Stepan Company (SCL) Q4 2019 Earnings Report, Transcript and Summary

Greetings and welcome to the Q4 and Full Year 2019 Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, today's conference is being recorded, Thursday, February 20th, 2020. I would now like to turn the conference over to Luis Rojo, CFO. Please go ahead, sir.

Thank you. Good morning and thank you for joining Stepan Company's fourth quarter 2019 financial review. Before we begin, please note that information in this conference call contains forward-looking statements, which are not historical facts. These statements involve risks and uncertainties that could cause actual results to differ materially, including, but not limited to, prospects for our foreign operations, global and regional economic conditions, and factors detailed in our Securities and Exchange Commission filings. Whether you are joining us online or over the phone, we encourage you to review the investor slide presentation, which we have made available at www.stepan.com under the Investor Relations section of our website. We make these slides available at approximately the same time as when the earnings release is issued, and we hope that you find the information and perspective helpful. Now, with that, I would like to turn the call over to Mr. Quinn Stepan, our Chairman, President and Chief Executive Officer.

Thank you, Luis. Good morning and 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. Company had strong cash flows and negative net debt, as cash balances of $350 million exceeded total debt of $222 million dollars. Adjusted operating income margin was 8%, 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 per diluted share versus $19.5 million or $0,84 per diluted share in the prior year. Full year adjusted net income was $119.4 million or $5.12 per diluted share versus $111.7 million or $4.79 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 volume due to one key customer losing an important piece of business and lower demand in year end inventory adjustments in the distribution channel. 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 polyols 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 Lipid Nutrition business. The company increased its quarterly cash dividend in the first quarter of 2020 by $0.025 per share or 10% marking the 52nd consecutive year that the company has increased its cash dividend to stockholders. The quarterly cash dividend on Stepan's common stock is now 0.275 per share payable on March 13th 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. On 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 used existing inventories to serve our customers. However, on February 17, operational issues impacted the site's waste water 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 waste water treatment back into operation within the next few days. Once the waste water treatment plant is operational, we expect that production of Surfactants will resume. We anticipate Phthalic Anhydride production will remain down for approximately 30 days. Because of the waste water treatment plant being down and low inventory levels, we have declared Force Majeure for the supply of Phthalic Anhydride and certain Surfactant product lines. We are using our global production network and working with customers to minimize this supply disruption. We are also working with our insurance provider to recover the losses related to this incident. This time, we are not able to quantify the extent of the impact from this event, but this incident creates a challenge for us in 2020. We are 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 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, Quinn. My comments will generally follow the slide presentation. Let's start with the slide five to recap the quarter. Adjusted net income for the fourth quarter of 2019 was $25.7 million, a 31% increase versus $19.5 million in the fourth quarter of 2018, because adjusted net income is a non-GAAP we provide full reconciliations to the comparable GAAP measures and these can be found in Appendix II of the presentation and Table II of the press release. Adjustment to reported net income for this quarter remained for deferred compensation, restructuring expenses and increases in the environmental remediation reserves. Adjusted net income for the quarter exclude deferred compensation expense of $1.8 million or $0.07 per diluted share compared to deferred compensation income of $4.7 million or $0.20 per diluted share in the prior year. The deferred compensation numbers represent the net expense related to the company's deferred compensation plan, as well as cash-settled stock appreciation rights for our employees. Because these liabilities change with a movement in our stock price, we exclude this item from our operational discussion. Adjusted net income for the quarter also exclude $0.8 million or $0.04 per diluted share of after-tax business restructuring charges related to the ongoing decommissioning costs associated with the Canadian plant closure in 2017 and the Germany sulfonation shutdown in 2018. We expect an additional $1 million of after-tax decommissioning expenses in 2020. In addition adjusted net income for the quarter also exclude $1.1 million or $0.04 per diluted share of environmental remediation reserve increases associated with the site previously owned by the company in Wilmington, Massachusetts. Slide 6 show the total company earnings bridge for the fourth quarter compared to the fourth quarter of 2018, and breaks down the increase in adjusted net income. Because this is net income, the figures noted here are on an after-tax basis. We will go at each segment in more detail, but to summarize, Surfactant and Specialty and Polymer were up, while Speciality Product was basically flat versus the prior year. Favorable net interest expense was related to higher interest income in the US after the company cash repatriation in 2018. The company's effective tax rate was 18.1% in 2019 versus 19.4% in 2018. This year-over-year decrease was due to higher US R&D tax credit, partially offset by one-time favorable tax project in 2018. We expect the full year 2020 effective tax rate to be in the range of 22% to 25. Slide 6 focuses on Surfactants segment results for the quarter. Surfactant operating income in the quarter increased $4.8 million versus the prior year, primarily due to an insurance recovery related to equipment failure in Ecatepec, Mexico and functional volume growth in Europe and North America. Surfactant net sales were $310 million for the quarter, a 4% decrease. Volumes were flat versus the prior year. Higher global demand for products sold into our agricultural and oil field end markets was offset lower sales volumes in the distribution channel. Selling prices were down 3% primarily due to the path through of lower raw material costs. A translation in impact of stronger US dollar decreased net sales by 1%. In the bridge we show North America and Asia in the same category because our Surfactant business in Asia is relatively small and most of the Surfactant production in that region is used to support business in United States. The North America decrease was primarily driven by lower demand and year end inventory correction in the distribution channel, Singapore overhead impacts and product mix. North America volume was up 5% driven by strong double-digit growth in the functional end markets. Latin America results were up primarily due to an insurance recovery related to the Ecatepec, Mexico incident. European results increased driven by higher demand in agricultural and oil field end markets. Now turning to Polymers on Slide 8. Polymer quarterly operating income increased $1.9 million versus the prior year, this was driven by rigid polyol volume growth. Polymer net sales were $160 million for the quarter, down 5% versus the prior year. Total volume increased 3% quarter over quarter. Global rigid polyol growth of 7% was partially offset by lower PA volumes. Selling prices declined 7% and the translation impact of a stronger US dollar negatively impacted net sales by 1%. Global polyol volumes increased 7% due to rigid polyol growth in North America and Asia. We continue to experience a strong market demand driven by energy conservation efforts and growth in construction. North America polyol results increased due to strong volume growth. European results decreased due to lower volumes. China results improved on 70% volume growth, driven by increased demand in the cold storage insulation and increased polyester polyol usage. Finally, PA results decreased due to lower volumes. Specialty Products quarterly operating income was $5 million, basically flat versus the prior year. Specialty Products net sales were $18.6 million for the quarter, a 9% decrease versus the prior year. We will now take a moment on a Slide 9 to recap the full year 2019 financial performance. Net income for the full year 2019 was a $103.1 million. Adjusted net income was again a record of $119.4 o million or $5.12 per diluted share, a 7% increase from $4.79 per diluted share in 2018. Surfactant operating income was $122.8 million, down from 2018 due to lower volumes in the US. The key drivers in the US were lower personal care commodity volume due to one key customer losing an important business and lower demand and year end inventory adjustments in the distribution channel. The polymer segment delivered $69.6 million of operating income, up from the prior year due to volume growth of 4% driven by double-digit growth in rigid polyols. The Specialty Product operating income was $16.4 million, up $4.8 million from the prior year, due to strong volume, productivity and raw material price reduction in our Lipid Nutrition business. Slide 10 shows the total company earnings bridge for the full year 2019 compared to 2018. Like the quarterly bridge, the figures here are noted on an after tax basis. Turning to 11, our balance sheet remains strong. We had negative net debt at year end, as cash balances of $350 million exceeded total debt of $222 million. We delivered a record year on cash with cash from operations at a record $280 million, an increase of 27% versus 2018. For the full year, the company returned $36.3 million to our shareholders via dividends and share repurchases. Beginning on slide 12, Quinn will now update you on our strategic priorities and plan to increase shareholder value.

Thank you, Luis. As mentioned previously the first quarter of 2020 will be a challenge. In addition to the Millsdale incident the direct and indirect impact of the coronavirus in China will negatively impact the quarter. The Chinese government asked Stepan 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 2 and Tier 3 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 are optimistic the business will deliver the volume growth in 2020. After impressive growth year in 2019, we anticipate that in 2020 Specialty Products business results will approximate 2019 results. Turning to Slide 13. We have made good progress on 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 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 2 and Tier 3 surfactant customer base and to maintain our leadership position in several of our key businesses. Volume in Tier 2 and Tier 3 customers was flat during the quarter, primarily due to higher demand in Latin America, offset by a reduction in the U.S. due to lower demand and in year end inventory adjustments. Global rigid polyol volume increased 7% during the quarter due to strong market demand, driven by increased insulation standards and growth in construction. We remain optimistic about continued growth of the rigid polyol market due to global energy conservation efforts. This summer we will experience extra costs to manage a shutdown of the Illinois River for planned maintenance activities. Innovation is a key part of our strategy. As a leader in the rigid 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 STEPANQUAT Helia 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 introduced the product in Latin America and India. Additionally, we continue to sell our NINOL CAA product with encouraging results. This new product is naturally derived in mild and has 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, operational excellence is 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 from our Ecatepec, Mexico acquisition. We continue to deliver savings on the shutdown of our Surfactant operations at the Wesseling, Germany plant. We will continue to examine our asset base for opportunities to further optimize and improve 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 improved contributions from our financial team. We have reduced net interest expenses by 45%, delivered an effective tax rate and reduced past due receivables, all of which have improved our bottom line and cash position. 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 KEMCO LLC's Demulsifier product line. We acquired the product line process technology and their customer list. Oilfield production requires the use of chemicals largely alkoxylates to help separate the oil and water before the crude oil goes to the refinery. The global market for DM oil suppliers is about $2 billion and is projected to grow at or slightly above GDP. This is an important opportunity for the future and complements our product portfolio in the oilfield market. We expect this acquisition will be accretive to Stepan in 2022. As the decade finishes, I reflect back on the recent history and businesses our team has built. In the last 10 years we have become a more diversified business. We increased adjusted net income 80% and had record results seven of 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 have the financial flexibility to make acquisitions that will complement our organic growth and help us deliver shareholder value. This concludes our prepared remarks. We understand that you may have more questions on the current situation in 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. Mollica, please review the instructions for the question portion of today's call.

Thank you. [Operator Instructions] Our first question is from the line of Mike Harrison with Seaport Global Securities. Please go ahead. Your line is open.

Hi. Good morning.

Good morning, Mike.

Good morning, Mike.

Quinn, I know you mentioned that the Millsdale situation is still kind of evolving, a fluid situation. But maybe can you help us understand which surfactant products are being affected there? Or maybe help us frame up how much of your North American volume is served by this facility. Maybe any metrics that you could share to help us understand what the impact would look like.

Okay. Yeah. If we take a look at primarily three product lines that we have called on force majeure within our surfactant line, our fabric softeners, our metal propyl based tertiary amine -- based amine oxides and our butane product line. So those are the three product lines that have been affected. Those product lines from Millsdale represent about 10% of our North American business which are currently on allocation and about 5% of our global business. If we look at what we hope will be a relatively short time frame for force majeure, but that's the size of the business today.

And Mike, I will add just, to your comment, on trying to understand. During January, we had extra cost for around $2 million. We are still assessing what was the business interruption piece for January. But in term of costs due to all the maintenance and everything that we have to do in Millsdale, the impact on extra cost was around $2 million.

All right, that's very helpful…

And that includes both Surfactant and Polymer.

Yeah, that's for the whole side.

Understood. And then on Ecatepec, can you maybe give us an update on how that plant is running, how the ramp-up is progressing there, and maybe what you're seeing more broadly in the surfactant market within Latin America? And also, in that set of questions, can you quantify the insurance recovery that you saw in Q4?

Yeah. So let me just deal with the insurance front. 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 Ecatepec, what we are seeing is, on a sequential quarter basis the volume is coming back from Q3 to Q4. Our volumes were up approximately 10%. We're anticipating, Q4 to Q1, that our volumes will be up at least another 10% as we have restored production in the area. And generally, we feel pretty good about 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 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. Our tier 2, tier 3 customer base is up. Our tier 3 customer base, in particular, was up about 15% last year in Brazil and our ag business was up about 30% last year in Brazil. So we feel pretty good about Latin America and the opportunities that it presents for Stepan Company.

All right. You referenced the Singapore overhead issue in the context of North America and Asia Surfactants op income being down in the fourth quarter. What was that issue? And has that been addressed?

Yeah. Mike, this is just basically production timing differences, and the impact was around $2 million in the quarter. And yes, I mean, that is not a going effect of this.

So no problems in Singapore…

No, no…

Just the timing of shipments from Asia to the US and the year in which we absorb the overhead.

Okay. One more for me and then I'll get back in the queue. Just on M&A, you referenced a product line acquisition. I assume that was relatively small, obviously, not accretive for a couple of years, but it sounds like it fits 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 over the last two years in 2020. So we would continue to do that. And obviously, we're committed to our dividend as well. So, we anticipate returning money to shareholders in both of those cases. From an acquisition perspective, we have developed a fairly extensive pipeline of opportunities that we are currently looking. The pipeline, generally, are very consistent with our priorities in terms of ag, oilfield, rigid polyol and personal care specialties are the four areas that we're looking at. And we would hope to make a few acquisitions in 2020, both some small and some larger ones as well. But we'll continue to work on that as an organization. We do want to be more acquisitive and have resources in place to work on that.

Yeah. And what I will add, Mike, on the point on resources, I mean, we have worked a lot in the past few quarters to put more resources into the M&A area, especially on the business units -- not at the corporate level, but in the business unit, people fully dedicated to M&A, which is going to help significantly going forward to be more -- to be fast and to be more clear on our targets and what we want to achieve there.

All right. Thanks very much.

Thank you, Mike.

Thank you. And our next question is from the line of Vincent Anderson with Stifel. Please go ahead. Your line is open. Mr. Anderson, 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 in Surfactants, if you'd be willing to give us an idea of how much contribution you saw from the products that you've launched over the last year. And then, on that topic, should we interpret your comments in the press release around agriculture to mean that you were successfully specked into those updated formulations that we've been discussing in the past? Or was this more of a broad-based increase in agricultural demand?

Vincent, as I mentioned in the script, we're very happy with our volume results in North America Surfactant. It was up 5%, driven by a strong double-digit growth in our functional markets. So, with all said, as we mentioned on the distribution channel. So, you saw the first three quarters, and closing the year with our biggest business in the Company which is North America Surfactants, I mean, growing volume 5%. We're very pleased. Quinn, do you want to add something on ag?

Yeah. Just from an ag perspective, most of the volume growth that we've seen in the agricultural market is increased share as a result of being incorporated in new formulations around the world. So we feel pretty good about the R&D resources that we have in the agricultural market and the great collaboration we have with the crop production companies. And so we feel that's a real strength for Stepan and we're continuing to do that. We have our new Chief Technology Officer who 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 we feel we're well positioned in that space and look for continued contributions from that in 2020 and beyond.

That's very helpful. Thank you. And then going over to the KMCO acquisition you know, I am just hoping you could specify exactly where these complement your current portfolio. And then any idea as to why KMCO [ph] had exited the alkoxylates demulsifiers, but not their polyol demulsifiers?

So, KMCO had an explosion at their facility that was about a year and a half ago, almost two years ago, at their facility. And although the event did not directly involve the demulsifier product, they have not been able to restart that facility and they needed to raise some cash 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 are excited about the opportunity to buy the technology, buy the formulations and buy the customer list associated with it. Don't know why they chose not to sell the other piece of the business yet at this point in time. They are also looking at trying to sell the site and exit the business overall. The current owner is a private equity owner. So, again, we're very happy with the acquisition. We are in the process of rebuilding the supply chain within Stepan's network, and that's why the business won't be accretive until 2022.

All right. Thanks. And then just turning over to CapEx. You've been investing consistently over the last few years in improving reliability, efficiency. What is your impression of your asset base today from your long-term reliability targets? And when would you expect to kind of reach those goals? And any incremental spending associated with those initiatives? Where could 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. It's a constant requirement to maintain safe and reliable production within the business that we're at. We could see capital go down slightly but not significantly from a maintenance perspective.

Sure. Thank you. But, sorry, to clarify, not the $60 million to $70 million, but the difference between your current CapEx budget and that regular maintenance budget.

You're talking about the difference between...

Yeah, $100 million. So, as you know, while we have spent in '19 -- I mean, the $106 million in CapEx is a combination of the basic maintenance and infrastructure and EH&S and all of that. We also continue investing on growth projects, especially on our polyol product line, putting more capacity and putting new capabilities for new innovation. So that combination of the two item is basically what add up to the $106 million that we spent in '19.

Yeah. So, I mean, we would like to continue to have growth opportunities to expend money on and to improve 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 as Luis has just mentioned, repositioning and adding additional flexibility and product capabilities for the future within our polyol business is capital-intensive and is where we're spending a fair amount of that differential today.

Okay. Understood. Thank you very much.

Thank you. Our next question is from the line of David Silver with C.L. King and Associates. Please go ahead. Your line is open.

Yeah, hi.

Good morning.

Morning 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 I was wondering if you could characterize the program and maybe across a couple of metrics. 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 -- in the 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 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 proprietary new products such as STEPANQUAT and NINOL versus -- I guess you're supporting a large important private label business and that might be an instance where maybe you're mimicking or inventing around products developed by other suppliers. So just looking to get kind of a big picture view of this 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 you have talked about. But what I would tell you is the way we do look at our research and development. We kind of look at it in kind of different buckets. One bucket is technical service. And let me just tell you what the buckets are, and then I'll come back and talk about a couple of them.

Sure.

So we look at it -- so technical service is a bucket. We look at kind of our innovative or inventive activities. We look at kind of plant support related activities, and plant support could be helping us debottleneck our facilities and get more from our existing assets. And then we kind of 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 of our assets today are probably spent on technical 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. When you talk about tier 3 and tier 2 customers, many of those customers around the world don't have the sophistication to develop their own laundry products, to develop their own dish wash products, to develop their own personal care products, and it's taking 80-year history -- that formulary that we've developed with old and new products to that customer base. So that is a significant part of our effort, and that's done not only in the US but that's done on a global basis. And the other area that we've talked about is in terms of our innovation or invention activities. And today, I would say we probably have about 10% to 15% of our R&D resources are kind of looking for those new molecules. And today, I would say, when we look at 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, innovative technologies from those resources today. And then the third bucket that I'll comment on is kind of the plant support. We have been able to drive significant enhanced productivity, particularly in our polymer area by having our plant people work with our R&D resources and 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 it helps our profit improvement.

Okay. And thank you for that. And then I have a question for Luis. In the appendix slides, where you're listing 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 20s next year. So a couple of things -- but I was wondering if you could maybe highlight the source of that firmwide increase and then also whether that's, in your opinion, a one or a shorter-term bump-up in your effective tax rate or whether we should be modeling that higher rate on into the future.

Yeah. Sure, David. Actually, what I will say is, the range that you see for 2020, the 22% to 25%, is actually our going range. What you saw in the last two years, the 19% and the 18%, was driven by a lot of one-time tax projects delivered by our tax group. So, for example, we mentioned in the script that in 2019 this low tax rate of 18% is driven by R&D tax credits that we were able to claim and to get for several of the last few years. So that's why the 18% and the 19% is not our normal tax rate, includes specific tax projects that are not going to be on a going basis. We will continue looking always for opportunities in compliance with laws and regulations. And if during the year we see an additional project, we will always communicate that. But as of now, this is our normal tax rate for on a going basis. And as you know, the tax rate also depends a lot on mix because every country has a different tax rate. So again, I mean, if you are growing faster in Mexico with a 30% tax rate, mix plays a role in the numbers as well.

Interesting. So you were able to claim some reasonably significant discrete tax benefits each of the last couple of years.

Yeah.

Okay. And then last question. You've talked about growth and development of your agricultural products business. I'm familiar with the use of surfactants for adjuvants that go into pesticide formulations of all types. Is that the guts of your agricultural product business? Or do your chemistries apply to other types of additives or other types of formulation ingredients in pesticide formulations? Thank you.

Our products are used as emulsifiers and solvents. In some applications, we're an adjuvant, but most of it is to the large crop protection companies around the world where we're helping them combine active ingredients and deliver those more effectively to the plants. So it's not adjuvants per se. 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. And 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 year-end. But where do you see distributor inventory levels now 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, as we mentioned in the script, was lower demand overall in the channel. And then in a few places we saw the inventory adjustment on top of the, in general, the lower demand. As we have talked in the past, I mean, these are two critical areas where we have started seeing the anticipation of a slowdown in the economy, typically in the distribution channel and in the PA business. So, yeah, I mean, distribution was soft in the US throughout '19.

Yeah. And I would say, the distribution business in Latin America, particularly for Brazil, and Europe was pretty healthy. But I would echo what Luis said -- when we start seeing small customers stop buying, it gives me some pause about the economy going forward. So, we'll see where that goes. But I am a little concerned about the economy. And the economy, in my mind, is not the stock market. It's actually people that make things and provide services for people around the world, and I see them starting to slow down their purchases and willing to commit less capital to the products that they make.

Got it. And then over on the Polymer side, it looks like pricing was down about 7% in the fourth quarter. Can you give us some additional color on what's going on with raw materials and pricing within the Polymers business, maybe how we should think about pricing dynamics and margins as we move into 2020?

Sure, Mike. As we have talked during 2019, it was not only Q4. But of course we saw raw material price reductions especially on the rigid polyol -- I mean, across Surfactants and Polymers. But on rigid polyols, we saw significant reductions in several materials, DEG, etc. So that's why, of course, we wanted to be competitive while improving our margins overall. As you saw, our operating margins in Polymers went up 100 basis points, and we feel good about the margins in this business and we want to make sure that we grow and we enjoy the market growth and we don't lose business and we don't lose share. So we will continue striking the right balance between top line and margins, and we feel good about where we are now.

And just a couple of comments on polymer raw materials. So, we have seen significant softening of the DEG market, particularly in China.

Yeah.

Lower demand in China. And we're seeing that impact the diethylene glycol prices, particularly in Asia, but potentially on a global basis as well. And then, we did mention 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 125 years of locks. So, we will have some incremental costs associated with the delivery of both orthoxylene and diethylene glycol to our facilities in Millsdale during the summer of this year. So not a Q1 issue but begin to impact us late Q2 and into Q3.

Yeah, both on costs and cash.

Got it. And then in terms of the specialty polyols business, your recent commentary there has 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 specialty polyols?

Yeah. I would say that the true answer is, it's probably a combination of both of those things. The market is down for that. A lot of the products that are used in that space are tied to the auto market. So we are seeing a decrease in demand in that space across the market.

Particularly in North America. I mean, our specialty polyol business in Europe is up and we had a good year with key global customers in this space.

Yeah.

So, it's up. I mean, North America was down but Europe was up.

Yeah.

All right. Thanks very much.

Thank you. And I'm showing no further question at this time.

Okay. Thank you very much for joining us on today's 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 ask that you please disconnect your lines.+