Scott Behrens: It’s a slightly different formulation than what we’re historically been supplying into the rigid market. So our formulation chemists are obviously working with customers in that market to meet their specific performance requirements. Some of those customers have very specific and unique formulation. So this is a traditional technical service collaboration with customers in the Springfield market that view Stepan as potentially bringing value, consistency, high quality product to their businesses. So it’s a standard process. And it takes many months and qualification trials before you become approved and start supplying.
Vincent Anderson: But at the end of it, this was a collaboration effort. So the sales will be there.
Scott Behrens: Correct.
Vincent Anderson: I just wanted to clarify one thing, you mentioned hiring freezes, but I assume that that would exclude whatever staffing is required for Pasadena and those costs are already contemplated in kind of your startup operating leverage headwind.
Scott Behrens: That is correct. So Pasadena is a high priority asset startup. The underlying business is doing extremely well. And the sooner that asset gets up, the better we’re going to be. So those headcounts are all in our cost structures for 2023. And we do not expect or see any plans to disrupt that hiring and onboarding of those new employees.
Luis Rojo: Vince, remember we talked last call that when you think about Pasadena and low 1,4, that’s roughly a $10 million investment that we’re making this year to have those assets up and running. So call it a half and half. And the first half is more heavy on low 1,4, the second half is more heavy on Pasadena. And, of course, we’re not planning to delay any of that.
Vincent Anderson: I guess, just one more probably for you, Luis, if you’ll entertain this. So if raw materials remain stable where they are now and you work through your higher cost of inventory, you said that somewhere around $7 million to $10 million of operating income just from those higher raw material overhangs in your inventory. Under more normal demand environments from a volume perspective, would dollar margins be at your target levels? Or is there still a bit more to do there?
Luis Rojo: Look, we are happy with our dollars per pound margins, but there is always room to do better, right? There are still places where we are below where we need. And we will continue managing the next few quarters, our pricing plans together with raw material costs to ensure that we deliver the margins that we need to reinvest back in the business. We continue working on pricing. As you know, we have excellent price mix in the last two years, 22% in 2021, 30% in 2022 and we still had a very healthy price mix of 12% in Q1 2023. So we will continue working on pricing based on the raw material situation to ensure that we deliver the margins that we need to reinvest back on the business.
Operator: The next question comes from David Silver with CL King.
David Silver: Scott, I’d like to go back to I think one of your comments and I wrote it down on either slide 9 or slide 10. But I think I got this right. But you made reference to, and I’m trying to quote this exactly, but prolonged, elevated inflationary pressures. And you did talk or Luis talked at some length about the raw material issues, which I think he said were likely to mostly be through this current quarter, second quarter. I know there’s a lot of puts and takes there, labor and logistics, et cetera, but when you were thinking about prolonged, elevated inflationary pressures on your business, could you maybe just talk about some of the elements that contributed to that maybe beyond raw materials, in particular?
Scott Behrens: In terms of quantifying or characterizing prolonged, I think use the timeframe through at least the end of the year. And when you think about year-over-year expenses, things along utilities, natural gas in Europe, you look at insurance costs, you look at wages year-over-year, those are all headwinds in 2023 versus 2022. And when you think about underlining contracts that may have been in place in 2022 where costs are resetting in 2023, that’s the inflationary pressure we’re still seeing in 2023. And Luis characterized that number as $40 million to $50 million of total headwinds from inflation as we entered 2023. So that’s what that is referring to, David.
David Silver: Second thing is, I’d like to maybe dig down a little bit into the customer inventory liquidation or customer purchasing trends relative to your Surfactants business. So I’m sure I missed maybe a detail or two here, but you did talk about broad based customer destocking and it likely to extend through the second quarter. And then in talking about the second half, you called out rigid polyols and new surfactant customer demand. But it sounds like the core legacy surfactant business is going to be in ample supply, let’s say, beyond, let’s say, June 30. And that’s always a combination of, I think, inventory buildup maybe during the pandemic, the buffer inventory issue, as well as some issues affecting current demand, whether it be trading down or fundamentally weaker end market demand.
Can you just talk about how you look at based on maybe your customer order patterns and how they’ve changed in the last quarter or two? Can you maybe give us a sense of how you expect – how long it might take for your core Surfactants business to legacy customers, for that to kind of normalize?
Luis Rojo: Let me provide more perspective on the two businesses, right? Let’s separate Surfactants and Polymers. Surfactant volumes are down 13% in the quarter, right? So, you have three effects there. One is the business that we lost because one customer backward integrated their 1,4 dioxane capacity. So that’s almost half of the impact of the 13% in Surfactants. So, let’s call that 6% out of the 13%. The other 7%, that’s where you see lower demand and destocking, right? This is not hard math. This is more art than science, but you see the two buckets impacting in that minus 7% and we believe that is going to start getting better in the second quarter and it’s going to get much better in the second half as destocking should end on the surfactants piece.
And then you’re going to have the new contracted volumes and that will play into the second half numbers. And the customer, remember the customer that we lost in low 1,4 dioxane, we lost that in Q3 2022. So that will start coming out of the base in the third quarter as well. So let’s talk now about polymers. Polymers volumes are down 18%. And that’s where destocking has a bigger impact, right? So it’s not only the inventory of our customers, but it’s the inventory in the whole channel. There is a lot of distributors that have these type of panels that they need for their construction projects. And that’s where we’re seeing a lot of the destocking. All the information that we have from our customers and how they dealt with the construction contractors is that we may see more in Q2.
Destocking has not finished in polymers, and we’re going to see more in Q2, but then we should see a rebound in demand in the second half. So that’s the difference in the two businesses. Destocking is more on the Polymer side than in Surfactants. surfactants, you have the effect of the customer that we lost that backward integrated.
David Silver: Last question would be on currency or foreign exchange translation. So you mentioned there was a $0.04 negative impact per share in the second quarter. But in speaking to some companies, I’m thinking that the currency mix is a little bit different this time than many other periods in the past. In other words, I guess we’re used to thinking about weaker dollar, stronger dollar more or less uniformly across your currency exposures. But I think what’s happening, if I’m not mistaken, is that I’m guessing that your European business is actually becoming – the translation is probably becoming something of a tailwind as the euro has strengthened versus the dollar. But I guess some of the more, I don’t know, inflationary currencies in Latin America might be – the volatility there might be what’s driving the overall picture.
So if you could just maybe talk about how you see currency translation by region, I guess, impacting your results, maybe in the second quarter and then looking ahead as far ahead as you care to.
Luis Rojo: Look, what we see now, for example, we should have started seeing a very small help at the end. These are not really material numbers. When you think about Q1, less than $1 million. I don’t think FX played a big, big role into the numbers. But what we’re seeing with the euro at $1.10, you should see a small help versus last year because, remember, last year in Q2, Q3, the euro was very different. So, we’re going to see a small help there. But on the other hand, you still have a lot of volatility in Mexico and Brazil, as you mentioned. So, currently, there are – continues to be strong. Of course, that drives higher cost in dollar terms. And sometimes, some of our contract there are in dollars. So that’s actually a small squeeze on the margin side.
So that’s why we need to keep working on productivity because, again, our costs can be higher in Brazil and in Mexico, and we need to recover that through productivity and through pricing. But again, we don’t believe we’re going to see any material impact in the next few quarters based on where currencies are now in our numbers.
Operator: The next question comes from Mike Harrison with Seaport Research.
Mike Harrison: Just a couple more. First on the Polymers business. It seems like you expect destocking to continue at least into the second quarter. Can you talk a little bit more broadly on what you see happening with underlying demand? It seems like from what we’re seeing in the headlines, residential housing is a big concern heading into the rest of this year. But the non-resi side of construction seems like it’s holding up a little bit better. I was curious what you guys are seeing in your business, given that it’s mostly non-residential?
