Company News
August 9, 2022
Huntsman Divests Textile Effects
Huntsman Announces Agreement to Sell Textile Effects Division
Download as PDF August 09, 2022 6:00am EDT
THE WOODLANDS, Texas, Aug. 9, 2022 /PRNewswire/ — Huntsman Corporation (NYSE: HUN) today announced it has entered into a definitive agreement to sell its Textile Effects division to Archroma, a portfolio company of SK Capital Partners. The total enterprise value of the transaction is approximately $718 million, which includes the assumption of approximately $125 million in net underfunded pension liabilities as of December 31, 2021. The acquisition is being partially funded with preferred equity, of which Huntsman is taking up to $80 million, an amount SK Capital Partners will seek to syndicate prior to the transaction closing.
Over the last twelve months ending June 30, 2022, the Textile Effects division reported sales of $772 million and adjusted EBITDA of $94 million. Huntsman anticipates cash taxes on the transaction of approximately $50 million. Huntsman intends to report Textile Effects as discontinued operations beginning in the third quarter of 2022. The transaction is subject to regulatory approvals and other customary closing conditions and is expected to close in the first half of 2023.
Peter Huntsman, Chairman, President, and CEO commented:
“Over the past seven months, we have conducted a comprehensive strategic review of our Textile Effects division, including detailed discussions with a wide range of relevant parties. After evaluating several different options and thoroughly reviewing prospective offers for the business, our Board of Directors decided that SK Capital would be a better owner of the business over the long-term than Huntsman and that the value they offered was in the best interests of our shareholders. After closing, Textile Effects will combine with SK Capital’s Archroma business to create a world leader in textile chemicals and dyes, with a leadership in sustainability and innovation.
“We expect the cash proceeds from this divestiture to be deployed in-line with our current balanced capital allocation program which includes strategic investments and acquisitions to further strengthen our core businesses as well as returning cash to shareholders through both our dividend and share repurchase program.”
BofA Securities is serving as Huntsman’s financial advisor and Kirkland & Ellis LLP is acting as its legal advisor.
August 5, 2022
Covestro Investors Call Urethane Highlights
Covestro AG (CVVTF) CEO Markus Steilemann on Q2 2022 Results – Earnings Call Transcript
Aug. 02, 2022 11:35 PM ETCovestro AG (CVVTF), COVTY
Covestro AG (OTCPK:CVVTF) Q2 2022 Earnings Conference Call August 2, 2022 9:30 AM ET
Company Participants
Ronald Koehler – Investor Relations
Markus Steilemann – Chief Executive Officer
Thomas Toepfer – Chief Financial Officer
Markus Steilemann
Yes. Thanks a lot, Thomas. So now we come into maybe a more complicated part of the presentation, talking about energy. But we deem it to be very helpful for you to understand how the overall energy market is developing and how Covestro is also positioned in that market with regard to purchasing but also with regard to locations that we have, particularly in Europe and Germany.
As you all know, the situation of energy supply has become a major issue that requires our continuous full attention. The price increases for natural gas and electricity keep us busy in trying to pass them on to the market. To be very clear, up to now, all Covestro sites in Europe, and especially in Germany, are fully supplied with natural gas to run our plants flat out. We are [indiscernible] with the federal government and the network agency responsible for the supply coordination on a frequent basis.
Throughout 2021, we have seen quarter-by-quarter an increase in our energy spend compared to 2020, finally leading to energy cost that almost doubled from 2020. The increase of quarter four 2021 of €260 million has since then continued to be the magnitude of the quarterly increases in Q1 and Q2 of 2022 on top of the energy costs of 2020 and 2021. Our initial evaluation of the energy spend for 2021 was €1.5 billion. With the revision of our guidance in May, we incorporated an increase of up to €2 billion. Given the current extremely volatile situation, we expect quarter three to show another sequential increase of €350 million to €400 million on top of the cost of 2020 and 2021. We are now assuming our total energy bill around €2.2 billion for the full year 2022, which reflects the prices of last week of July flat forward.
As you can see, on the three pie charts on the lower part of the slide, the major driver for the cost increases, are the European energy prices, which represent also the major share of our global energy purchases. Our energy mix comprises roughly 50% electricity and roughly 50% energy from other sources, including gas and other fossil fuels. Our sourcing activities are focused on the spot market. Covestro does not engage in any hedging activities for its energy purchases.
Let’s turn to the next page. If we now come to the specific situation of Covestro in Europe, you can see that Covestro entertains a large production base in Europe, and especially in Germany, with 25% of our global capacity for core products being located here. The shortfalls of current gas deliveries from Russia are posing a threat to the energy supplies to Germany and by that also to Covestro. We believe that our other European sites are not impacted at all or to much smaller extent.
In Germany, the Federal Network Agency which is the response – which is responsible for gas supply coordination and allocation, has declared gas warning level 2 on June 23 this year. But basically, nothing has changed fundamentally. The lacking gas volumes could so far be sourced from other sources, and no gas restriction has been imposed. To minimize possible risk scenarios, these risk scenarios of 10% to 40% gas curtailment have been evaluated in Covestro and detailed plans to reduce or stop production to align with the potential reduced gas supply have been developed.
For example, we have simulated a scenario with 25% curtailment of gas supply to Covestro in Germany, and the impact would be a low to mid-double-digit million euro impact on EBITDA per month. However, we are fully cooperating with the authorities and Federal Network Agency and are evaluating all measures to reduce our gas consumption by working with our suppliers and the chemical park operators providing us with raw materials and theme.
Please follow me to the next page. If we are now looking a little bit deeper in how the German natural gas network is structured. In the past, 55% of the German gas supply came from Russia through the different pipelines, Nord Stream 1, Yamal, [indiscernible]. The transfer points for Russian gas through these pipelines are concentrated in the eastern part of Germany. Accordingly, the German gas grid has been built for the flow direction east to west. As you can see, the lack in gas volumes from Russia have partly been replaced by supplies from Norway and the Benelux countries, starting from the first quarter 2021 – 2022, excuse me, with handover points mainly on the Western German border. This is where the plant of Covestro in North and Westphalia are located. The Covestro plant in Brunsbüttel in northern part is close to the majority of the new LNG floating storage and regasification units FSRUs. So these terminals are planned to be erected and brought online by the fourth quarter of 2022 or early 2023.
The grid appears for major flow direction east to west, but now more imports and LNG volumes come in through the western side. So it is not sure that the grid can transport as much volumes west to east. This needs to be simulated, tested and might even require additional infrastructure measures. In the case of curtailment, there is a possibility that some regions in Germany, especially in the eastern part, will have stricter rationing than some regions in the western part. What I want to say to sum it up, plants of Covestro are favorably located and might be even part of a critical infrastructure that could result in a reduced curtailment of gas in case such a curtailment is seen as a necessary step by the Federal Network Agency.
With that, I would like to quickly summarize. So please follow me on the next page. The record sales of €4.7 billion in the second quarter 2022 driven by significant price increases mitigating the extraordinary inflationary pressure. We also delivered an EBITDA above the guidance range in the second quarter 2022 due to faster-than-expected normalization of COVID situation in China.
The guidance revision reflects the challenges ahead in the second half of 2022. Therefore, we reduced the EBITDA guidance from €2 billion to €2.5 billion to now €1.7 billion to €2.2 billion. We also had seen a record dividend payout of €3.40 per share, and that represents a payout ratio of 40%. And the 2-year share buyback program of €500 million has been started. And now we have €150 million bought back during the first 4 months. So overall, we had a solid second quarter in a challenging environment.
Christian Faitz
Yes. Good afternoon, everyone. I have two questions, if I may. First of all, related to your updated outlook, you mentioned broad-based demand weakness across key customer industries. Can you please elucidate this a bit more? What are you seeing in your order books? What are your salespeople reporting back? And then second question, can you please comment on your view how the low Rhine water levels, which is now going actually into the dry season, could cause supply issues, for example, in [indiscernible] as we saw for, I believe, in 2018? Thank you very much.
Markus Steilemann
Yes. Christian, thanks a lot for your question. This is Markus speaking. So if you look at the current overall environment for our end market, you could say that the so-called stay-at-home categories are across the board affected. And notwithstanding the specific situation that we have alluded to in our presentation in China due to the lockdown that has amplified some of these effects quite significantly, you can say that those so-called home categories are very broad-based across the regions. And that includes furniture, mattresses, electro-electronics. And on top of that, we also have seen impact on the automotive industry, for example, but not only limited here to China and also to Europe. And that has numerous reasons. One reason for that, for example, is that we have had since months a so-called microchip crisis. But on top of that, we also have seen the effect, particularly in China, also because of the headquarters of our engineering plastics business being in China. And that engineering plastics business has above-average exposure in the Covestro portfolio to the automotive industry. So long story short, I would say those three categories, so Asia Pacific, on the one hand, the automotive industry as well as the so-called stay-at-home categories have seen a downturn. And also to be clear here, that downturn, particularly on stay-at-home categories, has accelerated in July.
On the Rhine level, maybe here, what we have seen so far, and we monitor the situation by the day that we currently can handle the situation, and we are, I would say, much better prepared than we have been about 4 years ago when it happened first time in October, November 2018. So that is maybe not, let’s say, a news that would totally please you. However, as I said, we are much better prepared. Currently, we have no, let’s say, issues to supply our plants in Europe, next to all other, let’s say, supply chain issues that we have in the overall scheme with regard to specifically issues with regard to the Rhine level and water levels. So from that perspective, I would say that currently, the situation is under control. And that, let’s say, even if things would, let’s say, deteriorate from here a little bit, we still think that we can keep up supply to our North Westphalia plants, let’s say, intact. And from there, we don’t see currently increased risks.
Georgina Fraser
Hi, and good afternoon. Thanks for taking my questions. The first one I wanted to ask is you provided in the slides mark-to-market for July. I imagine that includes an average of prices across the months. So, maybe if you could let us know where the mark-to-market is today and if you’d be willing to give us a sense of the EBITDA contribution by each major region? And my second question on the same vein is – TDI in Europe, I think, is probably loss-making today. Could you possibly talk us through any reasons for or arguments against scaling back production? Thank you.
Thomas Toepfer
Yes. Georgina, this is Thomas speaking. Let me maybe start with the mark-to-market question. So yes, I mean, first of all, I mean, we – even ourselves, we do not have daily margins or anything, but we have monthly margins. So therefore, I would struggle to give you any specific development over the course of July. However, currently, what we would see in August is probably a further margin decline relative to what we had in July, simply because we’re seeing that the energy costs are higher and they affect us negatively and we do see the price level that we have. On the other hand, what we also see is that going forward, raw material prices are decreasing. That should then be a positive with a certain delay of, whatever, 60 days or so. So I think there are some negatives and some positives that we already see. Therefore, we do think that the mark-to-market is fully intact. And it’s still a good guidance. So I think that will be my statement on this one. Markus, do you want to take the TDI question?
Markus Steilemann
Yes, Georgina. This is Markus speaking. Thanks for your question. So looking at TDI, and in all fairness, I mean, we can’t, as you might understand, let’s say, go into too many details here. But TDI in Europe, given, let’s say, current peaking levels of raw materials on the one hand, but still, on the other hand, also energy prices, might be loss-making at an EBITDA perspective, but still has a positive, let’s say, contribution in terms of fixed costs, so from that perspective – or diluting the fixed costs. So in that perspective, I don’t want to go, let’s say, into too many details because I think this is not appropriate on such a call. Nonetheless, we are closely observing and monitoring the situation with regard to how the cash costs and how the overall, let’s say, profitability levels are developing from a global perspective and also on a respective site level. But just as a reminder, and that has not changed, given the fact that we have a proprietary technology, the so-called gas phase or [indiscernible] gas phase technology for TDI in place – in a world scale plant in Dormagen, we are still convinced that we are the cost leader in TDI in Europe. So regardless, let’s say, of a global picture within our own cooperation when it comes down to European assets, we believe that we have a very competitive cost position with regard to TDI in the European asset landscape. I hope that gives you some flavor.
Markus Mayer
Good afternoon, gentlemen. Two questions more on a potential change in trade flows given the higher cost curve in Europe. Can you give us some flavor how your European-based Performance Materials business, how much of this is really for the regional market and how much for the export market? Or is it only for regional market? And if you also expect any kind of change in trade flows for your business globally.
Markus Steilemann
Yes. Markus, thanks a lot for your question. And let me take this one up. This is Markus speaking. In general, we produce in the region for the region. So we try wherever we can to avoid transporting, in particular, highly reactive products like TDI and MDI simply for the reason, let’s say, of serving out of one region permanently other regions. For sure, we have respected trade flows, but this is mainly driven by other reasons. For example, if we have planned or, in some cases, unplanned shutdowns, we need to make sure that we, based on these facts, deliver and supply respective markets, then we put, for example, highly reactive goods and transport them across regions or yes, in case there is short-term arbitrage opportunities, then we might also consider to transport goods. In that context, however, in general, we serve the respective markets from the region in the region. Have we seen trade flow activities now from one region going into other regions increasing? Yes, we have. So there is clear evidence based on import/export data that there is material flow, particularly from Asia Pacific, arriving in Europe and here, particularly in Southern Europe. And there is also a slightly increased level from North America also coming into Europe. Not all of that, but at least, I would say, a significant part can be attributed to material trying to find its way from the currently lower cost production areas in Asia Pacific into high cost and, therefore, low-margin production areas in Europe. And that is very easily explained because, particularly in Asia Pacific, if you look at the energy costs that have hardly moved during the crisis as well as raw materials, which have not, let’s say, moved that significantly, but they also have moved and now even slightly coming down, we clearly have to say that it obviously makes sense for one or the other producer to import from Asia Pacific into some regions of Europe.
There is a couple of things that were listed on the long run currently, not on, let’s say, short-term, against that, say, significantly increased levels of imports. Number one, it’s logistic capacity. And number two is you have to build also the respective infrastructure. So it’s a limit at least short to mid-term to how much you could actually import. And the second bit is for TDI and also some MDI applications, the reactivity of the material, because the quality of material, given the higher activity, deteriorates the quality. And we’ve seen it in the past already numerous times that then only some applications can be served. I do not want to include that this might have structural effects in many years to come. But for now, the short-term effects are as I have described them. I hope that helps a little bit.
Thomas Toepfer
I think – I mean Charlie, I would say is that Wanhua, I mean I jokingly tend to say they are our favorite competitor because they do behave in a very rational way, and that’s also what we are seeing here. So, I think they are not the problem. What we are seeing is that, of course, the industry utilization in polycarbonate is very low and that there are many players that are newcomers to the market or not in a market – in a strong market position. So, therefore, here the situation is slightly different. This is also why we do differentiate more and more into engineering plastics where we compound the material to decouple ourselves from the website pricing. But on the Wanhua side, we do really observe that they behave in a very rational manner, which is absolutely helpful for the market.
Charlie Webb
And are you seeing them curtail supply of MDI as in like do extended shutdowns or whatever? Is that starting to become more of a feature? I mean MDI spreads – I mean of course, pending prices have been part of it, but still look pretty pressured.
Thomas Toepfer
Yes. I think that specific question, it would be great if you could direct that – direct it to Wanhua. I don’t feel we are positioned to give that answer on their behalf.
Charlie Webb
Okay. So, you don’t see anything in the market at this stage per se?
Markus Steilemann
Once again, I think – it is Markus speaking. I would love you to turn to Wanhua and ask that question. One thing that is in that context sometimes really maybe forgotten is that – the overall situation is, let’s say, the most impactful for the market leader. And we have seen, let’s say, Wanhua being a very rational player in the past.
Geoff Haire
Yes. Good afternoon and thank you very much for the opportunity to ask. Two questions. First question is a little bit detailed. But I think if my math is right, your working capital chance in Q2 was about €68 million. I just wonder – it seems low given energy cost prices and raw material cost increases as well. I just wonder if you could maybe give some details on that. And then the second question, and I apologize for this, but going back to the new MDI plant decision, given that BASF has announced a doubling of that capacity in North America, does this make you sort of more favorable to moving – considering building the plant in Asia now?
Thomas Toepfer
So, let me start with the first question. So, first of all, your math is right. I have the same number in my mind. The reason, of course, is that the price increases already happened, to a large extent, in the first quarter of this year, and we are continuing on that very high level. Plus there is a little bit of different working capital buildup in Q2 – Q1, Q2 last year versus Q1, Q2 this year. But your math is absolutely right. And you can also see that overall, the working capital buildup this year relative to last year, if you look at the free cash flow statement, is only a little bit more than €100 million more. So, I think that those numbers do square for me. It’s really the price level that was already pretty elevated at the end of March.
Geoff Haire
Thanks.
Markus Steilemann
Geoff, and then your second question, if you look at the overall MDI capacity development globally and look also what has been announced by when the BASF plant decision, as you call it, and as announced, is exactly in line with what has been announced a couple of years ago. So, that was part of our long-term supply-demand assumptions and is now just, if you want to say so, materializing as planned with that is, as usual, an exception because most of the announcements either come too late or come never or do not come to the announced extent. So, this is, let’s say, an example of the 40% to 50% of announcements that obviously come on-time and in full, and with that, do not have, let’s say, a new facet to the already known information that we will make the basis for our MDI decision.
Matthew Yates
Hi. Good afternoon. A couple of questions around your capital allocation and balance sheet headroom. Thomas, I didn’t really understand your comment on the buyback in terms of saying it’s in keeping with the existing timeframe. If you have done the €150 million already, that looks to me like you are trying to complete the program over 1 year rather than 2 years. And given the whole buyback was intended to be opportunistic and countercyclical, wouldn’t it makes sense to accelerate the buyback at this point. And then maybe the second question, just following up on what Geoff asked about, the CapEx. Is there any update on the bottom line of new investment decision there? And any debate about pushing that out given the weaker demand backdrop?
Thomas Toepfer
So, yes, let me – on those two questions. So, I mean, the CapEx decision you are referring to the MDI decision and the question, where to build it, I mean we always said a decision would be taken after the summer break. I would feel this is still valid if you define it as a long summer. So, don’t – please don’t nail us down at the 1st of September, but we will come to a decision then in Q, I mean I would say, second half of the year, but not in December, rather September, October, we will come up with something that is then also discussed by the various committees that we have to go through. Of course, it needs Board approval. It needs Supervisory Board presentation, etcetera, etcetera. So, I think September, October is a realistic timeframe here. On the share buyback, what I wanted to say is, I mean we have the 2 years. We have the €500 million. We are not saying because we were already executing €150 million, there is necessarily an acceleration. Our goal is to execute it, as I said, over the 2 years with the amount – there can be some periods that are a little faster and some other periods that are a little slower. There is no indication of what we did so far that we always must accelerate it and be done within the year. I think that would be not exactly our target. And sorry, I should also say – sorry, I think you asked whether share buyback was independent of MDI, yes. I think those two things, we don’t see them as intellectually connected.
August 5, 2022
Covestro Investors Call Urethane Highlights
Covestro AG (CVVTF) CEO Markus Steilemann on Q2 2022 Results – Earnings Call Transcript
Aug. 02, 2022 11:35 PM ETCovestro AG (CVVTF), COVTY
Covestro AG (OTCPK:CVVTF) Q2 2022 Earnings Conference Call August 2, 2022 9:30 AM ET
Company Participants
Ronald Koehler – Investor Relations
Markus Steilemann – Chief Executive Officer
Thomas Toepfer – Chief Financial Officer
Markus Steilemann
Yes. Thanks a lot, Thomas. So now we come into maybe a more complicated part of the presentation, talking about energy. But we deem it to be very helpful for you to understand how the overall energy market is developing and how Covestro is also positioned in that market with regard to purchasing but also with regard to locations that we have, particularly in Europe and Germany.
As you all know, the situation of energy supply has become a major issue that requires our continuous full attention. The price increases for natural gas and electricity keep us busy in trying to pass them on to the market. To be very clear, up to now, all Covestro sites in Europe, and especially in Germany, are fully supplied with natural gas to run our plants flat out. We are [indiscernible] with the federal government and the network agency responsible for the supply coordination on a frequent basis.
Throughout 2021, we have seen quarter-by-quarter an increase in our energy spend compared to 2020, finally leading to energy cost that almost doubled from 2020. The increase of quarter four 2021 of €260 million has since then continued to be the magnitude of the quarterly increases in Q1 and Q2 of 2022 on top of the energy costs of 2020 and 2021. Our initial evaluation of the energy spend for 2021 was €1.5 billion. With the revision of our guidance in May, we incorporated an increase of up to €2 billion. Given the current extremely volatile situation, we expect quarter three to show another sequential increase of €350 million to €400 million on top of the cost of 2020 and 2021. We are now assuming our total energy bill around €2.2 billion for the full year 2022, which reflects the prices of last week of July flat forward.
As you can see, on the three pie charts on the lower part of the slide, the major driver for the cost increases, are the European energy prices, which represent also the major share of our global energy purchases. Our energy mix comprises roughly 50% electricity and roughly 50% energy from other sources, including gas and other fossil fuels. Our sourcing activities are focused on the spot market. Covestro does not engage in any hedging activities for its energy purchases.
Let’s turn to the next page. If we now come to the specific situation of Covestro in Europe, you can see that Covestro entertains a large production base in Europe, and especially in Germany, with 25% of our global capacity for core products being located here. The shortfalls of current gas deliveries from Russia are posing a threat to the energy supplies to Germany and by that also to Covestro. We believe that our other European sites are not impacted at all or to much smaller extent.
In Germany, the Federal Network Agency which is the response – which is responsible for gas supply coordination and allocation, has declared gas warning level 2 on June 23 this year. But basically, nothing has changed fundamentally. The lacking gas volumes could so far be sourced from other sources, and no gas restriction has been imposed. To minimize possible risk scenarios, these risk scenarios of 10% to 40% gas curtailment have been evaluated in Covestro and detailed plans to reduce or stop production to align with the potential reduced gas supply have been developed.
For example, we have simulated a scenario with 25% curtailment of gas supply to Covestro in Germany, and the impact would be a low to mid-double-digit million euro impact on EBITDA per month. However, we are fully cooperating with the authorities and Federal Network Agency and are evaluating all measures to reduce our gas consumption by working with our suppliers and the chemical park operators providing us with raw materials and theme.
Please follow me to the next page. If we are now looking a little bit deeper in how the German natural gas network is structured. In the past, 55% of the German gas supply came from Russia through the different pipelines, Nord Stream 1, Yamal, [indiscernible]. The transfer points for Russian gas through these pipelines are concentrated in the eastern part of Germany. Accordingly, the German gas grid has been built for the flow direction east to west. As you can see, the lack in gas volumes from Russia have partly been replaced by supplies from Norway and the Benelux countries, starting from the first quarter 2021 – 2022, excuse me, with handover points mainly on the Western German border. This is where the plant of Covestro in North and Westphalia are located. The Covestro plant in Brunsbüttel in northern part is close to the majority of the new LNG floating storage and regasification units FSRUs. So these terminals are planned to be erected and brought online by the fourth quarter of 2022 or early 2023.
The grid appears for major flow direction east to west, but now more imports and LNG volumes come in through the western side. So it is not sure that the grid can transport as much volumes west to east. This needs to be simulated, tested and might even require additional infrastructure measures. In the case of curtailment, there is a possibility that some regions in Germany, especially in the eastern part, will have stricter rationing than some regions in the western part. What I want to say to sum it up, plants of Covestro are favorably located and might be even part of a critical infrastructure that could result in a reduced curtailment of gas in case such a curtailment is seen as a necessary step by the Federal Network Agency.
With that, I would like to quickly summarize. So please follow me on the next page. The record sales of €4.7 billion in the second quarter 2022 driven by significant price increases mitigating the extraordinary inflationary pressure. We also delivered an EBITDA above the guidance range in the second quarter 2022 due to faster-than-expected normalization of COVID situation in China.
The guidance revision reflects the challenges ahead in the second half of 2022. Therefore, we reduced the EBITDA guidance from €2 billion to €2.5 billion to now €1.7 billion to €2.2 billion. We also had seen a record dividend payout of €3.40 per share, and that represents a payout ratio of 40%. And the 2-year share buyback program of €500 million has been started. And now we have €150 million bought back during the first 4 months. So overall, we had a solid second quarter in a challenging environment.
Christian Faitz
Yes. Good afternoon, everyone. I have two questions, if I may. First of all, related to your updated outlook, you mentioned broad-based demand weakness across key customer industries. Can you please elucidate this a bit more? What are you seeing in your order books? What are your salespeople reporting back? And then second question, can you please comment on your view how the low Rhine water levels, which is now going actually into the dry season, could cause supply issues, for example, in [indiscernible] as we saw for, I believe, in 2018? Thank you very much.
Markus Steilemann
Yes. Christian, thanks a lot for your question. This is Markus speaking. So if you look at the current overall environment for our end market, you could say that the so-called stay-at-home categories are across the board affected. And notwithstanding the specific situation that we have alluded to in our presentation in China due to the lockdown that has amplified some of these effects quite significantly, you can say that those so-called home categories are very broad-based across the regions. And that includes furniture, mattresses, electro-electronics. And on top of that, we also have seen impact on the automotive industry, for example, but not only limited here to China and also to Europe. And that has numerous reasons. One reason for that, for example, is that we have had since months a so-called microchip crisis. But on top of that, we also have seen the effect, particularly in China, also because of the headquarters of our engineering plastics business being in China. And that engineering plastics business has above-average exposure in the Covestro portfolio to the automotive industry. So long story short, I would say those three categories, so Asia Pacific, on the one hand, the automotive industry as well as the so-called stay-at-home categories have seen a downturn. And also to be clear here, that downturn, particularly on stay-at-home categories, has accelerated in July.
On the Rhine level, maybe here, what we have seen so far, and we monitor the situation by the day that we currently can handle the situation, and we are, I would say, much better prepared than we have been about 4 years ago when it happened first time in October, November 2018. So that is maybe not, let’s say, a news that would totally please you. However, as I said, we are much better prepared. Currently, we have no, let’s say, issues to supply our plants in Europe, next to all other, let’s say, supply chain issues that we have in the overall scheme with regard to specifically issues with regard to the Rhine level and water levels. So from that perspective, I would say that currently, the situation is under control. And that, let’s say, even if things would, let’s say, deteriorate from here a little bit, we still think that we can keep up supply to our North Westphalia plants, let’s say, intact. And from there, we don’t see currently increased risks.
Georgina Fraser
Hi, and good afternoon. Thanks for taking my questions. The first one I wanted to ask is you provided in the slides mark-to-market for July. I imagine that includes an average of prices across the months. So, maybe if you could let us know where the mark-to-market is today and if you’d be willing to give us a sense of the EBITDA contribution by each major region? And my second question on the same vein is – TDI in Europe, I think, is probably loss-making today. Could you possibly talk us through any reasons for or arguments against scaling back production? Thank you.
Thomas Toepfer
Yes. Georgina, this is Thomas speaking. Let me maybe start with the mark-to-market question. So yes, I mean, first of all, I mean, we – even ourselves, we do not have daily margins or anything, but we have monthly margins. So therefore, I would struggle to give you any specific development over the course of July. However, currently, what we would see in August is probably a further margin decline relative to what we had in July, simply because we’re seeing that the energy costs are higher and they affect us negatively and we do see the price level that we have. On the other hand, what we also see is that going forward, raw material prices are decreasing. That should then be a positive with a certain delay of, whatever, 60 days or so. So I think there are some negatives and some positives that we already see. Therefore, we do think that the mark-to-market is fully intact. And it’s still a good guidance. So I think that will be my statement on this one. Markus, do you want to take the TDI question?
Markus Steilemann
Yes, Georgina. This is Markus speaking. Thanks for your question. So looking at TDI, and in all fairness, I mean, we can’t, as you might understand, let’s say, go into too many details here. But TDI in Europe, given, let’s say, current peaking levels of raw materials on the one hand, but still, on the other hand, also energy prices, might be loss-making at an EBITDA perspective, but still has a positive, let’s say, contribution in terms of fixed costs, so from that perspective – or diluting the fixed costs. So in that perspective, I don’t want to go, let’s say, into too many details because I think this is not appropriate on such a call. Nonetheless, we are closely observing and monitoring the situation with regard to how the cash costs and how the overall, let’s say, profitability levels are developing from a global perspective and also on a respective site level. But just as a reminder, and that has not changed, given the fact that we have a proprietary technology, the so-called gas phase or [indiscernible] gas phase technology for TDI in place – in a world scale plant in Dormagen, we are still convinced that we are the cost leader in TDI in Europe. So regardless, let’s say, of a global picture within our own cooperation when it comes down to European assets, we believe that we have a very competitive cost position with regard to TDI in the European asset landscape. I hope that gives you some flavor.
Markus Mayer
Good afternoon, gentlemen. Two questions more on a potential change in trade flows given the higher cost curve in Europe. Can you give us some flavor how your European-based Performance Materials business, how much of this is really for the regional market and how much for the export market? Or is it only for regional market? And if you also expect any kind of change in trade flows for your business globally.
Markus Steilemann
Yes. Markus, thanks a lot for your question. And let me take this one up. This is Markus speaking. In general, we produce in the region for the region. So we try wherever we can to avoid transporting, in particular, highly reactive products like TDI and MDI simply for the reason, let’s say, of serving out of one region permanently other regions. For sure, we have respected trade flows, but this is mainly driven by other reasons. For example, if we have planned or, in some cases, unplanned shutdowns, we need to make sure that we, based on these facts, deliver and supply respective markets, then we put, for example, highly reactive goods and transport them across regions or yes, in case there is short-term arbitrage opportunities, then we might also consider to transport goods. In that context, however, in general, we serve the respective markets from the region in the region. Have we seen trade flow activities now from one region going into other regions increasing? Yes, we have. So there is clear evidence based on import/export data that there is material flow, particularly from Asia Pacific, arriving in Europe and here, particularly in Southern Europe. And there is also a slightly increased level from North America also coming into Europe. Not all of that, but at least, I would say, a significant part can be attributed to material trying to find its way from the currently lower cost production areas in Asia Pacific into high cost and, therefore, low-margin production areas in Europe. And that is very easily explained because, particularly in Asia Pacific, if you look at the energy costs that have hardly moved during the crisis as well as raw materials, which have not, let’s say, moved that significantly, but they also have moved and now even slightly coming down, we clearly have to say that it obviously makes sense for one or the other producer to import from Asia Pacific into some regions of Europe.
There is a couple of things that were listed on the long run currently, not on, let’s say, short-term, against that, say, significantly increased levels of imports. Number one, it’s logistic capacity. And number two is you have to build also the respective infrastructure. So it’s a limit at least short to mid-term to how much you could actually import. And the second bit is for TDI and also some MDI applications, the reactivity of the material, because the quality of material, given the higher activity, deteriorates the quality. And we’ve seen it in the past already numerous times that then only some applications can be served. I do not want to include that this might have structural effects in many years to come. But for now, the short-term effects are as I have described them. I hope that helps a little bit.
Thomas Toepfer
I think – I mean Charlie, I would say is that Wanhua, I mean I jokingly tend to say they are our favorite competitor because they do behave in a very rational way, and that’s also what we are seeing here. So, I think they are not the problem. What we are seeing is that, of course, the industry utilization in polycarbonate is very low and that there are many players that are newcomers to the market or not in a market – in a strong market position. So, therefore, here the situation is slightly different. This is also why we do differentiate more and more into engineering plastics where we compound the material to decouple ourselves from the website pricing. But on the Wanhua side, we do really observe that they behave in a very rational manner, which is absolutely helpful for the market.
Charlie Webb
And are you seeing them curtail supply of MDI as in like do extended shutdowns or whatever? Is that starting to become more of a feature? I mean MDI spreads – I mean of course, pending prices have been part of it, but still look pretty pressured.
Thomas Toepfer
Yes. I think that specific question, it would be great if you could direct that – direct it to Wanhua. I don’t feel we are positioned to give that answer on their behalf.
Charlie Webb
Okay. So, you don’t see anything in the market at this stage per se?
Markus Steilemann
Once again, I think – it is Markus speaking. I would love you to turn to Wanhua and ask that question. One thing that is in that context sometimes really maybe forgotten is that – the overall situation is, let’s say, the most impactful for the market leader. And we have seen, let’s say, Wanhua being a very rational player in the past.
Geoff Haire
Yes. Good afternoon and thank you very much for the opportunity to ask. Two questions. First question is a little bit detailed. But I think if my math is right, your working capital chance in Q2 was about €68 million. I just wonder – it seems low given energy cost prices and raw material cost increases as well. I just wonder if you could maybe give some details on that. And then the second question, and I apologize for this, but going back to the new MDI plant decision, given that BASF has announced a doubling of that capacity in North America, does this make you sort of more favorable to moving – considering building the plant in Asia now?
Thomas Toepfer
So, let me start with the first question. So, first of all, your math is right. I have the same number in my mind. The reason, of course, is that the price increases already happened, to a large extent, in the first quarter of this year, and we are continuing on that very high level. Plus there is a little bit of different working capital buildup in Q2 – Q1, Q2 last year versus Q1, Q2 this year. But your math is absolutely right. And you can also see that overall, the working capital buildup this year relative to last year, if you look at the free cash flow statement, is only a little bit more than €100 million more. So, I think that those numbers do square for me. It’s really the price level that was already pretty elevated at the end of March.
Geoff Haire
Thanks.
Markus Steilemann
Geoff, and then your second question, if you look at the overall MDI capacity development globally and look also what has been announced by when the BASF plant decision, as you call it, and as announced, is exactly in line with what has been announced a couple of years ago. So, that was part of our long-term supply-demand assumptions and is now just, if you want to say so, materializing as planned with that is, as usual, an exception because most of the announcements either come too late or come never or do not come to the announced extent. So, this is, let’s say, an example of the 40% to 50% of announcements that obviously come on-time and in full, and with that, do not have, let’s say, a new facet to the already known information that we will make the basis for our MDI decision.
Matthew Yates
Hi. Good afternoon. A couple of questions around your capital allocation and balance sheet headroom. Thomas, I didn’t really understand your comment on the buyback in terms of saying it’s in keeping with the existing timeframe. If you have done the €150 million already, that looks to me like you are trying to complete the program over 1 year rather than 2 years. And given the whole buyback was intended to be opportunistic and countercyclical, wouldn’t it makes sense to accelerate the buyback at this point. And then maybe the second question, just following up on what Geoff asked about, the CapEx. Is there any update on the bottom line of new investment decision there? And any debate about pushing that out given the weaker demand backdrop?
Thomas Toepfer
So, yes, let me – on those two questions. So, I mean, the CapEx decision you are referring to the MDI decision and the question, where to build it, I mean we always said a decision would be taken after the summer break. I would feel this is still valid if you define it as a long summer. So, don’t – please don’t nail us down at the 1st of September, but we will come to a decision then in Q, I mean I would say, second half of the year, but not in December, rather September, October, we will come up with something that is then also discussed by the various committees that we have to go through. Of course, it needs Board approval. It needs Supervisory Board presentation, etcetera, etcetera. So, I think September, October is a realistic timeframe here. On the share buyback, what I wanted to say is, I mean we have the 2 years. We have the €500 million. We are not saying because we were already executing €150 million, there is necessarily an acceleration. Our goal is to execute it, as I said, over the 2 years with the amount – there can be some periods that are a little faster and some other periods that are a little slower. There is no indication of what we did so far that we always must accelerate it and be done within the year. I think that would be not exactly our target. And sorry, I should also say – sorry, I think you asked whether share buyback was independent of MDI, yes. I think those two things, we don’t see them as intellectually connected.
August 5, 2022
Highlights from Huntsman’s Investors Call
Huntsman Corporation (HUN) CEO Peter Huntsman on Q2 2022 Results – Earnings Call Transcript
Aug. 02, 2022 7:03 PM ETHuntsman Corporation (HUN)
Q2: 2022-08-02 Earnings Summary
EPS of $1.28 beats by $0.14 | Revenue of $2.36B (16.70% Y/Y) beats by $57.99M
Huntsman Corporation (NYSE:HUN) Q2 2022 Results Conference Call August 2, 2022 10:00 AM ET
Company Participants
Ivan Marcuse – Vice President of Investor Relations
Peter Huntsman – Chairman, CEO and President
Phil Lister – Executive Vice President and CFO
Peter Huntsman
Thank you, Ivan. Good morning, everyone. Thanks for taking the time to join us. Let’s [indiscernible] on Slide number 5. Adjusted EBITDA for our Polyurethanes division in the second quarter was $229 million compared to $208 million of a year ago, a 10% increase.
We achieved the increase in adjusted EBITDA and corresponding 17% EBITDA margins despite a volatile economic backdrop of unprecedented energy costs in Europe, COVID-related lockdowns in China and FX headwinds.
Please note that we did receive an insurance settlement, which benefited our second quarter results in polyurethanes by $15 million. We focused on our selling price and our value over volume strategy intently throughout the quarter. We passed through approximately $900 million of annualized increases in raw materials and energy costs, which approximately half were related to higher energy prices. Overall volumes declined 4% as we continued to pursue our value-based strategy.
In the Americas, negative growth was driven by some weakness in consumer-related end markets, primarily furniture and ongoing supply constraints in our Huntsman Building Solutions business. In Asia, our growth was negatively impacted due to government mandated lockdowns in Shanghai as the Chinese government attempts to control COVID outbreaks.
Volumes in Europe were up compared to the prior year due to favorable comparisons as we completed our once every 4-year Rotterdam turnaround in the second quarter of 2021. Excluding the Rotterdam turnaround, our volumes declined year-on-year. Addressing European near-term demand, we currently expect volumes to contract across several end markets as persistent and extraordinary natural gas prices impact consumer and industrial demand for polyurethanes.
During the second quarter, natural gas prices averaged around $31 per MMBtu. And today, they are at a record high of approximately $60 per MMBtu, over 6x the price in the United States. As a reminder, for every $1 per MMBtu change in natural gas, our variable costs in our European polyurethane business change by approximately $10 million on an annualized basis.
While the European facilities are not insulated from the price volatility in natural gas, it is worth pointing out that our largest natural gas derivative consuming facilities are in the Netherlands and in the United Kingdom, which have different supply dynamics and are relatively less dependent on Russian supplies compared to Germany. Also considered that from a natural gas pricing perspective, approximately 60% of our MDI natural gas-related production cost requirements are linked to U.K. pricing via our upstream nitrobenzene and aniline facilities.
Of course, our focus in Europe remains to maintaining the quality of our business and related pricing and margins as we navigate through a high level of economic volatility in the second half of the year. Huntsman Building Solutions platform recorded second quarter revenues of approximately $154 million, up 16% year-over-year, driven by pricing. We are well above the profitability we targeted when we launched Huntsman Building Solutions.
That said, we were hindered by constraints in blowing agents, which negatively impacted volumes versus the prior year. As we look into the early part of the third quarter, we do see some destocking of inventory at our customers from the impact mortgage rate increases in the U.S. are having on housing activity. We estimate that roughly half of HBS serves residential markets, while the other half serves the commercial construction markets.
We will continue to remain focused on growing HBS internationally and not valuing our polymeric MDI in the spray foam insulation systems. Spray foam is an increasingly versatile insulation with superior energy saving properties, which we expect to gain market share over time as energy conservation remains a priority for consumers and governments. For the second sequential quarter, our polyurethanes automotive platform saw improved volumes year-over-year.
Our automotive business is well positioned to recover with the market over the coming years, and we are focused on bringing innovative solutions to our customers. As we previously announced, we achieved a key milestone in the second quarter as we completed the commissioning of our new MDI splitter in Geismar, Louisiana. Today, the new splitter is running well.
The strategic investment will be a catalyst and allow further upgrades to our Americas portfolio. As we disclosed previously, once the new splitter is fully up and running, we expect it to add an incremental $45 million of annual EBITDA to our results by 2024. Lower propylene oxide margins in China drove our equity earnings lower year-over-year.
Our joint venture contributed approximately $18 million in equity earnings for the quarter, well below the $42 million reported the year earlier. Given current levels of PO margins, we expect that equity earnings could be approximately [$60 million] lower in 2022 versus the record earnings of 2021. In addition to upgrading margins by driving molecules into our higher-value margin products, we are intent on further optimizing our cost structure in polyurethanes to improve margins.
On an annualized basis, we delivered more than $40 million from our first phase of cost optimization synergies in polyurethanes. As we stated last quarter, we are targeting an additional $60 million by the end of 2023. These cost savings will be achieved through optimization of our footprint, for example, by exiting regions in markets where we — where the returns do not justify long-term supply such as Brazil and other regions with similar dynamics and continuing to lower back-office expenses. We expect the lion’s share of these savings to impact 2023.
Looking into the third quarter, we are closely watching all of the relevant economic and end market indicators and in particular, the situation in European energy crisis. As we sit here today, we expect polyurethanes additional EBITDA for the third quarter — excuse me, polyurethanes adjusted EBITDA for the third quarter to be in the range of $170 million to $200 million.
Let’s turn to Slide number 6. Turning to Performance Products. We reported adjusted EBITDA of $152 million for the second quarter, with an adjusted EBITDA margin of 31%. The industry dynamics in Performance Products remain favorable. In addition, with our commercial excellence programs and continuing focus on cost control, this division should continue to deliver strong results.
We do not believe this certain — we do believe that certain amine markets in China are moderating. Volumes decreased 3% compared to the prior year period as we continue to focus on securing value over volume and a short-term operational issue at our maleic facility in Europe, which has since been resolved. The construction markets that we sell into specifically in the U.S., which is primarily nonresidential construction continue to have good underlying demand.
We also continue to see positive dynamics in our global fuel additives markets. We’re impacted in China by the government-mandated lockdowns in softer composite demand. Despite the lower volumes, we still saw profitability and margin quality significantly improved year-on-year in all 3 regions. Last year, we announced targeted capital investments in polyurethane catalysts and differentiated chemicals serving the electronic vehicle, semiconductor and insulation markets.
These projects continue to progress and remain on schedule to be completed on time. We expect all these projects to contribute positively to results in 2023, deliver more than $35 million of EBITDA benefits in 2024. As a reminder, we hold leading market positions in many of our main product lines as well as our maleic anhydride. Performance Products remains a highly attractive division, and we continue to evaluate strategic organic investments to grow this business over the long term.
Looking to the third quarter, this tends to be seasonally weaker than the second quarter, and there are some currency headwinds. That said, we currently expect another strong quarter from Performance Products with third quarter adjusted EBITDA in the range of $130 million to $140 million, solidly above the prior year.
Let’s turn to Slide number 7. Our Advanced Materials division reported adjusted EBITDA of $67 million in the quarter, significantly above last year’s second quarter and equal to the strongest quarter in the division’s history. We achieved 20% adjusted EBITDA margins with a disciplined approach to value over volume.
We recorded the record results in Advanced Materials, even though aerospace profitability is still recovering at approximately 40% below pre-pandemic levels. In addition to improving product mix, we’ve been aggressive in achieving pricing to more than offset raw material inflation. We continue to deselect a lower-margin business while increasing our higher volume and value sales where possible.
We are growing at an above — we’re growing at or above several of our industries, adhesives markets as we deliver solutions to our customers, and our industrial adhesives portfolio is positioned to grow further over the coming years. In addition, our recent acquisitions of Gabriel and CVC, contributing strongly in delivering above our average adjusted segment EBITDA margins as we execute our pricing strategies and capture synergies.
Volumes for the segment declined 16%, with much of the volume decline, a result of our conscious decision to exit commodity BLR manufacturing in the U.S. as well as lower margin coating markets. We did see modest growth in aerospace demand versus last year, leading to a 25% year-on-year improvement in profitability. While aerospace remains well below pre-pandemic levels, the fundamentals of this industry remain strong, and we expect to see continued improvement over the next couple of years back to pre-pandemic levels.
Currently, we still see relatively stable underlying demand in many of our core specialty businesses in the Americas and Europe. We do expect normal seasonality, currency headwinds and some softening in Europe to impact the third quarter versus the second quarter. That said, we still expect to show a solid improvement versus the prior year. We expect adjusted EBITDA for this segment in the third quarter to range between $58 million and $63 million.
Let’s turn to Slide number 8. Our Textile Effects division reported adjusted EBITDA of $22 million for the second quarter. Sales declined 7%, driven by a 16% decline in volume and the business was adversely impacted by both new and continuing COVID-related lockdowns in China. As a reminder, roughly 60% of Textile Effects sales are in Asia, with China representing more than half of those sales.
Also impacting volumes were lower home and hospitality sales due to lower North American imports. Despite these volume headwinds, we remain focused on improving our differentiated specialty businesses while deselecting low-margin value-oriented volumes. In addition, we took aggressive pricing action to offset substantial raw material and logistical headwinds.
As a result of these actions, we were able to improve variable contribution margins, which helped to offset the negative impact of the lower volumes. We remain optimistic on the long-term fundamentals of Textile Effects. We are confident our specialty-oriented portfolio will continue to develop as brands focus more and more on sustainability and product innovation.
We expect orders to pick up as retailers stock up for the critical holiday period and related winter and spring apparel trends. We currently expect adjusted EBITDA in the third quarter to be similar to the prior year and project a range of $20 million to $22 million.
Phil Lister
Thank you, Peter. Turning to Slide 9. Adjusted EBITDA increased by $98 million to $432 million, an increase of 29% compared to the second quarter of 2021. Sequentially, adjusted EBITDA improved by $17 million or 4%. As Peter highlighted, during the second quarter, we did benefit from an insurance settlement within our Polyurethanes division, which increased our adjusted EBITDA by approximately $15 million.
During the second quarter, we took the following steps: firstly, consistent with our Investor Day announcement to expand our global business services, we began the process of setting up regional service centers in Krakow, Poland and San Jose, Costa Rica. We expect those locations to be fully operational during 2023. Secondly, as Peter has indicated, we are exiting certain markets in polyurethanes.
In the second quarter, we communicated to our associates that we would exit Brazil, Argentina and Chile by the end of 2022, and we are in the process of evaluating positions in Southeast Asia and India. We have a number of additional cost savings initiatives in progress, including supply chain optimization, which we announced at our Investor Day. We remain confident of achieving our goals by the end of 2023. Turning to Slide 11. Regarding free cash flow.
We remain confident of achieving our 40% free cash flow conversion target in 2022. Capital expenditures remain on track towards our $300 million spend target for the year as we switch our attention from our newly commissioned Geismar MDI splitter to our various growth projects in our Performance Products division.
Peter Huntsman
Phil, thank you very much. Two years ago, during our second quarter report, I compared the economic shocks and volatility of that time to the same as 1791 Whiskey Rebellion. As I look at today’s lack of clarity and uncertain outlook around the world, I’m reminded of the words of St. Paul to the Corinthians, “For now we see through a glass, darkly.” I’m not sure [indiscernible] was referring to European gas prices, but it seems he at least had something similar in mind.
We reported today adjusted EBITDA of $432 million, margins in excess of 18%, more than $500 million in stock repurchases over the past 6 months. Our balance sheet is strong, and our business is on track to meet our objectives that we set out at our most recent Investor Day meeting. So we look into the third quarter, we’ve given a guidance of between $330 million and $375 million of adjusted EBITDA. And I’ve watched these other companies who have reported guidance have been criticized for being too rosy or for being too [indiscernible]. We try to guide you on our future performances accurately and transparently as we see it at this time.
I see three issues that we will be facing during the second half that may well help us exceed these numbers or not. I’d like to address these issues and what Huntsman is doing to take advantage of them, where we can and try to mitigate their impact when we can’t.
The biggest challenge we see today is the energy crisis and natural gas volatility in Europe and to a lesser degree, globally. As I pointed out in my earlier remarks, every dollar of price movement affects us about $10 million annually. During these past 2 weeks, European gas prices moved nearly 20% upwards costing us in excess of $100 million on an annualized basis of added cost.
This past Friday, prices dropped 4%, saving us nearly $25 million on an annual basis. And this morning, the prices rose greater than 15%. I do not see any reason why this volatility would not continue since Europe has become overly dependent on the same means of propulsion Magellan used to navigate the globe, mainly wind, and natural gas supplies from an equally unreliable, but far more dangerously calculating Russia.
To count to this, we are aggressive as we can and with our pricing. Some may be content to play the shock absorber between consumer and energy producers. We will continue to push through price-related surcharge and price increases where we can. As we stated earlier, we’ve converted the vast majority of our European sales contracts from quarterly contract prices to monthly pricing and where we can also add the surcharges.
In some cases, this may well mean that we are walking away from certain sales. We’re also evaluating the feasibility of reducing production at some of our largest European facilities and increasing our imports from Asia and North America. It has become fairly clear to us that Europe’s energy problems will not likely be fixed anytime soon.
Accordingly, we’re more aggressively looking at our business footprint and cost structure. We are evaluating steps in addition to our previously announced cost reduction targets of $240 million to further reduce our costs and reposition our global business footprint. We announced this past month, we’ll be relocating a portion of our European business services to crack out Poland. We will look at further consolidation and site rationalizations as we calibrate our business around what may be a more permanent reality for Europe.
Our second challenge is inflation in North American markets and increasingly around the world. Increasing costs and rising interest rates will likely slow consumer demand and lower consumer confidence. In our largest North American business, polyurethanes, we started operating our new MDI splitter to give us greater access to a wider range of consumer solutions and higher-margin materials.
In our Advanced Materials division, we will continue to see the benefits of our adhesives and Additives acquisitions, which will have been fully — which have been fully integrated from an operational point of view as we reduce cost and continue to grow the business. We are seeing encouraging signs in the Aerospace sector and in many parts of the modernizing power in electronic sector as well.
Kevin McCarthy
Peter, I was wondering if you could elaborate on your decision to exit polyurethane businesses in South America. What drove that decision? And what sort of impact on sales and earnings might we expect as you move forward there?
Peter Huntsman
Well, Kevin, good to hear from you. I hope you’re doing well. Yes, I think that as we look at the long-term margin prospects in this market. We look at the logistics, the working capital that’s tied up. We look at the tariff costs and so forth, the repatriation of capital.
When we factor all of these things, which you rarely talked about in these calls, but when you start factoring all of those issues, even if you’re earning the same margin in many of those markets as you are in, for example, in North America, your actual netback — the natural value that’s being created, in some cases, drops from what otherwise would be a 20% margin down to a mid- to low single-digit margin, I don’t see this changing. And so as we evaluate the markets as we evaluate where the growth and where the value is going to be, particularly the value. And I know that [indiscernible] beating a dead horse here and talking about value over volume, but I think so often, we get transfixed in this industry about growing sales. And we don’t look at the value of the sales. And in many cases, it costs us just as much to service and to supply and to produce a single-digit margin account as it does to get a 20% margin account.
And we need to be where those markets are going to reward us for innovation, reward us for the service and the technology that we invest in, reward our ability to uplift our molecules, our splitting capabilities and so forth. And frankly, while we see growth opportunities in many of these markets, we don’t see value opportunities as we do in North America. Again, that’s not to say that we’re going to completely abandon those markets, but it is to say that are focused in the infrastructure that we hold in each of those areas, the SG&A that we hold and the cost that we have — the fixed costs that we have to service many of those accounts that will be changing. And a lot of that tonnage will be going to higher end application, higher end margin applications a little bit closer to home.
Phil Lister
Kevin, just to add, the South American Polyurethanes about $60 million of revenue, less than 1% of Huntsman’s overall sales revenue. And obviously, the North American market itself, there’s a high demand for the products that we would otherwise ship down to South America.
Matthew Blair
Congrats on the strong results. Just digging into the Q3 polyurethanes outlook a little bit more. So it’s down about $44 million quarter-over-quarter at the midpoint. I think $15 million of that would be the insurance proceeds not repeating. Is there any way you could walk through the other moving parts in that guidance, the impact from just lower durables demand from higher benzene costs and then from higher natural gas costs?
Peter Huntsman
Yes. I think that we’re going to be seeing 2 impacts in the third quarter. The first and foremost is going to be the higher cost of our raw materials, particularly around natural gas products. And again, we’re talking about the variability of $10 million, $20 million, $30 million, $40 million, not that those have de minimis sums of money that I just [threw] out. But again, as I just look at the volatility of gas pricing over the last 2 weeks, we’re seeing on an annualized basis far greater than $20 million, $30 million, $40 million of value movement just on natural gas.
So much of where we end up in the third quarter will be the industry and Huntsman’s ability to move pricing and to — through surcharges and so forth in pricing to our customers and to move that down through consumers. And as you do that, that is obviously going to be impacting volumes. And so I think that, again, it’s going to be an issue about higher prices that will, at the same time, because of the rapid inflation we’re seeing in energy and in raw materials that higher price impacting volumes on a longer-term basis.
Phil Lister
That would be one of the addition to make polyurethanes, obviously, has our largest exposure in Europe from a division perspective and with the euro having weakened even further, you’ve got an impact of about $5 million to $10 million between quarter 2 and quarter 3 to consider.
Hassan Ahmed
Just rather than sort of specifically talking about any sort of competitors or the like, I just broadly wanted to talk about the polyurethane industry as you guys see it right now. I mean, obviously, Europe is not an insignificant chunk of polyurethane capacity, and we obviously all know the sort of energy price situation over there. So the question really is that on a go-forward basis, how do you see the evolution of polyurethane sort of utilization rates globally or supply-demand fundamentals, keeping in mind, obviously — and again, not specific to any European competitor, but keeping in mind, I’d like to imagine maybe some Europeans are considering shutdowns, certainly reduced operating rates. So I mean, are we — as sort of these recessionary clouds recede, are we going to be in a situation driven probably by Europe that we are in very tight utilization rates, at least in the near to medium term?
Peter Huntsman
Yes. And Hassan, you’re asking an excellent question. And if you really look at the industry and you think about the delta, and I’m just talking about really broad numbers here. You’re looking at over $1,000 per ton manufacturing cost difference between North America, Asia and Europe, right? North America and Asia right now are pretty competitive.
And you look at where Europe is right now, it’s around $1,000 per ton and in some cases, even higher than that. And if you think that is going to be the case over the course of the next 12 to 18 months, you really have to be arguing somewhere in some conference room right now. Do we start rationalizing capacity in Europe and start importing in from North America and Asia? If you think that this is a 6-month phenomenon or somehow between now and the early spring of next year that somehow prices will moderate and that gap will all of a sudden go down to a couple of hundred dollars a ton, $500 a ton or something like that. By the time you factor in freight, working capital, logistics, the excess capacity customers are going to be exiting from in order to satisfy the needs, you’re really not really not going to be able to shut down one site versus the next.
And so it really is a longer-term call as you look out not over the next quarter or 2, but it’s got to be one as you look out over the next 3 to 4 quarters. And I mean I’m literally just talking about some of the decision making, some of the challenges that we’re going through right now within our own company, is we don’t just not only look at polyurethane, but you look at some of the other products that we produce across the spectrum within our company, and you compare that with a natural gas price and an energy price. And when you look at the regulations, it’s not just on an energy basis, when you look at — there’s a lot of the very anti-competitive regulations that are coming out of the EU that are not going to be favorable towards industry on a longer-term basis, you’ve got to ask yourself some pretty tough questions here. And so it’s not a question about Huntsman or Huntsman’s German competitors [indiscernible] I look at it on a broader sense between urethanes, amines, epoxies between more commoditized and differentiated materials. Longer term, is Europe going to position itself to be even remotely competitive from an energy point of view, are they going to release the natural gas through fracking? Are they going to look at a nuclear? Are they going to — what is a longer-term perspective there for somebody like us that’s going to be investing in the decades to come, billions of dollars in maintenance and reliability and modernization, or you start moving out of the continent? And I think that the decisions that we’re making today are kind of the crash course as to what may be the road in the next 5 or 10 years that we’re going to have to travel anyways. We may be doing that over the course of the next quarter or 2. So sorry to ramble this on, excellent question.
It’s not just a simple black and white. You turn off one facility, you overrun another facility, and we export the availability of shipping backlogs [indiscernible] logistics, transportation tariffs and working capital, all that’s got to be factored in. What [indiscernible] especially as you move further and further downstream in a differentiated world, we’re pursuing value over volume, getting all that right. So again, apologies for a long-winded answer, but it’s an interesting question, and it’s not one with an easy answer, but I can imagine that the discussion that I just outlined, is not taking place in any company that has substantial North American, European or Asian assets and are looking at these cost differentials because they are historical, and we just simply we have never seen a delta of $1,000 a ton manufacturing difference just in MDI. And I imagine if you get into chlorine production, fertilizers, commodities, ethylene, olefins, whatever, you’re probably looking at pretty similar numbers across the board.
Michael Sison
Nice quarter. Peter, I guess I’m glad you didn’t just — didn’t have a quote from The Book of Revelations for the external environment, but just a question on polyurethanes. When you think about placing your MDI molecules maybe by end market, are there certain end markets that have good returns now? Are the ones that maybe don’t have as good returns that you’re looking at? And aside from the regional, are the better markets for you to place your MDI?
Peter Huntsman
Yes. I think that there are certainly some markets. And when I talk about these, we try not to focus on quarter-to-quarter, right? I mean if you look at what’s weak in the next month or a quarter or two, you have to be able to develop the product specifications and you have to be able to weather some of the cyclical storms and so forth. But as we look at automotive, it’s not just automotive, but as we look at some of the luxury brands, as we look at the EV, the lightweighting, as you start thinking about EV vehicles and cars in general, when you start thinking about self-driving cars.
Cars — the performance of the car, how fast it can go from 0 to 60 miles an hour is going to be far less important in the automobiles in the future than is going to be the comfort, the sound system, the information systems and the acoustic sounds and so forth, that’s going to be a lot more important to car manufacturers going forward, the lightweighting ability, safety. And so it’s not just saying we’re dedicated to the auto sector, but what sector within the auto sector as we think of something like insulation. There’s going to be sometimes when insulation, the tide goes in and the tide goes out and — but longer term, having the best [indiscernible] factor insulation in the world, being able to use the recyclability of used PET bottles and so forth as a raw material. That’s going to be a winner longer term. So we look at adhesions, we look at coatings, we look at lightweight and you start breaking that down, we get quite excited about those.
Now I take other segments. And again, I don’t want [indiscernible] segments, but I look at something like appliances. That’s a segment for us that we’re going to continue to be a part of, but that is also commoditized over the last couple of years. I look at something like furniture. There’s going to be segments of furniture like mattresses embedding the Tempur-Pedic, where there’s innovation and there’s margins that are paid in some of that area of furniture.
When you look at just the average sofa and furniture that 10 years ago was pretty attractive for polyurethanes. I’m not sure that’s a very attractive business for us going forward that we’re going to be getting a lot of value coming out of. So as you look at that commodity and we move that towards margins, that are 20-plus percent. And we want to see the stability of that urethanes business. Again, that doesn’t mean we’re always going to be the most profitable.
I hope it does mean that we’re not the least profitable, and it should mean that we’re one of the most consistent earners of around that high teens 20% sort of margin business. Yes, there are plenty of areas that we look at today. And even though they may not look all that exciting today, we want to continue in the construction, homebuilding, lightweighting, insulation, high-end automotive. So we’re going to continue to push into those areas and to push in within the best segments within those areas.
David Begleiter
Peter, in Advanced Materials, do you have any updated thoughts on how much aerospace will be up this year and what that will leave you below pre-pandemic levels and when you would catch up those levels?
Peter Huntsman
I would hope that as we look at the improvements that we see in aerospace, let’s remember that during the pandemic that we were down — pushing about $50 million of EBITDA from where we were — to the beginning of the pandemic to where we were at the depths of the pandemic. And I’d like to think that we have recovered probably about 40% of that. And I would — that’s going to be a lumpy recovery, but I would hope that certainly by the beginning of 2024 thereabouts. I mean I’m giving you a forecast on commercial airliners that I probably not qualified yet. I would assumably hope that by the beginning of 2024 that we’re back to kind of that pre-pandemic sort of volumes and margins and so forth.
But again, during this time period, there have been other projects that both Boeing and Airbus have been working on that we’ve qualified for. And I would hope that when the volumes get back to where they were previous to the pandemic that we’re actually doing better than we were previous to the pandemic. So I would hope that there are more applications as the industry looks at lightweighting. These high energy prices, by the way, high fuel prices, crude prices, natural gas price, you’re going to see the airline industry do everything they can to try to lightweight and putting a premium on saving fuel. Typically, when the economy slows, you think that they keep their more — they’re older, more depreciated their airlines in the fleet.
But when you have fuel prices as high as they are right now, we’re seeing a shift towards that lightweighting and anywhere they can replace a product with carbon fiber and they’re doing so. So I personally, am quite bullish as to us recovering sooner and better, but I think it’s still going to be over the course of the next 6 to 7 quarters or so before we’re fully back to normal. With that, operator, why don’t we take one more question. And given the fact we try to end at the top [indiscernible] a little bit over.
Operator
Our final question comes from the line of Josh Spector with UBS.
Josh Spector
Just maybe this is related with the prior question, but Advanced Materials, industrial markets in Europe, I think you have 3Q comments that you expect it to remain stable. To me, that seems pretty different than what we’ve heard from companies over the past couple of weeks and even how you talked about polyurethanes. So what’s the difference for Huntsman in Advanced Materials in Europe that enables that stability?
Peter Huntsman
Yes. I think that when we look at — again, there’s going to be some sectors that are falling there. But when we look at Europe, there are 3 areas in Europe that I’m quite bullish on over the next couple of quarters. One of them is aerospace. Airbus, obviously, located there, which is a very large customer of ours.
The other is the auto industry. Again, when we see this move towards lightweighting, carbon composite materials and so forth, insulation around — heat insulation around EV vehicles. We recently have won some exciting contracts that we won’t [indiscernible] the impact for the next quarter or so. But going forward, think about the temperatures in which these electric motors are operating, the batteries and so forth, those all need to be heat shielded as they are — they’re usually just mirror inches away from the driver. We qualified to have our products are both serving as the heat shield and also as the structural barrier between the driver and electric motors and batteries and so forth.
And the last is the power sector. So as you think about the grid systems that are being modernized, the grid systems that are being extended to include solar projects, wind projects, offshore projects and so forth, a lot of those are going to have transformers, cables, structural products where our materials have replaced ceramics and another — a number of older heavier applications, especially if you start looking at the marine — electrical marine applications. So that would — those would be three areas that we’re pretty bullish on.
August 5, 2022
Highlights from Huntsman’s Investors Call
Huntsman Corporation (HUN) CEO Peter Huntsman on Q2 2022 Results – Earnings Call Transcript
Aug. 02, 2022 7:03 PM ETHuntsman Corporation (HUN)
Q2: 2022-08-02 Earnings Summary
EPS of $1.28 beats by $0.14 | Revenue of $2.36B (16.70% Y/Y) beats by $57.99M
Huntsman Corporation (NYSE:HUN) Q2 2022 Results Conference Call August 2, 2022 10:00 AM ET
Company Participants
Ivan Marcuse – Vice President of Investor Relations
Peter Huntsman – Chairman, CEO and President
Phil Lister – Executive Vice President and CFO
Peter Huntsman
Thank you, Ivan. Good morning, everyone. Thanks for taking the time to join us. Let’s [indiscernible] on Slide number 5. Adjusted EBITDA for our Polyurethanes division in the second quarter was $229 million compared to $208 million of a year ago, a 10% increase.
We achieved the increase in adjusted EBITDA and corresponding 17% EBITDA margins despite a volatile economic backdrop of unprecedented energy costs in Europe, COVID-related lockdowns in China and FX headwinds.
Please note that we did receive an insurance settlement, which benefited our second quarter results in polyurethanes by $15 million. We focused on our selling price and our value over volume strategy intently throughout the quarter. We passed through approximately $900 million of annualized increases in raw materials and energy costs, which approximately half were related to higher energy prices. Overall volumes declined 4% as we continued to pursue our value-based strategy.
In the Americas, negative growth was driven by some weakness in consumer-related end markets, primarily furniture and ongoing supply constraints in our Huntsman Building Solutions business. In Asia, our growth was negatively impacted due to government mandated lockdowns in Shanghai as the Chinese government attempts to control COVID outbreaks.
Volumes in Europe were up compared to the prior year due to favorable comparisons as we completed our once every 4-year Rotterdam turnaround in the second quarter of 2021. Excluding the Rotterdam turnaround, our volumes declined year-on-year. Addressing European near-term demand, we currently expect volumes to contract across several end markets as persistent and extraordinary natural gas prices impact consumer and industrial demand for polyurethanes.
During the second quarter, natural gas prices averaged around $31 per MMBtu. And today, they are at a record high of approximately $60 per MMBtu, over 6x the price in the United States. As a reminder, for every $1 per MMBtu change in natural gas, our variable costs in our European polyurethane business change by approximately $10 million on an annualized basis.
While the European facilities are not insulated from the price volatility in natural gas, it is worth pointing out that our largest natural gas derivative consuming facilities are in the Netherlands and in the United Kingdom, which have different supply dynamics and are relatively less dependent on Russian supplies compared to Germany. Also considered that from a natural gas pricing perspective, approximately 60% of our MDI natural gas-related production cost requirements are linked to U.K. pricing via our upstream nitrobenzene and aniline facilities.
Of course, our focus in Europe remains to maintaining the quality of our business and related pricing and margins as we navigate through a high level of economic volatility in the second half of the year. Huntsman Building Solutions platform recorded second quarter revenues of approximately $154 million, up 16% year-over-year, driven by pricing. We are well above the profitability we targeted when we launched Huntsman Building Solutions.
That said, we were hindered by constraints in blowing agents, which negatively impacted volumes versus the prior year. As we look into the early part of the third quarter, we do see some destocking of inventory at our customers from the impact mortgage rate increases in the U.S. are having on housing activity. We estimate that roughly half of HBS serves residential markets, while the other half serves the commercial construction markets.
We will continue to remain focused on growing HBS internationally and not valuing our polymeric MDI in the spray foam insulation systems. Spray foam is an increasingly versatile insulation with superior energy saving properties, which we expect to gain market share over time as energy conservation remains a priority for consumers and governments. For the second sequential quarter, our polyurethanes automotive platform saw improved volumes year-over-year.
Our automotive business is well positioned to recover with the market over the coming years, and we are focused on bringing innovative solutions to our customers. As we previously announced, we achieved a key milestone in the second quarter as we completed the commissioning of our new MDI splitter in Geismar, Louisiana. Today, the new splitter is running well.
The strategic investment will be a catalyst and allow further upgrades to our Americas portfolio. As we disclosed previously, once the new splitter is fully up and running, we expect it to add an incremental $45 million of annual EBITDA to our results by 2024. Lower propylene oxide margins in China drove our equity earnings lower year-over-year.
Our joint venture contributed approximately $18 million in equity earnings for the quarter, well below the $42 million reported the year earlier. Given current levels of PO margins, we expect that equity earnings could be approximately [$60 million] lower in 2022 versus the record earnings of 2021. In addition to upgrading margins by driving molecules into our higher-value margin products, we are intent on further optimizing our cost structure in polyurethanes to improve margins.
On an annualized basis, we delivered more than $40 million from our first phase of cost optimization synergies in polyurethanes. As we stated last quarter, we are targeting an additional $60 million by the end of 2023. These cost savings will be achieved through optimization of our footprint, for example, by exiting regions in markets where we — where the returns do not justify long-term supply such as Brazil and other regions with similar dynamics and continuing to lower back-office expenses. We expect the lion’s share of these savings to impact 2023.
Looking into the third quarter, we are closely watching all of the relevant economic and end market indicators and in particular, the situation in European energy crisis. As we sit here today, we expect polyurethanes additional EBITDA for the third quarter — excuse me, polyurethanes adjusted EBITDA for the third quarter to be in the range of $170 million to $200 million.
Let’s turn to Slide number 6. Turning to Performance Products. We reported adjusted EBITDA of $152 million for the second quarter, with an adjusted EBITDA margin of 31%. The industry dynamics in Performance Products remain favorable. In addition, with our commercial excellence programs and continuing focus on cost control, this division should continue to deliver strong results.
We do not believe this certain — we do believe that certain amine markets in China are moderating. Volumes decreased 3% compared to the prior year period as we continue to focus on securing value over volume and a short-term operational issue at our maleic facility in Europe, which has since been resolved. The construction markets that we sell into specifically in the U.S., which is primarily nonresidential construction continue to have good underlying demand.
We also continue to see positive dynamics in our global fuel additives markets. We’re impacted in China by the government-mandated lockdowns in softer composite demand. Despite the lower volumes, we still saw profitability and margin quality significantly improved year-on-year in all 3 regions. Last year, we announced targeted capital investments in polyurethane catalysts and differentiated chemicals serving the electronic vehicle, semiconductor and insulation markets.
These projects continue to progress and remain on schedule to be completed on time. We expect all these projects to contribute positively to results in 2023, deliver more than $35 million of EBITDA benefits in 2024. As a reminder, we hold leading market positions in many of our main product lines as well as our maleic anhydride. Performance Products remains a highly attractive division, and we continue to evaluate strategic organic investments to grow this business over the long term.
Looking to the third quarter, this tends to be seasonally weaker than the second quarter, and there are some currency headwinds. That said, we currently expect another strong quarter from Performance Products with third quarter adjusted EBITDA in the range of $130 million to $140 million, solidly above the prior year.
Let’s turn to Slide number 7. Our Advanced Materials division reported adjusted EBITDA of $67 million in the quarter, significantly above last year’s second quarter and equal to the strongest quarter in the division’s history. We achieved 20% adjusted EBITDA margins with a disciplined approach to value over volume.
We recorded the record results in Advanced Materials, even though aerospace profitability is still recovering at approximately 40% below pre-pandemic levels. In addition to improving product mix, we’ve been aggressive in achieving pricing to more than offset raw material inflation. We continue to deselect a lower-margin business while increasing our higher volume and value sales where possible.
We are growing at an above — we’re growing at or above several of our industries, adhesives markets as we deliver solutions to our customers, and our industrial adhesives portfolio is positioned to grow further over the coming years. In addition, our recent acquisitions of Gabriel and CVC, contributing strongly in delivering above our average adjusted segment EBITDA margins as we execute our pricing strategies and capture synergies.
Volumes for the segment declined 16%, with much of the volume decline, a result of our conscious decision to exit commodity BLR manufacturing in the U.S. as well as lower margin coating markets. We did see modest growth in aerospace demand versus last year, leading to a 25% year-on-year improvement in profitability. While aerospace remains well below pre-pandemic levels, the fundamentals of this industry remain strong, and we expect to see continued improvement over the next couple of years back to pre-pandemic levels.
Currently, we still see relatively stable underlying demand in many of our core specialty businesses in the Americas and Europe. We do expect normal seasonality, currency headwinds and some softening in Europe to impact the third quarter versus the second quarter. That said, we still expect to show a solid improvement versus the prior year. We expect adjusted EBITDA for this segment in the third quarter to range between $58 million and $63 million.
Let’s turn to Slide number 8. Our Textile Effects division reported adjusted EBITDA of $22 million for the second quarter. Sales declined 7%, driven by a 16% decline in volume and the business was adversely impacted by both new and continuing COVID-related lockdowns in China. As a reminder, roughly 60% of Textile Effects sales are in Asia, with China representing more than half of those sales.
Also impacting volumes were lower home and hospitality sales due to lower North American imports. Despite these volume headwinds, we remain focused on improving our differentiated specialty businesses while deselecting low-margin value-oriented volumes. In addition, we took aggressive pricing action to offset substantial raw material and logistical headwinds.
As a result of these actions, we were able to improve variable contribution margins, which helped to offset the negative impact of the lower volumes. We remain optimistic on the long-term fundamentals of Textile Effects. We are confident our specialty-oriented portfolio will continue to develop as brands focus more and more on sustainability and product innovation.
We expect orders to pick up as retailers stock up for the critical holiday period and related winter and spring apparel trends. We currently expect adjusted EBITDA in the third quarter to be similar to the prior year and project a range of $20 million to $22 million.
Phil Lister
Thank you, Peter. Turning to Slide 9. Adjusted EBITDA increased by $98 million to $432 million, an increase of 29% compared to the second quarter of 2021. Sequentially, adjusted EBITDA improved by $17 million or 4%. As Peter highlighted, during the second quarter, we did benefit from an insurance settlement within our Polyurethanes division, which increased our adjusted EBITDA by approximately $15 million.
During the second quarter, we took the following steps: firstly, consistent with our Investor Day announcement to expand our global business services, we began the process of setting up regional service centers in Krakow, Poland and San Jose, Costa Rica. We expect those locations to be fully operational during 2023. Secondly, as Peter has indicated, we are exiting certain markets in polyurethanes.
In the second quarter, we communicated to our associates that we would exit Brazil, Argentina and Chile by the end of 2022, and we are in the process of evaluating positions in Southeast Asia and India. We have a number of additional cost savings initiatives in progress, including supply chain optimization, which we announced at our Investor Day. We remain confident of achieving our goals by the end of 2023. Turning to Slide 11. Regarding free cash flow.
We remain confident of achieving our 40% free cash flow conversion target in 2022. Capital expenditures remain on track towards our $300 million spend target for the year as we switch our attention from our newly commissioned Geismar MDI splitter to our various growth projects in our Performance Products division.
Peter Huntsman
Phil, thank you very much. Two years ago, during our second quarter report, I compared the economic shocks and volatility of that time to the same as 1791 Whiskey Rebellion. As I look at today’s lack of clarity and uncertain outlook around the world, I’m reminded of the words of St. Paul to the Corinthians, “For now we see through a glass, darkly.” I’m not sure [indiscernible] was referring to European gas prices, but it seems he at least had something similar in mind.
We reported today adjusted EBITDA of $432 million, margins in excess of 18%, more than $500 million in stock repurchases over the past 6 months. Our balance sheet is strong, and our business is on track to meet our objectives that we set out at our most recent Investor Day meeting. So we look into the third quarter, we’ve given a guidance of between $330 million and $375 million of adjusted EBITDA. And I’ve watched these other companies who have reported guidance have been criticized for being too rosy or for being too [indiscernible]. We try to guide you on our future performances accurately and transparently as we see it at this time.
I see three issues that we will be facing during the second half that may well help us exceed these numbers or not. I’d like to address these issues and what Huntsman is doing to take advantage of them, where we can and try to mitigate their impact when we can’t.
The biggest challenge we see today is the energy crisis and natural gas volatility in Europe and to a lesser degree, globally. As I pointed out in my earlier remarks, every dollar of price movement affects us about $10 million annually. During these past 2 weeks, European gas prices moved nearly 20% upwards costing us in excess of $100 million on an annualized basis of added cost.
This past Friday, prices dropped 4%, saving us nearly $25 million on an annual basis. And this morning, the prices rose greater than 15%. I do not see any reason why this volatility would not continue since Europe has become overly dependent on the same means of propulsion Magellan used to navigate the globe, mainly wind, and natural gas supplies from an equally unreliable, but far more dangerously calculating Russia.
To count to this, we are aggressive as we can and with our pricing. Some may be content to play the shock absorber between consumer and energy producers. We will continue to push through price-related surcharge and price increases where we can. As we stated earlier, we’ve converted the vast majority of our European sales contracts from quarterly contract prices to monthly pricing and where we can also add the surcharges.
In some cases, this may well mean that we are walking away from certain sales. We’re also evaluating the feasibility of reducing production at some of our largest European facilities and increasing our imports from Asia and North America. It has become fairly clear to us that Europe’s energy problems will not likely be fixed anytime soon.
Accordingly, we’re more aggressively looking at our business footprint and cost structure. We are evaluating steps in addition to our previously announced cost reduction targets of $240 million to further reduce our costs and reposition our global business footprint. We announced this past month, we’ll be relocating a portion of our European business services to crack out Poland. We will look at further consolidation and site rationalizations as we calibrate our business around what may be a more permanent reality for Europe.
Our second challenge is inflation in North American markets and increasingly around the world. Increasing costs and rising interest rates will likely slow consumer demand and lower consumer confidence. In our largest North American business, polyurethanes, we started operating our new MDI splitter to give us greater access to a wider range of consumer solutions and higher-margin materials.
In our Advanced Materials division, we will continue to see the benefits of our adhesives and Additives acquisitions, which will have been fully — which have been fully integrated from an operational point of view as we reduce cost and continue to grow the business. We are seeing encouraging signs in the Aerospace sector and in many parts of the modernizing power in electronic sector as well.
Kevin McCarthy
Peter, I was wondering if you could elaborate on your decision to exit polyurethane businesses in South America. What drove that decision? And what sort of impact on sales and earnings might we expect as you move forward there?
Peter Huntsman
Well, Kevin, good to hear from you. I hope you’re doing well. Yes, I think that as we look at the long-term margin prospects in this market. We look at the logistics, the working capital that’s tied up. We look at the tariff costs and so forth, the repatriation of capital.
When we factor all of these things, which you rarely talked about in these calls, but when you start factoring all of those issues, even if you’re earning the same margin in many of those markets as you are in, for example, in North America, your actual netback — the natural value that’s being created, in some cases, drops from what otherwise would be a 20% margin down to a mid- to low single-digit margin, I don’t see this changing. And so as we evaluate the markets as we evaluate where the growth and where the value is going to be, particularly the value. And I know that [indiscernible] beating a dead horse here and talking about value over volume, but I think so often, we get transfixed in this industry about growing sales. And we don’t look at the value of the sales. And in many cases, it costs us just as much to service and to supply and to produce a single-digit margin account as it does to get a 20% margin account.
And we need to be where those markets are going to reward us for innovation, reward us for the service and the technology that we invest in, reward our ability to uplift our molecules, our splitting capabilities and so forth. And frankly, while we see growth opportunities in many of these markets, we don’t see value opportunities as we do in North America. Again, that’s not to say that we’re going to completely abandon those markets, but it is to say that are focused in the infrastructure that we hold in each of those areas, the SG&A that we hold and the cost that we have — the fixed costs that we have to service many of those accounts that will be changing. And a lot of that tonnage will be going to higher end application, higher end margin applications a little bit closer to home.
Phil Lister
Kevin, just to add, the South American Polyurethanes about $60 million of revenue, less than 1% of Huntsman’s overall sales revenue. And obviously, the North American market itself, there’s a high demand for the products that we would otherwise ship down to South America.
Matthew Blair
Congrats on the strong results. Just digging into the Q3 polyurethanes outlook a little bit more. So it’s down about $44 million quarter-over-quarter at the midpoint. I think $15 million of that would be the insurance proceeds not repeating. Is there any way you could walk through the other moving parts in that guidance, the impact from just lower durables demand from higher benzene costs and then from higher natural gas costs?
Peter Huntsman
Yes. I think that we’re going to be seeing 2 impacts in the third quarter. The first and foremost is going to be the higher cost of our raw materials, particularly around natural gas products. And again, we’re talking about the variability of $10 million, $20 million, $30 million, $40 million, not that those have de minimis sums of money that I just [threw] out. But again, as I just look at the volatility of gas pricing over the last 2 weeks, we’re seeing on an annualized basis far greater than $20 million, $30 million, $40 million of value movement just on natural gas.
So much of where we end up in the third quarter will be the industry and Huntsman’s ability to move pricing and to — through surcharges and so forth in pricing to our customers and to move that down through consumers. And as you do that, that is obviously going to be impacting volumes. And so I think that, again, it’s going to be an issue about higher prices that will, at the same time, because of the rapid inflation we’re seeing in energy and in raw materials that higher price impacting volumes on a longer-term basis.
Phil Lister
That would be one of the addition to make polyurethanes, obviously, has our largest exposure in Europe from a division perspective and with the euro having weakened even further, you’ve got an impact of about $5 million to $10 million between quarter 2 and quarter 3 to consider.
Hassan Ahmed
Just rather than sort of specifically talking about any sort of competitors or the like, I just broadly wanted to talk about the polyurethane industry as you guys see it right now. I mean, obviously, Europe is not an insignificant chunk of polyurethane capacity, and we obviously all know the sort of energy price situation over there. So the question really is that on a go-forward basis, how do you see the evolution of polyurethane sort of utilization rates globally or supply-demand fundamentals, keeping in mind, obviously — and again, not specific to any European competitor, but keeping in mind, I’d like to imagine maybe some Europeans are considering shutdowns, certainly reduced operating rates. So I mean, are we — as sort of these recessionary clouds recede, are we going to be in a situation driven probably by Europe that we are in very tight utilization rates, at least in the near to medium term?
Peter Huntsman
Yes. And Hassan, you’re asking an excellent question. And if you really look at the industry and you think about the delta, and I’m just talking about really broad numbers here. You’re looking at over $1,000 per ton manufacturing cost difference between North America, Asia and Europe, right? North America and Asia right now are pretty competitive.
And you look at where Europe is right now, it’s around $1,000 per ton and in some cases, even higher than that. And if you think that is going to be the case over the course of the next 12 to 18 months, you really have to be arguing somewhere in some conference room right now. Do we start rationalizing capacity in Europe and start importing in from North America and Asia? If you think that this is a 6-month phenomenon or somehow between now and the early spring of next year that somehow prices will moderate and that gap will all of a sudden go down to a couple of hundred dollars a ton, $500 a ton or something like that. By the time you factor in freight, working capital, logistics, the excess capacity customers are going to be exiting from in order to satisfy the needs, you’re really not really not going to be able to shut down one site versus the next.
And so it really is a longer-term call as you look out not over the next quarter or 2, but it’s got to be one as you look out over the next 3 to 4 quarters. And I mean I’m literally just talking about some of the decision making, some of the challenges that we’re going through right now within our own company, is we don’t just not only look at polyurethane, but you look at some of the other products that we produce across the spectrum within our company, and you compare that with a natural gas price and an energy price. And when you look at the regulations, it’s not just on an energy basis, when you look at — there’s a lot of the very anti-competitive regulations that are coming out of the EU that are not going to be favorable towards industry on a longer-term basis, you’ve got to ask yourself some pretty tough questions here. And so it’s not a question about Huntsman or Huntsman’s German competitors [indiscernible] I look at it on a broader sense between urethanes, amines, epoxies between more commoditized and differentiated materials. Longer term, is Europe going to position itself to be even remotely competitive from an energy point of view, are they going to release the natural gas through fracking? Are they going to look at a nuclear? Are they going to — what is a longer-term perspective there for somebody like us that’s going to be investing in the decades to come, billions of dollars in maintenance and reliability and modernization, or you start moving out of the continent? And I think that the decisions that we’re making today are kind of the crash course as to what may be the road in the next 5 or 10 years that we’re going to have to travel anyways. We may be doing that over the course of the next quarter or 2. So sorry to ramble this on, excellent question.
It’s not just a simple black and white. You turn off one facility, you overrun another facility, and we export the availability of shipping backlogs [indiscernible] logistics, transportation tariffs and working capital, all that’s got to be factored in. What [indiscernible] especially as you move further and further downstream in a differentiated world, we’re pursuing value over volume, getting all that right. So again, apologies for a long-winded answer, but it’s an interesting question, and it’s not one with an easy answer, but I can imagine that the discussion that I just outlined, is not taking place in any company that has substantial North American, European or Asian assets and are looking at these cost differentials because they are historical, and we just simply we have never seen a delta of $1,000 a ton manufacturing difference just in MDI. And I imagine if you get into chlorine production, fertilizers, commodities, ethylene, olefins, whatever, you’re probably looking at pretty similar numbers across the board.
Michael Sison
Nice quarter. Peter, I guess I’m glad you didn’t just — didn’t have a quote from The Book of Revelations for the external environment, but just a question on polyurethanes. When you think about placing your MDI molecules maybe by end market, are there certain end markets that have good returns now? Are the ones that maybe don’t have as good returns that you’re looking at? And aside from the regional, are the better markets for you to place your MDI?
Peter Huntsman
Yes. I think that there are certainly some markets. And when I talk about these, we try not to focus on quarter-to-quarter, right? I mean if you look at what’s weak in the next month or a quarter or two, you have to be able to develop the product specifications and you have to be able to weather some of the cyclical storms and so forth. But as we look at automotive, it’s not just automotive, but as we look at some of the luxury brands, as we look at the EV, the lightweighting, as you start thinking about EV vehicles and cars in general, when you start thinking about self-driving cars.
Cars — the performance of the car, how fast it can go from 0 to 60 miles an hour is going to be far less important in the automobiles in the future than is going to be the comfort, the sound system, the information systems and the acoustic sounds and so forth, that’s going to be a lot more important to car manufacturers going forward, the lightweighting ability, safety. And so it’s not just saying we’re dedicated to the auto sector, but what sector within the auto sector as we think of something like insulation. There’s going to be sometimes when insulation, the tide goes in and the tide goes out and — but longer term, having the best [indiscernible] factor insulation in the world, being able to use the recyclability of used PET bottles and so forth as a raw material. That’s going to be a winner longer term. So we look at adhesions, we look at coatings, we look at lightweight and you start breaking that down, we get quite excited about those.
Now I take other segments. And again, I don’t want [indiscernible] segments, but I look at something like appliances. That’s a segment for us that we’re going to continue to be a part of, but that is also commoditized over the last couple of years. I look at something like furniture. There’s going to be segments of furniture like mattresses embedding the Tempur-Pedic, where there’s innovation and there’s margins that are paid in some of that area of furniture.
When you look at just the average sofa and furniture that 10 years ago was pretty attractive for polyurethanes. I’m not sure that’s a very attractive business for us going forward that we’re going to be getting a lot of value coming out of. So as you look at that commodity and we move that towards margins, that are 20-plus percent. And we want to see the stability of that urethanes business. Again, that doesn’t mean we’re always going to be the most profitable.
I hope it does mean that we’re not the least profitable, and it should mean that we’re one of the most consistent earners of around that high teens 20% sort of margin business. Yes, there are plenty of areas that we look at today. And even though they may not look all that exciting today, we want to continue in the construction, homebuilding, lightweighting, insulation, high-end automotive. So we’re going to continue to push into those areas and to push in within the best segments within those areas.
David Begleiter
Peter, in Advanced Materials, do you have any updated thoughts on how much aerospace will be up this year and what that will leave you below pre-pandemic levels and when you would catch up those levels?
Peter Huntsman
I would hope that as we look at the improvements that we see in aerospace, let’s remember that during the pandemic that we were down — pushing about $50 million of EBITDA from where we were — to the beginning of the pandemic to where we were at the depths of the pandemic. And I’d like to think that we have recovered probably about 40% of that. And I would — that’s going to be a lumpy recovery, but I would hope that certainly by the beginning of 2024 thereabouts. I mean I’m giving you a forecast on commercial airliners that I probably not qualified yet. I would assumably hope that by the beginning of 2024 that we’re back to kind of that pre-pandemic sort of volumes and margins and so forth.
But again, during this time period, there have been other projects that both Boeing and Airbus have been working on that we’ve qualified for. And I would hope that when the volumes get back to where they were previous to the pandemic that we’re actually doing better than we were previous to the pandemic. So I would hope that there are more applications as the industry looks at lightweighting. These high energy prices, by the way, high fuel prices, crude prices, natural gas price, you’re going to see the airline industry do everything they can to try to lightweight and putting a premium on saving fuel. Typically, when the economy slows, you think that they keep their more — they’re older, more depreciated their airlines in the fleet.
But when you have fuel prices as high as they are right now, we’re seeing a shift towards that lightweighting and anywhere they can replace a product with carbon fiber and they’re doing so. So I personally, am quite bullish as to us recovering sooner and better, but I think it’s still going to be over the course of the next 6 to 7 quarters or so before we’re fully back to normal. With that, operator, why don’t we take one more question. And given the fact we try to end at the top [indiscernible] a little bit over.
Operator
Our final question comes from the line of Josh Spector with UBS.
Josh Spector
Just maybe this is related with the prior question, but Advanced Materials, industrial markets in Europe, I think you have 3Q comments that you expect it to remain stable. To me, that seems pretty different than what we’ve heard from companies over the past couple of weeks and even how you talked about polyurethanes. So what’s the difference for Huntsman in Advanced Materials in Europe that enables that stability?
Peter Huntsman
Yes. I think that when we look at — again, there’s going to be some sectors that are falling there. But when we look at Europe, there are 3 areas in Europe that I’m quite bullish on over the next couple of quarters. One of them is aerospace. Airbus, obviously, located there, which is a very large customer of ours.
The other is the auto industry. Again, when we see this move towards lightweighting, carbon composite materials and so forth, insulation around — heat insulation around EV vehicles. We recently have won some exciting contracts that we won’t [indiscernible] the impact for the next quarter or so. But going forward, think about the temperatures in which these electric motors are operating, the batteries and so forth, those all need to be heat shielded as they are — they’re usually just mirror inches away from the driver. We qualified to have our products are both serving as the heat shield and also as the structural barrier between the driver and electric motors and batteries and so forth.
And the last is the power sector. So as you think about the grid systems that are being modernized, the grid systems that are being extended to include solar projects, wind projects, offshore projects and so forth, a lot of those are going to have transformers, cables, structural products where our materials have replaced ceramics and another — a number of older heavier applications, especially if you start looking at the marine — electrical marine applications. So that would — those would be three areas that we’re pretty bullish on.
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