Stepan Company

Good day, and thank you for standing by, and welcome to the Q2 2023 Step-in Company Earnings Conference Call. At this time, all participants are in the 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 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to introduce your host for today's call, Luis Rojo, CFO. Please go ahead.

Good morning, and thank you for joining Stephan Company's second 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. included but not limited to prospects for our foreign operations, global and regional economic conditions, and factors detailing our security and exchange commission filing. 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 on the investor section of our website. We make these slides available at approximately the same time as when the earnings release is issued. and we hope that you find the information perspective helpful. With that, I would like to turn the call over to Mr. Scott Bedden, our president and chief executive officer.

Good morning, and thank you for joining us today to discuss our second quarter results. I plan to share highlights from our second quarter performance. I will also share updates on our key strategic priorities, while Luis will provide additional details on our financial results. The company reported second quarter adjusted net income of $12.1 million. earnings were significantly impacted by a 19% decline in sales volume versus the all-time record prior year second quarter due to continued demand softness across most of our markets and continued inventory to stocking in certain market channels. In the second quarter, margins in our surfactant and polymer segments were only slightly lower versus prior year as a result of less favorable mix, while unit margins for specialty products were significantly lower versus prior year due to high-cost inventory and pricing pressure. Gradual volume improvement throughout the quarter within our rigid polyol business was more than offset by destocking activity within our agricultural business. Cash expenses were slightly lower versus prior year due to proactive headcount and discretionary expense controls implemented earlier in the year and lower accruals for incentive-based compensation. For the quarter, adjusted EBITDA was $45.8 million versus $96.7 million in the prior year quarter, primarily driven by the decline in sales volume. Adjusted EBITDA in the second quarter of 2023 was slightly lower than the first quarter of 2023. Second quarter surfactant operating income was $15.1 million versus $48.2 million in the prior year quarter. primarily due to a 15% decline in global sales volume. In addition, unit margins were slightly lower due to less favorable product mix, high-cost inventory carryover, and increased competitive pricing pressure in Latin America. Polymer operating income was $16.3 million, a decrease of $17.6 million versus the prior year. This decrease was primarily due to a 29% decline in global sales volume including a 28% volume decline in rigid polyols. Specialty product operating income was $3.8 million versus $9.9 million in the prior year. This decrease is primarily attributable to lower unit margins and sales volume within the medium-chain triglycerides product line versus a record prior year. During the second quarter of 2023, the company paid $8.2 million in dividends to shareholders and $16.3 million during the first six months of 2023. The company did not repurchase any company stock during the first half of 2023 and has $125 billion remaining under the share repurchase program authorized by its board of directors. Yesterday, our board of directors declared a quarterly cash dividend on Steppen's common stock of 36.5 cents per share, payable on September 15, 2023. Stepan has paid and increased its dividend for 55 consecutive years. Despite the challenging current macro environment and our reduced second quarter earnings, 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 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 $12.1 million, or 53 cents per diluted share, versus $53 million, or $2.30 per diluted share in the prior year. Because adjusted net income is a no-gap measure, we provide full reconciliations to the comparable 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 $0.7 million compared to an expense of $0.5 million in the prior 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 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 net income bridge for the second quarter, compared to last year's second 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 the segment in more detail, but to summarize, we experience lower operating income in all segments driven by lower volumes. The company effective tax rate was 20% in the first half of 2023 versus 25% in the first half of 2022. This decrease was primarily due to more favorable tax benefits derived from stock-based compensation awards exercised or distributed in the first half of 2023 versus the first half of 2022. Let's move to slide six. Slide six focuses on survival and segment results for the quarter. So, in fact, net sales were $392 million for the quarter, a 19% decrease versus the prior year. Selling prices were down 5%, and volume decreased 15% year-over-year. The reduction in volume was due to overall lower demand, cost-over-channel inventory stocking, and the previously disclosed backward integration by one customer associated with the long-run forked doubts in transition. Foreign currency translation positively impacted net sales by 1%. So in fact, an operating income for the quarter decreased $33 million versus the prior year. Most of this decrease is due to a 15% decline in volume. Unit margins were slightly lower due to less favorable product mix, high cost inventory carryover, and increased competitive pressures in Latin America. Higher expenses associated with the company transition to low 1,400 capabilities and pre-operating expenses in our Pasadena site were also headwinds during the quarter. Operating income declined in all surfactants regions, primarily due to the lower overall demand mentioned before, as well as pressure from imports in Latin America. Now, turning to polymers on slide seven. Net sales were $164.5 million for the quarter, a 31% decrease versus the prior year. Volume decreased 29%, primarily due to a 28% volume decline in region polyols, and lower demand in the specialty polyol and PA businesses. This was partially offset by volume growth in China. The lower demand reflects customer and channel inventory stocking and lower construction-related activities. Selling prices decreased 3%, and foreign currency translation positively impacted net sales by 1%. Former operating income decreased $17.6 million versus prior year, primarily due to the 29% decrease in global volume. North America and Europe results were both impacted by lower volumes. Asia's results improved on increased demand following the reopening of China. Finally, specialty product net sales were $23.8 million for the quarter, a 14% decrease versus the prior year. Volume was down 16% between years, while operating income decreased $6 million versus a record second quarter in 2022. The decline in operating income was primarily due to high-cost inventory carryover and pricing pressures. Turning to slide A, although our balance sheet remains healthy, we have increased our efforts to lowering working capital and reducing capital spending to adapt to the current business environment. For the second quarter, cash from operation was a healthy $108 million, and we deployed $103 million against CapEx investments, debt payments, and dividends. Our net debt improved from $584 million in the first quarter of 2023 to $549 million this quarter, as we continue to deliver a strong cash generation. Now, on slide 9 and 10, Scott will update you on our strategic priorities and capital investments.

Thanks, Luis. I will focus my comments on our cost and cash management initiatives and on the progress of our major capital investments. In regards to our 2023 cash expenses, we continue targeting to hold full-year cash expenses flat or down versus prior year, despite continued pressure from elevated cost inflation. Based on the disappointing second quarter financial results, we are taking further actions to control costs and improve cash flow, including a voluntary early retirement program for eligible employees at our corporate headquarters and global technology center, which are both located here in the Chicago area. This program should help position us to deliver improved earnings in 2024. We expect to take a restructuring charge in the third quarter. Our second half capital spending should decline by $70 to $80 million compared to the first half of the year as we finish our 1-4 dioxane projects in the coming weeks and begin to wind down spending on Pasadena sequentially over the remaining quarters. We also expect to reduce inventories by $40 million in the second half, freeing up additional cash. Moving to slide 10, construction on our new alkoxylation production facility in Pasadena, Texas is approximately 35% complete and has surpassed 500,000 construction hours without an injury. The new estimated capital investment now stands at $265 million. We expect the Pasadena plant to be 90% complete by year end and to start up in mid-2024. The underlying alkoxylation business that supports the Pasadena investment continues its strong double-digit volume growth in the first half of the year and at attractive margins. As you know, we are increasing North American capability and capacity to produce ethersulfates that meet new regulatory limits on 1,4-Dioxane. The new assets in our Millsdale facility are now mechanically complete and are being commissioned this quarter. New contracted low 1,4-doxane volumes have already started and should drive volume growth in the second half of the 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. Looking forward, We continue to believe second half of the year volume and margins will incrementally improve versus the first half of 2023, driven by the continued gradual recovery in rigid polyol demand, growth in surfactant volumes associated with new contracted business, and sequentially lower raw material costs. While first half financial results were disappointing, our anticipated lower second half CapEx spending and an improved working capital position should benefit our balance sheet and free up cash, allowing us to continue to invest and advance our long-term strategic growth and innovation initiatives. We expect additional actions to control costs, including today's announced voluntary early retirement program will benefit our earnings in 2024. While the current market environment continues to present near-term challenges, we believe second-half adjusted earnings will improve over the first half of 2023. This concludes our prepared remarks. At this time, we'd like to turn the call over for questions. Justin, please review the instructions for the question portion of today's call.

And thank you. 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. And one moment for our first question. And our first question comes from Mike Harrison from Seaport Research Partners. Your line is now open.

Hi, good morning. Good morning, Mike.

So I think I wanted to start here maybe just to understand a little bit more on what you guys were seeing in terms of volume trends in both the surfactants and the polymers business as the quarter progressed. And I think what I'm really trying to get to is understanding in both of those segments, When do you expect to see volumes stabilize and become a little bit more representative of what underlying demand looks like?

Yeah, thanks, Mike. You know, we believe we have seen the stabilization of both the polymers and the surfactant volumes in the, I'd say, the June-July, May-June time frame. So sequentially, month over month, in Q2, our rigid polyol volumes continued to grow. And the surfactant volume sequentially down 6% versus Q1, we believe that has stabilized. And in our prepared remarks, we shared that the contracted volumes we have for the second half will drive the incremental growth from here. So from a surfactant polymer perspective, I think the stabilization was experienced in June and in July, and I think we're going to be on our incremental path to recovery in the second half.

So, Mike, let me add a few other points. As Scott mentioned, we believe we hit bottom in Q2. Now, the dynamic, as we mentioned in our remarks and in the earnings release, is we saw sequential improvement in our rigid polio business from Q1 to Q2, but that was offset by significant destocking in the ag business in Q2. So that's the piece that actually offset the progress that we saw in polymers. And we still expect probably some further uh uh this talking in the ag in the ag business but again the polymers business and the new contracted volume uh should have said uh should have said that so we believe we saw the bottom uh and we believe we we have the elements uh for a gradual improvement in the second half

And as it relates to kind of where you guys are on price and cost, obviously pricing is coming lower. It looks like lower in both of your key segments. But you're still running some higher cost inventory through the P&L. Maybe just give us an update on when you would expect to be at a point where you could see those dynamics start to balance out and maybe start to see some recovery in unit margins as your inventory costs come lower and maybe start to reflect a little bit more on what the current pricing environment looks like.

No, good question, Mike. Let me separate two things. One is we saw unit margin significant compression in the specialty product business. And, you know, that's a separate animal, 5% of the company only. But you know that we had a significant high base in the first half of 2022. So when you think about inventory carryover and pricing pressures, because a lot of imports on MCTs from Asia, that's the business where we saw a good impact on unit margins. When you think about surfactants and polymers, our unit margins are still very healthy. Of course, you saw the company with an overall minus 4% in price mean. Our raw material prices went down 5%, okay? So our unit margins are in line with... our expectations, and we believe, as we said in our remarks, that in the second half, we should see not only gradual volume growth, but also gradual margin improvement as we continue running down the high inventory cost material, as you mentioned. So this is not going to be a big jump in one month or one quarter, but we see gradual improvement throughout the next couple of quarters. And let me say that, of course, when you look at oil prices and when you think about all our current Raw materials that we see we see also an stabilization Right. We're still running the high ones But but we are not planning for significant increases or decreases In raw materials in q3 and q4 on an export basis You saw you know oil in the 80s and that's kind of the consensus for the next two quarters All right understood

And I guess my last question here is you mentioned some cost actions you're taking, an early retirement plan, and expecting to take a restructuring charge in the third quarter. Maybe a little bit more color on some of the actions that you're taking, and do you have any sense of what the savings associated with those actions could look like at this point?

Yeah, Mike, we just announced that program today internally, so this is really premature to be talking about or estimating what the potential size could be. We'll be back in two, three when we have more details about the progression of the plan.

All right, understood. Thanks very much.

And thank you. And one moment for our next question. And our next question comes from Vincent Anderson from Stiefel. Your line is now open.

Yeah, thanks. So if I go back a little ways and I look at implied dollar contribution from volumes and surfactants since 2020, if you don't mind, you had about like a $75 million tailwind during 2020. And then since then, you've had cumulative volume declines of a little over $300 million. And yet until this year, you were maintaining dollar earnings despite that kind of general trend lower. Can you just maybe refresh my memory on how the business has trended over the last few years in that respect and what specifically about this leg of volume headwinds is really finally weighing on dollar earnings?

Vincent, so if you think about the surfactants in the last three years, so remember 2020, of course, big spike with the pandemic, volumes up. And you know our clear strategy. Our clear strategy is to continue growing in the functional business, higher margin business, and growing with Tier 2, Tier 3 customers growing. which also provide a higher margin. So what you saw in the last two to three years is despite volume reduction from the peak of the pandemic in 2020, we were able to materialize our strategy, growing our functional business, growing our construction and industrial business, and growing tier two, tier three. So that's why we were able to – I think we have talked a lot about this, right? I mean, there is very difference in profitability. I mean, 100 million pounds here can mean 10 million pounds in another segment when you think about the different type of profitability. So that was our strategy, and we executed on our strategy.

Okay. That's helpful. And then – Can you talk about maybe in a bit more detail the import pressures on Latin America and maybe separate that out between your Mexican sulfonation business, which, if I recall, has a pretty significant market position, and then maybe the rest of the Latin American exposure broadly?

Yeah. So I'd say we started to experience the competitive pressures earlier this year. And that's really because, you know, China reopened a lot of production ramped up in Asia in anticipation of that. And China, as we all know, hasn't recovered at the pace that we thought. And there's been a lot of import pressure up and down the South American coast and even into Mexico. And there were still supply chain constraints specific to Mexico's surfactant market. that also required imports to cover security of supply. So that's what's really impacted the Mexico business is imports and competitive pricing pressures taking margins down. To a much lesser extent, but our business throughout the Indian region, including our production site in Columbia, has also seen competitive pricing pressures. That region of the world tends to be one of the first that sees the aggressive imports to try and move volume and keep production up on the plants that we started in China. Brazil, probably a little less. The Brazilian market is more locally supplied, and I'd say the pressure's been less in Brazil. But, you know, I think what we've seen is that activity stabilized, and we expect second-half volumes to incrementally improve.

Okay. No, that's very helpful. And maybe just specifically on price, you know, I know raw materials are, you know, a significant component of that. But, you know, did you make a conscious effort to prioritize price over volume in some of these areas, you know, with the expectation that the competition would be pretty transient and you'd exit in a better position? Or do you expect your prices to have to react to this competition?

Your former statement is correct. So, you know, once we assess the situation, we acted appropriately with pricing measures to ensure that we could stabilize volumes.

All right. Excellent. Thanks very much. That's all from me.

And thank you.

And one moment for our next question.

And our next question comes from Dave Storms from StoneGate. Your line is now open.

Good morning. Good morning. Just hoping you could discuss the current customer acquisition environment and kind of what you're seeing on that front.

Yeah. You know, within the surfactant industry, or surfactant business, I should say, you know, there's still a lot of new customer acquisitions that are happening. I'd call it, you know, the first half, there's definitely a higher level of churn within our surfactant business as you've had competitive activities, customers looking for lower prices. But on the flip side, we've – the acquisition of new business has – done very well and has not been constrained or hampered by any issues as it relates to pricing in the marketplace. So I characterize this as a much higher churn environment, but the new customer acquisitions continue at an acceptable pace from our perspective.

Very helpful. Thank you. And then just turn into the balance sheet. Your net debt was down slightly. uh, sequentially quarter over quarter. Just curious how comfortable you are with, you know, this 31% level, uh, or if, you know, debt repayment is expected to take center stage once Pasadena is up and running.

Yeah. So, so as you saw, right, I mean, we, uh, we have invested in the business in the last few years, uh, because we believe in our end markets and we did the invest acquisition. We have two big programs in low one, four, And Pasadena, the good news is that a lot of that investment is behind us, right? These are investments for the next 5, 10, and 20 years. These are not investments for the short, short, short-term only. So we need to look at them with a long-term view that these are the right investments. And again, the good news is that we are past the biggest cash outflows. And from here, we need to continue improving the business so we can continue the leveraging a little bit the balance sheet to invest in other new opportunities that that for sure will materialize. We have talked in the past a lot about fermentation, and we will continue to be in the future more acquisitive, and we will continue looking for opportunities.

That's perfect. Thank you very much.

And thank you. And one moment, please. If you would like to ask a question, that is star 1-1. Again, if you would like to ask a question, that is star 1-1.

One moment for our next question.

And our next question comes from David Silver from CL King and Associates. Your line is now open.

Yeah, hi. Good morning. Thank you.

Good morning.

Yeah, good morning, Scott. A couple of areas maybe of focus, but, you know, if you wouldn't mind, I'd like to maybe start with the customer destocking activity. and kind of, you know, your perspective on that. So like a number of companies, you did have a lot of, you did have a meaningful impact from customer destocking this quarter. But I guess, you know, there's probably maybe the devil might be in the details there. But If you were to characterize the destocking activity, would you say it's from the Tier 2 and Tier 3s where you cited some price competition regionally, or would you say this is maybe the bigger merchant market customers and for whatever reason they seem to be carrying more inventory into this seasonal period than was anticipated? In other words, maybe if you could just characterize the nature of the destocking that you were seeing, you know, beyond just the raw percentages or numbers. And then just taking that a little further, you did talk about further reductions, I guess, on your inventories that you anticipated in the back half of the year. Any kind of color on the nature of that? Is it you know, do you have the inventories because customers are trading down or because, I don't know, you know, regional economies are slower than you anticipated? Just, you know, just some color on the nature of the destocking activity that you've seen in the second quarter and that you anticipate in the back half of the year would be helpful. Thank you.

Yeah. Yeah. Thanks, David. As regards to destocking, so the destocking, obviously, Started to happen in Q1 Definitely in the the poly all side of our business for sure And in I would say all segments of our consumer products business I think you know when you look back and try to appreciate Try to appreciate how much inventory was stuffed throughout the channels I don't think anyone had a really good handle on it What we can say going forward is in the rigid polyol business, we think that the stocking is predominantly behind us, and we're now starting to get into a normal demand pattern for the second half of the year. I would say the same thing is true in consumer products. The stocking probably bottomed out in late April, May, and we're now going to be entering a normal stabilized volume pattern going forward. The surprise for us was in agricultural chemicals. So we had an all-time record volume in agricultural chemicals in Q1. And in May, that kind of all stopped abruptly. And it has to do with what segment of the market you're servicing, whether you're in the commodity, generic pesticide end markets, or if you're in the proprietary branded Our business is more associated with proprietary branded. You saw companies announcing Q1, a massive slowdown in ag. We did not see that because we're in a different segment of the market. We did see it and we are experiencing it now. The channel is full in ag and it'll probably take us through the end of Q3 before we get back to a normal inventory and demand pattern for ag. So I'd say, The different industries, different markets, all experience the same issue at different times, but I want to leave you with, I think, polymers, the destocking is predominantly done, and the surfactant side, we expect a normal demand pattern for the second half.

Thank you for that. And just to clarify, of the back half liquidation, it's predominantly or it's tilted down, significantly towards the AgChem and not other surfactants and not so much on the polymers. Is that a fair summary of what you outlined?

Correct. And you asked about inventory reduction. We're really talking about our raw materials and a little bit of finished goods. Some of that is operational as well. One of our large plants is on a river that's going through major lock reconstruction. So we have to bring in higher levels of materials ahead of that three or four month outage. So when that project is done at the end of September, we'll be back to more normal inventory levels in the polymer business as well. So I think we shared earlier the $40 million target reduction for the second half in inventories. That's a real number from our perspective and our expectation.

Thank you for clarifying. I'd like to also just touch on, I guess, the current timeline for the Pasadena expansion. I may be a little off, but it seems like now mid-2024 means maybe another quarter or so slip in the overall planned startup, not overly dramatic in the whole scheme of things. But I was just wondering if you could characterize your decision to kind of maybe move the timeline to mid-2024. So is that a reflection of, I don't know, customer demand or customer orders? Is that maybe tied to the construction timeline and not anything else? Or might there be some other factors? But why would you say mid-2024 is now the right the right timing for your largest capacity expansion project ever?

Yeah, thanks for the question, David. No, this is strictly related to delays within the construction process. As we mentioned in our prepared remarks, the underlining business, the product line that's going through these new assets is continuing to grow at strong double-digit volumes, sequentially quarter over quarter. So the business is healthy. You know, we're in the construction, the actual construction phase of the project right now. So you're getting design field change issues. You're getting, you know, you're into that labor constraints. So these are just little progressive week-month delays that have caused us to, you know, I think we're about six months behind what our initial plan targeted startup was. We expect to be mechanically complete by the end of Q1 and commissioning the asset in Q2. So from an external view, when you think about when commercial volumes are available, the right timeframe for us to articulate is mid-2024. Okay, thank you.

Go right ahead. Sorry.

I was just going to say, David, it's in our highest, best interest to get that asset up and running as soon as we can because the demand is there.

Okay, I had definitely heard your demand comment. I missed the detail on the construction timeline, so thank you for clarifying that. And then this last question, I would just say, I'm just wondering, this may be a subtlety and I may be, you know, just way off, but, you know, in thinking about your development and rollout of the low 1,4-dioxine product, Could you kind of talk about it a little bit maybe from a marketing perspective? In other words, is there kind of a bit of give and take or, you know, I'm trying to think of the right word, but is there an issue where, you know, your customers who receive the newer low 1.4 dioxane version of you know, an intermediate chemical or a formulation that you've been supplying them. Is this kind of the case where, you know, they swap out, you know, kind of their legacy product and use yours as a drop-in replacement? Or, you know, how does that kind of work out just in practical terms? You know, how do you kind of transition your customers from, the traditional version of your product to the new one. And does that cause any, has that caused any of the customer liquidation or the backups or some of the, you know, some of the issues that maybe, you know, have flowed through your results the last quarter or two?

David, great question. The simplest comparison I can think of quickly here is this is like the U.S. gasoline market switching from leaded to unleaded. Okay, so everyone was putting gasoline, or in this case, ether sulfates in their shampoos, and now the regulation changes at a certain date that says it now has to have low 1,4-dioxane. So we've been working with our customers over the last three years to manage that transition from leaded to unleaded gas, right? So from a marketing play, there's not a lot of you know, differentiation, et cetera. It's a regulation change, and it's the removal of that byproduct from our existing franchise that has been the heavy lift. So I hope that answers your question.

Yeah, no, thank you. That was great. Cannibalization was the word I was trying to think of. But no, that's very helpful. I'll stop there, maybe get back in the queue. Thank you. Thank you.

And one moment, please. One moment for our next question. And we have a follow-up question from Vincent Anderson from Stiefel. Your line is now open.

Yeah, thanks. I just had one more quick one. You mentioned, I think, alkoxylation demand in your current product portfolio was a double-digit year-to-date. Is that correct? Correct. Correct. Okay, yeah, I believe the estimates that I've seen typically put demand growth for that family in kind of the mid to high single digit area at best. So can you talk about what's been driving your growth in your portfolio specifically?

Yeah, so it's pretty simple. It's a $265 million investment, tremendous focus from our commercial and R&D organizations. And we are winning out in the marketplace with our product offerings and, more importantly, our service. So there's a lot of formulation activity that's happening within the surfactant industry because of sustainability needs, because of all the supply chain constraints that have happened in 21 and 22. So there's a lot of opportunity to engage with customers on formulation projects. And quite honestly, we're winning.

That's good to hear. And maybe just a quick follow-up on just how you commercialize a plant that size. With the growth that you've seen so far, is it really kind of with a customer mix today that is matched to your current capacity and you'll just have to take what you've learned and start over with the higher volumes and higher volume customers? Or is this going to translate pretty quickly to larger offtake once the plant's up and running?

Yeah, so when that plant starts up, there is a strong baseload demand already existing within our business as we move product around both an internal and external manufacturing co-producer network. So we're pretty confident that we're going to have a good base load upon startup. The transition timeline, so once the commissioning process will take months, there is a lot of different products and a lot of number of qualifications. So, you know, when you're talking about steady, on-stream, continuous demand, it's going to be Q3 at the earliest before that sustainable stream of production is online.

Okay, that's perfect. Thank you very much.

And thank you. One moment, please. And I am showing no further questions. I would now like to turn the call back over to Scott Behrens for closing remarks.

Thank you, Justin.

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

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