Stepan Company

Welcome to the Q1 2023 Steppin' Company earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Luis Rojo, Chief Financial Officer. Please go ahead.

Good morning, and thank you for joining Stepan Company's first quarter 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 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.stephan.com under the investor section of our website. We make these slides available at approximately the same time as when the earnings releases issue, and we hope that you find the information perspective helpful. With that, I would like to turn the call over to Mr. Scott Behrens, our President and Chief Executive Officer.

Good morning, and thank you all for joining us today to discuss our first quarter results. To begin, I will share our first quarter highlights and strategic outlook, while Luis will provide additional details on our financial results. The company reported first quarter adjusted net income of $16.4 million. Earnings were significantly impacted by a 14% decline in volume driven by softening market demand, delays in the startup of new low 1.4 dioxane production assets, and continued customer and channel destocking across most of our markets. Our margins were in line with expectations despite high cost inventory carryover from the fourth quarter and increased competitive activity within certain end-use markets. Despite ongoing inflationary pressures and higher cash expenses related to the construction and pre-commissioning activities of our new alcoxylation investment in Pasadena, Texas, and the startup of our new low 1,4-doctrine capacity in the U.S., we kept cash expenses consistent year over year. For the quarter, adjusted EBITDA was $48.7 million, down $31 million versus Q1 2022, primarily driven by the decline in sales volume. Surfactant operating income was $27.1 million versus $53.8 million in the prior year, primarily due to a 13% decline in global sales volume that was partially offset by improved product and customer mix. The lower sales volume was mostly due to lower global commodity laundry demand, low 1,4-dioxane transition startup delays, and the previously disclosed backward integration by one customer. Volumes were also negatively impacted by lower demand within the North American personal care end market and customer inventory destocking. Higher global demand in the agricultural end market partially offset the declines. Polymer operating income was $10 million, a decrease of $4 million versus the prior year, or 28%. This decrease was primarily due to an 18% decline in global sales volume, led by a 19% volume decline in rigid polyols. Lower phthalic and hydride volumes were partially offset by slightly higher specialty polyol volumes. The lower demand in rigid polyols reflects customer and channel inventory to stocking and lower construction-related activities. Specialty product operating income was $2.5 million versus $3.7 million in the prior year. This decrease was primarily attributable to lower sales volume and margins within the medium chain triglycerides product line. Our board of directors declared a quarterly cash dividend on Steffen's common stock of 36.5 cents per share, payable on June 15, 2023. Stephan has paid and increased its dividend for 55 consecutive years. During the first quarter of 2023, the company paid $8 million in dividends to shareholders. The company did not purchase any company stock in the first quarter of 2023 and 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 continue to invest in our business, pursue strategic M&A opportunities, and return cash to our shareholders. Luis will now share some details about our first 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 was $16.4 million, or $0.71 per diluted share, versus $40.7 million, or $1.76 per diluted share in the prior year. Because adjusted net income is a not-gap measure, we provide full reconciliations to the compatible gap 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 first quarter excludes deferred compensation income of $0.1 million compared to income of $4.4 million last year. It also excludes minor business restructuring expenses and environmental remediation costs. The deferred compensation figures represent the net income related to the company deferred compensation plans 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. The effect of foreign currency translation negatively impacted net income by $0.9 million, or 4 cents per diluted share versus the prior year. Slide 5 shows the total company net income bridge for the first quarter, compared to last year's first quarter. and break down the decrease in adjusted net income. Because this is net income, the figure is not here on an after-tax basis. We will cover this statement in more detail, but to summarize, we experienced lower operating income in all segments driven by lower volumes. Despite significant inflation, our cash expenses were similar to last year. Adjusted corporate expenses and all other which are not allocated to the business segments were up due to higher interest expenses and overall inflation. The company effective tax rate was 19% in the first quarter of 2023 versus 24.6% in the first quarter of 2022. This decrease was primarily attributable to more favorable tax benefits derived from stock-based compensation awards exercised or distributed in the first quarter of 2023 versus the first quarter of 2022. Slide six focuses on surfactant segment results for the quarter. Surfactant net sales were $468 million for the quarter, flat versus the prior year. Selling prices went up 14%, mainly due to the path through of higher raw material and logistic costs, as well as improved product and customer needs. Volume declined 13% year-over-year, primarily due to lower global demand in commodity laundry, startup delays associated with the low 1,400 transition, lower demand within the North America personal care end market, and continued customer and channel inventory stocking. Higher global demand for products sold into the agricultural end markets partially offset the above. Foreign currency translation negatively impacted net sales by 1%. Sulfactant operating income for the quarter decreased $27 million versus the prior year. This reduction was driven by a volume decline of 13% and higher expenses associated with the company transition to low 1,4-dioxane products and Pasadena pre-operating expenses. Operating income declined in all sulfactant regions primarily due to the lower volumes mentioned before. Now, turning to polymers on slide seven. Net sales were $161 million for the quarter, a 14% decrease versus the prior year. Global volume declined by 18% primarily due to a 19% volume decline in rigid volumes. This was partially offset by double-digit volume growth in China and mid-single-digit growth in North America case business. The lower demand reflects customer and channel inventory stocking and lower construction-related activities. Selling prices increased 8%, primarily due to the path through of higher raw material and input costs. Foreign currency translation negatively impacted net sales by 4%. Polymer operated income was $10 million, a decrease of $4 million versus the prior year. The decrease is primarily due to the 18% decline in global volume. North America and Europe results were impacted by lower volumes. Asia results improved in increased demand following the reopening of China. Finally, specialty product net sales were $23 million for the quarter, a 13% increase versus the prior year. Sales volume was down 7% between years, while operating income decreased $1.2 million. The decline in operating income was primarily attributable to lower volumes and margins within NCT product lines. Turning to slide A, our balance sheet remains healthy, and we have ample liquidity to invest in the business. Our leverage and interest price ratios remain well managed, despite our elevated CAPEX spending in the first quarter. For the first quarter, cash from operation was $42 million, and we deployed $214 million against CAPEX investments, payments of accrued liabilities, dividends, and higher working capital requirements. The company's first quarter capital spend was $92 million, inclusive of our $14,000 in projects and passive investments in the U.S. Now, on slide 9 and 10, Scott will update you on our strategic priorities.

These slides describe our strategic priorities and operating principles for shareholder value creation. We believe our growth strategy is properly aligned to attractive growth vectors within our core markets. and we are committed to delivering greater productivity through efficient allocation of resources to increase value creation for shareholders. Our customers will always remain at the center of our strategy and innovation. Our long-standing Tier 1 customers value our technical capacity and the ability to manufacture and deliver quality products at the scale they need. We continue to diversify our customer base by expanding our global reach to Tier 2 and Tier 3 customers who highly value the technical support and services that Stefan can provide. Our technical collaborations are increasingly focused on helping our customers make their product portfolio transition towards a more sustainable future, and we are happy to be on this journey with them. Our diversification strategy centers around continued growth of our products into higher margin industrial applications where surfactants bring important benefits and functionality to applications. Technology advancement within the agricultural market is progressing at a rapid pace, and we see surfactants and formulation expertise playing an integral role in our customers' future. Our specialty non-ionic product line, which is the foundation of our new alkoxylation investment in Pasadena, Texas, continues to grow volumes at double-digit rates. In addition, we remain pleased with the expansion of customers and market, that last year's acquisition of Performadex's business has brought to Stefan. Insulation remains one of the most critical enablers to a more sustainable and energy efficient world. Our polymers business continues to focus on developing the next generation rigid polyol technologies that can increase the energy efficiency and cost performance of our customers' insulation products. We are also focused on the spray foam market as it offers attractive diversification and growth for Steppen's polyol. Fermentation remains an exciting future product platform opportunity for our surfactant business. We believe this new bio-based product family has significant opportunities in several important end markets, and we have identified an expanding range of new uses delivering unique performance and formulation advantages for bio-based rhamnolipids. our first fermentation-based product offering. Customer evaluations are underway in various markets, including agricultural chemicals, consumer cleaning, personal care, and oil field. Controlling costs and delivering value from productivity gains are part of our operating model, and we must deliver greater benefit to offset what may be prolonged elevated inflationary pressures. Successful first quarter cost management measures included controlling headcount, reducing third-party services, optimizing travel, and other activities. Manufacturing excellence initiatives are being strengthened across our production network to deliver productivity gains while eliminating inefficiencies across the broader supply chain. Improved and expanded data and analytics are enabling a more transparent view for our teams to identify priority areas of value creation. We are targeting to hold full-year 2023 cash expenses essentially flat to prior year. This is despite continued pressure from elevated cost inflation across our base expenses and new expenses related to pre-startup activities on our growth investments, including Pasadena, low 1,4-doxane, and fermentation. We are proud of the progress and the recognition we have received on our ES&G programs. With safety as our top priority, we are most proud of our team last year having its best safety year on record. We were recognized as the number one in the specialty chemical sector of Investors Business Daily's 2022 Best ESG Companies list, and we once again achieved the gold rating from Ecovadas, elevating STEP into the 96th percentile within our industry. We will publish our 2023 sustainability report soon. Finally, we will continue with an efficient and disciplined approach to capital allocation. Capital reinvestment for base infrastructure and EH&S enhancements is required for continued safe and reliable operations. Capital spending for growth and capability projects reached a record $302 million last year, which should secure the capacity and capability needed to meet expected long-term growth. Returning cash to shareholders via dividends is a core element of our total shareholder return strategy, having paid and increased the dividend for 55 consecutive years. And finally, given the strength of our balance sheet, acquisition opportunities that align with our growth and diversification strategy remain a priority. Moving to slide 11, construction on our new alkoxylation production facility in Pasadena, Texas. is approximately 25% complete and has surpassed 250,000 hours of construction without an injury. This asset will be a flexible state-of-the-art multi-reactor facility with approximately 75,000 tons per year of annual alkoxylation capacity and will provide strategically located capacity and capability for long-term specialty alkoxylate growth across our strategic growth and markets, including agriculture, oil field, construction, and household and institutional cleaning. We expect the plant to start up in the first half of 2024. The underlining alkoxylation business that supports the Pasadena investment continues its strong double-digit volume growth and at attractive margins. 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 by the end of the second quarter. While we have had some challenges and delays associated with the startup of the initial investments, we believe key learnings will afford efficient commissioning and startup of the remaining new installations. New contracted volume associated with the second quarter asset startup should drive volume growth in the second half of 2023. Once completed, Stephan will have the largest installed low 1,4-doxane production capacity serving the North American merchant market, which will enable Stephan to maintain and grow our North American sulfonation business in 2024 and beyond. In closing, I am proud of the progress our teams have made in several strategic areas, including capital project execution, progressing our sustainability and innovation programs, and delivering continued diversification and growth of our customer base within our targeted end-use markets. Looking forward, we believe second quarter volumes will remain depressed as markets continue to reconcile forward demand with inventory levels throughout the channel. We expect second half of the year volume growth driven by modest recovery in demand for rigid polyols, growth in surfactant volumes associated with new contracted business, and a low comparable base. We will continue to actively control costs and execute our productivity programs. Our balance sheet remains healthy, and we are committed to advancing our strategic and innovation initiatives that are instrumental to our long-term growth. This concludes our prepared remarks. At this time, we would like to turn the call over for questions. Michelle, please review the instructions for the question portion of today's call.

As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from Mike Harrison with Seaport Research. Please go ahead.

Hi, good morning. Good morning, Mike. I was wondering if we could maybe start with some discussion on the raw material and inflationary front. I'm just curious, is the inflationary pressure that you saw in Q1 related to working through some of the high-cost inventory that you still have within your system, or is it related to changes in market prices for your raw materials? I guess I'm curious, are you seeing market pricing today for raws stable, increasing, or decreasing?

Great question, Mike. This is Luis. You are 100% correct. What you saw in Q1 was we are still depleting high-cost raw materials that we have in the system, also because of the fact that volumes have been depressed in Q4 and Q1. So just to provide more perspective to that point, we saw an impact of around $7 to $10 million pre-tax in Q1 due to high row cost. And we believe we're going to need at least Q2 to finish the depletion of some of these materials, especially in the polymers business. So, now, to your questions on raw materials, we saw the deflation in Q4 and a little bit more in Q1, and what we see now is more stable prices. This can continue to be very volatile. We have seen oil going back up. So we're going to see more volatility up and down probably in the next few quarters. But right now, what we see is very stable raw materials versus Q1. But again, one of the key impacts of our results in Q1 is this high raw materials. Now let me just use the opportunity to also talk about other issues in our cost structure. And we said that our cash expenses were flat versus last year despite a lot of inflation in our P&L. So you have inflation in utilities, insurance, labor, And we were able to manage those with productivity gains and deliver cash expenses flat versus Q1 2022. All right.

Appreciate the color there. And I think that gets to my next question, which is a broader question about margins. You said that the first quarter margin performance was generally in line with expectations, given that you were seeing this volume weakness. But how much margin improvement should we expect in Q2 and maybe as we get into the second half with some seasonal pickup, particularly in the construction-related business, and as we start to get through this higher-cost inventory?

Right. I mean, you are 100% correct again, Mike. What we are expecting is gradual improvements in our margins in Q2 versus Q1, very gradual, very small, because, again, we still have high material costs, but we see more improvements in the second half. not only not only because depleting raw materials but as you said because of of mix as well and because starting shipping our low one for dioxin uh products uh more broadly with the commissioning of the assets in millsville that should provide also a mixed sweetener to the company all right that makes sense um

I guess maybe just a couple more, and then I'll get back in queue. You noted some productivity programs that you have in place, and you mentioned that you're holding your cash expenses fairly stable year on year. Maybe a little bit more detail on what you're doing on the productivity front and how much cost savings could be associated with those actions?

Yeah, so Mike, this is Scott. In regards to controlling our first quarter costs, really at the corporate level in terms of really putting a hold on new hires. So we did implement a hiring freeze. We have reduced and optimized our travel. And then we have other productivity gains in terms of potentially reducing third-party costs consulting and services that or delaying those costs into potentially fiscal 2024. And then at the operational level, really getting after improvements in logistics and freight. Demerrage also became an issue in Q1 as it relates to the inventory carryovers with the continued softness in demand. So we're really trying to get through the demurrage incurred expenses as well as optimize the logistics to put more income to the bottom line.

Let me provide a little bit more color also on the total year, Mike. So we are making a big statement today about we are aspiring to hold all our cash expenses similar to last year. That's a big productivity effort when you think about inflation, when you think about utilities, labor, all the elements that we were talking, that's roughly $40 million, $50 million in our P&L. So, offsetting all of that with productivity gains is a big statement that we're making today.

Perfect. Appreciate that, and that's great to hear and hopefully should help to leverage improvement in the future. Last question for now is, on the low 1,4-dioxane capabilities, it sounds like you've had some delays. if there's any way to quantify the impact that you saw in terms of higher costs related to those delays, uh, that there were above and beyond your expectations in Q1, uh, that's the first piece is, is can you quantify it? And, uh, second of all, um, it seems like we're still on track to start up in, in Q2. Is there a, um, I guess a specification or customer, uh, trial process before you can really start to realize some commercial sales? Or are we really going to start to expect to see some commercial sales and some benefits from these as we get in from these assets as we get into the second half?

Yeah, great question, Mike. First off, in terms of impact to Q1, you know, I think somewhere in the $2 to $3 million range, would be an accurate number for Q1 impact from the delays we've had in getting these aspects started up. Everything is on track as we sit here today to finish the construction and start the commissioning in Q2. So we expect volumes to grow incrementally year over year starting in the third quarter and continue to gain momentum throughout the remainder of the year.

Perfect. Thanks very much.

Please stand by for our next question.

The next question comes from Vincent Anderson with Stifel. Please go ahead.

Yeah, thanks and good morning.

What exactly do you need to do to position yourself in spray foam? Is that just about fine-tuning a formulation to include blowing agents or a purity component? I'm just wondering what that requires of you and what that might mean for time to market.

Yeah, it's a slightly different formulation than what we've historically been supplying into the rigid market. So our formulation chemists are obviously working with customers in that market to meet their specific performance requirements. Some of those customers have very specific and unique formulations. So this is a traditional technical service collaboration with customers in the spray foam market that view Stefan as potentially bringing value, consistency, high-quality product to their businesses. So it's a standard process, and it takes many months and qualification trials before you can become approved and start supplying.

Gotcha. But at the end of it, this was a collaboration effort, so the sales will be there.

Correct.

Excellent. That's helpful. And so I just wanted to clarify one thing. You mentioned hiring freezes, but I assume, you know, that would exclude whatever staffing is required for Pasadena, and those costs are already contemplated in kind of your startup, you know,

operating leverage headwind that is that is correct so pasadena is a high priority asset startup the underlying business is doing extremely well and the sooner that asset gets up the better we're going to be so those uh those head counts are all in our uh cost structures for 2023 and we do not uh expect or see any any plans to disrupt that hiring and onboarding of those new employees

And Vincent, remember we talked last call that when you think about Pasadena and low 1.4, that's roughly a $10 million investment that we're making this year to have those assets up and running. So follow the half and half. And the first half is more heavy on low 1.4. The second half is more heavy on Pasadena. And, of course, we're not planning to delay any of that.

Right, perfect. And then I guess just one more probably for you, Luis, if you'll entertain this. So if raw materials remain stable where they are now and you work through your higher-cost inventory, you said that's somewhere around $7 million to $10 million of operating income just from those higher raw material overhangs in your inventory. Under more normal demand environments from a volume perspective, would dollar margins be at your target levels? Or is there still a bit more to do there?

Look, we are happy with our dollars per pound margins, but there is always room to do better, right? I mean, there are still places where we are below what we need. And we will continue managing the next few quarters our pricing plans together with raw material costs to ensure that we deliver the margins that we need to reinvest back in the business. We continue working on pricing. As you know, we had excellent price mix in the last two years, 22% in 2021, 30% in 2022. And we still had a very healthy price mix of 12% in Q1 2023. So, we will continue working on pricing based on the raw material situation to ensure that we deliver the margins that we need to reinvest back on the business. Great. Thank you.

Please stand by for our next question.

The next question comes from David Silver with CL King. Your line is now open.

Yeah, hi, good morning. Thank you.

Good morning.

Scott, I'd like to go back to, I think, one of your comments, and I wrote it down on either slide 9 or slide 10. But I think I got this right, but you made reference to, and I'm trying to quote this exactly, but prolonged in elevated inflationary pressures. And, you know, you did talk or Luis talked at some length about the raw material issues, which I think he said were, you know, likely to mostly be through this current quarter, second quarter. You know, I know there's a lot of puts and takes there, labor and logistics, et cetera. But when you were thinking about prolonged elevated inflationary pressures on your business, could you maybe just talk about some of the elements that contributed to that, maybe beyond raw materials in particular. Thank you.

Yeah, great question, David. In terms of quantifying or characterizing prolonged, I think use the timeframe through at least the end of the year. And when you think about year-over-year expenses, things along utilities, natural gas in Europe, You look at insurance costs. You look at wages year over year. Those are all headwinds in 2023 versus 2022. And when you think about underlining contracts that may have been in place in 2022 where costs are resetting in 2023, that's the inflationary pressure we're still seeing in 2023. We've characterized that number as $40 to $50 million of total headwinds from inflation as we enter 2023. So that's what that is referring to, David.

Thank you for clarifying that. I appreciate it. Second thing is I'd like to maybe dig down a little bit into the customer inventory liquidation or customer purchasing trends relative to your surfactants business. So I'm sure I missed maybe a detail or two here, but You know, you did talk about broad-based customer destocking likely to extend through the second quarter. And then in talking about the second half, you know, you called out rigid polyols and new surfactant customer demand. But it sounds like the core, you know, surfactant, legacy surfactant business is going to be, you know, in ample supply, let's say, beyond, let's say, June 30. That's always a combination of, I think, inventory buildup maybe during the pandemic, the buffer inventory issue, as well as some issues affecting current demand, whether it be trading down or fundamentally weaker end market demand. Can you just talk about how you look at, based on maybe your customer order patterns and how they've changed in the last quarter or two, Can you maybe give us a sense of how you expect, you know, how long it might take for your core surfactant business to legacy customers, you know, for that to kind of normalize?

Great question, David. Look, let me provide more perspective on the two businesses, right? Let's separate surfactants and polymers. So surfactant volumes are down 13% in the quarter. Right? So you have three effects there. One is the business that we lost because one customer backward integrated. There's one for dioxin capacity. So that's almost half of the impact of the 13% . The other, so let's call that a 6% out of the 13. The other 7%, that's where you see lower demand, and this stocking, right? And, you know, this is not hard math. This is more art than science, but you see the two buckets impacting in that minus 7%, and we believe that is going to normalize in the second. It's going to start getting better in the second quarter, and it's going to get much better in the second half as this stocking should end on the surfactant piece. And then you're going to have the new contracted volumes, and that will play into the second half numbers. And the customer, remember the customer that we lost in low one for dioxin, we lost that in Q3 2022, so that will start coming out of the base in the third quarter as well. So let's talk now about polymers. Polymers volumes are down 18%, and that's where this stocking has a bigger impact. Right? So it's not only the inventory at our customers, but it's the inventory in the whole channel. There is a lot of distributors that have these type of panels that they need for their construction projects. And that's where we're seeing a lot of the destocking. All the information that we have from our customers and how they talk with the construction contractors is that we may see more in Q2. I mean, destocking has not finished in polymers, and we're going to see more in Q2, but then we should see a revamp in demand in the second half. So that's the difference in the two businesses. This stocking is more on the polymer side than in surfactants. But in surfactants, you have the effect of the customer that we lost that backward integrated.

Okay. No, thank you for the extra detail there. I appreciate it. Last question would be on currency or foreign exchange translation. So you mentioned there was a $0.04 negative impact per share. in the second quarter. But in speaking to some companies, I'm thinking that the currency mix is a little bit different this time than many other periods in the past. In other words, I guess we're used to thinking about weaker dollar, stronger dollar, more or less uniformly across your currency exposures. But I think what's happening, if I'm not mistaken, is that I'm guessing that your European business is actually becoming, you know, the translation is probably becoming something of a tailwind, you know, as the Euro has strengthened versus the dollar. But I guess some of the more, I don't know, inflationary currencies in Latin America might, you know, might be the volatility there might be what's driving the overall picture. So if you could just maybe talk about how you see currency translation, uh, you know, by region, I guess, impacting your results maybe in the second quarter and then looking ahead, you know, as far ahead as you care to. Thank you.

You know, great question, David. And look, what we see now, for example, we should start seeing very small help at the end. These are not really material numbers when you think about Q1. Less than $1 million. I don't think SX played a big, big role into the numbers. But what we're seeing with the Euro at 110, you should see a small help versus last year. Because remember last year in Q2, Q3, the Euro was very different. So we're going to see a small help there. But on the other hand, you still have a lot of volatility in Mexico and Brazil, as you mentioned. So, currency there continues to be strong, and now we need to make, of course, that drives higher cost in dollar terms. And sometimes some of our contracts there are in dollars, so that's actually a small squeeze on the margin side. So that's why we need to keep working on productivity because, again, our cost can be higher in Brazil and in Mexico, and we need to recover that through productivity and through pricing. But again, we don't believe we're going to see any material impact in the next few quarters based on where currencies are now in our numbers.

Very helpful. Thank you very much.

Please stand by for our next question. The next question comes from Mike Harrison with Seaport Research. Your line is now open.

Hi. Just a couple more, first on the polymers business. It seems like you expect the stocking to continue at least into the second quarter. Can you talk a little bit more broadly on what you see happening with underlying demand? It seems like from what we're seeing in the headlines, you know, residential housing is a big concern heading into the rest of this year, but the non-resi side of construction seems like it's holding up a little bit better. I was curious what you guys are seeing in your business, given that it's mostly non-residential.

Yeah, great question, Mike. You are correct. The underlining demand in the market seems to be healthy. If you look at Q1, there were a lot of weather events. When you think about the rain on the west coast, you think about the strong winter up in the upper Midwest and northeast. That did have an impact on the ability to get jobs done, replacing or building new roofs. But underlining that is, Luis mentioned a little bit earlier, there is a lot of inventory throughout the chain. When you look at those contractors, which is a very fragmented market across the United States, we're understanding there was a lot of inventory sitting around the country as jobbers would be bidding on work but needed to guarantee that they had supply of materials. So that is what we believe the industry is working through. The good news is I think there's pent-up demand. The activity for re-roofs and new roofs is out there. We need to continue to work through that destocking of inventory in Q2, and then I think we'll see recovery in the second half.

All right. And then also in polymers, you noted that the case business or that specialty polymers business in North America was showing some volume growth. Is there a chance that we see you guys reemphasize that specialty side of the polymers business as we kind of navigate this challenging period for the rigid polyols side of the polymers business?

No, I wouldn't expect to see significant movement on the specialty case side. We are an important player in the market, but our strategy remains focused on the energy efficiency within our polymers business.

All right, great. And then the last question I had is on you guys are now providing an adjusted EBITDA number. Is that just another metric that you're going to be giving us going forward, or does this represent some kind of change in the metrics that you guys are using to either operate the business or think about compensation or incentives or things like that?

Great question, Mike. Look, we haven't changed any official compensation or those type of metrics on the EBITDA side, but we have talked internally in the past a lot about EBITDA as well, right? We have internally talked a lot about operating income, about net income, and also EBITDA. That's something that we have done in the last two to three years. And we thought it was very important to make sure that everybody understand those metrics because we talk a lot, I talk a lot about EBITDA. So we say we need to be more proactive in putting the data there with the adjusted and everything. And I mean, when you think about the market, everybody talks about EBITDA. And I think it's easier for us to, you know, to compare with the other players and, you and talk the same language.

Sounds good. Thanks very much.

I show no further questions at this time. I would now like to turn the conference back to Scott Behrens for closing remarks.

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

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

Thank you.

Welcome to the Q1 2023 Steppen Company Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Luis Rojo, Chief Financial Officer. Please go ahead.

Good morning, and thank you for joining Stepan Company's first quarter 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, the prospects for our foreign operations, global and regional economic conditions, and factors detailing our Security and Exchange Commission filings. Whether you are joining us online or over the phone, we encourage you to review the investor slide presentation, which we have made available at www.stephan.com under the Investor section of our website. We make these slides available at approximately the same time as when the earnings releases issue, and we hope that you find the information perspective helpful. With that, I would like to turn the call over to Mr. Scott Behrens, our President and Chief Executive Officer.

Good morning, and thank you all for joining us today to discuss our first quarter results. To begin, I will share our first quarter highlights and strategic outlook, while Luis will provide additional details on our financial results. The company reported first quarter adjusted net income of $16.4 million. Earnings were significantly impacted by a 14% decline in volume driven by softening market demand, delays in the startup of new low 1.4 dioxane production assets, and continued customer and channel destocking across most of our markets. Our margins were in line with expectations despite high cost inventory carryover from the fourth quarter, and increased competitive activity within certain end-use markets. Despite ongoing inflationary pressures and higher cash expenses related to the construction and pre-commissioning activities of our new alcoxylation investment in Pasadena, Texas, and the startup of our new low 1,4-doctrine capacity in the U.S., we kept cash expenses consistent year over year. For the quarter, adjusted EBITDA was $48.7 million, down $31 million versus Q1 2022, primarily driven by the decline in sales volume. Surfactant operating income was $27.1 million versus $53.8 million in the prior year, primarily due to a 13% decline in global sales volume that was partially offset by improved product and customer mix. The lower sales volume was mostly due to lower global commodity laundry demand low 1.4 dioxane transition startup delays, and the previously disclosed backward integration by one customer. Volumes were also negatively impacted by lower demand within the North American personal care end market and customer inventory destocking. Higher global demand in the agricultural end market partially offset the declines. Polymer operating income was $10 million, a decrease of $4 million versus the prior year, or 28%. This decrease was primarily due to an 18% decline in global sales volume, led by a 19% volume decline in rigid polyols. Lower phthalic and hydride volumes were partially offset by slightly higher specialty polyol volumes. The lower demand in rigid polyols reflects customer and channel inventory to stocking and lower construction-related activities. Specialty product operating income was $2.5 million versus $3.7 million in the prior year. This decrease was primarily attributable to lower sales volume and margins within the medium chain triglycerides product line. Our board of directors declared a quarterly cash dividend on Steffen's common stock of 36.5 cents per share, payable on June 15, 2023. Stephan has paid and increased its dividend for 55 consecutive years. During the first quarter of 2023, the company paid $8 million in dividends to shareholders. The company did not purchase any company stock in the first quarter of 2023 and 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 continue to invest in our business, pursue strategic M&A opportunities, and return cash to our shareholders. Luis will now share some details about our first 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 was $16.4 million, or $0.71 per diluted share, versus $40.7 million, or $1.76 per diluted share in the prior year. Because adjusted net income is a not-gap measure, we provide full reconciliations to the compatible gap 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 first quarter excludes deferred compensation income of $0.1 million compared to income of $4.4 million last year. It also excludes minor business restructuring expenses and environmental remediation costs. The deferred compensation figures represent the net income related to the company deferred compensation plans, 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. The effect of foreign currency translation negatively impacted net income by $0.9 million, or $0.04 per diluted share versus the prior year. Slide 5 shows the total company net income bridge for the first quarter compared to last year's first quarter and breaks down the decrease in adjusted net income. Because this is net income, The figure is not here on an after-tax basis. We will cover this segment in more detail, but to summarize, we experienced lower operating income in all segments driven by lower volumes. Despite significant inflation, our cash expenses were similar to last year. Adjusted corporate expenses and all other which are not allocated to the business segments were up due to higher interest expenses and overall inflation. the company effective tax rate was 19% in the first quarter of 2023 versus 24.6% in the first quarter of 2022. This decrease was primarily attributable to more favorable tax benefits derived from stock-based compensation awards exercised or distributed in the first quarter of 2023 versus the first quarter of 2022. Slide six focuses on surfactant segment results for the quarter. Surfactant net sales were $468 million for the quarter, flat versus the prior year. Selling prices went up 14%, mainly due to the pass-through of higher raw material and logistic costs, as well as improved product and customer mix. Volume declined 13% year-over-year, primarily due to lower global demand in commodity laundry, startup delays associated with the low 1,400 transition, lower demand within the North America personal care end market, and continued customer and channel inventory stocking. Higher global demand for products sold into the agricultural end markets partially offset the above. Foreign currency translation negatively impacted net sales by 1%. Sulfactant operating income for the quarter decreased $27 million versus the prior year. This reduction was driven by a volume decline of 13% and higher expenses associated with the company transition to low 1,4-dioxane products and Pasadena pre-operating expenses. Operating income declined in all sulfactant regions primarily due to the lower volumes mentioned before. Now, turning to polymers on slide seven. Net sales were $161 million for the quarter, a 14% decrease versus the prior year. Global volume declined by 18% primarily due to a 19% volume decline in rigid volumes. This was partially offset by double-digit volume growth in China amid single-digit growth in North America case business. The lower demand reflects customer and channel inventory stocking and lower construction-related activities. Selling prices increased 8%, primarily due to the path through of higher raw material and input costs. Foreign currency translation negatively impacted net sales by 4%. Polymer operated income was $10 million, a decrease of $4 million versus the prior year. The decrease is primarily due to the 18% decline in global volume. North America and Europe results were impacted by lower volumes. Asia results improved in increased demand following the reopening of China. Finally, specialty product net sales were $23 million for the quarter, a 13% increase versus the prior year. Sales volume was down 7% between years, while operating income decreased $1.2 million. The decline in operating income was primarily attributable to lower volumes and margins within NCT product lines. Turning to slide A, our balance sheet remains healthy, and we have ample liquidity to invest in the business. Our leverage and interest coverage ratios remain well managed, despite our elevated CAPEX spending in the first quarter. For the first quarter, cash from operation was $42 million, and we deployed $214 million against CAPEX investments, payments of accrued liabilities, dividends, and higher working capital requirements. The company's first quarter capital spend was $92 million, inclusive of our one-fourth option project and passive investments in the U.S. Now, on slide 9 and 10, Scott will update you on our strategic priorities.

These slides describe our strategic priorities and operating principles for shareholder value creation. We believe our growth strategy is properly aligned to attractive growth vectors within our core markets, and we are committed to delivering greater productivity through efficient allocation of resources to increase value creation for shareholders. Our customers will always remain at the center of our strategy and innovation. Our long-standing Tier 1 customers value our technical capacity and the ability to manufacture and deliver quality products at the scale they need. We continue to diversify our customer base by expanding our global reach to Tier 2 and Tier 3 customers who highly value the technical support and services that Stefan can provide. Our technical collaborations are increasingly focused on helping our customers make their product portfolio transition towards a more sustainable future, and we are happy to be on this journey with them. Our diversification strategy centers around continued growth of our products into higher margin industrial applications where surfactants bring important benefits and functionality to applications. Technology advancement within the agricultural market is progressing at a rapid pace, and we see surfactants and formulation expertise playing an integral role in our customers' future. Our specialty non-ionic product line, which is the foundation of our new alkoxylation investment in Pasadena, Texas, continues to grow volumes at double-digit rates. In addition, we remain pleased with the expansion of customers and market, that last year's acquisition of Performanex's business has brought to stepping. Insulation remains one of the most critical enablers to a more sustainable and energy efficient world. Our polymers business continues to focus on developing the next generation rigid polyol technologies that can increase the energy efficiency and cost performance of our customers' insulation products. We are also focused on the spray foam market as it offers attractive diversification and growth for Steppen's polyol. Fermentation remains an exciting future product platform opportunity for our surfactant business. We believe this new bio-based product family has significant opportunities in several important end markets, and we have identified an expanding range of new uses delivering unique performance and formulation advantages for bio-based rhamnolipids, our first fermentation-based product offering. Customer evaluations are underway in various markets, including agricultural chemicals, consumer cleaning, personal care, and oil fields. Controlling costs and delivering value from productivity gains are part of our operating model, and we must deliver greater benefit to offset what may be prolonged elevated inflationary pressure. Successful first quarter cost management measures included controlling headcount, reducing third-party services, optimizing travel, and other activities. Manufacturing excellence initiatives are being strengthened across our production network to deliver productivity gains while eliminating inefficiencies across the broader supply chain. Improved and expanded data and analytics are enabling a more transparent view for our teams to identify priority areas of value creation. We are targeting to hold full year 2023 cash expenses essentially flat to prior year. This is despite continued pressure from elevated cost inflation across our base expenses and new expenses related to pre-startup activities on our growth investments, including Pasadena, low 1,4-doxane, and fermentation. We are proud of the progress and the recognition we have received on our ES&G program. With safety as our top priority, we are most proud of our team last year having its best safety year on record. We were recognized as the number one in the specialty chemical sector of Investors Business Daily's 2022 Best ESG Companies list, and we once again achieved the gold rating from Ecovados, elevating STEP into the 96th percentile within our industry. We will publish our 2023 sustainability report soon. Finally, we will continue with an efficient and disciplined approach to capital allocation. Capital reinvestment for base infrastructure and EH&S enhancements is required for continued safe and reliable operations. Capital spending for growth and capability projects reached a record $302 million last year, which should secure the capacity and capability needed to meet expected long-term growth. Returning cash to shareholders via dividends is a core element of our total shareholder return strategy. having paid and increased the dividend for 55 consecutive years. And finally, given the strength of our balance sheet, acquisition opportunities that align with our growth and diversification strategy remain a priority. Moving to slide 11, construction on our new alkoxylation production facility in Pasadena, Texas is approximately 25% complete and has surpassed 250,000 hours of construction without an injury. This asset will be a flexible state-of-the-art multi-reactor facility with approximately 75,000 tons per year of annual alkoxylation capacity and will provide strategically located capacity and capability for long-term specialty alkoxylate growth across our strategic growth and markets, including agriculture, oil field, construction, and household and institutional cleaning. We expect the plant to start up in the first half of 2024. The underlining alkoxylation business that supports the Pasadena investment continues its strong double-digit volume growth and at attractive margins. 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 by the end of the second quarter. While we have had some challenges and delays associated with the startup of the initial investments, We believe key learnings will afford efficient commissioning and startup of the remaining new installations. New contracted volume associated with the second quarter asset startup should drive volume growth in the second half of 2023. Once completed, Steppen will have the largest installed low 1,4-doxane production capacity serving the North American merchant market, which will enable Steppen to maintain and grow our North American sulfonation business in 2024 and beyond. In closing, I am proud of the progress our teams have made in several strategic areas, including capital project execution, progressing our sustainability and innovation programs, and delivering continued diversification and growth of our customer base within our targeted end-use markets. Looking forward, we believe second quarter volumes will remain depressed as markets continue to reconcile forward demand with inventory levels throughout the channel. We expect second half of the year volume growth driven by modest recovery in demand for rigid polyols, growth in surfactant volumes associated with new contracted business, and a low comparable base. We will continue to actively control costs and execute our productivity programs. Our balance sheet remains healthy, and we are committed to advancing our strategic and innovation initiatives that are instrumental to our long-term growth. This concludes our prepared remarks. At this time, we would like to turn the call over for questions. Michelle, please review the instructions for the question portion of today's call.

As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from Mike Harrison with Seaport Research. Please go ahead.

Hi, good morning. Good morning, Mike. I was wondering if we could maybe start with some discussion on the raw material and inflationary front. I'm just curious, is the inflationary pressure that you saw in Q1 related to working through some of the high-cost inventories that you still have within your system, or is it related to changes in market prices for your raw materials? I guess I'm curious, are you seeing market pricing today for raws stable, increasing, or decreasing?

Great question, Mike. This is Luis. You are 100% correct. What you saw in Q1 was we are still depleting high-cost raw materials that we have in the system, also because of the fact that volumes have been depressed in Q4 and Q1. So just to provide more perspective to that point, we saw an impact of around $7 to $10 million pre-tax in Q1 due to high row cost. And we believe we're going to need at least Q2 to finish the depletion of some of these materials, especially in the polymers business. uh so so now to your questions on raw materials we saw the deflation in q4 and a little bit more in q1 and what we see now is more stable uh prices uh uh and and you know the the This can continue to be very volatile. We have seen oil going back up, so we're going to see more volatility up and down probably in the next few quarters, but right now what we see is very stable raw materials versus Q1. But again, one of the key impacts of our results in Q1 is this high raw materials. Now, let me just use the opportunity to also talk about other issues in our cost structure. And we said that our cash expenses were flat versus last year despite a lot of inflation in our P&L. So you have inflation in utilities, insurance, labor. And we were able to manage those with productivity gains and deliver cash expenses flat versus Q1 2022. All right.

Appreciate the color there. And I think that gets to my next question, which is a broader question about margins. You said that the first quarter margin performance was generally in line with expectations, given that you were seeing this volume weakness. But how much margin improvement should we expect in Q2 and maybe as we get into the second half with some seasonal pickup, particularly in the construction-related business, and as we start to get through this higher-cost inventory?

Right. I mean, you are 100% correct again, Mike. What we are expecting is gradual improvement in our margins, in Q2 versus Q1, very gradual, very small, because, again, we still have high material costs, but we see more improvements in the second half. not only not only because depleting raw materials but as you said because of of mix as well and because starting shipping our low one for dioxin uh products uh more broadly with the commissioning of the assets in millsville that should provide also a mixed sweetener to the company all right that makes sense um

I guess maybe just a couple more, and then I'll get back in queue. You noted some productivity programs that you have in place, and you mentioned that you're holding your cash expenses fairly stable year on year. Maybe a little bit more detail on what you're doing on the productivity front and how much cost savings could be associated with those actions?

Yeah, so Mike, this is Scott. In regards to controlling our first quarter costs, really at the corporate level in terms of really putting a hold on new hires. So we did implement a hiring freeze. We have reduced and optimized our travel. And then we have other productivity gains in terms of potentially reducing third-party costs consulting and services that or delaying those costs into potentially fiscal 2024. And then at the operational level, really getting after improvements in logistics and freight, demurrage also became an issue in Q1 as it relates to the inventory carryovers with the continued softness and demand. So we're really trying to get through the demurrage incurred expenses as well as optimize the logistics to put more income to the bottom line.

Let me provide a little bit more color also on the total year, Mike. So we are making a big statement today about we are aspiring to hold all our cash expenses similar to last year. That's a big productivity effort when you think about inflation, when you think about utilities, labor, all the elements that we were talking, that's roughly $40 million, $50 million in our P&L. So, offsetting all of that with productivity gains is a big statement that we're making today.

Perfect. Appreciate that, and that's great to hear and hopefully should help to leverage improvement in the future. Last question for now is, on the low 1,4-dioxane capabilities, it sounds like you've had some delays. if there's any way to quantify the impact that you saw in terms of higher costs related to those delays, uh, that there were above and beyond your expectations in Q1, uh, that's the first piece is, is can you quantify it? And, uh, second of all, um, it seems like we're still on track to start up in, in Q2. Is there a, um, I guess a specification or customer, uh, trial process before you can really start to realize some commercial sales? Or are we really going to start to expect to see some commercial sales and some benefits from these as we get in, from these assets as we get into the second half?

Yeah, great question, Mike. First off, in terms of impact to Q1, you know, I think somewhere in the $2 million to $3 million range, would be an accurate number for Q1 impact from the delays we've had in getting these aspects started up. Everything is on track as we sit here today to finish the construction and start the commissioning in Q2. So we expect volumes to grow incrementally year over year starting in the third quarter and continue to gain momentum throughout the remainder of the year.

Perfect. Thanks very much.

Please stand by for our next question.

The next question comes from Vincent Anderson with Stifel. Please go ahead.

Yeah, thanks and good morning.

What exactly do you need to do to position yourself in spray foam? Is that just about fine-tuning a formulation to include blowing agents or a purity component? I'm just wondering what that requires of you and what that might mean for time to market.

Yeah, it's a slightly different formulation than what we've historically been supplying into the rigid market. So our formulation chemists are obviously working with customers in that market to meet their specific performance requirements. Some of those customers have very specific and unique formulations. So this is a traditional technical service collaboration with customers in the Spray-Po market that view Stephan as potentially bringing value, consistency, high-quality product to their businesses. So it's a standard process, and it takes many months and qualification trials before you can become approved and start supplying.

Gotcha. But at the end of it, this was a collaboration effort, so the sales will be there.

Correct.

Excellent. That's helpful. And so I just wanted to clarify one thing. You mentioned hiring freezes, but I assume, you know, that would exclude whatever staffing is required for Pasadena, and those costs are already contemplated in kind of your startup, you know, operating leverage headwind?

That is correct. So Pasadena is a high-priority asset startup. The underlying business is doing extremely well, and the sooner that asset gets up, the better we're going to be. So those headcounts are all in our cost structures for 2023, and we do not expect or see any plans to disrupt that hiring and onboarding of those new employees.

And Vincent, remember we talked last call that when you think about Pasadena and low 1.4, that's roughly a $10 million investment that we're making this year to have those assets up and running. So follow the half and half. And the first half is more heavy on low 1.4. The second half is more heavy on Pasadena. And, of course, we're not planning to delay any of that.

Right, perfect. And then I guess just one more probably for you, Luis, if you'll entertain this. So if raw materials remain stable where they are now and you work through your higher-cost inventory, you said that's somewhere around $7 million to $10 million of operating income just from those higher raw material overhangs in your inventory. Under more normal demand environments from a volume perspective, would dollar margins be at your target levels? or is there still a bit more to do there?

Look, we are happy with our dollars per pound margins, but there is always room to do better, right? I mean, there are still places where we are below what we need. And we will continue managing the next few quarters our pricing plans together with raw material costs to ensure that we deliver the margins that we need to reinvest back in the business. We continue working on pricing. As you know, we had excellent price mix in the last two years, 22% in 2021, 30% in 2022. And we still had a very healthy price mix of 12% in Q1 2023. So, we will continue working on pricing based on the raw material situation to ensure that we deliver the margins that we need to reinvest back on the business. Great. Thank you.

Please stand by for our next question.

The next question comes from David Silver with CL King. Your line is now open.

Yeah, hi, good morning. Thank you.

Good morning.

Scott, I'd like to go back to, I think, one of your comments, and I wrote it down on either slide 9 or slide 10. But I think I got this right, but you made reference to, and I'm trying to quote this exactly, but prolonged in elevated inflationary pressures. And you did talk or Luis talked at some length about the raw material issues, which I think he said were likely to mostly be through this current quarter, second quarter. I know there's a lot of puts and takes there, labor and logistics, et cetera. But when you were thinking about prolonged elevated inflationary pressures on your business, could you maybe just talk about some of the elements that contributed to that, maybe beyond raw materials in particular. Thank you.

Yeah, great question, David. In terms of quantifying or characterizing prolonged, I think use the timeframe through at least the end of the year. And when you think about year-over-year expenses, things along utilities, natural gas in Europe, You look at insurance costs. You look at wages year over year. Those are all headwinds in 2023 versus 2022. And when you think about underlining contracts that may have been in place in 2022 where costs are resetting in 2023, that's the inflationary pressure we're still seeing in 2023. We've characterized that number as $40 to $50 million of total headwinds from inflation as we enter 2023. So that's what that is referring to, David.

Thank you for clarifying that. I appreciate it. Second thing is I'd like to maybe dig down a little bit into the customer inventory liquidation or customer purchasing trends relative to your surfactants business. So I'm sure I missed maybe a detail or two here, but You know, you did talk about broad-based customer destocking likely to extend through the second quarter. And then in talking about the second half, you know, you called out rigid polyols and new surfactant customer demand. But it sounds like the core, you know, surfactant, legacy surfactant business is going to be, you know, in ample supply, let's say, beyond, let's say, June 30. And, you know, that's always a combination of, I think, inventory buildup, maybe during the pandemic, the buffer inventory issue, as well as, you know, some issues affecting current demand, whether it be trading down or fundamentally weaker end market demand. Can you just talk about how you look at Based on maybe your customer order patterns and how they've changed in the last quarter or two, can you maybe give us a sense of how long it might take for your core surfactant business to legacy customers for that to kind of normalize?

Great question, David. Look, let me provide more perspective on the two businesses, right? Let's separate surfactants and polymers. So, surfactant volumes are down 13% in the quarter, right? So, you have three effects there. One is the business that we lost because one customer backward integrated. There's one for dioxin capacity. So that's almost half of the impact of the 13% in surface. The other, so let's call it a 6% out of the 13. The other 7%, that's where you see lower demand and the stocking, right? And, you know, this is not a this is not hard math, this is more art than science, but you see the two buckets impacting in that minus 7%, and we believe that is going to normalize in the second, it's going to start getting better in the second quarter, and it's going to get much better in the second half as these tokens should end on the surfactant piece, right? And then you're going to have the new contracted uh volumes and that that will that will play into the second half numbers and the customer remember the customer that we lost in in in low one for dioxin we lost that in q3 uh 2022 so that will start coming out of the base uh in the third quarter as well so let's talk now about polymers polymers volumes are down 18 and that's where this talking has a bigger impact right uh so uh It's not only the inventory at our customers, but it's the inventory in the whole channel. There is a lot of distributors that have these type of panels that they need for their construction projects. And that's where we're seeing a lot of the destocking. All the information that we have from our customers and how they talk with the construction contractors is that we may see more in Q2. I mean, destocking has not finished in polymers, and we're going to see more in Q2, but then we should see a revamp in demand in the second half. So that's the difference in the two businesses. This stocking is more on the polymer side than in surfactants. But in surfactants, you have the effect of the customer that we lost that backward integrated.

Okay. No, thank you for the extra detail there. I appreciate it. Last question would be on currency or foreign exchange translation. So you mentioned there was a $0.04 negative impact per share. in the second quarter. But in speaking to some companies, I'm thinking that the currency mix is a little bit different this time than many other periods in the past. In other words, I guess we're used to thinking about weaker dollar, stronger dollar, more or less uniformly across your currency exposures. But I think what's happening, if I'm not mistaken, is that I'm guessing that your European business is actually becoming, you know, the translation is probably becoming something of a tailwind, you know, as the Euro has strengthened versus the dollar. But I guess some of the more, I don't know, inflationary currencies in Latin America might, you know, might be the volatility there might be what's driving the overall picture. So if you could just maybe talk about how you see currency translation, uh, you know, by region, I guess, impacting your results maybe in the second quarter and then looking ahead, you know, as far ahead as you care to. Thank you.

You know, great question, David. And look, what we see now, for example, we should start seeing very small help at the end. These are not really material numbers when you think about Q1. less than $1 million, I don't think SX played a big, big role into the numbers. But what we're seeing with the euro at 110, you should see a small help versus last year, because remember last year in Q2, Q3, the euro was very different. So we're going to see a small help there. But on the other hand, you still have a lot of volatility in Mexico and Brazil, as you mentioned. So, currency there continues to be strong, and now we need to make, of course, that drives higher cost in dollar terms. And sometimes some of our contracts there are in dollars, so that's actually a small squeeze on the margin side. So that's why we need to keep working on productivity because, again, our costs can be higher in Brazil and in Mexico, and we need to recover that through productivity and through pricing. But again, we don't believe we're going to see any material impact in the next few quarters based on where currencies are now in our numbers.

Very helpful. Thank you very much.

Please stand by for our next question. The next question comes from Mike Harrison with Seaport Research. Your line is now open.

Hi. Just a couple more. First on the polymers business, it seems like you expect the stocking to continue at least into the second quarter of Can you talk a little bit more broadly on what you see happening with underlying demand? It seems like from what we're seeing in the headlines, you know, residential housing is a big concern heading into the rest of this year. But the non-resi side of construction seems like it's holding up a little bit better. I was curious what you guys are seeing in your business, given that it's mostly non-residential.

Yeah, great question, Mike. You are correct. The underlining demand in the market seems to be healthy. If you look at Q1, there were a lot of weather events. When you think about the rain on the west coast, you think about the strong winter up in the upper Midwest and northeast. That did have an impact on the ability to get jobs done, replacing or building new roofs. But underlining that is, Luis mentioned a little bit earlier, there is a lot of inventory throughout the chain. When you look at those contractors, which is a very fragmented market across the United States, we're understanding there was a lot of inventory sitting around the country as jobbers would be bidding on work but needed to guarantee that they had supply of materials. So that is what we believe the industry is working through. The good news is I think there's pent-up demand. The activity for re-roofs and new roofs is out there. We need to continue to work through that destocking of inventory in Q2, and then I think we'll see recovery in the second half.

All right. And then also in polymers, you noted that the case business or that specialty polymers business in North America was showing some volume growth. Is there a chance that we see you guys reemphasize that specialty side of the polymers business as we kind of navigate this challenging period for the rigid polyols side of the polymers business?

No, I wouldn't expect to see significant movement on the specialty case side. We are an important player in the market, but our strategy remains focused on the energy efficiency within our polymers business.

All right, great. And then the last question I had is on you guys are now providing an adjusted EBITDA number. Is that just another metric that you're going to be giving us going forward, or does this represent some kind of change in the metrics that you guys are using to either operate the business or think about compensation or incentives or things like that?

Great question, Mike. Look, we haven't changed any official compensation or those type of metrics on the EBITDA side, but we have talked internally in the past a lot about EBITDA as well, right? We have internally talked a lot about operating income, about net income, and also EBITDA. That's something that we have done in the last two to three years, and we thought was very important to make sure that everybody understands those metrics because we talk a lot, I talk a lot about EBITDA, so we say we need to be more proactive in putting the data there with the adjusted and everything. And, I mean, when you think about the market, everybody talks about EBITDA, and I think it's easier for us to, you know, to compare with the other players and talk the same language.

Sounds good. Thanks very much.

I show no further questions at this time. I would now like to turn the conference back to Scott Behrens for closing remarks.

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

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