Huntsman Corporation (HUN) Q3 2023 Earnings Call Transcript

Nov. 01, 2023 3:44 PM ETHuntsman Corporation (HUN)

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Q3: 2023-10-31 Earnings Summary

EPS of $0.15 misses by $0.04 | Revenue of $1.51B (-25.11% Y/Y) misses by $60.92M

Huntsman Corporation (NYSE:HUN) Q3 2023 Results Conference Call November 1, 2023 10:00 AM ET

Company Participants

Ivan Marcuse – VP, IR

Peter Huntsman – Chairman, CEO & President

Phil Lister – EVP, CFO

Peter Huntsman

Ivan, thank you very much, and thank you all for taking the time to join us this morning. This past week, I had the opportunity to visit one of our largest aerospace customers with our Board of Directors. We watched firsthand as Huntsman’s composite raw materials were applied to some of the most fuel efficient and modern aircraft built anywhere in the world today. We also visited one of our plants that is making Germany’s premier sports cars lighter and consume less electricity. We spoke to our associates at the same plant who are responsible for making components for a smarter, more reliable power distribution and grid system.

I’d go on about the numerous applications that Huntsman is now pushing to serve a less energy intensive, but more energy-reliant economy. All this give me cause for optimism, and it’s a great reminder about our company’s position in the global marketplace.

Over the past 24 months, we’ve seen some of the strongest economic performance as we recovered from a global pandemic and subsequently among the most chaotic economic conditions as European energy policy seemingly collapsed, China’s bounced back stumbled along and North America’s construction markets took a beating over high interest rates and consumer uncertainty.

As we now have some visibility into the beginning of the fourth quarter, as I said during our last earnings call, we expect this to be a tough quarter depending on the amount of customer deinventoring we see and lack of consumer confidence. Our projections for the fourth quarter remain murky, as the real year-end seasonality does not yet start for a couple more weeks.

However, our customer and plant business demonstrates how vital our products are in an evolving global economy. We continue to see the recovery of the aerospace industry. In all of our other divisions, we will be a vital supplier to both the EV and ICE automotive industry. We continue to see growing demand in power and electronics, building insulation materials, cleaner solvents for the chip industry and expanding markets for lightweight and stronger materials.

We will pace our share buyback program to make sure we are both returning value to our shareholders and preserving a strong balance sheet that will assure our flexibility and allow us to capitalize on M&A opportunities.

During 2024, we will complete a $280 million cost realignment, a European restructuring program we announced over the past 2 years. This will help offset inflation, flatten our organization and allow us to compete more aggressively and respond quicker to market conditions.

As mentioned in our prepared remarks, we will be very conservative on our capital spend this next year. We will spend what is needed to assure our reliability and safety as well as investing in high-priority growth projects. Depending on the speed of an expected recovery in 2024, we will be ready to proceed with other projects as market conditions may warrant.

In short, as we conclude what has been a year with more challenges and opportunities, we believe that we’re in a unique position to rebound quickly as markets shift direction. We will also be calibrating our operations around a conservative approach to and capital allocation towards long-term shareholder return and reliability.

Aleksey Yefremov

Peter, it seems like China could be one of the main reasons, things global or so tough in MDI, in particular. Do you see anything in China to suggest a path for better 2024?

Peter Huntsman

Well, I think that it’ll — actually, first of all, it’s good to hear from you. And as I look at China, look, we’ve been saying for the past year that we’re seeing a slow and steady recovery taking place in China. I think we’re a little bit of an outlier earlier in the year when we were saying that people we’re expecting that there was going to be a very sudden bounce back. But I — we’re seeing in the housing market that interest rates are dropping. And typically, that will mean that there’ll be a recovery following, but we’re not overly reliant on that.

I think where we are invested on the domestic energy conservation in China around insulation, around building materials, around the EV market. We continue to get market share in the auto, both in ICE and in EV and in consumer goods and appliances. So our focus is not on the export segment of the Chinese economy rather the domestic consumption and building side of the Chinese economy.

And in that, I think that we’re going to just continue to see slow but steady growth and recovery in that area. And to that end, as I look at Chinese prices from the beginning of the year, they’re actually slightly up from where they started the year. And I think that we’re going to continue to see continued improvement throughout 2024 in China.

Phil Lister

Yes. Aleksey, I think it’s clear we’ve got a headwind going to the fourth quarter, particularly when you look at benzene, which averaged about $3.10 in quarter 3. It settled in October over $4. It settled for November at $3.65. Spot price is lower, but that is our largest raw material. Natural gas in Europe has also risen from approximately $10 a Btu to about $14 to $15 today. So some headwinds there, there are some benefits in the chlorine chain, with chlorine coming down, epichlorohydrin is falling. But those are outweighed by benzene and natural gas.

Michael Sison

Peter, when you think about, I guess, Polyurethanes in total, you’ve done a lot of things over the last several years going downstream and trying to improve the quality of the business. This year’s, for a lot of businesses, look really tough to see those changes. But when you think about, again, just thinking where the business see when things recur, maybe talk about whether EBITDA margins can get back to all this destock in difficult times end?

Peter Huntsman

Yes. I think that as we look at MDI, fundamentally, I do think that we’re in unprecedented downdraft right now with MDI, putting it mildly. The reason I say that is this is a product since I’ve been in it for the last 25 years, and some of the veterans that been in the last 30-plus years, we’ve not seen 2 consecutive years of falling demand. And that’s largely not about because of macroeconomic conditions. We’re not seeing competing materials. We’re not seeing a lots of people that are — or stopped building homes with OSP. They’ve stopped using MDI and furniture and bedding. And so it wasn’t anything. We see MDI continuing to expand its application base, its chemistry base and getting better.

So — I mean, if I look at the bare fundamentals, there’s absolutely no reason why this material during normal economic conditions, or even normal economic minus a bit, shouldn’t be doing immensely better than it’s doing today. And so I think that getting back to what I would see as mid-teens — plus mid-teens sort of margins. I personally don’t think that it’s going to take a great deal of change just from the sense that I don’t see any fundamentals in the business that have changed the broader outlook of MDI.

When U.S. housing comes back, that’s obviously a very large component of MDI demand. When people buy a new home, not only did the product that goes and build the home, but also to furnish a home and — means of furniture, bedding and paints and coatings, electronics and so forth. When you look at the automotive industry, particularly this last quarter, while we weren’t directly hit with strikes that we saw in North America, our customers weren’t hit by that. That did put more MDI on the market than you otherwise would have seen, probably having a detrimental effect.

And as we look at the global energy conservation and insulation areas around spray foam and insulation materials again, I look at those big macro issues. I see no reason why MDI shouldn’t recover. And when it recovers, I gladly predict — when it recovers, I think it’s going to surprise me how quickly it does.

Michael Sison

And as a quick follow-up. You referenced a Chinese MDIs in the prepared remarks. Where are we in the U.S. and Europe? And how much lower do you think will go into the fourth quarter on those prices? And do you think — what’s your thought about ’24? And what needs to happen to shore up all the regions?

Peter Huntsman

Well, fundamentally, in ’24, people need to stop tolerating losing money. And I think that, that fundamentally has to be a broad issue. It’s the age-old issue of any product that’s being bought and sold at very low margins, is that what’s the discipline of an industry to be able to sell a product and set a price to return money to shareholders. And right now, MDI is not doing that. And so fundamentally, I think that there needs to be a change in the entire MDI market.

Now that doesn’t just come about without economic recovery. It doesn’t come about through without customer demand returning. And those things will happen. But as I look at how close much of this is getting to fixed cost sort of return, it seems like we’re there. As I look at pricing in Europe, we’ve been able to get some modest increases in the fourth quarter. I’d like to say that’s because demand is improving, but I think it’s more just discipline. And there are signs that I’m saying or at least feeling that we’re to the bottom. But unfortunately, I think I’ve probably said that in the past. And so I’m not ready to call the bottom out, but I think that we’re very close to it.

Hassan Ahmed

On the polyurethane side of things, obviously, a bunch of questions around trying to sort of forecast demand, obviously, in our industry is always challenging to do. But it seems that the supply side of thing’s easier to forecast, right? So as you sort of sit there and look at polyurethane, sort of cost curves. I mean, in the response to one of your earlier questions, you talked about how margins are same for some of the marginal producers. You guys, yourselves, reported 8% EBITDA margins this quarter.

So I’m just trying to understand the marginal guys presumably are losing money right now. So with the supply looking the way it’s looking, I mean, do you forecast potentially shutdowns, more delays in capacity additions and the like and how will that play out as it pertains to a potential recovery going forward?

Peter Huntsman

I’m not sure that the recovery going forward is going to be dependent on any shutdowns. I am a bit surprised that, that hasn’t happened yet. As I look at the various regions, I look at the U.S. I don’t see a lot of shutdowns of total facilities in the U.S. because the major producers in the U.S. only have one facility. And I don’t see somebody exiting the North American market. And I think the same can be said for China.

Now there are people that are like — that have multiple facilities in China but I personally just don’t see them shutting one of down. They’re very competitive. They start with foam and they work their way through on a competitive set of economics.

Europe, in my opinion, longer term, when I look at the size of the facilities that are in Europe and the number of people that have multiple facilities in Europe, I do question the longer-term viability of some of those assets. But again, I’m not privy to decisions that are made, obviously. In those companies, I don’t know what their economics are. To the degree that they’ve got longer-term contracts with government-assisted money or with unions and so forth, I have no idea what limitations there might be on that. But fundamentally, I think that the industry is shutting down lines more than they’re shutting down facilities. And I think you’re probably going to continue to see that.

Phil Lister

The only supply coming to the market, Hassan, will really be 1 month over the next sort of 4 to 5 years, but there’s nothing else major that’s been announced and if the industry returns to its 4.5%, 5% growth level, then that will have strip supply as a rebound occurs.

Q – Unidentified Analyst

Perfect. And just a follow-up on the raw materials for MDI, besides a well-known increase in benzene prices, can you provide us a little bit with what you are assuming for Q4 in each of the key regions, Europe, China and the U.S. for other key raw materials, chlorine, et cetera?

Phil Lister

Yes. I think we said — so we outlined benzene, we outlined natural gas was headed in Europe intended to 15. Chlorine caustic under a little bit of downward pressure overall, so we built that in. This will remain I think — which are the two main raw materials, although they still represent a minority of Advanced Materials is coming off as well.

And then you’ve got ammonia, which is obviously a big raw material into Performance Products, which has been moving upwards. It moved down throughout the year, but it’s been moving upwards. That also impacts Polyurethanes in nitric — into nitric acid. So that’s the way to think about our raw material base pending still remains the biggest raw material that we purchase globally.

Peter Huntsman

And certainly, the most volatile — a lot of those products that Phil just mentioned on longer-term contracts or pass-through contracts with natural gas and so forth.

Matthew Blair

Peter, so it’s obviously a tough market, but your prepared comments did mention that building solutions volumes were up both quarter-over-quarter as well as year-over-year. So I don’t know that seems encouraging in the tough construction market. Should that be the read-through for investors? And do you have any more color here? And also, is this because you’re gaining share in the spray foam market or are there other dynamics at play?

Peter Huntsman

Well, a couple of things. First of all, last year, third quarter was a pretty tough year. I mean, it was a low point, I think, as we look at the overall business. But as you look at the third quarter, we’re up 2% from — versus the prior quarter. We’re up 10% a year ago.

If you look at some of our other products like the composite wood products and so forth, as we look at the order patterns thus far into fourth quarter, and I don’t want to get ahead of myself, but we’re seeing a positive year-on-year comparison there. And that’s the first time we’ve seen a positive comparison there for probably over a year on a quarterly basis.

So again, I’m not — I don’t want to get overly encouraged by this, but these are signs you first have to hit the bottom, and then you’re going to see a bounce back. So as I look at things from where we are in the third quarter, I think there’s some positive signs I’m seeing in HBS and the building solutions, all around in — areas around our total insulation business. From the prior quarter, it was up 3%.

From a year ago and again, this isn’t just spray foam. This is our installation that goes into rigid panels, construction panels and so forth, we’re down 4% over a year ago but up 3% sequentially. So starting to see, I think, signs that we’re hitting the bottom in some of these areas, and I’d like to think that we’re recovering in others of them.

So I would take those as — we call them green shoots, but I think it’s a tired metaphor because we’ve used it now the course in — and we haven’t seen much more than green shoots. But no, I think there’s probably more of those we see today than we did certainly a quarter ago.

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