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 around the world.
Basis.
The other big focus for us as in specialty <unk> were talking another double digit volume growth year in 2022, and we've got 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 happened within our R&D organization on a global basis and 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 and we're deeply embedded in those programs with our major customers in both Europe and North America.
What I would add David is Sop, where we're investing and we're making good progress as Scott mentioned in the remark of spray foam also so we are working with new products. There. If you think we also talk about kimco, we are re launching that product line and actually when you are.
Think about low <unk> for dioxin right desktop that's kind of at the end.
A significant investment that we're making to have a totally new ether sulfate.
Portfolio.
That meets the new regulation.
<unk>, that's a lot of new volume that is going to be in a new in a new product versus the past.
Okay.
Yes, no. Thank you and I'll just pick up Louise on your last comment I think that that was the direction I was heading.
But the last couple of years.
Of your business.
The last couple of years your business has been affected pretty significantly by.
Covid pandemic and some other some other issues that change the way people thought.
What about.
Cleaning and disinfection and things like that.
Two parts first of all.
What in your opinion will.
Persist once the COVID-19 the direct COVID-19 issues kind of fade in importance or maybe move to the background will there be some protocols may be for institutional cleaning or for.
For <unk>.
Commercial sites or arenas stadiums things like that.
Yes.
It will persist.
Beyond.
The.
The pandemic that were that.
That we've dealt with the last couple of years.
And then secondly are there other kind of initiatives or regulations.
Internationally or nationally here that you think are going to be important.
<unk> is or will require some adaptations in your business. So.
Kind of what remains after the pandemic fades.
Direct importance and then what one or two regulatory issues should we keep in mind, when we think about opportunities for your business.
Yes.
Okay David.
As it relates to the Covid pandemic I think if you look at North America, we have been pretty much open for about the last 12 months to 18 months here in the U S. So.
We did see the spike in the height of the pandemic around hand hand, soaps and disinfectants right hard surface disinfection and 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-19 levels, but to levels above where pre COVID-19 levels work that is continuing today. Okay. So.
Covid provided an immediate spike in 2020, it's come down, but it's still running at 10% to 20% above pre COVID-19 levels due to new consumer behaviors associated with the pandemic, but that's been pretty much steady state for about the last 12 months to 18 months in terms of new regulations or initiatives.
There is nothing on the horizon that we would say is a major headwind or tailwind for demand related to COVID-19 disinfection and cleaning.
The biggest regulation that has impacted our company has been the one four dioxane regulatory.
Environments started by the state of New York and that's why we've made the investments in <unk> to ensure our customers will be able to meet that new regulation.
Going forward.
Okay, Great and I Should've mentioned, one for tax and of course.
Last question and this would be on your marketing and it has to do with your strategy for tier two tier three customer development, but you did mention I think a net addition.
Customer base of about 550.
<unk>.
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 two tier three.
Base of customers or should.
Should we expect.
Got it.
There will be that this will be a multiyear effort going forward and you'll continue to kind of broaden the base of tier two tier three customers that you work with.
The products and services that you.
Provide there so should we expect a growing portion of your revenue and earnings to come from tier two tier three going forward or.
Is the progress to date kind of a good good measure of where.
What we should expect going forward.
Yeah, No David Great question.
We've been I think pretty clear that growing this tier two tier three segment is a major portion of our company's growth strategy. We continued 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 two tier three around the world in the tens of thousands.
And becoming more efficient and reaching and securing orders from these customers around the world is our focus and.
The 550 is a good number we're proud of that and that leads to improved profitability.
For our.
For our company and.
Thats kind of our our expectation going forward as our teams are going to continue to execute and deliver those those new customers on a net basis and that.
Hundreds per year.
That's great. Thank you very much I appreciate all the all the detail.
Thank you for your question.
One moment, we have a follow up question.
A 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.
Im curious if youre seeing any trading down happening.
Within the laundry portions of the business or personal care.
And if you are seeing that is it something thats happening in all regions or is it maybe more.
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.
Yes, great question Mike.
For my opinion trading down in high inflationary environments is a universal trend.
Not geographic specific and.
Yes, so consumers will trade down from premium to mid tier to economy tiers and in the economy tiers and mid tier is also include private label. So.
Do think there has been.
That trend that we've seen that trend from our lens with sales to customers in multiple regions.
Is it getting worse source.
Don't know if I can comment on whether it's getting worse or not.
Just.
It's an uncertain view right now with Destocking and everything in terms of what the trend is but it definitely happened in the in Q4.
Alright, 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.
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 kind of.
Kind of a stable versus that peak level, but yes. This has been roughly at $200 million in Greece.
So as the base period versus 2020.
We have seen a significant increase because of the of inflation on raw material and everything so.
We delivered a $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 a 100% in line with our plan. If you look at the $300 million Capex of course, the 300 million Capex has two major projects there.
Pasadena and low one four so if you strip that out.
You end up with a free cash flow productivity of around 85%, which is pretty damn good.
For us saw.
At the end you have those three big drivers that are kind of one timing $70 million morning, working capital and then of course, we won't build in Pasadena and low one four if you remove that from the equation. We are 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 <unk>.
Working capital when the industry average is more 2425%.
Alright.
I guess, just maybe another cash flow related question.
Where did the depreciation and amortization ended up for the full year I'm guessing it was around $95 million.
We're thinking about next year.
Where should that DNA number go I assume it goes up substantially as you start to bring on some of the.
The new assets that you've discussed.
Yes, 100% right $95 million, we're estimating at least $112 million to $140 million next year, So an increase between 17% to $20 million.
That of course will depend on timing on when Joe.
Just that the depreciation of some of these assets, but roughly roughly around $70 million.
Okay.
Excellent. Thank you very much.
Thank you.
That concludes our Q&A session for today I would like to turn the call over to Scott <unk> for closing remarks. Please go ahead.
Thank you very much for joining us on today's call. We appreciate your interest and 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.
The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
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Yes.
Yes.
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Thanks.
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