May 4, 2021

BASF Increasing BDO and PTMEG Prices

BASF to increase price for diols and derivatives in North America

FLORHAM PARK, NJ, May 4, 2021 – Effective May 15, 2021 or as existing contracts permit, BASF will increase prices in North America for 1,4-Butanediol (BDO) and derivatives.

Product                                                                                              Price Increase

1,4- Butanediol (BDO)                                                                       $0.15 / lb

Gamma-Butyrolactone (GBL)                                                            $0.15 / lb

N-Methylpyrrolidone (NMP)                                                               $0.15 / lb

Tetrahydrofuran (THF)                                                                        $0.25 / lb

Polytetramethylene ether glycol (PolyTHF®)                                     $0.25 / lb

BDO and its derivatives are used for producing engineering plastics, polyurethanes, pharmaceuticals, solvents and elastic spandex fibers.           

https://www.basf.com/us/en/media/market-news-/2021/basf-to-increase-price-for-diols-and-derivatives-in-north-americ0.html

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.

https://www.fool.com/earnings/call-transcripts/2021/04/30/huntsman-corp-hun-q1-2021-earnings-call-transcript/

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.

https://www.fool.com/earnings/call-transcripts/2021/04/30/huntsman-corp-hun-q1-2021-earnings-call-transcript/

May 3, 2021

Urethane Comments from Covestro Analysts Call

Covestro AG (CVVTF) CEO Markus Steilemann on Q1 2021 Results – Earnings Call Transcript

Apr. 28, 2021 4:57 PM ETCovestro AG (CVVTF), COVTY

Covestro AG (OTCPK:CVVTF) Q1 2021 Earnings Conference Call April 28, 2021 9:00 AM ET

Company Participants

Ronald Köhler – Investor Relations

Markus Steilemann – CEO

Thomas Toepfer – CFO

Markus Steilemann

Thank you very much, Ronald and very good morning. Good day and good afternoon to everyone on the call. As you can see from Slide #2, our financial highlights for the first quarter 2021. The first quarter 2021 performance was well above previous year’s level. Also, the first quarter 2021 performance was well above pre-pandemic levels of 2019. The trend of dynamic demand recovery and increasing product margin starts in the second half of 2020 is continuing. This trend is also continuing for the first half of 2021. In total, the Q1 core volumes were 5.3% above previous year levels.

EBITDA came in at €743 million in line with our Q1 guidance of €700 million to €780 million and as pre-announced on April the 13th. We saw very strong free operating cash flow of €380 million. The RFM acquisition was closed on April 1 and on closing day we welcomed 1,800 highly motivated new colleagues. We raised our earnings guidance for full year 2021 as announced on April 13th. And we see various short and long-term trends that are partly opposing each other. This leads to a rather low visibility.

Now let’s turn to Page #3. The core volumes as I mentioned before increased by 5.3%. Prior year basis was already impacted by the coronavirus pandemic, especially in Asia Pacific. The current quarter is burdened by unplanned outages, mid single-digit percentage reduction of global core volumes in Q1.

If you now look a little bit deeper into the regions. On low comparable figures, the volume rebound compared to prior year of 27.3% in APAC is very high. For another perspective, volume growth of 6% versus the first quarter of 2019, so pre-pandemic. China was clear driver and the demand rebound pushes volume growth in all key industries to rate of 50% to 80% year-on-year versus the low previous year basis.

We had a solid underlying demand in Europe. Actual volume growth was limited by constrained polyols availability. We also saw strong underlying demand in North America. Declining volumes were just the result of constrained availability in all product groups after the U.S winter storm Uri.

Now let’s turn the picture to an analysis by industries. The ranking is done by kilotons sold through specific industries. Furniture we saw a mixed picture. Overall a small decline, yet Asia Pacific 20% up year-on-year. On construction, up 3% year-on-year globally driven by good demand in the Europe, Middle East, Latin America region as well as Asia Pacific region and we saw a decline year-on-year in North America due to limited availability mainly of MDI and polyols. In automotive and transportation, plus 14% year-on-year globally, again, driven by Asia Pacific and slightly better than global auto production. America in diverse industries, small business but continued dynamic growth of 13% year-on-year.

Now let’s turn to Page#4. Longer term quarterly comparison underscores the performance is not only above previous year, but also above pre-pandemic levels of 2019. The first quarter 2001 sales were up plus 4.2% and volumes plus 1.0% compared to pre-pandemic levels of the first quarter 2019. The year-on-year top line comparisons benefits from low comparable figures in the first quarter 2020 impacted as mentioned earlier by the pandemic.

Operationally, we saw increasing earnings momentum that started in the second half of 2020 continued into the first half of 2021. Improving industry trading at the same time and industry trading conditions as well as industry margins allowed to increase selling prices over feedstock prices, especially in PUR. Compared to the first quarter 2020, EBITDA strongly benefited from positive pricing data as well as from higher volumes. Compensating provisions for variable compensation that increased in [indiscernible].

We delivered 22.5 percentage point in margin in the first quarter of 2021. And this is the highest EBITDA margin for 10 quarters, but still below historic margin peak of 21.8% in the first quarter of 2018.

Now let’s turn to the segments. Turn to Page #5 [technical difficulty] Polyurethanes. Core volume growth was only 2.5% year-on-year despite solid underlying demand. We continue to be sold out. Of all segments, PUR most burdened by the constrained availability — constrained availability after the U.S winter storm Uri. Higher prices, year-on-year drove sales up 36.1% and positive pricing data contributed vast majority of year-on-year EBITDA growth, compensating higher provisions for variable compensation.

Some remarks on the trading environment. The current demand is outstripping [technical difficulty] to deliver. Based on [indiscernible] evidence, finished goods inventory seemed very low in value chain, especially in North America and partly in Europe. The global prices continue to move up in North America and partly in Europe, but declining in Asia Pacific. Overall, we assume slightly declining prices during the second quarter.

Based on IHS data, current outage rate expected to decline during the second quarter or latest in the third quarter. Let me give you a few examples. First example on MDI global outage rate, we assume it is currently around 20% in the first quarter, and that is expected to decline to around 15% in the second quarter and 10% in the third quarter. On TDI, the global outage rate is around 15% in the first quarter, expected to be around 20% in the second quarter, but declined to around 10% in the third quarter. Future unplanned outages are for sure not considered.

Christian Faitz

Yes, thank you very much. Good afternoon, everybody. I have one question, please. It’s on cars. Can you please explain the volume weakness in cars in Europe? Is this luxury car industry related? And also maybe in that context, given the SME supply shortage in the car industry, Markus you alluded to that a little bit already. You can confirm that B2C pent up demand from automotive in the second half of this year, right.

Markus Steilemann

Yes. Hi, Christian. Thanks for your question. If we look at the — as you call it, volume weakness of cars in Europe, that was referring back to a labor plant force majeure that we had. And here particularly to give you a little bit more detail, we are cooling down some of the resulting product mix to a very low temperature. So we’re talking about minus 30 to minus 40 degrees, and one of the external third-party providers of this cooling device actually had to declare a technical failure. And that’s why we could only operate at very limited rates that has lowered our yield. And that also has therefore lower the output of final products. And that was the main reason for the — as you called it, volume weakness in Europe. So if you want to say so, force majeure demand was very healthy in this context, and we really struggled to fulfill all customer orders here. And we see also that the demand is continued to be very good in this area. I hope that answers your question.

Charlie Webb

Thanks a lot. And thank you very much for taking the questions. Maybe just one around outage issues and force majeures. Could just update us on current situation for Covestro as it relates to force majeure outage issues, do you have any lingering issues kind of coming from the [indiscernible] now resolved. Just trying to understand that mid double-digit impact you see in Q1. Is there anything kind of lingering into Q2, anything that will curtail volumes? And then second question, I know it’s very early, perhaps, in terms of the integration of RFM. But any kind of update how that business is trading thus far this year? Anything surprised you? And are you still confident on the synergy delivery?

Markus Steilemann

Yes, thanks, Charlie, for the question. I will take the first one. Thomas then will give you, let’s say the trading update on RFM. The situation in the United States is and based on that we still all under force majeure, and all three product groups and the inventories given the very challenging situation, us as well as for customers and suppliers are still very low. And therefore we assume that the force majeure still might stay in Q2, and some just let me emphasize this, some might be even carry into the third quarter because we have to do really some repair work on our plants, but also something is very important. We’re talking here about an entire supply chain effect. That means not only us, but also our suppliers are affected. And if you think about the massive, let’s say, repair work that needs to be done almost in the entire region, you might understand that we are slowly and steadily recovering, but we are still recovering and that’s why we’re still in the force majeure. With that I would like to hand over to Thomas.

Thomas Toepfer

Yes, Charlie, and with respect to RFM, I can tell you we’re seeing very good demand. And in terms of the numbers and the business, I mean, the — [indiscernible] numbers for 2020, but also then the outlook for 2021 I would characterize this as slightly better than what we had expected in our due diligence business case. So therefore, no surprise, if any, on the positive side. And in terms of the closing and also the welcoming of the 1,800 new employees, I would say this went extremely smooth. So we do think that this is a great fit, not only from the business perspective, but also from the cultural perspective. And therefore, I would say the — what we experienced in terms of openness, and in terms of collaboration is absolutely great. And therefore, I would say very good start into the integration process, which will take place over the course of the year.

Charlie Webb

That’s very helpful. Maybe just one really quick follow-up on the first point around the force majeure. Am I right in thinking that when we kind of talked about the U.S prices lagging rest of the world, much that we can kind of put down to force majeure as you can’t really increase prices if you’re under force majeure conditions, and therefore, that is why the pricing is lagging a little bit in the U.S. Is that fair?

Markus Steilemann

Well, first and foremost, I think the United States market in general and that is a long-term experience that we have observed over many years. The price environment is anyhow less volatile. And that is, I think, significantly different for example, the markets in the Middle East, but also the markets in Asia Pacific and also partly that is due to the situation that you have described the force majeure situation. So there we have, at least, strictly limited opportunities. This is not totally excluded under specific, let’s say circumstances, take pricing formulas and things like that. But let’s say, if you don’t have any pricing formula in place, there is limited opportunities. So there’s partially, also the suggestions you made the reason for that.

Laurence Alexander

Hello. Could you give a little bit of perspective on pent up demand in the furniture markets, particularly looking at your kind of benchmark for the full year and market demand growth? Do you expect Covestro to be able to outgrow that market? And also as furniture demand recover, should you have a positive mix effect?

Markus Steilemann

Yes, Laurence. Very good morning to you. I assume you are here in the U.S. So let me give an answer. The pent up demand in furniture, the bottleneck why we haven’t seen that say that strong demand was not demand issue, but what it was a supply issue in terms of limitations for polyols. And if you take the chemistry into consideration to produce a soft form you need two parts of polyols and one part of TDI, just roughly speaking. That means whenever you’re short in polyols, that significantly hampers the opportunity to sell also that context TDI and therefore significantly drives down the opportunity as we go short in supply to really capture the still strong demand for respective applications in the market.

And if you now look further out, catching up will be difficult as we most likely will not be able to recover the lost production. But that demand that we have not caught up, or that we have not, let’s say, positively got into our books for the first quarter we’re not, let’s say, lead to higher sales in the second quarter, but we’ll just see them the normal amount of the second quarter. So in a sense, that losses of the first quarter are lost for the entire year.

Chetan Udeshi

Yes, hi. A slightly different question than usual. I was just trying to understand, can you maybe help us with any data or insights into what is the recyclability rate for polyurethanes and polycarbonate, in general. It seems for the whole plastic industry the recyclability is still pretty low 15% also. I mean, I was just trying to understand how much it is for polyurethane and polycarbs? Thanks.

Markus Steilemann

Chetan, thank you much for the question. And I would say it is — the recycling rate is still improvable, yes, so to put it that way. Honestly speaking, there’s very limited amount today of polyurethane components being recycled be it for rigid forms or be it for soft forms, simple reason is most of these materials are not accessible for classical so called mechanical recycling that you normally use, for example, for poly — for PET bottles. However, the entire industry is not only putting significant research and development efforts into this topic, but we see already first successes, where we could go for advanced recycling methodologies that would add up to the mechanical recycling opportunities and here particularly, so called chemical recycling.

And what many companies are currently working on is, for example, soft foam mattresses, because every year a few 100 million soft foam mattresses are produced, and a few 100 soft foam mattresses are currently either disposed and landfill are mechanically recycled, but therefore downgraded for example, into carpets. But also an even larger part is currently used as an exchange for fossil fuels and being incinerated, for example, for concrete — for the production of concrete or other purposes, for example, to recover the energy and produce for example electricity. So long story short, currently, there is a super, super limited amount of soft foam as well as rigid forms being recovered.

However, we have recently made a breakthrough discovery, which is we can now extract the building blocks from soft foam mattresses, and use those building blocks to produce entirely new soft foam mattresses without any compromise on quality and hygiene standards for the end consumers. And we have successfully demonstrated that recyclability already in a pilot plant that is running since now 4 weeks at all operations in Leverkusen, Germany. That means we have not only lab scale, but also technical scales currently demonstrated that this works. And this has gained significant traction also with value chain partners in the industry. That means we see huge opportunities in closing the loop here on this very, very large, let’s say, consumer product market for soft furniture and soft mattresses. And that’s why we’re very confident that was in the next decade, we will see significantly ramping up recycling rates also for this respective application.

And what is the main difference for our, let’s say, recently developed and now in the lab scale and technical scale test the process that we not only can recover the respective polyols which many other current, let’s say, suggested approaches also can do, but we can also recover the precursor for TDI. And that is absolutely new and based on our knowledge currently in a continuous process, not possible. And that’s why we see huge opportunities here.

Chetan Udeshi

Thank you.

Operator

And the next question comes from Isha Sharma, Stifel. Please go ahead with your question.

Isha Sharma

Hi, good afternoon, gentlemen. Thank you for taking my questions. The first one is reference that I want to make the Dow CEO expect polyols tightness [ph] to continue and also mentioned that he expects good operating rates through the year at isocyanates mainly driven by demand in construction and automotive. He also mentioned that the inventory buildup might only be possible by Q4. Would you subscribe to that view? And the second one is for Markus. Markus, you mentioned at the start of the call some opposing trends, which gives you less visibility. Were you referring to the regional development or end markets? Could you elaborate on that please a little bit? And just the last one, on the Q2 guidance, what needs to happen for you to achieve the upper end of the guidance?

Thomas Toepfer

Yes, Isha, let me start with the last question, what has to happen to achieve the upper end of the guidance. Simply speaking nothing in the sense that the upper end of the guidance assumes that the prices will stay at the level where they currently are. The midpoint of the guidance very assumed a certain decline starting in June, which we currently don’t see yet just to be very clear, because our visibility only as into the April numbers which we have and then of course into May, but as also for the entire year guidance, we wanted to stay cautious also as for the second quarter.

With respect to the full year, it’s always good to hear that others are more optimistic. That is good. I think we are, maybe by nature and character a little bit more cautious. And therefore, I think for our guidance applies the thinking that I had described in the earlier question. So we do assume and factor in a decline in margin in the second half of the year. Full stop, which we currently however, don’t see and therefore there is a certain cautiousness built in.

Markus Steilemann

Yes, maybe, Isha, also hello from my side as [indiscernible] addressed, let’s say the question on the opposing trends to me. There is a bigger, let’s say, picture and a more specific picture. The bigger picture is if you look at the current development of the pandemic, we still have to say that some countries obviously are doing very well, some countries at least have seen the end of the light of the tunnel. But some countries are still in a catastrophic situation.

Many countries, for example, in South America, but also just mentioning the Indian subcontinent in this context. So therefore, we will maybe see a very mixed picture in terms of overall economic growth. I’m very positive about the development in the United States, positive about China. And let’s say cautiously optimistic about at least some countries in Europe. But other than that, we also will see countries and also respective economies where the overall situation in terms of demand will not improve and maybe not improved for a very long time. So that’s the overall picture, why we see this opposing trends.

And if you just now, particularly look at our respective industries, what we also have elaborated in our presentation when we talked about the so-called industry utilization, and here particularly the utilization based on available capacity due to many unplanned shutdowns or simply no availability for some players on raw materials. There is an opportunity for example, short-term more available capacity will come to the market, which will then bring us closer to the lower end of the guidance. However, it is also the midterm market trend, that those capacities will be quicker also slower being absorbed.

And, for example, we can also expect to get a short market in MDI, and also slightly better market over time in TDI. So it is basically another reason behind what Thomas has alluded to in terms of our limited visibility in the third and also in the fourth quarter. And therefore also our, let’s say, current challenge in terms of the full year guidance, and here in particular on the second half. So that is a little bit the full picture. It is all in the end of the day, the same phenomena what we’re describing.

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May 3, 2021

Urethane Comments from Covestro Analysts Call

Covestro AG (CVVTF) CEO Markus Steilemann on Q1 2021 Results – Earnings Call Transcript

Apr. 28, 2021 4:57 PM ETCovestro AG (CVVTF), COVTY

Covestro AG (OTCPK:CVVTF) Q1 2021 Earnings Conference Call April 28, 2021 9:00 AM ET

Company Participants

Ronald Köhler – Investor Relations

Markus Steilemann – CEO

Thomas Toepfer – CFO

Markus Steilemann

Thank you very much, Ronald and very good morning. Good day and good afternoon to everyone on the call. As you can see from Slide #2, our financial highlights for the first quarter 2021. The first quarter 2021 performance was well above previous year’s level. Also, the first quarter 2021 performance was well above pre-pandemic levels of 2019. The trend of dynamic demand recovery and increasing product margin starts in the second half of 2020 is continuing. This trend is also continuing for the first half of 2021. In total, the Q1 core volumes were 5.3% above previous year levels.

EBITDA came in at €743 million in line with our Q1 guidance of €700 million to €780 million and as pre-announced on April the 13th. We saw very strong free operating cash flow of €380 million. The RFM acquisition was closed on April 1 and on closing day we welcomed 1,800 highly motivated new colleagues. We raised our earnings guidance for full year 2021 as announced on April 13th. And we see various short and long-term trends that are partly opposing each other. This leads to a rather low visibility.

Now let’s turn to Page #3. The core volumes as I mentioned before increased by 5.3%. Prior year basis was already impacted by the coronavirus pandemic, especially in Asia Pacific. The current quarter is burdened by unplanned outages, mid single-digit percentage reduction of global core volumes in Q1.

If you now look a little bit deeper into the regions. On low comparable figures, the volume rebound compared to prior year of 27.3% in APAC is very high. For another perspective, volume growth of 6% versus the first quarter of 2019, so pre-pandemic. China was clear driver and the demand rebound pushes volume growth in all key industries to rate of 50% to 80% year-on-year versus the low previous year basis.

We had a solid underlying demand in Europe. Actual volume growth was limited by constrained polyols availability. We also saw strong underlying demand in North America. Declining volumes were just the result of constrained availability in all product groups after the U.S winter storm Uri.

Now let’s turn the picture to an analysis by industries. The ranking is done by kilotons sold through specific industries. Furniture we saw a mixed picture. Overall a small decline, yet Asia Pacific 20% up year-on-year. On construction, up 3% year-on-year globally driven by good demand in the Europe, Middle East, Latin America region as well as Asia Pacific region and we saw a decline year-on-year in North America due to limited availability mainly of MDI and polyols. In automotive and transportation, plus 14% year-on-year globally, again, driven by Asia Pacific and slightly better than global auto production. America in diverse industries, small business but continued dynamic growth of 13% year-on-year.

Now let’s turn to Page#4. Longer term quarterly comparison underscores the performance is not only above previous year, but also above pre-pandemic levels of 2019. The first quarter 2001 sales were up plus 4.2% and volumes plus 1.0% compared to pre-pandemic levels of the first quarter 2019. The year-on-year top line comparisons benefits from low comparable figures in the first quarter 2020 impacted as mentioned earlier by the pandemic.

Operationally, we saw increasing earnings momentum that started in the second half of 2020 continued into the first half of 2021. Improving industry trading at the same time and industry trading conditions as well as industry margins allowed to increase selling prices over feedstock prices, especially in PUR. Compared to the first quarter 2020, EBITDA strongly benefited from positive pricing data as well as from higher volumes. Compensating provisions for variable compensation that increased in [indiscernible].

We delivered 22.5 percentage point in margin in the first quarter of 2021. And this is the highest EBITDA margin for 10 quarters, but still below historic margin peak of 21.8% in the first quarter of 2018.

Now let’s turn to the segments. Turn to Page #5 [technical difficulty] Polyurethanes. Core volume growth was only 2.5% year-on-year despite solid underlying demand. We continue to be sold out. Of all segments, PUR most burdened by the constrained availability — constrained availability after the U.S winter storm Uri. Higher prices, year-on-year drove sales up 36.1% and positive pricing data contributed vast majority of year-on-year EBITDA growth, compensating higher provisions for variable compensation.

Some remarks on the trading environment. The current demand is outstripping [technical difficulty] to deliver. Based on [indiscernible] evidence, finished goods inventory seemed very low in value chain, especially in North America and partly in Europe. The global prices continue to move up in North America and partly in Europe, but declining in Asia Pacific. Overall, we assume slightly declining prices during the second quarter.

Based on IHS data, current outage rate expected to decline during the second quarter or latest in the third quarter. Let me give you a few examples. First example on MDI global outage rate, we assume it is currently around 20% in the first quarter, and that is expected to decline to around 15% in the second quarter and 10% in the third quarter. On TDI, the global outage rate is around 15% in the first quarter, expected to be around 20% in the second quarter, but declined to around 10% in the third quarter. Future unplanned outages are for sure not considered.

Christian Faitz

Yes, thank you very much. Good afternoon, everybody. I have one question, please. It’s on cars. Can you please explain the volume weakness in cars in Europe? Is this luxury car industry related? And also maybe in that context, given the SME supply shortage in the car industry, Markus you alluded to that a little bit already. You can confirm that B2C pent up demand from automotive in the second half of this year, right.

Markus Steilemann

Yes. Hi, Christian. Thanks for your question. If we look at the — as you call it, volume weakness of cars in Europe, that was referring back to a labor plant force majeure that we had. And here particularly to give you a little bit more detail, we are cooling down some of the resulting product mix to a very low temperature. So we’re talking about minus 30 to minus 40 degrees, and one of the external third-party providers of this cooling device actually had to declare a technical failure. And that’s why we could only operate at very limited rates that has lowered our yield. And that also has therefore lower the output of final products. And that was the main reason for the — as you called it, volume weakness in Europe. So if you want to say so, force majeure demand was very healthy in this context, and we really struggled to fulfill all customer orders here. And we see also that the demand is continued to be very good in this area. I hope that answers your question.

Charlie Webb

Thanks a lot. And thank you very much for taking the questions. Maybe just one around outage issues and force majeures. Could just update us on current situation for Covestro as it relates to force majeure outage issues, do you have any lingering issues kind of coming from the [indiscernible] now resolved. Just trying to understand that mid double-digit impact you see in Q1. Is there anything kind of lingering into Q2, anything that will curtail volumes? And then second question, I know it’s very early, perhaps, in terms of the integration of RFM. But any kind of update how that business is trading thus far this year? Anything surprised you? And are you still confident on the synergy delivery?

Markus Steilemann

Yes, thanks, Charlie, for the question. I will take the first one. Thomas then will give you, let’s say the trading update on RFM. The situation in the United States is and based on that we still all under force majeure, and all three product groups and the inventories given the very challenging situation, us as well as for customers and suppliers are still very low. And therefore we assume that the force majeure still might stay in Q2, and some just let me emphasize this, some might be even carry into the third quarter because we have to do really some repair work on our plants, but also something is very important. We’re talking here about an entire supply chain effect. That means not only us, but also our suppliers are affected. And if you think about the massive, let’s say, repair work that needs to be done almost in the entire region, you might understand that we are slowly and steadily recovering, but we are still recovering and that’s why we’re still in the force majeure. With that I would like to hand over to Thomas.

Thomas Toepfer

Yes, Charlie, and with respect to RFM, I can tell you we’re seeing very good demand. And in terms of the numbers and the business, I mean, the — [indiscernible] numbers for 2020, but also then the outlook for 2021 I would characterize this as slightly better than what we had expected in our due diligence business case. So therefore, no surprise, if any, on the positive side. And in terms of the closing and also the welcoming of the 1,800 new employees, I would say this went extremely smooth. So we do think that this is a great fit, not only from the business perspective, but also from the cultural perspective. And therefore, I would say the — what we experienced in terms of openness, and in terms of collaboration is absolutely great. And therefore, I would say very good start into the integration process, which will take place over the course of the year.

Charlie Webb

That’s very helpful. Maybe just one really quick follow-up on the first point around the force majeure. Am I right in thinking that when we kind of talked about the U.S prices lagging rest of the world, much that we can kind of put down to force majeure as you can’t really increase prices if you’re under force majeure conditions, and therefore, that is why the pricing is lagging a little bit in the U.S. Is that fair?

Markus Steilemann

Well, first and foremost, I think the United States market in general and that is a long-term experience that we have observed over many years. The price environment is anyhow less volatile. And that is, I think, significantly different for example, the markets in the Middle East, but also the markets in Asia Pacific and also partly that is due to the situation that you have described the force majeure situation. So there we have, at least, strictly limited opportunities. This is not totally excluded under specific, let’s say circumstances, take pricing formulas and things like that. But let’s say, if you don’t have any pricing formula in place, there is limited opportunities. So there’s partially, also the suggestions you made the reason for that.

Laurence Alexander

Hello. Could you give a little bit of perspective on pent up demand in the furniture markets, particularly looking at your kind of benchmark for the full year and market demand growth? Do you expect Covestro to be able to outgrow that market? And also as furniture demand recover, should you have a positive mix effect?

Markus Steilemann

Yes, Laurence. Very good morning to you. I assume you are here in the U.S. So let me give an answer. The pent up demand in furniture, the bottleneck why we haven’t seen that say that strong demand was not demand issue, but what it was a supply issue in terms of limitations for polyols. And if you take the chemistry into consideration to produce a soft form you need two parts of polyols and one part of TDI, just roughly speaking. That means whenever you’re short in polyols, that significantly hampers the opportunity to sell also that context TDI and therefore significantly drives down the opportunity as we go short in supply to really capture the still strong demand for respective applications in the market.

And if you now look further out, catching up will be difficult as we most likely will not be able to recover the lost production. But that demand that we have not caught up, or that we have not, let’s say, positively got into our books for the first quarter we’re not, let’s say, lead to higher sales in the second quarter, but we’ll just see them the normal amount of the second quarter. So in a sense, that losses of the first quarter are lost for the entire year.

Chetan Udeshi

Yes, hi. A slightly different question than usual. I was just trying to understand, can you maybe help us with any data or insights into what is the recyclability rate for polyurethanes and polycarbonate, in general. It seems for the whole plastic industry the recyclability is still pretty low 15% also. I mean, I was just trying to understand how much it is for polyurethane and polycarbs? Thanks.

Markus Steilemann

Chetan, thank you much for the question. And I would say it is — the recycling rate is still improvable, yes, so to put it that way. Honestly speaking, there’s very limited amount today of polyurethane components being recycled be it for rigid forms or be it for soft forms, simple reason is most of these materials are not accessible for classical so called mechanical recycling that you normally use, for example, for poly — for PET bottles. However, the entire industry is not only putting significant research and development efforts into this topic, but we see already first successes, where we could go for advanced recycling methodologies that would add up to the mechanical recycling opportunities and here particularly, so called chemical recycling.

And what many companies are currently working on is, for example, soft foam mattresses, because every year a few 100 million soft foam mattresses are produced, and a few 100 soft foam mattresses are currently either disposed and landfill are mechanically recycled, but therefore downgraded for example, into carpets. But also an even larger part is currently used as an exchange for fossil fuels and being incinerated, for example, for concrete — for the production of concrete or other purposes, for example, to recover the energy and produce for example electricity. So long story short, currently, there is a super, super limited amount of soft foam as well as rigid forms being recovered.

However, we have recently made a breakthrough discovery, which is we can now extract the building blocks from soft foam mattresses, and use those building blocks to produce entirely new soft foam mattresses without any compromise on quality and hygiene standards for the end consumers. And we have successfully demonstrated that recyclability already in a pilot plant that is running since now 4 weeks at all operations in Leverkusen, Germany. That means we have not only lab scale, but also technical scales currently demonstrated that this works. And this has gained significant traction also with value chain partners in the industry. That means we see huge opportunities in closing the loop here on this very, very large, let’s say, consumer product market for soft furniture and soft mattresses. And that’s why we’re very confident that was in the next decade, we will see significantly ramping up recycling rates also for this respective application.

And what is the main difference for our, let’s say, recently developed and now in the lab scale and technical scale test the process that we not only can recover the respective polyols which many other current, let’s say, suggested approaches also can do, but we can also recover the precursor for TDI. And that is absolutely new and based on our knowledge currently in a continuous process, not possible. And that’s why we see huge opportunities here.

Chetan Udeshi

Thank you.

Operator

And the next question comes from Isha Sharma, Stifel. Please go ahead with your question.

Isha Sharma

Hi, good afternoon, gentlemen. Thank you for taking my questions. The first one is reference that I want to make the Dow CEO expect polyols tightness [ph] to continue and also mentioned that he expects good operating rates through the year at isocyanates mainly driven by demand in construction and automotive. He also mentioned that the inventory buildup might only be possible by Q4. Would you subscribe to that view? And the second one is for Markus. Markus, you mentioned at the start of the call some opposing trends, which gives you less visibility. Were you referring to the regional development or end markets? Could you elaborate on that please a little bit? And just the last one, on the Q2 guidance, what needs to happen for you to achieve the upper end of the guidance?

Thomas Toepfer

Yes, Isha, let me start with the last question, what has to happen to achieve the upper end of the guidance. Simply speaking nothing in the sense that the upper end of the guidance assumes that the prices will stay at the level where they currently are. The midpoint of the guidance very assumed a certain decline starting in June, which we currently don’t see yet just to be very clear, because our visibility only as into the April numbers which we have and then of course into May, but as also for the entire year guidance, we wanted to stay cautious also as for the second quarter.

With respect to the full year, it’s always good to hear that others are more optimistic. That is good. I think we are, maybe by nature and character a little bit more cautious. And therefore, I think for our guidance applies the thinking that I had described in the earlier question. So we do assume and factor in a decline in margin in the second half of the year. Full stop, which we currently however, don’t see and therefore there is a certain cautiousness built in.

Markus Steilemann

Yes, maybe, Isha, also hello from my side as [indiscernible] addressed, let’s say the question on the opposing trends to me. There is a bigger, let’s say, picture and a more specific picture. The bigger picture is if you look at the current development of the pandemic, we still have to say that some countries obviously are doing very well, some countries at least have seen the end of the light of the tunnel. But some countries are still in a catastrophic situation.

Many countries, for example, in South America, but also just mentioning the Indian subcontinent in this context. So therefore, we will maybe see a very mixed picture in terms of overall economic growth. I’m very positive about the development in the United States, positive about China. And let’s say cautiously optimistic about at least some countries in Europe. But other than that, we also will see countries and also respective economies where the overall situation in terms of demand will not improve and maybe not improved for a very long time. So that’s the overall picture, why we see this opposing trends.

And if you just now, particularly look at our respective industries, what we also have elaborated in our presentation when we talked about the so-called industry utilization, and here particularly the utilization based on available capacity due to many unplanned shutdowns or simply no availability for some players on raw materials. There is an opportunity for example, short-term more available capacity will come to the market, which will then bring us closer to the lower end of the guidance. However, it is also the midterm market trend, that those capacities will be quicker also slower being absorbed.

And, for example, we can also expect to get a short market in MDI, and also slightly better market over time in TDI. So it is basically another reason behind what Thomas has alluded to in terms of our limited visibility in the third and also in the fourth quarter. And therefore also our, let’s say, current challenge in terms of the full year guidance, and here in particular on the second half. So that is a little bit the full picture. It is all in the end of the day, the same phenomena what we’re describing.

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