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Stepan Corporation (SCL 0.03%) 2021 Third Quarter Earnings Conference Call October 20, 2021, 10:00 AM Eastern Time
Hello, and welcome to Stepan, the third quarter earnings conference call of 2021. [Instructions]. After that, we will conduct a question and answer session. [Instructions]. As a reminder, this conference will be recorded on Wednesday, October 20, 2021.
I now want to transfer the meeting to Luis Rojo, Vice President and Chief Financial Officer. please continue.
Luis E. Rojo - Vice President and Chief Financial Officer
Good morning, thank you for joining Stepan Company, financial review for the third quarter of 2021. Before we begin, please note that the information in this conference call contains forward-looking statements and are not historical facts. These statements involve risks and uncertainties that may cause significant differences in actual results, including but not limited to our overseas business prospects, global and regional economic conditions, and the factors detailed in our Security and Exchange Commission documents.
Whether you join us online or over the phone, we encourage you to view our investor slide presentations available under the investor section of the www.stepan.com website. We provide these slides almost at the same time as the earnings release. We hope that the information and opinions will be helpful to you.
Now, with this, I want to forward the call to our Chairman and CEO Quinn Stepan.
F. Quinn Stepan - Chairman and CEO
Good morning, thank you everyone for joining us today to discuss our third quarter and year-to-date earnings. Although many parts of the world are slowly improving, Delta Variant continues to spread, and vaccination rates in many developed countries have stagnated. Disruptions in the global supply chain are affecting businesses, and many of the products we use every day are affected. At Stepan, our team continues to navigate the turbulent environment to help our customers serve the market.
Adjusted net income for the third quarter was $36.4 million, the same as last year. One-off tax incentives offset the negative effects of disruptions in global supply chains and inflationary pressures. Year-to-date adjusted net income was US$121 million or diluted earnings per share of US$5.20. Compared with the first nine months of 2020, adjusted net income and adjusted earnings per share both increased by 22%. Surfactants have also been negatively affected by the decline in consumer demand for cleaning, disinfection and personal washing products, which have fallen since the peak of the 2020 pandemic.
In the third quarter, the company's three global business units were all negatively affected by rising raw material prices and severe supply chain disruptions including raw material shortages and logistics restrictions. Surfactant operating income fell by 16%, mainly due to inflation, increased planned maintenance costs, and US$2.2 million in insurance compensation related to the Millsdale plant in 2020, driven by rising North American supply chain costs.
Our polymer operating income fell by 12%, mainly due to the non-repetitive nature of insurance compensation and compensation received from the Chinese government in the third quarter of 2020. Global polymer sales increased by 27%, mainly driven by the acquisition of INVISTA. Our specialty products business increased by 53%, mainly due to the difference in the order time of our food and fragrance business.
Our board of directors announced a quarterly cash dividend of $0.335 per share for Stepan common stock, which will be paid on December 15, 2021. With an increase of 9.8%, Stepan has now increased and paid dividends for 54 consecutive years.
The board of directors also authorized the company to repurchase up to US$150 million in common stock, further demonstrating our commitment to creating value for shareholders through strict capital allocation. Our strong balance sheet and cash generation will enable us to invest in our current business and seek strategic opportunities, while we return capital to our shareholders.
Luis will now share some details about our third quarter and year-to-date performance.
Luis E. Rojo - Vice President and Chief Financial Officer
Thank you, Quinn. My comments will usually be made after the slide presentation. Let's start with Slide 4 and review this quarter. Adjusted net income for the third quarter of 2021 was US$36.4 million or diluted earnings per share of US$1.57, which was basically the same as the third quarter of 2020. Since adjusted net income is a non-GAAP measure, we provide a full reconciliation with comparable GAAP measures. This can be found in Appendix 2 of the presentation and Table 2 of the press release.
Specifically, the net profit adjustments reported in this quarter include deferred compensation, increased environmental reserves, and adjustments to small restructuring expenses. Adjusted net income for the quarter did not include deferred compensation income of US$1.1 million or diluted earnings per share of US$0.05, while deferred compensation expenses for the same period last year were US$2.6 million or US$0.11 of diluted earnings per share. The deferred compensation figures represent the net amount of expenses related to the company's deferred compensation plan and the cash-settled stock appreciation rights of employees. Since these liabilities change with changes in stock prices, we have excluded these items from our operational discussions.
Slide 5 shows the company's total revenue bridge in the third quarter compared to the third quarter of last year, and breaks down the adjusted net income growth. Because this is net income, the figures mentioned here are based on after-tax. We will introduce each part in more detail. But all in all, surfactants and polymers declined, while specialty products rose compared to the previous year.
Due to inflation, corporate expenses and all other expenses are slightly higher. The company's effective tax rate for the first nine months of 2021 was 20%, compared with 24% in the same period last year. This year-on-year decrease was mainly due to the preferential tax incentives confirmed in the third quarter of 2021. The tax incentives are related to the merger of the company’s three Brazilian entities into one entity and a more favorable R&D tax credit. We expect the effective tax rate for the full year of 2021 will be in the range of 20% to 22%.
Slide 6 focuses on the performance of the surfactant division for the quarter. Surfactant net sales were US$388 million, a year-on-year increase of 16%. The sales price rose by 20%, mainly due to the improvement of the product and customer mix and the transmission of the increase in the cost of raw materials. The impact of foreign currency translation had a positive impact of 2% on sales.
Sales fell by 6% year-on-year. Much of this decline is due to the decline in demand for cleaning, disinfection, and personal washing products from the peak of the pandemic, and the decline in North American consumer product end-market sales. This was partially offset by the strong growth of our functional product end market and the steady growth of the industrial and institutional cleaning market.
Surfactant operating income for the quarter decreased by US$6.7 million or 16% from the previous year, mainly due to the impact of supply chain disruption and the one-time insurance payment of US$2.2 million confirmed in the third quarter of 2020. We estimate the negative impact of supply chain disruption to approximately US$4 million this quarter. We implemented a price increase in October to continue to restore our profit margins. Due to planned maintenance and expansion activities, operating performance in Latin America has declined. Due to increased demand for functional products, Europe's performance increased slightly, but this was partially offset by the decline in consumer products.
Now turning to polymers on Slide 7, net sales for the quarter were $199 million, an increase of 70% over last year. The 44% increase in sales prices was mainly due to the transmission of rising raw material costs. Driven by a 33% increase in global rigid polyols, sales in the quarter increased by 27%. This sales increase is mainly related to the acquisition of INVISTA. Driven by supply chain disruptions, global sales of rigid polyols, excluding INVISTA, remained flat. Higher demand in the specialty polyol business has also contributed to sales growth.
Driven by a one-time gain of US$4 million in the third quarter of 2020 and severe supply chain disruptions this quarter, polymer operating income fell by US$2.6 million, or 12%. We estimate that the supply chain disruption had a negative impact of approximately US$3 million during the quarter.
Due to one-off gains and supply chain disruptions confirmed in the third quarter of 2020, the decline in North American polyol performance was partially offset by increased sales. In October, we implemented price increases in the market to restore our profit margins. Driven by the acquisition of INVISTA, European performance has grown. Due to the one-time gains recorded in the third quarter of 2020 and rising supply chain costs, China's performance has declined.
Driven by a 9% increase in sales during the quarter, net sales of specialty products increased by 15%. Due to the difference in the order time of our food and spice business and the improved profitability of our MCT product line, operating income increased by US$800,000 or 53%.
Go to slide 8. Our balance sheet remains strong, and we have sufficient liquidity to invest in the business. Our leverage ratio and interest coverage ratio continue to be maintained at a very healthy level. In view of strong sales growth and raw material inflation, we have obtained a large amount of cash from operations in the first nine months of 2021, which we have used for capital investment, dividends, stock repurchases and working capital. We executed $50 million in private placement notes at a very attractive fixed interest rate of around 2%.
We will use the new cash to fund our organic and inorganic growth opportunities and other general corporate purposes. The annual capital expenditure is expected to be between 200 million and 220 million US dollars. This new estimate includes the alkoxylation investment announced today in our Pasadena, Texas plant.
Starting with slide 10, Scott will now introduce you to our strategic focus for 2021.
Scott R. Behrens - President and Chief Operating Officer
Thank you, Louis. As we end the first nine months of 2021, we believe that even though we and our customers are experiencing supply chain challenges, our business will remain relatively strong.
As we provide products that help fight COVID-19, we will continue to prioritize the safety and health of our employees. Consumer habits have changed, and these new behaviors include increased use of disinfection, cleaning and personal washing products. We believe that our surfactant sales in the consumer product terminal market will still be higher than the level before the pandemic, but below the peak demand of the 2020 pandemic.
With the reopening of economies around the world, people have put forward higher requirements for the cleaning and disinfection standards of public places, and we have seen an increase in the amount of cleaning and disinfection in institutions. Our diversification strategy to enter functional markets remains Stepan's key priority. In the first nine months of this year, global agricultural production increased by double digits. High commodity prices for corn and soybeans, coupled with an increase in planting acreage in 2021, have boosted demand for crop protection products in North America.
As new products are launched globally, sales in Latin America and Asia continue to grow in the field of post-patent pesticides. Due to rising oil prices and a sluggish base figure in 2020, oil field production experienced strong double-digit growth in the first nine months of this year. As oil prices return to the level of US$80 per barrel, we remain optimistic about the business’s future opportunities. We will continue to promote our new cost-effective product solutions to increase the return on investment of oilfield operators and protect their Oil well.
We will continue to focus on improving operational productivity and product and customer portfolios in order to increase the operating income and profit margins of surfactants. Globally, we are increasing the production capacity of certain product lines, including biocides and zwitterions, to ensure that we can meet the higher requirements of our customers.
As mentioned earlier, we are improving North America's ability to produce low 1,4-dioxane sulfate. 1,4-Dioxane is a minor by-product of the production of ether sulfate surfactants, which are key cleansing and foaming ingredients used in consumer product formulations.
By combining process optimization and additional manufacturing equipment, Stepan will be ready to supply customers with sulfuric acid ether that meets the new regulatory requirements in January 2023. This project and our announcement today that we invested 220 million U.S. dollars in our Pasadena, Texas plant to build 75,000 metric tons of alkoxylation production facilities per year under the EPC contract is our 2021 capital expenditure forecast of 200 million to 220 million. The main driver of the dollar. We are excited about the capabilities and future growth that these investment projects will bring to Stepan.
Tier 2 and Tier 3 customers remain the focus of our surfactant growth strategy. We added 300 new customers this quarter and approximately 800 customers in the first nine months of this year. We completed the consulting work at the Millsdale plant and are now focused on implementing the proposed changes. We have accelerated investment in expenses and capital expenditures to increase productivity and increase production capacity. We expect this project and level of investment will continue until the rest of this year, and we should see benefits, including increased productivity, increased production capacity for several high-margin product lines, and improved service levels for customers next year.
Due to COVID restrictions, market demand recovered after a challenging year in 2020, and polymers performed well in the first nine months of this year. The business also benefited from the acquisition of INVISTA completed in January. However, in the third quarter, due to the increase in raw material supply and costs, our profit margin was significantly affected, while customer orders were still restricted by their own raw material supply and other supply chain issues.
In contrast, we have our suppliers declare force majeure for key raw materials, while our customers have experienced market shortages of MDI and flame retardants, which are used in their finished foam insulation formulations. We are currently working to restore profit margins in the fourth quarter. The long-term prospects of our polyol business remain attractive, as energy-saving work and stricter building codes should increase demand. The business integration acquired from INVISTA is progressing smoothly, and it is expected that the acquisition will achieve an EBITDA of more than US$20 million in 2021.
Given the strength of our balance sheet, we plan to continue to look for and seek acquisition opportunities to fill gaps in our investment portfolio and add new platform chemicals that are consistent with our company's growth strategy.
I will now turn the call back to Quinn to end the comment.
F. Quinn Stepan - Chairman and CEO
Thank you, Scott. The company achieved record returns in the first nine months of 2021. Looking ahead, we believe that our surfactant sales in the North American consumer product end market will continue to be challenged by the availability of raw materials and transportation. Although we believe that industrial and institutional cleaning will increase over the previous year, we believe that this will not make up for the decline in consumer consumption of cleaning, disinfection and personal washing products.
We believe that the demand for surfactants in the agricultural and oilfield markets will exceed last year's demand. We believe that due to the recovery of pandemic-related delays and our acquisition of INVISTA’s aromatic polyester polyol business in the first quarter, our polymer business will achieve growth compared to last year.
We still believe that the long-term prospects of rigid polyols are still attractive. We expect our specialty products business to slightly improve year-on-year. Despite the persistent raw material procurement problems, rising raw material prices, increased planned maintenance costs and supply chain challenges, we believe that the potential market demand remains strong, and we are optimistic about achieving full-year profit growth this year. Low inventories throughout the value chain should provide opportunities in 2022.
This concludes our prepared comments. At this time, we want to turn the phone over to ask questions. Frank, please check the instructions in the questions section of today's conference call.
thank you. [Instructions]. Our first question comes from Mike Harrison of Seaport Global Securities. please continue.
Michael Harrison - Seaport Global Securities - Analyst
F. Quinn Stepan - Chairman and CEO
Michael Harrison - Seaport Global Securities - Analyst
Regarding a few questions about your Texas capacity announcement today, I believe these sites are things you got from Sun and then left unused. So can you tell us about the decision to make this investment in that state [Phonetic] and help us understand how much incremental capacity is represented by 75,000 tons per year in your network?
F. Quinn Stepan - Chairman and CEO
OK. Thanks, Mike. Let me start by saying that Stepan has built a very strong balance sheet over the past few years, which allowed us to acquire INVISTA Polyester Polyol earlier this year and will allow us to invest in this and other strategic organic Growth opportunities, especially in this case, our core product line with higher profit margins are specialty alkoxylates.
We are investing US$220 million in the Pasadena plant to truly meet our long-term growth expectations for the surfactant and polymer business. Maybe I hope Scott will join and make some additional comments and answer your questions about incremental capacity.
Scott R. Behrens - President and Chief Operating Officer
Thanks, Quinn. Mike, we believe our existing Pasadena plant is an ideal location for new capacity growth because it is close to key raw materials including ethylene oxide, propylene oxide and other key raw materials used in our specialty alkoxylate production . In addition, the on-site existing infrastructure that we acquired from Sun has existing infrastructure surrounding utilities and ample storage tanks, which makes it an attractive and capital efficient building.
We are managing the project under a third-party EPC contract, which includes the installation of three alkoxylation reactors, which will provide 75,000 tons of new incremental capacity for our company’s product portfolio, and the site will be expandable to 10 total The reactor will increase investment in the future.
We will use our investment in Pasadena to optimize our current alkoxylation network, and we expect that the new installed capacity will be effectively utilized after the start-up and the completion of customer approval.
Michael Harrison - Seaport Global Securities - Analyst
OK. This is very helpful. Can you help me understand whether this is a facility to replace old idle assets in Pasadena, or are you also restarting some idle assets?
Scott R. Behrens - President and Chief Operating Officer
Yes. Therefore, the site we acquired at Sun five or six years ago does have-we have a vision to install alkoxylation capabilities on that site. The existing or acquired assets on site are of no use to Stepan. We have dismantled most of the sulfonation capacity and other esterification capacity on site to invest in new alkoxylation. As a result, we have been able to utilize 50 different storage tanks on site. We are able to use the fire-fighting pool and logistics infrastructure they have. But in terms of process capabilities, all new capabilities are added to the site.
Michael Harrison - Seaport Global Securities - Analyst
Understood. This makes sense. Then came the capital expenditure of 220 million U.S. dollars. Maybe Louis’ problem, it looks like there will be about 50 million US dollars this year. Will the remaining $170 million or so be evenly distributed between 2022 and 2023? Can you talk about the return or payback period of this investment?
Luis E. Rojo - Vice President and Chief Financial Officer
Good question, Mike. Well, I would say, yes. The $50 million increase in our capital expenditure guidance for this year is related to the long-delivery equipment that we want to purchase immediately and start the project quickly. When you consider the remaining capital expenditure, it is more-I mean, it is not even a split between 22 and 23 years. 22 is more important than 2023, because we need to complete the plan ahead of time and ensure that we are ready for the start of 2023. We will discuss more specific goals regarding project finance in future conference calls. And, as Quinn and Scott mentioned, this is a key product line, and it is our high-margin product line. Therefore, we expect that this project will increase EBITDA margin and EBITDA value added for Stepan.
Michael Harrison - Seaport Global Securities - Analyst
OK. Then my last question now is about the overall issue of pricing and cost. Does the third quarter show a headwind of profit margins or a peak in raw material costs, or do you see a worsening of profit margins headwind in the fourth quarter? Maybe you just want to know the progress of raw material costs and supply chain disruptions from the third quarter to the fourth quarter, and how much you expect to offset the pricing. Obviously, there is already a lot of pricing, and you announced that there will be some additional increases in October. Any color will help. thank you.
Luis E. Rojo - Vice President and Chief Financial Officer
Of course Mike. I mean, I think this is a very unstable environment. But what we want to say is that we expect some additional inflation in the fourth quarter. What I mean is, if you consider the oil price of $83, etc., inflation in all aspects such as systems and transportation may increase a bit.
Now, we think the slope of inflation is decreasing, right. The inflation slopes you see in the first, second, and third quarters are falling. Of course, in a high inflation environment, there is always a lag between pricing and cost. This is why, as you can see, our polymer price combination is 44%, and the surfactant price combination is 20%. In October, we announced further price increases to continue to gradually restore our profit margins.
So there is always lag. So-but we will see. I mean, inflation is still there. But of course we plan to gradually restore our profit margins.
F. Quinn Stepan - Chairman and CEO
I would like to say from the perspective of the availability of raw materials in the supply chain, we think the situation in the third quarter is very bad and is slowly recovering. Therefore, when we see the availability of key raw materials entering the fourth quarter, it is slowly improving, and we expect this situation to gradually improve and become better as we approach 2022.
Michael Harrison - Seaport Global Securities - Analyst
OK. Thank you so much.
Our next question comes from Vincent Anderson and Stifel. please continue.
Vincent Anderson - Stifel - Analyst
Yes. Thank you and good morning everyone.
F. Quinn Stepan - Chairman and CEO
Vincent Anderson - Stifel - Analyst
Good morning. I just have a few quick questions about alkoxylation capabilities. Just look at your product guide, products based on propoxylation don't seem to be a large part of your product portfolio now. Can you confirm, or-and then-if this is true, what opportunities will that product line open up?
F. Quinn Stepan - Chairman and CEO
So I want to say that today we have more than 100 different products based on alkoxylation. Similarly, most of them belong to the professional range, and some of these products are used as key intermediates for other Stepan products we sell to the market. So today, alkoxylation, the use of EO and PO are an important part of our product portfolio sold to the market, and we are interested in expanding this-our presence in the non-anionic market.
Vincent Anderson - Stifel - Analyst
Okay thank you. As you increase this capability, are there any considerations that you might have to transfer some of your own sulfonated sales to the detergent market, or do you feel you can use it all for more professional applications to place it?
F. Quinn Stepan - Chairman and CEO
Most of our alkoxylation products are aimed at professional markets, agriculture, oil fields, and industrial and institutional cleaning. We do use some commodity ranges in the sulfonation business today, many-a fair amount of commodity ranges, ethoxylates. We will mainly continue to purchase those from the market. We will gradually utilize the available capacity as appropriate.
Vincent Anderson - Stifel - Analyst
Okay, excellent. thank you. Then just-give Louis a quick one. You have been running a very streamlined balance sheet for a long time. Now that we see the options for recovery in spending and stock repurchase, when you consider your capital expenditure budget and the opportunity to repurchase all stocks in the coming time, are you thinking about moving toward that level of goals? About two years?
Luis E. Rojo - Vice President and Chief Financial Officer
No. Good question, Vincent. What I want to say is that we are very excited about the growth opportunities we have. We are-the company has built a very strong balance sheet over the past ten years, and we ended last year with $350 million in cash. We have a good growth opportunity. We are very pleased that we have deployed future opportunities on our balance sheet. We will continue to evaluate the continued growth of organic and inorganic options, and based on these opportunities, we will continue to adjust our repurchase plan. But at this point, we are not looking for meaningful change.
F. Quinn Stepan - Chairman and CEO
We have adopted strict methods in capital allocation. But we are willing to adjust the balance sheet as market opportunities arise, and we can increase our business from the perspective of value-added. So, whether it is organic or inorganic.
Luis E. Rojo - Vice President and Chief Financial Officer
My final comment to Vincent is that we are in-and a good and unique opportunity to obtain very affordable financing. You saw our review and we noticed that we will receive a fixed interest rate of 2%. So now is a good time to adjust the balance sheet slightly.
Vincent Anderson - Stifel - Analyst
Okay, excellent. Thank you very much and wish you good luck for the rest of the year.
Our next question comes from David Silver and CL King. please continue.
David Silver - CL King and Associates - Analyst
OK. Good morning. Therefore, I will start my review, because when I work here, there is no network, the Internet and our network are here. Therefore, if I ask for some information in the slides or other content and ask you to repeat yourself, I apologize in advance.
Okay, I do want to follow up on your comments on raw materials, inflation and supply chain disruption. In particular, I want to know if we can focus on your non-North American assets, especially let us start in Europe. In the past few weeks, I mean there are many stories talking about energy costs, electricity costs, and the resulting extreme levels of production shutdowns or cuts by some manufacturers. I just want to know if you can put your comments in context, which may peak here or have a limited time before things start to return to normal.
In other words, what makes you believe that the extremely high cost of natural gas and especially the power restrictions entering the winter season will not prove to be a long-term problem, or that the interruption may even be exacerbated? thanks.
Scott R. Behrens - President and Chief Operating Officer
Hi David. This is Scott Behrens. I will try to answer your questions. So far, we have not seen any energy disruptions in our European business in surfactants and polymers. The constraints in the supply chain are actually centered on the availability of raw materials. Even in the construction market, the shortage of wood, windows and other building materials will hinder the demand we see now.
So I want to say that energy is not the problem we are seeing now. I would like to point out that although China, the Chinese industrial market is experiencing energy disruptions because they are trying to achieve some early milestones in the use of fossil energy. We are seeing blackouts of industrial power used across the country, which affect both our raw materials and our customers' raw materials, and ultimately, at some point, will most likely affect the production of our facilities and customer facilities.
In terms of duration, the good news is that there is potential demand in the market. Therefore, the incentives and incentives to alleviate these supply chain disruptions are very high, so that our customers will step in, and our customers can help meet the market demand for surfactants and our business polymers.
F. Quinn Stepan - Chairman and CEO
Where we have raw material restrictions, we have been in contact with our main raw material suppliers who may have some supply issues today, taking into account the forecast that they will have to restart the facility. This is why we believe that the situation will get better as we enter the fourth quarter.
David Silver - CL King and Associates - Analyst
okay, thank you. I plan to follow up a question about Chinese people-the situation in China. So you expected that. I want to follow up on a question, which may be about marketing strategies. So I guess Scott outlined your continued success in penetrating Tier 2 and Tier 3 customer bases.
And, I just want to know, maybe from a long-term perspective, Stepan’s goal is to eventually replace, let’s say, by offsetting this by continued growth in Tier 2 or Tier 3, directing your current large volume of transactions To a Tier 1 account? Or, if we look at the situation three to five years from now, you will retain the current Tier 1 business foundation, and the incremental growth will be mainly for Tier 2s, and then your continued Tier 3s penetration. thank you.
F. Quinn Stepan - Chairman and CEO
Yes, David. The latter is true. We intend to develop together with our large first-tier customers and smaller second- and third-tier customers all over the world. This is indeed the diversification strategy of our entire enterprise. We believe that a wide range of customers value Stepan for different reasons. Whether it is our product line capabilities or our technical and formulation service expertise, we are catering to the entire target customer base.
Therefore, we have no intention to pay more attention to one. We intend to grow with both.
David Silver - CL King and Associates - Analyst
OK. Then maybe it's the last one, please. But this is related to the decision to promote the expansion of ethoxylate production capacity. However, in media reports in the past few months, Stepan is associated with another ethoxylate producer that is about to sell. And, I just want to know whether we should treat the decision to move forward now as a decision to build and buy. In other words, you have a dual-track process, and you are willing to expand or purchase another company's production capacity through inorganic means. And, when it fails, you are willing to move on and grow organically.
So this is-should we think of it as a build and buy scenario that has occurred in the past few months? thank you.
F. Quinn Stepan - Chairman and CEO
David Silver - CL King and Associates - Analyst
Of course you can [voice]. alright, thank you very much. These are my questions.
Our next question comes from Marco Rodriguez of Stonegate Capital Markets. please continue.
Marco Rodriguez - Stonegate Capital Markets - Analyst
good morning everyone. Thank you for answering my question.
F. Quinn Stepan - Chairman and CEO
Marco Rodriguez - Stonegate Capital Markets - Analyst
Good morning. I want to know if I can make some clarifications about the surfactant and Poly's supply chain disruption that you called for. I know that the total is $7 million, but you are also a bit talking about inflationary pressures and increased planned maintenance costs. Are inflationary pressures in planned maintenance costs included in this figure, or are they independent figures that need to be quantified?
F. Quinn Stepan - Chairman and CEO
Marco Rodriguez - Stonegate Capital Markets - Analyst
understood. Is there a way to quantify these effects?
Luis E. Rojo - Vice President and Chief Financial Officer
Marco, we don't have one yet-we provided a figure of 7 million dollars. We think this is the most relevant number in the third quarter. Of course we also have other factors of inflation. And we-since last quarter, our maintenance costs are getting higher and higher, especially in one of our facilities. After we completed all the work with our consultants, we decided to speed up some investments in maintenance and capital expenditures. But the most relevant number is $7 million. You might argue that other projects have millions of dollars here and there. But they are not that kind of material.
Marco Rodriguez - Stonegate Capital Markets - Analyst
understood. Very helpful. Then, in terms of raw material prices, you see price increases and your price plans for customers increase, you obviously mentioned here in October that you raised prices again, you raised prices last quarter. Just want to know if you can also talk about the kind of competitive environment you are seeing now, and if the raw material environment still exists, how your feelings about the ability to continue to pass through price increases will remain in the next six months or so Challenging.
Scott R. Behrens - President and Chief Operating Officer
Yes, Marco, this is Scott. What I want to say is that supply chain disruptions caused by commodity prices and raw material upgrades driven by supply chain disruptions are raging across the industry. So, I think the inflation that industrial customers and our consumer customers have seen in the past-so called, three to four months is almost unprecedented. Moreover, supply- and supply security is very important because inventory levels throughout the value chain have been exhausted.
So I want to say that everyone is in the same boat to ensure that the products are delivered on time. Therefore, they can add that the customer's order is more important than negotiation in terms of pricing.
Marco Rodriguez - Stonegate Capital Markets - Analyst
understood. Very helpful. Then, a quick follow-up to the alkoxylation expansion plant in Texas. You mentioned earlier that this is clearly your long-term goal in terms of growth potential. Can you talk about what drives your decision-making process, whether you see something in the market and you want to start moving more Go in that direction. Have there been discussions with specific customers seeking to increase supply? Will any colors help?
F. Quinn Stepan - Chairman and CEO
So what I want to say is that today Stepan produces alkoxylated products in our two factories: Winder, Georgia and Millsdale, Illinois. We also use a network of external tool manufacturers. Therefore, our business is actually much larger than our current capabilities. Therefore, in a period of time, we will seek to continue to develop our business, and may also transfer some outsourcing business to internal.
Therefore, we believe that with the new capacity we are investing in, we can grow at a higher profit margin in a relatively short period of time-through a higher profit margin growth business.
Marco Rodriguez - Stonegate Capital Markets - Analyst
Understood. My last short question is about the tax benefits you saw this quarter. Is this something you may have planned for a while, or have you just seen some special benefits, I guess, in this quarter-the last quarter, when you can execute it?
F. Quinn Stepan - Chairman and CEO
Especially in terms of merging Brazilian entities, we have already-our plan is to do this to simplify our business in that country. So we know this is an opportunity, and... [Speech Overlap]
Luis E. Rojo - Vice President and Chief Financial Officer
Yes, we-of course, we have no certainty about the quarter, because this is also a SAP migration and requires us to provide resources. Well, this is a project in our plan, and we finally found a suitable window to use our resources for SAP implementation. We were able to execute it in the third quarter. But this is a project that has been around for a while.
The other parts are minor adjustments, with more R&D tax credits for some people.
Marco Rodriguez - Stonegate Capital Markets - Analyst
Understood. Great, thank you very much for your time. Appreciate it.
Luis E. Rojo - Vice President and Chief Financial Officer
We have Mike Harrison from Seaport Global Securities to follow up. please continue.
Michael Harrison - Seaport Global Securities - Analyst
Hi, just a few extras. In terms of surfactant sales growth, obviously you are seeing some normalization-I guess, your consumer customer demand and inventory levels. But then you also mentioned institutional growth. Is the institutional growth you are seeing at this time a real demand? Or does the channel carry out some inventory replenishment to some extent?
Perhaps consumers are facing the opposite problem, is there some destocking happening there? I just want to know what kind of surfactant sales growth we might consider when we start to simulate 2022? Thank you for any colors provided there.
Scott R. Behrens - President and Chief Operating Officer
Hi Mike. This is Scott. Let's start with the institutional aspect of the business. Demand is happening in today's market. Therefore, as economies around the world open restaurants, hotels, and cruise ships, public disinfection is part of the plan. So I want to say that we have surpassed inventory building and entered the actual consumption of institutions.
On the consumer side, this is a very good question. It is not clear which ones are still destocking in the market and which ones are delayed due to supply chain disruptions. You might argue that hand sanitizer is a product that is in high demand during the pandemic, and inventory may still be reduced during the peak of the 2020 pandemic. But in general, I have to say that supply chain disruption may inhibit more demand than destocking.
And I believe-I think we believe that inventory levels throughout the value chain remain low until these supply chain disruptions are alleviated.
Michael Harrison - Seaport Global Securities - Analyst
Okay, this is very helpful. Then about the polymer business, you mentioned some issues that may be related to the shortage of isocyanates, some delays related to other supply chain issues, and some of the construction activities are-they can’t get the other products they need to move forward. Can you Talk about whether you expect the isocyanate problem to subside, I guess it’s the seasonal slowdown in the winter months, maybe you can talk about your polymers-your rigid polyol customers have already said that their backlog starts with us Entering next year's construction activities?
Scott R. Behrens - President and Chief Operating Officer
Yes. I think from a high-level perspective, our polyol customers tell us that they cannot meet the pent-up demand. So they do have a large backlog of orders. They expect that the backlog will remain the same-approximately in the first half of 2022. So yes, we do expect the supply chain problems to get better, as I mentioned earlier. So we are in-we expect we will see growth in 22 years compared to growth in 2021.
Michael Harrison - Seaport Global Securities - Analyst
alright, thank you very much.
Scott R. Behrens - President and Chief Operating Officer
There are no other questions at this time.
F. Quinn Stepan - Chairman and CEO
OK. Thank you very much for participating in today's conference call. We thank you for your interest in and ownership of Stepan Corporation. Please stay safe and healthy. Wash your hands frequently and clean the surface with a disinfectant. If you have not done so, get vaccinated. Have a nice day.
Luis E. Rojo - Vice President and Chief Financial Officer
F. Quinn Stepan - Chairman and CEO
Scott R. Behrens - President and Chief Operating Officer
Michael Harrison - Seaport Global Securities - Analyst
Vincent Anderson - Stifel - Analyst
David Silver - CL King and Associates - Analyst
Marco Rodriguez - Stonegate Capital Markets - Analyst
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