The Urethane Blog

Epoxy Comments from Huntsman Investors’ Call

Peter Huntsman

Our power business, largely going into power grid infrastructure was least impacted with volumes down approximately 2%. We did see modestly improving trends in most other markets in June. Despite the significantly lower sales, the business was able to generate an adjusted EBITDA margin of 16%, owing to stable pricing and the business’ ability to quickly adjust certain fixed costs. On May 18, we closed on our CVC Thermoset Specialties acquisition, which contributed slightly to the segment EBITDA. CVC is approximately 30% weighted to auto and approximately 15% weighted to aerospace.

The business had built inventory prior to our close. And as a result, we estimate a related incremental cost of nearly $5 million during the second half of 2020 as we approximate right size the inventory. Excluding this adjustment, CVC is performing roughly in line with our Advanced Materials business. On day one of ownership, we immediately began integrating the business, and we are confident that we will be able that we will be at synergy run rate of approximately $15 million when we exit 2021. We would expect to exceed our $15 million target as we move through 2022 and beyond. We’ve identified additional cost savings within the segment and are very focused on identifying additional organic and inorganic growth opportunities. As we look at quarter 3, improving trends quarter-over-quarter, most of our industrial markets will be more than offset by the continued challenges in our aerospace market. As a result, we estimate that our third quarter results in Advanced Materials are likely to be slightly lower than the second prior quarter.

Sean Douglas

Now, turning to Slide 10. During the quarter, we spent from available cash approximately $300 million to acquire the CVC Thermoset Specialties business and ended the second quarter with $2.6 billion of liquidity including approximately $1.2 billion of cash. Despite having a modest positive EBITDA for the quarter, we still managed to generate a positive free cash flow. In line with our expectation for the quarter, we benefited from favorable networking capital change of about $125 million. Our business divisions continue to place a high priority on efficiently managing all components of working capital. We paid $55 million in capital expenditures during the second quarter and still estimate a spend between $225 million and $235 million for the year.

Prashant Juvekar

Yes, Peter, I mean, I think you bought CVC Thermoset in second quarter. And I think you guys paid roughly 2.6x sales. So what are the normalized EBITDA margins at CVC? And how did EBITDA hold up in 2Q?

Peter Huntsman

Well, as we look at the overall margins, it’s around 30% and that’s where we would expect the business to continue to operate if not better once we’re done with synergies. I would remind you, as we said in our comments, that CVC is largely tracking the rest of our Advanced Materials business, and they’re down on their sales approximately 25% to 30%. And yes, so as we look at the overall business, we kind of would be taking that sort of a macro view on the business as we proceed throughout the 2021.

Prashant Juvekar

And then you compared recoveries between U.S. and Europe. But if you were to compare recoveries between like construction, automotive and aerospace, can you just talk about that? It seems like aerospace is clearly lagging. Do you think it’s possible to have a recovery in aerospace in 2021? Or is that more like 2022?

Peter Huntsman

No. I think that I don’t think you’ll see recovery in 2021. Again, that’s just my opinion. On the slide that we gave you on, there’s I think it’s Slide 6, there’s a bottom left-hand graph there that kind of shows the total planes that are in service, the total planes that are in storage and then the total that are on order. And one of the things with the aerospace business is you see in 9/11 and you see during the economic recession. So one was obviously in economy driven by terror and war. The other one was in economy driven by, well, bad economics. And this one is an economy driven by a health crisis. You see that there’s a three- to four year recovery. And I would certainly hope that there would be a sooner recovery than three to four years here.

But as I look in the past to try to figure out the future, I’m not terribly optimistic. When I especially when you look at the amount of planes that are in storage and the amount of number of planes in total service, what we’ve seen in the aerospace market is just it’s unprecedented, what we’re seeing right now. You cannot go back in time in the last 50, 60, 70 years and say, well, this is what happened then. My biggest concern as of just yesterday with Boeing building at an even reduced rate of output that the airlines aren’t even taking the planes once the planes are ready to be taken. They talked in a front page story yesterday of planes being stored off in Victorville and around the country, waiting for people to come pick up planes that were ordered and already built. So again, I don’t want to be overly pessimistic on aerospace. It makes up mid-teens of our entire business here. And there’s going to be a core, and this is going to be longer term, it’s going to recover, and it’s going to be a great business for us. But I think that of all of our areas of concern within the business, I think that that’s probably the one where I have the most pessimism.

And I think about footwear, I think about apparel, I think about even oilfield services. That are — I think are kind of some of those longer recovering sort of items. I think once retail sales start to recover, I think you’re going to see apparel and footwear not only come back, but it may actually come back with a vengeance sometime later this year, early next year. I don’t think it’s going to be next month. But I think you can start seeing as you start seeing retail stores and so forth reopen. So yes, my biggest concern would be around aerospace at this time. And I’m sorry, I forgot the other part of your question.