Q3 2023 Stepan Company Earnings Call
Okay.
Good day and welcome to the Stepan Company third quarter 2023 earnings Conference call.
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I would now like to hand, the conference over to your speaker today. So we use Russell Chief Financial Officer. Please go ahead.
Yeah.
Good morning, and thank you for joining Stepan company's third quarter 2023 financial review.
Before we begin please note that information on this conference call contains forward looking statements, which are not historical facts.
These statements involve risks and uncertainties that could cause actual results to differ materially.
In but not limited at all.
So for our foreign operations global and regional economic conditions and factors driving our securities and Exchange Commission filings.
Whether you're joining us online or over the phone. We encourage you to review the Investor Slide presentation, which we have made available at www Dot com.
Com under the investors section of our website.
We made it looks like it's available at approximately the same time as when the earnings release is issued and.
We hope that you'll find information.
Helpful.
With that I would like to turn the call over to Mr. Scott betting, our president and Chief Executive Officer.
Good morning, and thank you all for joining us today to discuss our third quarter results.
Plan to share highlights from our third quarter performance and we will also share updates on our key strategic priorities, while Luis will provide additional details on our financial results.
The company reported third quarter adjusted net income of $14 $7 million earnings were significantly impacted by a 9% decline in sales volume versus the record prior year third quarter due to continued demand softness across most of our markets and continued inventory destocking in certain market channels.
In the third quarter surfactant unit margins were lower versus the prior year due to less favorable product mix high cost raw material inventory carryover in pricing pressure in Latin America from imported products.
Volumes in Latin America grew by high single digits compared to the second quarter.
Specialty product unit margins were significantly lower due to high cost inventory and pricing pressure related to increased MCT import activity.
Expenses were slightly lower versus prior year due to proactive head count and discretionary expense controls implemented earlier in the year.
Lower incentive based compensation accruals.
We recorded a $4 $1 billion after tax restructuring reserves for the transition of employees participating in our voluntary early retirement program.
We continue to make significant progress on our cash objectives, reducing our inventory levels by $55 million.
Finally, we completed our lower wallboard axon capital investments and continued our constellation project in Pasadena, which is expected to be operational midyear 2024.
For the quarter, adjusted EBITDA was $48 million versus $85 million in the prior year quarter, primarily driven by the decline in sales volume.
Adjusted EBITDA in the third quarter of 2023 was slightly higher than the second quarter of 2023, adjusted EBITDA of $46 million.
So the fact that operating income was $15 $4 million versus $39 million in the prior year and $15 $1 million in the second quarter of 2023.
The decline versus prior year was primarily due to a 7% decline in global sales volume and lower unit margins in Latin America, driven by competitive pressure from imports.
Land within the agricultural end market remained low due to continued customer and channel inventory destocking.
Polymer operating income was $21 8 million versus $31 9 million in the prior year at $16 $3 million in the second quarter of 2023.
The decrease versus prior year is primarily due primarily due to a 12% decline in global sales volume driven by a 10% decline in rigid polyol.
Unit margins for global polymers remained in line with previous year.
Specialty product operating income was $2 4 million versus a record $9 7 million in the prior year.
This decrease was primarily attributable to lower sales volume and unit margins within the MCT product lines due to pressure from imported products.
The residual high cost raw material inventories within our MCT business should be consumed in the fourth quarter, which should lead to better margins moving forward.
During the third quarter of 2023, the company paid $8 $2 million in dividends to shareholders, a $24 $5 million during the first nine months of 2023.
The company has not repurchased any company stock during the first nine months of 2023 and has $145 million remaining under the share repurchase program authorized by its board of directors.
Yesterday, our board of directors declared a quarterly cash dividend on step of its common stock of $37.05 per share payable on December 15, 2023. This represents a 3% increase in our dividend and Stefan has paid an increased its dividend for 56 consecutive years.
Despite the challenging current macro environment and our reduced third quarter earnings we remain confident in the strength and diversity of our business and its ability to generate cash that will allow us to continue to invest in our business and return cash to our shareholders.
Luis will now share some details about our third quarter results.
Thank you Scott My comments will generally follow the slide presentation, let's just start with the slide four to recap the quarter.
Adjusted net income was $14 7 million or <unk> 64 cents per diluted share.
But it was a record $46 3 million or $2.01 per diluted share in the prior year.
Because adjusted net income and non-GAAP measures, we provide political affiliations to their comparable GAAP measures is can be found in appendix two of the presentation unable to affect price relief.
Specifically the adjusted net income for the third quarter exclude deferred compensation income of $2 1 million versus $1 million of income in the prior year.
I'll, just glue business restructuring of $4 3 million of after tax expenses.
This business was started in reserve is driven by the company's voluntary early retirement program.
The deferred compensation on figures, representing the net income related to the company deferred compensation plan azuela cash settled stock appreciation rights, but our employees because these liabilities change with the morphing the stock price we exclude this item from operational discussion.
Slide five shows the total company net income bridge for the third quarter compared to last year's third quarter and breaks down the decrease in adjusted net income.
Because this is net income the figures noted here that on an after tax basis.
We'll cover each segment in more detail, but to summarize what's giving you all were operated income in all segment versus prior year.
The company effective tax rate was 25% for the first nine months of two.
2023.
It was 24% for the first nine months of 2022.
This year over year decrease was primarily attributable to more favorable tax benefits from stock based compensation awards exercised or disagree with that during the first nine months of 2023.
Slide six focus on the surfactant segment results for the quarter operating income for sort of fact that was $15 $4 million.
The fact that business improved slightly from the second quarter of 2023, driven by a volume increase of 2%.
This volume increase was driven by double digit volume growth in our personal care business due to new contracted volume as part of the low one for <unk> syndrome patients.
Our laundry our Canadian volumes were up mid single digits, our distribution oilfield institutional cleaning and construction and industrial solutions businesses were generally flat versus the second quarter of 2023.
Based on these results and customer engagements, we believe Destocking has largely run its course in these end markets.
Agricultural chemical business was down a strong double b versus the second quarter due to continued cost summit on channel Destocking.
This is the main driver of some factors not generating greatest sequential operating income improvement in the third quarter.
Now turning to polymers on slide seven.
Operating income for polymers was $21 $8 million, we continue delivering sequential growth quarter on quarter, driven by mid single digit volume growth.
Volume increased 6% versus the second quarter of 2023, driven by high single digit growth in global <unk> volumes as well.
That's partially offset by a 25% decline in our commodity BPA business.
Finally, our specialty product operating income was $2 4 million.
Down versus the second quarter of 2023 at $3 8 million.
This reduction was primarily due to order timing differences.
Turning to slide eight we continue making significant progress on our cash position, we have increased our efforts to lower working capital and reduced capital spending to adapt to the current business environment.
For the third quarter cash from operations was $70 million and free cash flow was positive at $16 $4 million.
During the quarter, we deployed $95 million again, capex investment debt payments and dividends.
Finally inventories closed at $285 million.
Which is already below our initial end of the year goal. We are working to further reduce inventory by another $25 million in the fourth quarter.
Now on slide nine and 10 at Cod, we are Beijing.
Our strategic priorities and capital investments.
Thanks, Luis I will focus my comments at our cost and cash management initiatives and on the product progress of our major capital investments.
Regard to 2023 cash expenses, we continue targeting to hold full year cash expenses flat or down versus prior year. Despite the continued pressure from cost inflation and from our new investments in Pasadena and low <unk>.
During the third quarter, we took actions to control costs and improve cash flow, including our voluntary early retirement program for eligible employees at our corporate headquarters in Global Technology Center, which are both located in the Chicago area. We expect this program to deliver more than $8 million in pre tax savings in 2024.
Given the continued challenging market conditions, we are expanding our cost reduction activities, which when combined with the early retirement program are expected to deliver $50 million in pre tax savings in 2024 centered around workforce productivity and improved operational performance across our manufacturing network.
Regarding capital investments, we are continuing with our efficient and disciplined approach to capital allocation capital spending was $53 $7 million during the quarter at $216 $3 million during the first nine months of 2023.
Capital spending in the fourth quarter of 2023 is expected to be in the range of $41 million to $46 million down versus the first three quarters of trailing 12 month three as spending on the LOE for one.
Low one four dioxane investments is now complete and lower remaining capital outlays are anticipated to complete the new <unk> facility in Pasadena.
For the full year capital expenditures are expected to be in the range of $255 million to $260 million, we will provide more details on our capital forecast for 2020 forward our February call, but generally we expect to return to historical levels.
Moving to slide 10, construction on our new constellation production facility in Pasadena, Texas is approximately 55% complete and has surpassed 900000 construction hours, we expect the plant to be 75% complete by year end and to startup in mid 2024.
The underlining our constellation business that supports the Pasadena investment continues at strong double digit volume growth in the first nine months of the year and at very attractive unit margins.
As you know, we are increasing north American capability and capacity to produce either sulfates that meet new regulatory limits on <unk>, the new assets in our mill sales facility are now mechanically complete and are undergoing commissioning new contracted low one for the oxide volumes have already started shipping from the site and should grow.
As we advance the commissioning process to reach full installed capacity during the first quarter of 2024 and should drive additional volume growth in the future.
Stepping now has the largest installed low on Florida Oxy production capacity, serving the North American merchant market, which will enable step in to maintain and grow our north American sulfonation business in 2024 and beyond.
Looking forward, we believe the fourth quarter of 2023 will face challenges similar to those experienced during the first nine months, including continued to stock within the agricultural end market and the normal low seasonal demand for rigid polyol is in the fourth quarter.
We expect to reduce inventory levels further by year end and we are nearing the end of our high capital spending phase.
As we look forward to 2024, we believe volumes and margins will improve due to continued recovery in rigid polyol demand growth and surfactant volume driven by new contracted business lower raw material costs and the anticipated sequential year on year recovery of agricultural volumes in.
In closing a combination of anticipated market recovery. The continued execution of our strategic initiatives and Dave for mentioned cost reduction activities should position us to deliver earnings growth and positive free cash flow in 2024.
We remain confident in our long term growth and innovation initiatives.
This concludes our prepared remarks at this time, we would like to turn the call over for questions. Abby. Please review the instructions for the question portion of today's call.
Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced.
Your question. Please press star one again.
One moment, we will be compile the Q&A roster.
Our first question comes from Vincent Anderson with Stifel. Your line is open.
Thanks, Good morning, gentlemen.
So Florida.
Hey, good morning.
So I wanted to start just kind of picking apart the surfactants margins I respect that you don't adjust out things like startup costs on Pasadena.
If youre willing I would love to get an idea of.
The explicit impact and maybe the cadence of that as we work towards the mid 2024 startup.
And then maybe just leave the back half of 'twenty four for for when we actually see the plant running.
Thanks, Jason for the question look let me let me provide the first the context of what we say for this year. So we have in our cost structure. This year $10 million of extra expenses between Pasadena and low one fold out right. This is the guidance that we hospitalizing. If you look at 2002.
Four.
Pasadena is going to start up in the meat.
In the middle of the year, but we're going to have almost 90% of the cost during the year right. I mean, we're already hiring we are already executing all of our activities to be ready.
For me for midyear.
What about not only the benefit of all.
Savings and productivity improvements in the back half of 2024. So if you look at that is a $7 million to $10 million extra.
Headwind that we have in 2024, when you think about all that kind of cost on all these savings are for in sourcing and all of that in the second half.
Second to terminate on its why you could model for 2024.
Okay, Alright, that's very helpful and then.
You probably don't want to give specifics on this.
I get the sense that the mix impact from agriculture, this quarter was pretty severe.
Is there anything just directionally, you would want to add to that.
Under the assumption that we get some form of restocking or normalization in 2024 to reverse that out.
Yes, I think Vincent we shared in our materials, a double digit decline in volumes in agricultural chemicals this quarter.
Which did have.
And impact on obviously the recovery of the surfactants earnings in Q3, we were able to show sequential volume growth of 2% in surfactants.
But the adjusted EBITDA and our income did not benefit from the decline in agricultural volumes. So I think that's all I'll say on the impact of that in Q3.
All being said, we we've talked publicly I mean, we had a good Q1 in 2023 <unk>.
<unk> is still a strong in Q1.
And whether you are a good operating income in Q1 is the fact.
Okay. That's helpful.
If I could shift over to polymers.
It was kind of looking to just get your thoughts on where you are with.
Some of the opportunities and polyol.
Maybe a bit longer term, but thinking about spray foam products and then maybe any progress towards converting.
Former and Vista assets run.
P J.
Just curious if you've been able to push those a little bit harder in this weaker demand environment or if that's something that we should return to maybe next year.
Yes, Vincent I would say.
Our activities with our prospective customers and spray foam continue at a very robust pace I do think that market has been impacted by the overall market conditions, but that has not stopped our pursuit of new customer approvals and lab business and the outlook.
Is still positive from our perspective.
With regards to Ta there are no plans or intentions to put into the investor assets.
<unk> sale as our as our production site and that will remain our OLED production site going forward.
Okay I apologize if I was unclear I was referring to using your mills.
<unk> stock into one of the.
Mr plants.
No.
We did the integration of the business in 'twenty, one Vincent so whatever raw material and operational synergies that we've gotten we're taken care of in 2021.
Okay Alright.
Is that is all from me. Thank you. Thank you very much.
One moment for our next question.
Our next question comes from Dave storms with Stonegate. Your line is open.
Good morning.
Good morning, Dave.
Good morning.
Just would love to start if you could talk a little more about the $50 million in savings that you're expecting over 2024.
I know you broke out that there is you know maybe roughly $8 million in productions from the restructuring costs.
What does that other like 42 look like on a ground level.
Yeah, So I think as we put it in our materials.
We're centered around operational benefits continuing to reduce the inefficiencies we have across our global operational network. So you can envision everything from logistics, even procurement inventory management ways.
That's going to be the big bucket, that's going to get us to the $50 million and we have.
We have a lot of resources that are putting those plans together and we'll have more to report.
In our fourth quarter earnings call on our progress.
There will be additional workforce productivity activities that we will look to.
Engage in Q4 and also have more to report out that in our February call.
Very helpful. Thank you and then just thinking.
Thinking about customer acquisitions.
Are you able to break it down between what Youre seeing.
New tier two and three customers in the door is there any updates there.
So I think generally in our materials, we shared our contracted one forward that low end for the oxide volumes are starting to ramp up as we complete the investments that's going to benefit all of our customers across all tiers.
And then tier two tier three has obviously been a big part of our growth strategy over the last two or three years that we've been sharing in our materials.
The acquisition of new customers and that continues.
Please.
At a very robust pace.
The issue right now is the market demand and all the Destocking. That's happened in 2023 is offsetting a lot of the continued positive momentum we have in new customer acquisition.
That's perfect. Thank you very much I'll jump back in queue.
One moment our next question.
Our next question comes from David Silver with CL, King and Associates. Your line is open.
Yeah.
Okay.
Yes, hi, thank you very much.
Yes.
Ill stipulate here I did have to step away for a couple of minutes during your.
Remarks, so I apologize if I may apologize in advance if I make you repeat yourself.
I did want to maybe just start with the polyol.
Segment and in particular I did want to talk about.
Ask you about the improvement in a couple of areas. So the per unit margins I guess, so sequentially on a sequential basis.
You had higher operating income and I think kind of flattish or slightly better.
Shipment volumes and then I did pick up on the comment about improvement from China and assuming that these products are mainly used in the construction area.
Just kind of scratching my head wondering if you can provide a little color I mean, I wasn't I wasn't aware that construction.
Segment in China in General was especially robust now so just a couple of comments there would be helpful. Thank you.
Yes, Laurie David regarding the unit margins in polymers. So we have been reporting.
The last couple of quarters, you know, we've had a significant raw material headwinds and as we continue to work through those raw material headwinds matching our pricing structure.
Our margins. We believe are now stabilized and you can see the sequential volume growth between Q1 to Q2 and now Q3 to Q2 to Q3.
We do believe that Destocking has run its course and we're back on a positive trajectory towards more more normal market demand in the polymers space.
As it relates to China.
Well since that asset was fully commissioned three or four years ago. We've been on a diversification strategy of end use markets and applications and I think what we're seeing is the result of our team's efforts and.
Bringing a much broader diversification of markets and product technologies to that site.
Yes, remember we use we use that site is a different end market and when you think ill call. It storage and all of that is not typical installation that we do here in the U S or Europe and on top of that the team has done a fantastic job diversifying to other businesses and you've seen the assets in different end markets.
What is driving a very strong global <unk>.
Our growth in Q3.
Okay.
Very good thank you and I did just wanted to pick up on.
Scott's comment about Destocking being largely.
Completed I guess on the polymers area, but I think if I mesh that with the.
The comments in the press release.
You are still pointing to.
Inventory liquidation and Destocking.
Into the fourth quarter, I believe and I guess that would make maybe at least four maybe five quarters, where destocking has been in effect.
From a big picture perspective should should the fourth quarter be.
<unk>.
I don't know the bulk of having the destocking behind us.
I did notice.
<unk> customer Destocking and then there is your own inventory draw downs.
Just wondering if you might be able to draw a contrast between the two I mean are the customers.
Largely through it but maybe there is going to be a big reduction at the company level or how would you just characterize the overall.
Greg.
Draining I guess, the overall supply chain of excess product may be built up during the pandemic enduring.
Some concerns over supply chain.
Reliability. Thank you.
David So what is called was mentioning was destocking is almost dawn in the polymers business. There is a parking in the west calls due to rain and all the activities. We're not all the construction activities were able to be executed. So that is a small piece there remaining.
But most of the Destocking in polymers is already flushed through while you will see in Q4 in polymers is the normal seasonality of the business right. If you go back 510, 20 years Q4 is our lowest quarter in terms of demand because of course a lot of winter.
Sure.
State and don't execute a lot of a lot of re roofing activity during the winter. So that's only seasonality and then when you look at surfactant.
We have while we are seeing the destocking is mostly done in all day cleaning personal care.
Market and what is remaining is at we believe <unk> will continue the destocking in Q4.
We'll have more perspective in February .
How we see Q1 and Q2.
In the AG Destocking.
<unk>.
Consumer in.
Polymers.
Destocking activities by almost two quarters.
As Lisa mentioned earlier, we had a record Q1 in AG in 2023 and then.
Q2 is when we saw the destocking start in.
In agriculture.
It's got probably another quarter at least to run its course.
Okay. Thank you for that last question maybe for this round I did want to ask maybe a couple of just to try to get to be on.
Cash flow for next year, not so much this year.
If you could remind me I mean, I do think capex is going to tail off quite a bit but could you.
Just point out where your absolute kind of bedrock.
Sustainable level of Capex.
Spending might be thinking ahead to 2024.
And then if I look at the trend in DD&A should should we continue to see a rise maybe to the 120 $120 million.
Level for full year 2024.
Just be kind of.
Maybe some some rough.
Numbers to start with that would be helpful. Thank you.
Great question, David what I will say is that we are very proud of the free cash flow and the cash the cash from operations that we have made even in this year.
You think about the first nine months of 2023, our cash from operation is up 41%.
Versus last year last year was a record year in a net income right.
Right.
This year, we have redoubled, our efforts on working capital and inventory and cash management and our cash from operation is up 41% as a result of all these excellent work done by the organization. We will continue that effort in 2024 is not only the.
$50 million that as Scott mentioned, it but it's also cash management into next year and as you know.
Things like Pasadena will provide.
A lot of help on cash because you don't you apply bonus depreciation on your taxes go slower on a cash basis. So that those out of the benefits that we're going to see in term of cash in 2024.
And we put a bullet we've put a foot note in the slides I know I know you just got the slides a few hours ago, but we are estimating depreciation for next year I'd be doing $130 million to $132 million is in the slide in the guidance that we provided is a bullet point. There. So you can use that for your modeling in 2024.
Yes on that last point I apologize I literally just saw it here on slide 13, so apologies.
Alright, Thank you very much I'll go back in the queue.
And David.
One moment for our next question.
Our next question comes from Mike Harrison with Seaport Research Partners. Your line is open.
Please make sure your line is muted.
One moment for our next question.
<unk>, Mike jump back in the queue.
Yes.
Okay.
Okay.
Okay.
Our next question comes from Dave storms with Stonegate. Your line is open.
Okay.
And earlier that the Pasadena plant is expected 90%.
The cost for the year I would not expect it to be up and running until the middle of next year should we expect that to be running at full capacity or should we.
I expect there to be a couple of quarters worth of ramp up SaaS Paas Pasadena gets fully operational.
Yes, Dave.
Dave The latter statement is more accurate. So if we think about starting up an asset of this size. There is a lot of unit operations that have to go through commissioning and more importantly, the product mix that we will be putting through there. Some of it is highly specialized and there is a customer qualification periods.
<unk>.
And protocols that we have to follow so it'll be it'll be a ramp up.
In the second half of the year for sure.
Okay, and that's more just based on the logistics. So it's not a question of getting contracts in the door and so demand is there but the contracts are there it's just.
The nature of the base.
Yes, starting up new assets. There is a customer qualification protocol that has to be followed to get customers to approve production from new sites.
Understood. Thank you very much.
And our next question.
Our next question comes from Mike Harrison with Seaport Research Partners. Your line is open.
Mike we cannot hear you.
Mike Please make sure your line is muted.
One moment for our next question.
Our next question comes from David Silver with CL, King and Associates. Your line is open.
Okay.
Yeah. Thanks.
Question would be just for Scott and I'd, just like to ask him to reflect.
If you could.
Scott on your long experience in the surfactants Indus.
Industry and what if anything would you call out right about now that may be.
Deviates from.
I think the three decades that you've been managing that business and now the whole company here.
Here, but.
I don't know.
This is my opinion, not yours, but for a long time I would say surfactants was not one of the more volatile or trickier sub sectors within the chemical industry.
I would contrast that maybe with the.
The past three and a half four years, where first.
To me there was the very unusual demand boost from.
The pandemic is.
Surrounding supply chain reliability.
And maybe some of your new product development and customer development efforts.
<unk>.
As you stand here right now.
You have coming off a few Rick consecutive record years, and then this year, maybe some pullback but.
As you look ahead I mean do you think that the next year or two are going to be a reversion to the mean.
Something of a catch up.
<unk>.
For demand that might have been deferred or delayed this year, we might see a comeback over the next 12 months or something but from your perspective, managing this business over a very long period of time, what sticks out to you as maybe the the transitional points versus the second.
Growth points.
You might.
Care to call out.
Yeah.
Thanks for the question David.
Let me, let me say that I think what's not just the surfactant industry, but what the chemical industry has experienced in the last 18 months has been unprecedented.
In my career within the industry.
To see volume reductions of 10% to 20% in calendar year is I think unprecedented definitely in the surfactant market.
It was really driven in my opinion by the supply chain constraints and the.
I'll call it hoarding of material in 2022 as economies opened up around the world after the pandemic and the supply chain constraints caused.
A really strong year of demand in 2022, and we're paying the price for this year as.
There's a lot of inventory reconciliation happening.
Tom.
Combine that with the fact that Stepan is.
Finishing the end of our largest historical investment cycle and Capex over the last three years those those two things don't marry up to well together and you can see it in our in our P&L right now but.
The outlook and the prospects, we have long term in our business and the investments, we're making are absolutely the right investments to continue to grow value for our shareholders.
Just I think a unique point in time, right now where we.
And the impact on the consumer you can tell that the consumer is.
Impacted with the six plus quarters of record inflation that we've seen at least here in the U S.
Those that would be my thoughts right now David.
Very good.
Thanks, a lot I appreciate it.
Thank you one moment our next question.
As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced.
Our next question comes from Robert <unk> with AWS <unk>. Your line is open.
Thank you good morning.
Got it hoping you might be able to help me I was interested in sort of what you guys are thinking about on your gross margin cadence and price cost.
This year.
You had businesses that were up high single mid double digit pricing in the first quarter and now that's reversed.
Presumably because youre passing through those lower costs.
I guess, if I think about your cost structure that might imply your raw materials are down 20 or 25%.
In the quarter you reported so am I thinking about that right and you mentioned destocking and some slower volumes does that mean your purchases today are actually meaningfully better than that even.
And then maybe if you could just help me out I know you have pass through arrangements on a good amount of the portfolio but.
How is that going to change the cadence of that gross margin going forward because I think.
You are in the 12, 13% range and at times. Your company has had margins that are 50% above that so any help you could provide there would be great. Thank you.
Look great question, but as we have been talking in the last few quarters.
It's always a lag with all these pricing on raw materials activities right. So what we saw last year.
Of course, we were taking a lot of pricing pricing because raw materials were going up.
But at the end you had also.
Lower raw material prices in your P&L, because you had inventory right. So.
So you'll get that benefit.
On the way down that the lag that youll see us well I mean, we as you mentioned, we have pass through cost.
Tracks in our business not in a 100% of the business of course, just a portion of the surfactant business and the rest is.
Moves with the market, but of course with lower raw material prices things get more competitive and.
And we need to adjust our prices and we have been very clear that that for example, Latino andi got mcps, especially proud of business and a lead or be it in Europe is what we have seen a lot of.
Pricing pressure from imports from Asia.
So there is a lag well what I will say most of the of the high raw material prices on washout.
Expect in Q4 for the polymers absolute fact, and subtract is where our standards are in line with the market prices right now.
And the only remaining piece that we have is in the CPE business youre going to see a steel.
And the impact in Q4 because of fatty acid prices went down 70% so were tested.
They all loans.
So and then we'll see what happens in 2024 by Q4, it should be it should be pretty key.
<unk>.
And if I could just follow up it's very helpful. Can you tell me beyond the fatty acids. I mean, I know you have a big broad basket with or are there a handful of more significant raw materials for you or.
And I guess should we be concerned now that oil drilling.
Have to deal with inflation again next year.
Yes, I think generally other than what Luis mentioned, we feel we're in good shape now with where our raw material costs are versus related to market pricing. So I think we're going to see.
A more stabilization going forward too early to tell what's going to happen with raw materials. So as to let the centre for volatility in the markets right now that don't give us a real clear picture.
We have proof historically that we can make money in the way up and in that way down with their respective lap that is always a lag.
But we have a business model that allow us to price also.
Things are going on.
Got it thanks very much.
Thank you that concludes the question and answer session. At this time I would like to turn the call back to Scott Behrens for closing remarks.
Thank you very much for joining us on today's call. We appreciate your interest and ownership in Stepan company and please have a great day.
Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
Okay.
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Yes.
Yes.
[music].
Yeah.
Oh.
Hum.
[music].
Okay.
[music].
Okay.
[music].
Okay.
[music].
Yes.
Okay.
[music].
Sure.
Yes.
[music].