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.

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