Stepan Company

Greetings and welcome to the Step & Company second quarter 2022 results call. At the start of the presentation, all lines will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star 0. As a reminder, today's call is being recorded Wednesday, July 27, 2022. I would now like to turn the conference over to Luis Rojo, Vice President and Chief Financial Officer. Please go ahead, sir.

Good morning, and thank you for joining Stepan Company's second quarter 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 prospects for our foreign operations, global and regional economic conditions, and factors detailing our security 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 section of our website. We made these slides available at approximately the same time as where the earnings releases issue. and we hope that you find the information and perspective helpful. With that, I would like to turn the call over to Mr. Scott Behrends, our President and Chief Executive Officer.

Scott Behrends Thank you, Luis, and good morning, and thank all of you for joining us today to discuss our second quarter results. To begin, I will share our second quarter highlights and strategy outlook, and Luis will provide additional details on our financial results for the quarter. The second quarter continued to be a challenging operating environment, given continued raw material and transportation constraints, cost inflation, and global macroeconomic uncertainties. Nonetheless, I am proud of how our team has continued to overcome these challenges by delivering record results for the second quarter. Reported net income reached a record of $52.1 million, or $2.26 per diluted share. while adjusted net income was a record $53 million, or $2.30 per diluted share. So, in fact, an operating income was $48.2 million compared to $45.9 million in the prior year quarter. Growth was mainly driven by a better product and customer mix, but was partially offset by a 3 percent decline in global sales volume related to commodity laundering. Lower commodity laundry volumes were the result of continued raw material supply constraints in North America and lower overall demand in Latin America. The sales volume decline was driven by laundry products within the consumer products business, partially offset by very strong functional products volume growth. Our polymer segment reached a record operating income of $33.9 million, compared to $23 million in the prior year. which represents a 47% increase. Margin recovery, improved mix, and a 2% increase in global volume were responsible for the record quarter. Our specialty product segment also had a record quarter, growing operating income by 41%, driven by improved margins within the MCT product line. Our board of directors declared a quarterly cash dividend on Steppen's common stock of 33.5 cents per share. payable on September 15, 2022. During the second quarter of 2022, the company paid $7.5 million of dividends to shareholders and repurchased $7 million of company stock. For the first half of 2022, the company paid $15 million in dividends and repurchased $17 million of company stock. Steppen has increased its dividend for 54 consecutive years. The company still has $133 million remaining under our share repurchase program authorized. Looking forward, we believe the operational environment will remain challenging. However, we are confident that we can deliver a good year as demand for our products remains healthy. At this point, I would like Luis to walk through a few more details about our second quarter results.

Thank you, Scott. My comments will generally follow the slide presentation. Let's start with slide four to recap the quarter. Adjusted net income for the second quarter of 2022 was a record $53 million, or $2.30 per diluted share, versus $42.2 million, or $1.81 per diluted share for the second quarter of 2021. Because adjusted net income is a non-GAD measure, we provide full reconciliations to the compatible GAD measures. And this can be found in Appendix 2 of the presentation and Table 2 of the press release. Specifically, adjusted net income for the second quarter excludes deferred compensation expense of $0.6 million, compared to last year's income of $1.1 million. It also excludes minor changes in our environmental reserves and restructuring costs. The deferred compensation figures represent the net income related to the company's deferred compensation plan, as well as cash settled stock appreciation right for our employees. Because these liabilities change with the movement in the stock price, we exclude this item from operational discussion. Slide five shows the total company's net income bridge for the second quarter, compared to the second quarter last year, and breaks down the increase in adjusted net income. Because this is net income, the figure is not here on an after-tax basis. We will cover each segment in more detail, but to summarize, we deliver excellent income growth in all our segments. Corporate and all other expenses, which are not allocated to the business segments, were lower during the quarter, mainly due to lower acquisition-related expenses. The company effective tax rate was 25% in the second quarter, which was similar to last year. We continue to expect the full year 2022 effective tax rate to be in the range of 24% to 26%. Slide 6 focuses on surfactant segment results for the quarter. Surfactant net sales were $485 million, a 26% increase versus the prior year. Selling prices increased 32%, primarily due to the path through higher raw material and logistic costs and improved product and customer mix. Volume decreased 3% due to supply chain constraints, mainly raw material availability issues, and lower commodity laundry demand in Latin America. This was partially offset by higher global demand in functional products, personal care, and institutional cleaning and markets. Foreign currency translation negatively impacted net sales by 3%. Surfactant operating income for the quarter was $48.2 million. which represents a 5% growth versus prior year. This increase was driven by improved product and customer mix, mostly in North America and Europe. Latin America was down due to lower volumes in commodity laundry products. Now, turning to polymers on slide seven. Net sales were $239 million, up 25% from the same quarter last year. Selling prices increased 30% due to the pass-through of higher raw material and logistic costs and recovering our margins. Volume increased 2%, driven by a 5% growth in global rigid volume, which was partially offset by lower demand in PA and lower volumes in the specialty polio business due to supply chain challenges. Foreign currency translation negatively impacted net sales by 7%. Polymer delivered a record operating income of $33.9 million, which represents a 47% increase. This is primarily due to margin recovery, improved mix, and volume growth. Both North America and Europe had excellent results in the quarter. The polymer business in China was slightly down due to COVID lockdowns and restrictions. Finally, specialty product also had a record quarter, delivering $9.9 million of operating income, which represents a 41% increase. The operating income improvement was primarily attributable to a favorable customer mix and improved margins within our MCT product line. Turning to slide eight, our balance sheet remains strong, and we have ample liquidity to invest in the business. Our leverage and interest coverage ratios continues at very healthy levels. During the quarter, cash from operation was $84 million, and we deployed $123 million, again, capex investments, dividend and debt payments, share repurchases, and higher working capital requirements due to the strong sales growth. We continue to project full-year capital spending in the range of $350 to $375 million. Inclusive of our one-fourth dioxin project and Pasadena investments in the U.S. Beginning on slide nine, Scott will now update you on our 2022 strategic priorities.

Thank you, Luis. In addition to delivering another record quarter, we continue to advance our strategic priorities The following two slides capture our strategic priorities and vision for a cleaner, healthier, and more energy-efficient world with our customers' preferences in mind. Our diversification strategy into functional products, including agricultural and oilfield chemicals, continues to be a key priority for STEPN. Our global agricultural volumes increased strong double digits in the second quarter of this year. High agricultural commodity prices, coupled with increased planted acreage in 2022, drove a strong season for crop protection sales in North America, while elevated agricultural commodity prices and a favorable currency impact on exports are driving increased planted acreage in Brazil. Oil field volumes also increased in the second quarter. Demand for our products used in oil field, including biocides, remains robust, as crude prices remain elevated at around $100 per barrel. We continue with the integration and supply chain planning of the Kimco oil field demulsifier product line, which we plan to relaunch in the second half of this year. 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 Millsdale plant continues to be one of our key priorities. We are accelerating investments to improve productivity and reliability. and to increase capacity through de-bottlenecking projects. These investments will continue throughout the year, and we expect to see benefits from our efforts and investments starting next year. Moving to slide 11, work continues on our major investment in a new alkoxylation production facility in Pasadena, Texas. This asset will be a flexible, state-of-the-art, multi-reactor facility with approximately 75,000 tons of annual capacity. It will provide strategic... It will provide strategically located capacity and capability for long-term specialty alcoxalate growth across our strategic growth and markets, including agriculture, oil field, construction, and household and institutional cleaning. Given the current supply chain disruptions and tight labor market, startup of the Pasadena facility will be delayed into the first quarter of 2024. And also due to cost inflation and the disruptions previously mentioned, total project cost is now projected to be 10% higher. The underlining epoxylation business that supports the Pasadena investment grew very strong double digits and at margins above our original projections. We remain confident and excited about the investment in Pasadena. As you know, we are increasing North American capability and capacity to produce ether sulfates that meet new regulatory limits on 1,4-dioxane by the January 2023 deadline. 1,4-doxane is a minor byproduct generated in the manufacture of ethersulfate surfactants, which are key cleaning and foaming ingredients used in consumer product formulations. Stefan is working to supply customers with ethersulfates that meet these new regulatory requirements. Given the strength of our balance sheet, acquisition opportunities that align with our growth and diversification strategy remain a priority. We are excited about our progress in our fermentation product platform. Our priority remains the development and commercialization of romdolipids, our first anticipated biosurfactant offering. We believe this new biobased product family has significant opportunities in several important end markets for step-in, including agricultural chemicals, consumer cleaning, personal care, and oil field. Our new fermentation laboratory, which opened in February, continues to make good progress in regards to process development, and we expect to start providing samples to customers later this year. As we wrap up comments on the quarter, we delivered record second quarter and first half results, driven by the effort and teamwork of our employees around the globe. I am proud of our team's resiliency in delivering record earnings, despite the continued challenging supply environment and inflationary impacts. Looking forward, we believe that surfactant volume within the functional product end markets, including agricultural and oil field, will continue growing given the favorable current commodity pricing environment. We also expect to continue growing in the personal care and institutional cleaning end markets. We continue forecasting consumer products demand to remain healthy and around current levels. Within our polymers business, we believe we will deliver full year growth over the prior year. The future prospects for rigid polyols remain attractive, especially when considering the energy conservation efforts and more stringent building codes. Lastly, we believe that our results within the specialty product segment will continue to improve on a year-over-year basis. In closing, external supply chain challenges and inflationary pressures clearly will remain as headwinds in our business. However, we are cautiously optimistic about the balance of the year. This concludes our prepared remarks. At this time, we would like to turn the call over for questions. Carlos, please review the instructions for the question portion of today's call.

Thank you, sir. If you would like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press 1-3. One moment, please, for the first question. And our first question comes from the line of Vincent Anderson with Stifel. Please go ahead.

Yeah, good morning. So I wanted to start on surfactants. Maybe just, if you're willing, a rough idea of the volume impact from laundry detergents compared to the growth in functional products. just kind of generally, how much of the decline, maybe in asset utilization on laundry versus just price versus raw material spreads, as always, were the bigger impact on margins in the quarter?

Hi, Vincent. This is Luis. Look, as we mentioned in the call, the volume for global surfactant was down 3%. Of course, as you know, The portion of commodity laundering, our total volume is a big percentage. That's why when that business is down, you see the total business down. But we were able to offset a lot of that with functional products, with personal care, with institutional cleaning, growing our tier two, tier three channel. So we haven't provided publicly the details of how much is our laundry business, but the important point also is that we were constrained in several raw materials, especially in North America, so we were not able to supply the whole market. So where we saw demand destruction is more in the Latin America business. But at the end, as you know, that's a significantly lower portion of our total business. And the good news is that we are growing in the high margin business, in the high, you know, functional products, institutional cleaning, and all of that.

Okay, yeah. And so then with what should have been a pretty positive mix shift then at the very least, where would most of the margin degradation have come from then?

Yeah, let me expand a little bit on that as well, because if you look historically, if you look at five, six, seven years' data, you will always see the second quarter margins for surfactants a little bit lower than Q1. That's historical data that you can take a look at it. our absolute volumes are lower, so the fixed cost impacts the margin piece. And that's why you saw surfactants at 10% of sales margins in Q2. Around one point, it's just the volume effect. And as you know, we are growing sales significantly higher than we can grow our bottom line and our dollars per pound margins. So that's the mathematical effect of why you go from 11 and a half margins in Q1 to 10% in Q2 is basically the lower volumes and the fact that we are increasing prices faster than in previous quarters.

okay all right that's that's very helpful I appreciate it if I could just ask about Pasadena with the delay there I mean this is not you know this is not an emergency situation yet but maybe it's worth just talking about your contract with their you know engineering and construction provider you know what kind of ranges Have they promised in terms of cost and timing where if you were to exceed those, you might have some contractual recourse to reclaim some costs associated with the project? Is there anything there that you'd be willing to share at this stage?

No, Vincent. What I would say is in today's environment, building a major capital investment, it's a difficult environment. What we're experiencing in terms of this delay, which is around a quarter, you know, three months, and 10% is not unexpected in today's environment. So we remain committed to the project. We have a great working relationship with the general contractor, and we see no additional issues going forward.

Okay, fair enough. If I could ask just one more quick one here. You've kept a pretty good handle on SG&A so far this year, despite wage inflation and the broader trajectory of sales and profitability. Are there any specific items or timing considerations that have specifically helped the first half that could revert in the second half, or is this just good cost control and we can kind of expect this level going forward?

Look, as I mentioned in my prepared remarks, remember last year in the first half, we had a lot of expenses due to the INVISTA acquisition and integration. So we had that kind of a one-time that is helping a little bit the comparison here. But yeah, we remain committed to be very cost-conscious and continue improving our productivity. and automation efforts in SG&A, and you saw that we're investing on R&D. So we are very committed to continue investing in the most important part of SG&A, which is our R&D investment.

All right, thanks. I'll let someone else have a turn.

Our next question comes from the line of Mike Harrison with Seaport Research Partners. Please go ahead.

Hi, good morning. Congratulations on a nice quarter. Thanks, Mike. I was hoping that we could start with the polymers business and specifically talk about what you guys are seeing in terms of price versus cost. I think the margin performance there surprised a lot of people. So just trying to get a better sense of what those margin drivers are. Is it primarily price cost or are there some other things going on? Trying to get a sense of how sustainable the Q2 margin performance could be going forward.

Yeah, thank you, Mike. Great question. Of course, our polymer business is a key business for us. And you know that there are also some seasonality, right? I mean, you know that this business, by quarter, tends to have a very clear seasonality because of construction projects during the winter. So you typically see lower margins in Q4 because you have all the fixed costs. So you need to go back also and make sure that you see the numbers But if I think about the 14.2% that we just delivered in Q2 in polymers, as you know, I mean, we are taking the pricing actions that we needed to take, and raw material prices are starting to, the slope of increase is starting to come, you know, lower and lower. So we are just recovering the margins that we used to have in this business, and we're not even there yet. If you go back in our history, you know that this business used to have even higher margins. So we feel very good with the work that the Polymers team has delivered in the first half, recovering our margins from last year. The 14.2 is a good number, but if you look at it historically, we are not in the peak yet. And we will continue monitoring the market, the raw material prices, and we will continue making adjustments as appropriate.

All right. And then just in terms of overall demand by region, I'm particularly interested in what you're seeing in Europe at this point. Are there any signs of declining demand trends either in surfactants or in your polymers business?

Yeah, Mike, I would say it's a little bit early to have a really good look. You know, we have obviously are staying very close to our customers. On the surfactant side, our Q2 volume performance was very well in line with Q1 other than some seasonality within the markets. So, we have not seen any signs or have heard any signs of a slowdown to this point. On the polymer side, I'd say there's a little more chatter and concerns about second half demand from the marketplace. And I think it's, you know, in that general universe of, you know, I think there's a lot of talk about talking ourselves into a recession. growing signs that that is actually maybe a higher probability and closer to reality. Every week is a new dynamic in terms of understanding where the markets are going. But overall, we still feel pretty good about our business. But that could change in a matter of weeks or months, depending on what happens in Europe over the next 30 days.

Yeah, Mike, you know, the volatility will be high. I mean, based on where we are now, we feel we are cautiously optimistic about the second half, but Europe is still a big question mark.

Yeah, I guess with that in mind, can you maybe talk about the contingency plans that you're putting in place in case we see some natural gas or other energy rationing happen in Europe? And do you have any ballpark figure on how much of your sales are tied to plants in Europe that rely on natural gas for energy or for power?

Yeah, Mike, let me give you kind of a high-level perspective of contingency. So within our polymers business, we do have two main manufacturing sites. We have three manufacturing sites in total in Europe, two main sites that are related to the rigid polyol production. And at those sites, we are actively looking at contingency plans to switch over utility capabilities to fuel oil and or coal in some of our heating requirements. But from a a larger perspective, we do have a global network of rigid polyol manufacturing capabilities with plants in China and the U.S. And we do believe that we could supplement supply into Europe from our global network to a level that, depending on what the unforeseen or unknown allocation restrictions are going to be, which are not Well documented or understood by industry by country yet. We feel pretty good that we've got supply across our global Network to supplement potentially any shortfalls that that could could be put upon us and it also depends on what happens with our customers as well and their ability to get natural gas and energy for their lamination production lines and

That commentary was specific to polymers. Any concerns on the surfactant side?

No. I would say there is risk. We do have two main surfactant plants in Europe, one in the UK and one in France. I think France, we're not as concerned as some of the northern European countries. And I think the UK so far is we're not seeing any significant concerns growing yet. But once again, that could change. We need to understand what the European Commission's allocation process is going to look like.

Yeah, I understand it's all hypothetical. So I appreciate the detail there. The last question I have is on the specialty business. We don't talk about it very much, but this is the second year in a row that you guys have shown a very strong or surprisingly strong Q2. Can you give some additional color, I guess, on the seasonality of that business? It's always relatively lumpy or challenging, I guess, for us to model. But in the context, maybe the way to ask this question is in the context of doing about 10 million of operating income in the second quarter, You know, how should we think about the third and fourth quarter looking there from an op income standpoint?

Yeah, so, Mike, you know, this business has had some significant constrainments in key raw materials over the last two years, and that's what's been driving some of the lumpy earnings as well as sales volumes throughout the last eight quarters. You know, Q2, I would say, is a little bit, of an anomaly in the fact that we did get access to some unanticipated key raw material which allowed us to clear out some back borders on some very high margin packaged goods inventory which we were not able to service in the prior quarters. So I think you saw a really favorable product or I should say customer mix in Q2 that the was a large result driver for the results in earnings. I would not expect that level of profitability going forward in the second half of the year.

And as we are saying in our outlook, Mike, we are expecting this business to grow versus 2021. But of course, I mean, you'll see the numbers that we put in 2021. And as Scott mentioned, this is more a one time in Q2.

Yeah, I mean, you're almost ahead of 2021 levels as of the end of the first half. Yep. Okay, appreciate the color. Thanks very much.

Our next question comes from the line of David Silver, CL King. Please go ahead.

Yeah, hi. Good morning. Thank you. Hey, David. Hey, good morning. So I'll preface my remarks. I'm having a tough time with the connection. There's been a lot of cut-ins and cut-outs along the way. So I'll apologize in advance if I make you repeat yourselves. The first topic I'd like to ask you about is currency. So I recall about – so this quarter you did note that there was an $0.08 per share negative EPS effect this quarter. And I was kind of scratching my head because I believe about a year or so ago you had a quarter that I would consider from a currency perspective less volatile than the current one. And in that particular quarter, I believe it was at least an $0.11 detriment. So given the unusual strength of the dollar versus, I don't know, all kinds of currencies, certainly Latin America and Europe, is the company doing anything differently here to maybe mitigate the overall impact of currency swings or are certain overseas sales automatically priced in dollars? In other words... Maybe just a comment or two on how you see your exposure to a stronger dollar going forward and whether the second quarter was impacted at all by any unusual items or some active hedging or anything like that. Thank you.

No, great question. The good news here is that despite the $0.08 impact on EPS, we had an excellent quarter. We grew EPS 27%. FX was a headwind of 4 points. Without that, we could have been growing EPS by 31%. We have an active hedging program in several countries where we see hedging costs relatively low and really provide the benefit of smoothing your P&L without a big impact in hedging costs. But we manage our business in some of those regions, especially Latin America, on a dollar basis as well. We try, but there are always lags, but we try to manage of the business on a dollar basis and recover our margins on a dollar basis, of course, with some lag, as I mentioned. The key issue right now, I wouldn't say a big issue, but the key concern right now, of course, is Europe, and it's the Euro, right? I mean, when you think about Euro 101 to dollars, that, of course, is our biggest concern because we manage the European business on a Euro basis. So that is going to be very hard to recover immediately, but we believe, I mean, we will continue managing our prices and our margins to make sure that we get the right return. That's the main concern that we have now with the Euro of 101, but we will continue. We have managed this business in the past successfully, and we don't foresee any major issues.

Okay, thanks for that. I'd like to circle back next to the polymers segment. And again, I apologize if I'm making you repeat yourself here. But one aspect I wanted to ask you about was the effect of business in China. So it was not called out in the press release. But when I think of what's happened there over the first half of the year, I mean, there's been a number of potential disruptions, lockdowns. I think, you know, in the news have quite a bit of commentary about what's happening to the property market there, et cetera. And I'm just wondering if you could comment on maybe how your construction-based, you know, China business in the first half and whether you see a meaningful you know, deviation from that end market maybe for the next quarter or two. Thank you.

Yeah, David, you know, I would say China has, our business in China has been impacted by the lockdowns in the first half of the year. We have seen a little bit lower of demand from the marketplace, and it had a very negligible, unfavorable impact on our Q2 results. In terms of what we see going forward in the second half, directionally, we can see it potentially improving, but it's not going to be a meaningful impact to what I think 2022 results are going to be. COVID is still with all of us in all regions of the world, and I'm not going to try and anticipate what China's lockdown strategy could be for the second half of the year. But, I mean, at this point, it's not going to have a significant material impact one way or the other on the company's overall results.

And as I mentioned in my remarks, David, I mean, the impact was very minor, so we're very happy with the work that our organization in China has done. Despite all these lockdowns and despite the volume impact, they were able to recover that with margins, and the impact on operating income is very, very small. So the team has done a very good job of finding other ways to compensate for all these COVID restrictions and lockdowns.

Okay. I do have one more big picture question, and this one would be for Scott. And, you know, a number of the questioners on this call have pointed out or asked about the, you know, pretty significant margin improvement and the mix improvement and things like that that are, you know, really stick out in these record results. But, you know, one thing that's not really in the press release, hasn't really been in the remarks directly, would be the impact of your leadership, Scott. In other words, I think this is probably, you would say, the first full quarter where, you know, you've been the CEO and you've been able to maybe implement certain changes or tactical shifts, et cetera. So when I looked at these results and I saw relatively small changes in volumes and comments about recovering lost margin rather than adding to historical margins, So I'm kind of scratching my head, and I'm saying, for lack of a better term, I'm saying, what is the Barron's effect in these results? So I was just wondering if you could take a minute and maybe discuss any kind of notable, qualitatively, any kind of notable shifts or other changes in policies or go-to-market approaches, et cetera, that you think have positively impacted, you know, these results, either whether it's, you know, year over year or sequentially?

Thanks for the question, David. I'm really proud to say that these results are the efforts of our team for the last several years. You know, we operate under a five-year strategic plan, which has been in place and really has not changed over the last two or three years. What we are doing is effectively executing deep into that strategy today. When you look at the acquisitions that we've made in Latin America, we look at the acquisition we made of Invista last year. These are all part of our strategy to increase the earnings and profitability of the company and also get into higher strategic growth markets. This is nothing more than execution of the team that's been in place for the last several years.

Okay, thank you very much.

Once again, please press 1-4 for any questions. We have a follow-up from Vincent Anderson from Stifel. Please go ahead.

Yeah, thanks for humoring me. I just wanted to ask quickly, you know, if we look back at 3Q21, things are really, really starting to pick up on the pricing side. So I guess it's just worth getting a recap on, you know, outside of where raw materials go, how much pricing do you have left in the tank for the second half of this year in terms of planned initiatives?

Great question, Vincent. Yes, as you have seen, we have improved our price mix every quarter in the last six quarters. We started in Q1 2021 with a price mix of 13%, then 20, 28, and we just posted our highest price mix ever with the 32% that you saw in Q2 2022. We will continue monitoring and changing our prices based on all the inflationary pressures that we see in the market. Inflation is not over yet, right? I don't think we have peak on inflation in general. However, as I mentioned before, the slope of the increases are significantly lower, especially on the raw material side. So if you think about our cost structure, of course, it's heavily on raw materials, then logistics, and then all the other fixed costs. But raw material escalation is gradually coming down. We have seen the oil prices a little bit more stable in the last few weeks. So we still envision that we're going to have some price mix, of course, in the back half. But I would expect those numbers to start gradually, you know, come down versus the peak that we just had.

Okay, fair enough. And then just a quick one. I might have missed it, but, you know, that strength in North American rigid polyols demand. Last couple of quarters, I think you had noted that it's really MDI availability that was constraining growth there. uh... is that what changed to the better was there another channel that was able to pull that through no no uh... with the uh...

We see demand strong in North America region, but if you think about the 8% that we just posted in Q2, I mean, I think you also need to look at Q1, right? And you need to look at the previous quarters. So, you know, in Q1, we had the meal sale issue. So the 8% also includes some inventory recovery from our customers. So you cannot take the full 8% as full demand. But we feel good about the overall demand of the business. We'll see what happens with recession in the back of the year and in 2023. But the reality is that with the infrastructure bill and with all the efforts on energy conservation, insulation is a big, big building block to reduce energy consumption. And that's why we feel good about this business on a long-term basis.

All right. Thanks. That's all from me.

Another follow-up from David Silver, Seal King. Please go ahead.

David Silver Yeah, thank you. I just had a quick targeted follow-up for Luis, and it has to do with the new credit agreement that was completed in late June. And in particular, I just was wondering if you could remind me, you know, what the benchmark will be for that credit facility in terms of determining your ultimate interest rate. So I guess we're entering a period where certain rates might be pretty volatile. But is the base rate related to LIBOR or a T-bill rate or a T-bond rate? Just what particular benchmark might we keep in mind as we move forward here for thinking about your interest expense going forward? Thank you.

No, great question. I think this was a very good accomplishment from the team in Q2. As you saw, we have a credit line there. When you add up all the blocks, it's $700 million. That gives us a lot of flexibility to execute our M&A playbook for the future. And as you probably saw in the details, we got this new facility with better terms for a step-in company than in the previous one. which is great for us and for our shareholders. You know LIBOR is going away, and everything is going to be based on SURF. So that's the base rate that everybody is going to be looking at with the exit of LIBOR rates. Again, the important piece here is we have a very strong balance sheet, and we have now this new facility up to $700 million that can help us to execute our strategy.

I will check your answer on the transcript. Thank you very much.

And we have no further questions on the phone line.

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

That concludes today's call. We thank you for your participation and ask you to please disconnect your line.