Q2 2020 Stepan Co Earnings Call
Greetings and welcome to the Q2 2020 earnings Conference call.
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Afterwards, we will conduct a question answer session.
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As a reminder, this conference is being recorded Wednesday July 22nd 2020.
I would now like to turn the conference over to lease at all Hall, Vice President and Chief Financial Officer. Please go ahead.
Good morning, Thank you for joining a step on company's second quarter 2020 financial review.
Before we begin piece and all that information these calls going to school in contains forward looking statement.
Which I know he started coming back.
These statements involve risks and uncertainties.
Actual results could differ materially.
Loading, notably me that prospects when I was wondering what grade shows no what I'm really not economic on these shows back towards the bad you know where security and Exchange Commission site.
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Now with that I would like to talk to the going over to me so when I step.
<unk>, Chairman, President and Chief Executive Officer.
Thank you Louise good morning, and thank you all for joining gosh.
We hope you and your families are safe and healthy.
Furthermore.
We hope you are cleaning and disinfecting your homes and work spaces often.
Our washing your hands frequently.
At step in and we appreciate the passion and commitment our employees have just fly products that contribute to the fight against the Corona virus.
Despite the challenges of the pandemic and the impact or the first quarter powder power outage at our Millsdale facility step and had a solid first half for the year.
Second quarter adjusted net income was a record $38.3 million or one dollar and 65 cents per diluted share versus $35.1 million or one dollar and 50 cents per diluted share in the prior year.
Surfactant income benefited from strong volumes in the global consumer product end market driven by higher demand for cleaning and disinfecting products as result of Kobin 19th.
Functional product volumes were down.
Mexican operations continue to deliver year over year earnings growth.
Polymer income was down as covert 19, construction project delays and cancellations in Europe, and North America led to reduce rigid polyol volumes, partially offset by strong growth in China.
Lower salak in hydride volume at higher raw material inventory costs.
So she is also contributed to the decline in income.
Our specialty product business results were lower due to order timing differences within our food and flavor business and lower margins within our medium chain triglyceride product line.
Our board of directors declared a quarterly cash dividend on Stepans common stock up 27, and a half centsper share payable on September 15th 2020.
At this point I'd like Luis to walk through a few more details about our second quarter results.
Thank you Queen my comments wouldn't get another follow this slide presentation.
Starting with a fly for totally got think water.
Adjusted net income for the second quarter 2000 on Sweeney, well some rate for $38.3 million.
$1.65 things for that even with that share.
9% increase versus $85.1 million.
$1.50 cents.
Good share into second quarter 2019.
It was adjusted net income used on non-GAAP measures.
We put a wide full reconciliations to comparable GAAP measures. These can be found in appendix two of the presentation.
Dave Dewalt that press release.
Difficulty adjustment to reported net income this quarter consist of adjustments for deferred compensation cash settled Sars unsold minority start cutting expenses.
Adjusted net income for the quarter scheduled to be fair compensation expense of $2.4 million or 10 cents per diluted share.
Prior to the fair compensation expanse of $1.4 million or six cents per diluted share in the same theme here last year.
Have you fair compensation numbers, we presented and that expands related to the company's deferred compensation plan I swear last gosh settle stock appreciation rights, what I would aim.
Because these liabilities change we that movement in the stock price we exclude these items from our what operation on discussion.
Slide five shows that don't thirdly, the total company earnings, but each for the second quarter.
For two last year second quarter on breaks down being getting adjusted net income.
Because this is net income fee, but it's not a he had out on an after tax basis.
We will get we would call that each segment in more detail, but to summarize sort of fact I was up significantly.
Pretty much on its based on People's was down versus the prior year.
Corporate expenses unfold older what higher during the quarter due to acquisition related expenses, how you think staffs raid floating exchange losses.
The company's effective tax rate was 23.9% into first half of 2020.
She was 21.8% into first half of 2019.
Thank you could ease was primarily attributable to lower tax benefits.
Defunding company mix of income in the first half of 2000 on swinney versus 2019.
We expect that full year 2020 effective tax rate to be in the range of 20% to 25%.
Slide six focus on sort of fact on segment results for the quarter.
In fact on net sales were 300 on $32 million for the quarter.
6% increase versus prior year.
Sales volume increased 10%.
Mostly due to higher demand for products sold into the consumer broken market driven by increased demand for cleaning on disinfection first one on watch, but also so we sort of Colby 19.
Partially offsetting this growth was low what are the man in the company's functional throttled end market.
Volume into the global as we pointed out market was up 6% offset by lower demand in the oilfield markets.
Selling prices were up 1% due to product mix on the translation impact by stronger us dollar negatively impacted net sales by 5%.
So in fact on operating income increased $16.4 million or 51% versus prior year.
I Love you to strong sales volume growth.
Record quarterly nothing America.
North America result, increase primarily driven by a strong demanding that consumer product and market driven by calling gain.
But it was broad based on customer mix.
Latin America results were up due to a 5 million open any good improvement in Mexico that even by 33% of voting growth on product mix.
We also had a record of ordering Brasil, despite significant FX headwind.
Europe results, what how yet also due to strong demand for consumer products and double digit growth nonrecourse gaming.
Now turning to polymers on slide seven.
Net sales were $112.4 million into quarter, 20% decrease versus prior year.
Sales volume decreased 13%, primarily due to lower renewed for your volumes in North America and Europe.
These lower demand primarily reflects gabi 19, construction project delays and cancellations.
Sure.
Volumes were down significantly while China up all yield volume grew versus last year.
Selling prices declined 5% on the translation impact of a stronger us dollar negatively impacted sales by 2%.
Body metal Threed income decreased $7.2 million versus the prior year quarter for my lead you to sales volume declined on lower North America Marty.
The lower North America margins reflect hi calls for raw material inventory carryover from the first quarter.
To the power outage incidents.
Companies and Neil sale facility.
Europe results were basically flat with lower renewed for Youll demand you to coffee 19, offset by good old, especially on the volume.
Finally, our China volume grew 41%.
Even by is that on the mining the growing color storage livestock market.
Specialty products net sales were $15.8 million for the quarter, a 17% decrease versus prior year.
Sales volume was flat.
Operating income decreased $2.8 million versus prior year quarter, primarily due to order timing differences within our food on flavor business.
Lower margins within our MCT product line.
Turning to slide eight our balance sheet remains strong we had negative net that water and gas.
Cash balances of $273 million exceeded total debt of $208 million.
Capital spending was $21.5 million food and water versus $19.4 million seem to prior year quarter.
For the full year capital expenditures at expected to be in the range of Andreas on that on $20 million.
Moving to slide nine we believe we have sufficient liquidity to operate in these challenging year term environment.
We have $273 million cash on hand, we have x. local meet at 350 million dollar revolving credit agreement.
Our debt maturity schedule in 2020 $23 million with only 9 million into second half.
Beginning on slide 10, we would now update you on our 22 any uncertainty.
Thank you Luis 2020 will continue to be a difficult year for our world our country and our industry.
We believe Stephens business remains better position to perform than most as we demonstrated in the second quarter.
We continue to prioritize the safety and health of our employees as we deliver products that contribute to the fight against covert 19.
We believe our surfactant volume in the consumer product end markets should remain strong as result of changing consumer habits and increased use of disinfection cleaning and personal wash products.
Our core product lines drove surfactant volume growth of 10% in the second quarter.
Tier two and tier three customers continue to be the center of our strategy, we had strong double digit growth in this space as we added 443, new customers around the world.
Our diversification strategy into functional products continues to be a key priority for Stephens.
Agricultural business grew 6% despite a decrease in that in North America due to high inventory carryover from last year.
We have introduced many new products in this end market and we continue investing in more capacity and new capabilities.
Oil oilfield volume was down due to the collapse in oil prices during the quarter.
We remain optimistic about future opportunities in this segment as we continue to expand our portfolio.
Polymers is having a challenging year given the availability of labor on construction projects and the need for social distancing.
However, the long term prospects for our polymer business remain attractive as energy conservation efforts and more stringent been building codes should increase demand.
We will have higher raw material costs due to the Illinois River lot closure during the second half of 2020.
We continue to work with our insurance carrier to recover costs associated with the first quarter power outage at our Millsdale site.
We remain fully committed to deliver productivity gains across step and have engaged an external consultant to help us improve our supply chain efficiency.
Forecast begun that mill sale, our largest plant and we will extend learnings to all other 18 manufacturing sites overtime.
M&A represents an important tool as a means to deliver meaningful EPS and EBITDA growth over the next few years, given the strength of our balance sheet and the significant cash on hand.
We will continue to identify and pursue acquisition opportunities to fill gaps in our portfolio portfolio and to add new platform Chemistries.
In the quarter, we delivered record results in Mexico, and Brazil, both benefiting from previous acquisitions.
Last week, we signed a definitive agreement to buy Clariant.
Mexican anionic surfactant business and related softened nation equipment.
This will enable us to accelerate growth in the Mexican market.
To date 2020 has been difficult, but rewarding year.
As we have seen our team responded challenges and deliver on opportunities. We have much work left to do this year, but overall, we are optimistic that we will continue to deliver value to you.
Our shareholders.
This concludes our prepared remarks at this time, we'd like to turn the call over for questions. Leah. Please review the instructions for the question portion of today's call.
Thank him if he would like to register a question. Please press the one followed by the foreign your telephone you will hear three tone from technology request. If your question has been answered and you would like to whats driving registration. Please press the one followed by the three.
One moment please for the first question.
Our first question comes from the line of Vincent Anderson with Stifel. Please go ahead.
Good morning, and can really nice job on the quarter everyone.
And why you who fit.
Absolutely agriculture particular.
I wanted to ask maybe it's early but are you hearing any shifts.
With regards to order patterns from some of your surfactants customers, where maybe end users of commercial and industrial cleaning supplies are looking to secure larger or maybe longer dated volume commitments related to structurally higher demand for cleaning this effect disinfection going forward.
I would say the market is tight.
Global market is tight for.
Disinfecting products.
Inventory building or hoarding, if you will but but there is quite frankly not enough material available on the marketplace.
To to really do much of that today.
Interesting. Thank you.
And then just quickly I was hoping to get a little bit more background on the Clara acquisition.
It sounded like this plant for plants are bigger being absorbed been sort of went backwards integrated operations in Mexico.
So is that going to provide an immediate margin uplift or do you plan to carry some of the fixed costs at those assets.
For the purpose of maybe transitioning it saw their product lines.
So the first thing I would say as we have not closed on the acquisition yet so I'm not going to share a lot of details about it but our intent is not to continue to run that site is to buy the business and the equipment at the site and both of those things will be moving to our account effect.
Mexico facility, so we'll be increasing capacity utilization at our contact site and serving our customers well from that that one location.
That's helpful. Thanks.
If I can sneak one more in I'll give everyone else a chance.
And Richard Polyol growth in China.
Were you able to gauge just how much of this demand increases is coming from the Buildout of factory farms and cold storage versus maybe more general trends in construction demand or shifts on the building efficiency standards.
Virtually all our business and all of our growth is being driven by cold storage and livestock.
Activity, we do not have positioned in the traditional construction market due to Chinese regulations today.
On Vincent this is really what I will add east between call. It a storage on livestock what were seeing is roughly equal SEC.
Between those two end market.
Very helpful. Thank you.
Our next question comes from the line of Mike Harrison with Seaport Global Securities. Please proceed.
Hi, good morning nice quarter.
Good morning, Mike.
Well I was wondering Quinn if you can talk a little bit above the margin strikes that you saw in surfactants, maybe help us understand.
How much of that maybe is mixed benefits.
From a higher margins associated with products for disinfection.
Versus how much maybe is related to plant utilization I assume that your plants are running about as flat out as they have in some time right now.
Yes in what I would say is when we look at the performance of our surfactant business overall.
Volume is driving a significant part of the.
Benefit both from just additional sales, but also in higher plant utilization, but we are benefiting from an improved product mix.
So we look at our kind of our sulfonation being our core business, but if we look at our kind of at our next four.
Product lines that we sell into that marketplace, including the amp. The terex, which would include a mean oxides and de chains and.
In addition to Biocidal clots in at Foxwoods kind of all of those product lines, including sulfonation are up significantly, but but the other ones.
That have typically have a higher margin than.
Than our sulfonation business those product lines up on average are up about 22%. So so we are benefiting significantly from an improved product mix and more volume of those products that we're selling in the marketplace.
Some of that improvement is actually being driven by an improved customer mix with our 232 tier or tier two tier three strategy.
So if we look at that business growth in that segment of customers is also up strong double digits as well. So we feel pretty good about kind of the customer mix and product mix going forward, and that's really where the margin improvements coming from.
Alright. Thank you and then I saw that the surfactant pricing was up by about six cents in the second quarter. I think you mentioned that that was mostly mix driven but just given.
The tight supply and demand dynamics that you're seeing should receipts or expect to see some additional price.
Come into the surfactants business in Q3.
I think as we look at the performance of the business overall.
Price customer mix and product mix.
Yes.
Between the three of those or maybe some limited upside potential.
But.
Product mix was generally pretty healthy in Q2 and.
Yes.
That's much more important than pricing at this point in time, yes, Mike I would not also raw material dynamics writings in some cases, where raw materials at all we would need to pass that through.
Second our sole so thats another component of that whole is Friday, but that even if the mix is probably look on customer mix.
Oh I wasn't actually gets to my next question, which is just understanding these raw material dynamics I think you mentioned, particularly in the polymers business.
That you saw higher raws flowing through the PML.
During the second quarter.
Have we burned through that high cost the inventory at this point or is there still some additional high cost just trying to understand maybe.
How much sequential tailwind we could see.
Well material cost normalize.
The vast majority of that raw material bubble. If you will has been moved through the system I would anticipate that we've got maybe another million dollars to kind of work its way through the system, but.
We've significantly reduce that vulnerability.
In the second quarter.
Alright, and then.
Last question for me is the Illinois River Lock maintenance project I think now now that that's getting closer I don't know if it started yet or not.
Yes.
It has started in the river is supposed to be close for a period of three months.
Last week the.
The Army Corps of Engineers announced that they are two weeks.
On schedule Weve.
Dissipated that will be down six months, we're hoping that will be closer to the three and a half to for four months as we go forward on I would add like that the previous estimates that we have shared continuously the same with bank of run a 3 million increasing cost because all of these on DVT and again, we hold.
Got it stays in the three and half to four months, if any for longer than that cost could be a need to be higher.
So the 3 million dollar in higher $3 million and higher costs is based on the current assumption of three and a half the four month or quarter.
Understood Alright, thanks, gentlemen.
Right.
So that 3 million that we have Mike that 3 million that we have shares is based on our plan.
Six month, yet, but again that 3 million east on estimate on dotcom Dwight I need to beat we will provide more clarity when we close Q3.
What we're seeing.
Our next question comes from the line of David Silver with CL King. Please go ahead.
Yes.
Yeah, Hi, Thank you good morning.
Good morning, I guess, probably.
Yeah. Thank you.
So I guess I wanted to maybe just start out nicely you have addressed this in part, but I was just hoping for a more comprehensive view, but I.
I was.
Looking at the Delta in the surfactants area in terms of revenue was about 19 million higher year over year.
Operating income was up more than 16 million. So you did say.
The improved customer mix I was just wondering to what extent did operating efficiency or the lack of disruptions that either millsdale are caught APAC or maybe other facilities in other words, what kind of a role did.
Just pure operational efficiency inside the plant gate.
Play in boosting year over year operating income.
I don't have the number in a caught APAC, but kind of tech was down in last year's second quarter scope. So there is a and we were spending expense dollars during that period too.
Remediate fix this site you'll recall right.
Before we received an insurance settlement.
So so there is a shipment timing difference in terms of our performance in Mexico overall, our business in Mexico is up significantly we're kind of back on track with our business case plans.
From 2018, when we purchased the site so we feel good about.
Where we're going in Mexico and at that facility.
Yes, that's why we make big comment about 5 million that'll be a $16 million. So in fact on 5 million. These coming from mixing fall Annies, because you are comparing versus not very low low base. Because we were not open trading at that time, that's why don't the diversity of 16 million off on of course, Dan, but autos on customer mix in North America.
No that regions and last year's Q2 relative to our Millsdale sites and other sites that we have around the world. We didnt have any significant operational issues. So that performance for the balance of the increase is a function of the volume growth primarily the volume growth that we have.
Okay, great. Thank you for that to that detail.
I was hoping to get honed in on your surfactants business a little bit.
With a little bit finer view, but.
You know certainly you had 10% volume growth and I'm kind of scratching my head I mean, I'm just wondering how that compares.
To maybe over all industry growth.
And you did provide a little bit of detail with the fotonation growth versus the non sulfonation areas.
But you know I'm just wondering.
In terms of ability to meet ongoing demand increases with the assets you have in place now I mean.
You mentioned tight supply is stepping close to running full out or maybe I don't know in the m. for tier Ics, which you've indicated or more of a batch.
Process is there potentially significant capability would be assets in place.
To kind of ramp up ramp up production in a.
In response to continued growth, let's say in the Handwashing kind of a disinfection demand. Thank you guys.
So.
Let me start by saying from a sulfonation perspective in North America, we have sufficient capacity to support the market needs.
As we look at our asked Sulfonation asked assets on a global basis.
We do have some excess capacity in Mexico that will allow us to absorb the.
The Clariant acquisition.
But if we look at our other assets sulfonation assets in the UK.
In Brazil, and others, where I'd say, we're relatively full or PROCHIEVE approaching approaching relatively full.
So we so.
Kind of good about that from a capacity utilization perspective, you mentioned dampened tariffs and protect is a batch process and I would say.
An apple Terex globally, we are tight we are looking at debottlenecking efforts and have and are producing more today than we have in the past.
We will add and replace an existing reactor in feels borough and idled reactor in our feels grove facility to add new capabilities in North America will also add additional after terex and specifically I mean oxide capabilities.
And by taking advantage of an idle reactor in our Mexican economy Peck facility.
And so we're looking at our asset utilization on a global basis.
Because they are batch processes, we do have some flexibility.
Particularly.
To make more I mean oxides butanes requires special metallurgy and so so is that we're looking at that as well from a bias cytof lottery, which isn't disinfectant product. We have plans in place to add additional reactor capabilities to our Mehta Morris, Mexico facility and that will provide.
Additional capacity to support the North American and Mexican Latin American markets.
That that reactor will be up.
Late Q late Q4 of this year so.
So we are taking steps to support our.
Profitable product lines as appropriate around our global network.
And just to clarify but the in that current Capex budget on changes you know 100 million to 120 that does include the growth Capex you just stated through Mytomorrows.
Is that yes, do I understand that correctly, that's not incremental okay.
That's correct.
Yes, no no. Thank you.
And then I did have one.
Big picture question on I guess your policies with regards to FX, so I'm going to be pulling a warn you an advance this might seem a little scatter shot from pulling.
Some data points from a couple of different areas.
You mentioned that FX is reduced your.
Reported EPS by believe 11 cents a share here and what was a record quarter. So.
In my opinion that was pretty significant than.
And then you also mentioned.
I believe it was 443, new customers, which sounds like a lot to me and I'm, assuming most of those are offshore.
So you know I'm, just kind of scratching my head and from a global perspective from a business planning perspective.
That does the growth in the market tilted towards offshore and you know the relatively high exposure you have currently to the current mix of currencies that you'd deal and I guess Latin America in particular, most recently I mean, what is what is the right approach or are you.
Taking a harder look at.
Implementing maybe a more sophisticated more global approach with the different emphasis on on certain currencies.
As you move forward in this post pandemic environment I, sorry for the you know.
Sorry for the disjointed comments, but but that was kind of my question how does.
Your policy towards managing your FX exposures change.
With.
The evolving business outlook in especially post pandemic. Thank you.
Yes, David is this me what I would say that the majority of FX impacts.
You saw in the quarters on the on the opened 18 side on the operating income side. The majority of the impact was in Latin America. As you rightly mentioned at the biggest actually was Brazil, and that's why we weren't extremely happy to that even another record of ordering but I see on despite the significant.
Thanks headwinds that we had in that market as you know.
Realize went up from $4.
Reality for though not all the way to seeks you went back down now is around 535 40, but that was the biggest impact in the in the quarter undertake on one whats Mexico.
If you remember I mean that Mexican pesos went on to wait to 25 26 on now settled back in the into 20 to 23.
Range, and Weve, EBITDA rank or on record of water.
In Mexico Oswell, despite FX for that.
We manage our hardware based as well to US based company and we will continue looking at dollars.
Despite.
Hope at 18.
Companies, we want to make the dollars and now we will we will manage what pricing.
I would have cost structure accordingly, right.
The other thing that I would say that out.
When you think about FX exposure showed on day on the balance sheet, we have we how good of hedging program.
On the world on actually that will since more health.
In Q2, we we had a small helping hedging program that we have instituting in many of our market saw so so we manage these up.
They do they basis on a weekly basis on on and again, we want to make sure that we've been lever the margins on the on the dollars Dot out now we are targeting in all up or not I would operations outside the U.S.
Okay, and if you don't mind just one last question this would be related to your businesses.
In country in Mexico, Matamoros cut the pack.
I guess, Brazil.
Those two countries you don't have suffered the from the pandemic two is pretty severe extent and there has been some disruption.
You know to two Workforces and whatnot can you just give us a quick review of.
The status of your Workforces in Mexico, and Brazil on weather.
We should expect any disruptions or any difficulty in.
Maintaining full operations, let's say over the next quarter or too. Thank you.
So.
Let me let me first.
Kind of.
Give you an overview of what Stepan is doing in terms of coven 19.
Our and we've established a set of principles and I won't go through all of those here today, but first and most importantly, what we've said is that the health and safety of our employees is number one number to what we've said is the supply of products that can help.
Contribute to the solution of covert 19, which are cleaning products are disinfection products in our personal wash products.
We will prioritize the sale and the manufacture and sale of those.
Versus versus others.
Next priority that we've established says that we want to.
Continue to and keep our place employed and we want to continue to provide.
Health benefits to them and position them position us and them.
For the post spin dynamic world, So I'm pleased to say that.
Generally speaking we've been able to keep our employees very very healthy I believe the current numbers. We've had 32 employees affected on a global basis.
The answer here and 24 of those 32 are back at work no problem.
Within the past week, we've had.
For people that are metamorphosis, Mexico facility being diagnosed with Cove it.
And we've had no impact to the operations as result of that.
We have a disciplined process.
As it relates to.
Quarantining and tracing the activity of the employees and.
So if we do have an incident today in Brazil, I believe we have one employee that has been diagnosed in and.
Currently self quarantine we've had a couple other instances in Brazil over the last three months all of those employees are back in healthy.
At work.
Most most of our admin employees around the world are still working from home our plants, all 18 of them are up and running and.
And Thats the biggest vulnerability that we have as an organization is and.
Just if.
If we have a significant outbreak at one of our sites and apps closed down that's a big deal and.
Big deal for our employees, it's a big deal for us as an organization and and so far we've been able.
With everybody contributing and everybody kind of watching out for themselves and for each other we've been able to keep everybody safe.
We feel good about the policies and practices that we have ongoing throughout the throughout the company.
Jamie what do anything that I will add east squeezed mention and Thats. The biggest race in the whole supply chain on nodal not only in d. seem to see but of course on could I was hoping to city because he's not only a step on you can have pieces we.
On supply you can happen issue, we talked customer plus some are manufacturing site. So that the does the biggest splitting their liability in the whole supply chain and we are just one piece of it.
Yeah, no. Thank you for kind of bringing the some of those headline issues down to ground level I appreciate the additional color.
Thanks very much.
Welcome.
Our next question comes from the line of Vincent Anderson with Stifel. Please proceed.
Yes, Thanks Jen.
We go back to your comments on on pricing upside surfactants. It seems like I can interpret that as may be are more focused on using this opportunity to improve your longer term customer mix via market share gains instead of taking price or am I thinking about that wrong.
[music].
Okay.
I think the bigger benefit for the company is to supply.
Supply of more diverse robust value added product mix rather than pricing at this point in time.
That's not to say that were noisy ignoring pricing pricing is an important component of it but in today's world.
We want to be able to help our customers solve problems out in the marketplace. We want to help them facilitate their delivery of solutions to consumers around the world.
And that's the most important thing that we're concentrating on at this point in time.
Makes sense. Thank you.
And then just quickly you X you mentioned that you grew in specialty Polyols.
What exactly drove that especially in the Twoq you environment that we had and how repeatable do you expect that to be going forward.
Was specifically we grew our specialty polyol business in Europe and.
Our year our business in Europe is more tied to adhesives and so there was significant adhesive growth in the marketplace as a result of.
Food packaging.
So.
As people were.
I'm not going out to eat as often as.
Fighting a little more processed food or package food the adhesive component of our specialty Polyol business group. In addition to the that we'd have a new application.
In China, which is helping that business in that sense that we're supplying some specialty polyols into the face mask.
Market in China.
So it's helpful. Thanks, and I promise just one more.
Can you remind us if you plan to told the manufacturing of the KMC O portfolio for now and this 2020 launch the planned given the oil price environment.
Thanks for me to assume that you've had good customer feedback or even some contracts in place to ensure demand that soon.
I think the first step is to make sure that we can replicate the product line and so.
Supply and meet the customer's needs.
From a product perspective, and so right now we're working our target is to have five products that are qualified.
Throughout this year and introduce those back to the marketplace. So.
Our intent is to introduce five products in 2021.
We're not anticipating significant contribution from that business until 2022.
Done anything that I will not be incentives that we have hot very good feedback from the customer sites.
So will we will continue replicating our processes on making sure that we have the supply chain rating for the future.
On the consumer side very positive very positive engagements already.
That's great. Thanks again.
Our next question comes from the line of Mike Harrison see Perclot for Securities. Please go ahead.
Hi, just a couple more for me or on the Richard Polyol business.
You mentioned the project delays that we're going on in North America in Europe.
Can you comment in a little more detail on how those volumes trended maybe in the May to June July timeframe.
And then kind of a separate question. If we're seeing delays now because this is more of a maintenance and re roofing.
Type of application because that means that we potentially have some pent up demand.
Either later this year going into 2021.
So.
What I would say is that.
We anticipate our polyol volumes to be down in Q3 about the same order of magnitude that it was down in Q2, maybe maybe down a little bit less.
We think Europe is going to perform better than North America, because we had some pent up demand as I mentioned earlier.
Some of the well some of the school business was pulled forward in the United States in Q2, I'm, sorry in Q1 versus Q2, because as the schools started to shut down they continue to do the roofing project.
Most of our customers are kind of saying 2020 kind of put that year, aside and wheat, and they're anticipating kind of going back to a 2019 base load and then start to look at 3%, 4% growth from 2019 perspective, we're hearing that from a.
A number of customers around the world. So thats kind of what we're putting in our planning documents.
Alright, and then the other thing I wanted to ask about is you mentioned, bringing in some third party supply chain consultants.
Can you just talk about what the opportunity could be.
From improving supply chain efficiency from both a pea and dollar margin perspective, as well as maybe a working capital perspective.
Yes, I would say kind of from an expense perspective, we're looking at trying to generate an additional $10 million of operating income in 2021 and.
And that kind of we'll look for additional opportunities beyond that as we go forward.
And begin to.
Extend that program on a global basis.
We're early on in the process. We are very early on I might have gotten but we would not have started the process. If we didn't think we could add at least $10 million of operating income.
Seeing that as you say these is going to be BNL and he's going out is going to be also cash because we would we will try to improve our inventories as well.
All right understood. Thanks very much.
We do not have a follow up question from David Silver C.L. King. Please proceed.
No I take it personally if I don't get the last question and just just kidding.
I had a quick I had just to follow up question on the 443, new customers and your 10% volume growth in surfactant.
So just in general I I'm wondering if it was the case, where you continued to meet full contract requirements for your existing customer base.
And then added the new customers 443, or whatever or is this the case.
My understanding is most supply contracts.
Do you have some flexibility a minimum required volume ship.
Had a maximum two which the specified contract terms supply.
And I'm just wondering was the second quarter a quarter, where you know you were.
Applying your existing customer base, a little bit less than the Max in order to free up volumes for the new customers or is this one where with the capacity you have now you were able to meet all customer commitments you know in full so I'm, just just trying to wonder what what type of adjustments.
You make kind of in real time.
Bonds to the to the.
Net new demand that you're trying to service. Thank you. So so relative to the 443, new customers, but we've said is that that as part of our tier two tier three acquisition of new customers. So those are smaller customers on a global basis that by realm.
Typically small volumes.
On a global basis. So so so that is not that that is not a barrier to us servicing our tier one customers on a global basis.
As the vast majority of our product lines, we were able to.
Sells the full volumes that we needed to to our cost to customers on a global basis, we did have and one of our amp and Tehrik product lines, we did.
Our need to play some customers on allocation, where we're shipping at 85% allocation to our customers due to some raw material availability issues. We are trying to work with our supplier base and with our customers looking at in some cases, some re formulation to more readily.
The available.
Products that can be substituted.
In addition to that we're also working on it with our supplier base to try to get additional quantities.
Made there are some expansion for those.
Some of those product lines that are enticed by today.
From our supplier base that will become available and Q1 of 2021 so.
We've got some issues in a limited part of our portfolio that we're working through with our customers.
That's great. Thank you very much.
There are no further questions at this time.
Okay. Thank you very much for joining us on todays call. We appreciate your interest and ownership and Stepan company. We look forward to reporting to you on our third quarter 2020 call have a great safe healthy day. Thank you.
That does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect your line.
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