August 2, 2021

Olin Epoxy Comments from Investors’ Call

Hassan Ahmed

Understood. And as a follow-up on the raw material side of things, obviously, we’ve seen higher natural gas prices, as it relates to the Epoxy segment, we’ve seen sort of higher benzene and propylene prices. So you know, as you have given your guidance for the second half of the year, how are you guys thinking about sort of rows? How are you managing those sort of higher prices? And as you’ve given your guidance, if rows do come down, could that be the source of a tailwind above and beyond what you guys have guided to?

Scott Sutton

Yes, I mean, some of those things you mentioned really impact our Epoxy segment quite a lot. So I’ll ask Pat to answer it.

Pat Dawson

Yes, Hassan. I think, first of all, raw material costs, the hydrocarbon cost have really never had a big impact on the Epoxy business. We deal with those pretty easily through our value chain. So I wouldn’t really be, I’m really not concerned about what happens with hydrocarbons, given our ability to pass those costs along and to manage those costs within our system. And of course, we do have options to make versus buy in our key raw materials around things like BPA, phenol and even epichlorohydrin.

Jeff Zekauskas

Thanks very much. How do you see changes in global Epoxy supply and demand, now that prices have elevated? Do you think that it will invite new competitors in or some of your competitors may expand capacity or you think, it will take quite a long time?

Scott Sutton

Thanks, Jeff. I mean, I’ll just start it out. And then Pat will give a little bit of color on maybe some specific areas of demand. But generally, Jeff, I mean demand is superb and improving across multiple segments that Epoxy goes into. Pat, do you want to give a little color?

Pat Dawson

Yes, Jeff. I think if you look at some of the major markets, we have a variety of markets that we sell into, the biggest markets being around industrial and performance coatings. But we also, electronics is very important to us, automotive, and of course, between automotive and electronics, they get intertwined with electrical vehicles, and a lot more printed circuit boards being put into electric vehicles, and that plays to our strength with what we do in electrical laminates in Asia, appliances very strong.

Oil and Gas, we’re seeing oil and gas improving, there’s more demand coming in oil and gas for fusion bonded Epoxy resins. And then I don’t know, Jeff, if you crossed this or not, but the Marine Coatings have been very, pretty much pardon the pun dead in the water for the last, I’d say five years. And shipbuilding, container ships or orders for new container ships in the first five months of this year were nearly double the orders for all of both 2019 and ’20. So this is demand for Epoxy that is yet to be realized, but will come in 2022 and 2023.

Jeff Zekauskas

Okay, I guess my follow-up, there have been so many outages in the United States because of weather in chlorine and caustic, which has tightened supply demand balances. If we don’t have outages to come and the industry gets back up to normal rates of production. Do you think the supply demand balance in chlorine will change in 2022?

Scott Sutton

Yes, I mean, Jeff this is Scott. I mean I guess two points, number one, we’re running our model. And so we control supply and demand characteristics of our business. That’s point one. But even if you fast forward to 2022, ECU demand growth outstrips ECU supply growth, same exact thing in Epoxy and Epichlorohydrin, right. Demand growth far outstrips supply growth. And if you take that to our small-caliber ammunition business, Winchester, you see exactly the same phenomena as well.

Frank Mitsch

Hey, good morning and congrats. Yes, as I look at your Epoxy results in the second quarter, and the guidance for a higher third quarter in a business, I mean, we’re starting to talk about an $800 million EBITDA run rate. I mean is that the sort of neighborhood that we should start thinking about for the Epoxy business?

Scott Sutton

Yes, hey thanks a lot, Frank. I mean, this is Scott, what I’ll say is we’re just not up to our target yet. And so we have some work to do in that business, right. We put a target out there of 30%, which may be at the end of the day get succeeded, but we still have some work to do. So get it to a range.

Josh Silverstein

Thanks. Good morning, guys. Just looking at the EBITDA guidance for next year to be at least up year over year, could you talk about the different business units, what you’re expecting there, I imagined Epoxy is probably moving higher with the margins, but anything that you can kind of break down by the different business units would be helpful?

Scott Sutton

Yes, I mean, we didn’t give, I appreciate the question. But we didn’t give a breakout by business of what’s expected there, but the reality is, I can indirectly answer your question by saying that in each business fundamentals get better and, in each business, we have a specific set of actions that are likely to add value as well.

You’ve heard me just to give examples of it, you’ve heard the team speak to some of those right, we release ourselves from more contractual restrictions and CAPV. We work the Upstream Linchpin product, more in Epoxy. And we’re going after more recreational shooters in our Winchester business by growing the pie, not taking share as well. So you might have a view that is broad based.

Josh Silverstein

Got you. That’s helpful for that. And then just as far as free cash flow deployment for next year, you guys are doing a billion dollars of debt reduction this year. Is there more balance sheet cleanup for next year or can you start to think about stepping up the return of capital profile, using cash for M&A? How are you guys thinking about that billion dollars potentially for next year?

Scott Sutton

No, we have a number of options, we’re thinking about, Todd do you want to give a little bit on that now?

Todd Slater

No problem. I mean if you think about it, where we sit in 2021 today, we’re generating $1.3 billion of levered free cash flow. That’s the cash flow yield of around 18% based on our current stock price. Clearly, we’re going to use about a billion dollars of that to reduce debt. And by reducing debt today, that really frees the balance sheet up to provide flexibility going forward to accomplish those structuring activities, including M&A, and parlaying activities as we’re, the parlaying activities were obviously much more capital light.

Josh Silverstein

Is there any necessary because balance sheet for next year or can you really just redeploy all that billion dollars for those other activities?

Scott Sutton

Yes, I’ll jump in, Todd. And so this is Scott, I mean a part of it will go toward structuring activities, assuming we’re successful at finding some targets that complement our model there, we’ll be exploring some other options as well. There’s not a lot more debt that we necessarily intend to take down. But we’ll be exploring, other ways to get value for shareholders.

Look I mean, at the end of the day, if this phenomenon of multiple compression keeps happening in our stock price, our equity becomes the best return for us. It sits at an 18% return right now.

Arun Viswanathan

Great, thanks for taking my question. Congrats on the results. So yes, I guess first question, just real simply, could you just reiterate or describe the impact of natural gas on your business? There has been some inflation there recently, is there any hedging that we should be aware of or what’s the impact there?

Scott Sutton

Yes, hey Arun, thanks a lot. I mean, yes, we do, Todd, you want to give a little more?

Todd Slater

Yes, sure. Arun, in the near-term, we’re very heavily hedged. So as you’ve heard from us before, about a quarter out, we’re fairly heavily hedged. So we have a high degree of cost certainty, and rolling four quarter basis. So your comment about natural gas, natural gas clearly has caught up lately, you really won’t see unless that is sustained, you will see that in our results over the next year, as our hedges start to roll-off. And back in the deck, we said the dollar changing in gas is worth $50 million of cost.

Arun Viswanathan

Great, thanks. And if I could just ask one more quick one. Have you had any impact from the container shortages globally? Is that something that’s a pressure point now or do you see that not as an issue for you? Thanks.

Scott Sutton

Yes, sure. I mean from a supply chain, there has been some impact that we’ve been able to deal with. The neatest impact is the future impact in Pat’s business of Epoxy where new ships are being built, many new containers to be utilized on these ships, all those things are coated inside and out with Epoxy. So it’s actually a forward positive impact.

Steve Byrne

And then maybe a similar question on the Epoxy business. Have you shifted volumes either more downstream or more upstream? And how does that shift get reflected in your PCI algorithm? I mean, you’re moving some portion of your – of the chlorine side of the ECU into that business, and that business is generating more profit. Is that reflected in your PCI?

Scott Sutton

Yes, so I mean Pat, do you want to give a little color?

Pat Dawson

Yes. I think, first of all, we’ve got a lot of flexibility in this prioritization of value overbuy and within the Epoxy value chain, right. So and we have a lot of flexibility. Obviously, we got a lot of flexibility on our pricing as demonstrated here over the last three months, six months or a year. So, we have a lot of flexibility to do that. And I think on mix, yes, we look across that whole portfolio of Epoxy’s from upstream EPI, and even converting that phenol into BPA, we’ve got options there that we’re discovering.

And then we have a lot of optionality of where we place that EPI molecule, and we monetize it in the form of liquid Epoxy resin, converted resin. We systematize that LER into things like laminates, wind energy. So a lot of flexibility. And then the last part of that mix flexibility is around merchant versus captive. So that’s kind of the way we think of it. It’s a pretty dynamic creative of where we can extract the best value across that whole chain.

Roger Spitz

Thank you so much. My second one is you’re clearly changing the chlorine, caustic, LER pricing paradigm in a very significant way. What is changed for you to be successful? I mean, clearly, it’s your will and drive. But is there any other change in the industry dynamic that is allowing you to turn this paradigm on its head in an extraordinarily positive way? Thank you.

Todd Slater

No, I mean, I wouldn’t say it’s industry dynamic. I would just say that, Olin is controlling its own destiny and changing its own outcome. In other words, we’re the leader in elemental chlorine. We have a contrarian model that we are focused on every day to go get the value. We have a list of clear actions. And we’ve identified elemental chlorine as the number one driver of this company’s overall value evolution. And it is a ratchet and a linchpin because of that, and that’s how we treat it. And when you focus on it that much, you’re going to liberate a lot of value.

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August 2, 2021

Epoxy Comments from Huntsman

Huntsman Corporation (HUN) CEO Peter Huntsman on Q2 2021 Results – Earnings Call Transcript

Jul. 30, 2021 4:31 PM ETHuntsman Corporation (HUN)3 Comments

Q2: 2021-07-30 Earnings Summary

EPS of $0.86 beats by $0.05 | Revenue of $2.02B (62.31% Y/Y) beats by $162.34M

Huntsman Corporation (NYSE:HUN) Q2 2021 Earnings Conference Call July 30, 2021 10:00 AM ET

Company Participants

Ivan Marcuse – Vice President, Investor Relations

Peter Huntsman – Chairman, President & Chief Executive Officer

Phil Lister – Executive Vice President & Chief Financial Officer

Tony Hankins – President, Polyurethanes

Peter Huntsman

Let’s turn to slide number 5. Advanced Materials reported adjusted EBITDA of $58 million in the quarter, a significant improvement year-over-year driven primarily by the continuing recovery of our core industrial businesses and improving contributions from our recent acquisitions.

Excluding the acquisition of Gabriel Performance Products, sales revenue in Advanced Materials increased to 42% compared to the second quarter of 2020 generating adjusted EBITDA margins of 19%.

Aerospace results were flat in the quarter versus the prior year. Although, we saw another quarter of sequential improvement, which we expect to see again in the third quarter. We still think a full recovery to pre-pandemic levels in this segment will take another year or two given our exposure to the wide-body planes used more in international travel, but we’re encouraged that the recovery is tracking better than we had anticipated earlier this year.

Excluding aerospace sales in our other core specialty businesses experienced growth year-over-year and are now slightly above 2019 levels. Additionally, the integration of CVC Thermoset Specialties and Gabriel Performance Products continues on plan. We remain confident that we will achieve the total run rate synergies of $23 million we communicated at the time each of these respective transactions were announced.

Overall our Advanced Materials division is tracking well and our aerospace — and as aerospace recovers we expect this position to consistently generate adjusted EBITDA margins in excess of 20%.

We will continue to grow this division organically and through targeted bolt-on acquisitions. Third quarter adjusted EBITDA for Advanced Materials should look similar quarter-over-quarter subject to typical seasonality and be between $50 million and $55 million.

Our Advanced Materials division has gone through a meaningful change this past year, as we’ve purchased and integrated our recent acquisitions of CVC and Gabriel. We’ll see further cost optimization and commercial synergies in excess of $13 million by 2023 building upon the $10 million we will achieve this year. We will also see the return of our aerospace business that will further enhance our EBITDA by an additional $40 million to $50 million that is fully recovered. Our Textile Effects business will not only see the continued recovery of its retail customer base, but the completion of our Bangladeshi expansion that will deliver $10 million annually. In short, in the coming quarters the groundwork is being laid for over $150 million of additional EBITDA that will take place across our businesses. Aside from aerospace this assumes no further recovery in the market. Additionally, we have a very strong balance sheet that affords us to aggressively pursue M&A opportunities. This will be done where we have true synergies growth opportunities and the ability to stabilize our earnings.

Having said that, I am surprised at some of the multiples that have been seen in some of the recent transactions in this industry. As I have said before, we will be disciplined. The quality of our earnings will continue to be of paramount importance. This past quarter notwithstanding when we experienced a perfect storm of third-party outages unplanned inventory build and associated lost sales most of which will be recovered in the second half of this year, we are confident of our ability to deliver greater than 25% free cash flow to EBITDA this year. Should present market conditions prevail, we will see this percentage of free cash flow to EBITDA increase to 40% this next year.

Alex Yefremov

Thank you, and good morning, everyone. Peter, do you expect typical seasonality in the fourth quarter in polyurethanes and Advanced Materials, or given the trends you just discussed could we see maybe flat Q4 versus Q3?

Peter Huntsman

Yes, I do see seasonality. I mean, there will be the typical closures. Every year for some reason we have this phenomenon called Thanksgiving and Christmas, the New Year’s that seemingly slow things down. And yeah, we will see that. I do think that to offset – my only point in saying that, I’m optimistic on the fourth quarter is I think that some of that seasonality will be offset by possible – possible supply shortages, and price increases. And if those things happen then you’ll see some of that seasonality will be muted. But yeah, there will be a slowdown in demand, and that’s just something that will happen.

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