Scott Beamer – Vice President and Chief Financial Officer Quinn Stepan Jr. – President and Chief Executive Officer.

Eugene Fedotoff – KeyBanc Capital Markets David Stratton – Great Lakes Review Mike Harrison – Seaport Global Securities.

Ladies and gentlemen, thank you for standing by. Welcome to the Stepan Company’s First Quarter 2016 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 Tuesday, April 26, 2016.

I would now like to turn the conference over to Scott Beamer, Vice President and Chief Financial Officer of Stepan Company. Mr. Beamer, please go ahead..

Hello and thank you for joining Stepan Company's first quarter 2016 financial review. Before we begin, please note that information discussed 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 and Exchange Commission filings.

Whether you're joining us online or over the phone, we encourage you to review the investor slide presentation, which we have made available at www.stepan.com, under the Investor Relations section of our website.

We make these slides available at approximately the same time as when the earnings releases issued and we hope that you find the information and prospectus helpful. Now with that said, I'd like to turn the call over to F. Quinn Stepan, Jr., our President and Chief Executive Officer..

Thank you, Scott, and good morning and thank you all for joining us on our call today. Stepan Company closed out 2015 and began 2016 with solid results. Our first quarter’s record results reflect continued increased volumes, improved operating efficiency and lower raw material cost.

Reported net income increased 30% to $27.7 million, or $1.21 per diluted share, compared to $21.3 million, or $0.93 per diluted share, in the same quarter last year. Adjusted net income was a record $29.5 million, or $1.29 per diluted share, a 44% increase compared to $20.4 million, or $0.90 per diluted share, in the first quarter of 2015.

Net sales decreased 3% to $445 million as much higher volumes were offset by lower selling prices related to lower raw material cost and the negative impact of foreign currency translation. Volume growth was significant in both surfactants and polymers.

And operationally, we continue to benefit from increased asset utilization, reduced cost, and enhanced internal efficiencies. Surfactant operating income was a record $37.2 million, up $3.6 million, or 10%, versus the prior year. Polymer operating income was $22.2 million, an increase of $7.4 million, or 50%, compared to the first quarter of 2015.

Excluding last year’s system sale, polymer operating income was up $10.3 million, or 87%. Our Board of Directors declared a quarterly cash dividend on Stepan’s common stock of $0.19 per share payable on June 15, 2016. At this point, I’d like Scott to walk through a few more details about our first quarter results..

Thank you, Quinn. My comments will generally follow the slide presentation. Let’s start with Slide number 3 to recap the quarter. Adjusted net income for the first quarter of 2016 was $29.5 million, or $1.29 per diluted share, which is a 44% increase compared to $20.4 million, or $0.90 per diluted share, in the first quarter last year.

Both of our largest segments, surfactant and polymers, delivered solid operating income growth due to higher sales volumes and lower raw material cost, despite continued foreign currency translation headwinds.

Since adjusted net income is a non-GAAP measure, we provide full reconciliations to the reported figures and these can be found in Appendix 2 of the presentation and Table 2 of the press release.

Specifically regarding adjustments to reported net income, this quarter included deferred compensation expense of $1.8 million, or $0.08 per diluted share, compared to $600,000, or $0.03 of income, in the same period of the prior year. Naturally all employee compensation expenses reflected in our normal operating income.

However, we allow employees the opportunity to defer their incentive payouts until some future date and the future payment changes based on the company’s share price. When the stock price increases, expenses generated.

Since the future liability of employee compensation only changes consistently with the change in the share price, we exclude this item from our operational discussion. The first quarter of 2015 results also included one-time items as detailed in Appendix 2.

Surfactant operating income increased $3.4 million to $37.2 million, or 10%, compared to the prior year quarter primarily the result of improved North American performance.

Polymer operating income increased by 50% or $7.4 million to $22.2 million compared to the first quarter of last year as a result of volume growth in the Global Rigid Polyol business and improved phthalic anhydride results.

Specialty products increased slightly to $100,000 to $2.3 million due to improved Lipid Nutrition results despite a change in order pattern in our pharmaceutical and flavor businesses. Also as discussed on the February 24, 2016 conference call, we officially announced the closure of ethoxylation production in Canada during the first quarter.

Let’s move to Slide number 4, which shows the total company earnings bridge for the first quarter compared to last year’s first quarter and break down the $9.1 million increase and adjusted net income. Since this is net income, the figures noted here are after the effective taxes. We’ll cover each detail – each segment in more detail shortly.

But both Surfactant and Polymers saw solid growth compared to the prior year. Specialty product increased, operating income increased $100,000 or by 4% over the first quarter of 2015.

The Lipid Nutrition business improved because of actions taken in the fourth quarter of 2015 to lower cost and enhance supply chain efficiencies plus there was slightly higher demand within this business. This was mostly offset by a change in order pattern in our pharmaceutical and flavor businesses.

In the fourth quarter, we’ve reported that we exited our TIORCO joint venture with Nalco, which was focused on enhanced oil recovery end market. As a result we no longer recognize losses from equity in that joint venture. This item was previously represented separately below operating income on our income statement.

We’ve remained committed to that market over the short and longer term, but will serve it through a smaller and more focused set of resources. Going forward, our commercial benefits and related cost will be reported entirely within the global Surfactant segment.

The all other category primarily represents the favorable impact of having no external consulting fees paid in the first quarter of 2016 related to our ongoing global efficiency initiative, which is called DRIVE. This initiative is now internally managed and the related benefits are captured within each big business segment operating results.

Our discussion on Slide number 5 focuses solely on the results of our Surfactant business for the quarter. Surfactant sales were down by $20.6 million or 6%. Prices were down 12%, primarily related to lower raw material cost. The negative impact of foreign currency translation lowered sales by 5% while volumes were up 11%.

The business delivered $37.2 million of operating income and increased $3.4 million over the first quarter of 2015. North American volumes were up 17% primarily as a result of a new laundry supply contract. Excluding the new contract, volumes were up 1% in North America.

Unit margins were up slightly versus the prior year excluding the impact of the laundry business and margins as a percent of sales increased.

We continue to show North America and Asia in the same category because our Surfactant businesses in Asia is relatively small and much of the Surfactant production in the region is used to support business in the U.S. North America benefited from higher volumes the impact of earnings leverage associated with those volumes.

Lower raw material cost drive contributions and a more favorable mix related to our agricultural end market and sales through our distributor partners. This improvement was partially offset by lower performance in our oil field business, which was again negatively impacted by lower crude oil prices and reduced industry activity.

Latin America decreased slightly despite continued volume growth in Brazil and Columbia, primarily the results of negative foreign currency exchange. Looking forward we expect strong growth in Latin America for the rest of the year.

Following a record 2015 year for Europe we expect modest growth for the remainder of the year as a result of our diversification efforts in the region. Accelerated depreciation related to the previously mentioned Canadian ethoxylation shutdown negatively impacted results. The related assets have now been fully depreciated.

Now, turning to the polymer discussion on Slide 6. Sales were up $4.5 million or 4%. Prices were down a 11% primarily because of lower pricing related to raw material cost. The negative impact of foreign currency translation lowered sales by 2% while volumes were up 17%.

Operating income was $22.2 million which is $7.4 million higher compared to the same quarter last year excluding last year's Sale of the Systems business operating income was up $10.3 million or 87%, unit margins and margins as a percent of sales both increased versus the prior year.

North America rigid volumes were 33% higher primarily due to strong market demand from increased insulation standards. Additionally margins benefited from falling raw material costs. Europe results increased on higher rigid volumes due to increased insulation standards there as well as the conversion to metal panel applications.

Specialty polyols improved from higher volumes and lower raw material costs. Overall for global Polymers, we continue, we anticipate continued strong volume growth for the remainder of the year but expect headwinds if raw material cost increase.

Although China startup cost minimally impacted us during the first quarter of 2016, China plant depreciation expense combined with weak construction related demand for insulation materials would negatively impact the balance of the year.

Phthalic Anhydride or PA results increased primarily because the prior year first quarter results were negatively impacted by an unfavorable orthoxylene inventory position. Now, Quinn will cover Slide number 7 and make some additional comments about 2016..

Thank you, Scott. Similar to last – our last call, I will provide an update on key initiatives as well as items we know with some level of certainty. Each amount stated will be before the effect of taxes. As previously communicated 2016 should benefit from restructure activities taken in 2015.

Although, our resources maybe more limited, our Enhanced Oil Recovery efforts are now better aligned for opportunities in the current low petroleum price environment. We did not realize any net favorable year-over-year benefits in the first quarter of 2016, due to a significant orders that we received in the first quarter of 2015.

However, we’re on – still on track to deliver $3 million of improvement related to our EOR activities since we no longer will absorb losses related to the joint venture with Nalco.

The actions taken in the fourth quarter of 2015 to lower cost and enhance supply chain efficiencies combined with greater demand within the Lipid Nutrition portion of Specialty Products delivered growth.

The improvements related to our Lipid Nutrition business should increased throughout the remainder of the year and we’ll likely deliver more than the $3 million previously discussed. In January of 2016, we announced that we would begin transitioning ethoxylation volume from our Canadian site.

The first quarter of 2016 Surfactant results were negatively impacted by $1.1 million of accelerated depreciation. We expect to incur an additional $1 million of unit shutdown cost in the second half of 2016. Our DRIVE program delivered expected benefits in 2015 and in the first quarter of 2016.

We expect continued benefits from projects to carried over into 2016, new projects and the elimination of consulting fees for this initiative. DRIVE will deliver at least an additional $8 million in 2016. We expect that the second quarter of 2016 will benefit from the additional laundry volumes that began in July of 2015.

The year-over-year benefits will anniversary at the end of the second quarter of 2016. Ongoing our plans [ph] continue to benefit from volume leverage associated with this business. In Germany we will incur an additional $4 million in cost because of an expected every five-year government mandated shutdown of our site.

The shutdown typically last 30 days, this action will impact our surfactant and polymer businesses in the second half of this year. Our plants in China began operations in March, ahead of schedule and below budget cost.

However, due to the start-up cost and weaker construction activity in China, China will likely represent a headwind of $3 million in 2016. Our plan to export production volume to other regions should provide some benefits. The special Polyol business had a good first quarter and we expect earnings momentum to continue through 2016.

The coatings, adhesives, sealants and elastomers or CASE business, is an important adjacency for Polymers. We still expect the new reactor in Poland to begin production in the second half of the year. In terms of growing our top line we expect our rigid insulation foam business to continue to grow benefiting from energy conservation efforts globally.

As for surfactants, in Latin America, despite foreign currency headwinds in the first quarter of 2016, we still plan to build on last year’s records in Brazil and Colombia by introducing new products and earning new customers in those countries.

We believe earnings per share should grow in 2016, more specifically, we are cautiously optimistic about the second quarter but the headwinds mentioned potentially could make the second half of 2016 more difficult. Net debt without acquisition should improve. This concludes our prepared remarks.

At this time we would like to turn the call over for questions. Chris, please review the instructions for the question portion of today’s call..

Thank you. [Operator Instructions] And our first question comes from the line of Eugene Fedotoff with KeyBanc Capital Markets. Please go ahead..

Good morning, guys. Congratulations on a strong quarter..

Thank you. Thank you Eugene..

Thank you..

Just wanted to ask you about volumes in North America excluding the surfactant contract it looks like volumes were up slightly.

Could you talk a bit about what was driving volumes in the quarter?.

To break down and look by our two major business segments volumes and our Surfactant business in North America were up slightly the agricultural and the distribution businesses were up in addition to strong laundry volumes which drove the majority of the increase.

From a Polymer perspective, volumes in North America were up significantly based on increase customer demand, which benefited from a little bit of mild weather but also it just lower prices for both our polyester polyol and MDI which is the product that has used with made our polyol MDI combination attractive for customers in the marketplace..

Okay and just a follow-up on that for polyol, obviously very strong increase in North America in the first quarter.

Do you feel like there was some inventory build-up or all that was driven basically by increased insulation standard to maybe or a bit more milder weather as you mentioned?.

From talking with our customers they believe 2016 is going to be a strong demand year. We believe we got some benefit from the weather but overall we’re projecting a strong year for polyols both in Europe and in the United States in 2016.

Generally speaking, we have experienced near 8% growth over the last 10 years but we get kind of wide ranges of growth, last year was a small growth year. So we’re optimistic that 2016 is going to be strong throughout the year, remains to be same..

Great. And just a last question.

As far as trends in raw material cost can you comment on that?.

We’re starting to see an increase in oleochemical raw material cost at this point in time, palm and coconut based raw materials have increased over the last 30 days to 45 days. Petroleum prices as you see in the marketplace are fairly volatile trending up a little bit. So we would anticipate some raw material pressure as the year unfolds..

And for the full year are you expecting raw materials to be up slightly or up significantly what is it – what is your expectation?.

Our expectation as a company the raw materials will be up slightly for the year..

Great, thank you. .

Our next question comes from the line of David Stratton with Great Lakes Review. Please go ahead..

Good morning, thanks for taking up my question..

Good morning..

Good morning Dave..

Thanks for taking my question.

Can you talk a little bit about the order timing around pharma and the flavored segment in the specialty?.

We have relatively stable demand for some specialty products that we sell within those portfolios and the variation of the order pattern is somewhat variable. But at the end of the year, we will be on track for our expectations for both pharmaceutical and the flavor products for the year.

So we are not concerned at all about the full-year results, we’re just getting – there’s variation that occurs through the course of the year..

Alright, thank you. And then, regarding the China plant start-up, can you provide some color into how that’s going. And I said it began operations in March, but just….

Yes, so the construction project overall was actually slightly under budget, one month early. And start-up process has gone very, very smoothly. We have utilized global resources to help us start that facility.

But the Chinese team has done an outstanding job making products in speck and we’re in the process of going through our product mix, making all the products that we need to and sampling customers and waiting for the customer approvals at this point in time.

So we are very pleased with the plan itself and the team that has worked on the start-up process. .

And how long do you think it will take to get the customer approvals you’re seeking?.

Yes generally, probably it will take two months to three months, to get approvals. Some of them could be a little bit longer. But for the most part we anticipate by the end of the second quarter, kind of – no longer using toll manufactures and starting to use that plant more regularly..

All right, thank you..

Thank you..

[Operator Instructions] Our next question comes from the line of Mike Harrison with Seaport Global Securities. Please go ahead..

Hi, good morning, congratulations on a nice quarter..

Thank you, Mike..

Quinn, I was wondering if you could give a little bit more detail on what’s going on in the phthalic anhydride market, I know that in the prior year you mentioned there that you were seen kind of unusually high costs slug of your raw material that was coming through the P&L and that negatively effected the profitability in the prior year, but can you give us a little more color on what’s going on in that market and how things go play out the rest of this year..

Great. Yes, thank you. So, if we take a step back approximately 50% of our phthalic anhydride is used to support our polyol business. The other 50% there are approximately about 100 million pounds is used to support the merchant market demand. So we’re effectively running our plant sold out today.

And the plants running well and you will continue to look for opportunities to squeeze a little bit more out of there. But really the challenge for us in terms of our PA business is trying to get the margins up a little bit. We have tried to work with our customers, we’ve tried to get the margins up a little bit, but we’ve had limited success to-date.

So we’re comfortable with the volumes we have, we get additional $0.01 a pound in margin that add some million dollars of operating income to our business. So our focus is trying to get the right margins associated with the business to support the capital expenditures that we have related to maintaining that capacity.

Relative to the inventory position, we had an unfavorable inventory position at the end of 2014 going into 2015 and so that negatively impacted the results of 2015. We’re pretty comfortable that that won’t reoccur we do expect profitability for our PA business to be up in 2016 versus 2015..

And then just looking to follow-up a little bit more on the raw material front, you kind of walk through your different expectations around those raw is going up. Obviously your pricing is coming lower still on a year-on-year basis.

Can you give us a sense of just based on the raw material dynamics? When do we start to lap those price is coming lower? And can you get traction if your raw start to go higher? Can you get traction on pricing to help offset those higher raw is?.

So as we’ve discussed our margin – and across the businesses were generally up as a result, in part due to falling raw material prices. And so as raw materials begin to increase it will be an objective to maintain the higher margins or relative higher margins that we add in 2015.

So but that’s we live in a competitive world mostly have those dynamics unfold. I think as we look at Q2 where we feel pretty good about our ability to hang on to those margins in Q2, in case we move throughout the year Q3, Q4 that, that is still a little bit uncertain at this point..

All right. And then….

And I guess let me just add one more comment, if we take a look at kind of or the $9 million increase in our business if you will. We kind of look at that is may be 50% of that is volume related and then the other half of that the other 50% is a combination of margin mix in our drive initiative.

So that just provides little color in terms of kind of where that increase is coming from for you..

So [indiscernible] there is the improvement that you saw year-on-year was mostly raw material driven there were a number of drivers here most of it’s actually volume and internal initiatives..

Yes, that’s correct..

That’s correct. .

All right. The last thing I want to understand is just, you mentioned that the construction market in China is not playing out to your expectations. It sounds like you guys are taking some steps to make sure that, that plant that you are building is going to be utilized through some exports but how do you see the construction market playing out.

Are we a year behind where you had it sort of hope that would be? Is that a couple of quarters behind? Or could it may be never get to where you would previously expected the inflation demand could get..

At this point in time, we probably view that we are a year and a half behind. So we’re – it’s not a couple of month issue, it is a significant time period, year and a half to two years. Now, when it grows, it’ll grow in big chunks. But today we’re again probably a year and a half, two years away.

So looking for other opportunities around the world to utilize some of that capacity is a priority for us, and we’re actively working on that to-date..

All right, thanks very much..

Thank you..

Thank you, Mike..

Our next question comes from the line of Ivan Marcuse with KeyBanc Capital Markets. Please go ahead..

Hey, thanks for taking my questions. Just a couple of quickies. In terms of your rigid polyol volumes of 33%, how much of that had to do with underlying demand? I don’t know if you could parcel it out, but underlying demand versus maybe some pre-buying ahead of raw materials going higher.

So we saw oil and some raw materials start to accelerate in March.

Did that compel some of your customers to buy ahead of prior potential price increases in second quarter or is that too hard to tell?.

I don’t believe there was any pre-buy associated with rising raw material prices..

Okay.

And then if you look at your cash flow, what was your cash flow from operations in this quarter?.

It was close to neutral, Ivan, for the quarter. And so we consume some working capital in the first quarter which is pretty consistent with the typical trend for us in Q1..

Okay.

And then what’s your expectation for – just for – in terms of cash flow for 2016? Free cash flow?.

We don’t give that number specifically, Ivan, but I think by modeling out the earnings with no real change in fundamentals on working capital from prior years, and using the CapEx expectation that we’ve given in our slides, I think you can get to the projection for the full year..

Okay. Thanks..

Yes..

And there appears to be no further questions on the phone lines at this time..

Okay. Thank you for your interest and your ownership of Stepan Company. We look forward to reporting continued positive performance to you on our second quarter 2016 call. Have a great day. Thank you..

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