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Huntsman Earnings Call Urethane Highlights

Huntsman Corporation (HUN) CEO Peter Huntsman on Q3 2021 Results – Earnings Call Transcript

Oct. 29, 2021 5:06 PM ETHuntsman Corporation (HUN)

Q3: 2021-10-29 Earnings Summary

EPS of $1.08 beats by $0.16 | Revenue of $2.29B (51.32% Y/Y) beats by $241.71M

Huntsman Corporation (NYSE:HUN) Q3 2021 Earnings Conference Call October 29, 2021 10:00 AM ET

Company Participants

Ivan Marcuse – VP, IR

Peter Huntsman – Chairman, President and CEO

Phil Lister – EVP and CFO

Tony Hankins – President, Polyurethanes

Peter Huntsman

Thank you very much, 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 third quarter was $246 million versus $156 million of the year ago. Our Polyurethanes business EBITDA growth was primarily a result of 2% year-on-year total volume increase and improved margins.

Total volumes have increased 5% — would have increased 5% had it not been for Hurricane Ida disrupting our Geismar, Louisiana operations in the third quarter. Our differentiated volumes increased by 4% in the quarter, led by our insulation, including spray foam and elastomers and adhesive businesses.

Our core construction markets, including insulation, adhesives and coatings continue to be the strongest markets for polyurethanes. The North American insulation businesses includes spray foam and our composite wood products business. These remain strong as we see solid residential and commercial construction spending.

Our Huntsman Building Solutions business continues to benefit from strong demand and market share gains. HBS revenues were well above the prior year and on track to exceed $575 million for 2021, combined with margins approaching 20%.

The backlog of our order book for spray foam remains strong. The price increases that we implemented during the quarter are helping to offset higher raw material prices and logistical costs and challenges.

Further, our efforts to expand internationally continue to gain momentum and is contributing ahead of our expectations. We remain very positive about this platform, and we’ll look to add to it with bolt-on acquisitions and organic investments when feasible.

Our elastomers, which includes our global footwear business, is another core growth platform for Polyurethanes and it continues to see strong recovery trends globally. This platform is implementing price increases globally to offset the headwinds in raw materials and supply chain costs that are pressuring margins.

Our global automotive business is being hindered by the chip-related shortages that are reducing automotive production. We believe that these challenges will eventually be worked out, that low inventories and strong underlying demand globally could drive higher production rates for several quarters once the supply chain issues are resolved.

Fortunately, global demand in our other markets is strong, and we were able to redirect volumes originally intended for our automotive market into markets utilizing similar formulations and margins. Polyurethanes’ strategy is to upgrade the quality of our portfolio.

We will continue to redirect more of our plants’ output to our differentiated businesses and bottom slice lower-margin component business. We will invest in our downstream businesses organically and where it makes sense through bolt-on acquisitions. Where we can generate higher and more stable margins through long-term contracts in our component business, we are doing so.

Our splitter investment in Geismar, Louisiana is consistent with this strategy, helping to drive our downstream growth and increasing overall margins. This project will start up in the second quarter of 2022 and once fully operational and selling at capacity, it will contribute $45 million in incremental adjusted EBITDA on an annualized basis in 2024.

Our PO/MTBE joint venture with Sinopec in China, where we own a 49% interest, continues to benefit from above-normalized margins and is driving above-average equity earnings. As we said last quarter, the equity earnings contribution will be lower in the second half versus the first half of this year.

We expect the fourth quarter to be lower than the third quarter by between $10 million to $15 million. While many countries and economies remain hobbled by COVID and Europe and Asia grapple with unprecedented high energy costs, the underlying fundamentals of our MDI global markets remain strong.

Globally, industry MDI demand continues to grow at rates higher than GDP. Limited capacity will be added, particularly in North America and Europe. Our downstream pull-through of MDI will allow us to generate less capital-intensive, less volatile and higher earning MDI formulations.

As I’ve said in the past, this is not necessarily about more MDI but higher value-added MDI. Looking into the fourth quarter, except for automotive, we see general demand fundamentals in most of our core markets remaining solid. The typical seasonality in our construction markets and lower joint venture equity earnings, we would expect our Polyurethanes fourth quarter adjusted EBITDA to be between $200 million and $220 million for the fourth quarter.

Peter Huntsman

Thank you, Phil. Given that our Investor Day is a little over a week away, I shall limit my comments this morning until the time when my team and I intend to share a more fulsome vision of the business.

However, this past quarter marks a significant achievement in that our strongest quarter on record still has room for improvement so we further cut costs, complete our MDI splitter, see the Aerospace recovery continue, anticipate new capacities of specialty products and push through price increases.

Over 40% of our EBITDA came from non-Polyurethanes’ earnings, marking a significant balance. We also purchased just over $100 million this past quarter of our stock. Our Board, upon reviewing our projected earnings and cash generation, has decided to resume a share buyback program that will include a quarterly buyback that, at a minimum, should approximate our quarterly dividend.

As we look into the fourth quarter, we should expect some seasonality, raw materials headwinds and logistics challenges. This should be largely offset by aggressive price increases, operating excellence and a continued focus on cost reductions. We expect our fourth quarter EBITDA to be between $320 million and $355 million.

On another front, we began reporting, in 2017, on the significant lawsuit we filed at that time against Rockwood and Albemarle after discovering that Rockwood had committed fraud and breached contractual obligations at Otas under an agreement to purchase Rockwood’s TiO2 colored pigments business in 2013. After we closed on the transaction in the following year, Albemarle merged with Rockwood when it purchased the stock of the remaining Rockwood businesses.

We sued Rockwood and Albemarle as Rockwood’s successor after discovering that when we were negotiating the deal, Rockwood misled us about the viability of the key color pigments manufacturing technology it was selling.

We arbitrated the case for two weeks in May of this year, had closing arguments in July, and yesterday afternoon, I’m pleased to report the panel of three former federal court judges unanimously ruled in our favor, wrote detailed opinion and awarded us in excess of $600 million in damages, of which we will net approximately $400 million after fees and before taxes.

We are now beginning the process of having the panel’s award confirmed in the New York State Supreme Court. This process, which will also include any appeal by Albemarle, will take at least several months. We are confident that the panel’s ruling and damages awarded will be upheld.

We think the court will be hesitant to disturb an arbitration award rendered in these circumstances, especially after the American Arbitration Association held numerous hearings, supervised months of far-reaching discovery, conducted extensive motion practices and held a two-week trial with live witnesses before three distinguished former federal trial judges; Kirkland and Elson tried the case for us and David Stryker, our General Counsel, led a fully engaged team of in-house lawyers.

Our long-time Board member, Wayne Reaud, himself a distinguished trial lawyer, was actively involved in the case route, consistent with our approach on major legal matters going back to the Apollo litigation.

Lastly, without the support, unity, integrity of our association — of our associates and engaged Board of Directors, we would not have won this award. Thank you very much.

And with that, operator, we’ll open the line for any questions.

Bob Koort

Thank you. Good morning Peter. I wanted to ask you about your comments on the Polyurethanes division and the journey you’ve been on to high-grade it, which will, I guess, culminate shortly with the splitter project. Do you anticipate, is the vision there that your margins will actually increase?

Or relative to the sort of mid- to upper teens channel you’ve been in, as you displace some of the commodity sales, which obviously can have very, very good margins at times, is it more of an outcome that you’ll have a more stable margin structure in Polyurethanes?

Peter Huntsman

Yes, we certainly would assume that on an ongoing basis, we’re at about an 18% margin today, on a total Polyurethanes basis. Between further cost consolidation, operating consolidation and upgrading of the materials, we believe that, that should have an average EBITDA going forward of about 20%.

We’re hoping to get at least 200 basis points, and a lot of that needs to be on things that we control. You’ll remember or noticed just recently here that we’ve shut down one or two of our system houses. We’ve been able to consolidate some of those operations.

We’re not abandoning any of those customers or any of those product lines as much as we’re consolidating into system houses, which in the past have focused on two or three product applications and today are focusing on five and six product applications.

As we further expand our spray foam business in Europe, I don’t think that this will require any further investment in new locations. We’ll do this out of existing system houses, and we’ll continue to grow the business downstream without a great deal of capital investment. We’ll see an opportunity, I think, to further consolidate costs and to further move this business.

Obviously, one of the areas I would just note of, I wouldn’t say frustrations but I hope of recognition from our investors, is that when you do these sort of transformations, you make the investment upfront in splitting. You make the investment upfront in your capacities, in your R&D, in your route to markets, in your specialty products.

And then you go out and you sell those, you market those and those can take — and many applications can take anywhere from six to 18 months to be able to get approval for fire-retardant materials or automotive or aerospace applications, adhesives, coatings and so forth. So it’s not just simply a question that we’re going to be taking polymeric and shifting it over to differentiated, and we’ll see that take place over the course of the next quarter or two.

This is something that’s usually a 12 to 18-month sort of a transition as you build up capacities and capabilities and then you transfer products to qualifications and then eventually are able to move the volume there. But I think we’re well down that road and we obviously see the benefits of that certainly throughout 2022. And we’ll certainly be giving more information of that this next week in our Investor Day.

Hassan Ahmed

Good morning Peter. Peter, just obviously, Q3 with Hurricane Ida, supply chain constraints and the like was a bit of a tricky quarter. But just looking at the volume growth, particularly within Polyurethanes, I mean, sequentially up 10%, clearly very impressive. So if you could just — I would love to hear your views on how we should think about volume growth, particularly as one starts thinking about 2022.

I mean, we all know that this is an industry that typically grows volumes at, call it, 5%, 6%. But I mean, are we going to see some sort of a major restocking exercise? I mean, how are you thinking about volume growth year-on-year in 2022.

Peter Huntsman

Yes, I think that, Hassan, it’s an excellent question, one that we grapple with. And when I look at Polyurethanes, in the third quarter, we’re essentially sold out. We’re producing as much as we can and we’re selling as much as we can. We saw an increase in that volume in the third quarter over second quarter largely because of the Rotterdam turnaround that we have that had that facility down for a little bit longer than we had expected.

But I think again, as I just personally am not a believer that we ought to be investing capital to expand revenue and expand tonnage for the sake of expanding tonnage. I’d much rather see us deploy that capital and take the least profitable lens of our businesses and figure out how we can upgrade and how we can make a higher-margin product across the board.

And so I think that whilst the industry is going to be growing, the MDI industry will be growing at 5% or 6% globally, I don’t have a problem with us being essentially sold out. We’re obviously going to have some incremental debottleneck projects that will come along of low single-digit sort of growth rates, reliability projects and so forth.

But we’re going to be far more focused on how we increase the margin on the volume that we have. We have plenty of MDI, I think, in the world. We need to have better Huntsman. I’m not talking about the industry. Huntsman needs to have better MDI, better margins, lower costs and be able to take what is already a great business and make it even better.

David Begleiter

Thank you. Peter, Performance Products has had a very good 2021 and a good back half of the year. How do you think about the sustainability of these numbers or more normalized earnings power of this business heading into next year?

Peter Huntsman

Yes, I think look, these products and the applications that we’ve gone into, and I hope that we’ve been clear in what we — the transformation that we’ve seen in that industry. When you’re operating facilities such as those that we sold to Indorama, we had capacity in Fort Neches that we sold to them of, I think it’s somewhere around 1.5 billion pounds. And you have — and that’s not including the PO/MTBE facility. That’s just including the EO, EGs, ethylene capacities and so forth, propylene capacities.

You have — more importantly than focusing on the value per pound, though you’re always looking at that, you’ve got to keep those plants running, you got to keep them running at capacity.

So your end markets, obviously, are going to be more commoditized and be larger volume customers. And as we look at where we are today, we’ve sought after and we’ve been able to win a lot of niche businesses and such as our polyurethanes catalysts. That’s just not our polyurethane catalysts but also that of others.

Matthew DeYoe

Thanks. So, if we rewind back to 1Q, the discussion around Polyurethanes business was that there was some degree of overearning. Since then, prices continued to move higher. Obviously, there’s been a lot of outages, but one of your larger competitors tried to dispel kind of any notion that MDI and Polyurethanes from a commodity basis is really overearning at the moment. So like what’s your opinion on this? Has it changed at all? What do you think the most likely direction for MDI profitability is over the next 12 months?

Peter Huntsman

I think — I don’t think that right now, the MDI markets are overearning. I think that industry demand, I think, is pretty balanced right now. And as you look right now, industry feels like it’s around the mid-80s utilization in Europe, probably 110%, 120% utilization in Americas, taking in some imports, and Asia is probably a little bit less than Europe. But I think that we’ve — I think that we’re doing about where we ought to be doing in MDI right now.


Thank you. Our next question is coming from the line of Mike Harrison with Seaport Research Partners. Please proceed with your question.

Mike Harrison

Hi good morning. Was wondering, Peter, if you can comment on where polyurethane inventory levels are right now in terms of volumes compared to normal for this time of year as we think about coming recovery in the supply chain in construction and the seasonal build there. Will you have some additional inventory that you would typically build into that spring season?

And then maybe also talk about what that means for plant utilization. Does that mean that you’re going to be running your plants harder than you typically would in Q4 and Q1 and we could potentially see some better utilization, better margins from those facilities in the next couple of quarters? Thanks.

Peter Huntsman

Very good question. And I’m — again, I’m reticent to talk about where our competitors might be nearly because I haven’t the foggiest idea where they are and especially — well, I won’t comment any more on competitors. Tony, do you want to comment on where you see inventories right now, potential build?

Tony Hankins

Yes, thanks, Peter. Mike, I think level is now as low as they’ve ever been in MDI, certainly [Indecipherable] We see demand continuing to be very strong, particularly in North America. The disruptive supply chains, the regional balances there have really evened out. And I think our customers are running low inventories as well. They’re struggling to get key components needed to make these formulations.

And I think we’re going to see very strong utilization rates on the plants. We’re flat out. We can’t run those harder than we’re running at the moment anyway. So I don’t see any balance between Q4 and Q1 in that respect. We’re running as hard as we can, particularly to manufacture the downstream products.

And in fact, we’ve got still in Huntsman Building Solutions, we still got an eight-week backlog in orders so we can sell every molecule we can make. So I think that bodes well for industry utilization rates and I see that continuing well into 2022. So yes, inventory is low and we need everything we can make.

John Roberts

Thank you. On Huntsman Building Solutions, when you talk about margins approaching 20% — EBITDA margins approaching 20%, is that with market-based MDI and propylene oxide? Just remind me, do you have an advantaged propylene oxide cost in that business? And I assume you’re using market-based MDI?

Phil Lister

John, it’s Phil. We use integrated margins. Strategically, our focus is on upgrading the quality of our margins overall. And we make decisions as an overall supply chain team looking at where we direct those molecules. And we look at integrated margins, including how we move our polymeric downstream into our HBS business for the supply chain.

Tony Hankins

John, just to add to that, and we do have an advantage here on polyols because as we grow that business, particularly with close sales using polyester polyol, rather than polyether which comes from PL, the polyester comes from a recycled bottle-grade terrell. And there, we do have a cost advantage and we see that end of the market growing very rapidly.

Alex Yefremov

Thank you. good morning everyone. Peter, about a month ago, the company announced energy surcharges for MDI in Europe. Have you been able to fully implement any of those? What’s been the market reaction?

Peter Huntsman

Well, this will shock you that our customers are less than excited about this. But it’s something that we’re pushing through as we speak and as we’re in a number of very sensitive negotiations with others, I really don’t want to speculate. One of the reasons why we gave a rather wide range in the fourth quarter on our EBITDA is because there is some uncertainty as to the outcome of all of these.

I think we’ll get some of them. And right now, I don’t want to speculate on all of them but we’re pushing very hard. The — as we’re telling our customers, the incredibly shortsighted and bad energy policy in Europe is not of our making, and the volatility of these prices and costs are not of our making.

And they really need to — I’ve spoken with scores and hundreds of our customers around the world, they’ve got to push these things through and people have to see the consequences of decisions. And Huntsman is not going to be the shock absorber between energy policy — bad energy policy and the consumer.

So yes, I feel very passionate about this and it’s something that we’re going to push. Even if we lose some volume, that we’re going to continue to push. And as far as our competition, I can’t speculate what they’re doing, if they’re doing it through price increases or surcharges or whatever.

But again, so much — I think one of the great criticisms in this industry is at times, I think we can be lazy and even lethargic when it comes to these sort of issues and just figure they’re going to go away in a quarter or two and we’ll just absorb it. And I don’t think that’s fair to shareholders that have that take place.

Angel Castillo

Hi good morning and thanks for taking the question. Just curious on the Asian market competitive environment. Just if you could give us a little bit more color as to what you’re seeing both from a demand perspective, given all of the uncertainty and changes that have been taking place, but also from the perspective of the competitor that added capacity or expanded its capacity earlier this year, how have you seen the market absorb that? And are we kind of at a good balanced level in that region and how we’re seeing it progress?

Peter Huntsman

I’ll let Tony comment on the polyurethane side of that. I would just remind all of you that as we look at the Asian market, very similar to Europe and very similar to North America, we’re probably about 95% self-supplied within that region. And yes, we do have some logistics backlogs, and we — I would say that we’re probably in the low tens of millions of dollars, particularly in some of our specialty products in Advanced Materials and in Performance Products.

And Tony mentioned some of our blowing agents and so forth in our spray foam business, where we are getting hit with some of the backlogs and so forth at the ports. But by and large, as we look at our Asian market, we produce a product between China and Singapore and Thailand and other locations and we supply within that region. And so as we look at it from a macro basis, it looks quite solid and a slow and steady recovery. Tony, you want to comment on MDI in Asia?

Tony Hankins

Yes, Peter, I think you’re absolutely right. I mean, particularly in China now, we’re seeing a balanced situation with the dual control policy clearly having effect in certain provinces. So the way to look at that is, geographically, Jiangsu, Fujian and Guandong have slowed down because of the imposition by the government of the dual control energy policies. And that’s affected demand in those regions, particularly in things like appliances and footwear, which tend to be concentrated in those provinces.

But that’s been offset by outages in quarter four. There’s — one of our major competitors has got a significant turnaround. So the way that I look at this is I think the market is going to slow down between 5% and 10% in Q4 because of dual control.

So, that will be balanced by the capacity coming out for turnaround. So I see a balanced situation going to quarter four, and I think that prices remain pretty steady around RMB2,000 a ton. So to answer the question, balanced conditions in China right now.