Epoxy
August 2, 2023
Urethane Highlights of Huntsman Earnings Call
Huntsman Corporation (HUN) Q2 2023 Earnings Call Transcript
Aug. 01, 2023 3:57 PM ETHuntsman Corporation (HUN)
139.11K Followers
Q2: 2023-07-31 Earnings Summary
EPS of $0.22 misses by $0.08 | Revenue of $1.60B (-32.43% Y/Y) misses by $91.65M
Huntsman Corporation (NYSE:HUN) Q2 2023 Results Conference Call August 1, 2023 10:00 AM ET
Company Participants
Ivan Marcuse – Vice President, Investor Relations and Corporate Development
Peter Huntsman – Chairman, CEO and President
Phil Lister – Executive Vice President and CFO
Peter Huntsman
Thank you for joining us this morning. We hope that you like our new format that is designed to give our results to the market earlier and to provide more time for meaningful review questions and comments. Before opening the line for questions, I’d like to take a moment and summarize some of the broader observations that we see at this present time. As we have an early but still rather murky view of the third quarter, some fundamental trends are shaping up. Now North American markets, particularly around MDI and construction demand, I believe that we’re seeing the end of prolonged inventory destocking. While this is not the case for all products and applications, we are seeing demand follow more seasonal trends. There are currently fewer homes and commercial real estate projects being built than we saw 12 or 18 months ago. However, order patterns would tell us that much of this destocking has ended and we are in the early recovery of building starts as we move into the next year. Commercial construction may take a bit longer to recover. We continue to see growth in our Asian and specifically our Chinese markets. This growth would be best characterized as modest, while pricing trends for MDI are also inching upward. Short of a major government initiative to spur faster economic growth, it appears that the second half of 2023 will continue to see modest seasonally adjusted improvements.
A broader European recovery still feels as though it is yet to come. Pricing is very aggressive as companies fight for what demand is available. Energy prices are down from the recent historical highs, but still multiple times higher than energy costs in the Americas or Asia. Energy and economic policies and regulations in Europe do not seem to adequately address the growing uncompetitiveness and the industrialization that is taking place. Europe is losing its ability to export while also seeing more raw materials imported from abroad, particularly in products where new capacity has been added and demand in domestic markets are unable to absorb new production. As I look at our overall portfolio of products, unlike past recessions and downturns in the economy, we have maintained decent margins in many of our businesses. Our biggest problem today is simply demand. While we do not expect any sudden improvements in the second half of the year, we do see green shoots in many areas of North America and China, but less so in Europe. I believe that the worst of the de-inventorying, particularly in North America, is behind us and we’re obviously much closer to a more fulsome recovery. We’re in a unique position to take advantage of this coming recovery given our product portfolio, lower cost, global footprint and quality of customers and applications. So I think about a recovery and the steps that we need to get there, I can’t help but think you of Churchill’s quote in ’42, perhaps we are at the end of the beginning. To this end, we will continue to preserve our balance sheet and review our portfolio for both possible divestitures and acquisitions. We are ahead in our efforts to streamline our costs and we’ll continue to not only look at cost but working capital as well. We are dedicated to returning value to shareholders in the form of earnings, dividends and share repurchases.
David Begleiter
Peter, as recovery occurs in polyurethanes, I know it’s early, but how do you think about the trajectory of earnings growth in 2024?
Peter Huntsman
I think much of this is going to depend on the speed of the recovery. So I do believe that — and again, I’m going to be particularly talking about North America here because I think that a recovery — again, this is just my opinion. I think a recovery is going to happen sooner in North America and China than it will in Europe. But as I look at North America, in particular, I think that the supply chains and the inventory levels are getting precariously thin. Now this may be a new normal. But typically, when we see very thin supply chains of inventory, anything like a sudden spurt of demand or even a perceived spurt of demand outages that might occur in the industry, an MDI plant comes down or something like that or if there should be a sudden increase in the price of crude oil. You look at the price of crude oil and where we’ve kind of come from the lows of where we were just a quarter ago to where we are today, we’ve seen an increase of about $10 per barrel or so. If that starts to translate into where people are thinking, I’ve eventually got to refill or start to refill inventory and prices seemingly are going up, that might cause — I don’t want to — well, I shouldn’t use the word stampede. But it might cause a more aggressive buying than we would be used to, and you would see something rather more suddenly.
Personally, I — again, when we give the forecast for the second half and even looking to early ’24, I don’t — we’re not anticipating that but that wouldn’t surprise me either. I mean, that kind of is more of the trend. As you know, Dave, as long as you’ve been in this industry it’s kind of more of the trend of the industry that they’re very rarely or they’re gradual declines and gradual improvements to take place over a year or two. It’s usually sudden events that have a tendency to shock the industry. So yes, we do have a large percentage of our North American sales going into housing, construction, energy insulation and so forth. That’s not a market that we’re trying to shy away from and it’s not something that we’re ashamed of. I think that we continue to see an improvement in building materials and energy conservation and lightweighting and a whole number of opportunities, bioretardancy, better coatings and applications and so forth in the housing industry. It’s going to continue to be an area of growth for many years to come. But I think that’s where the biggest turnaround will come. And I believe that it will probably, again, in my opinion, happen sooner rather than later. But right now, the numbers would tell us we’re looking for a gradual recovery throughout the second half.
David Begleiter
And just on the Shanghai MDI JV, are there any benefits to Huntsman on the new configuration of the LD operations?
Peter Huntsman
I’m going to let Phil comment on any of the financial side of that. We’ve had a great relationship with our Chinese partners and a very strong relationship with BASF. They’ve been an excellent operating partner with us and we can both go to the marketplace and fight like hell beating each other up over prices and applications and market share and so forth. But from a manufacturing point of view, it’s been a great partnership, and I don’t see any material change to the business. They’ll be able to operate an MDI technology of their own and we’ll be able to operate an MDI technology of our own on our side. So it’s a natural separation and one that’s been planned for, for many, many years. You can obviously tell this kind of an equal divide here of technologies and companies and so forth. Phil, anything you’d add to that from a financial point of view?
Phil Lister
I think we said, David, in our prepared remarks, no material impacts on adjusted EBITDA, free cash flow and over time on liquidity. I think we may see some slight benefits to EBITDA and free cash flow next year as we move through the course of the year, we will get one crude MDI plant, as Peter said, we’ll also get the strategically important hydrochloric acid recycle plant. So that’s a good balance for us to have. And we will be able to improve some of the split ratios that we have coming off of that crude plant and therefore, target some more of the differentiated businesses and grow those. So look, it’s a win-win for everyone. And essentially, it was a forced joint venture decades ago with BASF and three Chinese partners. But overall, from your perspective and modeling, no material impact.
Alex Yefremov
Peter, you talked about improvements in China and polyurethanes business, maybe [Technical Difficulty]. could you tell us what’s going on there? There’s talk about stimulus. Any signs that [Technical Difficulty] could be much stronger next year?
Peter Huntsman
Well, I believe that when you have an economy of the size of China that’s been in lockdown for as long as it has, I don’t think that we’ve seen the full impact of China reopening. As I look at polymeric pricing where it stands right now being around 16.8, 16.9, that’s about where it was a year ago. But it’s also, I think, healthy to note that’s as high as it’s been in the last year as well. In the last year, it’s been down from there. So we’re seeing this — and it’s a gradual recovery, which I think is healthy to see. I always get [leery] when I see a spike that occurs in a week or two period because usually what goes up that quickly comes down that quickly. So it feels to me like there’s just a slow, steady recovery. I did note in the Wall Street Journal this morning talking about the recovery is not happening as quickly and so forth. But what we’re seeing around auto, around infrastructure, energy conservation, building materials and so forth, we continue to see a pretty good recovery there.
Alex Yefremov
And then in your spray foam business, you’re talking about volumes in North America being flat. How is profitability? Are you able to hold spray foam prices maybe to a better degree than underlying [Technical Difficulty]?
Phil Lister
So you note, and I think it’s a positive that volumes were flat year-on-year. Spray foam, as you’ll recall, was the first really to go down from a demand perspective. And so in terms of any orange or green shoots, as we’ll call them spray foam is indicating that on the volume front. Pricing has been under pressure and you can probably see that as you talk to contractors. So pricing on spray foam has undoubtedly been under pressure as the market has been depressed over time, we’d expect that to reverse out as you move forward one, two years and spray continues to replace fiberglass.
Jeff Zekauskas
Can you talk about sequential pricing trends in MDI in your three major regions, the United States, Europe and China?
Peter Huntsman
Well, I mean, as we look at this, we are able to, I think, see stronger margins. And as we look into urethanes into the US and into APAC I think that we’re gradually making some recovery in those areas. Again, Europe continues to look pretty tough and it continues to — I think pricing there is tracking raw materials and perhaps a bit more. And so I think there’s — again, there’s a real struggle, I think, going on in Europe and a fight for market share there. I’m more optimistic about pricing gains or at least margin staying flat to maybe gradually improving in the US and I see it getting better in Asia.
Jeff Zekauskas
When you assess the MDI market in 2023, how fast do you think global MDI demand will either grow or contract and how much incremental capacity do you think has been added because of Chinese expansion?
Peter Huntsman
Well, the Chinese expansion, I’m going to let Phil answer that one because that — he’ll need a second just to look up the data. In the meantime, as we look at 2023 growth in MDI, we’re really seeing about a flat market, zero growth. Last year, we saw a contraction of 3% which in the 25 years that I’ve been in the MDI business, we’ve never seen two consecutive years of negative growth. As a matter of fact, I’m not sure MDI seen two executive years in MDI growth in 30 or 40 years, that’s during the recession and so forth. So again, I don’t want to sound overly bullish on the second half. I have a tendency to be an optimist, which after this many years in this industry, you have to be or you’d probably be diagnosed with some form of insanity or mental illness. But I think that you’ve — as you look at this — the latter part of this year, MDI continues to be a great product. It’s replacing materials, it’s making in-roads and replacing applications in UPR and rubber and thermoplastic elastomers and so forth and it’s going to continue to do so. I think the fundamental positive growth for MDI is going to continue on the longer term basis. And as you look out over the course of the next five years or so, we’re still going to see — if we see something around a 4%, 5% growth, that’s still going to outstrip the projected capacity additions that will be coming on in that time period. I think the fundamental balances over the future, you’re going to see more years that look like 2022 in MDI, the beginning part of than you do 2023.
Phil Lister
Just to follow up, Jeff. So as Peter said, it is unusual to have two years where it’s either negative to flat in MDI and typically, the history is that that snaps back and snacks back pretty quickly from a demand perspective. In terms of your question around supply, one what brought on the Fujian Province facility this year, that’s a 400-kilotonne facility overall. They’ve indicated that they will build over time, quite frankly, out some of the Fujian, some of the Yantai assets further. The history of Wanhua is their discipline, they have a 50%, 55% market share. We expect that to come in over time and probably matching a 5% demand growth increase over the coming year. MDI utilization rates are low right now and again, you’d expect those to snap back as demand recovers.
Matthew DeYoe
And with new home construction data points have obviously kind of ticked up. Peter, you talked about that a bit. I think is there any reason why the mix of houses and who’s building and maybe the price point would that lend to spray foam insulation underperforming or outperforming the rebound that we see in just data from new construction in the US?
Peter Huntsman
No, I don’t believe that that’s going to have nearly the impact as the number of homes that are being built. The spray foam, we’ll have about the same percentage of penetration, that percentage should continue to grow. Actually, if you look at smaller homes that are supposed to be more economical, I believe that there’s more to be saved in utilities and so forth, and this would be a great selling point. What we need to see in housing, in my opinion, is to first get back to what I would considered to be an equilibrium. So we saw housing in 2021, 2022, kind of peak out at around that $1.7-ish sort of a, right, 1.7 million units on a housing start on an annualized basis. And that number dropped down at about 1.3%, is the run rate where we see it today, 1.3, maybe up a bit from that. And that’s a decrease of around 10% to 12%, 13%. When I look at the volume drop off, the volume drop off was more like 30% in the housing construction, so 30%, 40%. That obviously fell far greater than the housing starts fell because of the inventory. And so what we need to do first and I think this is what the US — what we’re going to see in the second half is that we get back to what I would consider to be a new normal which perhaps is where we were back in ’21, ’22 minus that 12%, that sort of volume adjusted from 1.6 million, 1.7 million starts to 1.3 million to 1.4 million. Now last time, housing was at 1.3 million to 1.4 million, we were doing quite well.
So I’d much rather see a higher number. But there is a tremendous amount of difference in pricing and demand. When you’re looking at 30% to 40% drop versus a 10% to 12% drop. So when we talk about new normal, I think that that’s what we’ll see and that will be impacted as well by typical seasonality is that when homes are being built and the time of year they’re being built. But I think that recovery is well underway. When we start looking at the demand for CWP quarter-on-quarter for us from first quarter to second quarter was up 16% on a global basis, insulation was up about the same amount. Our spray foam was up a little bit less than that but still up from quarter-to-quarter. So we’re seeing that quarter-to-quarter buildup from the first quarter to second quarter, which is again starting to get back into a more normalized environment. We’re also seeing the SPF spray foam, OSB prices starting to stabilize, if not going back up in a lot of applications through North America. So these are all positive signs, I would say, would continue to give me more optimism that the housing recovery is underway, more importantly than the housing recovery is the end of this massive de-inventorying.
Phil Lister
And Matt, obviously, from our perspective on housing starts, single family homes matters, still well below the replacement level that is required. And therefore, we look forward to 2024.
Kevin McCarthy
Peter, I was intrigued by your comments at the top of the call that you’re exploring possible divestitures. I also think you indicated in the remarks released yesterday that you’re evaluating inorganic growth opportunities as well. So maybe without getting into specific details, can you discuss what you would like to do with the portfolio conceptually over the next couple of years?
Peter Huntsman
Well, first of all, I think that any management team has got to come into the office every morning and look at your portfolio, look at the present market conditions and the projected market conditions and make sure that your portfolio that your attention, your capital spend, your management and your focus is around the right asset base. And so we used to be in a lot of intermediates, we used to be in textile chemicals, we used to be in pigments and so forth. And time came when we looked at a lot of these products and we just felt we weren’t the right owner for these assets. And there were also opportunities that we saw when we can expand further in MDI into spray foam energy conservation more greening portfolio, if you will, we could expand into hardeners and into adhesions and structural composites and so forth in our epoxy businesses and so forth. We continue to look very aggressively in some of these downstream applications, particularly in our performance products and even more particularly in our advanced materials as I think about lightweighting, I think about adhesion, I think about a lot of the green polymers and chemistry, I think about fire retardancy and construction, energy conservation and so forth. These are all going to be areas of the future that we want to be looking into.
As we look at other areas of assets, particularly those that might be underperforming financially or may not be particular sciences that we add a great deal, then we’ve got to make some painful decisions at times and look at these assets from a financial point of view and look at a possible divestiture. But I’ve always been leery of somebody, particularly in an industry that changes as fast as our industry, if somebody says we’ve got the right mix, the right portfolio and there’s no need for change. I mean there’s always a need for improvement for change and so we’re going to continue to stay focused on that.
Phil Lister
As a reminder, Kevin, I mean, as Peter says, we’re always looking at the portfolio. We have sold some smaller assets, right? We sold our DIY business in India, we exited out of our Southeast Asia businesses, our South American businesses. We’ve said very clearly that we’re looking to exit the Russian market as well, and we’ll continue to always look at financial performance around the world.
Vincent Andrews
Just given the weak macro conditions continuing, maybe you could give us an update on what you think the splitter contribution is going to be and maybe frame it a little bit?
Peter Huntsman
Well, the splitter — again, this is a project that I’m very glad that we put it in when we did. It’s much better today that we’re out trying to sell a differentiated product than we are more commodity MDI, if you will. And I think that there’s — the premium per pound that we represented to the market still holds, but there is definitely less volume out there, and I see that as a temporary issue that will be recovering — that will be correcting itself here over the next couple of quarters. And that project, I think, will continue to be a success.
Phil Lister
I mean we’d originally said $35 million, that was in a much stronger volume environment, we’ll still get up to that $35 million as volumes come back, as Peter says, that premium of differentiated over the component side still holds. So it’s a volume leverage and a recovery as we look forward to 2024.
Michael Sison
Peter, on your Analyst Day, you talked about in polyurethanes kind of splitting that portfolio up in three different areas, commodities, formulary systems, especially solutions. And so when I think about where your margins are right now, any thoughts on how those three buckets have performed this year and what the potential is for those to get back to double digits over time?
Peter Huntsman
So I think no. As we look at it, the upper end of that split, if you will, of those three areas, I think that the lower end of that split, we’re seeing margin erosion that has taken place and we’re struggling with margins in those areas. As we think about the upper end of that, the elastomers end and that would be the product that’s going into your iPhone protector and cabling and so forth, the high end running shoes, what have you, the higher end of that, the elastomers end, we continue to see very strong margins. There’s been no erosion in the margins and it’s just a question of volume. So I think that in the middle part of that, that I would consider to be that which is going into the insulation, the spray foam and so forth, that certainly is under pressure but nothing like the commodity and polymeric down at the very bottom of that split. And so yes, I think that we’re probably — at this time, we’re probably seeing an even greater bifurcation of margins and of the vitality and health of the three sections between that high end, the midrange and the low end than we did at the time of the Investor Day.
Michael Sison
And then I guess when I did the math, it looks like your volumes this year and last year in total, maybe down $1 billion or so in sales. If you get that back are we back to that $800 million, $900 million EBITDA range longer term?
Peter Huntsman
I’d like to think that that’s — yes, I’d like to think that’s something that should be happening in the MDI business, and it’s really on a longer term basis that ought to be the average of the business. Again, I’m not sure this is a question for Huntsman at least where we presently are at least, a question of volume as much as it is value. And I think that we’ve got a real opportunity here to take the molecules that we have and to upgrade those and reliably see a 15%, 16% to 18% business on normal times and we’d like to see that being pushed closer to 20%. And as we move further downstream as we get more and more and build up the elastomers into the business and so forth, this is an opportunity for us to create more reliable and consistent earnings.
Hassan Ahmed
Appreciate the commentary, a lot of commentary around polyurethane demand and potentially destocking being behind us and how historically, the restock tends to be fairly sort of impressive. If we could just move away from the demand side, could you talk a bit about the supply picture? I mean, could we — because obviously, we’ve come across sort of number of announcements around potential capacity addition delays and the like. So could we be in a situation where as the restock happens in the near to medium term, it’s in the face of relatively sort of limited supply?
Phil Lister
So Hassan, I think we said. So right now, relatively low utilization, unusual for MDI to go two years on the demand side where it’s pretty low. So looking forward, we’d expect that demand profile to to tighten out with 5% plus growth per annum going forward. On the supply side, honestly, there’s really only one way that you can point to, BSS on some small debottlenecking in North America. Covestro, obviously, announced the delay of any expansion in either North America or in China, which confirms your point, Dow has not announced anything and no Huntsman. So it’s really down to one. And as we said, an tends to be relatively disciplined, they will bring on capacity over the next five years but they’ll do it in a pretty disciplined manner, particularly with the 50% to 55% market share that they have in China. The fact that the other majors aren’t really doing any expansions that can lead to some of the tightness that you described.
Hassan Ahmed
And just moving on a bit on the M&A side of things. I mean historically, you guys as well as a bunch of industry participants have talked about valuations being unrealistic. Now with several quarters of relatively tepid or negative demand, interest rates where they are and the like, I mean, what are you guys seeing in the M&A market? It certainly seems private equity has gotten more active. So have valuations become a little more realistic, are there more opportunities you guys are seeing on the inorganic growth side of things?
Peter Huntsman
Not really. I’m not seeing a fundamental shift in the market. I think that you’re seeing a little bit of — valuations are coming down a bit. Obviously, capital cost something nowadays where a year ago, costs nothing. And I continue to just be befuddled as the companies that trade at 5 times, 6 times EBITDA, buying assets that are 15 times, 12 times, 10 times, not seeing any impact on their stock and then seemingly shareholders don’t really care. So I think that we have to be — remain disciplined. I know that, that sounds a bit of a cliche. But I think we’ve demonstrated that if we can’t buy it, sometimes the multiple is going to be a little bit higher than we’d like to see. But in those rare instances, we will have a very quick and a very thorough plan of action to be able to grow the business, simultaneously to integrating and cutting costs and we’ll justify that to the market with a very clear map going forward. If not, we will continue to invest in our own company and buy our own stock and make sure that we maintain and stay focused on a dividend. But we’ve got to remain disciplined because — just because everybody else wants to pay these multiples doesn’t mean it’s the right thing to do.
John Roberts
I think of the MDI industry being relatively unintegrated back into oil and benzene. If Abu Dhabi is successful in their bid for Covestro, does that significantly change the structure of the industry in your opinion?
Peter Huntsman
I’m not sure that it does. And again, I want to make sure my comments don’t have anything to do with — speaking on behalf of Abu Dhabi or Covestro, I have zero information on either of what’s happening there. But I would just say that as you look at Yantai, I think that from their integration into coal, I would kind of consider them to be a little more integrated than other MDI producers. But look, at the end of the day, we’re going to have the greatest value that will come to a molecule of MDI, it’s going to be being able to push that into a formulated mix downstream and get a premium price for the MDI. In my opinion, that will be far better than looking at it on an integrated basis going upstream up through benzene and nitrobenzene and crude oil and crude oil production and refining. Because all of those products, all of our basic raw materials have a market value to them, right? I mean just because you produce benzene and I don’t produce benzene, we essentially have to value that benzene the same. You may be able to get an integrated cost on that benzene, integrated value on the benzene. But if you just subsidize your MDI because you’ve got benzene that you’re making, I’m not sure that necessarily gives you an advantage unless you want to just move the benzene at a loss to market. So I’ve never thought of MDI in particular as being terribly advantaged or disadvantaged by lack of integration. I think MDI is going to — the value of MDI is going to be far more of what you do downstream than what you do upstream.
John Roberts
And is the problem in epoxy more the delay in the wind turbine projects or is it more the raw material position that the Chinese producers have that they’re lower than the Western producers, which is more of a problem for the industry right now?
Peter Huntsman
I’m not sure — when we think about epoxy for us, at Huntsman, that’s just not a big end use market for us and it’s not a market where we really compete on 10 years ago, that was the whole BLR. You’ll remember that we used it 10 years ago, we used to talk all the time about wind and the impact of wind. And we largely traded those molecules up over the last decade into aerospace and into — I’d much rather be investing in the grid system that’s going to hook all these wind mills up in the electrical infrastructure that’s going to try to make sense of all these wind projects than the wind projects themselves.
Phil Lister
John, think about [AdMat] portfolio as being about 20% aerospace, 20% auto, about 20% into construction, and the remainder into infrastructure but excluding any wind, where we don’t participate in those markets. Now we participate in things like the power grid, which ultimately is why we can deliver 18% margins even in a lower volume environment.
Mike Harrison
Peter, I was wondering if you could talk about how you’re feeling about your cost structure in Europe at this point? It seems like you’re kind of indicating a more extended period of softer demand and elevated energy costs.
Peter Huntsman
Well, something that we look at all the time. I mean I think it was about a year ago at this time that we were announcing some pretty radical closures, restructurings and so forth, moving a lot of our back offices to crack out. Those projects are largely coming to conclusion here in the next couple of — next quarter or so. And I think that we’re benefiting from having made those decisions. Now if Europe continues to be industrialized and we see — my bigger concern is that you start to see the customers, the OEMs and so forth start to leave Europe and they go to China, they go to North America, they go to the Middle East. And you continue to see this industrialization taking place in Europe, we may well have to reassess that market and the cost structure. I’m quite comfortable where we are today as I look out over the course of the next year or two to what we can see and what we’re hearing from customers and so forth. I think that we took the right moves at the time I know we were being accused of being over reactionary in some of these decisions. I think, though, looking back on it, we moved with all haste at the first signs that we saw that there was this fundamental shift and I’m glad we did it. And we’re better in Europe because of it. It’s an area that we need to continue to, as I said earlier, we need to count every morning and just continue to look at the area and how do we adapt and how do we restructure around having the right people in the right locations and the right cost structure. I don’t want to survive in Europe. We’ve got a prosper in Europe. We’ve got to have a good return in Europe and we’ve got to have a supply chain in Europe that makes sense, and I think there’s still work to be done.
Matthew Blair
Peter, could you discuss MDI operates by region on just an overall industry basis? And in regards to Huntsman, how are things going at the Rotterdam MDI plant that you restarted earlier this year, and then is the Geismar line still down?
Peter Huntsman
I think that, yes, globally, we’re probably in, yes, the low 80s bouncing around that area. Geismar, we’re around 70% and working, I would say, still under inventory control. Rotterdam, we’ve got all the lines running Rotterdam across the board about 80%. And Asia, well, we’ve been a shutdown in Asia, doing maintenance work there. But when we can, that plant will be running full out.
Matthew Blair
And then another company recently mentioned that China competitors in their space were benefiting from getting paid to take chlorine which clearly improved the cost position. Is the similar dynamic occurring in MDI and is that having any sort of material impact on global cost curves?
Peter Huntsman
I’m not aware of that happening in MDI, but if you can give me the name of a supplier that will pay me to take chlorine, I will take as much as they will give me.
Phil Lister
Yes, I mean in the price of the process of producing MDI, you produce byproduct HCL, right, and that goes downstream into the PVC market. It’s quite normal as part of the overall process in China, we have an HCL recycle unit where you don’t need to move that down into the PVC market, but it’s quite a normal part of the overall MDI process.
July 31, 2023
Olin Investor Highlights
Olin Corporation (OLN) Q2 2023 Earnings Call Transcript
Jul. 28, 2023 12:15 PM ETOlin Corporation (OLN)
138.98K Followers
Q2: 2023-07-27 Earnings Summary
EPS of $1.08 beats by $0.06 | Revenue of $1.70B (-34.91% Y/Y) misses by $168.30M
Olin Corporation (NYSE:OLN) Q2 2023 Earnings Conference Call July 28, 2023 9:00 AM ET
Company Participants
Steve Keenan – Director-Investor Relations
Scott Sutton – Chief Executive Officer
Todd Slater – Chief Financial Officer
Scott Sutton
Thanks, Steve, and good morning, everybody. Global market conditions continue to be quite poor. Additionally, our performance in the second quarter was not up to expectations, partially due to the previously announced Freeport vinyl chloride monomer plant operating issues, but also due to excessive Asian Epoxy resin exports and our associated Epoxy asset right sizing activities. These factors will result in a lower trough expectation for 2023 adjusted EBITDA. The bright spot in the second quarter was our purchase of 2.5% of our outstanding shares while simultaneously reducing net debt compared to the first quarter. Since January 1, 2022, we have purchased 21% of our outstanding shares.
In the third quarter, we expect Epoxy resins and system sales volumes to slightly improve relative to the second quarter. However, inventory reduction efforts will lead the business in negative EBITDA territory. While Winchester’s performance is expected to slightly improve in the third quarter, mainly due to international and domestic military growth, our Chlor Alkali and Vinyls business is expected to be slightly down, mainly due to execution of our leadership model as we see bottoming of ECU values in some geographies likely a positive sign for 2024.
This is our time to be testing, and I am confident that the Olin team is up to that test. It should be clear from Slide number 4 that Olin believes running a value strategy with lots of built-in free options, delivers more total cash for shareholders versus any alternative strategy. Looking forward, we are working on numerous initiatives to make sure both future peaks and troughs from that value strategy are higher than our previous results. Those initiatives are spelled out on Slide number 5.
Hassan Ahmed
Understood. And sorry, it’s – the peak side of it, I also wanted to sort of touch base on. You guys sort of flagged over $3 billion in the next peak, right? And if I take a look at what you guys on a quarterly basis were run rating in Q1 2022 and Q2 2022, it was over $850 million. And clearly, utilization rates weren’t as tight as they potentially could be in the next peak, right? And you hadn’t sort of restructured the Epoxy business as you are right now, right? So, I mean, from the sounds of it, $3 billion in the next peak actually sounds pretty bare bone, is that fair?
Scott Sutton
I mean – yes. I mean, Hassan, look, our outlook certainly says that the structure of Chlor Alkali only gets better over, over time. And it’s true that we’ve done some restructuring in our Epoxy business. But I will say that in order for Epoxy to get back to the levels it was that – that’s probably a couple of years out. So you’re going to see the next peak in Chlor Alkali while Epoxy is still recovering. And that’s why we put the next peak at somewhere just about $3 billion.
Hassan Ahmed
Understood. And one last one, if I may. On Dow’s earnings call, they basically talked about how their contract with you was renewed through 2035. Is there any sort of commentary you can give about? I know historically, sort of Olin’s talked about not really making any money on that contract. But is there any commentary you guys can give us about that renewed contract?
Scott Sutton
Yes. I would just agree that we did reach an agreement, and I think that’s going to be good for everybody in the future.
Steve Byrne
Hi, thank you. Just continuing on to this peak EBITDA discussion. Is it more driven by Chlor Alkali? And is your view on Epoxy a little more measured than it used to be? And with the former Chlor Alkali and – are you moving any further down the path of partnering on some downstream polymer capacity? Or is it a little too early for that?
Scott Sutton
Well, I would say, I mean, the big driver of it is certainly Chlor Alkali. There is no doubt Epoxy will improve, but the structure of the Epoxy industry, when you have a China, that’s probably added almost 20% to the world’s supply capability in the last 18 months or so, it’s going to take a little more time to recover. I mean I’d also call out our Winchester business as well. I mean that business has great fundamentals, particularly in the growth of international and domestic ammunition. So it’s those things that will get us there.
Mike Sison
Okay. And then just in terms of where your mid-cycle EBITDA could be? Is it sort of the delta between the peak and this year? Or is it a different number? And how long do you think it takes to sort of get to sort of a mid-cycle number?
Scott Sutton
Yes. Well, I would just say, Mike, that we expect 2024 to be better. There’s good signs to that. I think even though they are slowly maturing signs and 2025 looks even better than that. So it’s in that range.
Michael Leithead
Morning. First question on epoxy. When you look at Asian exports and the prices they’re selling for in the market, is your sense that producers there are below cash breakeven levels? And if so, how, if at all, does that change your thinking about how Olin should approach, say, the epoxy value chain?
Scott Sutton
Yes. Thanks for the question. I would just say, yes. I mean you got to remember in China that they’ve been operating with favorability of negative chlorine values, right, at potentially negative hydrochloric acid values. So those key inputs, which is just one input, has gone into the epoxy chain with somebody paying the producers of epoxy to take it. That’s totally different than any other geography, and it has nothing to do with covering any kind of level of fixed cost and certainly no return on capital. So yes, I think that’s a real issue. We’re going to consider what we’re going to do about proposing duties in certain geographies as well because this really can’t go on.
Jeff Zekauskas
Thanks very much. You’ve always spoken of negotiation of the Dow contract has a meaningful future benefit in 2025. Now it seems that Dow is going to take less chlorine and caustic because of what they’re doing in propylene oxide. Is it still a meaningful jump for Olin in 2025? Or is that no longer the case?
Scott Sutton
Yes. I would say it’s really a positive arrangement for Olin. And Jeff, I mean you’re right that one PO unit Dow has announced that they’re closing that. So that volume goes away. But other volumes at that same site remain, and the site in Louisiana becomes the site of focus for the bigger volumes.
Jeff Zekauskas
So we shouldn’t expect some meaningful contractual – some meaningful EBITDA benefit to you in 2025 because of the renegotiation of the contract. Is that correct?
Scott Sutton
No, I think it’s positive, Jeff.
Duffy Fischer
Yes. Good morning. Scott, I was hoping, can you just kind of summarize all the changes you’ve made to your epoxy footprint and what does that do to the upside coming out? I mean, how much capacity have we taken off when we get through this downturn, how much different is your footprint today?
Scott Sutton
Yes, I mean, we’ve made and are in the process of making quite a number of changes. Upstream, I’ll say that we exited a Cumene plant. We exited one of our BPA facilities. In the resin area, we reduced our capability both in Freeport, Texas and in strata [ph] and then at a few downstream plants, we reduced our capability in solids epoxy resin, and then we shut down a facility in Korea. So, yes, I mean, that has reduced our capability some. What I will say is that in epoxy, we had at least two of everything to begin with and sometimes three or four of everything. So we’ve gotten rid of that overhang. We’re much more efficient now, and it’s not going to take a massive amount of volume to put as closer to a higher capacity utilization, and we’re still working to get those costs out.
Aleksey Yefremov
Thanks, Scott. And coming back to your configuration with Dow, as you mentioned, Dow will shut some PO capacity at Freeport that will free up some of your chlor alkali capacity. Should we assume that that’s not used in any way? Or is it more likely that you’ll look for some other derivative opportunities either through joint ventures, other arrangements or even organic investments downstream of chlor alkali.
Scott Sutton
Well, I would just say it opens up possibilities, right? And those are sort of some of the free options that we have going forward and we haven’t made a decision about that.
Matthew Blair
Hey, good morning Scott and Todd, circling back to the Dow contracts, Scott, you mentioned it was a positive resolution there. Should we think about this as being more significant on the free cash flow side for you than the EBITDA side? Or can you give us any color on that?
Scott Sutton
So, I would say it’s probably favorable for both parties on both sides, because there’s some real win-win elements of this, and that not only helps how we’re both running our day-to-day operations, but it also prevents inefficient investments on both parties side, which drives free cash flow. So, I would just say it’s a positive for both parties on both those fronts.
Matthew Blair
Sounds good. And then do you have any more commentary on the epoxy side. In terms of demand, could you talk about how things are going in areas like electronics and wind and autos?
Scott Sutton
Yes. I mean, look, the demand in all of those areas as well, at least in electronics was certainly sluggish. Automotive coatings at least in the U.S. has shown some recent recovery and you’ve seen some of that in the coatings company’s earnings announcement here. There is a nice portfolio of wind projects, and that’s one of the biggest outlets for our systems activities, but those projects go through stops and starts, and there’s been some level of inventory adjustment in those supply chains. But I would say all three of those areas as we move into 2024 are positive.
Frank Mitsch
Hey, good morning. If I could just point of clarification. The new terms on the Dow contract, did they take place when the old one was supposed to expire in October of 2025? Or is there a different effective date for the new terms?
Scott Sutton
Yes. I mean that’s roughly right. I mean, Frank, I won’t comment on all the different dates and all the different improvements, but I guess you can average it there.
Frank Mitsch
All right. Awesome. Thank you. And yes, I totally appreciate the difficulties in the epoxy business, and obviously, you’ve been taking number of steps to improve your own footprint. You’ve outlined some of them. And I know in the past, you’ve indicated that some of these actions should start to lead to a $50 million annual EBITDA improvement starting in the fourth quarter, given the degradation in the broader markets, how should we think about sort of these actions that Olin is proactively taking will start impacting your income statement.
Scott Sutton
Yes. I mean, principally, you’ll see it more in 2024. It’s actually being effective today and into the fourth quarter, Frank. But we’re having to clean up our inventory on the balance sheet a bit. And that is offsetting some of that underlying improvement that will expose itself after a couple of quarters here.
John Roberts
And then is any of the Parlay activity in epoxies? Or is it all in chlor alkali items?
Scott Sutton
Well, the majority of it is in chlor alkali. We’ve been successful at running that Parlay strategy in epoxy until capacity utilization got so low. And so we’ve reduced that participation there. It just doesn’t make sense to do it at the moment.
John Roberts
Do you have any longer-term targets for both total Parlay and the balance between Epoxy and chlor alkali?
Scott Sutton
Well, I wouldn’t say there’s a target for a balance between chlor alkali and epoxy. I would say that we’re going to do the right amount of Parlays so that we can keep a leadership strategy in place and keep our product values up even when our capacity utilization is low. So when our capacity utilization is very low, like it is now, you’re going to see big percentages. When it goes up, you might see some smaller percentages. However, I will say that Blue Water is out there trading more caustic and more EDC across the oceans and that trading activity will continue and grow no matter what our capacity utilization is.
July 28, 2023
Olin Epoxy Results
Olin Announces Second Quarter 2023 Results
Jul. 27, 2023 4:05 PM ETOlin Corporation (OLN)
Q2: 2023-07-27 Earnings Summary
EPS of $1.08 beats by $0.06 | Revenue of $1.70B (-34.91% Y/Y) misses by $168.30M
Highlights
- Second quarter 2023 net income of $146.9 million, or $1.13 per diluted share
- Quarterly adjusted EBITDA of $351.1 million
- Share repurchases of $186.9 million in second quarter 2023
- Expect 2023 adjusted EBITDA in the $1.4 billion range
CLAYTON, Mo., July 27, 2023 /PRNewswire/ — Olin Corporation (OLN) announced financial results for the second quarter ended June 30, 2023.
Second quarter 2023 reported net income was $146.9 million, or $1.13 per diluted share, which compares to second quarter 2022 reported net income of $422.1 million, or $2.76 per diluted share. Second quarter 2023 adjusted EBITDA of $351.1 million excludes depreciation and amortization expense of $136.8 million, gain on sale of our domestic private trucking fleet and operations of $27.0 million, and restructuring charges of $19.2 million. Second quarter 2022 adjusted EBITDA was $727.3 million. Sales in the second quarter 2023 were $1,702.7 million compared to $2,616.1 million in the second quarter 2022.
Scott Sutton, Chairman, President, and Chief Executive Officer, said, “In this challenging demand environment, Olin’s global team continues to prove our model’s resilience and the ability to deliver significantly higher trough level adjusted EBITDA and corresponding cash flows. Our investment grade balance sheet and strong cash flow allow Olin to successfully maintain our commercial discipline and “value-first” approach, which will fuel an accelerated earnings recovery once demand improves. We continue to prioritize share repurchases from excess cash flow with approximately 5% of outstanding shares repurchased so far in 2023.
“In light of the difficult global economic environment and continued operating issues with the vinyl chloride monomer Freeport, Texas facility, we expect third quarter 2023 results from our Chemical businesses to be lower than second quarter 2023 levels. We expect our Winchester business third quarter 2023 results to increase sequentially from second quarter 2023 as we anticipate international and domestic military growth. Overall, we expect Olin’s third quarter 2023 adjusted EBITDA to be approximately 10% lower than second quarter 2023 levels. We expect full year adjusted EBITDA to be in the range of $1.4 billion.”
EPOXY
Epoxy sales for the second quarter 2023 were $333.8 million compared to $772.7 million in the second quarter 2022. The decrease in Epoxy sales was primarily due to 24% lower resin and systems volumes and $206.9 million of lower cumene and bisphenol A sales. As part of the Epoxy business restructuring actions to right-size our global asset footprint to the most cost-effective asset base to support our strategic operating model, the Epoxy business ceased operations at our cumene facility in Terneuzen, Netherlands in first quarter 2023 and one of our bisphenol A production lines at our Stade, Germany facility in fourth quarter 2022. Second quarter 2023 segment loss was $0.5 million compared to segment earnings of $139.9 million in the second quarter 2022. The $140.4 million decrease in Epoxy segment earnings was primarily due to lower volumes and lower pricing, partially offset by lower raw material and operating costs, mainly decreased natural gas and electrical power costs. Epoxy second quarter 2023 results included depreciation and amortization expense of $15.2 million compared to $20.4 million in the second quarter 2022.
June 23, 2023
Olin Epoxy Moves
Olin Updates Second Quarter 2023 Outlook and Announces Additional Epoxy Restructuring Actions
Jun. 20, 2023 8:30 AM ETOlin Corporation (OLN)
CLAYTON, Mo., June 20, 2023 /PRNewswire/ — Olin Corporation (NYSE: OLN) announced today an updated outlook for the second quarter 2023. Olin’s second quarter 2023 adjusted EBITDA is expected to be in the $350 to $360 million range, which is lower than previously expected mainly due to an approximately $50 million impact from an extended vinyl chloride monomer plant turnaround and additionally due to a lower market participation rate by Olin in the face of deteriorating market conditions. The planned vinyl chloride monomer plant maintenance turnaround at the Freeport, Texas facility required an extension of approximately seven weeks and resulted in higher unabsorbed fixed manufacturing costs, reduced profit from lost sales, and higher turnaround expense. The vinyl chloride monomer plant has returned to operations at a reduced rate.
Olin also announced the decision to cease all operations at its Gumi, South Korea facility, reduce epoxy resin and upstream capacity at its Freeport, Texas facility, and reduce our sales and support staffing across Asia. Olin’s second quarter 2023 results are forecast to include approximately $12 million of restructuring charges associated with these plans of which approximately $6 million represents non-cash asset impairment charges. The cash component of these charges is expected to be paid over the next year.
“The restructuring actions announced on March 21, 2023, and in this announcement will complete the rightsizing of the Epoxy business and are expected to deliver $50 million of improved annual EBITDA beginning in fourth quarter 2023 continuing our commitment to elevate our Epoxy business earnings to a more sustainable level. Through these actions, we will have configured our global Epoxy asset capability to improve profitability through future recessions,” remarked Scott Sutton, Chairman, President, and Chief Executive Officer. “Both of our chemical businesses continue to experience a challenging demand environment. Our team remains focused on demonstrating our winning model’s resilience and ability to deliver significantly higher trough level adjusted EBITDA compared to Olin’s historical approach.”
June 13, 2023
Lanxess Increases Benzyl Alcohol Capacity
LANXESS doubles capacity for high-purity benzyl alcohol in North America
MOSCOW (MRC) — LANXESS has doubled its production capacity for benzyl alcohol at its site in Kalama, WA, US, to support the growth of its established customer base in the Americas, said the company.
The capacity expansion is the result of various technical upgrades. LANXESS also produces benzyl alcohol at its sites in Krefeld-Uerdingen (Germany), Botlek (Netherlands), and Nagda (India).
The LANXESS business unit Flavors & Fragrances develops and produces one of the world’s broadest portfolio of fragrances and flavours, preservatives, and animal nutrition products. Its substances are found in various everyday consumables, such as cosmetics and personal care products, detergents and cleaning agents, beverages, baked goods, candles, oils, and animal feed.
The portfolio also includes speciality chemicals for industrial applications, including pharmaceuticals, agrochemicals or the construction industry. The business unit operates production sites in five locations on three continents. The sites are “ISCC Plus” certified. Through the use of green electricity and sustainable raw materials, these sites will produce mass balance certified renewable alternatives for the entire product portfolio by end-2023, reflecting the business unit’s strong commitment to sustainability. The business unit has around 750 employees and is part of LANXESS’ Consumer Protection segment which generated sales of about EUR 2.4 bn in 2022.
We remind, LANXESS will be at the Battery Show Europe showcasing its portfolio for batteries for electric and hybrid vehicles, said the company. The event in Stuttgart is Europe’s largest trade fair for cutting-edge technologies and production processes in this fast-growing segment.
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