# DEAR FELLOW SHAREHOLDERS

_Source: `DeepSeekOCR_Ardian_pruned_1k/basic-materials-specialty-chemicals/NYSE_SCL_2019/NYSE_SCL_2019.mmd` · pages 4-10_

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DEAR FELLOW SHAREHOLDERS

2019 WAS A CHALLENGING YEAR BUT A GOOD YEAR FOR STEPAN COMPANY. REPORTED NET INCOME WAS \(103.1 MILLION AND ADJUSTED NET INCOME WAS A RECORD \)119.4 MILLION \( ^{1} \) , UP 7 PERCENT FROM LAST YEAR. AFTER TWO YEARS OF GROWTH, OUR SURFACTANT BUSINESS TOOK A STEP BACKWARDS IN 2019. POLYMER OPERATING INCOME GREW DUE TO STRONG GLOBAL RIGID POLYOL VOLUMES. SPECIALTY PRODUCTS DELIVERED A RECORD PERFORMANCE BASED ON HIGHER NUTRACEUTICAL VOLUMES AND MARGINS.

Company results benefitted from higher interest income on cash balances and a lower consolidated tax rate. We believe The Chemistry That Connects Us defines our culture internally and externally with customers provides opportunities for the Company to grow in 2020 and beyond.

Net income decreased 7 percent, and adjusted net income rose 7 percent, or \(0.33 per diluted share. Volume decreased 2 percent. Unit gross profit margins increased by 2 percent. Net sales decreased 7 percent to \)1.9 billion, attributable to lower selling prices and a volume decline in commodity surfactants sold to large consumer product companies offset by growth in the functional surfactant and rigid polyol markets.

Surfactants made \(122.8 million operating income in 2019, down 8 percent from 2018. A large part of that decrease was a result of a fire in our Ecatepec, Mexico facility early in 2019. While losses were mitigated by insurance recovery, the business did not recover as quickly as we had expected. However by year end, we were able to restore a large percentage of the lost volume, which has put us in a better place going into the new year.

In 2020 and beyond, we will continue to diversify our customer base in Surfactants by increasing our smaller tier three customers on a global basis. In 2019, we saw good tier three growth in Europe and Brazil. We will also achieve Surfactant growth by embracing opportunities in functional markets, including agriculture, oilfield and emulsion polymerization. Volume in these target markets grew 4 percent in 2019.

We continually look for opportunities to become more effective and more efficient in servicing our customer base. Toward that end, we have initiated a project at Millsdale, our largest facility, to deliver a sustainable step change in performance.

## "As the decade closes, I reflect back on how far the Company has come and what our team has delivered."

In 2019, Polymer operating income was \(69.6 million, up 5 percent from 2018. In 2019, we saw gains in this business from increased volume in North America and China. North American volumes grew due to energy conservation efforts aided by the adoption of more stringent building codes. In China, our team is helping reduce food waste by supplying insulation raw materials for cold storage.

Specialty Products delivered \(16.4 million of operating income in 2019, up \)4.8 million, or 41 percent, from the previous year. Our NE0BEE \( ^{\circledR} \)  Lipid Nutrition business had a good year, with increased volumes supported by favorable trends as the world continues to be more concerned about the nutritional value and health benefits our products provide.
Capital spending was \(105.6 million, up 22 percent from \)86.6 million in 2018. Going forward, we will invest to improve our position in the market for nonionic surfactants, expand capacity and capabilities in rigid polyols, as well as maintain our plants and make them more efficient.

Our balance sheet continues to be strong, and we finished the year with no net debt. We generated \(112.8 million in free cash flow \( ^{2} \)  and we plan to be more acquisitive and accelerate our growth. Our priorities will be to add new platform technologies and chemistries as well as to support growth within the Company's key target markets of agricultural, oilfield, personal care specialty and rigid polyol.

In 2019, Stepan increased its quarterly cash dividend by 10 percent, marking the 52 \( ^{nd} \)  consecutive year the Company has increased its cash dividend to shareholders.

During 2019, we welcomed David G. Kabbes, Vice President, General Counsel and Secretary, and Jason S. Keiper, PhD, Vice President and Chief Technology and Sustainability Officer, to our executive team. We also want to express our gratitude to Frank Pacholec, PhD, Vice President of Strategy and Corporate Development, who retired after 17 years.

We are confident that The Chemistry That Connects Us will provide opportunities for our customers and Stepan Company. The science and expertise we provide to our customers empowers their success and creates value for Stepan Company.

As the decade closes, I reflect back on how far the Company has come and what our team has delivered. In the last ten years we have built a more diversified business, we increased adjusted net income by 80 percent and had record results 7 of the last 10 years. We built a balance sheet with more cash than debt and tripled our market capitalization from \(700 million to \)2.2 billion. We remain an attractive and safe place to work. We value every employee and their contributions to our success. Employees think and act as owners because they are through our profit sharing and ESOP programs.

Looking ahead, we have a great organization and three strong businesses with opportunities to grow. We have the financial flexibility to make acquisitions that will complement our organic growth and help us deliver value to you, our shareholders.

Thank you for your investment in Stepan Company.

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F. Quinn Stepan, Jr.
Chairman, President and CEO

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