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Q4 2023 Stepan Co Earnings Call

Participants

Luis Rojo; VP, CFO; Stepan Company

Scott Behrens; President, CEO; Stepan Company

Mike Harrison; Analyst; Seaport Global Holdings LLC

Vincent Anderson; Analyst; Stifel Financial Corp.

David Silver; Analyst; CL King & Associates, Inc.

Dave Storms; Analyst; Stonegate Capital Markets Inc

Presentation

Operator

Greetings and welcome to the Stepan Company fourth quarter and full year 2023 earnings conference call. (Operator Instructions) As a reminder, this call is being recorded on Tuesday, February 20, 2024. It is now my pleasure to turn the call over to Mr. Luis Rojo, Vice President and Chief Financial Officer of Stepan Company, Mr. Rojo. Please go ahead.

Luis Rojo

Good morning, and thank you for joining Stepan Company fourth quarter and full year 2023 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.
And in addition, this conference call will include discussions of adjusted net income, adjusted EBITDA and free cash flow, which are non-GAAP measures. We provide reconciliations to the comparable GAAP measures in the earnings presentation and press release, which we have made available at www.stepan.com on the Investors section of our website, whether you're joining us online or over the phone. We encourage you to review the investor slide presentation. 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 perspective helpful. With that, I would like to turn the call over to Mr. Scott Behrens, our President and Chief Executive Officer.

Scott Behrens

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. Luis will then provide additional details on our financial results, and I will finish up with comments on our strategic investments and will also provide brief comments on 2024.
For the full year, adjusted net income was $50.7 million versus a record prior year of $153.5 million. Earnings for the full year were significantly impacted by an 11% decline in volume due to a slowdown in demand across most end-use markets, including significant customer and channel inventory destocking. While we believe the negative impacts of destocking are mostly behind us. We continue to experience destocking within our agricultural business at the start of 2024.
The team did an excellent job controlling our cash expenses. Cash expenses were similar to the prior year due to proactive headcount and discretionary expense controls implemented earlier in the year and lower incentive-based compensation accruals. Additionally, we executed our voluntary early retirement program and other fourth quarter workforce productivity actions that will deliver savings in 2024.
In 2023, our cash flow from operations increased to $175 million, representing growth of 9% or $14 million compared to the previous year. The improvement in liquidity was driven by reducing inventory levels, while we continued with our significant level of investment in our strategic growth product projects. In the fourth quarter, the Company reported adjusted net income of $7.5 million versus $13.5 million in the prior year. Volume was up 3% versus prior year, driven by double digit growth in polymers and 1% up in volume in surfactant.
Within surfactants, we delivered strong volume growth in personal care from our low one for vaccine investments. We also grew volume in the industrial cleaning end market and with our distribution partners. Latin American surfactants volume also grew strong double digits as we continue recovering the business. These gains were partially offset by continued customer and channel destocking. In the agricultural end market expenses were similar to prior year due to proactive hedge accounting, discretionary expense controls implemented earlier in the year and lower incentive-based compensation accruals.
Adjusted EBITDA for the fourth quarter was $37.5 million versus $40.0 million in the prior year. The reduction of 6% in adjusted EBITDA was largely driven by surfactants and specialty products, partially offset by growth in polymers, the fact that EBITDA was lower due to an unfavorable customer and product mix, lower income and agricultural chemicals and lower revenues. Within our biocide product line, Latin American surfactants experienced lower volumes and margins due to competitive imports. Specialty Products was down versus record results last year due to pricing pressure and higher cost raw materials.
Adjusted EBITDA for polymers nearly doubled due to strong volume growth. We continue to make significant progress on our cash objectives, delivering another $19 million reduction in our inventory levels during the last quarter of the year, we delivered $22 million of positive free cash flow during the quarter. As we finished our heavy capital investment phase in the fourth quarter, our Board of Directors declared an increase to the quarterly cash dividend of $0.01 per share or 3%, marking the 56th consecutive year that the Company has increased its cash dividend to stockholders.
During the fourth quarter of 2023, the company paid $8.4 million in dividends to shareholders and $33 million in dividends to shareholders for the full year. The Company did not repurchase any Company stock during the year and has $125.1 million remaining under the share repurchase program authorized by the 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.
In summary, 2023 was a very challenging year for the Company by and proud and grateful for the resilience and efforts shown by our team and executing the two biggest growth projects in the Company's history. While concurrently delivering our productivity gains and workforce actions. Luis will now share some details about our fourth quarter and full year results.

Luis Rojo

Thank you, Scott. My comments will generally follow the slide presentation starting with Slide 5. To recap, the quarter fourth quarter adjusted net income was $7.5 million or $0.33 per diluted share versus $13.5 million or $0.59 per diluted share for the fourth quarter of last year. Specifically, adjusted net income for the fourth quarter exclude deferred compensation expenses and environmental reserve changes. Both items were similar to a prior year for a total of $2.7 million after-tax.
Finally, we recorded restructuring charges of $6 million after tax. These include our workforce, both EBIT problem as well as noncash asset and goodwill impairments. 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 a move in the stock price. We exclude this item from our operational discussion.
Slide 6 shows the total company net income bridge for the fourth quarter compared to last year fourth quarter and breaks down the decrease in adjusted net income because this is net income. The figures noted here are on an after-tax basis. We will call it a big segment in more detail. But to summarize, we delivered excellent operating income growth in polymers and lower operating results, sourcing patterns and specialty products.
Slide 7, focus on the Surfactant segment results for the quarter. Surfactant net sales were $370 million for the quarter, a 19% decrease versus the prior year. Selling prices were down 22%, primarily due to the pass-through of lower raw material costs from favorable product mix and competitive pricing pressures.
In Latin America, volume increased 1% year-over-year, primarily due to strong double digit growth in personal care from our low one for downstream investments. We also grew volume in the industrial cleaning end market and with our distribution partners, Latin America surfactant volume also grew strong double digits as we continue recovering the business.
This growth was largely offset by lower demand within the agricultural end market due to continued customer and channel inventory restocking. Foreign currency translation positively impacted net sales by 2%. Surfactant operating income for the quarter decreased $6.9 million, mainly due to the product mix and lower unit margins in Latin America due to competitive pressures.
Now turning to Polymers on Slide 8. Net sales were $147 million, a 1% decrease versus the prior year. Volume increased 10%, driven by a 12% increase in global rigid polyols and higher demand within the specialty polyol business, Rigid Polyols experienced strong growth in all regions. Selling prices decreased 15%, primarily due to the pass-through of lower raw material costs.
Foreign currency translation positively impacted net sales by 4%. Volume and operating income increased more than four times versus prior year, primarily due to the 12% increase in Global Rigid Polyol volumes and margin improvements.
Finally, Specialty Products operating income decreased $3.9 million. This decline was mostly attributed to lower unit margin and volume within the MCT product line and lower unit margins were primarily due to a competitive pricing pressures.
Turning to Slide 9. For the full year, adjusted net income was $50.7 million or $2.21 per diluted share, a 67% decrease versus a record $153.5 million or $6.65 per diluted share in the prior year. Total Company volume declined 11% due to lower demand and significant customer and channel inventory destocking across most of the Company's end markets. Adjusted EBITDA for 2023 was $180 million, a decrease of 40% versus a record year in 2022. The decrease was largely driven by the volume reduction and lower overhead absorption.
The Surfactant segment delivered operating income of $72 million, down from 56% compared to prior year, driven by a 9% reduction in volume. The Polymer segment delivered operating income of $61 million, down 27% versus the prior year, driven by a 14% reduction in volume.
Finally, the Specialty Products segment delivered operating income of $11.5 million, down 62% versus prior year, driven by lower volumes and margin contraction due to due to competitive dynamics. The Company's full-year effective tax rate was 17% in 2023 versus 22% in the prior year.
This year over year decrease was primarily attributable to R&D tax credits and stock-based compensation awards over a lower pretax base. We are projecting a higher effective tax rate for 2024 due to an anticipated disallowance of guilty reduction of foreign tax credits resulting from the expected election of bonus depreciation for our Pasadena capital investment.
Moving on to Slide 10. We continue making significant progress on our cash position we have increased our efforts to lower working capital and reduced capital spending to adapt to the current business environment.
For the year, cash from operations was $175 million, up 9% versus prior year. During the year, we deployed $331 million against CapEx investments, debt payments and dividend. Finally, we reduced inventory by $102 million versus Q1 2023. The Company full year capital spending was $260 million versus $302 million in the prior year, inclusive of our low one for downstream capacity and investments in the US for 2024, we are projecting our capital expenditures will return to historical levels while still executing the final phase of our Pasadena project.
Now beginning on slide 11 and 12, Scott will update you on our strategic priorities.

Scott Behrens

Thanks, Luis. I will focus my comments on our cost and cash management initiatives and the progress of our major capital investments and strategic priorities, despite continued pressure from general cost inflation and higher expenses related to our major growth investments in Pasadena and low one for taxing. Our cash expenses remained flat year over year. Throughout the year, we took proactive actions to control costs and also successfully executed a significant productivity program that led to a 9% increase in cash generated from operations.
As you may recall from our October earnings call, we anticipate returning to pre positive free cash flow generation this year now that we are approaching the end of our heavy investment phase cost reduction activities initiated last year, along with additional productivity and cost-out programs underway in 2024 for our future centered around improved operational performance across our manufacturing network are expected to deliver $50 million in pretax savings in 2024.
Moving to Slide 12. Construction at our new constellation production facility in Pasadena, Texas is approximately 80% complete. We expect the plant to start up in the third quarter of 2024 for the underlining our Constellation business that supports the Pasadena investment, continued its volume growth during 2023 and at a very attractive unit margin.
Despite the continued destocking activity happening within the agricultural chemicals market as you know, we have increased North American capability and capacity to produce ether sulfates that meet new regulatory limits on one for the AxSYM recently installed assets at our wholesale facility are now mechanically completed new contracted low one for taxing volumes have already started shipping from the site and should grow as we reach full installed capacity during the first quarter of 2024.
Stepping now has the largest installed, more one for vaccine production capacity serving the North American merchant market, which will enable second to maintain and grow our North American sulfonation business in 2024 and beyond. In early 2024, our Millsdale site encountered operational interruptions due to a series of power disruptions from our external power provider compounded by a period of extremely cold weather.
In January, the plant was able to successfully restart most unit operations. Our phthalic anhydride and polyol unit operations were more significantly impacted by the unplanned outage, and we expect to be back to full production in PA polyol shortly.
Moving to Slide 13. As we look to 2024, we believe volumes and margins will improve through the continued recovery in Rigid Polyols demand growth in surfactant volumes driven by new contracted business, along with the expected recovery of the agricultural business in the second half of the year and lower overall raw material costs versus 2023.
Our cost reduction activities are expected to deliver $50 million in pretax savings in 2024, which will help offset future inflation, increased expenses associated with the planned commissioning of our new Pasadena Constellation assets and higher incentive-based compensation expenses.
A combination of the anticipated market recovery, executing our strategic initiatives and the aforementioned cost reductions should position us well to deliver adjusted EBITDA growth and positive free cash flow in 2024. We remain confident in our long-term growth and innovation initiatives. This concludes our prepared remarks.
At this time, I'd like to turn the call over for questions. Daniel, please review the instructions for the question portion of today's call.

Question and Answer Session

Operator

(Operator Instructions) Mike Harrison, Seaport Research Partners.

Mike Harrison

Good morning, Laurie. Like mining like I said, yes, I wanted to start out with a couple of questions on surfactant side. You mentioned a lot of the volume growth there was related to a recent low one for Dyax in investment.
Can you just maybe give a little bit more color on where those assets are in their ramp, what the customer response has been? And I guess if you can talk at all about what the margins or returns have looked like there compared to your expectations.

Scott Behrens

Sure. Yes. So Mike, over the last 18 to 24 months, we've gone on a heavy investment phase one for dock same capability. We did install some new assets at both our Winder, Georgia facility and to separate production units at our Millsdale facility.
All three of those assets are now often operational with the last asset at Millsdale, which is going through final commissioning and start-up this quarter. But volumes have sequentially been ramping up as we bought each of those three independent assets up over the last 12 months or so. In terms of margins, I think it's yes at night.

Luis Rojo

I don't know if you were waiting for other context on volume growth in surfactants up. So our Personal Care grew strong double digits due to the low [one 4,000] investment that is called was mentioning, we had a strong double-digit growth in Latin America as well.
In surfactants, we grew with our distribution partners, our high single digits, mid to high single digits. We grew our institutional cleaning as well. And so the plus 1% that that you see in surfactants is coming from a lot of places with good growth. But unfortunately, of course, offset by the destocking in ag. So if you exclude the destocking in actual fact, it grew 5%, which is great robust number or I think that's very helpful.

Mike Harrison

And maybe a little bit more detail on what you're seeing in Latin America. Obviously, the ag business is dragging there, but I think you mentioned some pricing pressure, some share loss related to imported products on. So just curious if you can talk about any actions you're taking and kind of what the path to better earnings in Latin America surfactants might look like this year like?

Scott Behrens

Yes, you're absolutely correct. As I shared on prior calls, with the supply chain disruptions in the second half of 2022 and customers were looking for security of supply they, I think enticed in imports in early 2023, which caused some of our margin and share issues. But I'm happy to report we are recovering our share in the marketplace and margins should continue to gradually improve going forward.

Luis Rojo

On a ninth one seen that happen now in 2023. And that's why margins are depressing Latin America, is it is a competitive situation, but also carrying high cost of raw materials sold. Actually, we just flush out the last high cost material in January, but that was a big drag for the region in 2023, and that should improve in 2024.

Mike Harrison

All right. Perfect. And then I guess just switching over to the comments you made on the Millsdale facility and the power disruption and operational issues you had there on. I think it'd be helpful if there's any way for you to quantify the impacts there.
But I guess my broader question is on I thought we had gone through some modest some improvements at Millsdale to reduce the potential impact of power disruption. So maybe just an update on where we are in terms of improving resiliency there?

Luis Rojo

Yes, let me give you the let me give you the numbers and then Scott can also expand on the situation in yields of at the end might be a small number vis a vis the EBITDA of this company. So we're projecting probably around $5 million of EBITDA impact in Q1.
Again, we are still understanding all the all the details of doing the final fixes are some extra dollars in expenses or we don't have a precise number now, but it's going to be roughly $5 million of EBITDA impact in Q1 and --

Scott Behrens

Yes, Mike, in terms of your correct in terms of this has been a focused area of investments over the last couple of years to improve the operational reliability in the winter months. But I can't say the site based on our prior investments over the last two years fared much better. And with these power disruptions from the month of January.
As I mentioned in my earlier comments, the PA polyol assets were more impacted than the broader sites was, and we have obviously more work and more investment to do to fix the areas within the PA polyol that were disrupted. But overall, I think we're pretty pleased with the way we improved the resiliency. We've been able to do through investments over the last couple of years.

Luis Rojo

And we are working now in partnership with our external power supplier because that was the driver of the situation so we need we need to improve resiliency on that side as well.
And now I forgot to mention that I think it's got a book, a lot of RPA. So the majority of the $5 million will be in the polymers business.

Mike Harrison

All right. Very helpful. And then the last question for me is more of a high-level question. Just on the 2024 outlook and you called out a number of positive drivers and talk about that EBITDA improvement to come, which, you know, I think we all understand that.
But maybe just a little bit of additional detail or color about how we should think about the cadence of earnings in 2024? And it seems like maybe at some point there should be a meaningful step-up or positive inflection point. Just curious if you could maybe help us understand what the timing looks like on that potential inflection.

Luis Rojo

Well, great. Great question, Mike. And as we've as we mentioned in our prepared remarks, we are still expecting destocking that to continue in the first and we are expecting a revamp of the ag business in the second half and now, so that's one of our key drivers. Second, I will say the $50 million productivity program already came, but you are going to have a you know, a gradual ramp-up of that program. So you should expect to deliver more savings in the second half than in the than in the first.
And the third thing that I would say, of course, Pasadena is one of our key building blocks for the second half and for 2025 is still starting up. The plant is not going to be all positive at the beginning. Do you need to spend some money and now, but those are the three big building blocks that we see are. And of course, I mean, you know that we have a seasonality effect on the polymers business where typically Q2 and Q3 on our stronger with all the construction activity so that that that better skew the earnings, the EBITDA is more in the second half.

Scott Behrens

And Mike, I would also just point out without the underlying core business outside of those specific initiatives that we just went through has demonstrated sequential growth in Q4. So distribution, I&I polymers that we'll continue to should continue to incrementally grow through the quarters going forward. But really the second half of the year is what our newer assets come online in Pasadena. And as Louis said, as one ag destocking is close to a subside.

Mike Harrison

All right. Very helpful. Thanks very much.

Operator

Vincent Anderson, Stifel.

Vincent Anderson

Yes, thanks. Good morning, everyone. I wanted to follow up on it again, I wanted to follow up on a couple of Mike's questions. I think first and foremost, I was hoping to get some more context on ag, but really more your confidence in a second half recovery given we're still seeing a lot of pressure in Brazil? Yes, on both the safrinha corn acres and then just overall farmer financial position.

Scott Behrens

Yes. So Vincent, the good news is the macro trend is there. If you've been reading some of the downstream agricultural companies feel that the demand in the field remains right. So this truly is a destocking activity that we're going through right now. I think what we've had, Brad and I have talked to with our customers in the second half is when we should start to see the improved volume now the rate of that ramp up and the geographical cadence of how that happens?
I do think you're right. Brazil could be probably the slowest to recover or work through that destocking. But we know our ag business is global in nature. North America, Europe and Asia are all important for us. So we have we have good anticipation that we will start to see those volumes recover in the second half.

Luis Rojo

And this is 100% in line with feedback that we're getting from our customers. I mean this is 100% in line with their forecast.

Vincent Anderson

Okay. It's good to know. I just called out Brazil because I think you pointed to that as a specific area of pressure recently. But now that all tracks and then kind of going back to the Latin American business, I think you kind of framed it as imports were incentivized by supply chain disruptions. But if I recall, those were Chinese imports that can be tough to compete with once they kind of get a toehold.
And so are you comfortable with where you're running those assets from a margin perspective right now, or you know it if the imports don't play nice, let's say, is there more room for you to compete from being a domestic supplier? Or is this something that you're going to have to continue to monitor pretty closely?

Scott Behrens

No, Bob, I think we feel pretty good, Vincent. As Luis mentioned, with that inventory hangover in the first half of last year, we were chewing through high cost raw materials, which really impacted margins as we competed in the domestic market down there. But all things equal, our customers prefer to buy from local suppliers.
And when raw material valuations are matching where market pricing is, I think we're going to win that game. And I think our Q4 where we reported double digit volume growth is demonstrating that and we expect that to continue, quite frankly. And but yes, margins can always improve. We're not happy or pleased with where the margins are currently at in Q4, but we expect those two to continue to improve as we as we go forward.

Vincent Anderson

Excellent. Good to hear and then I've just got two really quick ones. You mentioned the BioScience business being a little bit of a headwind. Is that just continued destocking or is there may be some customer concentration on that on that portfolio that's creating one-off headwinds?

Scott Behrens

Yes, it was really customer concentration and just rolling off some of the COVID types of activity and business that came off in Q4 of 2022.

Vincent Anderson

Okay, thanks. And then last one is just anything remarkable to report on the it kind of annual polyol negotiations this year?

Luis Rojo

No, nothing really to report now for nothing new to report now of Vincent, you know, it's a very competitive business. Are we out of good margin stores in the marketplace and we will continue we will continue protecting our volumes and margins.

Vincent Anderson

All right. That's all for me.

Operator

David Silver, CL King and Associates.

David Silver

Yes, hi, good morning. Thank you for David morning. Couple of things, and I don't think this was as if it is an if it has been, I apologize. And but the during the quarter you called out or in your remarks and in the release, our growth on the Rigid Polyol side was called out and some double digit growth, all regions, et cetera.
And I'm just wondering if you could go back and maybe kind of speak to that just a little bit in other words, some in my opinion, I mean that's more construction and durable goods related like industries that have not necessarily been the strongest lately. And I believe you called out North America and Europe. You know where maybe the UK is just indicated they're in a typical recession.
The German market hasn't been especially robust. So you called out the volume growth you called out higher margins, I believe, or per unit margins. So what is what is in your opinion driving that growth? Is this the share gain situation or what type of drivers should we be thinking about for that portion of your polymers business?

Luis Rojo

A good question, David. What I will say is remember that destocking for this particular business has started in Q4 2022. So what you have you have the effect of no destocking impact, and that's why you see the 12% in renewables. There are still a lot of growth opportunities for the market for the market with all the construction activity that needs to happen and with all the reroofing that needs to happen in the US, if you look at the pipeline and the backlog of our projects on reroofing in North America is still pretty strong, and that should provide our market grow for the next three to five years.
So there is still this is not like we are in a peak and were good. This is just a reflection of not destocking and what we believe and what our customers are also saying is with roofing and construction activity, there is still plenty of opportunity with energy conservation. With all of that, this industry should be healthy for the next few years.

David Silver

Okay, great. Um, I was hoping to change subject to your CapEx budget for fiscal year 2024. So the midpoint of your range is almost exactly half of what was spent in 2023. If I was just to take the midpoint of maybe $130 million. I was hoping you could maybe talk about that in terms of how much of that is what you might consider sustaining.
And then more to the point for the non-sustaining for the discretionary portion of the $130 million or so. And could you just kind of highlight where the discretionary CapEx is being directed? So in other words, I'm guessing one for Doug saying, and anything remaining was Pasadena is in there, but also wondering, does Rigid Polyols need some incremental capacity there or where else, you know, should we be looking for on where the discretionary portion of your CapEx budget for 2024 is being directed. Thank you.

Scott Behrens

Yes, This is Scott. Yes, no, you're spot on in the $130 million is some is inclusive of us finishing the last final touches on the Pasadena and one for docs and investments. And definitely the minority portion of that $130 million in terms of other discretionary spends, I would call them incremental opportunities where we may be modifying reactor set to produce or execute on this customer-specific opportunities or certain product line extensions.
I would not characterize anything in that $130 million outside of Pasadena and one for Daxing has significant discretionary spend. And it's important for us to get these new assets fully up and running and start generating returns against them. Right. So I consider it a pause in 2024 for any new major incremental capital discretionary projects, and I'll leave it at that.

David Silver

Okay. Thank you for that. Luis, I did want to ask about the debt structure. And if you could just remind me of your the total debt that you have at the end of the year here in north of $0.5 billion. If you could just remind me how much of that would you consider variable in terms of either know fixed rate or something that's been locked in with derivatives where your interest costs are highly predictable and then what is the balance that might be subject to fluctuations in short term base rates or indices?

Luis Rojo

Good question, David. Look up as you saw $654 million in gross debt, $500 million for our 2014 net debt when we went into the $130 million that we have from cash. And if you think about our debt, the majority stakes and Aesop, I would say 65%, 70% of that. And you know, we fixed a lot of debt during COVID at a very attractive interest rate, so below 3%. And we also Al Did somebody, but the full $100 million also hedging a bit below 3%. So the majority is fixed at a very attractive rate.

David Silver

Okay, great. And then last one, if I could, but I was hoping to just get a tiny bit more color on the workplace productivity programs that are the biggest part, I guess, of the $50 million cost reduction program. So I guess there were some start to it here, but you do have kind of a growing global network here, and I'm just kind of scratching my head, and I'm wondering if you could qualitatively maybe just point out one or two areas where you see have the most opportunity to get from where you are now to the $50 million, I guess, run rate in cost reductions over the next year or two?

Luis Rojo

Thank you and good question, David. Look, the majority of the $50 million comes from the operational side, right off of, for example, our logistics team is doing a great job on reducing our logistic costs and of course, the market is in favor of that. Our logistic cost is going down 25%, 30% of our procurement savings on raw materials of are improving the operations in the whole supply chain in our plans to reduce inefficiencies that we have.
So 70%, roughly 70% of the $50 million is on the operational side. And then only 30% is the workforce productivity that we already executed. This was already the programs that we announced last year with the early retirement program and some reductions in force. So that's the other 30%.

David Silver

Okay. Thank you very much. I'll get back in queue.

Operator

Dave Storms, Stonegate.

Dave Storms

I'm just wondering if I can ask about kind of what you're seeing upstream from a raw material standpoint, both from a cost and sourcing lens, how you expect that might change over the next coming quarters?

Luis Rojo

Good question, Dave. I now look, when you think about raw material prices and pricing I think we're in a pretty good position as you saw Q4. And despite our sales down 15%, our cost of goods sold is down 17%. So we basically almost hold our gross margin flattish, our $66 million, $67 million despite a 15% drop in our Intel.
So I'm just see oil now relatively stable, right in the $70 million to $80 million range. And what we have seen is our raw material prices have stabilized. There are a few pockets where they are still coming down a little bit, but then [80] for the [20] is sustainable. And this is a and this is why we are catching up on the margin side.

Scott Behrens

And I would just say that our overall capacity in the chemical industry is much looser than it was 12 months ago, 18 months ago, right? So there's greater optionality and opportunity to really work on the raw material costs in the current environment.

Dave Storms

Very helpful. Thank you. And then just also, what's the customer acquisition environment looking like? It sounds like you defended your market share pretty well and continue to defend your market share pretty well. Is there potential to expand into more our clients are either Tier ones through three?

Scott Behrens

So that's obviously a big part of our growth strategy within the surfactant business is to continue to service and sell more tier two and tier three customers even last year. In the U.S., the challenging market we had financially, we grew our net customers within surfactants by over 500 new customers.
And those are around the world that that truly value our technical service, our formulation expertise and our broad product line. And that continues in a in a difficult challenging market. So we're very excited that the and that our sales and R&D teams continue to do a great job bringing new customers into the Company.

Dave Storms

Perfect. And then just one more quick clarifying question. Luis, I think you mentioned earlier that you were through most of the high cost inventory. Was that specific to surfactants inventory or does that include polymer and specialty?

Luis Rojo

Yes. Is both. Is that three businesses or is it three businesses.

Dave Storms

Very helpful. Thank you very much for taking my call.

Luis Rojo

Thank you, Dave.

Operator

Thank you. I'm showing no further questions at this time. I would now like to turn it back to Scott Behrens for closing remarks.

Scott Behrens

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

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

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