Stepan Company (SCL) Q3 2021 Earnings Report, Transcript and Summary

Greetings, and welcome to the Stepan Company Q3 2021 Earnings Call [Operator Instructions]. As a reminder, this conference is being recorded on Wednesday, October 20, 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 note that information in 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, including but not limited to, prospects for our foreign operations, global and regional economic conditions and factors detailed in our Securities and Exchange Commission filings. Whether you are joining us online or over the phone, we encourage you to review the investor slide presentation, which we have made available at www.stepan.com under the Investors section of our Web site. We make these slides available at approximately the same time as was the earnings release issued, and we hope that you find information perspective helpful. Now with that, 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 variant continues to spread and vaccine rates in much of the developed world have stalled. Global supply chain disruptions are impacting commerce and many of the products we all use every day have been impacted. At Stepan, our team continues to navigate through the turbulent environment to help our customers serve the market. Adjusted third quarter net income was $36.4 million flat with prior year. The negative impact of the global supply chain disruptions and inflationary pressures was offset by one-time 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 months of 2020. Surfactants 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 company's three global business segments was negatively affected by raw material price inflation and significant supply chain disruptions, including raw material shortages and logistics constraints. Surfactant operating income was down 16% 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 Millsdale plant in 2020. Our Polymer operating income was down 12%, mostly due to the non-reoccurrence 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 INVISTA 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 Stepan's common stock of $0.335 per share payable on December 15, 2021. With this 9.8% increase, Stepan has now increased and paid its dividend for 54 consecutive years. The Board also authorized the company to repurchase up to $150 million of its common stock, further demonstrating 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. Luis will now share some details about our third quarter and year-to-date results.

Thank you, Quinn. My comments will generally follow the slide presentation. Let's start with Slide 4 to recap the quarter. Adjusted net income for the third quarter of 2021 was $36.4 million or $1.57 per diluted share, basically flat versus the third quarter of 2020. Because adjusted net income is a non-GAAP measure, we provide full reconciliations to the comparable GAAP measures, and this can be found in Appendix 2 of the presentation and Table 2 of the press release. Specifically, adjustment to reported net income this quarter consists of adjustment for deferred compensation, environmental reserve increase, and minor restructuring expenses. Adjusted net income for the quarter excludes deferred compensation income of $1.1 million or $0.05 per diluted share compared to deferred compensation expense of $2.6 million or $0.11 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 settled 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 5 shows the total company earnings bridge for the third quarter compared to last year's 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 basis. We will cover each segment in more detail. But to summarize, Surfactants and Polymers were down, while Specialty Product was up 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. This year-over-year decrease was primarily attributable to a favorable tax benefit recognized in the third quarter of 2021. The tax benefits are related to the merger of the company's three Brazilian entities into a single entity and more favorable R&D tax credits. We expect the full year 2021 effective tax rate to be in the 20% to 22% range. Slide 6 focuses on Surfactant segment results for the quarter. Surfactant net sales were $388 million, a 16% increase versus the prior year. 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. Most of this decrease reflects lower volumes sold into the North American consumer product end market as demand for cleaning, disinfection, and personal wash products dropped from the peak of the pandemic. This was partially offset by very strong growth in our functional product end markets and solid growth in the industrial and institutional cleaning market. Surfactant operating income for the quarter decreased $6.7 million or 16% versus the prior year, primarily due to supply chain disruption impacts and the onetime insurance payment of $2.2 million recognized in the third quarter of 2020. We estimate that supply chain disruption had a negative impact of approximately $4 million during the current quarter. We implemented price increases in October to continue recovery in our margins. Latin America operating results were lower due to planned maintenance and expansion activities. Europe results increased slightly due to higher demand in functional products, partially offset by a decrease in consumer products. Now turning to Polymers on Slide 7. Net sales were $199 million in the quarter, up 70% from prior year. Selling prices increased 44%, primarily due to the pass through of higher raw material costs. Volume grew 27% in the quarter, driven by 33% growth in global rigid polyol. This volume growth is mostly related to the INVISTA 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. Polymer operating income decreased $2.6 million or 12%, driven by one-time benefits of $4 million in the third quarter of 2020 and significant supply chain disruptions in the current quarter. We estimate the supply chain disruption had a negative impact of approximately $3 million during the quarter. North America polyol result decreased due to a onetime benefit recognized in the third quarter of 2020 and supply chain disruptions, partially offset by higher volume. In October, we implemented price increases in the market to recover our margins. Europe results increased driven by the INVISTA acquisition. China results decreased due to the onetime benefit recorded in the third quarter of 2020 as well as higher supply chain costs. The Specialty Products net sales were up 15%, driven by volume up 9% between quarters. Operating income increased $0.8 million or 53% due to order timing differences within our food and flavor business and improved margins within our MCT product line. Moving on to Slide 8. 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 level. We had a strong cash flow operations in the first nine months of 2021, which we have used for capital investments, dividends, share buybacks and working capital, given the strong sales growth and raw material inflation. We executed a $50 million private placement note at a very attractive and fixed interest rate of around 2%. We will use the new cash to fund our organic and inorganic growth opportunities and for other general corporate purposes. For the full year, capital expenditures are expected to be in the range of $200 million to $220 million. This new estimate includes today's announced alkoxylation investment at our Pasadena, Texas facility. Beginning on Slide 10, Scott will now update you on our 2021 strategic priorities.

Thank you, Luis. 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 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 in the consumer product end market will remain higher versus prepandemic 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 in the 2021 growing season, drove the demand for crop protection products in North America. Latin American 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 double digits during the first nine months of 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 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 biocides and amphoterics to ensure we can meet higher requirements from our customers. As discussed previously, we are increasing North American capability and capacity to produce low 1,4-dioxane sulfates. 1,4-dioxane is a minor byproduct generated in the manufacture of either sulfate surfactants, which are key cleaning and foaming ingredients used in consumer product formulations. Through a combination of process optimization and additional manufacturing equipment, Stepan will be prepared to supply customers either sulfates that meet the new January 2023 regulatory requirements. This project, along with our announcement today to invest $220 million to build under an EPC contract, a 75,000 metric ton per year alkoxylation production facility at our Pasadena, Texas site, are the primary drivers of our 2021 capital expenditure forecast of $200 million to $220 million. We are excited about the capability and future growth that these investment projects will deliver to Stepan Company. Tier 2 and Tier 3 customers continue to be a focus of our Surfactant growth strategy. 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 Millsdale plant and are focusing now on executing the recommended changes. We accelerated investments in both expense 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 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 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 perspective, we had suppliers declare 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 are currently working to recover our margins in the fourth quarter. The long-term prospects for our polyol business remain attractive as energy conservation efforts and more stringent building codes should increase demand. The integration of the business acquired from INVISTA 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 in our portfolio and to add new platform chemistries aligned with our company's growth strategy. I will now turn the call back to Quinn for closing comments.

Thank you, Scott. The company delivered record first nine months earnings in 2021. 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 in 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 INVISTA's aromatic polyester polyol business. We continue to believe the long-term prospects for rigid polyols remain attractive. We anticipate our Specialty Products business will improve slightly 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 remains strong and we are optimistic about delivering full year 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 of today's call.

[Operator Instructions] Our first question comes from Mike Harrison with Seaport Global Securities.

A couple of questions on the Texas capacity announcement you had today. I believe that site was something that you acquired from Sun and then idled. So, can you walk through the decision to make this investment in that [indiscernible] and maybe help us understand how much incremental capacity that 75,000 tons a year represents in your network?

Let me begin by saying that, Stepan, over the last several years, has built a very strong balance sheet which has allowed us to make the INVISTA 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 for specialty alkoxylates. We are investing $220 million at the Pasadena site really 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.

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 oxide, and other key feedstocks used in the production of our specialty alkoxylates. 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 capital efficient build. We are managing the project under a third-party EPC contract and will include the installation of three alkoxylation reactors, which will provide 75,000 tons of new incremental 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 alkoxylation network, and we expect the new installed capacity to be effectively utilized after startup and after customer approvals are complete.

Can you help me understand, is this facility replacing the old idled assets in Pasadena or 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 alkoxylation capacity at the site. The existing or the acquired assets that were at the site were not of use to Stepan. We have dismantled most of the sulfonation capacity and other esterification capacity at the site to put in the new alkoxylation investment. 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 and the logistics infrastructure that they had, but in terms of process capabilities, all the new capabilities are being added to the site.

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 or so pretty evenly split between 2022 and 2023? And can you talk at all about the returns or the payback period for this investment?

What I will say, yes, the $50 million that were increased in our CapEx guidance for this year is related to long lead time equipment that we want to buy right away and start fast the project. When you think about the remaining CapEx, I mean, it's not even a split between '22 and '23. It's more in '22 than 2023, because I mean we need to get ahead of the plan and make sure that we are ready for 2023-year start-up. We will discuss in future calls about more specific targets about the project financials, and as Quinn and as Scott mentioned, this is a key product line. It's our high margin product line. So, we are expecting this project to be EBITDA margin accretive and EBITDA accretive for Stepan Company.

And then the last question I have for now is 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 costs 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 would be helpful.

I mean, I think it's a very volatile environment out there, but what we will say is we expect some additional inflation in Q4. I mean if you think about oil prices at $83, et cetera, it could be a little bit more inflation in the system and transportation and all of that. Now, the slope of inflation is what we believe is reducing, right. The slope of inflation that you saw in Q1, Q2, Q3, that slope is reducing. And in a high inflation environment, of course, you always have a lag between pricing and cost. So that's why, as you saw, we had a 44% price mix in polymers and 20% price mix in surfactants as well as we announced additional price increases in October to continue gradually recovering our margins. So, there is always a lag, but we'll see. I mean inflation 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 the situation in Q3 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 we approach 2022.

Our next question comes from Vincent Anderson with Stifel.

Just a couple of quick questions on the alkoxylation capacity. Just looking through your product guide, it doesn't appear that propoxylation based products are 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 a 100 different alkoxylation based products. Again, most of those fall into the specialty range and some of those products are used as key intermediates in other Stepan products that we sell to the marketplace. So today, alkoxylation, the use of EO and PO, is a significant part of our portfolio of products that we sell to the marketplace and we're interested in expanding that, our presence in the non-anionic market.

And as you grow this capacity, is there any consideration for maybe having to 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 alkoxylation products are targeted for the specialty markets, agricultural, oil field and industrial and institutional cleaning. We do use some commodity range or fair amount of commodity range, ethoxylates in our sulfonation business today, we would primarily continue to source those from the marketplace. We will utilize available capacity on an incremental basis as appropriate.

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 and the option of share repurchases. Are you maybe thinking about moving more towards a target net debt level when you think about your CapEx budget and the opportunity to buy back shares over in the next two years or so?

What I will say is we're very excited about the growth opportunities that we have. 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 growth. 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 depends on those opportunities, we will continue adjusting our buyback program. But we are not looking 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.

And the last comment that I will make, Vincent, is we are also in a good and unique opportunity to get very affordable financing. You saw our remarks about notes that we're getting at 2% fixed interest rate. So this is a good time to flex a little bit the balance sheet.

Our next question comes from David Silver with CL King.

So 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 and making you repeat yourself. I did want to kind of follow up on your comments about raw materials inflation and supply chain disruptions. And in particular, I was wondering if we could focus a little bit on non-North American assets of yours and in particular, let's start with Europe. But in the last few weeks, I mean there's been a number of stories talking about the extreme levels of energy costs, power costs and resulting shutdowns or curtailments in production by a number of manufacturers there. And I'm just wondering about maybe if you could 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 extremely elevated gas costs and then the power limitations, particularly heading into the winter months, will not prove to be kind of a longer term issue or disruptions may even increase in intensity?

I'll try to answer your question as best as 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 really are centered around raw material availability. Even in the construction market, just shortages of timber, windows and other construction materials can 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 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 fossil energy use. And we are seeing rolling, what I'll call, blackouts of industrial power use throughout the country, which are both impacting our raw materials, our customers' raw materials and ultimately will affect, at some point, most likely production of our facilities and our customer's facilities. In terms of the duration, the good news is the underlying demand is there in the marketplace. So there is high motivation and incentive to get these supply chain disruptions alleviated, so that both Stepan 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 material suppliers that may be having some supply issues today. And given the projections that they have to restart their facilities, that's the reason why we have confidence that the situation will get better as we move through Q4.

I was going to follow up with a question about the Chinese -- the situation in China, so you anticipated that one. I wanted to follow up with a question maybe about marketing strategy. So I guess, Scott outlined your continued success at penetrating the Tier 2 and Tier 3 customer segments. And I'm just wondering, maybe from a longer-term perspective, is Stepan's goal to ultimately displace, let's say, a meaningful amount of your current volume directed to Tier 1 accounts by offsetting that with continued growth on the Tier 2 or Tier 3 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 1 business and the incremental growth will be largely directed to the Tier 2s and the Tier 3s that you'll continue to penetrate?

David, the latter is true. We intend to grow both, with our large Tier 1 customers throughout the world as well as with our smaller Tier 2, Tier 3 customers. It's really a diversification strategy for our overall enterprise. We believe having a broad breadth of customers who value Stepan 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 the other. We intend to grow with both.

And then maybe one last one, please. But this relates to the decision to move forward on the ethoxylates capacity expansion. But in the past few months in the press Stepan was associated with another ethoxylates producer that was up for sale. And 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 two track process and you were willing to expand via inorganic route or buying into another company's capacity? And when that fell through, you were willing to move forward growing organically. So 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.

Next question comes from Marco Rodriguez with Stonegate Capital Markets.

I was wondering if I can a little bit of clarification on the supply chain disruptions that you guys called out for surfactants and polyol. I know that the total number is $7 million but we're also sort of talking about inflationary pressures and increased planned maintenance costs. Are those inflationary pressures and the planned maintenance costs included in that number or are there separate numbers that need to be sort of quantified?

They are separate numbers.

And is there any way to quantify those impacts?

Marco, we provided $7 million, because we thought that's the most relevant number in Q3. We have, of course, inflation in other elements. And as talking last quarter, we're running higher on our maintenance expenses, especially in one of our facilities after all the work that we have done with our consultant, and we decided to accelerate some of the investments in maintenance and CapEx, but the most relevant number is $7 million. And you could argue that a couple of million dollars here and there on the other items but they are not that material.

And then in terms of the raw material prices that you're seeing, the increases in the prices and the planned increases of your prices to customers. Obviously, you mentioned out here in October, you're raising them again. You raised 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 continue to pass on through price increases if the raw material environment still kind of remains challenging throughout the next six months or so?

I would say that the supply chain disruptions and the escalation on raw materials driven by commodity prices and supply chain disruptions, they're ramping wild across the industry. So the inflation that I think the industrial customers and our consumer customers have seen in the last, call it, three to four months is almost unprecedented and supply and security of supply is important as inventory levels are depleted across the value chain. So I would say everyone is in the same boat, ensuring that product is delivered on time so they can replenish their customers' orders, is taking paramount over negotiations in terms of pricing.

And then just one quick follow-up on the alkoxylation expansion plant in Texas. When you talked earlier about it obviously being a long-term target for you in terms of growth potential, can you maybe talk a little bit about what was sort of driving that decision process for you guys? Were there certain things you were seeing in the market that you wanted to start moving more towards that or is it discussions with particular customers that were looking for increased supply there? Any sort of color there would be helpful.

So what I would say is that today, Stepan makes alkoxylation products at two of our facilities, our Winder, Georgia and Millsdale, Illinois, facility. We also do use a network of outside tool 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 and also potentially move some of the outsourced volume in-house as well, and so we believe the new capacity that we're putting in that we can fill over a relatively short period of time at a higher margin accretive -- with higher margin accretive business.

And last quick question for me just on the tax benefit you saw this quarter. Was this something that you guys maybe were planning for some time or you just saw some particular benefit that, I guess, timing-wise made this last quarter when you're able to execute on that?

Specifically, with regard to the merging 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 of course, we didn't have certainty on the quarter, et cetera, because this was an SAP migration as well that require resources from our side. So this was a project that we had in our planning and we finally found the right window to put our resources to do the SAP implementation and we were able to execute a little in Q3. But this has been a project that has been there for a while. And the other pieces are minor true-ups and more R&D tax credits, for some.

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

Just a couple of additional ones. In terms of the surfactants volume growth, obviously, you're seeing some normalization of I guess, demand and maybe inventory levels from your consumer customers, but then you also mentioned the institutional growth. Is the institutional growth that you're seeing at this point, real demand 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.

Let's start with the institutional side of the business. The demand is happening in the marketplace today. So as the economies around the world are opening up, 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 the consumer side, great question. 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 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 than there is on the destocking side. And I believe, I think we believe inventory levels across the value chain remain depressed until the supply chain disruptions get alleviated.

And then over on the Polymers business, you mentioned maybe some issues related to shortages of isocyanates, some delays related to other supply chain issues where some of that construction activity, they're not able to get other products they need to move forward. Can you talk a little bit about whether you expect that isocyanate issue to subside, I guess, over the winter months, the seasonal slowdown? And maybe talk a little bit about what your polymers -- your Rigid Polyol customers have said about their backlog of construction 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. And we do anticipate that supply chain issues getting better, as I mentioned previously. So we are anticipating that we're going to see growth in '22 versus where we're at in 2021.

There are no 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, and if you haven't already done so, please get vaccinated. 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 lines. Have a great day, everyone.