Stepan Co (SCL) 2022 Q4 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Stepan Fourth Quarter and Full Year Earnings Conference Call. (Operator Instructions) Please be advised that today's conference call is being recorded. I would now like to turn the conference over to your speaker today, Luis Rojo, Vice President and Chief Financial Officer. Please go ahead.

Good morning and thank you for joining Stepan Company's fourth quarter and full year 2022 financial review. Before we begin, please note that information in this conference call contains forward-looking statements, which are not historical facts. These statements involve risks and uncertainties that could cause actual results to differ materially, including, but not limited to process for our foreign operations, global and regional economic conditions and factors detailed in our Securities and Exchange Commission filings.

Whether they'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 Investors 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 information and perspectives helpful.

With that, I would like to turn the call over to Mr. Scott Berens, our President and Chief Executive Officer.

Good morning and thank you all for joining us today to discuss our fourth quarter and full year results. To begin, I will share our fourth quarter and full year highlights and strategy outlook, while Luis will provide additional details on our financial results. Despite significant external supply chain challenges in a difficult macro environment, the business was able to deliver another record year. Significant inflation in raw materials, logistics and other expenses were fully offset with pricing actions, mix improvements and productivity efforts.

Improved product and customer mix increased revenue by 30% in 2022 after delivering 22% growth in 2021. Surfactant's operating income was down slightly, primarily due to lower global commodity laundry demand, raw material constraints and customer inventory destocking. Higher demand for products sold into the functional product and institutional cleaning end markets partially offset the above. Polymer operating income increased 13% versus prior year despite lower global sales volume due to customer and channel inventory destocking, reduced construction industry activity and general economic concerns.

Specialty Products delivered record operating income of $30 million compared to $14 million in the prior year, driven by improved margin and customer mix. Our Board of Directors declared a quarterly cash dividend on Stepan's common stock of $0.365 per share, payable on March 15, 2023. Stepan has paid and increased its dividend for 55 consecutive years. During the fourth quarter of 2022, the company paid $8.1 million in dividends to shareholders and repurchased $2.7 million of the company's stock. For the full year, the company paid $30.6 million in dividends and repurchased $25 million of company stock.

The company has $125 million remaining under the share repurchase program authorized by its Board of Directors. We remain confident in the strength and diversity of our business and its ability to generate cash that will allow us to invest in our current business, pursue strategic M&A opportunities and return cash to our shareholders.

Luis will now share some details about our fourth quarter and full year results.

Thank you, Scott. My comments will generally follow the slide presentation. Let's start with slide 5 to recap the quarter. Adjusted net income was $13.5 million or $0.59 per diluted share versus $22.5 million or $0.97 per diluted share for the fourth quarter of 2021. Because adjusted net income is a non-GAAP measure, we provide full reconciliations to the comparable GAAP measures, and this can be found in Appendix 2 of the presentation and Table 2 of the press release. Specifically, the adjusted net income for the fourth quarter exclude deferred compensation expense of $2.2 million compared to last year's expense of $2.4 million.

It also excludes minor changes in our environmental remediation reserve and restructuring expenses. The deferred compensation figures represent the net income related to the company's deferred compensation plan as well as cash-settled stock appreciation rights for our employees. Because these liabilities change with the movement in the stock price, we exclude this item from operational discussion. Slide 6 shows the total company net income bridge for the fourth quarter compared to last year's fourth quarter and breaks down the decrease in adjusted net income.

Because this is net income, the figure is not here at on an after-tax basis. We will cover each segment in more detail, but to summarize, we delivered excellent operating income growth in specialty products and lower operating results for Surfactants and polymers. Corporate and all other expenses, which are not allocated to the business segment were up $5.4 million, driven by higher interest expenses and overall inflation. The company effective tax rate for the quarter was slightly negative, mainly due to onetime favorable tax benefits. Slide 7 focus on the Surfactant segment results for the quarter.

Surfactant net sales were $455 million for the quarter, an 8% increase versus the prior year. Selling prices were up 26%, mainly due to the pass-through of higher raw material and logistic costs as well as improved product and customer mix. Volume declined 15% year-over-year, primarily due to lower demand in commodity laundry and personal care end markets, lower volumes due to the transition of low 1,4 dioxane capabilities and customer inventory destocking efforts. Higher global demand for products sold in the agricultural institutional cleaning end markets partially offset the above.

Foreign currency translation negatively impacted net sales by 3%. Surfactant operating income for the quarter was $22 million, a decrease of $11 million versus the prior year, driven by a volume decline of 15%, like mentioned before, and higher expenses associated with the company transition of low 1,4 dioxane products. All Surfactant reporting regions saw decreased operating income primarily due to the lower volumes mentioned before. Now turning to Polymers on slide 8; net sales were $148 million for the quarter, a 15% decrease versus prior year.

Selling prices increased 14%, mainly due to the pass-through of higher raw material costs. Global volume declined by 23%, primarily due to a 21% volume decline in Rigid Polyols and lower demand across Specialty Polyols and Phthalic businesses. The decrease was driven by customer inventory destocking, reduced construction industry activity and general economic concerns. Foreign currency translation negatively impacted net sales by 6%. Polymer operating income was $3 million versus $13 million in the prior year. The decrease is primarily due to the 23% decline in global volume and higher costs associated with the planned maintenance activities in the company's PA plant located in the U.S.

North America and Europe results were impacted by lower volume across all Polymer segments, partially offset by margin recovery efforts. Asia results improved on increased demand following the easing of COVID lockdowns and restrictions in China. Finally, Specialty Product operating income was $6.6 million versus $2 million in the prior year. This increase was primarily attributable to improved margins and customer mix within the NEOBEE product line up. Turning to Slide 9; despite significant external supply chain challenges and a difficult macro environment, the business was able to deliver another record full year.

Adjusted net income was a record $153.5 million or $6.65 per diluted share, a 7% increase versus $143.5 million or $6.16 per diluted share in 2021. The company volume declined 7% versus the prior year, driven by lower demand and customer inventory destocking efforts in the second half of the year. The Surfactant segment delivered operating income of $163 million, down slightly versus the prior year. Surfactant global volume was down 6%, primarily due to lower global commodity laundry demand, the impact of the low 1,4 dioxane transition and customer inventory destocking efforts.

Higher demand for products sold in the functional products and institutional cleaning end markets partially offset the above. The Polymer segment delivered $83 million of operating income, up 13% versus the prior year. Global polymer volume declined 7% versus the prior year due to customer and channel inventory destocking and lower construction-related activities in the second half of the year. The Specialty Product operating income was a record $30 million versus $14 million in the prior year, driven by improved margins and costumer mix in our NEOBEE product line.

Lastly, the effect of foreign currency translation negatively impacted net income by $5.6 million or $0.24 per diluted share versus the prior year. Earnings per share, excluding FX, grew 12% versus 2021. Slide 10 shows the total company earnings bridge for the full year of 2022 compared to 2021 and breaks down the increase in adjusted net income. Surfactant was slightly down, more than offset by polymers and specialty products. The company's full year effective tax rate was 22% in 2022 versus 20% in 2021. This year year-over-year increase was primarily due to nonrecurring favorable tax benefits recognized in 2021.

Moving on to slide 11; our balance sheet remains strong, and we have ample liquidity to invest in the business. Even with our increased CapEx investments, our leverage and interest coverage ratios continues at very healthy levels. During the year, cash from operations was $161 million, and we deployed $466 million against CapEx investments, dividend and debt payments, share repurchases and higher working capital requirements due to raw material inflation. The company's full year capital spending was $302 million, inclusive of our 1,4 dioxane project and Pasadena investments in the U.S.

Now beginning on slide 12, Scott will update you on our strategic priorities.

Thank you, Luis. In addition to delivering another record year of earnings, we made good progress on advancing our strategic priorities in 2022. The following slides capture our strategic priorities and a vision for a cleaner, healthier and more energy-efficient world with our customers' preferences in mind. Our diversification strategy in the functional products, including agricultural and oilfield chemicals continues to be a key priority for Stepan. Our global agricultural volumes increased double digits in 2022, supported by high commodity prices for corn, soybean and wheat, which incentivize growers to utilize the full breadth of crop protection options.

In addition, Brazil continues to advance in agronomic practices while favorable weather patterns in Australia increased demand for crop protection. We continue with the build-out of the KMCO oilfield Demulsifier product line, having commercialized over half of the acquired product portfolio to-date. We remain optimistic about future opportunities in this business as elevated crude prices should encourage increased oil production and the use of production and stimulation chemicals. Our Polymer business continues to focus on developing the next-generation advanced Rigid Polyols technologies, capturing the organic market growth driven by increasing global energy conservation efforts and delivering diversified growth in the [spray fill] market.

We completed several significant infrastructure projects at our Millsdale manufacturing site, which will improve productivity and winter time reliability. Our efforts to improve operational efficiency and debottleneck capacity continue across many of the production units at the site. We also look forward to commissioning new low 1,4 dioxane investments at the site by mid-year. Tier 2 and Tier 3 customers continue to be a focus of our Surfactant growth strategy. We added 550 new net customers during 2022. And including functional products, we grew volumes mid-single digits despite the destocking efforts we observed in the fourth quarter across most markets and channels.

We will continue serving and investing in the strategic market segment. In recognition of our ESG efforts, Stepan was named number 1 within the specialty chemicals sector of Investors Business Daily's 2022 Best ES&G Company list. We also once again achieved the Gold Rating from EcoVadis which places Stepan at the 96 percentile level within our industry. Moving to slide 13; work continues on our new alkoxylation production facility in Pasadena, Texas. This asset will be a flexible state-of-the-art multi-reactor facility with approximately 75,000 metric tonnes of annual alkoxylation capacity.

It will provide strategically located capacity and capability for long-term specialty alkoxylation growth across our strategic end markets, including agriculture, oilfield, construction and household and institutional cleaning. We expect the plant will be up and running mid-2024. The underlining alkoxylation business that supports the Pasadena investment continues its strong double-digit volume growth and at margins exceeding initial expectations. The recent acquisition of PerformanX's Specialty alkoxylate business delivers additional baseload volumes for Pasadena and provides attractive market diversification opportunities for our alkoxylation product line.

The integration of PerformanX business is complete, and we are delighted with the new customers we are now serving in both existing markets and new markets to Stepan such as pulp and paper and lubricants. As you know, we are increasing North American capability and capacity to produce ether sulfates that meet new regulatory limits on 1,4 dioxane with network completion expected in the first half of 2023. 1,4 dioxane is a minor byproduct generated in the manufacture of either sulfate surfactants, which are key cleaning and foaming ingredients used in consumer product formulation.

Stepan is working to supply its customers with ether sulfates that meet the new regulatory requirements. Customers have made long-term commitments to low 1,4 dioxane ether sulfates, and we expect this transition to go through 2023 with our focus on generating value growth. Stepan will have the largest installed low 1,4 dioxane production capacity for sales into the North American market, enabling Stepan to maintain and grow our North American sulfonation business. We are pleased with the progress in our fermentation product platform. Our priority remains the development and commercialization of rhamnolipid, our first anticipated bio-surfactant offering.

We believe this new bio-based product family has significant opportunities in several important end markets for Stepan, including agricultural chemicals, consumer cleaning, personal care and oilfield. Customer sampling has begun as development and engineering teams progress towards final process design. Finally, given the strength of our balance sheet, acquisition opportunities that align with our growth and diversification strategy remain a priority. Summarizing 2022, we delivered record earnings, and I am proud of our team's effort and resiliency during what was a challenging market environment.

We have now successfully delivered three consecutive years of record earnings. We made significant progress in several strategic areas, including capital project execution, our sustainability and innovation programs while also delivering continued diversification and growth of our customer base within our targeted end use markets. We also delivered double-digit operating income growth within our Surfactants Functional products business within our Polymers business and within our Specialty Products business. Looking forward, we believe 2023 will be challenged by continued elevated inflation and high interest rates.

We believe the macro environment could negatively impact consumer demand and construction-related activity, which will affect both our Surfactant and Polymer businesses. Additionally, we believe higher overall cost inflation, higher depreciation and pre start-up expenses associated with our new Pasadena site will challenge our ability to deliver earnings growth in 2023. We are seeking to offset these 2023 headwinds with productivity improvements, pricing increases where possible and furthering our efforts to improve product and customer mix. Despite this projected macro environment, we remain committed to executing our long-term growth strategy.

This concludes our prepared remarks. At this time, we would like to turn the call over for questions. Lisa, please review the instructions for the question portion of today's call.

(Operator Instructions) Our first question will be coming from Mike Harrison of Seaport.

I was hoping that you could discuss some of the factors that drove the 17% volume decline that you saw in Q4? Maybe help us understand how those split out between destocking, underlying market weakness and other factors? And were there any key differences in the volume impacts, particularly from destocking as you look between the Surfactants business and the Polymers business.

Thank you, Mike. Look, as you rightly said, so when you think about the minus 17%, you need to think about those three buckets, right? One is demand, one is destocking and the other is the transition to low 1,4 dioxane product, which we clearly communicated in October that we lost a Tier 1 customer, and there are other impacts on the volume side related to the transition. So if you think about those three big buckets and you think about the minus 17%, roughly, each bucket is one-third. So think about 5%, 6% is the impact of each of them. And of course, when you think about polymers, you don't have the low 1,4 dioxane transition, so you can see more than a half and half situation between the other two buckets. But that's how we'll summarize the three big buckets that we saw in the minus 17% in Q4.

All right. And I guess in terms of destocking, that can't go on forever from your customers. Are you starting to see signs that order patterns are normalizing at some point here in Q1? Maybe talk about what you're hearing from your customers in surfactants as well as in polymers.

Yes, Mike, I would say that it can't go on forever as well. But I would say, incrementally, we may be seeing a little uptick versus what the pattern we saw in Q4, but I don't think we're done with destocking activities at this point. As you compare surfactants versus polymers, obviously, two different channels to the retail end use. I would say on the polymer side, it's -- once you get past the manufacture of the rigid insulation panels that our Polyols goes into, it's a highly fragmented market of distributors and contractors across the country.

So I think the destocking efforts will continue a while because I think that chain was pretty stuffed up. The Surfactant side, I think as you look at consumer demand, I think the inventories got pretty full into Q4. And we may be further along in the destocking of the consumer product retailers and packaged companies, but I think polymers may be a little bit behind surfactants.

So Mike, and I would summarize it as simple as in Q1 versus what we are seeing already 6 weeks into it, we expect a similar demand condition versus what we saw in Q4. But everybody is expecting a pick up in the second half, right? That's kind of the general theme and consensus that we're hearing from customers and suppliers, people stay at of Q1 or first half of the year and then picking up in the second half.

All right. Very helpful. And then I wanted to ask about the Pasadena start-up process. It sounds like there's going to be some P&L impact associated with expenses that you're taking on before you officially start commercial sales. And it does also look like the startup or commercial sales timing was pushed out a little bit. I believe you said previously, early 2024 now first half of '24. So maybe just help us out with the timing and how we should think about modeling the impact of that start-up.

Sure. I will let Scott later to comment on the small -- on the very small delay that we're seeing on the construction phase. What I will tell you, look, we have -- you have -- on the expense side you have three big buckets as well, right? I mean you have the Pasadena pre start-up investments, right? I mean if we're going to produce full -- we're going to have a full production capacity in 2024, we need to hire. We need to train our people. This is a chemical plant, and we take this very seriously our training, EH&S and everything.

So that we're going to, as Scott mentioned it in the remarks that we're going to commission in also the low 1,4 dioxane capabilities in Millsdale plant. We started last year in Georgia, this year in Millsdale. So between those two buckets, the net impact because remember, we also had high expenses in 2022 with the Millsdale (inaudible) event that we had in Q1. So when you net out the three, you are talking around $10 million of extra costs in our P&L as we commissioning low 1,4 dioxane and we invest to be ready on Pasadena. I will turn to Scott to talk a little bit more about the scheduled timing.

Yes. So Mike, as it relates to the construction and start-up schedule, we have slipped maybe a month, maybe two max -- we're about 20% complete with the construction. So it's in full swing. We had some raw material delays related to getting the civil construction done on the site. So nothing from just normal raw material constraints that were associated with the civil portion of the site project. So we should be mechanically complete and up and running before midyear.

And for example, we have all the major equipment already on site. I mean when you think about the reactors and all the major equipment that we need they're all on site already.

The next question will be coming from Vincent Anderson of Stifel.

I just wanted to ask, given your existing alkoxylate portfolio and the PerformanX acquisition last quarter, how quickly do you think you can ramp and then fill the order book for the Pasadena facility once it's up and running?

Yes. Good morning Vincent, from an alkoxylation perspective, we have two existing alkoxylation facilities here in the U.S. today. Pasadena will be our third. We also utilize a broad network of third-party toll manufacturers today that we have been using as capacity to continue to grow the product line, which has been doing very well, exceeding our expectations. So upon startup at Pasadena, we will have a very good opportunity to get that utilization up in balance with how we want to manage our external tolling network. So we have, I think, the ultimate flexibility to ensure the proper utilization of our internal assets and allow us to continue to grow using tollers as needed.

Perfect. And I'm not going to ask you to predict the future on raw materials and all of that. But if we continue along this slow demand environment through at least the first half of the year, is there any reason that we wouldn't see a little bit of positive timing impact between price and raws like we've seen in past down cycles.

It's hard to say, Vince. I would say that raw materials kind of plateaued in Q4. So it's pretty stable right now. And whether it's going up or down from here, it's hard to predict. There's too many factors that play into that. Our focus is really we will continue our pricing actions to cover our continuing any cost inflation that we have within the business and operations. So I think it's wait and see, but we expect that we'll continue with our pricing strategy as needed.

Okay. Fair enough. And then I had a quick one on taxes of all things. The 2023 effective tax rate guidance is maybe a little bit higher than the last couple of years. But more importantly, maybe with all this capital spending, do either the low 1,4 dioxane projects or the Pasadena project qualify for bonus depreciation? And if so, how should we think about that impact in cash taxes over the next couple of years?

Yeah. Great question, Vincent. Look, the guidance is kind of similar. Remember, for example, UK is moving to a 25% tax rate in April. So that's a key impact. And then you have country mix as well baked into that. So our normal tax rate, if you go back to 2021 -- or 2020, 2021, we had a lot of tax projects. But in 2020, you see our tax rate always in the 25%, 26%. So that's the guidance that we have right now.

And you are totally right, on a cash basis as soon as we commission in all the low 1,4 dioxane assets, we will apply -- those apply for bonus depreciation. Now remember that bonus depreciation moved from 100% last year to 80% this year per the new law. I mean, it's going down. And next year, we're going to be able to have Pasadena, but the bonus depreciation goes down to 60%. So unfortunately, we see that -- I mean it's not 100% like in the past. But of course, we are planning for that in our cash flow.

(Operator Instructions) And our next question will be coming from David Storm of Stonegate.

Perfect. Just curious about some of the pace in which relates to the expenses for 1,4 dioxane project and the Pasadena project.

David, could you repeat that question? We broke up on us.

No. Sorry about that. Just curious about the pacing for the expenses. You've mentioned some of the expenses to 1,4 dioxane projects and the Pasadena projects. And just curious how we should think about the pacing with that through 2023 and beyond?

Yes. No. What I would say is probably it's more half and half year. The first half is heavily loaded. It's more loaded into low 1,4 dioxane. The back half is going to be more loaded with Pasadena.

Perfect. The other thing, I know you guys don't give explicit guidance. But after companies like Exxon and Procter & Gamble released their earnings, we saw a lot of analysts raised their estimates for revenue and EBITDA. Do you think that's kind of directionally correct for the market going forward or?

Can't comment on that, David. I don't know what's driving Exxon and their expectations.

(Operator Instructions) Our next question will be coming from David Silver of CL King.

This is kind of a qualitative question, but you did discuss the outlook for 2023 in some detail overall. I was wondering if you could maybe just highlight some thoughts regionally. In other words, of Europe, let's say, North America and South America. I mean, would North America, in your opinion, and in your build up to an overall 2023 outlook, is North America the strongest region or are there some regional issues that we should kind of keep in mind as we think about the overall 2023 outlook? And of course, I'm thinking maybe geopolitical concerns in Europe or some broader regional issues in Latin America. But how does the regional outlook shake out in your opinion at this point for 2023?

All right. Great question, David. And let me take a shot at first, talking about kind of destocking and where the underlying demand is. I think everyone saw an earlier kind of slowdown in Europe starting in maybe Q3 last year, whereas in North America, at least in our business, we didn't see the slowdown really to start until Q4. So I think Europe is a little bit ahead in their demand pattern than North America. And I think I said earlier, I think it's still a little uncertain right now 6 weeks into the year as to where the North American destocking will end and a really good demand profile going forward will be able to be established.

So I think from that perspective, Europe is a little bit ahead, but I don't see any big macro differences between the two regions going forward. The one watch out is Latin America and the continued high inflation in those emerging economies where the average wage is much lower than in North America and Europe. I think they're going to be more exposed to continued prolonged inflation and could have a better impact or a bigger impact on underlining consumer demand.

That's great color, I appreciate it. My next question would be kind of about new products. And in particular, I think I've asked this question some time ago, but does Stepan track, I guess, or calculate internally a vitality index? In other words, percentage of revenues from products that have been developed in the last three years, the last five years, something like that. And if not, I was just wondering if you could call out from a revenue or from a margin impact, however you look at it internally.

What are the one or two areas with the strongest new sales performance maybe in 2022 and if we look out another year or two beyond? I mean I'm guessing the functional products area is at or near the top of the list. But if you could just highlight some of the advances in your new product sales, that would be helpful.

Yes. So I'd first start with where we are focused on strategic end market growth. And that's within the agricultural chemicals space as well as specialty alkoxylates. So in agricultural chemicals, we're part of that development pipeline for new active pesticides. And that pipeline is anywhere from 5 to 10 years long for new products to come to market. So we're deeply embedded in those development pipelines with the large pesticide producers out there, which is a really great place to be, and we have new products being launched in multiple regions (inaudible). The other big focus for us is in specialty alkoxylates.

We're talking another double-digit volume growth year in 2022, and we've got a team dedicated to continuing to meet customers' needs for new and improved technical performance, but also broadening out our product portfolio. So those are daily or underlying activities that happened within our R&D organization on a global basis. And the last area I would push is in rigid polyols. So we're really focused on innovation and delivering a more sustainable and better performing board for the next generation of rigid panels. And we're deeply embedded in those programs with our major customers in both Europe and North America.

What I would add, David, is we are investing and we are making good progress as Scott mentioned in the remark spray foam also. So we are working with new products there. If you think -- we also talk about [Chemco] we are relaunching that product line. And actually, when you think about low 1,4 dioxane, right, that's kind of at the end, a significant investment that we're making to have a totally new ether sulfate portfolio that meets the new regulation, but that's at the end, there's a lot of new volume that is going to be in a new product versus the past.

Yes. No. And I'll just pick up, Luis, on your last comment. I think that was the direction I was heading. But the last couple of years of your business last couple of years, your business has been affected pretty significantly by COVID and pandemic and some other issues that change the way people thought about cleaning and disinfection and things like that. Two parts. First of all, what, in your opinion, will persist once the COVID -- the direct COVID issues kind of fade in importance or maybe move to the background.

Will there be some protocols maybe for institutional cleaning or for commercial sites or arenas, stadiums, things like that, that will persist beyond the pandemic that were -- that we've dealt with the last couple of years? And then secondly, are there other kind of initiatives or regulations either internationally or nationally here that you think are going to be important opportunities or will require some adaptations in your business. So kind of what remains after the pandemic fades and direct importance? And then what one or two regulatory issues should we keep in mind when we think about opportunities for your business?

Yes. Okay, David. As it relates to the COVID pandemic, I think if you look at North America, we've been pretty much open for about the last, what, 12 to 18 months here in the U.S. So we did see the spike while in the height of the pandemic around hand soaps and disinfectants, right, hard service disinfection. And I think we reported back in 2021, the significant spike we saw in 2020, but felt that, that was going to come back down not to pre-COVID levels but to levels above where pre-COVID levels were. That is continuing today, okay?

So COVID provided an immediate spike in 2020. It's come down, but it's still running at 10% to 20% above pre-COVID levels due to new consumer behaviors associated with the pandemic. But that's been pretty much steady state for about the last 12 to 18 months. In terms of new regulations or initiatives, there's nothing on the horizon that we would say as a major headwind or tailwind for demand related to COVID disinfection and cleaning.

The biggest regulation that has impacted our company has been the 1,4 dioxane regulatory environments started by the state of New York. And that's why we've made the investments in 1,4 dioxane to ensure our customers will be able to meet that new regulation going forward.

Okay. Great. And I should have mentioned 1,4 dioxane, of course. Last question, and this would be on your marketing, and it has to do with your strategy for Tier 2, Tier 3 customer development. But you did mention, I think, a net addition customer base of about 550 for 2022. And I'm just wondering if we should think about a particular target for next year? And more to the point, do you think you've kind of, I don't know, cherry-picked or high-graded the opportunities out there on the Tier 2, Tier 3 base of customers?

Or should we expect that there will be -- that this will be a multiyear effort going forward, and you'll continue to kind of broaden the base of Tier 2, Tier 3 customers that you work with and the products and services that you provide there. So should we expect a growing portion of your revenue and earnings to come from Tier 2, Tier 3 going forward or is the progress to-date kind of a good measure of where -- what we should expect going forward?

Yeah. No, David, great question. We've been, I think, pretty clear that growing this Tier 2, Tier 3 segment is a major portion of our company's growth strategy. And we continue to invest in sales, marketing and R&D to support our continued growth with this segment on a global basis. We've identified that target for a prospective customer list in Tier 2, Tier 3 around the world in the tens of thousands. And becoming more efficient in reaching and securing orders from these customers around the world is our focus. And the $550 million is a good number. We're proud of that, and that leads to improved profitability for our company. And that's kind of our expectation going forward is our teams are going to continue to execute and deliver those new customers on a net basis in that hundreds per year.

(Operator Instructions) Our follow-up question will be coming from Mike Harrison of Seaport.

Just a couple more from me. In terms of the Surfactants business, I'm curious if you're seeing any trading down happening within the laundry portions of the business or personal care. And if you are seeing that, is it something that's happening in all regions or is it maybe more as you called out Latin America, maybe the consumers are under a little bit more pressure because of inflation? And I guess are you seeing this trend around trading down? Is it getting worse as you look at Q1 or is it pretty stable?

Yes. Great question, Mike. I would -- from my opinion, trading down in high inflationary environment is a universal trend. It's not geographic specific. And yes, so consumers will trade down from premium to mid-tier to economy tiers. And the economy tiers and mid-tiers also include private label. So I do think there's been that trend -- we've seen that trend from our lens with sales to customers in multiple regions. Is it getting worse? Or I don't know if I can comment on whether it's getting worse or not. It's just -- it's an uncertain view right now with destocking and everything in terms of what the trend is. But it definitely happened in Q4.

All right. And then just looking at the working capital numbers that you guys provided, it looks like working capital improved a little bit compared to Q3. It does look like your net debt went up, though. What was cash from operations in the fourth quarter or the full year? Whatever you can disclose on cash flow would be very helpful.

Great question, Mike. So what we're seeing is we saw the peak of working capital kind of in Q3, and now we are kind of stable versus that peak level. But yes, this has been roughly a $200 million increase versus the base period versus 2020 we have seen a significant increase because of the -- of inflation on raw material and everything. So as we delivered $161 million in the equation, we're happy with our cash flow. And as you know, we're very efficient on our working capital. We have less than 20% of our sales in working capital when the industry average is more 24%, 25%.

All right. And I guess just maybe another cash flow-related question. Where did the depreciation and amortization end up for the full year? I'm guessing it was around (inaudible), where should that D&A number go? I assume it goes up substantially as you start to bring on some of the new assets that you've discussed.

You're 100% right, $95 million, we're estimating at least $112 million to $114 million next year, so an increase between $17 million to $20 million. That, of course, will depend on timing on when -- the start of depreciation of some of these assets, but roughly around $17 million.

That concludes our Q&A session for today. And I would like to turn the call over to Scott Behrens for closing remarks. Please go ahead.

Thank you very much for joining us on today's call. We appreciate your interest and ownership in Stepan Company, and have a great day.

This concludes today's conference call. Thank you all for joining, and enjoy the rest of your day.