Q3 2022 Stepan Co Earnings Call
Yeah.
Greetings and welcome to the Stepan Company third quarter 2022 result.
During the presentation, all participants 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, but any time during the conference you need to reach an operator. Please press star Zero as a reminder, this conference is being recorded.
Wednesday October 19th 2022.
I would now like turn the conference over to Luis Rojo, Vice President and Chief Financial Officer. Please go ahead.
Good morning, and thank you for joining Stepan company's third quarter 2020 to finance for a review.
Before we begin please note that information in this conference call contains forward looking statements, which are not historical facts.
The statements involve risks and uncertainties that could cause actual results to differ materially, including but not limited prospects for our foreign operations global and regional economic conditions and factors detailed in our Securities and Exchange Commission filings.
Whether drug joining us online or over the phone we encourage you to review the investor Slide presentation.
Which we we have made available at Www Dot is Stefan <unk>.
Under the investors section of our website, we make these slides available at approximately the same time as when the earnings release is issued and we hope you'll find information and perspective helpful.
With that I would like to turn the call over to Mr. Scott Berry, our president and Chief Executive Officer.
Good morning, and thank you for joining us today to discuss our third quarter results.
To begin I will share our third quarter highlights and strategy outlook and Luis will provide additional details on our financial results for the quarter.
The third quarter continued to be a challenging operating environment given continued raw material constraints the energy crisis in Europe cost inflation foreign currency exchange impacts from a stronger U S dollar and overall glad global macro economic uncertainties.
Nonetheless, I am proud of how our team has continued to overcome these challenges by delivering record results for the third quarter.
Reported net income reached a record $39 $4 million or $1 71 per diluted share. While adjusted net income was a record of $46 $3 million or $2 <unk> per diluted share.
Surfactant operating income was $39.0 billion compared to $34 5 million in the prior year quarter.
Growth was mainly driven by a better product and customer mix, partially offset by an 8% decline in global volume.
Our polymer segment reached a record operating income of $31 $9 million compared to $19 8 million in the prior year, which represents a 61% increase driven by margin recovery and improved mix.
Our specialty product segment also had a record quarter growing operating income to $9 $7 million, representing a seven $3 million increase over prior year.
Our board of directors declared a quarterly cash dividend on Stephens common stock of $36.05 per share payable on December 15th 2022. This represents a 9% increase in our dividend and Stefan has paid an increased its dividends for 55 consecutive years.
During the third quarter of 2022, the company paid $7 $5 million of dividends to shareholders and repurchased $5 $3 million of company stock.
During the first nine months of 2022, the company paid $22 5 million in dividends and repurchased $22 $3 million of company stock.
The company still has $127 $7 million remaining under our share repurchase program.
Looking forward, we believe the operational environment will remain challenging. However, we are confident that we can deliver another record year at this point I would like Luis to walk through a few more details about our third quarter results.
Thank you Scott My comments will generally follow the slide presentation, let's just start with a slide four to recap the quarter adjusted net income for the third quarter of 2022 was a record $46 3 million or.
Or $2.01 per diluted share versus $36 $4 million.
Or $1 57 per diluted share for the third 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 appendix two of the presentation.
In table two of our press release.
Specifically the adjusted net income for the third quarter exclude deferred compensation income of $1 1 million.
Compared to last years income of $1 $3 million.
It also excludes changes in our environmental reserve was $7 $9 million.
Compared to last year excluded reserve of <unk> 7 million. The company increase is pretax environmental reserve from $23 million to $33 5 million.
Based on new remediation cost estimate associated with EMEA, New Jersey site.
The deferred compensation figures represent the net income related to the company's deferred compensation plan as well as cash settled stock appreciation rights for our anchors.
Because these liabilities change with the movement in the stock price with glued this item from operational discussion.
Slide five shows the total company net income bridge for the third quarter compared to the third quarter last year and breaks down the increase in adjusted net income.
Because this is net income the figures noted here are on an after tax basis, we will cover each segment in more detail, but to summarize we deliver excellent income growth in all our segments.
Corporate and all of that expenses, which are not allocated to the business segments were up $2 3 million driven by higher interest expenses and overall inflation.
The company effective tax rate was 24% for the first nine months of 2022 versus 19, 6% for the first nine months of 2021.
This year over year increase was primarily due to nonrecurring favorable tax benefits recognized in the third quarter of 2021.
We expect the full year 2022 effective tax rate to be in the range of 23% to 25%.
Slide six focuses on surfactant segment results for the quarter. So in fact, our net sales were $475 million.
22% increase versus the prior year selling prices increased 35%, primarily due to the pass through higher raw material and logistic costs.
An improved product and customer mix.
Volume decreased 8%, primarily due to lower commodity laundry demand and raw material availability issues in North America.
This was partially offset by higher global demand and functional products and institutional cleaning ad markets.
Foreign currency translation negatively impacted net sales by 5%.
So the fact that operating income for the quarter was $39 million, which represents a 13% growth versus prior year. This increase was driven by improved product and customer mix.
That was partially offset by the 8% decline in volume.
All regions grew operating income include factors, despite volume reductions supply chain challenges inflationary pressures and FX headwinds in Europe . This is a result of our diversification strategy to deliver higher value behind product and customer mix.
Now turning to polymers on slide seven net sales were $215 million of.
Up 8% from the same quarter last year selling prices increased 26% due to the pass through of higher raw material and logistic costs and recovering margins volume decreased 10% driven by nine 8% decline in global volume, primarily due to softening demand in Europe .
Foreign currency translation negatively impacted net sales by 8%.
Polymers delivered a record operating income for the quarter of $31 9 million.
Which represents a 61% increase versus prior year. This is primarily due to margin recovery and improved mix, which was partially offset by the 10% decrease in global volumes.
With America polio and income increased driven by margin recovery and mix improvement.
That increase in Europe was driven by FX and volume reductions.
China operating income was down slightly due to suppress demand from the Kobe Lockdowns and restrictions.
Finally, our specialty products also had a record quarter delivering $9 $7 million of operating income an increase of $7 3 million operated.
Operating income improvement was primarily attributable to a favorable customer mix and improved margins within our MCT product line.
Turning to slide eight our balance sheet remains strong and we have ample liquidity to invest in the business. Despite our capex investments our leverage and interest coverage ratios continues at very healthy levels. During the quarter cash from operations was $71 million and redeploy it at $132 million against <unk>.
Capex investments dividends and debt payments and share repurchases higher working capital requirements due to strong sales growth and the acquisition of performance <unk>, a cogs solid business.
We project full year capital spending in the range of $330 million to $350 million inclusive of our one for downstream project and Pasadena investments in the U S. <unk>.
Beginning on slide nine as Scott will now update you on our 2022 expertise priority.
Thank you Luis in addition to delivering another record quarter, we continue to advance our strategic priorities in the third quarter the.
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 the functional products, including agricultural and oilfield chemicals continues to be a key priority for steffan.
Our global agricultural volumes increased double digits in the third quarter of 'twenty two.
Hi, agricultural commodity prices, coupled with increased planted acreage in 2022 drove a strong season for crop protection sales in North America, while elevated in agricultural commodity prices and a favorable currency impact on exports are driving increased planted acreage in Brazil.
Oilfield volumes also increased in the third quarter of 2022, despite raw material availability constraints.
Demand for our products used in oilfield remains robust as crude oil prices remain elevated around $90 per barrel. Additionally, we are expecting the raw material constraints in this business to improve over the next few quarters.
We continued with the build out of our kimco oilfield Demulsify our product line, we remain optimistic about future opportunities. In this business is elevated crude prices should encourage increased oil production and the use of production and stimulation chemicals.
Our mill steel plant continues to be one of our key priorities, we are accelerating investments to improve productivity and reliability and to increase capacity through operational excellence initiatives. These.
These investments will continue throughout the year and we expect to see benefits from our efforts and investments starting next year what are the key priorities at mill sales the execution of our low one <unk> project.
Moving to slide 11 work continues on our new <unk> constellation production facility in Pasadena, Texas.
This asset will be a flexible state of the art multi reactor facility with approximately 75000 tonnes per annum of annual calculation capacity.
It will provide strategically located capacity and capability for long term specialty our <unk> growth across our strategic growth end markets, including agriculture oilfield construction and household institutional cleaning, we expect expect the plant to be up and running in early 2020 for.
The underlining our constellation business that supports the Pasadena investment continues its strong growth and our margins above our original projections, we remain confident and excited about our investment in Pasadena.
The recent acquisition of performance <unk> business should deliver additional base load volumes for Pasadena in the future and the Chemistries are well known by Stephan. This acquisition is a strong fit within step in surfactant business and provides attractive market diversification opportunities for our constellation product line.
The acquired surfactants are supplied to key customers and end markets covering personal care pulp and paper lubricants household institutional cleaning oil and gas agricultural and other industrial markets. We are excited to expand our customer base and some of these new end use markets for steffan.
As you know, we are increasing north American capability and capacity to produce either sulfates that meet new regulatory limits on one <unk> by the end of January 2023.
<unk> is a minor byproduct generated in the manufacturer of ether sulfate surfactants, which are key cleaning and folding ingredients used in consumer product formulations.
<unk> is working to supply customers with either sulfates that meet the new regulatory requirements as.
As part of this transition one key customer chose to invest in internal production capabilities. So that lost volume was recognized starting in the third quarter power.
However, we are gaining volume with other customers, who will continue focusing on strategic priority of growing within our tier two tier three customer segments. We expect this transition to go through 2023, and our focus is on generating value growth.
The good news is that the overall market continues to believe that either sulfates, which meet the new regulation levels for <unk> are the best alternative for performance and cost.
We are pleased with our progress in our fermentation product platform.
Our priority remains the development and commercialization of Ramadan lipids are first anticipated <unk> an offering we believe this new bio based product family has significant opportunities in several important end markets for steffan, including agricultural chemicals consumer cleaning personal care and oilfield.
Our new fermentation laboratory, which opened in February continues to make good progress in process development and we expect to start providing samples to customers later this year.
Finally, given the strength of our balance sheet acquisition opportunities that align with our growth and diversification diversification strategy remain a priority.
Summarizing the quarter, we delivered record third quarter and first nine months net income and I am proud of our team's effort and resiliency in delivering record earnings during this challenging market environment.
We expect to deliver another record year, both on a reported and on an adjusted basis, despite approximately $8 million of incremental fourth quarter expenses related to planned maintenance activity in our plants at mill sale and low one for vaccine related transition expenses.
We believe that surfactants polymers and specialty products will all deliver full year operating income growth over prior year grew.
Growing the three segments at the same time would represent an extraordinary outcome for 2022.
From a segment perspective, we believe that surfactant volume within the functional products and institutional cleaning end markets should show full year growth over 2021.
Despite the short term challenge demand challenges and volatility we believe that the long term outlook for rigid polyol will remain extremely attractive as energy conservation efforts and more stringent building codes are expected to continue and are a critical step to deliver a world with less energy consumption.
In closing looking forward to the next few quarters. We believe the company will be challenged by slowing global economic growth weakening consumer and construction demand continued inflationary pressures and a stronger U S dollar.
Despite this projected macro environment, we remain committed to executing our long term growth strategy.
This concludes our prepared remarks at this time, we would like to turn the call over for questions to Kathy. Please review the instructions for the question portion of today's call.
Certainly thank you if you would like to register a question. Please press the one followed by the four on your telephone Youll hear three Tom prompt to acknowledge your request.
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And our first question comes from the line of Mike Harrison with Seaport Research Partners. Please go ahead.
Hi, good morning, congratulations on a nice quarter.
Thank you Michael.
Scott I was hoping that you could talk about price cost dynamics in both the surfactants business and polymers as we look from Q3 into Q4 are you still seeing higher costs and expecting that maybe we could see some sequential margin headwind or are you seeing there.
Costs are moderating a little bit in price cost is turning into a good guy for you.
That seems to be particularly the case in polymers, but maybe you could give us some color.
Again on both of your key segments.
Yes, I would.
<unk>.
From a high level, Mike what I would say as you know.
We've done a good job recovering our margins and covering our inflationary cost to this point.
Although we are seeing raw materials somewhat moderating they still remain highly volatile and the other inflationary costs that the business is facing still remains and those remain in the freight area utilities.
And even labor so I would say we're not we're not.
At a point where.
We're done in terms of covering.
Future cost Escalations and I think it's going to remain volatile going forward and I would say it's pretty.
Pretty evenly spread between the surfactants and polymers business each are facing similar similar continued cost pressures.
So Mike. This is this is right in line with what is called was mentioning.
Our raw materials do you think about raw material, specifically, we are seeing kind of the peak. However, it's still a lot of volatility on some of things are coming down and all that sort of going up but what we believe at least raw the raw material piece is in a better spot versus the previous quarter.
But again, the other inflationary pressures on freight and other elements.
We'll continue.
Alright, and maybe kind of a related question on how you are seeing.
The energy.
Availability situation unfold in Europe , and with your European operations are you planning to continue running all of your plants in the winter or could you see that maybe energy availability or demand issues could lead you to idle some of your facilities in Europe .
Good question, Mike at this point, we do not see a disruption.
In any of our operations.
In Europe and are expected to continue to operate throughout the winter. We have worked on contingency plans with alternate sourcing of energy.
That gives us a little more confidence if there was a constraints put on industrial use of natural gas or electricity.
But as of this point there is our anticipation is were going to operate as normal throughout the winter.
Alright. Thank you and then my last one for now is on the surfactants business and the margin performance. There I'm just curious is that lower commodity laundry volume.
Number is having a negative impact on your fixed cost absorption.
Or is maybe the plant loading faster less of an issue for you guys spend it might've been in the past.
Also just curious if youre seeing any trading down.
In this more challenging economic environment for consumers any trading down to lower value products in surfactants, whether that's on the laundry side or in personal care.
No good questions Mike of course.
When you have lower volumes you have the fixed cost.
Impacting you, but but again, we feel very good with the work that we have done in margins in both surfactants and polymers and remember that we focus first in dollars per pound and a percentage of sales.
<unk> is a consequence of our sales are growing significantly.
Significantly higher, but we're very happy with the year to date margins that we have the 10% in surfactants on 13 pertaining in polymers.
And of course, you also know that we have some seasonality by quarter. So of course Q4 is our lowest volume quarter youll see more fixed cost impact and therefore lower margins.
There, but again.
Our strategy is to continue growing the high growth high margin businesses functional as coda was mentioning.
<unk> double digit growth in AG and oil field. So those will continue helping our margins despite whatever fixed cost impact that would have been a half and I will add is Scott talk a little bit more about the dynamics on consumer demand.
So like I would I would say the trading down in.
From premium to mid or economy tiers, I think that started well well earlier this year and even late last year I think what what's different now is the sustained inflation that the consumers are facing it's actually starting to show demand softness across the board.
Stepping we're agnostic to whether.
We participate in all segments of consumer products, whether it be.
Premium economy or mid tier so we're we're agnostic there, but I think now we're seeing the overall softness in demand from the consumer.
And fair to say that Thats, primarily Europe and emerging market trend rather than something you are seeing in North America.
Yes.
Yes, as it falls the other industries.
First signs of softness happened in the emerging markets in Europe with the energy crisis.
And interest rates rises definitely europes going to be in that phone as well North America to this point has held up much better than the other.
Other regions.
Alright, thanks, very much I'll turn it back for now.
And our next question comes from line of Vincent Anderson with Stifel. Please proceed.
Yes, good morning, Scott.
So.
I just wanted to dig in on the acquisition a little bit.
I'm trying to understand how the alcohol thoughtful it kind of fits your portfolio with these with these.
Intermediate product between your existing formulations that are mostly told.
Or is this just a brand new derivative family that would that would generally be sold as is and then second word. These products already won four dioxane compliant or is that something that you are bringing to this company.
Yes, great.
Great question Vincent first the alcohol Fox lift product line that we're acquiring there have acquired from performance that is a standard product line that exist in the industry today and quite honestly is in step with this product portfolio and has been for 20 years.
What it's really doing is bringing new customers in new markets to Stephan.
It is a great diversification opportunity for our <unk> business and provides I believe material opportunities for pull through.
Products within <unk> other stepping up step into other product lines, including cation X and maybe even bioscience into these new end use market. So that was really the driver of that chemistry is standard chemistry line that we have in our product portfolio today.
And can you remind me your second question, but <unk> put about one <unk>.
So one for dioxane is really primarily generated from the sulfonation process that's in.
In our commodity anionic product line used in laundry.
These non IONICS that are not sulfonate as have much much lower almost negligible negligible levels of <unk> and not really of concern as it relates to the new regulations that are showing up.
Next year.
Okay perfect.
And then just on the topic of one four dioxane.
Have your investments there to reduce its levels in your relevant products.
We are reading about some switching to alpha olefin.
Dolphin, it's as an alternative to just not even deal with the lower.
One four dioxane concentration is that an opportunity within your portfolio to also pushed that as an alternative or would that be considered trading down or you really are focused on other end markets with your AOS capacity.
No.
Stephen is a one stop shop for sulfonation, chemistries, whether it be either sulfates sulfonic acid Alpha olefins sulfates.
We've been practicing in producing these and selling to the market for multiple decades.
We are agnostic to the customer base in terms of what is their best solution for their company's needs.
Either sulfates do provide the best cost performance in some consumer cleaning.
Liquid cleansing applications, so customers that are <unk>.
Formulating based on strong consumer performance benefits wants to stay in either sulfates, others that may be looking to avoid.
You know.
A lot of re formulation or I should say.
Cost related.
Related issues with the new one Ford actually relations are looking to switch away to alternatives anionic and we're working with those customers on changing their formulations to AOS or laurel sulfates or sulfonic acid. So.
We're agnostic.
<unk> and <unk>.
It remains an opportunity for our AOS franchise as well as customers look to find their own custom solution for the <unk> regulation.
Oh great.
Very helpful.
And just one more quick one from me.
We don't normally talk about but.
<unk> had another nice quarter, you've mentioned in the past.
Wanted to build out some of your raw material availability to improve output of those products is that is that still a strategy and how much volume upside is there from from those assets.
Yeah.
The supplier the fatty acid used to make Mct's has has loosened up a bit global supply chains are operating a little more freely.
But I would not say that there is a significant opportunity.
From here in terms of continued.
Profit expansion that we've seen over the last four months or last four quarters I should say.
Margins are probably close to being at their peak.
I think we've done a really good job with our customer optimization and getting fatty acids.
Two our manufacturing facilities in a time, where they were constraints.
And Vincent this is luis.
Additional perspective fees.
<unk> mentioned it probably went on the peak on the margin side, but we continue.
Looking for opportunities to grow volume.
And we have extra capacity right now in our facility Maywood.
So as fatty acid become more available our focus for the next few quarters will continue to grow the business and gain new customers and continue growing volume.
Understood. If I remember correctly. These are mostly coconut oil or palm kernel oil pad, yes, <unk>, yes, okay.
Okay, Alright, thanks, guys.
And as a reminder to register for a question. Please press the one followed by the foreign your telephone and our next question comes from line of David <unk> with C. L. King. Please proceed.
Yes, hi, good morning.
I guess my first question would be.
Regarding the surfactant segment in.
You talked about the price cost.
Balance earlier I was wondering if you could maybe just.
Help me parse through the lower sales volume so in other words for the last few quarters, you've been clear about the divergent trends, let's say in the personal.
Personal care side of your surfactants business.
Versus institutional or commercial which has been healthier.
And I'm just wondering one if you could maybe just talk about that a little bit and how far along do you think we are.
We are in.
The personal care side bottoming out.
<unk> pandemic.
If we maybe just start there thank you.
Yeah, David if I understand your question.
As it relates to our personal care volumes.
One thing I would say is.
We've had significant raw material raw material constraints affecting our personal care volume specifically at our amphoteric product lines.
That was quite honestly industry wide.
A critical raw material that was short to the industry. So that's helped exasperate some of the divergence that youre referring to.
In terms of the post COVID-19 demand in personal care as it relates to the increased use of Hand-wash factoring.
Peak of the pandemic that has pretty much stabilized and is not in any declining or significant increasing trajectory. So that's kind of more stable. So I'd say most of the impact of the divergence you're seeing is really just been with some isolated supply chain constraints on raw materials that has really impacted volume.
Yes.
And then.
You for that and then also on surfactants. So I was just hoping to get a.
An update let's say year to date.
On your tier two tier three customer strategy do you have a figure for account said it may be this quarter or year to date.
And then if you might be able to comment on how that's affected.
The margins in other words smaller volumes, but maybe with the greater service component structurally higher margins I mean, when we look at the third quarter segment results. There what would you say the.
The impact of that strategy to date might be.
Yes, definitely contributing to the continued success of core elements of our strategic growth priorities going forward.
Our earnings slide deck Youll see that there is over 100, new customers that were gained in the third quarter and yes, the smaller volume tends to be higher higher margin business and that's been a core foundation of our of our our growth strategy going forward.
Okay and this one is for Luis and I would just have to do with the trend on interest expense.
Sequentially I see your debt levels are rising I think we know that.
Interest rates at least in this country are rising.
Rising.
Just just wondering why there was a modest sequential decline in interest expense and maybe if you might if you could kind of help us on where that that interest expense line might go in the next quarter or two is maybe another rate hike or two is in the offing that would be that would be great. Thank you.
Great question.
David and yes.
Yes, Youre right were going to see our interest net.
On a yearly basis of course going.
<unk>.
We have clear guidance that it's going to be around $11 million. This year versus last year was roughly around $6 million. So you clearly see the effect of all the new debt that we acquire however, remember that we acquired significant new debt at fixed interest rates that were well below 3%.
So I think we.
We believe letting a very good spot and actually what we're seeing recently is of course with the interest rate increases.
We're generating more interest income.
Of our cash so that is actually helping that and by the way we're generating now our interest income that at a high year and about what we're paying on the debt. So we're generating three and three and a half interest.
Our interest rates for the interest income fees.
That is that is actually that is actually healthy but in February I will give you I will provide clear guidance as always.
B our interest net forecast for 2023 of course, it should go higher than the $11 million.
That we have that we have in 2022, I will give you, but nothing dramatic and we will give you guys. The sac numbers when we meet in February .
Okay, Great and then just last question I mean, this is something I just.
I have noticed in the headlines over the last week or two but.
Water levels.
As in the U S logistics, but the water levels on the Mississippi are such that.
Our Gen vehicle vessel traffic is being disrupted.
So thinking about mills, Dale and maybe some of your other or maybe your flow of raw materials.
Is that creating unusual issues for you or are you kind of.
Diverting to different modes of transfer transport.
As a result or is that just is that something you were able to manage with that.
Too much difficulty thank you yes.
Yes, great question and yes, we have been operating our plants on the Illinois River the displays river for 50 years and.
We have a very robust contingency plans and our sourcing and planning planning groups worked with.
Very closely with our raw material suppliers to ensure alternate modes are available into into the Chicago area. So.
Not as impactful.
Yeah, no major impact no major impact to us.
Youre right David.
That has to be now that has been an issue, but no major impacts for us.
Okay, great. Thank you very much I appreciate it.
And I do have a follow up question from the line of Mike Harrison with Seaport Research partners. Please proceed.
Hi, just a few more for me.
In terms of this $8 million fourth quarter impact related to some.
Some planned maintenance.
How much of that is going to hit the polymers business and how much of it impacts surfactants.
Good question, Mike actually I want to make a clarification that $88 million is after tax just to make sure that everybody understand that its roughly $10 million to $11 million on a pretax basis and seven around 70% of that will heat polymers and 30% will hit us in practice.
Okay and have you seen any customers pulling forward any volumes in Q3 in anticipation of that Q4 outage or where the order pattern.
Generally pretty pretty steady.
Yes, we work with our customers wallet advanced our shutdowns are planned six to 12 months in advance so the supply chain has already been executed against the shutdown.
Okay, and then I guess, maybe hoping for a little bit more color on what exactly you guys are doing at that mill sales site.
You mentioned some some operational excellence initiatives, but are some of these actions are intended to help improve reliability, Idaho, we look back over the last couple of years, we've had some some power outages that affected production out of that plant.
Yes, great insight, Mike and yes, we are investing heavily in improving the reliability of the infrastructure asset at our mills deals site. So we've had multiple projects ongoing since Q2 to replace substrates Substations Mcc's and.
And we feel really good that the projects are going to significantly improve our liability and.
And we're ready for the upcoming winter.
And then I guess as it relates to the low $1 four dioxane transition costs that are associated with this $8 million impact.
What do those costs entail and are they one time in nature or are there going to be.
Additional costs that we see you guys incur.
At some point in 'twenty three.
Mike I will say a good chunk will be one time, but of course as we mentioned in our prepared remarks.
Transition for low one Florida is going to evolve through 2023. This is not a one day.
Sweet.
So we need to work through the transition on App on up to after we execute all of these of course, we are not.
We're not incurring some of those one timers.
Okay, but it sounds like maybe as we're thinking about 2023 that we should consider that theres still some some headwind associated with these transition costs.
Yeah, I think it would be I mean, it's not going to be major.
And Im looking forward also to meet any favorite already we can provide a little more guidance about how we see the yields on what are some of the key elements that we see going forward, but.
Yes, you are going to expect some additional expenses there, but nothing major.
Yeah.
Okay and then.
Last one I had is on polymers.
Just hoping you could give a little bit more detail on what youre seeing in terms of demand trends as we're getting into Q4, obviously, the 10% volume decline in Q3.
Suggests that you're definitely seeing some things getting worse.
Curious if some of that as customer inventory destocking.
That might be a little bit more temporary but anything you can share on near term demand.
And the construction related portions of polymers would be appreciated.
Yes, I think.
As we all read what's happening in Europe , specifically in the construction markets. There is there is a slowdown happening projects are being put on hold or canceled.
Which is really whats driven our volume decline in polymers in Q3, and then the continued kind of Lockdowns in China.
<unk> also significantly impacted demand.
Whereas it looks sequentially quarter over quarter in Q4 were kind of expecting a lot of the same for Q4 and I think the overall hope is that there is maybe a two or three quarter and call. It a hiatus and expecting growth and recovery in the construction markets in Europe in the second.
Half of next year, I think thats kind of a general consensus right now across what we're hearing in the market.
And as you know Mike I mean at the end insulation plays.
I think I'll roll in what needs to be achieved in the world, which is to reduce energy consumption. So of course.
People preserve cash in this environment.
And people put on hold some of the projects, but if you need to replace your route you need to replace it right and you can hold out for one two or three quarters, but you cannot hold forever.
So we believe this is a transitory thing and if you look at North America. Despite all the challenges.
<unk> North America year to date is growing.
Volume single low single digits, but it is still growing so the impact that we saw in Q3.
Is mainly Europe and.
In Asia.
Alright, Thats very helpful. Thanks.
And our next question comes from the line of David storms with Stonegate. Please proceed.
Good morning, gentlemen, thanks for taking my call you actually just touched on it with the demand weakening in Europe in the Chinese markets I know the North American markets seem to still have pretty strong demand are there any.
Here's that you're keeping an eye on forecast.
When any of this demand weakness spread to the North American markets.
Yes, we are.
Obviously, staying very close to our customers and watching.
And hearing what they are saying about the installation contractors and whatnot.
I think everyone's been talking about the backlog of orders and projects in the first sign of weakness that we will see is when we hear that those back orders are starting to decline so.
At this point in time as Luis mentioned our growth.
Our rigid north American volumes continued to grow.
The small single digits.
We can anticipate that Q4 should be very similar but.
Too early to tell.
Thank you and one more if I could you mentioned earlier that labor is an inflationary pressure I expect it to continue along with a great in utilities, but the labor market in the U S remain as strong as it is do you anticipate this becoming an outsized expense relative to those freight and utilities expenses or just kind of maintain an asset.
It has that.
No.
I would say is all of course is a normal chemical company, we don't have.
A lot of labor in our science.
But the situation is that we're coming from years, where salary inflation was soft.
In the U S was roughly in the 3% we could see a little bit more pressure on those numbers in the short term. So that's kind of the difference on when you think about developing markets in Europe .
Could be it could be higher single digit type of number so that kind of the new athene on the labor piece, However, labor foot all season, not the biggest impact for us is about raw materials freight and utilities.
Perfect. Thank you very much.
Okay.
And I have a follow up question from the line of Vincent Anderson from Stifel. Please proceed.
Yes. Thanks.
Hopefully a quick one.
I meant to ask the customer that took its one four dioxane compliant.
Internal.
Was that a customer that was kind of core to your investment case into the low one four dioxane capacity or those customers more secure.
And then I just have a quick follow up on that.
Yeah. So.
With the level of investment that we've made for one for the Oxy, We obviously had.
Early and often conversations with our customer base, both existing and new.
To get ready for the type of capacity and capability we put in.
So.
Core to Steffan, yes, but.
Definitely within our plans and our forecasts.
Okay that makes sense and then just to understand.
Maybe the commercialization of that product, assuming I'm guessing, it's a little bit more.
Overcapacity, so to speak and then you need for day one compliance.
Is.
Is most of this being addressed with the purification step post reaction that you could maybe bypass or are you managing this on the front end and so when the plant changes over Youre just making.
<unk> four product, regardless and it's up to your team to find a home for it.
Accretive margin.
We have the flexibility in the design of the process that we've implemented we have the flexibility to operate the units.
As we see fit I'll leave it at that.
No it's perfect I appreciate it.
That's all from me I promise.
And there are no other questions I will turn the call back to you Scott for closing remarks.
Thank you Cathy and thank you all for joining us on today's call. We appreciate your interest and ownership in Stepan company have a great day.
Thank you that does conclude the call for today, we thank you for your participation and ask that you. Please disconnect your lines and have a great day.
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