Olin (NYSE:OLN) on Monday was upgraded to Overweight from a previous investment rating of Sector Weight by analysts at KeyBanc Capital Markets. They said a selloff in the chemical company on Friday was unwarranted after announcing the planned departure of CEO Scott Sutton.
“We believe shares have reached attractive levels and justify an Overweight rating,” Aleksey Yefremov, analyst at KeyBanc, said in a September 4 report. “We may be too early, given meaningful pressure on caustic soda, but believe the stock is undervalued with a 12-24 months view.”
KeyBanc set a price target of $67 a share on Olin (OLN) based on a multiple of 6.5 times estimated Ebitda for 2024.
Discussions on Pay?
The analysts said Sutton’s departure may have been related to discussions about pay.
“Our sense is that Mr. Sutton’s initial compensation package reflected turnaround status of the company at the time, while going forward the board prefers pay to be more closely in line with industry standards,” according to KeyBanc. “Mr. Sutton’s compensation was well-earned, and the stock’s reaction is just another testament to investors’ view of his value.”
Amid the pending departure, Olin (OLN) is positioned for growth, according to KeyBanc.
“Mr. Sutton was a highly successful and creative CEO for Olin (OLN), and it will be difficult to find a replacement of a similar caliber, considering the impressive performance improvement that was achieved by Olin (OLN),” KeyBanc said. “Still, having set the major parameters of the new strategy, the company is now ready to rip the benefits of the coming cyclical upside.”
CLAYTON, Mo., Sept. 1, 2023 /PRNewswire/ — Olin Corporation (OLN) today announced a mutual agreement that Scott Sutton will step down as President, Chief Executive Officer, and Chairman of the Board in the first half of 2024. Mr. Sutton will continue as Executive Chairman of the Board until his departure to facilitate a smooth transition.
Mr. Sutton has led a strategic transformation of Olin since taking the helm in 2020 which has delivered significant value for Olin’s shareholders. He has embedded the Winning Model across Olin’s businesses and built a strong leadership team for the future.
“It has been a privilege and an honor to lead Olin,” said Sutton. “Olin has a great future ahead and the Board and I are working closely together to identify an excellent leader who will enable the next phase of growth for Olin building on our strong foundation.”
William H. Weideman, Olin’s Lead Director, noted, “On behalf of the Board and the Olin team, I extend our gratitude to Scott for his dedication, leadership and extraordinary contribution. We look forward to working with Scott and the leadership team to ensure a smooth transition.”
Olin Corporation is a leading vertically-integrated global manufacturer and distributor of chemical products and a leading U.S. manufacturer of ammunition. The chemical products produced include chlorine and caustic soda, vinyls, epoxies, chlorinated organics, bleach, hydrogen, and hydrochloric acid. Winchester’s principal manufacturing facilities produce and distribute sporting ammunition, law enforcement ammunition, reloading components, small caliber military ammunition and components, and industrial cartridges.
Westlake Corporation (NYSE:WLK) Q2 2023 Earnings Call Transcript August 3, 2023 Westlake Corporation misses on earnings expectations. Reported EPS is $2.31 EPS, expectations were $2.83.
Jeff Holy: Thank you. Good morning, everyone, and welcome to the Westlake Corporation conference call to discuss our second quarter 2023 results. I’m joined today by Albert Chao, our President and CEO; Steve Bender, our Executive Vice President and Chief Financial Officer; and other members of our management team. During the call, we will refer to our two reporting segments: Performance and Essential Materials, which we refer to as PEM or Materials; and Housing and Infrastructure Products, which we refer to as HIP or Products. Today’s conference call will begin with Albert, who will open with a few comments regarding Westlake’s performance. Steve will then discuss our financial and operating results, after which, Albert will add a few concluding comments, and we will open the call up to questions.
Albert Chao: Thank you, Jeff. Good morning, everyone. We appreciate you joining us to discuss our second quarter 2023 results.
For the second quarter of 2023, we reported sales of $3.3 billion, net income of $297 million and EBITDA of $690 million. In our PEM segment, the continuation of soft industrial and construction activity and unplanned maintenance activities drove sales volume declines, particularly impacting PVC resin, caustic soda and epoxy in North America and Europe. The elevated level of unplanned outages resulted in lost sales that impacted operating income by approximately $50 million.
While our PEM segment average selling prices were lower than in the first quarter. We benefited from our strategically located globally advantaged feedstock position in North America, where we saw lower feedstock and fuel costs compared to the first quarter. In our HIP segment, we experienced an increase in sales volumes quarter-over-quarter with the start of the construction season in North America with housing starts in the second quarter, averaging 1.4 million units and repair and modeling continuing to grow. HIP segment EBITDA margin increased sequentially due to the 13% volume improvement and raw material cost reductions. And its margin remained in line with the record second quarter of 2022 at approximately 22%, reflecting the strength in our branded products and relationships with our customers.
While we expect the challenging macro backdrop to continue in the third quarter, we will focus our efforts of operating our assets reliably and reducing costs. To that end, we now expect our cost reduction program to achieve between $75 million to $105 million of cost savings in 2023, up from the previous $55 million to $105 million target after we achieved approximately $25 million of cost savings in the second quarter and $50 million in the first half of 2023. Overall, our second quarter results reflected the weakness in global manufacturing and industrial activity, along with the impact to sales volumes and margins from the planned and unplanned outages, and we continue to take a disciplined approach to managing our operations in this volatile economy and advance our long-term strategic priorities. I would now like to turn our call over to Steve to provide more detail on our financial results for the second quarter of 2023.
Steve Bender: Thank you, Albert, and good morning, everyone. Westlake reported net income of $297 million or $2.31 per share in the second quarter of 2023 on sales of $3.3 billion. Net income for the second quarter of 2023 decreased $561 million from the second quarter of 2022 as a result of lower average selling prices and integrated margins and more production and sales volumes. When compared to the first quarter of 2023, net income decreased by $97 million in the second quarter of 2023, primarily to lower average selling prices, particularly for caustic soda, PVC resin due to softer market conditions and unplanned production outages. For the second quarter of 2023, our utilization of the FIFO method of accounting had a negligible impact on pre-tax earnings compared to what earnings would have been reported on the LIFO method. This is only an estimate and has not been audited. Moving to our segment performance.
Our performance in Central Materials segment’s second quarter 2023 sales were $2.1 billion with EBITDA of $435 million compared to EBITDA of $1.2 billion in the second quarter of 2022 due to lower average selling prices, particularly for Performance Materials in addition to lower sales volume, largely in PVC and epoxy. PEM segment EBITDA of $435 million in the second quarter decreased $180 million from the first quarter of 2023, largely due to lower average selling prices for both Performance Materials and essential materials particularly for caustic soda, epoxy resins and polyethylene. Lower demand and resulting in sales volumes, particularly, for PVC, caustic soda and epoxy resin, and elevated level of unplanned outages that impacted both sales volumes and integrated margins.
Albert Chao: Thank you, Steve. Looking ahead, with continued high interest rates and a slowing economy we’re expecting a challenging environment in the second half of this year. However, we remain confident in our long-term growth plans, the strength of our business portfolio and our disciplined approach to creating long-term value. We look to expand our sales through differentiated product offerings and innovations with sustainable products to meet our customers’ needs on managing our costs and adapting to the changing market conditions as they unfold. In our PEM segment, we will leverage our North American feedstock advantage and highly integrated production chain. We remain positive on the outlook for our PEM segment, driven by increased consumer activity and demand for clean, fresh water, electrification and renewable energy benefits from the Infrastructure Investment Act and Inflation Reduction Act and favorable demographic trends, all driving demand for PVC resin, caustic soda, polyethylene and epoxy.
While PEM average selling price ending in June were below the average selling prices of the second quarter, in the last few weeks, we have seen some signs of improvement in both PVC resin and polyethylene markets from tightening export markets with unprofitable high-cost international producers curtailing production and lower industry inventory levels. As a result, we remain constructive on the outlook for our PEM segment from recent levels.
Patrick Cunningham: Got it. That’s helpful. And then what’s driving the weakness in epoxies and how do you see demand trending by region for the balance of the year?
Albert Chao: Yes. Epoxies applies to many areas, mostly into the industrial coatings and also in windmill blades and lightweighting of vehicles. And windmill blades business is still coming back slow demand, especially China. China has one of the largest capacities in the world in Epoxie and China’s economy is really not growing much and there’s overcapacity of new plants coming on. So the business is very weak and impacted global. And we expect US, European policy man pick up in the coming quarters or years, but it takes a while. China is the main issue we have.
Kevin McCarthy: That’s helpful. And then as a second question, Albert, I would appreciate any updated thoughts you might have on China. Generally speaking, we’ve seen demand from China languish across many commodity chemical markets. In the markets where you compete, are you seeing any signs of improvement there following recent efforts to stimulate or for that matter, any improvement on the supply side dynamics in China?
Albert Chao: China is the elephant in the room. It has the largest capacity produce many of the chemicals and plastics as well as one of the largest market for it, and as we all know that China did not recover much since the Chinese New Year, people expected after coming out of the pandemic. And the economy is still quite weak. As a result, polymers and chemical market prices has dropped a lot and impact global prices as well. Not only that, they used to import products and now they’re being exporting products. So all that impacted global prices for those products. And as we’re aware that the economy, especially for unemployment for young people has been quite surprisingly high, and recently, the Chinese Government have made a statement, they are coming up with policies to stimulate, but those statement has not come out with concrete actions, specific action plans yet. But I think with Chinese — I presume leadership in China as they said very well the issues. And the central government is still quite well off. They have a lot of buyer power to do things. So we believe that over time, the Chinese economy will improve and they talk about targeted 5% GDP growth for the near term coming years. So time will tell, but the meantime, as Steve mentioned, the spot price has really bottomed out in China. We see coupled with some planned issues with turnaround all that, that there the prices have started moving up the last several weeks. We hope that will be sustained, especially during the third quarter, which is usually a busy quarter. So time will tell, but we think China should improve over time.
Michael Leithead: Great. Thank you. Good morning, guys. My first question on PEM and maybe sticking on the last topic. Your slides talk about competitively priced exports out of China for epoxy and when you sort of do the back of the envelope math, it seems like producers there are selling export products below cash breakeven levels, so how do you think this dynamic or down cycle plays out? And does it change at all how you approach…
Albert Chao: Certainly, some of the Chinese — depending on the industry, definitely in the integrated ethylene to polyethylene, our information shows that in to the present China based on naphtha cracking are losing cash, whereas the US integrated players are still based on ethane feedstock ethylene up, we still have very good cash margin. So — but in business like epoxy, where they have built additional capacities. Some of the Chinese plants are running below 50%. And some new plants have not started up – idle and starting up. So I think companies are adjusting to the new dynamics. And over time, they should make the right decisions, what to do with their businesses.
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
Ivan Marcuse – Vice President, Investor Relations and Corporate Development
Peter Huntsman – Chairman, CEO and President
Phil Lister – Executive Vice President and CFO
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.
Peter, as recovery occurs in polyurethanes, I know it’s early, but how do you think about the trajectory of earnings growth in 2024?
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.
And just on the Shanghai MDI JV, are there any benefits to Huntsman on the new configuration of the LD operations?
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?
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.
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?
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.
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]?
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.
Can you talk about sequential pricing trends in MDI in your three major regions, the United States, Europe and China?
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.
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?
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.
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.
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?
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.
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.
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?
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.
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.
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?
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.
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.
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?
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.
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?
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.
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?
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.
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?
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.
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?
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.
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?
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.
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.
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.
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.
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?
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.
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?
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.
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.