Company News
May 4, 2021
Epoxy Comments from Huntsman Investors Call
Huntsman Corp (HUN) Q1 2021 Earnings Call Transcript
HUN earnings call for the period ending March 31, 2021.
Peter Huntsman — Chairman, President & Chief Executive Officer
Let’s turn to slide number four. The Performance Products segment reported adjusted EBITDA of $63 million compared to $58 million in last year’s first quarter. We saw growth in our Asia business and strong demand and margins for most of our division’s products. This combined with lower fixed costs, more than offset the approximate $14 million of headwind that resulted in winter storm Yuri.
Total volumes for the division declined 3% due largely to the storm and due to the recent discontinuation of certain tolling arrangements associated with the chemical intermediates business that we sold this past year. On a pro forma basis, we estimate that our underlying volumes were actually up 6% year-over-year, leading the way with strong demand in our performance amines portfolio, largely in our sustainability related products, such as amines that are sold in new VOC-free polyurethane catalysts and into the wind market.
Growth in the construction markets have also benefited our amines that go into coatings and adhesives as well as the maleic anhydride business that serves the UPR markets. Volumes increased 6% year-over-year within our maleic anhydride business. Raw material costs have been rising, but we’ve been successful in passing through price increases to offset higher costs. We believe that some of the lost sales in the first quarter due to the winter storm will be captured in the second quarter. This combined with some of the seasonal strength and improved margins, should translate into EBITDA growth in the second quarter over the first quarter of about 5% to 10% for Performance Products.
Let’s turn to slide number five. Our Advanced Materials business reported adjusted EBITDA of $44 million, down 8% versus the prior year. The first quarter last year still experienced solid aerospace results before the global pandemic started significantly impacting the commercial aerospace industry.
As a result, our aerospace sales were down approximately 40% year-over-year. It’s the primary reason that our adjusted EBITDA declined year-over-year. As we previously stated, we believe our aerospace business bottomed in the fourth quarter of 2020. While we still anticipate full recovery to pre-pandemic levels will take at least a couple of years, we did see a sequential improvement in our aerospace sales, and we are encouraged that recovery is a bit better than we had anticipated.
When excluding aerospace, the underlying volumes of our other core specialty businesses experienced growth year-over-year from improved trends, as well as positive contribution from our recent acquisition of CDC Thermostat Specialties and Gabriel Performance Products. Our non-aerospace business, EBITDA grew 8.5% over last year. While our non-aerospace EBITDA, including our recent acquisitions and divestitures, grew at 28%. The integration of both acquisitions remain on track and we’re confident that we will achieve the run rate synergies that we communicated at the time each respective transaction was announced. We believe that overall fundamental demand is improving in our core businesses.
Looking toward the second half of 2021, with improving fundamentals, as well as contributions from the recent acquisitions, we expect adjusted EBITDA for our advanced materials division to be about 10% better than the first quarter.
Sean Douglas — Executive Vice President & Chief Financial Officer
Thank you, Peter. Turning now to slide seven. We were pleased to see a continuation of a strong recovery in the first quarter of 2021. The adjusted EBITDA increased by $124 million year-over-year and by $49 million quarter-over-quarter. This is in spite of approximately $25 million of negative impact to EBITDA in the first quarter of this year from winter storm Yuri that slam the Gulf Coast in February. The overall decrease in volumes year-over-year is primarily attributed to our aerospace business where sales in the prior year period were strong before the pandemic.
As Peter has commented, aerospace revenues were down approximately 40% versus the prior year. However, they have bottomed, and we saw a meaningful improvement in the first quarter this year versus the fourth quarter of the prior year. Variable margins significantly improved year-over-year and quarter-over-quarter as demand for products has steadily improved and increases in our sales prices have exceeded increases in our raw material prices, allowing overall adjusted EBITDA margins to recover to mid-teens.
Turning to slide 8. Regarding synergies from recent acquisitions, we have now exceeded the $20 million target we set, facilitated by combining our polyurethane spray foam businesses and creating our Huntsman Building Solutions platform. With respect to the CVC Thermoset acquisition, we estimate having already achieved a current annualized run rate of approximately $9 million of synergies and are on target to achieve $15 million near the end of 2021. We are also on target to achieve the Gabriel synergies of $8 million by early 2023.
John Roberts — UBS — Analyst
Thank you. Best wishes as well, Sean. We hear another company in the epoxy market is targeting 30% EBITDA margins. Do you think Huntsman has a better or worse mix than the competition? And any thoughts on that kind of target?
Peter Huntsman — Chairman, President & Chief Executive Officer
Well, I think our mix is far, far better than the competition, but I’m slightly biased in saying that. So without knowing who you’re talking about or anything, look, if we’re able to-if we’re able earn it, we’re going to earn it. And I think we’ve got a great batch of customers and so forth.
I think that, again, we are probably a bit different than our competition and the amount of volume that we’re moving into the aerospace industry. That might seem like a bit of a frustrating position for us to be in right now.
But I think over the past decade and over the decade to come, that position is going to serve us extremely well. It’s been a very reliable earner for us and with margins that are on the high end of our spectrum of customers we have globally.
So I think that in an area like epoxies, I really don’t compare us with our competition because we really don’t compete a great deal with the more widely recognized epoxy producers around the world. I think our biggest competitors we have in that business really are smaller blenders and formulators that are downstream. And those are the people that we probably are competing more aggressively against.
So again, I don’t-I say that tongue and cheek about us being far superior than our competition. I really just don’t see us competing head to head with a lot of them.
David Begleiter — Deutsche Bank — Analyst
Thank you. Peter, just on aerospace, with that market beginning to bottom return as we speak, do you think you could still get back the entire, I think, roughly $80 million of EBITDA loss last year? Or could you even do maybe better going forward?
Peter Huntsman — Chairman, President & Chief Executive Officer
Well, I think we’ll do better going forward. We’ve got — I think that the idea that you’re going to be producing planes five, 10 years from now with the aluminum content that you had a couple of years back.
I just-I don’t know it’s going to happen. I think when you look at the next-generation 320 Airbus, the wing of the next-generation 777X, the Boeing 787 and so forth, if anything, these are going to be having more carbon composite materials on a per plane basis.
I’d also note that with the recent acquisition of the CBC Specialty Polymers Group, we’ve-there’s additional exposure there, been a bit frustrating for us this year. But longer term, that additional exposure into the aerospace business is going to be significant. It’s going to be something that we’re going to be continuing to guard right now and make sure that we’re nurturing it, but carrying forward now because I think longer term. It’s going to add to what would otherwise be a normalized EBITDA in the aerospace industry.
May 4, 2021
Epoxy Comments from Huntsman Investors Call
Huntsman Corp (HUN) Q1 2021 Earnings Call Transcript
HUN earnings call for the period ending March 31, 2021.
Peter Huntsman — Chairman, President & Chief Executive Officer
Let’s turn to slide number four. The Performance Products segment reported adjusted EBITDA of $63 million compared to $58 million in last year’s first quarter. We saw growth in our Asia business and strong demand and margins for most of our division’s products. This combined with lower fixed costs, more than offset the approximate $14 million of headwind that resulted in winter storm Yuri.
Total volumes for the division declined 3% due largely to the storm and due to the recent discontinuation of certain tolling arrangements associated with the chemical intermediates business that we sold this past year. On a pro forma basis, we estimate that our underlying volumes were actually up 6% year-over-year, leading the way with strong demand in our performance amines portfolio, largely in our sustainability related products, such as amines that are sold in new VOC-free polyurethane catalysts and into the wind market.
Growth in the construction markets have also benefited our amines that go into coatings and adhesives as well as the maleic anhydride business that serves the UPR markets. Volumes increased 6% year-over-year within our maleic anhydride business. Raw material costs have been rising, but we’ve been successful in passing through price increases to offset higher costs. We believe that some of the lost sales in the first quarter due to the winter storm will be captured in the second quarter. This combined with some of the seasonal strength and improved margins, should translate into EBITDA growth in the second quarter over the first quarter of about 5% to 10% for Performance Products.
Let’s turn to slide number five. Our Advanced Materials business reported adjusted EBITDA of $44 million, down 8% versus the prior year. The first quarter last year still experienced solid aerospace results before the global pandemic started significantly impacting the commercial aerospace industry.
As a result, our aerospace sales were down approximately 40% year-over-year. It’s the primary reason that our adjusted EBITDA declined year-over-year. As we previously stated, we believe our aerospace business bottomed in the fourth quarter of 2020. While we still anticipate full recovery to pre-pandemic levels will take at least a couple of years, we did see a sequential improvement in our aerospace sales, and we are encouraged that recovery is a bit better than we had anticipated.
When excluding aerospace, the underlying volumes of our other core specialty businesses experienced growth year-over-year from improved trends, as well as positive contribution from our recent acquisition of CDC Thermostat Specialties and Gabriel Performance Products. Our non-aerospace business, EBITDA grew 8.5% over last year. While our non-aerospace EBITDA, including our recent acquisitions and divestitures, grew at 28%. The integration of both acquisitions remain on track and we’re confident that we will achieve the run rate synergies that we communicated at the time each respective transaction was announced. We believe that overall fundamental demand is improving in our core businesses.
Looking toward the second half of 2021, with improving fundamentals, as well as contributions from the recent acquisitions, we expect adjusted EBITDA for our advanced materials division to be about 10% better than the first quarter.
Sean Douglas — Executive Vice President & Chief Financial Officer
Thank you, Peter. Turning now to slide seven. We were pleased to see a continuation of a strong recovery in the first quarter of 2021. The adjusted EBITDA increased by $124 million year-over-year and by $49 million quarter-over-quarter. This is in spite of approximately $25 million of negative impact to EBITDA in the first quarter of this year from winter storm Yuri that slam the Gulf Coast in February. The overall decrease in volumes year-over-year is primarily attributed to our aerospace business where sales in the prior year period were strong before the pandemic.
As Peter has commented, aerospace revenues were down approximately 40% versus the prior year. However, they have bottomed, and we saw a meaningful improvement in the first quarter this year versus the fourth quarter of the prior year. Variable margins significantly improved year-over-year and quarter-over-quarter as demand for products has steadily improved and increases in our sales prices have exceeded increases in our raw material prices, allowing overall adjusted EBITDA margins to recover to mid-teens.
Turning to slide 8. Regarding synergies from recent acquisitions, we have now exceeded the $20 million target we set, facilitated by combining our polyurethane spray foam businesses and creating our Huntsman Building Solutions platform. With respect to the CVC Thermoset acquisition, we estimate having already achieved a current annualized run rate of approximately $9 million of synergies and are on target to achieve $15 million near the end of 2021. We are also on target to achieve the Gabriel synergies of $8 million by early 2023.
John Roberts — UBS — Analyst
Thank you. Best wishes as well, Sean. We hear another company in the epoxy market is targeting 30% EBITDA margins. Do you think Huntsman has a better or worse mix than the competition? And any thoughts on that kind of target?
Peter Huntsman — Chairman, President & Chief Executive Officer
Well, I think our mix is far, far better than the competition, but I’m slightly biased in saying that. So without knowing who you’re talking about or anything, look, if we’re able to-if we’re able earn it, we’re going to earn it. And I think we’ve got a great batch of customers and so forth.
I think that, again, we are probably a bit different than our competition and the amount of volume that we’re moving into the aerospace industry. That might seem like a bit of a frustrating position for us to be in right now.
But I think over the past decade and over the decade to come, that position is going to serve us extremely well. It’s been a very reliable earner for us and with margins that are on the high end of our spectrum of customers we have globally.
So I think that in an area like epoxies, I really don’t compare us with our competition because we really don’t compete a great deal with the more widely recognized epoxy producers around the world. I think our biggest competitors we have in that business really are smaller blenders and formulators that are downstream. And those are the people that we probably are competing more aggressively against.
So again, I don’t-I say that tongue and cheek about us being far superior than our competition. I really just don’t see us competing head to head with a lot of them.
David Begleiter — Deutsche Bank — Analyst
Thank you. Peter, just on aerospace, with that market beginning to bottom return as we speak, do you think you could still get back the entire, I think, roughly $80 million of EBITDA loss last year? Or could you even do maybe better going forward?
Peter Huntsman — Chairman, President & Chief Executive Officer
Well, I think we’ll do better going forward. We’ve got — I think that the idea that you’re going to be producing planes five, 10 years from now with the aluminum content that you had a couple of years back.
I just-I don’t know it’s going to happen. I think when you look at the next-generation 320 Airbus, the wing of the next-generation 777X, the Boeing 787 and so forth, if anything, these are going to be having more carbon composite materials on a per plane basis.
I’d also note that with the recent acquisition of the CBC Specialty Polymers Group, we’ve-there’s additional exposure there, been a bit frustrating for us this year. But longer term, that additional exposure into the aerospace business is going to be significant. It’s going to be something that we’re going to be continuing to guard right now and make sure that we’re nurturing it, but carrying forward now because I think longer term. It’s going to add to what would otherwise be a normalized EBITDA in the aerospace industry.
May 4, 2021
Huntsman Earnings Call Highlights
Huntsman Corp (HUN) Q1 2021 Earnings Call Transcript
HUN earnings call for the period ending March 31, 2021.
Peter Huntsman — Chairman, President & Chief Executive Officer
Thank you, Ivan. Good morning, everyone. Thank you for taking the time to join us.
Let’s turn to slide number three. Adjusted EBITDA for our Polyurethanes division in the first quarter was $207 million versus $84 million of a year ago. This improvement versus the prior year was largely driven by improved margins due to higher prices, primarily in the component end of our business, which more than offset the approximate $10 million EBITDA impact related to winter storm Yuri that we experienced in February.
Our MDI volumes declined approximately 7% versus the prior year’s first quarter, primarily due to a fourth quarter 2020 T&I at our Geismar, Louisiana, which we deferred to this year’s first quarter, some impact related to winter Storm Yuri and our planned need to build inventory ahead of our scheduled Rotterdam turnaround. However, improved margins more than offset the decline in volumes. We will note that our differentiated MDI volumes, which include our automotive, elastomers and spray foam businesses were up 4% for the quarter.
Demand trends in our core markets of construction and automotive have led to solid underlying growth in the quarter. When excluding the impact from storms and turnarounds our insulation businesses, including spray foam and our composite wood products business remains solid as markets such as North American residential construction and renovation remains strong.
Many have inquired as to the impact of the reported ongoing chip shortage in the automotive industry is having on our Polyurethanes business. By the end of the first quarter, we haven’t seen any impact to our customers as our automotive business e business was up 12% globally compared to the previous year. We believe this has been a result of our being more European-centric and supplying a market segment that is more skewed toward luxury automotive. So far in the second quarter, we are seeing a 2% to 3% drop in volumes due to chip-related slowdowns. We’ve reallocated this volume of MDI to other areas and expect to earn similar margins.
We’re also pleased to see a strong recovery in our global elastomers business largely comprised of footwear along with other specialty end-use and industrial related markets. The improvement in footwear is being helped by the gradual reopening of economies, which is having a positive effect on the retail markets.
Industrial side of our elastomers business correlates somewhat with global PMI which have continued to expand around the world. Short-term and long-term fundamentals of our polyurethanes business remains positive. We are benefiting from some level of inventory restock, our own inventory levels remained below normal levels for this time of year. We’re keeping an eye on the evolving reoccurrences of COVID pandemic around various regions of the world. Overall demand reflected within our order book remained solid.
Our margin within the first quarter benefited more than we had anticipated from ongoing tight conditions within the industry. In addition to various planned turnarounds within the industry, unscheduled outages compounded the situation. We were fortunate that our Geismar, Louisiana facility was able to continue largely uninterrupted while others were forced to declare force majeure due to damage just the spend by winter storm Yuri. Previously mentioned, we estimate the negative impact from Yuri on polyurethanes was approximately $10 million. This was largely a result of supply chain and raw material constraints. This is a testament to the team that we have at our Geismar, Louisiana facility and their ability to work through these conditions in a safe manner to keep it running.
Currently in the Americas, we believe most of the industry capacity is in the process of returning back to full operating rates. Business conditions in China remain solid. Our margins in the first quarter exceeded our expectations. Given the completion of local turnarounds and some announced capacity additions within China, we’ve seen margins recently recede a bit, though they are generally firm.
Within our PO/MTBE joint venture with Sinopec in China, where we own 49%, we benefited from very strong margins, largely the result of industry outages and stronger than expected demand in the quarter. As of the current moment and once in every four year-once in every four year multi-facility turnaround at our Rotterdam MDI plant is nearing completion. We are highly dependent on many other chemical companies conducting turnarounds and everyone meeting a pre-agreed synchronized time line to restart.
Due to some delays with a third-party supplier, our start-up is delayed. As a result, the total estimated EBITDA impact from this turnaround is now estimated to be around $25 million versus the initial $15 million estimate that we gave you last quarter. Our facilities about ready to start back up, we’re hopeful that do we not experience any further delays from-that are outside our control. Putting it all together, we remain very positive about the trends that we are seeing in polyurethanes globally. Demand is good. The industry is balanced, substitution will continue and areas driven by sustainable solutions, such as energy efficiency, are expected to follow trends, but will have a very positive impact on the business for the foreseeable future.
Looking into the second quarter, we see seasonal strength being partially offset by turnaround costs and potentially lower MDI margins in Asia. We would expect the second quarter adjusted EBITDA to be around 5% stronger than the first quarter dependent upon the Rotterdam T&I, which should be up significantly versus a year ago period.
Alex Yefremov — KeyBanc Capital Markets — Analyst
Thank you. Good morning, everyone. Sean, congratulations on moving on to new adventures. Peter, could you talk about component MDI market in China? It’s been soft lately. What do you think is going on there? When do you-do you have an idea whether we could see stability or maybe even improvement in China market?
Peter Huntsman — Chairman, President & Chief Executive Officer
Well, I think that we did see some tightness that really started in the fourth quarter where we saw component prices, the more commoditized end of our business, that we saw really over about a two week period, we saw component prices rise about 20%. Again, that’s a 20% in prices over a two week period. This was largely driven because of outages and because there’s very strong economic demand taking place as China recovers its economy on a post-COVID sort of a world.
I would say that in the fourth and first quarter, we probably would have somewhere around $40 million or so of over-earn. And of that $40 million-ish or so of over-earn that might be $40 million, $45 million on a quarter-to-quarter basis. I’d say that about one-third of that was European, and two-thirds of that was China.
We have a lot of our more commoditized component businesses in North America are more dependent on formula pricing. And so we don’t see the fly up in North America like we do the rest of the world, nor do we see the sudden drops in North America like we do the rest of the World.
As we look into the second quarter, I think that we’ll probably see that over-earn and on those similar sort of ratios, probably around $20-ish million, give or take, a couple of million.
I would say, though, that as we look at pricing over the course of the last couple of weeks, it is stable. I don’t see it falling at the present time. And I think that we’ve-I am hoping that throughout the rest of the second quarter and so forth that we ought to see some stability in that pricing.
I will just note that from the public notifications that have been discussed in China as well, we have some very significant turnarounds that will be taking place in the third and fourth quarter in the industry, not in the industry that will be hitting China later in the year as well.
So as I’ve said in past calls, I think as we look at the overall MDI capacity utilization, we’re probably globally, right now, running pretty close to 90%. And so you see a large disruption or closure to take place around the world, you’ll see the impact of that, I think, reverberate pretty quickly.
Operator
Thank you. Our next question comes from the line of Kevin McCarthy with Vertical Research Partners. Please proceed with your question.
Kevin McCarthy — Vertical Research Partners — Analyst
Good morning. Peter, I was wondering if you could update us on your view of supply chain inventory in Polyurethanes. We hear a lot about tightness in both isocyanates as well as polyols going into urethanes.
What did your volumes run at HBSs? And what is your outlook for the next few quarters as these dynamics start to normalize?
Peter Huntsman — Chairman, President & Chief Executive Officer
Well, I think that when I talk about the vision that we have in orders and so forth, you’re probably looking one month or two into the future. So I certainly don’t want to sound as long speaking for the rest of the year.
But these trends that we’re seeing, our inventories are quite low. I think we probably could be moving even more product through HBS if we had it. Now of course, we can cut off customers. But we do have some customer commitments and contracts and so forth that we’re going to fulfill. And we’re doing that right now.
But we’re seeing, I think, much stronger than normal growth taking place in our HBS business. And I think that, that sort of growth is twofold. Its new houses that are being built. And it’s also-I mean can you imagine being a sales representative for selling insulation in the state of Texas after the devastating freeze.
So I think that it really goes a long along an entire spectrum there. And I think that those are the sort of trends in energy conservation that you see the possibility of tax credits and so forth being given to people that are reinsulating their homes and using better products than what traditionally have been used and so forth. But I think that we’re going to continue to see market share gains in our HBS business and in those sectors of downstream MDI that we want to be focused in.
But right now, I’d say that, again, to summarize your question. Inventories, I think, on both — from what we see, from our end, from our business are quite well in that entire supply chain.
Operator
Thank you. Our next question comes from the line of Mike Sison with Wells Fargo. Please proceed with your question.
Mike Sison — Wells Fargo — Analyst
Hey, guys. Nice start to the year and congrats again, Sean. We’ll miss you. Peter, when you think about polyurethanes, looks like it’s going to have a record year in ’21. I know it’s a little bit early, but when you think about growth in ’22 and beyond, can you maybe walk us through what are the variables there in terms of continuing to grow that business? How does the split or affect it? I know you’re more differentiated now and then maybe acquisitions potentially over the next couple of years, and where can that EBITDA potentially go?
Peter Huntsman — Chairman, President & Chief Executive Officer
Well, I think that we have a great opportunity, great question. I think we have a great opportunity to increase our margins. I’ve said in the past that I’m not sure that our Polyurethane business necessarily needs more tonnage. Though, again, I want to be very clear, we are going to be operating our facilities and debottlenecking our facilities and trying to get every ton out of our facility, the very best we can.
But I think that we need to be focused on how do we maximize the margin on a per ton basis. And as we look at that going forward, I think it’s going to be opportunities for us to align ourselves with customers that are further downstream, customers that are taking a higher blend of products that are coming out of our MDI splitters, that we continue to invest and grow our downstream businesses like HBS.
We’re going to continue to be looking at acquisition and opportunities not just in spray foam, but in other areas where we can consume, particularly the lower margin, more commoditized grades of our MDI and consume those internally and upgrade those internally.
So again, I think that we’ve got a great portfolio of volume within our business. We’ve got a great opportunity, I think, to continue to look for ways where we can expand incrementally on that volume.
But I think what I think we’ll continue to be mostly focused on is how do we bottom price and how do we take the lowest margin segments of that business and continue to upgrade that. That’s why we’ve invested in our splitter. We continue to invest in cost reduction. We’ll align our R&D around those customers and those applications that return us the most money. And we think longer-term sustainability is going to continue to be very important for us.
So-and again, I think from a macro basis, when I look at the overall industry, I just don’t see a lot of new capacity over the next couple of years. It’s going to be coming into a market that is today operating probably somewhere in the very high 80% to 90% capacity utilization.
Hassan Ahmed — Alembic Global Advisors — Analyst
Peter, question, just wanted to revisit MDI pricing in China, particularly with sort of a focus on the second half of the year. I mean I know the first half has been sort of a little sort of tricky. We saw obviously some incremental capacity coming online. There was charter of, call it, some inventory rebuild leading into Chinese New Year.
So obviously, with all of these puts and takes in mind and something that you mentioned about sort of incremental turnarounds in the back half of the year, could we be in a situation relative to right now in H2 in China where supply demand fundamentals are actually tighter and we may actually see potentially another run-up in pricing there?
Peter Huntsman — Chairman, President & Chief Executive Officer
I think that right now, we’re probably looking at a pretty stable. I mean that’s what we’d like to see. I talked earlier about that run-up kind of 20% in a week or two. I see prices have kind of gone back to that pre-Chinese holiday sort of time period. They feel like they’ve kind of stabilized in this area.
And I think that with a number of the facilities that are back online in China and the economic growth that they’ve been experiencing, slowing just a little bit, but still seeing significant growth, I think we’re probably looking at, hopefully, stability between now and the end of the year.
Now having said that, there have been some very large T&I and some maintenance work that includes over 1 million tons of capacity that’s been pushed off for the second half of the year.
But usually, I mean, unless there’s a problem with that, usually those projects will build up inventory beforehand. And unless there’s some unforeseen problem with restarts or something of that nature, hopefully, we’ll see stability throughout the rest of the year.
P.J. Juvekar — Citi — Analyst
For your slide 10 for ESG efforts, and my question is, you’re taking recycled PET bottles into TEROL polyols. You mentioned you can take up to 60% rPET. One of the peers, Eastman is doing molecular recycling of PET. So I guess my question is demand for recycled PET goes up. And PET is much more easier to recycle than polyethylene. Do you think those rPET prices could go up?
Peter Huntsman — Chairman, President & Chief Executive Officer
No. I don’t see that happening anytime soon. I mean as I look at the source of our PET, and we’re taking PET both post-consumer and post-industrial scrap. There’s-I cannot speak for Eastman, just for our efforts. We’re using with the equivalency of 1.25 billion, 1.5 billion bottles a year of recycled PET. That’s a small dent. We’ve got a lot more that we can be doing as an industry. We’ve got a lot more that we can be doing. I commend companies like Eastman and our efforts.
The challenge of recycling any plastic is to be able to upgrade the value of it. Anybody can take a plastic and melt it-used plastic, melt it down and it make it into a park bench. But you’re not going to be able to take-ultimately take billions of pounds of plastics and convert them all into park benches.
You’ve got to be able to take a PET bottle or a polyethylene or polypropyl, you’ve got to be able to take it and actually recycle it, hopefully, into something of equal value or in the case of our polyols, something of even greater value. And so I think these are the initial steps. I think they’re relatively small in the overall market. But I don’t see the post-PET industry in the foreseeable future. When I say that, I mean, at least the next five years, five to 10 years. I don’t see there being-I wish it was, but I don’t see there being a shortage. I’d love to say that that we’re taking 100% of the world’s PET that’s been consumed, and we’re upgrading all of it. But it’s going to be — it’s — we’ve got some real work ahead of us.
Jeff Zekauskas — JPMorgan — Analyst
Thanks very much. I have a question on the polyurethane slide. Your MDI volumes decreased 7% year-over-year, but the year-over-year volumes were flat. How fast did the non-MDI volumes grow in the quarter? What are they? And are the margins comparable to MDI?
Peter Huntsman — Chairman, President & Chief Executive Officer
Yes. I think that as we look at that, most of that volume is around polyols. And that’s what we’re-that’s what we’re blending with MDI to create specific effects, downstream effects and so forth and HBS, in particular.
And so as we’re doing that, that’s something that we certainly want to be doing is blending more polyol with more MDI and because in doing that, we’re creating greater differentiated chemistry down below. So that’s an area where we’ve seen significant growth.
Matthew DeYoe — Bank of America — Analyst
Good morning, everyone and I guess just to reiterate everyone else’s sentiments, congrats on your next steps. It seems to be a little bit of a theme here for Huntsman’s CFO, so good luck there. Peter, you touched on this a little bit. Obviously, we have some MDI over-earning in the short term, but we’re probably nearing the end of the global capacity build out. So even if we do loosen up here a little bit in the second half, how long do you think it takes before we tighten again? And what do you envision for earnings or at least maybe margins for industry between 2020 to two, three and four [Phonetic]? That’s it.
Peter Huntsman — Chairman, President & Chief Executive Officer
Well, I am not sure we’re-I certainly can’t speak for the industry because I think one of the things we’ve seen in the last couple of years is I think you’ve seen a real bifurcation of corporate strategies and we’ve certainly have capped our lot into saying that we’re going to go further downstream. We’re going to buy those assets. We’re going to buy into system houses. And we’re going to deploy our capital further downstream.
Now again, that’s not going to be-to say that we neglect the upstream of the business, but I think I publicly have said that we will not alone, on our own, use our balance sheet to go out and build $1 billion MDI capacity grassroots projects somewhere around the world. We’d be willing to do it with through partnerships and so forth. We’re not stressing our balance sheet over it. That’s something that would have to be very appealing to us and to our shareholders. But we will be deploying further capital as we look at it on a downstream basis. There’s other of our competitors that have said that their priority is going to be focused on the upstream, adding the upstream tonnage and so forth. And look, I’m not saying one’s right and one’s wrong. We feel very comfortable with where we’re going. And I would prefer with Huntsman that we are trying to move toward a higher margin with greater stability. Not necessarily greater volume, but just greater stability, and we’ve got that, hopefully, as we build out that downstream, we’ll accomplish that.
I have also said that in past calls that, if we decided today to go out and build a new facility grassroots facility or even a significant expansion upon our existing facilities, this is a multiyear process. If you’re really thinking about a grassroots facility, that is a new site that doesn’t exist today.
And you’re starting with Nitro Benzene and going all the way down to Aniline and MDI and splitting and so forth. You’re looking at $1 billion-plus investment to build a minimal world-scale capacity. And you’re probably looking at anywhere from-depending on where you’re building around the world, anywhere from five to eight years. And we’ve seen some fault starts and stops here in North America. And I think that’s just a testament as to how difficult it is to build these facilities.
So again, I’m not here saying that we’re going to just get tighter and tighter and tighter as in the industry, but is that you kind of project out a 6% growth, and you kind of project out what would, in my opinion, be your normal incremental expansion of 2% to 3% growth per year, you just have through greater efficiencies in operations and technology know-how and so forth.
The industry does kind of get tighter and tighter over the course of the next couple of years. And it is a regional industry, by and large. And so you’re going to see some parts of the world that are going to be tighter than other parts. But by and large, I think it’s going to be a balanced to snug industry over the course of the next three to five years.
Operator
Thank you. Our next question comes from the line of Adley [Phonetic] with Jefferies. Please proceed with your question.
Unidentified Participant
Thank you. Good morning, guys. Peter, in terms of the impact of the semiconductor shortage on auto production, you’ve talked about maybe reallocating some of those products to other end markets. Can you elaborate on what end markets you supply and that have similar or better margins than that? And what those markets on the supply before?
Peter Huntsman — Chairman, President & Chief Executive Officer
Sure. As announced earlier, we’ve got Tony Hankins here, our divisional President of Polyurethanes. And so Tony, I’m going to — and one of my questions, too, would be why don’t we get higher margins than just the automotive margin. Anyways, Tony you go ahead and answer that.
Anthony Hankins — Chief Financial Officer, Asia Pacific & Division President, Polyurethanes
Thank you. Good morning. Thanks for the question. Yes, these — the automotive products we manufacture are very specialty formulations going into the high-end auto market. But there are common characteristics to other markets such as high-end furniture, for example, where we supply viscoelastic grades into high end furniture. So there’s a direct comparison, if you will, between high-end seating and high-end furniture. And the margins there are good or even better in some cases, than in the auto market. So there’s an opportunity. And that market is growing very fast at the moment. We sold-out into those areas. So this is very easy for us to divert products into those other high-end opportunities we have.
Arun Viswanathan — RBC Capital Markets — Analyst
Great. Thanks. Maybe you can just comment a little bit on the long term, Peter, and congrats, Sean, as well. But you noted $1.1 billion of normal EBITDA. What would you kind of view as peak at this point with the changes that you’ve made to the portfolio? Thanks.
Peter Huntsman — Chairman, President & Chief Executive Officer
Yes. I’d hesitate to use the word peak just because I hope that if our portfolio is truly integrated and downstream, we might see sometimes where our more commoditized products as we’ve pointed out in our MDI business are tight, and you’re going to experience higher than normalized earnings for a quarter or two. But as I think about peak sort of performance and Performance Products or Advanced Materials, even Textile Effects and the majority of our MDI products in polyols and so forth. I don’t see those products really peaking, if you will. I see them-they ought to be growing at better than GDP. We ought to be able to expand margins faster than GDP sort of growth.
And again, depending on the macro economy, which we’re dependent, I would hope that we would be able to see a normalized number that continuously improves and equal to the EBITDA improvement is going to be generating that level of cash of around 40%, high-30s, 40%-ish that we’ve been very consistent in being able to generate over the course of the last five or six years.
May 4, 2021
Huntsman Earnings Call Highlights
Huntsman Corp (HUN) Q1 2021 Earnings Call Transcript
HUN earnings call for the period ending March 31, 2021.
Peter Huntsman — Chairman, President & Chief Executive Officer
Thank you, Ivan. Good morning, everyone. Thank you for taking the time to join us.
Let’s turn to slide number three. Adjusted EBITDA for our Polyurethanes division in the first quarter was $207 million versus $84 million of a year ago. This improvement versus the prior year was largely driven by improved margins due to higher prices, primarily in the component end of our business, which more than offset the approximate $10 million EBITDA impact related to winter storm Yuri that we experienced in February.
Our MDI volumes declined approximately 7% versus the prior year’s first quarter, primarily due to a fourth quarter 2020 T&I at our Geismar, Louisiana, which we deferred to this year’s first quarter, some impact related to winter Storm Yuri and our planned need to build inventory ahead of our scheduled Rotterdam turnaround. However, improved margins more than offset the decline in volumes. We will note that our differentiated MDI volumes, which include our automotive, elastomers and spray foam businesses were up 4% for the quarter.
Demand trends in our core markets of construction and automotive have led to solid underlying growth in the quarter. When excluding the impact from storms and turnarounds our insulation businesses, including spray foam and our composite wood products business remains solid as markets such as North American residential construction and renovation remains strong.
Many have inquired as to the impact of the reported ongoing chip shortage in the automotive industry is having on our Polyurethanes business. By the end of the first quarter, we haven’t seen any impact to our customers as our automotive business e business was up 12% globally compared to the previous year. We believe this has been a result of our being more European-centric and supplying a market segment that is more skewed toward luxury automotive. So far in the second quarter, we are seeing a 2% to 3% drop in volumes due to chip-related slowdowns. We’ve reallocated this volume of MDI to other areas and expect to earn similar margins.
We’re also pleased to see a strong recovery in our global elastomers business largely comprised of footwear along with other specialty end-use and industrial related markets. The improvement in footwear is being helped by the gradual reopening of economies, which is having a positive effect on the retail markets.
Industrial side of our elastomers business correlates somewhat with global PMI which have continued to expand around the world. Short-term and long-term fundamentals of our polyurethanes business remains positive. We are benefiting from some level of inventory restock, our own inventory levels remained below normal levels for this time of year. We’re keeping an eye on the evolving reoccurrences of COVID pandemic around various regions of the world. Overall demand reflected within our order book remained solid.
Our margin within the first quarter benefited more than we had anticipated from ongoing tight conditions within the industry. In addition to various planned turnarounds within the industry, unscheduled outages compounded the situation. We were fortunate that our Geismar, Louisiana facility was able to continue largely uninterrupted while others were forced to declare force majeure due to damage just the spend by winter storm Yuri. Previously mentioned, we estimate the negative impact from Yuri on polyurethanes was approximately $10 million. This was largely a result of supply chain and raw material constraints. This is a testament to the team that we have at our Geismar, Louisiana facility and their ability to work through these conditions in a safe manner to keep it running.
Currently in the Americas, we believe most of the industry capacity is in the process of returning back to full operating rates. Business conditions in China remain solid. Our margins in the first quarter exceeded our expectations. Given the completion of local turnarounds and some announced capacity additions within China, we’ve seen margins recently recede a bit, though they are generally firm.
Within our PO/MTBE joint venture with Sinopec in China, where we own 49%, we benefited from very strong margins, largely the result of industry outages and stronger than expected demand in the quarter. As of the current moment and once in every four year-once in every four year multi-facility turnaround at our Rotterdam MDI plant is nearing completion. We are highly dependent on many other chemical companies conducting turnarounds and everyone meeting a pre-agreed synchronized time line to restart.
Due to some delays with a third-party supplier, our start-up is delayed. As a result, the total estimated EBITDA impact from this turnaround is now estimated to be around $25 million versus the initial $15 million estimate that we gave you last quarter. Our facilities about ready to start back up, we’re hopeful that do we not experience any further delays from-that are outside our control. Putting it all together, we remain very positive about the trends that we are seeing in polyurethanes globally. Demand is good. The industry is balanced, substitution will continue and areas driven by sustainable solutions, such as energy efficiency, are expected to follow trends, but will have a very positive impact on the business for the foreseeable future.
Looking into the second quarter, we see seasonal strength being partially offset by turnaround costs and potentially lower MDI margins in Asia. We would expect the second quarter adjusted EBITDA to be around 5% stronger than the first quarter dependent upon the Rotterdam T&I, which should be up significantly versus a year ago period.
Alex Yefremov — KeyBanc Capital Markets — Analyst
Thank you. Good morning, everyone. Sean, congratulations on moving on to new adventures. Peter, could you talk about component MDI market in China? It’s been soft lately. What do you think is going on there? When do you-do you have an idea whether we could see stability or maybe even improvement in China market?
Peter Huntsman — Chairman, President & Chief Executive Officer
Well, I think that we did see some tightness that really started in the fourth quarter where we saw component prices, the more commoditized end of our business, that we saw really over about a two week period, we saw component prices rise about 20%. Again, that’s a 20% in prices over a two week period. This was largely driven because of outages and because there’s very strong economic demand taking place as China recovers its economy on a post-COVID sort of a world.
I would say that in the fourth and first quarter, we probably would have somewhere around $40 million or so of over-earn. And of that $40 million-ish or so of over-earn that might be $40 million, $45 million on a quarter-to-quarter basis. I’d say that about one-third of that was European, and two-thirds of that was China.
We have a lot of our more commoditized component businesses in North America are more dependent on formula pricing. And so we don’t see the fly up in North America like we do the rest of the world, nor do we see the sudden drops in North America like we do the rest of the World.
As we look into the second quarter, I think that we’ll probably see that over-earn and on those similar sort of ratios, probably around $20-ish million, give or take, a couple of million.
I would say, though, that as we look at pricing over the course of the last couple of weeks, it is stable. I don’t see it falling at the present time. And I think that we’ve-I am hoping that throughout the rest of the second quarter and so forth that we ought to see some stability in that pricing.
I will just note that from the public notifications that have been discussed in China as well, we have some very significant turnarounds that will be taking place in the third and fourth quarter in the industry, not in the industry that will be hitting China later in the year as well.
So as I’ve said in past calls, I think as we look at the overall MDI capacity utilization, we’re probably globally, right now, running pretty close to 90%. And so you see a large disruption or closure to take place around the world, you’ll see the impact of that, I think, reverberate pretty quickly.
Operator
Thank you. Our next question comes from the line of Kevin McCarthy with Vertical Research Partners. Please proceed with your question.
Kevin McCarthy — Vertical Research Partners — Analyst
Good morning. Peter, I was wondering if you could update us on your view of supply chain inventory in Polyurethanes. We hear a lot about tightness in both isocyanates as well as polyols going into urethanes.
What did your volumes run at HBSs? And what is your outlook for the next few quarters as these dynamics start to normalize?
Peter Huntsman — Chairman, President & Chief Executive Officer
Well, I think that when I talk about the vision that we have in orders and so forth, you’re probably looking one month or two into the future. So I certainly don’t want to sound as long speaking for the rest of the year.
But these trends that we’re seeing, our inventories are quite low. I think we probably could be moving even more product through HBS if we had it. Now of course, we can cut off customers. But we do have some customer commitments and contracts and so forth that we’re going to fulfill. And we’re doing that right now.
But we’re seeing, I think, much stronger than normal growth taking place in our HBS business. And I think that, that sort of growth is twofold. Its new houses that are being built. And it’s also-I mean can you imagine being a sales representative for selling insulation in the state of Texas after the devastating freeze.
So I think that it really goes a long along an entire spectrum there. And I think that those are the sort of trends in energy conservation that you see the possibility of tax credits and so forth being given to people that are reinsulating their homes and using better products than what traditionally have been used and so forth. But I think that we’re going to continue to see market share gains in our HBS business and in those sectors of downstream MDI that we want to be focused in.
But right now, I’d say that, again, to summarize your question. Inventories, I think, on both — from what we see, from our end, from our business are quite well in that entire supply chain.
Operator
Thank you. Our next question comes from the line of Mike Sison with Wells Fargo. Please proceed with your question.
Mike Sison — Wells Fargo — Analyst
Hey, guys. Nice start to the year and congrats again, Sean. We’ll miss you. Peter, when you think about polyurethanes, looks like it’s going to have a record year in ’21. I know it’s a little bit early, but when you think about growth in ’22 and beyond, can you maybe walk us through what are the variables there in terms of continuing to grow that business? How does the split or affect it? I know you’re more differentiated now and then maybe acquisitions potentially over the next couple of years, and where can that EBITDA potentially go?
Peter Huntsman — Chairman, President & Chief Executive Officer
Well, I think that we have a great opportunity, great question. I think we have a great opportunity to increase our margins. I’ve said in the past that I’m not sure that our Polyurethane business necessarily needs more tonnage. Though, again, I want to be very clear, we are going to be operating our facilities and debottlenecking our facilities and trying to get every ton out of our facility, the very best we can.
But I think that we need to be focused on how do we maximize the margin on a per ton basis. And as we look at that going forward, I think it’s going to be opportunities for us to align ourselves with customers that are further downstream, customers that are taking a higher blend of products that are coming out of our MDI splitters, that we continue to invest and grow our downstream businesses like HBS.
We’re going to continue to be looking at acquisition and opportunities not just in spray foam, but in other areas where we can consume, particularly the lower margin, more commoditized grades of our MDI and consume those internally and upgrade those internally.
So again, I think that we’ve got a great portfolio of volume within our business. We’ve got a great opportunity, I think, to continue to look for ways where we can expand incrementally on that volume.
But I think what I think we’ll continue to be mostly focused on is how do we bottom price and how do we take the lowest margin segments of that business and continue to upgrade that. That’s why we’ve invested in our splitter. We continue to invest in cost reduction. We’ll align our R&D around those customers and those applications that return us the most money. And we think longer-term sustainability is going to continue to be very important for us.
So-and again, I think from a macro basis, when I look at the overall industry, I just don’t see a lot of new capacity over the next couple of years. It’s going to be coming into a market that is today operating probably somewhere in the very high 80% to 90% capacity utilization.
Hassan Ahmed — Alembic Global Advisors — Analyst
Peter, question, just wanted to revisit MDI pricing in China, particularly with sort of a focus on the second half of the year. I mean I know the first half has been sort of a little sort of tricky. We saw obviously some incremental capacity coming online. There was charter of, call it, some inventory rebuild leading into Chinese New Year.
So obviously, with all of these puts and takes in mind and something that you mentioned about sort of incremental turnarounds in the back half of the year, could we be in a situation relative to right now in H2 in China where supply demand fundamentals are actually tighter and we may actually see potentially another run-up in pricing there?
Peter Huntsman — Chairman, President & Chief Executive Officer
I think that right now, we’re probably looking at a pretty stable. I mean that’s what we’d like to see. I talked earlier about that run-up kind of 20% in a week or two. I see prices have kind of gone back to that pre-Chinese holiday sort of time period. They feel like they’ve kind of stabilized in this area.
And I think that with a number of the facilities that are back online in China and the economic growth that they’ve been experiencing, slowing just a little bit, but still seeing significant growth, I think we’re probably looking at, hopefully, stability between now and the end of the year.
Now having said that, there have been some very large T&I and some maintenance work that includes over 1 million tons of capacity that’s been pushed off for the second half of the year.
But usually, I mean, unless there’s a problem with that, usually those projects will build up inventory beforehand. And unless there’s some unforeseen problem with restarts or something of that nature, hopefully, we’ll see stability throughout the rest of the year.
P.J. Juvekar — Citi — Analyst
For your slide 10 for ESG efforts, and my question is, you’re taking recycled PET bottles into TEROL polyols. You mentioned you can take up to 60% rPET. One of the peers, Eastman is doing molecular recycling of PET. So I guess my question is demand for recycled PET goes up. And PET is much more easier to recycle than polyethylene. Do you think those rPET prices could go up?
Peter Huntsman — Chairman, President & Chief Executive Officer
No. I don’t see that happening anytime soon. I mean as I look at the source of our PET, and we’re taking PET both post-consumer and post-industrial scrap. There’s-I cannot speak for Eastman, just for our efforts. We’re using with the equivalency of 1.25 billion, 1.5 billion bottles a year of recycled PET. That’s a small dent. We’ve got a lot more that we can be doing as an industry. We’ve got a lot more that we can be doing. I commend companies like Eastman and our efforts.
The challenge of recycling any plastic is to be able to upgrade the value of it. Anybody can take a plastic and melt it-used plastic, melt it down and it make it into a park bench. But you’re not going to be able to take-ultimately take billions of pounds of plastics and convert them all into park benches.
You’ve got to be able to take a PET bottle or a polyethylene or polypropyl, you’ve got to be able to take it and actually recycle it, hopefully, into something of equal value or in the case of our polyols, something of even greater value. And so I think these are the initial steps. I think they’re relatively small in the overall market. But I don’t see the post-PET industry in the foreseeable future. When I say that, I mean, at least the next five years, five to 10 years. I don’t see there being-I wish it was, but I don’t see there being a shortage. I’d love to say that that we’re taking 100% of the world’s PET that’s been consumed, and we’re upgrading all of it. But it’s going to be — it’s — we’ve got some real work ahead of us.
Jeff Zekauskas — JPMorgan — Analyst
Thanks very much. I have a question on the polyurethane slide. Your MDI volumes decreased 7% year-over-year, but the year-over-year volumes were flat. How fast did the non-MDI volumes grow in the quarter? What are they? And are the margins comparable to MDI?
Peter Huntsman — Chairman, President & Chief Executive Officer
Yes. I think that as we look at that, most of that volume is around polyols. And that’s what we’re-that’s what we’re blending with MDI to create specific effects, downstream effects and so forth and HBS, in particular.
And so as we’re doing that, that’s something that we certainly want to be doing is blending more polyol with more MDI and because in doing that, we’re creating greater differentiated chemistry down below. So that’s an area where we’ve seen significant growth.
Matthew DeYoe — Bank of America — Analyst
Good morning, everyone and I guess just to reiterate everyone else’s sentiments, congrats on your next steps. It seems to be a little bit of a theme here for Huntsman’s CFO, so good luck there. Peter, you touched on this a little bit. Obviously, we have some MDI over-earning in the short term, but we’re probably nearing the end of the global capacity build out. So even if we do loosen up here a little bit in the second half, how long do you think it takes before we tighten again? And what do you envision for earnings or at least maybe margins for industry between 2020 to two, three and four [Phonetic]? That’s it.
Peter Huntsman — Chairman, President & Chief Executive Officer
Well, I am not sure we’re-I certainly can’t speak for the industry because I think one of the things we’ve seen in the last couple of years is I think you’ve seen a real bifurcation of corporate strategies and we’ve certainly have capped our lot into saying that we’re going to go further downstream. We’re going to buy those assets. We’re going to buy into system houses. And we’re going to deploy our capital further downstream.
Now again, that’s not going to be-to say that we neglect the upstream of the business, but I think I publicly have said that we will not alone, on our own, use our balance sheet to go out and build $1 billion MDI capacity grassroots projects somewhere around the world. We’d be willing to do it with through partnerships and so forth. We’re not stressing our balance sheet over it. That’s something that would have to be very appealing to us and to our shareholders. But we will be deploying further capital as we look at it on a downstream basis. There’s other of our competitors that have said that their priority is going to be focused on the upstream, adding the upstream tonnage and so forth. And look, I’m not saying one’s right and one’s wrong. We feel very comfortable with where we’re going. And I would prefer with Huntsman that we are trying to move toward a higher margin with greater stability. Not necessarily greater volume, but just greater stability, and we’ve got that, hopefully, as we build out that downstream, we’ll accomplish that.
I have also said that in past calls that, if we decided today to go out and build a new facility grassroots facility or even a significant expansion upon our existing facilities, this is a multiyear process. If you’re really thinking about a grassroots facility, that is a new site that doesn’t exist today.
And you’re starting with Nitro Benzene and going all the way down to Aniline and MDI and splitting and so forth. You’re looking at $1 billion-plus investment to build a minimal world-scale capacity. And you’re probably looking at anywhere from-depending on where you’re building around the world, anywhere from five to eight years. And we’ve seen some fault starts and stops here in North America. And I think that’s just a testament as to how difficult it is to build these facilities.
So again, I’m not here saying that we’re going to just get tighter and tighter and tighter as in the industry, but is that you kind of project out a 6% growth, and you kind of project out what would, in my opinion, be your normal incremental expansion of 2% to 3% growth per year, you just have through greater efficiencies in operations and technology know-how and so forth.
The industry does kind of get tighter and tighter over the course of the next couple of years. And it is a regional industry, by and large. And so you’re going to see some parts of the world that are going to be tighter than other parts. But by and large, I think it’s going to be a balanced to snug industry over the course of the next three to five years.
Operator
Thank you. Our next question comes from the line of Adley [Phonetic] with Jefferies. Please proceed with your question.
Unidentified Participant
Thank you. Good morning, guys. Peter, in terms of the impact of the semiconductor shortage on auto production, you’ve talked about maybe reallocating some of those products to other end markets. Can you elaborate on what end markets you supply and that have similar or better margins than that? And what those markets on the supply before?
Peter Huntsman — Chairman, President & Chief Executive Officer
Sure. As announced earlier, we’ve got Tony Hankins here, our divisional President of Polyurethanes. And so Tony, I’m going to — and one of my questions, too, would be why don’t we get higher margins than just the automotive margin. Anyways, Tony you go ahead and answer that.
Anthony Hankins — Chief Financial Officer, Asia Pacific & Division President, Polyurethanes
Thank you. Good morning. Thanks for the question. Yes, these — the automotive products we manufacture are very specialty formulations going into the high-end auto market. But there are common characteristics to other markets such as high-end furniture, for example, where we supply viscoelastic grades into high end furniture. So there’s a direct comparison, if you will, between high-end seating and high-end furniture. And the margins there are good or even better in some cases, than in the auto market. So there’s an opportunity. And that market is growing very fast at the moment. We sold-out into those areas. So this is very easy for us to divert products into those other high-end opportunities we have.
Arun Viswanathan — RBC Capital Markets — Analyst
Great. Thanks. Maybe you can just comment a little bit on the long term, Peter, and congrats, Sean, as well. But you noted $1.1 billion of normal EBITDA. What would you kind of view as peak at this point with the changes that you’ve made to the portfolio? Thanks.
Peter Huntsman — Chairman, President & Chief Executive Officer
Yes. I’d hesitate to use the word peak just because I hope that if our portfolio is truly integrated and downstream, we might see sometimes where our more commoditized products as we’ve pointed out in our MDI business are tight, and you’re going to experience higher than normalized earnings for a quarter or two. But as I think about peak sort of performance and Performance Products or Advanced Materials, even Textile Effects and the majority of our MDI products in polyols and so forth. I don’t see those products really peaking, if you will. I see them-they ought to be growing at better than GDP. We ought to be able to expand margins faster than GDP sort of growth.
And again, depending on the macro economy, which we’re dependent, I would hope that we would be able to see a normalized number that continuously improves and equal to the EBITDA improvement is going to be generating that level of cash of around 40%, high-30s, 40%-ish that we’ve been very consistent in being able to generate over the course of the last five or six years.
May 4, 2021
Epoxy Comments from Olin Investors Call
Scott Sutton
Yes. Thanks, Steve, and hello to everyone. Look, I’m super proud of the Olin team for their passion, results and for their optimism for our future. Because of their optimism and success, I had the opportunity to pull forward our value creation formula story. First of all, Olin is on track to deliver more than $1.8 billion of adjusted EBITDA this year. One proof point to that track is that second quarter adjusted EBITDA is expected to exceed first quarter adjusted EBITDA, excluding Uri onetime impacts, even though we have significant turnarounds in the second quarter. The third quarter adjusted EBITDA should also exceed the second quarter. So it is time to start projecting toward a higher adjusted EBITDA of $2.5 billion and above in future years, the emphasis really being on the above. For clarity, 2022 is expected to be a positive stepping stone toward that direction. Some key activities to bridge that gap to $2.5 billion are shown on Slide number 4. But maybe Slide number 5 tells a more comprehensive story to that $2.5 billion and above.
Olin is quickly moving through four phases of evolution. We have already discussed the first two with you on prior earnings calls, and we are currently in Phase 2, the leading phase as we enhance our unique model of optimizing value first across the whole ECU. Think of leading as solving the ECU co-production conundrum by setting our participation to the weak side of the ECU, anticipating potential value inflection points and then activating to achieve a desired response. Shortly, we’ll be looking to take our innovative model and apply it across multiple millions of tons of similar molecules and parlay the model into a much larger business. All kinds of commercial strategies will be employed in this Phase 2 of parlaying including bartering, sophisticated trading and differentiated alliances to better serve customers. Simultaneously, Olin will be preparing for Phase 4, structuring as we look to take proceeds from our cash flow machine and invest them in a smart way to expand our beneficial footprint. Please don’t miss our internal equity price target in the lower corner of that slide.
Okay. Let me pull back to today a bit and fill in some key activities and results. Slide number 6 shows that in the first quarter, we matched our market participation to the weak side of the ECU.
In other words, we sold less caustic, which not only allowed us to hold up caustic value relative to the fourth quarter but more importantly, allowed us to significantly expand value throughout our chlorine and chlorine derivatives chain. I think the lift in the ECU PCI shown on Slide number 7 clearly shows the positive results. That value impact was also significantly expanded by the innovative actions taken by our epoxy team, as shown on Slide number 8. Olin is the world’s leader in epoxy and our wins continue to stack up as we place our offering with key customers and into key applications. Look, I would also like to highlight the updates made to our Olin ESG scorecard in the appendix slides. We are generally delivering to many of the commitments made in our sustainability report that we still have a lot of work to get fully on track here. Again, this demonstrates the team’s comprehensive passion for Olin’s broader contribution.
So before opening this call up to Q&A, let me wrap it all up into contemporary value on Slide number 9. Our team’s shared success in leading and running toward parlaying is forecasted to generate roughly $1.1 billion of levered free cash flow this year, which at the current stock price represents a yield of roughly 16%, really attractive, considering we’re just in the early stages of our push for shareholder value delivery.
Alex Yefremov
Scott, you were talking about epoxy margins moving towards 30% in the medium to long term. If margins are this high, I assume part of this equation is the price. How do you think competitors and industry in general would respond to this? What level of reinvestment economics are we in this position ad you just see more capacity amount?
Scott Sutton
I’ll turn it over to Pat here in just a moment. We probably won’t go into the competitor action there. But I would just start Pat’s comments by saying that we actually have a long way to go to get to that 30% adjusted EBITDA, but it’s totally within our scope and range. So Pat?
Pat Dawson
Alex, I would say why not 30% because I think if you look at the performance properties of epoxy and the fact that there’s really not any clear substitutes for epoxy in terms of its performance and the value that it brings to customers, it should be able to command these kind of returns. I think also, you look at our leadership position and the space that we occupy, vis-a-vis competitors that’s more of an upstream, midstream space and the way we can monetize our Epicor hydrant in the form of liquid epoxy resin, I think those leadership positions are very strong. I think also, we have a number of opportunities to parlay that you see on Slide 8. That upstream position into opportunities that, quite frankly, are already in motion, whether we have the option to toll produce, the option to make versus buy, the option to produce more if we can get the value for that. I think we have a lot of optionality there. So that’s the way we look at it. And we’re really working to accelerate those parlaying activities as we move early into the game here towards that 30%.
Alex Yefremov
And just as a follow-up, Scott, you mentioned you expect third quarter EBITDA to continue improving sequentially. We had a lot of disruptions in the US Gulf Coast, as you well know. How do you expect ECU PCI to behave in the back half? Do you think we’ll start coming down at some point in the third to fourth quarter from Q2 level?
Scott Sutton
Well, I mean, I would say our improved EBITDA performance is going to be a reflection of an improved ECU PCI as well. But what I would say, there are going to be points in our future that perhaps we exist through a quarter where we have to make some adjustments in how we’re set up as we’re running our model and that can lead to potential declines in the ECU PCI. But they’re going to be short lived because what they do is position us for the next phase of growth that we have in that ECU PCI and in our EBITDA.
Kevin McCarthy
Scott, as I listen to the commentary and having read the slides, it seems to me that when we hear about alliances tolling agreements, bartering, et cetera, that you’re going to be looking for, what I would call, capital light solutions to growth as opposed to building, let’s say, new greenfield or brownfield capacity. Is that correct or am I overreading into the signals here?
Scott Sutton
No, I mean, that’s correct. I mean, we do have a next path to growth that is capital light. And in fact, we are already engaging in those activities. You heard when Pat had answered an earlier question that we’re doing things why tolling some of our shares upstream materials into liquid epoxy resin, for example, so that we can service our customer base. And there’s just a lot of opportunities to do that across our complete portfolio. So those are the things that we can pull forward the fastest to support growth. There’s other things we can do beyond that. I don’t really see greenfield expansion as part of our future. There could be limited brownfield expansion, depending on the alliance opportunity that we might have. But yes, it’s a low capital near term growth strategy that will complement with that Phase 4 structure.
Matthew Blair
And then I was hoping you could share any more details on just other chlorine derivatives that were especially strong in the quarter other than EDC, which has some pretty pretty transparent pricing. On our sources, it looks like HCL pricing was up more than 100% quarter-over-quarter. But could you just offer any more commentary on what you’re seeing on that chlorine envelope?
Scott Sutton
Well, I mean that chlorine envelope is most of our company. So I’m going to let Damian make a comment or two on something and then, Pat, might want to add on to as epoxy comments being a key chlorine derivative for us?
Damian Gumpel
Matt, I’ll refer you to a couple of slides. I’ll refer you to Slide 17. The appendix showing our heat map and then refer you to a slide also at the back, Slide 21. And both of those, when you put those together, you see pretty widespread interest in Olin, chlorine and chlorine derivative for very broad spectrum of end uses, you see a continued momentum and request from customers for Olin’s ability to supply. I’ll go back to the Scott’s comments, or questions at the beginning, he, about are we seeing things — question around maybe market share. I will just tell you that our customer forecasts are still for volume throughout the rest of the year that are higher than our forecasted ability to supply them. So that should give you an indication as to the robustness of the chlorine side, which of course, as going to my earlier comments, is still relatively stronger than the caustic side. So we’ll continue to manage the ECU around that. But across [CCO], ACL, bleach versus chlorine, it’s all those three legs in the heat map. And I’ll pass it over to you, Pat.
Pat Dawson
Matthew, I’d say from a epoxy standpoint, we do sell some of our upstream products into wastewater treatment and municipalities for water treatment. We’ve seen that really continue to improve on demand. And some from an epoxy and resin standpoint, you look at civil engineering, construction, automotive, even though there’s been semi chip shortage, we’ve seen improvement coming back there. Appliances, electronics, we’re starting to see maybe a little bit of life again, and oil and gas, which uses fusion bonded epoxy for pipelines and everything like that, machinery is coated with epoxy. So I think it’s back to what Scott said, we’ve seen good month over month improvement. But we think we’re still very much in the early innings of this demand recovery. We think there’s more coming based on some of these end use markets I just mentioned.
Eric Petrie
And then maybe a question for Pat. How much epoxy goes into higher value versus the low margin end markets, where do you want to get that down to? And then is there a difference in profitability between regions currently?
Pat Dawson
I think, if you look on Slide 8, we talk about where we’re increasing our supply and the high margin performance coatings, I mentioned civil engineering earlier, formulated type systems. And certainly that value over volume orientation that we have is putting more into those types of areas and applications. And there’s places where you have low margins in industrial coatings, wind energy, it’s been an area that’s been growing but we’ve pulled back from some of the low end of that business. And then some of our upstream base stocks, we’re definitely doing less business here because the value is not there. I think geographically speaking, one of our leadership advantages that we have is we have a lot of flexibility as to how we flex product between the regions. And that’s a pretty dynamic process that we use all the time around our activation. So I wouldn’t say anyone geographies, I don’t pay attention to that so much strategically as I do where the opportunities come up to create more value to juice up our return to the ECU.
Steve Byrne
With respect to this 30% EBITDA target in epoxy and the shifts more downstream and less of the upstream commodity sales. Do you have the commercial relationships in those downstream resins and/or the production capacity to move more of the feedstock material into those downstream products or will this require some acquisitions?
Pat Dawson
First of all, let me just course correct you here a little bit. Really, our sweet spot is in the up and the midstream part of the epoxy value chain. We don’t go nearly as far down in that chain as to say the questions that you were asking. We certainly have all the right channels to market in place today to monetize and to really exert our leadership in up and midstream. So I would just say just a little correction in how we view that chain and where our strengths are.
Steve Byrne
So you can get to 30% EBITDA margins by selling epi and cumene and BPA and so forth and not move downstream?
Pat Dawson
No, Steve, that’s — again, part of the equation is the strength and you have upstream, but that midstream, we have many channels as to how we monetize the epichlorohydrin and the bisphenol A. So that’s where we have a lot of channels, a lot of optionality, a lot of optionality to parlay. So that’s pretty broad reaching as you move down into that midstream.
Steve Byrne
And then just curious about the margin on epi. If you look about your broad platform of chlorine containing derivatives, where would you put epi in the ranking of all of those chlorine containing products? I mean if you look at the margin difference between your two segments, I’m just curious where that epi would fall in the ranking.
Pat Dawson
I don’t think we’re going to get into the rankings of epi versus derivatives of where we put that epi. Epi, make no mistake, is a strategic pillar to our upstream and it’s a strategic pillar as to how we parlay down through the midstream into those various end use markets where we’re prioritizing our value over volume. And I think the other thing to keep in mind, Steve, is when we had our investors presentation back in February 19th, one of the headlines on my slides read that epi and LER supply demand projected to be tight by 2021. And so we’re just entering this phase of what we’ve been saying for the last two years of what we saw coming in this sweet spot of ours around this up in the midstream and parlaying these things that we talked about on Slide 8. So I think those kind of fundamentals bode well for our ability to get to this 30% EBITDA in epoxy.
Angel Castillo
And then on the epoxy margins, you noted that you expect them to improve sequentially in the second quarter. I was just curious, does that contemplate, I guess, the meaningful pickup in benzene prices? And/or as you think about where raw materials are moving, how should we think about that within your guidance?
Todd Slater
We feel very confident in the fact that we’ve had good pricing momentum. We’ve seen that pricing momentum continue here in April. There’s publicly announced increases out there for May that are also getting good traction. So we feel very good about the sequential improvement in our margins and the sequential improvement in improved returns to the ECU.
Everchem Updates Archive 
Sign Up for Email Updates