Q3 2021 Stepan Co Earnings Call

Okay.

Greetings and welcome to the Stepan Company Q3, 2021 earnings call 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 if at any time during the conference you need to reach an operator. Please press star Zero as a reminder, this conference is being recorded on Wednesday.

The October 20th 2021.

I would now like to 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 2021 financial review.

Before we begin please.

Date information. 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.

Judy, but not limited prospects for our floating operations global and regional economic conditions and factors detailed in our securities.

And Exchange Commission filings.

Well, if you're joining us online or over the phone. We encourage you to review the Investor Slide presentation, which we have made available at Ww.

Don't escape on Dot com under the investors section of our website, we make these slides available at approximately the same time as the earnings release.

<unk> issue.

And we hope that you find information and perspective helpful.

Now with that I would like to turn the call over to Mr. Quintana stay upon our chairman and Chief Executive Officer.

Good morning, and thank you all for joining us today to discuss our third quarter and year to date earnings.

Although many parts of the world are slowly improving the delta Varian continues to spread and vaccine rates and much of the developed world have stall.

Global supply chain disruptions are impacting commerce and many of the products. We all use everyday have been impacted at.

That step in our team.

<unk> continues to navigate through the turbulent environment to help our customers serve the market.

Adjusted third quarter net income was $36.400 million flat with prior year the negative.

Impact of the global supply chain disruptions and inflationary.

Insurers was offset by onetime tax benefits.

Year to date, adjusted net income was $121 million or $5 20 per diluted share. Both adjusted net income and adjusted earnings per share were up 22% versus the first nine.

Our impressive 2020.

Surfactant was also negatively impacted by lower consumer demand for cleaning disinfection and personal wash products, which have dropped since the pandemic peak in 2020.

In the third quarter each of our companies three global business segments.

Segments was negatively affected by raw material price inflation and significant supply chain disruptions, including raw materials shortages and logistics constraints.

Surfactant operating income was down 16%.

Largely due to higher North American.

Nine months chain cost driven by inflation higher planned maintenance costs, and the $2 2 million insurance recovery related to the mills sale plant in 2020.

Our polymer operating income was down 12%, mostly due to the non re occurrence of the insurance.

<unk> and the compensation received from the Chinese government in the third quarter of 2020.

Global polymer sales volume rose, 27% and was largely driven by the in Vista acquisition.

Our specialty product business rose by 53% and was mainly.

Due to order timing differences within our food and flavor business.

Our board of directors declared a quarterly cash dividend on Stephens common stock of $33.05 per share payable on December 15, 2021.

With this nine 8% increase.

<unk> has now increased and paid its dividend for 54 consecutive years.

The board authorized the company to repurchase up to $150 million of its common stock.

Other demonstrating our commitment to deliver stockholder value.

Disciplined capital allocation our strong.

Our balance sheet and cash generation will allow us to invest in our current business and pursue strategic opportunities, while we return capital to our stockholders.

Luis will now share some details about our third quarter and year.

Through date results.

Thank you Queen My comments will generally follow the slide presentation, let's just start with a client portal recap the quarter.

Net income for the third quarter of 2021 was $36 4 million or $1 57.

Sure.

Basically.

Year to date flat versus the third quarter of 2020.

Because adjusted net income is a non-GAAP measures, we provide full reconciliations to their comparable GAAP measures.

It can be found in appendix two of the presentation and table two of that branch release.

Specifically adjustment to reported net income this quarter consist of adjustment for the FERC.

<unk> presentation, Environmental reserve increase a minor restart cutting expenses.

Adjusted net income for the quarter and exclude deferred compensation income of $1 1 million or five cents per diluted share compared to the FERC compensation expense of $2 $6 million.

Or.

Vertical 11 cents per diluted share in the same period last year.

The deferred compensation numbers represent the net expense related to the company's deferred compensation plan as well as cash handling and stock appreciation rights for our employees.

Because these liabilities change with the movement in the stock price we exclude these items from our.

Or any kind of discussion.

Slide five shows the total company's earnings, but each for the third quarter compared to last year third quarter.

Breaks down the increase in adjusted net income.

Because this is net income the figures noted here that on an after tax basis, we will call. It he said maybe more detail but to summarize.

What Bernie surfactants and polymers were down while specialty product was all versus the prior year.

Corporate expenses and all others were slightly higher due to inflation.

The company's effective tax rate was 20% for the first nine months of 2021 compared to 24% in the same period last year.

<unk> decrease was primarily attributable to a favorable tax benefit recognized in the third quarter of 2021.

And tax benefits unrelated to the merger of the companies three Brazilian entities into a single entity.

More favorable R&D tax credits.

With.

Full year 2021 effective tax rate to be in the 20% to 22% range.

<unk> seeks focuses with fact those segment results for the quarter.

Net sales were $388 million.

16% increase versus the prior year.

Selling prices were up to 80%.

Finally, due to improved product and customer mix as well as the pass through of higher raw material costs.

The effect of foreign currency translation positively impacted sales by 2%.

Volume decreased 6% year over year.

Most of this decrease reflects lower volumes sold into the.

Primary consumer product and market.

<unk> for cleaning disinfection I'm personally not watch products that all from the peak of the pandemic.

This was partially offset by very strong growth in our functional product end markets and solid good all in the industrial and institutional cleaning market.

So the fact that operating income for the quarter decreased $6 7 million or.

Or 16% versus the prior year.

I'll leave you to supply chain disruption impacts and a one time insurance payment of $2 $2 million recognized in the third quarter of 2020.

With demand the supply chain disruption.

<unk> had a negative impact of approximately $4 million during.

During the current quarter.

We implemented price increases in October to continue recovering our margins.

Latin America, but I think we sold were lower due to planned maintenance and expansion activities Europe results increased slightly due.

Due to higher demand in functional products, partially offset by a decrease in consumer products.

Now turning to polymers on slide seven.

Net sales were $199 million in the quarter.

Up 17% from prior year sales.

Selling prices increased 44%.

Primarily due to the pass through of higher raw material costs.

Volume grew 27% in the quarter, but EBIT by 33% growth in global rigid polyol.

This volume growth is mostly related to the <unk> acquisition.

Global rigid polyol volume, excluding Invista was flat driven by supply chain.

Disruptions.

Higher demand within the specialty polyol business also contributed to the volume growth.

<unk> operating income decreased $2 6 million or.

12% driven by onetime benefits of $4 million in the third quarter of 2020 and significant supply chain disruptions.

In the current quarter.

We estimate the supply chain disruptions had a negative impact of approximately $3 million during the quarter.

North America, Ponyo result decreased due to a onetime benefit recognized in the third quarter of 2020 and supply chain disruptions, partially offset by higher volume.

Options in October we implemented price increases in the market to recall that at what margins.

Europe results increased driven by DMV acquisition.

China results decreased due to a one time benefit recorded in the third quarter of 2020, as well as higher supply chain costs.

Specialty products net.

While up 15% driven by volume of 9% between quarters operating income increased zero point $8 million or 53% due to order timing differences within our food and flavor business and improve margins within our MCT product line.

Moving onto slide eight our balance.

Sales remained strong and we have ample liquidity to invest in the business our leverage and interest coverage ratios continues at very healthy levels.

We had a strong cash from operations in the first nine months of 2021, which we have used for capital investments dividends share buybacks.

Balance sheet working capital given the strong sales growth and raw material inflation.

We executed a $50 million private placement note at a very attractive fixed interest rate of around 2%.

We will use our new cash to fund, our organic and inorganic growth opportunities and for other.

Our corporate purposes.

Full year capital expenditures are expected to be in the range of $200 million to $220 million.

Can you estimate includes today's announced a constellation investment at our Pasadena excess facility.

Beginning on slide 10, as Scott will now update you.

January 2021 and strategic priorities.

Thank you Louise as we wrap up the first nine months of 2021, we believe our business will remain relatively strong despite the supply chain challenges, we and our customers are experiencing.

We continue to prioritize the.

Now what are you and health of our employees as we deliver products that contribute to the fight against COVID-19.

Consumer habits have changed and these new behaviors include the higher use of disinfection cleaning and personal wash products.

We believe our surfactant volumes in the consumer products and.

Save kit.

We remain higher versus pre pandemic levels, however, lower than peak pandemic demand in 2020.

We are seeing institutional cleaning and disinfection volumes grow as economies around the world reopen and people demand higher standards for cleaning and disinfection.

In public settings.

Our diversification strategy into functional markets continues to be a key priority for Stepan during the first nine months of the year global agricultural volume increased double digits.

High commodity prices for corn, and soybeans, coupled with higher planted acreage.

And Mark only 21 growing season drove the demand for crop protection products in North America.

Latin America, and Asia sales continued to grow in the post patent pesticide segment with new products being launched throughout the world.

Oilfield volume was up strong double digits during the first nine.

And that to the year due to higher oil prices and a depressed 2020 base, we remain optimistic about future opportunities in this business as oil prices have recovered to the $80 per barrel level and we continue to promote our new cost effective product solutions that improve.

Nine months oilfield, operator, ROI and protect their wells.

We will continue working on improving operational productivity as well as product and customer mix to improve surfactant operating income and margins.

Globally, we are increasing capacity in certain product lines, including.

<unk> <unk> and <unk> to ensure we can meet higher requirements from our customers.

As discussed previously we are increasing north American capability and capacity to produce low one for dioxin Sulfates, one core dioxane as a minor byproduct generated and the manufacturer.

<unk> filed either sulfate surfactant, which are key cleaning and foaming ingredients used in consumer product formulations.

Through a combination of process optimization and additional manufacturing equipment step and we'll be prepared to supply customers either sulfates that meet the new January 2023 regulatory.

<unk> requirements. This.

This project along with our announcement today to invest $220 million to build under an EPC contract of 75000 metric ton per year I'll constellation production facility at our Pasadena, Texas site are the primary drivers of our 2021.

<unk> towards little expenditure forecast of $200 million to $220 million. We are excited about the capability and future growth that these investment projects will deliver to step in company.

Tier two and tier three customers continued to be a focus of our surfactant growth strategy.

We.

One cat 300, new customers during the quarter and approximately 800 customers during the first nine months of the year.

We finished our consulting work in our mills Dale plant and are focusing now on executing the recommended changes we accelerated investments in both expense and Capex.

We added improved productivity and to increase capacity.

We expect this project and the investment level to continue through the remainder of the year and we should see benefits, including productivity enhancements increased capacity in several high margin product lines and improved service levels to our customers next year.

Polymers had good performance during the first nine months of the year as market demand recovered after a challenging year in 2020 due to Covid restrictions. The business has also benefited from the Invista acquisition, which closed in January.

However, in the third quarter, we saw a significant impact to our margins.

<unk> do.

Due to raw material availability and cost escalation, while orders from customers remain restrained by their own raw material availability and other supply chain issues.

For perspective, we had suppliers declared force majeure on critical raw materials, while our customers Express.

<unk> market shortages on MDI and flame Retardants, which are used in their finished foam insulation formulations.

We are currently working to recover our margins in the fourth quarter.

The long term prospects for our polyol business remains attractive as energy conservation efforts and more stringent building codes.

Experience should increase demand.

The integration of the business acquired from <unk> is going well and expect this acquisition to deliver more than $20 million of EBITDA in 2021.

Given the strength of our balance sheet, we plan to continue to identify and pursue acquisition opportunities to fill gaps.

And our portfolio and to add new platform Chemistries aligned with our company's growth strategy I.

I will now turn the call back to <unk> for closing comments.

Thank you Scott the company delivered record first nine month earnings in 2021.

Looking forward, we believe our <unk>.

<unk> items in North American consumer product end markets will continue to be challenged by raw material and transportation availability.

While we believe industrial and institutional cleaning volume will grow versus prior year, we do not believe it will compensate for lower consumer consumption of cleaning.

And function and personal wash products.

We believe that the demand for surfactants, when the agricultural and oilfield markets will exceed prior year demand.

We believe our polymer business will deliver growth versus prior year due to the ongoing recovery from pandemic related delays.

And our first quarter acquisition of investors aromatic polyester polyol business.

We continue to believe the long term prospects for rigid polyol remain attractive.

We anticipate our specialty products business will improve slightly year over year. Despite continued.

As material sourcing issues.

Raw material price increases higher planned maintenance expenses and supply chain challenges, we believe underlying market demand remains strong and we are optimistic about delivering full year earnings growth this year.

Hello.

Rob inventories across the value chain should provide opportunities in 2022.

This concludes our prepared remarks at this time, we would like to turn the call over for questions. Frank. Please review the instructions for the question portion of today's call.

Thank you.

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Our first question comes from Mike Harrison with Seaport Global Securities. Please proceed.

Hi, good.

Good morning, Mike.

A couple of questions.

The Texas capacity.

So the announcement today I believe that sites with something that you acquired from Sun and then idled.

So can you walk through the decision to make this investment.

Good morning, Matt and maybe help us understand.

How much incremental capacity that 75000 tons a year represents in your network.

Okay. Thanks, Mike, let me begin by saying that stepping over the last several years has built a very.

<unk> balance sheet.

Which is which has allowed us to make the inverse.

Polyester polyol acquisition earlier, this year and will allow us to invest in this and other strategic organic growth opportunities.

Particularly for our higher margin core.

Strides and in this case for specialty <unk>.

Our investing $220 million at the Pasadena site.

To meet our long term growth expectations.

In both our surfactant and our polymer business and maybe I'd like Scott to jump in and make.

<unk>.

Comments and answer your specific question about the incremental capacity.

Thanks Glenn.

Mike We believe our existing Pasadena site is an ideal location for the new growth capacity due to its close proximity to key raw materials, including ethylene oxide propylene.

A few hide and other key feedstocks used in the productions of our production of our specialty <unk>.

Additionally, the existing infrastructure at the site, which we acquired from Sun.

Has existing.

Infrastructure around utilities ample storage tanks, which makes this an attractive and a key.

Knochel efficient builds.

We are managing the project under a third party EPC contract and will include the installation of three I'll constellation reactors, which will provide 75000 tons of new incremental capacity to our company's.

Capital Folio.

And the site will be expandable up to 10 total reactors with future additional investment.

We will leverage the investment in Pasadena to optimize our current El constellation network, and we expect the new installed capacity to be effectively.

Port utilized after startup and after customer approvals are complete.

Yeah.

Yeah.

Alright, that's very helpful.

Help me understand is this facility replaces.

The old idled assets.

<unk> Pasadena, where are you also restarting some of those idled assets.

So the site, we acquired in Sun five six years ago.

Really had we had the vision to install our constellation capacity at the site.

Existing.

The acquired assets that were at the site or not of use to step in.

We have dismantled most of the sulfonation capacity and other.

Esterification capacity at the site to put in the new constellation investment.

So so we've been able.

Or the average kind of 50 different storage tanks that were on site, we were able to take advantage of the fire water pond in the logistics infrastructure that they had but in terms of process capabilities.

All the new capabilities are being added are being added to.

Well the lake.

Understood that makes sense.

And then in terms of the 220 million of Capex, maybe a question for Luis it looks like about $50 million of VAT is coming this year is the remaining 170 million or so pretty evenly split.

To this I mean, 2022 and 2023 and can you talk at all about the returns of the payback period for this investment.

Good questions, Mike what I would say again, the $50 million that we're increasing our capex guidance for DCF.

It's related to loan.

Long lead time equipment that we want to buy it right away.

And that is that a fact that project when you think about the remaining capex is more.

I mean, it's not even the split between 'twenty one 'twenty two 'twenty three is more in 'twenty two than in 2023.

Uh huh.

Yeah.

I mean, we need to get ahead of ahead of.

The plan.

Make sure that we are ready for 2023 your style.

We won't discussing future calls about about more specific targets about the project financials.

As a screen on it Scott mentioned it. This is a key product line is our high margin product line. So we are expecting this project do we EBIT margin accretive on EBITDA accretive for Stefan company.

Alright, and then the last question I have for now.

Kind of an overall question on pricing versus cost.

Is Q3.

Showing the peak margin headwind or peak raw material costs or do you see the margin headwind worsening in Q4.

Just maybe looking for a little bit more color on.

The progression of raw material cost and supply chain disruption from Q3 into Q4 as well as how much offset you're expecting.

From pricing, obviously theres been a lot of pricing already and you're announcing some additional increases for October any color there would be helpful. Thank you.

Sure.

Sure Mike I mean, I think is a very volatile environment out there, but what we will say east we expect somewhat regional inflation in in Q4, I mean, if you think about oil prices at 83 et cetera.

Could be a little bit more inflation in the system and transportation and all of that now.

Now basically all the inflation is what we believe fees is reducing by advanced low of inflation that you saw in Q1 Q2 Q3 that is low piece is reducing.

And in a high inflation environment of course, you always have a lag.

Between pricing.

Cost.

So that's why as you saw we had a 44% price mix in polymers on 20% price mixing in some factors at work and we announced additional price increases in October to continue gradually recovering our margins. So that is always a lag so but but but we'll.

We'll see I mean, the inflation on the steel is still out there.

But we of course are planning to recover our margins on a going out of the base.

And I would say from a supply chain raw material availability perspective, we believe the situation in Q3.

Was was it was bad and it is slowly recovering so as we look at availability of key raw materials going into.

The fourth quarter, it is slowly improving and we would anticipate.

That would gradually improve and get better as.

<unk> 2022.

Alright, thanks very much.

Yeah.

Our next question comes from Vincent Anderson with Stifel. Please proceed.

Yes, thanks, and good morning, everyone.

Good.

As we have presented.

Good morning.

Just a couple of quick questions on the El calculation capacity, just looking through your product guide.

It doesn't appear that propoxur relation based products or maybe a large part of your portfolio now could you maybe confirm that.

And then if.

That's true what kind of opportunities does that product line open up.

So I would say that today, we have over 100 differed.

Al constellation based products.

Again most of those.

At more fall into the specialty range and some of those products are used as key intermediates in other step in products that we sell to the marketplace.

So today.

Our constellation the use of Eo and Po is a significant part.

Our portfolio of products that we sell to the marketplace.

And we're interested in expanding that.

Our presence in the non ionic market.

Okay. Thanks.

As you grow this capacity.

Is there any consideration for maybe having too.

Displace some of your own sulfonation sales into.

Detergent markets or do you feel comfortable being able to direct it all into more specialty applications to place it.

The vast majority of our.

Al constellation products are targeted for these specialty markets agricultural oilfield in.

Industrial and institutional cleaning we.

We do use some commodity range.

Fair amount of commodity range.

E thoughtfully asos.

Pat.

In our sulfonation business today.

We would primarily.

Continue to source those from the marketplace will utilize available capacity on an incremental basis.

As as as appropriate.

Okay.

Excellent. Thank you and then just one.

One quick one for Luis.

You guys have run a very lean balance sheet for a very long time and now that we're seeing the spending pick up in.

And the option of share repurchases are you may be thinking about moving more towards the target.

That level.

When you think about your Capex budget and the opportunity to buy back shares all within the next two years or so.

No. Good question Vincent what I would say is we're very excited about the growth opportunities that we have and we are there.

The company has built a very strong balance sheet over the last.

And we closed last year with $350 million in cash.

And we have good opportunities for growth and we're happy that we're deploying the balance sheet for future opportunities. We will continue evaluating options to continually growing organically and inorganically.

And the pains on those opportunities we will we will continue adjusting our buyback program, but we are not looking for for meaningful changes in that point, we have had a disciplined approach in terms of our capital allocation, but we are willing to flex the balance sheet.

As the market opportunities present themselves and we can add to our business from an accretive perspective, so both organically and inorganically.

Last comment that I would make things any we.

We are adding are also.

Good on unique opportunity to get very affordable.

Affordable.

Etsy.

You saw what remarks about.

Notes that we're getting a 2%.

Fixed interest rates. So this is a good time to flex I'll need to be the balance sheet.

Alright excellent. Thank you very much and best of luck on the rest of the year.

Yes.

Our next question comes from David Silver with CL King. Please proceed.

Okay. Good morning.

So I'll just preface my remarks, I'm kind of working without a net here.

Both Internet and our network are down.

Finance, though.

I'll apologize in advance if I'm asking for some information that was in the slides or whatever.

I'm, making you repeat yourself.

Okay.

I did want to kind of follow up.

Hum.

On your your comments about raw materials.

Inflation in the supply chain disruptions.

And in particular I was wondering if we could focus a little bit on our non north American assets of yours in particular to start with Europe.

In the last few weeks I mean, theres been a number of stories talking.

One here that the extreme levels of <unk>.

Energy costs power cost and resulting.

Shutdowns or curtailments in production by a number of manufacturers.

There.

And I'm just wondering about maybe if you could put it into context.

Talking about your comments about.

Maybe disruptions kind of peaking around here or being of kind of a limited duration before things big.

Again to return to normal in other words, what gives you confidence that.

The extremely elevated gas call.

First year and the power limitations.

Particularly heading into the winter months.

We will not prove to be kind of a longer term issue or.

Disruptions may may even increase in intensity.

<unk>.

Hi, David This is Scott Behrens.

Ill try to answer your question as best I can.

To this point, we have not seen any energy disruptions.

In our European businesses, both on the surfactant and polymer side the restraints within the supply chain you really.

Centered around raw material availability.

Even in the construction market.

Shortages of timber windows and other construction materials can can.

Impede.

The demand that we're seeing right now so I would say energy is not.

Not an issue.

That we have seen to this point I would I would call out, though China. There are energy disruptions going through the Chinese industrial markets as they try to achieve some of their earlier.

Milestones around.

<unk>.

Fossil energy use and we are seeing rolling what I'll call blackouts of industrial power used throughout the country, which are both impacting our raw materials, our customers raw materials, and then ultimately will affect at some point, most likely production of our facilities and our customers' facilities.

In terms of the duration.

The good news is the underlying demand is there in the marketplace. So there is high motivation and incentives to get these supply chains disruptions alleviated so that both stepping in and our customers can help meet the market demand on.

Both the surfactant and our polymer side of the business.

And where we have raw material constraints, we are in constant contact with our key raw materials suppliers that may be having some supply issues today and given the projections that they have to restart their facilities.

That.

That's the reason why we have confidence that the situation will get better as we move through Q4.

Okay. Thank you for that.

It's going to follow up with a question about the Chinese situation in China. So you anticipated that one.

I wanted to follow up with a question.

About marketing strategy. So I guess Scott outlined your continued success at penetrating the tier two and tier three.

Customer segments.

And I am just wondering maybe from a longer term perspective is.

And then maybe coal to ultimately displace let's say a meaningful amount of your current volume directed to tier one accounts bye bye bye.

Offsetting that with continued growth on the tier two or tier three side or is this the case where.

Maybe if we look out three to five years from now you will have retained your current base of tier one business and the incremental growth will be largely directed to.

The tier twos and tier threes that you'll you'll continue to penetrate thank you.

Yeah, David the Atlanta is.

<unk>.

We intend to grow both with our large tier one customers throughout the world as well as with our smaller tier two tier three customers, it's really a diversification strategy for our overall enterprise.

We believe having a broad breadth of customers.

Hum.

True you step in for different reasons, whether it be our capacity and our product lines or the our technical and formulation services expertise.

We are catering to the entire target customer base. So we have no intention of.

Focusing on one more more than the other.

<unk> Val tend to grow with both.

Okay, and then maybe one last one please.

This relates to the decision to move forward on the <unk> capacity expansion.

<unk>.

In the past few months.

In the press.

Step in was associated was.

Another ethoxyl eights producer that was up for sale.

I'm just wondering if we should think about the decision to move forward now as kind of a build versus buy decision in other words, you had kind of a.

Process and you were willing to expand.

Inorganic route are buying into.

Another company's capacity.

And when that fell through you were willing to move forward.

Growing.

Organic.

So is this was this should we think of this as kind of a build versus buy.

Scenario.

Played out over the course of the last several months.

Yes.

Okay.

So I think okay.

Thanks very much.

Two questions.

Our next question comes from Marco Rodriguez with Stonegate capital markets. Please proceed.

Good morning, everybody and thank you for taking my questions.

Good morning Marco.

Good morning.

I was wondering if I can get a little bit of clarification on the plate with supply chain disruption that you guys called out for surfactants in poly I know that the total number of $7 million, but we're also talking about inflationary pressures and increased planned maintenance costs.

Are those inflationary pressures and the planned maintenance costs included in.

In that number or there are separate numbers that need to be sort of quantified.

They are separate numbers.

Got it and is there any way to quantify those impacts.

Michael We haven't we've provided a $7 million because we thought that the most relevant.

Number in Q3, we have of course inflation and all of that and we.

Talking last quarter, we're running high you are not on our maintenance expenses.

Especially in one of our four Cvd's asked that all the work that we have done with our consultants, we decided to accelerate some of the.

Investments in maintenance and Capex, but but the most relevant number is there is a $7 million on a.

You could argue that a couple of millions dollar here and there I don't know that items, but they are not that material.

Got it very helpful and then in terms of the.

The raw.

Prices that youre seeing in the increases in the prices and the planned increases of your prices to customers.

Obviously, you've mentioned out here in October youre, raising them again, you raise them last quarter.

Just wondering if you can maybe also talk a little bit about the kind of the competitive environment, you're seeing right now and how you are feeling about your ability to continue.

Pass through price increases if the raw material environment is still kind of remains challenging.

Challenging throughout the next six months or so.

Yeah, Mark this is Scott.

I would say that the.

The supply chain disruptions in the escalation on raw materials driven by commodity.

<unk>.

And supply chain disruptions.

They're ramping wild across the industry.

So the inflation that I think the industrial customers in our consumer customers have seen in the last call. It three to four months is almost unprecedented.

Price and supply and security of supply is important as our inventory levels are depleted across the value chain. So I.

I would say everyone is in the same boat.

Ensuring that product is delivered on time, so they can replenish their customers' orders.

It is taking paramount over negotiations in terms of pricing.

Got it very helpful and then.

Then just one quick follow up on the.

All calculations expansion plant in Texas.

When.

His earlier about there's obviously been a long term.

Target for you in terms of growth potential can you maybe talk a little bit about.

What's sort of driving that decision process, where you guys were there certain things you were seeing in the market that you wanted to start moving more towards.

That was it discussions with particular customers that were looking for increased.

Fly there any sort of color there would be helpful.

So what I would say is that today's Stephan makes our constellation products at two of our facilities.

Our Winder, Georgia and Mills Dale, Illinois facility. We also do use our network of outside toll manufacturers and so our business is actually much larger than our current capabilities. So over a period of time, we would look to.

Continue to grow our busy.

And also.

Potentially move some of the outsourced volume in house as well and so we believe the new capacity that we are.

Putting in.

That we can.

Phil over a relatively short period of time at a higher margin.

<unk>.

Accretive.

With higher margin accretive business.

Understood.

Last quick question for me.

On the tax benefit you saw this quarter.

Is this something that you guys, maybe we're planning for some time or you just saw some particular bench.

Benefit.

I guess timing wise made this quarter. This last quarter, when you were able to execute on that.

Specifically with regard to the Bruce the emerging of the Brazilian entities.

Our plan was to do that to simplify our business within the country.

And so we knew that was an opportunity and yes of course, we didn't have certainty on the quarter to tighten it up because this will suddenly say integration is well done required resources from our side. So.

This was a project that we had in our planning and we finally found the right window.

<unk>.

What resources to do the SAP implementation.

We're able to do executed in Q3, but this has been a project that has been there for a while.

Right.

The other piece of kind of minor or mine ore.

True ups on more R&D tax credits for them.

Understood Great. Thank you guys very much for your time I appreciate it.

Thank you Rocco.

We have a follow up from Mike Harrison with Seaport Global Securities. Please proceed.

Hi, just a couple of additional ones.

In terms of the surfactant volume growth.

Obviously, you're seeing some normalization of.

I guess, the band and maybe inventory levels from your consumer customers. But then you also mentioned the institutional growth.

Is the institutional growth that youre seeing at this point real demand.

Both there some inventory restocking going on in that channel to some extent and maybe the opposite question in consumer is there. Some destocking that's happening there I guess, just trying to get a sense of what kind of surfactant volume growth.

We might think.

Or is that we're starting to model 2022. Thanks.

Thanks for any color you can provide there.

Hi, Mike This is Scott, let's start with the institutional side of the business.

The demand is.

<unk> happening in the marketplace today, so as the economies around the world are opening.

The restaurants the hotels.

Cruise ships are starting to open up that public disinfection is part of that regimen. So I would say, we're beyond the inventory build and into actual consumption on the institutional side on.

On the consumer side great question.

It's.

It's not as clear to understand what is still destocking.

In the marketplace versus what's being.

Delayed due to supply chain disruptions.

You could argue that.

Hans So which was a very high demand.

During the pandemic the peak pandemic in 2020 that may still be going through some.

Inventory reduction.

Across the board I'd have to say that.

<unk>.

Supply chain disruptions are probably restraining more dim.

And then there is on the Destocking side.

I believe I think we believe inventory levels across the value chain remained depressed.

Until these supply chain disruptions get alleviated.

Alright, that's helpful and then over on.

The polymers business you mentioned.

Some issues related to shortages of isocyanate.

Some delays related to.

There are supply chain issues, where some of the VAT construction activity.

Theyre not able to get other products they need to.

Move forward can you talk a little bit about.

Whether you expect that ISO sign it issued to subside I guess over the over the winter months, the seasonal slowdown and maybe talk a little bit about what your polymers rigid polyol customers have said about their backlog of construction activity.

Activity as we start to get into next year.

I think from a high level perspective, our polyol customers are telling us there is pent up demand that they have not been able to serve so they do have an active backlog of orders.

They are anticipating that that backlog will remain in place.

Kind of into the first half of 2022, so so.

Yes, and we do anticipate that spice chain issues getting better as I mentioned previously.

So we are in we are anticipating that we're going to see growth in 'twenty two versus where were at in 2021.

Alright, thanks very much.

Thanks, Mike.

There are no further.

Further questions at this time.

Okay. Thank you all very much for joining us on today's call. We appreciate your interest and ownership in Stepan company.

Please stay safe and healthy wash your hands frequently use disinfectants to clean surfaces.

You haven't already done so please get back <unk>.

Have a great day.

That does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect. Your line have a great day everyone.

Yeah.

Yeah.

Yeah.

And if yes.

Uh huh.

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Okay.

[music].

Okay.

[music].

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Okay.

[music].

No.

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[music].

[music].

Yeah.

[music].

[music].

Greetings and welcome to the Stepan company.

In Q3 2021 earnings call 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.

At any time during the conference you need to reach an operator, Please press star zero.

As a reminder, this conference is being recorded on Wednesday October 20th 2021, I would now like to 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 third quarter 2000 and Duane.

Our 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, including but not limited prospects for our floating operations Bill Wheeler.

Regional economic conditions and factors detailed in our Securities and Exchange Commission filings.

Whether youre, joining us online or over the phone. We encourage you to review the Investor Slide presentation, which we have made available at www Dot escape.

On the investors section of our website, we make these slides.

Any one approximately the same time.

The release is issued and.

And we hope that you find information and perspective helpful.

Now we've got I would like to turn the call over to Mr. Quinn, Stepan, our chairman and Chief Executive Officer.

Good morning, and thank you all for joining us today to discuss.

Our third quarter and year to date earnings.

Although many parts of the world are slowly improving the delta Varian continues to spread and vaccine rates and much of the developed world have stall.

Global supply chain disruptions are impacting commerce and many of the products we all use.

Every day have been impacted at.

That step and our team continues to navigate through the turbulent environment to help our customers serve the market.

Adjusted third quarter net income was $36.400 million flat with prior year.

The negative impact.

Impact of the global supply chain disruptions and inflationary pressures was offset by onetime tax benefits.

Year to date, adjusted net income was $121 million or $5 20 per diluted share both adjusted net income and adjusted earnings.

<unk> per share were up 22% versus the first nine months of 2020.

Surfactant was also negatively impacted by lower consumer demand for cleaning disinfection and personal wash products, which have dropped since the pandemic peak in 2020.

And.

In the third quarter each of our companies three global business segments was negatively affected by raw material price inflation and significant supply chain disruptions, including raw materials shortages and logistics constraints.

Surfactant operating income was down 16.

Percent.

Largely due to higher North American supply chain costs, driven by inflation higher planned maintenance costs and the $2 2 million insurance recovery related to the mills sale plant in 2020.

Polymer operating income was down 12%.

<unk>, mostly due to the non re occurrence of the insurance recovery and the compensation received from the Chinese government in the third quarter of 2020.

Global polymer sales volume rose, 27% and was largely driven by the Investor acquisition.

Our specialty.

<unk> business rose by 53% and was mainly due to order timing differences within our food and flavor business.

Our board of directors declared a quarterly cash dividend on <unk> common stock of $33.05 per share payable on December 15, 2021.

John.

With this nine 8% increase Stefan has now increased and paid its dividend for 54 consecutive years.

The board authorized the company to repurchase up to $150 million of its common stock further demonstrate.

<unk>, our commitment to deliver stockholder value through disciplined capital allocation.

Our strong balance sheet and cash generation will allow us to invest in our current business and pursue strategic opportunities, while we return capital to our stockholders.

<unk> will now share some details about our third quarter and year to date results.

Thank you Queen 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 2021 was $36 4 million or $1.

57 <unk>.

Sure.

Basically flat versus the third quarter of 2020.

Because adjusted net income and non-GAAP measures, we provide full reconciliations to comparable GAAP measures and these can be found in appendix two of the presentation and table two of that branch released.

Specifically.

Adjustments to reported net income this quarter consist of adjustment for deferred compensation environmental reserve increase a minor restart cutting expenses.

Net income for the quarter and exclude deferred compensation income of $1 1 million or five cents per diluted share compared to the FERC compensation.

I can expand of $2 $6 million or <unk> 11 per diluted share in the same EBIT last year.

The deferred compensation numbers represent the net expense related to the company's deferred compensation plan as well as cash stock appreciation rights for our employees.

Because these liabilities.

Change with the movement in the stock price, we exclude these items from our operational discussion.

Slide five shows the total company earnings, but each for the third quarter compared to last years third quarter and breaks down the increase in adjusted net income because this is net income. The figures noted here are on an after tax.

Mutation.

Call. It <unk> said, maybe more detail, but to summarize surfactants and polymers were down while specialty product was up versus the prior year.

Cockpit and expenses and all others were slightly higher due to inflation.

Companys effective tax rate was 20% for the first nine months of 2021.

Space compared to 24% in the same period last year.

Year over year decrease was primarily attributable to a favorable tax benefit recognized in the third quarter of 2021.

And tax benefits unrelated to the merger of the companies three Brazilian entities into a single entity.

One a more favorable R&D tax credits.

We expect the full year 2021 effective tax rate to be in the 20% to 22% range.

<unk> focus on surfactant segment results for the quarter. So in fact, our net sales were $388 million.

A 16% increase versus.

Prior year spending.

Selling prices were up 20%, primarily due to improved product and customer mix as well as the pass through of higher raw material costs.

The effect of foreign currency translation positively impacted sales by 2%.

Volume decreased 6% year over year.

But most of this decrease reflects lower volumes sold into the North America consumer product and market.

As demand for cleaning disinfection of personal wash products that all from the peak of the pandemic.

This was partially offset by very strong growth in our functional product end markets and solid goodall.

Industrial and institutional cleaning market.

So the fact that operating income for the quarter decreased $6 7 million or 16% versus the prior year.

Primarily due to supply chain disruption impacts and a one time insurance payment of $2 2 million.

<unk> recognized in the third quarter.

Indians and Im Duane.

With demand the supply chain disruptions had a negative impact of approximately $4 million.

During the current quarter.

We implemented price increases in October to continue recovering our margins.

Latin America operating results were lower due to planned maintenance and expansion.

Total activities.

Results increased slightly due to higher demand in functional products, partially offset by a decrease in consumer products.

Now turning to polymers on slide seven.

Net sales were $199 million in the quarter.

Up 17% from prior year.

Selling prices increased 44%, primarily due to the pass through of higher raw material costs.

<unk> grew 27% in the quarter, but EBIT by 33% growth in global rigid polyol.

Volume growth is mostly related to the <unk> acquisition.

Global rigid polyol volume excluding.

<unk> was flat driven by supply chain disruptions.

Higher demand within the specialty polyol business also contributed to the volume growth.

<unk> operating income decreased $2 6 million or.

12% driven by onetime benefits of $4 million in the third quarter of 2000.

In bidding and significant supply chain disruptions in the current quarter.

We estimate the supply chain disruptions had a negative impact of approximately $3 million during the quarter.

North America, Ponyo result decreased due to a onetime benefit recognized in the third quarter of 2020 and supply chain disruptions.

I'm joined partially offset by higher volume.

In October we implemented price increases in the market to recall that our margins.

Europe results increased driven by DMV acquisition.

China results decreased due to a onetime benefit recorded in the third quarter of 2020, as well as higher supply chain costs.

Specialty products net sales were up 15% driven by volume up 9% between quarters.

Trading income increased zero point $8 million or 53% due to order timing differences within our food and flavor business and improved margins within our MCT product line.

Moving onto slide eight our balance sheet remains strong and we have ample liquidity to invest in the business our leverage and interest coverage ratios continues at very healthy levels.

A strong cash from operations in the first nine months of 2021, which we have used for capital investments D.

Share buybacks on working capital given the strong sales growth and raw material inflation.

We executed a $50 million private placement notes at a very attractive fixed interest rate of around 2%.

We will use our new cash to fund, our organic and inorganic growth opportunities.

And for the.

General corporate purposes.

Full year capital expenditures are expected to be in the range of $200 million to $220 million.

Can you estimate includes today's announced a constellation investment at our Pasadena excess facility.

Beginning on slide 10.

<unk> will now update you on our 2021 and strategic priorities.

Thank you Louise as we wrap up the first nine months of 2021, we believe our business will remain relatively strong despite the supply chain challenges, we and our customers are experiencing.

We.

Let's call you to prioritize the safety and health of our employees as we deliver products that contribute to the fight against COVID-19.

Consumer habits have changed and these new behaviors include the higher use of disinfection cleaning and personal wash products.

We believe our surfactant volumes.

Continue to consumer product end market will remain higher versus pre pandemic levels, however, lower than peak pandemic demand in 2020.

We are seeing institutional cleaning and disinfection volumes grow as economies around the world reopen and people demand higher standards.

<unk> and cleaning and disinfection in public settings.

Our diversification strategy into functional markets continues to be a key priority for Stepan.

During the first nine months of the year global agricultural volume increased double digits high commodity prices for corn and soybeans coupled.

For higher planted acreage in the 2021 growing season drove the demand for crop protection products in North America.

Latin America, and Asia sales continue to grow in the post patent pesticide segment with new products being launched throughout the world.

Oilfield volume was up strong.

Hold withhold digits during the first nine months of the year due to higher oil prices at a depressed 2020 base, we remain optimistic about future opportunities in this business as oil prices have recovered to the $80 per barrel level and we continue to promote our new cost effective products.

Alex solutions that improve oilfield, operator, ROI and protect their wells.

We will continue working on improving operational productivity as well as product and customer mix to improve surfactant operating income and margins.

Globally, we are increasing capacity.

<unk> other product lines, including Bioscience, and <unk> to ensure we can meet higher requirements from our customers.

As discussed previously we are increasing north American capability and capacity to produce low one <unk> sulfates, one four dioxane as a minor byproduct.

<unk> generated in the manufacture of either sulfate surfactant, which are key cleaning and foaming ingredients used in consumer product formulations.

Through a combination of process optimization and additional manufacturing equipment step and we'll be prepared to supply customers either sulfates that meet the new January.

Product 2023 regulatory requirements.

This project along with our announcement today to invest $220 million to build under an EPC contract of 75000 metric ton per year I'll constellation production facility at our Pasadena, Texas site are the primary.

Papers of our 2021 capital expenditure forecast of $200 million to $220 million.

We are excited about the capability of future growth that these investment projects will deliver to Stepan company.

Tier two and tier three customers continue to be a focus of our surfactant growth.

Dry energy.

We added 300, new customers during the quarter and approximately 800 customers during the first nine months of the year.

We finished our consulting work in our mills Dale plant and are focusing now on executing the recommended changes we accelerated investments in both expense.

<unk> and capex to improve productivity and to increase capacity.

We expect this project and the investment level to continue through the remainder of the year and we should see benefits, including productivity enhancements increased capacity in several high margin product lines and improved service levels.

Levels to our customers next year.

Polymers had good performance during the first nine months of the year as market demand recovered after a challenging year in 2020 due to COVID-19 restrictions.

The business has also benefited from the Invista acquisition, which closed in January.

However in the.

Third quarter, we saw a significant impact to our margins due to raw material availability and cost escalation while orders from customers remained restrained by their own raw material availability and other supply chain issues for.

For perspective, we had suppliers declared force majeure on.

Critical raw materials, while our customers experienced market shortages on MDI and flame Retardants, which are used in their finished foam insulation formulations we.

We are currently working to recover our margins in the fourth quarter.

The long term prospects for our polyol business remains attractive as any.

Energy conservation efforts and more stringent building codes should increase demand.

The integration of the business acquired from <unk> is going well and expect this acquisition to deliver more than $20 million of EBITDA in 2021.

Given the strength of our balance sheet, we plan to continue to identify and.

And pursue acquisition opportunities to fill gaps in our portfolio and to add new platform Chemistries aligned with our company's growth strategy I.

I will now turn the call back to <unk> for closing comments.

Thank you Scott the company delivered record first nine month earnings in 2021.

Don.

Looking forward, we believe our surfactant volumes in North American consumer product end markets will continue to be challenged by raw material and transportation availability.

While we believe industrial and institutional cleaning volume will grow versus prior year, we do not believe it will compensate.

For lower consumer consumption of cleaning disinfection and personal wash products.

We believe that the demand for surfactants, when the agricultural and oilfield markets will exceed prior year demand.

We believe our polymer business will deliver growth versus prior year due to the.

Wayne recovery from pandemic related delays and our first quarter acquisition of investors aromatic polyester polyol business.

We continue to believe the long term prospects for rigid polyol remain attractive.

We anticipate our specialty products business will improve slightly.

On a year over year, despite continued raw material sourcing issues.

Raw material price increases higher planned maintenance expenses and supply chain challenges, we believe underlying market demand remained strong and we are optimistic about delivering full.

<unk> earnings growth this year.

Low inventories across the value chain should provide opportunities in 2022.

This concludes our prepared remarks at this time, we would like to turn the call over for questions. Frank. Please review the instructions for the question portion.

All year of today's call.

Thank you.

If you would like to register a question. Please press the one four on your telephone you will hear a three pronged technology a request. If your question has been answered and you would like to withdraw your registration. Please press the one fall butter three.

One moment please.

A portion of the order first question.

Yeah.

Our first question comes from Mike Harrison with Seaport Global Securities.

Proceed.

Hi, good morning.

Good morning, Mike.

A couple of questions.

Texas capacity announcements today, I believe that sites with something that you acquired from Sun and then idled.

So can you walk.

Through the decision to make this investment to advance and maybe help us understand.

How much incremental capacity that 75000 tons a year represents in your network.

Okay. Thanks, Mike let.

Let me begin by saying that step.

Please over the last several years has built a very strong balance sheet.

Which is which has allowed us to make the investor.

Polyester polyol acquisition earlier, this year and will allow us to invest in this and other strategic organic growth opportunities.

Particularly for our higher margin core product lines and in this case it for specialty consulates.

Our investing $220 million at the Pasadena site.

To meet our long term growth expectations.

In both our surfactant and our polymer business.

And maybe I'd like Scott to jump in and make a few extra comments and answer your specific question about the incremental capacity.

Thanks Glenn.

Mike We believe our existing Pasadena site is an ideal location for the new growth capacity due to its close proximity.

While materials, including ethylene oxide propylene oxide and other key feedstocks used in the productions of our production of our specialty <unk>.

Additionally, the existing infrastructure at the site, which we acquired from Sun.

Has existing.

Infrastructure around utilities ample store.

The key rings, which makes this an attractive in a capital efficient builds.

We are managing the project under a third party EPC contract and will include the installation of three I'll constellation reactors, which will provide 75000 tons of new.

<unk> channel capacity to our company's portfolio.

And the site will be expandable up to 10 total reactors with future additional investment.

We will leverage the investment in Pasadena to optimize our current El constellation network and we.

From a new installed capacity to be effectively utilized after startup and after customer approvals are complete.

Yeah.

Alright, that's very helpful. Can you help me understand is this.

<unk>, replacing.

The old idled assets in Pasadena, where are you also restarting some of those idled assets.

So the site, we acquired in Sun five six years ago.

Really had we had the vision to install our constellation capacity at the site.

Yes.

The existing or the acquired assets that were at the site or not of use to step in we have dismantled most of the sulfonation capacity and other.

Esterification capacity at the site to put in the new constellation.

Site assessment.

So we've been able to leverage kind of 50 different storage tanks that were on site. We were able to take advantage of the firewater pond in the logistics infrastructure that they had but in terms of process capabilities.

All the new.

<unk> had being added are being added to the site.

Understood that makes sense.

And then in terms of the 220 million of Capex, maybe a question for Luis it looks like about $50 million of that is coming this year is the remaining 170 million.

Capable so pretty evenly split between 2022 and 2023 and can you talk at all about the returns of the payback period for this investment.

Good questions, Mike what I would say again.

<unk> million dollars that we're increasing our capex guidance for this.

Are these is related to loan long lead time equipment that we want to buy it right away.

And.

Is that a fact that project when you think about the remaining capex is more I.

I mean, it's not even the speed between 'twenty one 'twenty two 'twenty three is more in 'twenty two.

DCF in 2023.

Because.

I mean, we need to get ahead of the ahead of.

The plan.

Make sure that we are ready for 2023 and style.

We won't discuss in future calls about about <unk>.

More specific targets about me.

And then the project financials.

As a screen on as Scott mentioned it. This is a key product line is our high margin product line.

We are expecting this project do we EBIT that are margin accretive.

On EBITDA accretive for Stepan company.

Alright.

And then the last question I have for now is kind of an overall question on pricing versus cost.

As Q3.

Showing the peak margin headwind or peak raw material costs or do you see the margin headwind worsening in Q4.

Just maybe looking for a little bit more color on the <unk>.

Ration of raw material cost and supply chain disruption from Q3 into Q4 as well as how much offset you're expecting from pricing. Obviously, there's been a lot of pricing already and you're announcing some additional increases for October.

Any color there.

There would be helpful. Thank you.

Sure Mike I mean, I think is a very volatile environment out there, but what we will say east we expect somewhat regional inflation in in Q4, I mean, if you think about oil prices at 83 et cetera.

It could be a little bit more inflation.

CCM in transportation and all of that now the slope of the inflation is what we believe fees is reducing by advanced low of inflation that you saw in Q1 Q2 Q3 that is slow piece is reducing.

And in a high inflation environment of course, you always have a lag.

In between pricing and cost. So that's why as you saw we had a 44% price mixing in polymers on 20% price mixing in surfactant, whereas.

We announced additional price increases in October to continue gradually recovering our margins so that.

But with a lag so, but but but we'll see I mean inflation is still is still out there.

But we of course are planning to recover our margins on a gradual basis.

And I would say from a supply chain raw material availability perspective, we believe.

That is all Jewish in in Q3.

Was it was it was bad and it is slowly recovering so as we look at availability of key raw materials going into.

The fourth quarter, it is slowly improving and we would anticipate.

That would gradually.

This should improve and get better as we approach 2022.

Alright, thanks very much.

Our next question comes from Vincent Anderson with Stifel. Please proceed.

Yeah. Thanks.

Good morning, everyone.

Good morning.

Good morning.

Just a couple of quick questions on the El constellation capacity, just looking through your product guide.

It doesn't appear that propoxur relation based products or maybe a large part of your portfolio now.

Can you maybe.

<unk>.

Firm that more and then.

That's true what kind of opportunities does that product line open up.

So I would say that today, we have over 100 different.

Al constellation based product.

Products.

Again, most of those fall into the specialty range and some of those products are used as key intermediates in others step in products that we sell to the marketplace.

So today.

Al constellation the use of Eo and Po.

Significant part of our portfolio of products that we sell to the marketplace.

And we're interested in expanding that.

Our presence in the nonionic market.

Okay. Thanks.

Yes.

Is as you grow this capacity is there any consideration for maybe having too.

Displace some of your own sulfonation sales.

Two.

Detergent markets or do you feel comfortable being able to direct it all into more specialty applications to place it.

The.

The majority of our population products are targeted for the specialty.

Markets agricultural oilfield and <unk>.

Industrial and institutional cleaning.

We do use some commodity range.

Fair amount of commodity range.

The vast oxalate asos.

In our sulfonation business today.

We would primarily continue to source those from the marketplace will utilize available capacity on an incremental basis.

As as as appropriate.

E.

Okay excellent. Thank you.

And then just.

One quick one for Luis.

You guys have run a very lean balance sheet for a very long time and now that we're seeing the spending pick up in.

And the option of share repurchases are you, maybe thinking about moving more towards the target.

Preet net debt level.

When you think about your Capex budget and the.

The opportunity to buy back shares all within the next two years or so.

No. Good question Vincent what I would say is we're very excited about the growth opportunities that we have and we are you know they.

The company has built.

A very strong balance sheet over the last decade, and we closed last year with $350 million in cash.

And we have good opportunities for growing we're happy that we're deploying the balance sheet for future opportunities. We will continue evaluating options to continually growing organically.

Italy, and Inorganically and depends on those opportunities. We will we will continue adjusting our our buyback program, but we are not looking for for meaningful changes in that point.

We have had a disciplined approach in terms of our capital allocation, but we are willing.

The flex the balance sheet as the market opportunities present themselves and we can add to our business from an accretive perspective, so both organically and inorganically and the last comment that I would make things any.

We are adding a also an a.

Good and unique opportunity to get very.

<unk>.

Affordable financing.

You saw our remarks about.

Notes that we're getting a 2% fixed interest rates. So this is a good time to flex I'll need to be the balance sheet.

Alright excellent. Thank you very much and best of luck on the rest of the year.

Yeah.

Our next question comes from David Silver with C. L. King. Please proceed.

Okay. Good morning.

I'll just preface my remarks, I'm kind of working without a net here both internet and.

Our network are down here so.

I'll apologize in advance if I'm asking for some information that was in the slides or whatever.

Making you repeat yourself.

Okay.

I did want to kind of follow up.

On your comments about.

The raw materials in.

Inflation in the supply chain disruptions.

And in particular I was wondering if we could focus a little bit on our non north American assets of yours and in particular to start with Europe.

But in the last few weeks I mean, theres been a number.

Our growth story is talking about the extreme levels of energy costs power cost.

And resulting.

Shutdowns or curtailments in production by a number of manufacturers.

There.

And I'm just wondering about maybe if.

<unk> put into context, your comments about maybe disruptions kind of peaking around here or being of kind of a limited duration before things begin to return to normal in other words, what gives you confidence that the.

The extremely Ella.

You completed gas costs and the power limitations.

Particularly heading into the winter months.

We will not prove to be kind of a longer term issue or.

Disruptions may may even increase in intensity.

Hi, David This is Scott Behrens.

I'll try to answer your question as best I can.

To this point, we have not seen any energy just ructions.

In our European businesses, both on the surfactant and polymer side.

Restraints within the supply.

We really are centered around raw material availability.

Even in the construction market.

Shortages of timber windows and other construction materials can.

And impede.

The demand that we're seeing right now so I would say.

Energy is not an issue.

That we have seen to this point I would I would call out, though China, there are energy disruptions going through the Chinese industrial markets.

They try to achieve some of their earlier.

<unk> stones.

Around.

Fossil energy use and we are seeing rolling what I'll call blackouts or industrial power used throughout the country, which are both impacting our raw materials, our customers raw materials, and then ultimately will affect at some point, most likely production of our facilities and our customers' facilities.

In terms of the duration.

The good news is the underlying demand is there in the marketplace. So there is high motivation and incentives to get these supply change disruptions alleviated so that both <unk> and our customers can help meet the market demand.

Both the surfactant and polymer side of the business.

And where we have raw material constraints, we are in constant contact with our key raw materials suppliers that may be having some supply issues today and given the projections that they have to restart their facilities.

Demand. That's the reason why we have confidence that the situation will get better as we move through Q4.

Okay. Thank you for that I was going to follow up with a question about the Chinese situation in China. So you anticipated that one.

I wanted to follow up with.

And maybe about marketing strategy.

I guess Scott outlined your continued success penetrating the tier two and tier three.

Customer segments and I'm, just wondering maybe from a longer term perspective.

Second goal to ultimately displace let's say a meaningful amount of your current volume directed to tier one accounts by.

Bye bye.

Offsetting that with continued growth on the tier two or tier three side or is this the case.

This where maybe if we look out three to five years from now you will have retained your current base of tier one business and the incremental growth will be largely directed to.

The tier twos and tier threes that youll youll continue to penetrate thank you.

Yes, David the ladder.

There is true.

We intend to grow both with our large tier one customers throughout the world as well as with our smaller tier two tier three customers, it's really a diversification strategy for our overall enterprise.

We believe having a broad breadth of customers.

Who value step in for different reasons, whether it be our capacity and our product lines or it be our technical and formulation services expertise.

We are catering to the entire target customer base. So we have no intention of.

Focusing on one more than.

Then the other we intend to grow with both.

Yeah.

Okay, and then maybe one last one please.

This relates to the decision to move forward on the <unk> capacity expansion.

<unk>.

In the past few months.

The press.

Yes.

Step in was associated with.

Another ethoxy relates producer that was up for sale.

I'm just wondering if we should think about the decision to move forward now as kind of a build versus buy decision in other words, you had kind of a.

A two track process and you were willing to expand.

Inorganic route are buying into.

Another company's capacity.

And when that fell through you were willing to move forward.

Growing.

Clinically. So is this was this should we think of this as kind of a build versus buy.

Scenario that played out over the course of the last several months.

Yes.

[laughter], okay. Thanks very.

Those are my questions.

Our next question comes from Marco Rodriguez with Stonegate capital markets. Please proceed.

Good morning, everybody and thank you for taking my questions.

Good morning Marco.

Good morning, I was wondering if I can get a little bit of clarification on the plate supply chain disruption that you guys called out for surfactants in poly I know that the total number of $7 million, but we're also talking about inflationary pressures and increased planned maintenance costs.

Are those inflationary pressures and the planned maintenance costs included.

<unk> in that number or there are separate numbers that need to be sort of quantified.

They are separate numbers.

Got it and is there any way to quantify those impacts.

Michael we haven't.

We've provided a $7 million because we thought that the most relevant.

On number in Q3, we have of course inflation in all of the elements and we are starting last quarter, we're running higher on our maintenance expenses.

Especially in one of our four cvd's. After all the work that we have done with our consultants, we decided to accelerate some of the.

Investments in maintenance and capex, but but the most relevant number.

$7 million.

You could argue that a couple of millions dollar here and there I don't know that items, but not.

Not that material.

Got it very helpful and then.

In terms of the.

Raw material prices that youre seeing in the increases in the prices and the planned increases of your prices to customers.

Obviously, you've mentioned out here in October you're raising them again, you raise them last quarter. Just wondering if you can maybe also talk a little bit about the kind of the competitive environment, you're seeing right now and how you're feeling about your ability to.

Continuing to pass through price increases.

Raw material environment is still kind of remains challenging.

Challenging throughout the next six months or so.

Yeah, Mark this is Scott.

I would say that the.

The supply chain disruptions in the escalation on raw materials driven by <unk>.

Commodity prices and supply chain disruptions.

Their ramp at wild across the industry.

So the inflation that I think the industrial customers in our consumer customers have seen in the last call. It three to four months is almost unprecedented.

And it and supply and security of supply is important as inventory levels are depleted across the value chain. So I.

I would say everyone is in the same boat.

Ensuring that product is delivered on time, so they can replenish their customers' orders.

<unk> is is taking paramount to over negotiations in terms of pricing.

Got it very helpful. And then just one quick follow up on the.

All calculations expansion plant in Texas.

Okay.

When you talked earlier about there's obviously been a long term.

<unk> for you in terms of our growth potential can you maybe talk a little bit about.

What was sort of driving that decision process, where you guys were there certain things you were seeing in the market.

You wanted us to start moving more.

More towards that discussions with particular customers that were looking for increased.

<unk>, there any sort of color there would be helpful.

So what I would say is that today's Stephan makes our constellation products at two of our facilities.

Our Winder, Georgia, and Mills, Dale, Illinois facility.

Also do use our network of outside toll manufacturers and so our business is actually much larger than our current capabilities. So over a period of time, we would look to.

Continue to grow our.

Business.

Also.

Potentially move some of the outsourced volume in house as well and so we believe the new capacity that were.

Putting in.

That we can.

Phil over a relatively short period of time at a higher.

<unk> margin.

Accretive with higher margin accretive business.

Understood.

Last quick question from me just on the tax benefit you saw this quarter.

Was this something that you guys, maybe we're planning for some time or you just saw.

Some particular benefit.

I guess timing wise made this quarter. This last quarter, when you were able to execute on that.

Specifically with regard to the Bruce the emerging of the Brazilian entities.

Our plan was to do that to simplify our business within the country.

So we knew that was an opportunity and we of course, we didn't have certainty on the quarter to tighten it up because this was on ACP integration as well that required resources from our side. So.

This was a project that we had in our planning that we finally found the right window.

To put our resources to do the SAP implementation.

We're able to execute on any in Q3, but this has been a project that has been there for a while.

Right.

The other piece and it's not a minor admiring or true ups on more R&D tax credits for something.

Understood Great. Thank you guys very much for your time I appreciate it.

Thank you Marco.

We have a follow up from Mike Harrison with Seaport Global Securities. Please proceed.

Hi, just a couple of additional ones.

In terms of the surfactant volume growth.

Obviously, you're seeing some normalization of.

I guess, the band and maybe inventory levels from your consumer customers. But then you also mentioned the institutional growth.

Is the institutional growth that youre seeing at this point real demand or.

Or is there some inventory restocking going on in that channel to some extent and maybe the opposite question in consumer is there. Some destocking that's happening there I guess, just trying to get a sense of what kind of surfactant volume growth.

We might think.

About as we're starting to model 2022.

Thanks for any color you can provide there.

Alright, Mike This is Scott, let's start with the institutional side of the business.

The demand is.

Is happening in the marketplace today, so as the economies around the world are opening.

The restaurants hotels.

Cruise ships are starting to open up that public disinfection is part of that regimen. So I would say, we're beyond the inventory build and into actual consumption on the institutional side on.

On the consumer side great question.

It.

It's not as clear to understand what is still destocking.

In the marketplace versus what's being.

Delayed due to supply chain disruptions.

You could argue that.

Ill hand soap which was a very high demand.

Product during the pandemic the peak pandemic in 2020 that may still be going through some.

Inventory reduction, but across the board I'd have to say that.

The supply chain disruptions are probably restraining more demand.

Demand than there is on the Destocking side.

I believe I think we believe inventory levels across the value chain remains depressed.

Until these supply chain disruptions get alleviated.

Yeah.

Alright, that's helpful and then over on.

The polymers business you mentioned.

Maybe some issues related to shortages of isocyanate.

Some delays related to.

There are supply chain issues, where some of the some of that construction activity.

Theyre not able to get other products they need to.

To move forward.

Can you talk a little bit about.

Whether you expect that isocyanide issued to subside I guess over the over the winter months, the seasonal slowdown and maybe talk a little bit about what your polymers rigid polyol customers have said about their backlog of construction activity.

Activity as we start to get into next year.

I think from a high level perspective, our polyol customers are telling us there is pent up demand that they have not been able to serve so they do have an active backlog of orders.

They are anticipating that that backlog will remain in place.

Kind of into the first half of 2022, so so.

And we do anticipate that spice chain issues getting better as I mentioned previously.

So we are in we are anticipating that we're going to see growth in 'twenty two versus where were at in 2021.

Alright, thanks very much.

Thanks, Mike.

There are no further.

Further questions at this time.

Okay. Thank you all very much for joining us on today's call. We appreciate your interest and ownership in Stepan company.

Please stay safe and healthy wash your hands frequently use disinfectants to clean surfaces.

You haven't already done so please get back to David <unk>.

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