Q2 2022 Stepan Co Earnings Call
Readings and welcome to the Stepan Company second quarter 2022 results call.
Start with a presentation all lines will be in a listen only mode. Afterwards, we will conduct a question and answer session at that time. If you have a question. Please press the one followed by the four on your telephone.
If at any time during the conference you need to reach an operator, Please press star zero.
I should remind you today's call is being recorded Wednesday July 27, 2022, I would now like to turn the conference over to Luis Rojo, Vice President and Chief Financial Officer. Please go ahead Sir.
Good morning, and thank you for joining Stepan company second quarter 2022 financial review.
Before we begin please note that information in this conference call contains forward looking statements, which are not historical fact, these statements involve risks and uncertainties that could cause actual results to differ materially.
Clearly, but not limited to prospects for our foreign operations global and regional economic conditions and factors detailed in our Securities and Exchange Commission filings.
Whether a drug joining us online or over the phone. We encourage you to review the Investor Slide presentation, which we have made available at www Stepan com under the investors section of our website we.
We make these slides available at approximately the same time, what the earnings release is issued.
And we hope that you find information and perspective helpful.
With that I would like to turn the call over to Mr. Scott <unk>, our president and Chief Executive Officer.
Thank you Luis and good morning, and thank all of you for joining us today to discuss our second quarter results.
To begin I will share our second quarter highlights and strategy outlook and Luis will provide additional details on our financial results for the quarter.
The second quarter continued to be a challenging operating environment, given continued raw material and transportation constraints cost inflation and global macroeconomic uncertainties.
Nonetheless, I am proud of how our team has continued to overcome these challenges by delivering record results for the second quarter.
<unk> net income reached a record of $52 $1 billion or $2.26 per diluted share. While adjusted net income was a record $53 million or $2 30 per diluted share.
Surfactant operating income was $48 $2 million compared to $45 9 million in the prior year quarter.
Growth was mainly driven by a better product and cuts customer mix, but was partially offset by a 3% decline in global sales volume related to commodity laundry.
Lower commodity laundry volumes were the result of continued raw material supply constraints in North America, and lower overall demand in Latin America.
The sales volume decline was driven by laundry products within the consumer products business, partially offset by very strong functional products volume growth.
Our polymer segment reached a record operating income of $33 9 billion compared.
Compared to $23 million in the prior year, which represents a 47% increase.
Margin recovery improved mix and a 2% increase in global volume were responsible for the record quarter.
Our specialty products segment also had a record quarter growing operating income by 41% driven by improved margins within the MCT product line.
Our board of directors declared a quarterly cash dividend on Stephens common stock of $33 five per share payable on September 15th 2022.
During the second quarter of 2022, the company paid $7 $5 billion of dividends to shareholders and repurchased $7 million of company stock.
For the first half of 2022, the company paid $15 million in dividends and repurchased $17 million of company stock.
Stefan has increased its dividend for 54 consecutive years the company still has $133 million remaining under our share repurchase program authorized.
Looking forward, we believe the operational environment will remain challenging. However, we are confident that we can deliver a good year as demand for our products remains healthy.
At this point I would like Luis to walk through a few more details about our second quarter results. Thank you Scott My comments will generally follow the slide presentation, let's start with slide four to recap the quarter adjusted net income for the second quarter of 2022, while <unk> $53 million or $2.
Earnings per diluted share versus $42 2 million or $1 81 per diluted share for the second quarter of 2021.
Because adjusted net income is a non-GAAP measure we provide full reconciliations to the comparable GAAP measures and these can be found in <unk> two of the presentation and table two of the press release.
Cyclically adjusted net income for the second quarter exclude deferred compensation expense of <unk> 6 million compared.
Compared to last years income of $1 $1 million in order to exclude minor changes in our environmental reserve and restructuring costs.
The deferred compensation figures represent the net income related to the company's deferred compensation plan as well as cash settled stock application will drive for our employees.
Because these liabilities change with the movement in the stock price, we exclude this item from operational discussion slide.
Slide five shows the total company's net income bridge for the second quarter compared to second quarter last year and breaks down the increase in adjusted net income because this is net income the figures noted here at on an after tax basis, we will cover each segment in more detail, but to summarize we delivered excellent income growth in all.
Our segments.
Corporate and all other expenses, which are not allocated to the business segments were lower during the quarter, mainly due to lower acquisition related expenses. The company effective tax rate was 25% in the second quarter, which was similar to last year. We continue to expect the full year 2022.
This tax rate to be in the range of 24% to 26%.
Slide six focuses on surfactant segment results for the quarter. So in fact, our net sales were $485 million at 26% increase versus the prior year selling prices increased 32%, primarily due to the pass through of higher raw material and logistic costs and improved product and customer mix.
Volume decreased 3% due to supply chain constraints, mainly raw material availability issues and lower commodity laundry demand in Latin America.
This was partially offset by higher global demand and functional products personal care and institutional cleaning and markets.
Foreign currency translation negatively impacted net sales by 3%.
So the fact that operating income for the quarter was $48 2 million, which represents a 5% growth versus prior year. This increase was driven by improved product and customer mix, mostly in North America, and Europe , Latin America was down due to lower volumes and commodity laundry products now.
Now turning to polymers on slide seven net sales were $239 million.
25% from the same quarter last year, selling prices increased 30% due to the pass through of higher raw material and logistics costs and recovering our margins volte.
Volume increased 2% driven by a 5% growth in global credit volume, which was partially offset by lower demand and lower volumes in our specialty polyol business due to supply chain challenges.
Foreign currency translation negatively impacted net sales by 7%.
<unk> delivered a record operating income of $33 9 million, which represents a 47% increase is primarily due to margin recovery improved mix and volume growth.
Both North America, and Europe at excellent results in the quarter the polymer business in China was slightly down due to COVID-19 load balancer and restrictions.
Finally, our specialty products also had a record quarter delivering $9 $9 million of operating income, which represents a 41% increase.
<unk> income improvement was primarily attributable to a favorable customer mix and improved margins within our <unk> product line.
Turning to slide eight our balance sheet remains strong and we have we have ample liquidity to invest in the business our leverage and interest coverage ratios continues at very healthy levels during the quarter cash from operations was $84 million.
And we deployed $123 million again, capex investments dividend payment.
Payments share repurchases and higher working capital requirements due to the strength of strong sales growth.
We continue to project full year capital spending in the range of $350 million to $375 million.
Inclusive of our one for dialysis project and Pasadena investments in the U S.
Beginning on slide nine as Scott will now update you on our 2022, our strategic priorities.
Thank you Luis in addition to delivering another record quarter, we continued to advance our strategic priorities.
The following two slides capture our strategic priorities and vision for a cleaner healthier and more energy efficient world with our customers' preferences in mind.
Our diversification strategy and our functional products, including agricultural and oilfield chemicals continues to be a key priority for steffan are global agricultural volumes increased strong double digits in the second quarter of this year.
Hi, agricultural commodity prices, coupled with increased planted acreage in 2022 drove a strong season for crop protection sales in North America, while elevated agricultural commodity prices and a favorable currency impact on exports are driving increased planted acreage in Brazil.
Oilfield volumes also increased in the second quarter demand for our products used in oilfields, including Biocidal remains robust as crude prices remained elevated at around $100 per barrel.
We continue with the integration and supply chain planning of the Kimco oilfield Demulsify, our product line, which we plan to relaunch in the second half of this year, we remain optimistic about future opportunities in this business as elevated crude prices should encourage increased oil production and the use of production and stimulation chemicals.
Our mills deal plant continues to be one of our key priorities, we are accelerating investments to improve productivity and reliability and to increase capacity through debottlenecking projects. These investments will continue throughout the year and we expect to see benefits from our efforts and investments starting next year.
Moving to slide 11 work continues on our major investment in a new <unk> constellation production facility in Pasadena, Texas. This asset will be a flexible state of the art multi reactor facility with approximately 75000 tons of annual capacity.
It will provide strategic.
It will provide strategically located capacity and capability for long term specialty approximate growth across our strategic growth end markets, including agriculture oilfield construction and household institutional cleaning.
Given the current supply chain disruptions and tight labor market startup of the Pasadena facility will be delayed into the first quarter of 2024 and also due to cost inflation and the disruption as previously mentioned total project cost is now projected to be 10% higher.
The underlining our constellation business that supports the Pasadena investment grew very strong double digits and at margins above our original projections, we remain confident and excited about the investment in Pasadena.
As you know, we are increasing north American capability and capacity to produce either sulfates that meet new regulatory limits.
One four dioxane by January 2023 deadline.
<unk> is a minor byproduct generated in the manufacturer of either Sulfates surfactants, which are key cleaning and forming ingredients used in consumer product formulations step. It is working to supply customers with either sulfates that meet these new regulatory requirements.
Given the strength of our balance sheet acquisition opportunities that align with our growth and diversification diversification strategy remain a priority.
We are excited about our progress at our fermentation product platform.
Our priority remains the development and commercialization of Ramen Olympics, our first anticipated <unk> an offering.
We believe this new bio based product family has significant opportunities in several important end markets for stepan, including agricultural chemicals consumer cleaning personal care and oilfield.
Our new fermentation laboratory, which opened in February continues to make good progress in regards to process development and we expect to start providing samples to customers later this year.
As we wrap up comments on the quarter, we delivered record second quarter and first half results driven by the effort and teamwork of our employees around the globe I am proud of our team's resiliency in delivering record earnings. Despite the continued challenging supply environment and inflationary impacts.
Looking forward, we believe that surfactant volume within the functional product end markets, including agricultural and oilfield will continue growing given the favorable current commodity pricing environment.
We also expect to continue growing in the personal care and institutional cleaning and markets. We continue forecasting consumer products demand to remain healthy and around current levels.
Within our polymers business, we believe we will deliver full year growth over the prior year, the future prospects for rigid polyol remain attractive, especially when considering the energy conservation efforts and more stringent building codes.
Lastly, we believe that our results within the specialty products segment will continue to improve on a year over year basis.
In closing external supply chain challenges and inflationary pressures clearly will remain as headwinds in our business. However, we are cautiously optimistic about the balance of the year.
This concludes our prepared remarks at this time, we would like to turn the call over for questions.
<unk>. Please review the instructions for the question portion of today's call.
Thank you.
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One moment please for our first question.
And our first question comes from the line of Vincent Anderson with Stifel. Please go ahead.
Yes, good morning.
So I'm wondering does this start.
Okay.
I wanted to start on surfactants.
Maybe just if you're willing a rough idea of the volume impact from wandering detergents compared to the growth in functional products and then just kind of generally how much of the decline maybe an assay utilization on laundry.
Versus just price versus raw material spreads is always where the bigger impact on on margins in the quarter.
Hi, Vincent this is Luke.
As we mentioned in the call the volume on for Blowers for factor <unk> was down 3%.
Of course as you know.
A portion of commodity laundry. Our total volume is a big is a big percentage, that's why wouldn't that be since these down youll see the total business down.
But we weren't able to offset a lot of that with functional products waived personal care with institutional cleaning growing our tier two tier three channel.
So we haven't provided publicly the details of how much is our is our laundry business, but but the important board can also use that.
We were constrained in several raw materials, especially in North America. So we were not able to supply the whole the whole mark So where we saw demand destruction is more in the Latin America business.
At the end as you know that's up significantly lower portion of our total business.
And the good news is that we are growing in the high margin business and the high functional broad oaks, our institutional cleaning and all of that.
Okay Yeah.
And so then with.
With what it should have been a pretty positive mix shift then at the very least where would most of the margin degradation of come from them.
Yes, let me expand a lead a beat on that as well because if you look historically if you look at 567 year data you will always see the second in the second quarter margins for us with fact us a little bit lower than Q1.
<unk> historical VAT.
Yes, you can take a look at our.
Our absolute volumes are lower so the fixed cost impact.
The margin piece and that's why you saw you saw us with <unk> up 10% of sales.
Our margins in Q2 around one point is Joe Zee each of the volume effect and as you know.
We have we are growing.
<unk> seen efficiently high year, then we can grow our bottom line and our dollar per pound margin. So.
That's the mathematical effect of why Youll go from 11 and a half.
Margins in Q1 to 10% in Q2 is basically the lower.
Volumes and the fact that we are increasing prices faster than in previous quarters.
Okay, Alright, that's very helpful. I appreciate it.
If I could just ask about Pasadena with the delay there I mean this is not.
This is not an <unk>.
Emergency situation, yet, but maybe it's worth just talking about your contract with the engineering and construction provider.
But what kind of.
Ranges have they have they promised in terms of cost and timing, where if you were to exceed those you might have some contractual recourse.
To reclaim some costs associated with the project is there anything there that you'd be willing to share at this stage.
No Vincent was you know what.
I would say as you know.
In today's environment building.
Ager capital investment is a difficult environment. So what we're experiencing in terms of this delay which is around a quarter.
Three months.
And 10% is not unexpected in today's environment. So we remain committed to the project we have a great.
Working relationship with the general contractor and this is <unk>.
No no.
Additional issues going forward.
Okay fair enough.
If I could ask just one more quick one here.
Kept a pretty good handle on SG&A. So far this year, despite wage inflation and the broader trajectory of sales and profitability.
Are there any specific items or timing considerations that is specifically helped the first half that could revert in the second half or is this just good cost control and we can kind of expect this level going forward.
Look as I mentioned in my prepared remarks remember last year in the first half first half we had a lot of expenses due to the in feedstock acquisition and integration. So we had a.
That's kind of a one time that is helping <unk>. The comparison here, but yeah, we remain committed to be very cost conscious and continue improving our productivity and our.
<unk> Air Force in SG&A and you saw that we're investing on R&D. So we are very committed to.
To continue investing in the most important battle based DNA, which is which is our R&D investments.
Alright, Thanks, a lot.
Someone else have a turn.
Our next question comes from the line of Mike Harrison with Seaport Research Partners. Please go ahead.
Hi, good morning, congratulations on a nice quarter.
Thanks, Mike Thanks, Mike.
Oh.
So I'm, hoping that we could start with the polymers business.
Specifically talk about what you guys are seeing in terms of price versus cost.
The margin performance there surprised a lot of people. So just trying to get a better sense of what those margin drivers are is it primarily price cost or are there. Some other things going on trying to get a sense of how sustainable.
<unk> margin performance could be going forward.
Yes, Thank you Mike.
Great question of course, our polymer businesses.
Business for all I do know that that out also some seasonality right.
You know that this business by quarter. Thanks.
Thanks to have a very clear seasonality because of construction projects during the winter. So youll typically see lower margins in Q4.
Because you have all the fixed cost. So so you need to you need to <unk>.
And make sure that youll see the numbers by quarter, but if I think about the 14, 2% that we just delivered in Q2 in polymers.
As you know I mean, we are we are taking the pricing actions that we needed to take and raw material prices.
Are they starting to the slope of increase is starting to come lower and lower so we are just recovering the margins that we used to have in this business and we're not even there yet.
You go back in our history, you know that this business used to have even even higher margin. So we feel very good with the work that the polymers team have deliver in the first half recovering.
Our margins from last year.
$14 two is a good number but if you look at it historically, we are not enough in the peak yet.
We will continue monitoring the market the raw material prices and we will continue making adjustments as appropriate.
Alright, and then.
Just in terms of overall demand by region I'm, particularly interested in what Youre seeing in Europe .
At this point are there any signs of declining demand trends either in surfactants or in your polymers business.
Yes, Mike.
I would say it's.
It's a little bit early to have a really good look.
We have obviously are staying very close to our customers.
On the surfactant side, our Q2 volume performance.
Was very well in line with with Q1 other than some seasonality within the markets.
So we have not seen any signs or I've heard any signs of a slowdown to this point on the <unk>.
Polymer side, I'd say, there's a little more.
Chatter and concerns about second half.
Demand from the marketplace.
And I think it's in that general universe of I think there is there is a lot of talk about talking ourselves into a recession.
Our growing signs that that is actually maybe a higher probability and closer to reality.
Every week.
As a new dynamic in terms of understanding where the markets are going but.
Overall, we still feel pretty good about our business.
But that could change in a matter of weeks or months, depending on what happens in Europe over the next 30 days, yes, Yes, my view the volatility will be will be high.
Based on where we are now we feel we are cautiously optimistic about the second half, but Europe is still a big question Mark.
Yes, I guess with that in mind can you maybe talk about the contingency plans that you're putting in place in case, we see some natural gas or other energy rationing happened in Europe .
And do you have any ballpark figure on how much of your sales are tied to plants in Europe that rely on natural gas for energy or for power.
Yes, Mike Let me, let me give you a kind of a high level perspective of contingency.
So within our polymers business, we do have two main manufacturing sites, we have three manufacturing sites in total in Europe . Two main sites that are related to the rigid polyol production.
And at those sites, we are actively looking at contingency plans to switch over utility capabilities to fuel oil <unk> coal and some of our heating.
Their requirements.
But from a larger perspective, we do have a global network of rigid polyol manufacturing capabilities with plants in China, and the U S and we do believe that we could supplement supply into Europe from our global network to.
To a level that depending on what the unforeseen or unknown allocation restrictions are going to be which are not.
Well documented are understood by industry by country, Yes, we feel pretty good that we've got supply across our global network to supplement potentially any shortfalls that that could it could be.
Put upon us.
And it also depends on what happens with our customers as well and their ability to get natural gas and energy for their lamination production lines.
Okay.
Alright, and that commentary was specific to polymers any concerns on the surfactant side.
No I would say.
There is risk we do have two main surfactant plants in Europe , one in the UK and one in France, I think France.
We're not as concerned as some of the northern European countries and in <unk>.
The uk's. So far is we're not seeing any significant concerns growing yet, but once again that could change we need to understand what the European Commission's allocation process. If there is going to look like.
Yes, I understand it's all hypothetical so I appreciate the detail there. The last question I have is on the specialty business. We don't talk about it very much but this is the second year in a row that you guys have shown a very strong surprisingly strong Q2.
Can you give some additional color I guess on the seasonality of that business, it's always relatively lumpy or challenging I guess for us to model.
Right.
In the context, maybe the way to ask this question is in the context of doing about $10 million of operating income in the second quarter, how should we think about the third and fourth quarter looking better from an op income standpoint.
Yes, so Mike.
This business has had some significant constraints in key raw materials over the last two years and that's what's been driving some of the lumpy.
Earnings as well as the sales volumes throughout the last eight quarters.
Yes.
Q2, I would say is a little bit of anomaly in the fact that we.
We did get access to some unanticipated key raw material, which allowed us to clear out some back orders on some very high margin.
Packaged goods inventory, which we were not able to service in the prior quarters. So I think you saw really favorable product or I should say customer mix in Q2 that.
It was a large result draw.
Driver for the results and earnings I would not expect that level of profitability going forward in the second half of the year.
And as we are saying in our outlook.
We are expecting this business to good old versus versus 2021.
But of course, I mean, you'll see that number so that in 2021.
And as Scott mentioned it this is more one time in Q2.
Yes, I mean youre almost ahead of 2021 levels.
The end of the first half.
Yep.
So.
Okay I appreciate the color thanks very much.
Our next question comes from the line of David Silver of CL King. Please go ahead.
Yes, hi, good morning, Thank you.
Hey, good morning, So I'll preface my remarks, I'm, having a tough time with the connection theres been a lot of cut ins and cut out.
Along the way so if I.
Apologize in advance if I make you repeat yourself.
The first topic I'd like to ask you about is currency.
So I recall about so this quarter you did note that there was.
Eight cents per share.
Negative EPS effect this quarter.
And I'm kind of scratching my head because I believe about a year or so ago, you had a quarter that I would consider from a currency perspective less volatile than the current one.
And in that particular quarter I believe it was at least an 11 detriment.
So given the unusual strength of the dollar versus I don't know all kinds of currencies, certainly Latin America and Europe .
Is the company doing anything differently here to maybe mitigate the overall impact of currency swings or.
Are certain overseas sales automatically priced in dollars in other words, maybe just a comment or two on.
How you see your exposure to a stronger dollar going forward and whether the second quarter was impacted at all by any unusual items or some active hedging or anything like that thank you.
No great question David.
Yeah. So the good news here is that despite the.
The <unk> impact on EPS, we had an excellent quarter, we grew EPS, 27% and FX was a headwind of four points. So.
We thought we felt that we could have been growing EPS by 31%.
In lithium we do we have an active hedging program in several countries, where we see hedging costs.
Relatively low on <unk>.
Really provide.
The.
Provides the benefit of all.
As moving your P&L without a big impact in hedging cost, but we manage our business in some of those regions, especially Latin America, and I bought our basis as well right. I mean, we tried but there are always lags right by we try to manage the business on a dollar basis and recall that our.
Margins on a dollar basis of course with some lag.
As I mentioned.
The key issue right now.
I wouldn't say.
Big issue, but the key concerned right now of course is Europe and Eastern Europe right. I mean, when you think about a euro 101 $2.
That of course is our biggest concern because because we manage.
Our European business on a euro basis saw so that he is going to be very hard to recover immediately.
But we believe we.
We will continue managing our prices on our margins to make sure that we get the right.
The right return.
That's the main concern that we have now.
101, but we will continue we have managed this business in the past successful we don't foresee any major any major issue.
Okay. Thanks for that I'd like to circle back next to the polymers segment and again I apologize if I'm, making you repeat yourself here, but.
But one aspect I wanted to ask you about was the effect of business in China. So it was not called out in the press release, but when I think of what's happened there over the first half of the year I mean, theres been a number of potential disruptions.
Lockdowns I think.
And the news.
We have quite a bit of commentary about what's happening to the property market there.
Cetera, and I'm just wondering if you could comment on maybe how your construction base China business.
During the first half and whether you see a meaningful.
Deviation from that end market.
Maybe for the next quarter or two thank you.
Yes, David.
Yes, I would say China has.
Has the our business in China has been impacted by the Lockdowns in the first half of the year, we have seen.
A little bit lower of.
Demand from the marketplace and it was at a very negligible unfavorable impact on our Q2 results in terms of what we see going forward in the second half Directionally.
We can see it potentially improving but it's not going to be a meaningful impact.
Two I think 2022 results are going to be.
Covid is still with all of us in all regions of the world and I'm not going to try and anticipate.
China's lockdown strategy could be for the second half of the year, but I mean.
At this point, it's not going to have a significant material impact one way or the other on the.
Company's overall results.
And as I mentioned in my remarks, David I mean, the impact was very minor. So we're very happy with the work that our organization in China has done.
Despite all these lockdowns and despite the volume impact they weren't able to recover that with margins and the impact on operating income.
<unk> is very very small so the team has done a very good job of finding other ways to compensate.
For all these call these restrictions and Lockdowns.
Okay I do have one more big Big picture question.
This one would be for Scott and.
A number of the the questioners on this call. If pointed out are asked about the pretty significant margin improvement and the mix improvement and things like that.
<unk> really stick out and these record results.
But you know one thing that's not really in the press release, it hasnt really been in the remarks directly.
Would be the impact of your leadership Scott in other words I think this is probably you would say the first full quarter where.
You've been the CEO and you've been able to maybe implement certain changes or tactical shift.
Cetera.
So when I looked at these results and I saw you know relatively small changes in volumes.
Comments about recovering lost margin.
Rather than.
Adding to historical margins.
I'm kind of scratching my head and I'm, saying what is for lack of a better term I'm, saying what does the barron's effect in these in these results.
I was just wondering if you could take a minute and maybe discuss any kind of notable qualitatively any kind of notable shifts or.
Other.
Changes in policies or go to market approaches et cetera that you.
You think of positively impacted these results either whether it's.
Year over year or sequentially.
Thanks for the question David.
Im really proud to say that this these results are the efforts of our team for the last several years, we operated under a five year strategic plan, which has been in place and really has not changed over the last two or three years. What we are doing is effectively executing into deep into that.
That strategy today.
When you look at the acquisitions that we've made in Latin America, we look at the acquisition we made in with of Investor last year. These are all part of our strategy to increase the earnings and profitability of the company and also get into higher strategic growth markets. So.
This is nothing more than execution of the team that's been in place for for the last several years.
Okay. Thank you very much.
Once again, please press one floor for any questions. We have a follow up from Vincent Anderson from Stifel. Please go ahead.
Yes. Thanks for humor me I just wanted to ask quickly if we look back at <unk> 21.
Sure.
Things are really really starting to pick up on the pricing side. So I guess, it's just we're getting a recap on.
Outside of where raw materials go how much pricing do you have left in the tank for the second half of this year in terms of planned initiatives.
Great question Vincent.
As you have seen we have improve our price mix every quarter in the last six quarters right, where it started in Q1 2021 with a price mix of 13% in 2020 eight.
We just posted our highest stock price mix ever with a 32% that you saw in Q2 2022.
We will continue.
Tori annex on changing our prices based on all the inflationary pressures that we see in the market.
Inflation is not over yet right.
I don't think we have people on inflation.
In general However, as I mentioned it before the slope of the increases.
Our significantly lower especially on the raw material side. So if you think about our cost structure of course is heavily on raw materials than our logistics and then all the fixed costs, but but raw material.
Escalation is get out of oil coming down we have seen the oil prices.
A little more stable in the last few weeks.
We are still in vision that you're already going to that we're going to have some price mix of course in the back half, but I would expect those numbers to start to get out of <unk>.
Come down versus versus the peak that we just had.
Okay Fair enough and then just a quick one I might have missed it but you know that strength in north American rigid polyol demand last couple of quarters. I think you had noted that its really MDI availability that was constraining growth there.
Is that what changed for the better or was there another channel that was able to pull that through.
No look.
We see a.
We see demand is strong in North America, but if you think about the 8% that we just posted in Q2 I mean, I think you also need to look at Q1 right on Geneva to look at the previous quarters.
You know in Q1, we had a we had the meal zale issue.
So so the 8% also.
Includes some inventory.
Inventory recovery from our customers. So you cannot take the full 8%.
A full demand so, but we feel good about the overall demand of the business, we will see what happened with recession.
In the back of the year in 2023, but the reality is that we the infrastructure Bill and with all the Air Force on Energy Conservation insulation is a building block to reduce energy consumption and that's why we feel we feel good about this business on a long term basis.
Alright, Thanks, that's all from me.
Another follow up from David Silver CL King. Please go ahead.
Yes. Thank you I just had a quick.
Targeted follow up for Luis.
And has to do with the new credit agreement that was completed in late June .
And in particular I just was wondering if you could remind me what the benchmark.
We will be for that credit facility in terms of determining your ultimate interest rate. So I guess, we're entering a period, where certain rates might be pretty volatile, but is the base rate.
Related to LIBOR or a T bill rate or a T bond rate just split what.
Particular benchmark.
We keep in mind.
As we move forward here for thinking about your interest expense going forward. Thank you.
No great question I think this was a very.
Good accomplishment from the team in Q2 as you saw we have a we have a credit line data when you add up all the blocks is 700 million that gave us a lot of flexibility to execute our M&A playbook for the future.
And as you probably saw in the details we got these new facility with better terms for Stepan company than in the previous one.
Which is which is great for all sand for our shareholders. You know LIBOR is going away and everything is going to be based on <unk>. So that the base rate that everybody is going to be looking at.
With the exit of LIBOR rates again, the important <unk>. We have we have a very strong balance sheet and we have now these new facility up to $700 million that can help us to execute out where our strategy.
I will check your answer on the transcript. Thank you very much.
And we have no further questions on the phone line.
Okay.
Thank you very much for joining us on today's call. We appreciate your interest and ownership in Stepan Company and please have a great rest of your day. Thank you.
That concludes today's call. We thank you for your participation and ask you to please disconnect your lines.
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Thanks.
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