Scott D. Beamer - Chief Financial Officer & Vice President F. Quinn Stepan, Jr. - President, Chief Executive Officer & Director.

Eugene Fedotoff - Keybanc Capital Markets Daniel Rizzo - Sidoti & Company.

Welcome to the Stepan fourth quarter and full year 2014 earnings conference 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, this conference is being recorded, Wednesday, February 18, 2015.

I would now like to turn the conference over to Scott Beamer, Vice President and Chief Financial Officer..

Thank you for joining Stepan Company’s fourth quarter and full year 2014 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 of our foreign operations, global and regional economic conditions, and factors detailed in our Securities & Exchange Commission filings.

Whether you’re joining us online or over the phone, we encourage you to review the investor slide presentation which we’ve 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 our earnings release is issued.

We hope that you find the additional information and prospectus helpful. With all that being said, I’d like to turn the call over to F. Quinn Stepan, Jr., our President and Chief Executive Officer..

Consistent with this year’s prior quarters, the company’s results were significantly impacted by lower surfactant income, partially offset by polymer income growth for the quarter and the year. Surfactant results were down on lower commodity consumer volumes in North America and Brazil.

We are aggressively pursuing asset utilization opportunities in North America and believe volumes in Brazil will be up in 2015. Functional sales were down slightly as lower agricultural volumes were partially offset by higher oil field sales.

Our polymer group delivered record operating income for the year supported by greater energy conservation efforts globally and growing specialty case resin and polyol volumes. In the quarter, we completed several major capital projects and took several other actions including an early retirement program that should favorably impact 2015.

Net income for the quarter was $6.2 million down $10.7 million from last year. Several significant non-recurring items as well as deferred compensation impacted fourth quarter income which Scott will detail. Earnings from our base business or adjusted net income were $8.8 million versus $14.3 million last year.

Full year reported net income was $57.1 million or $2.49 per diluted share. Excluding deferred compensation and significant non-recurring items, full year adjusted net income was $57.7 million or $2.52 per diluted share, a disappointing year. In 2014 we completed several projects that should enable our income to recover in 2015.

Our balance sheet remains strong and we intend to make additional investments that will further improve our efficiency, restore earnings growth, and deliver value to shareholders. Our board of directors has declared a quarterly cash dividend on Stepan’s common stock of $0.18 per share payable on March 13, 2015.

In the fourth quart of 2014, we increased our quarterly dividend by $0.01 per share which marked the 47th consecutive share of increased dividends to Stepan’s shareholders. At this point I’d like Scott to walk through Stepan’s fourth quarter and full year results..

Generally my comments will follow the Slide Presentation. On Slide Number Three, we provided some headlines about the quarter and we start by listing the items which are removed from reported net income in order to speak about adjusted net income.

Each item is worth mentioning but we believe by adjusting for these items it allows us to focus our discussion on the items which truly impacted operations. Since adjusted net income is a non-GAAP measure, naturally we provide a full reconciliation to reported net income which can be found in table two of the press release.

On a reported basis, net income was $6.2 million or $0.27 per share, while adjusted net income was $8.8 million or $0.38 per share. The following items account for this difference. Deferred compensation income was $1.6 million or $0.07 per share.

All employee compensation as reflected in our normal net income, however, we also allow employees the opportunity to defer some of their payouts until some future dates and the future payment changes based on the company’s share price. We then exclude this item from our operational discussion since the change in share price is non-operational.

When the stock price falls, income is generated. We recorded restructuring and asset impairment charges of $3 million after tax, or $0.13 per share as we took some actions as a result of the changing external environment. Specifically, we offered an early retirement incentive program which reduced headcount and we wrote off certain non-core assets.

These 2014 charges will yield about $1 million of after tax savings. As shown on the income statement, during the fourth quarter of 2013 we also recorded a restructuring charge. That one was related to the reduction of commodity surfactant capacity in our Longford Mills Canada site.

The actions associated with this charge were completed as planned by mid-year and that capacity was shuttered. The total ongoing savings of both programs should be $3 million after tax. The fourth quarter also contained $1.8 million of after tax dollars or $0.08 per diluted share of additional environmental expense.

This is associated with our Maywood New Jersey site. The reserve was adjusted as a result of a recent discussion with the EPA. The record of decision for Maywood was published in the third quarter. We recorded $600,000 of after tax income to reduce the reserve for a bad debt reserve for a specific customer.

Since there’s no underlying change to our bad debt expectations, we highlighted this income as a special item. Excluding these non-recurring items and deferred compensation income, adjusted net income for the fourth quarter was $8.8 million or $0.30 per diluted share. Surfactant had a difficult quarter while polymers continued to grow.

We will examine each segment in more detail on the subsequent slides. Slide Number Four provides the company’s earning bridge for the quarter which breaks down the $5.5 million total reduction in adjusted net income. The first three items all relate to surfactants and we’ll cover these in more details on the next slide.

Polymers was up and specialty products was down mostly due to the timing of some shipments and one large customer managing down their inventory. The total earnings decline is isolated to the surfactant segment where earnings declined by $8.4 million on a pre-tax basis and $5.3 million on an after tax basis.

Slide Number Five focuses solely on surfactants which made $12.1 million of operating income and shows a bridge by business team, which highlights the fact that while there was some growth in higher margin businesses such as household, institutional, and industrial, distributors in oil field, it was not enough to overcome the decline in commodity surfactant volumes within consumer products.

Again this quarter we did not sell biodiesel and the fourth quarter benefitted from spot sales of a similar product in the Asian market. That’s the fourth quarter of prior year. Lower surfactant volumes in North American consumer products were primarily due to loss laundry volumes which we’ve discussed in previous quarters.

Slide Number Six may be useful as it outlines the past and future impact of this item and other larger previously mentioned surfactant volume and mix items which were negative drivers in 2014. Continuing with the surfactant’s bridge, agricultural sales declined 20% which was generally in line with overall industry trends.

After a difficult winter, the summer weather in the US was favorable to farming, which combined with lower crop prices led to fewer treatments. We grew some of our key higher value businesses which are specifically listed here.

For the full year, enhanced oil recovery delivered $5 million in operating income improvement which was in line with the expectations.

Although enhanced oil recovery is likely to be challenged by the lower current oil prices, we remain optimistic about our prospects in the non-EOR oil field applications as about 75% of our chemicals are used in production as opposed to exploration and development.

Higher freight and maintenance costs as well as a product liability expense were offset by lower incentive base compensation. Freight was higher due to increased rates while maintenance costs were higher as we substantially rebuilt our Anaheim plant and weather proofed various units at our Millsdale Illinois site.

Polymers made $13.2 million in the quarter. Net sales for the quarter rose 2% while operating income increased 18% compared to the prior quarter. North American polyols which are used in rigid foam insulation, benefitted from healthy commercial building activity and higher insulation requirements in state and local regulations.

In Europe, volume increased despite the political and economic challenges in that region. However, the rapid rise of raw material costs and competitive pressures reduced margins. North American specialty polyols which are used in coatings, adhesives, sealants, and elastomers, contributed $2 million to operating income for this segment.

This is the business we acquired from Bayer Material Sciences in May of 2013 so the fourth quarter of 2014 earnings is beyond what was delivered for the same period last year. For the full year, this acquisition delivered over $9 million operating income exceeding our 2014 target.

It is also worth mentioning that in January 2015 we completed the sale of the specialty polyurethane systems business which was non-core for us and we expect to record a pretax gain of between $2.5 million and $3 million in the first quarter.

Slide Number Eight summarizes our difficult 2014 in a similar way Slide Number Three did for the fourth quarter. In summary, polymers exceeded prior year earnings and met all key strategic objectives.

Surfactants was negatively impacted by a number of issues which have been discussed but met some important strategic objectives such as the acquisition agreement in Brazil and growing some higher value businesses while Europe also delivered a record year. Slide Number Nine is potentially very useful as you consider expectations for 2015.

Each of the items shown here has been covered in detail either on this call or in previous calls, but we felt that a summary of these items and the expected impact would provide some useful transparency.

I would like to specify that we’re not trying to include all potential items here but only those which are known with some degree of confidence and have been previously discussed. Overall, considering only these items, earnings might grow by $17 million after tax or $0.75 per diluted share.

The points on Slide Number 10 list some additional expectations which will be important to growing earnings. Quinn will speak to those points in his closing comments. Next, I will comment on Slide 12 which is appendix one. Capital expenditures for continuing operations were $102 million for the year.

For 2015 we expect to spend between $120 and $140 million as we build the polyol plant in China, expand our polyol capacity in Poland and in Columbus Georgia in the US as well as surfactant capacity in Brazil. The effective tax rate for 2014 was 24.4% which was the same as 2013.

We expect an effective tax rate of between 28% and 32% for 2015 as we must assume that in 2015 we’ll not benefit from some credits that were recorded in 2014 and also as our US earnings grow the overall tax rate should increase. Now referencing balance sheet information which is shown on the press release.

Total debt was $274 million as of the end of December 2014. This is similar to the total debt at year end 2013 of $271. We also report net debt which is total debt minus cash on hand. Net debt increased $12.2 million compared to the third quarter and $51.4 million versus the prior end of year.

We generated less cash in 2014 compared to 2013 due to lower earnings, slightly higher working capital requirements, and higher capital investments supporting improved reliability, greater efficiency, and growth.

As shown in the release, the ratio of net debt to capitalization as of December 31st was 26% which is slightly higher than the past three quarters. We remain very comfortable about where we stand relative to our most restrictive loan covenants. Now, Quinn would like to make some comments on expectations for 2015..

In 2015 Stepan Company is positioned to reestablish earnings momentum. Global energy conservation efforts should support continued growth for our rigid insulation polyols. Specialty case resins and polyols should benefit from new applications and new capacity in Columbus from process improvements.

Profitability in China will be down as we begin to staff the new plant mid this year for startup in the first quarter of 2016. Higher functional surfactant volumes, particularly from a recovery in our agricultural business should enhance 2015 results.

Commodity consume product volumes in North America remain a challenge, but opportunities to improve surfactant asset utilization by adding new customer volumes and/or further capacity rationalizations are being aggressively pursued.

We believe consumer product volumes in Brazil should increase this year as our planned acquisition is anticipated to close at the end of the first quarter. Significant investments were made in our plants to improve operations and reduce costs.

Specific products, including rebuilding a large part of our Anaheim plant and our Millsdale and [indiscernible] assets, these projects and others should contribute $6 million in 2015. Our internal efficiency program using internal and external resources is advancing and should deliver meaningful results in 2015 and beyond.

Net of corporate expenses, Stepan Company makes 50% of its operating income in the United States. The current value of the dollar versus other currencies will negatively impact results by approximately $5 million versus 2014. 58% of the company’s raw materials are petroleum based.

We expect margins and working capital to improve from the recent decline in oil prices and should more than offset the negative impact of currency. We have taken steps to recover higher freight rates from our customer base. January was a good month for the company. February orders look good. We expect to report recovered first quarter income in April.

This concludes our prepared remarks. At this time we’d like to turn the call over for questions. .

Your first question comes from Eugene Fedotoff – Keybanc Capital Markets..

I wanted to follow up on Slide Nine, you mentioned $8 million in cost savings in 2015.

Could you provide a little bit more details on that especially, on timing of the cost savings?.

As we look at it today we have internal programs that we cost drive. We are using an outside consulting company to help us with that as well and today, when we look at the $8 million that is our current projection based on changes that have already occurred in the marketplace for the most part.

We have other potential activities that we’ll be working on throughout the year, but those are activities that we’ve completed and we’re anticipating that benefit in 2015. It’s a combination of internal opportunities and also commercial opportunities as well..

I would say Eugene, in terms of your phasing question, I would mostly phase that sort of evenly throughout the year. There are some things we have accomplished in our delivering and we have this staged throughout the year so I would think of it as being fairly consistent throughout the year in terms of a ramp up..

Those are specific projects that we worked on throughout 2014 that we’re beginning to receive the benefit of..

Can you talk a little bit about raw material costs? What kind of trends you saw during the quarter and can you provide some sort of expectations for raw material costs in 2015 given that oil prices stay at current levels?.

There were minimal impact in 2014, slight improvement in margins seen in the second half of November and December. The majority, particularly as we had raw materials that were working their way through our system, so the majority of the benefit is going to be seen in 2015.

At this point in time we’re still trying to determine exactly what the benefit is going to be. What we’ve said is that we believe that it will more than offset the foreign currency impact which we’ve highlighted at $5 million..

Do you think you’ll be able to keep current selling prices or some of the benefits will be passed through to the customers?.

Certainly, some of the benefits will be passed down through the customer base..

Do you think it’s going to be more in surfactants, or polymers?.

Our polymer business is more petroleum based than our surfactant business. The primary product line polyol is manufactured from diethylene, glycol, and thalicanhydrite [ph] which comes from [o-Xylene], so virtually all of the polymer business is petroleum based.

Having said that, we participate in a competitive market and we will do our best to do the right thing for our customers but also do the right thing for Stepan Company. .

Looking at your margins back in 2009 and 2012 when raw materials declined, you reported pretty significant improvement in operating income in both segments.

Is there any reasons why you wouldn’t see the sort of similar impact in 2015?.

The prior period which you’ve referenced we saw both failing petroleum and natural vegetable oil prices. At this point in time natural prices have not decreased as well so I would anticipate the benefit based on today’s market prices to be less. .

[Operator Instructions] Your next question comes from Daniel Rizzo – Sidoti & Company..

You highlighted as a benefit in 2015, a potential benefit just from not repeating the weather problems of last year, which given everything that has happened over the past month or month and half it’s been fairly cold with some severe weather in the Midwest and the northeast, is it possible that you’re going to see something similar occur again this year, that it could repeat?.

To date our plants – we spent significant amount of money in 2014 to decrease the temperatures at which key elements of our plant can operate. We spent in excess of $5 million throughout our plant networks on higher maintenance expense to prepare ourselves better for the cold in 2015.

To date, our plants have been running extremely well through the period. We have not seen that impact to date in this first quarterly. Certainly, on the east coast of the United States there’s been some transportation issues but they have been relatively minor, quite frankly..

You indicated that the distribution oil field, the high value business for surfactant is doing fairly well.

That hasn’t fallen off either since the beginning of the year just given – I know it held up in the fourth quarter of last year, but I’m just saying since the end of the year has there been a downturn at all?.

We’re off to a good start in the first quarter. I haven’t looked at January results specifically by product line yet, but I would say overall we’re very pleased with the January results and our business overall is performing well..

I think the idea that we’re more concentrate on the production side where there’s been more investment already, that’s a sunk cost, as opposed to the exploration side I think works in favor of that business right now. .

The broader oil field business..

Your next question comes from Eugene Fedotoff – Keybanc Capital Markets..

I just wanted to follow up on your comments around capacity expansion and polyols.

Can you talk a little bit about utilization rates right now and sort of your ability to support growth in this business before capacity comes online in China in 2016? Can you also provide a little bit more details on the timing of capacity expansion in the US and Europe?.

From a US perspective, and let me answer your question for our rigid lamination business first and then I’ll talk about our specialty polyol business, because the plants are not multifunctional today, they do one or the other. From a rigid lamination perspective we’re fairly full in the United States.

We have identified some debottlenecking projects that will provide us probably about 10% additional capacity that we will be implementing in ’15 and ’16 in North America and so that we would anticipate that that would take us into 2016 early 2017.

Beyond that we would probably look to add additional capacity for our commodity rigid insulation business in North America. In Europe we have sufficient capacity available at our [indiscernible] site based on the investments that we’ve made over the last four or five years to support anticipated market growth through 2018, 2019.

In China, I mentioned in my brief comments that that plant will be up in 2016. At that point in time we will have sufficient capacity to support Asian growth for the foreseeable future ’19, ’20 probably.

From a specialty polyol perspective we are effectively – we’re very close to be being full both in Columbus and in Poland, and we will be implementing projects to add capacity in 2015 for startup in 2016 in both those sites. We’re adding one reactor to each one of those sites. .

Are you seeing your competitors expanding capacity as well or the market remains tight?.

I would say some of our competitors are debottlenecking their facilities at this point in time and there is new capacity being added in Asia, but we are investing ahead of the market growth demand in those areas. I would say not a lot of competitive activity today that I’m aware of..

Just a last question, on the freight costs what are your expectations for 2015?.

Freight costs should moderate in 2015 and certainly the freight surcharge will decrease if the price of oil stays down so overall we would anticipate slightly lower freight rates. There’s still a shortage of trucks in the United States so from a US perspective we don’t anticipate line haul rates themselves decreasing significantly.

Again, we have taken steps to recapture some of those higher freight rates from our customer base at this point..

Your next question comes from [Unidentified Analyst]..

I was wondering if you could talk a little bit about the surfactant in agriculture.

I guess I’m just not familiar with where exactly they’re used and what factors are going to turn around the decline that you’re experiencing?.

We primarily sell our surfactants to the large integrated multinational agricultural active pesticide herbicide companies. That’s generally where we sell our products and we sell products that emulsify their active ingredient and help spread the pesticide over a large piece of land.

That’s generally the functionality that surfactants provide and who we sell our products to.

Generally speaking, there is a finite level of [indiscernible] land in the world and there’s a growing population so we need to increase productivity of the land that’s used for the agricultural business and chemistry is going to be a big part of that solution and so the long term trend is favorable for higher levels of growth in the agricultural market.

In 2014 there were weather challenges in North America and in Brazil that reduced the amount of pesticide that farmers around the world used and as a result surfactant demand was down.

Going into 2015 what we have seen is based on lower inventories in our customer base, we’ve seen increased demand back to more traditional levels of 2013 so we’re seeing increased demand as they’re improving and filling their pipelines..

I know in years past biodiesel was a pretty good product line to have and it’s continuously declining.

At what point do you pretty much say, “Well, this isn’t going to be part of our business anymore,” and we don’t keep talking about it?.

We’ll we’re not planning on talking about it in 2015, but we felt we needed to talk about it in this conference call just because there were comparables to 2013, but effectively we sold no biodiesel in 2014. The only biodiesel we sold were some byproducts of our [indiscernible] unit. We did not make any intentionally this year.

If the market changes and the margins improve and we still have some excess reactor capacity we may opportunistically participate in the business. It’s not in our plan for 2015..

Also, can you just expand on what now you define as the household, industrial, institutional segment? I think that’s sort of a new breakout in the past few years?.

If we look at that, those are companies that are [indiscernible], Clorox, Johnson Diversity, Eco Lab, companies that are supplying cleaning materials for institutions, hospitals, restaurants, hotels and people that have more industrial applications so metal parts cleaning and markets like that..

Mr. Stepan there are no further questions at this time. I will now turn the call back to you..

I’d like to thank everyone for joining Scott and I on the call today as well as the entire Stepan team for their continued dedication to serving our customers worldwide. We look forward to reporting recovered results to you on our first quarter 2015 call. Have a great day. .

Ladies and gentlemen that does conclude the conference call for today. We thank you for participation and ask that you please disconnect your lines. Have a great day..