Huntsman Corporation (HUN) Q1 2023 Earnings Call Transcript

May 05, 2023 2:30 PM ETHuntsman Corporation (HUN)

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Huntsman Corporation (NYSE:HUN) Q1 2023 Results Conference Call May 5, 2023 10:00 AM ET

Company Participants

Ivan Marcuse – Vice President of Investor Relations

Peter Huntsman – Chairman, President, and Chief Executive Officer

Phil Lister – Executive Vice President and Chief Financial Officer

Peter Huntsman

Thank you, Ivan. Good morning, everyone. Thank you for taking the time to join us. Let’s turn to Slide number 5. Adjusted EBITDA for our Polyurethanes division in the first quarter was $66 million. We continue to see significant destocking across our markets, specifically in North America. This destocking, combined with the competitive pricing environment, continue to put substantial pressure on the Polyurethanes business during the quarter.

However, the business conditions improved sequentially and in both our European and Asian regions, driving a nearly 80% improvement in EBITDA compared to the fourth quarter.

Overall sales volumes in the quarter declined 21% year-on-year. Loans also declined 6% sequentially. Which is in line with normal seasonality. All regions declined in the quarter versus the prior year, with the Americas accounting for 2/3 of the reduction, with lower demand and significant destocking significantly impacted sales volumes. Our European region did show a sequential improvement versus the fourth quarter. As business conditions stabilized, destocking subsided and costs moved lower.

From our vantage point, business conditions appear to be steadily improving from last year’s low point within Europe. Our Automotive business delivered volume improvements versus both the prior year and prior quarter. Most other major markets in Europe showed stable to improved volume sequentially. Profitability in the region was helped by natural gas prices falling from an average of about $23 per MMBtu to about $17 per MMBtu.

I’ll note that while natural gas costs are significantly lower today, they’re still 6 times higher than the U.S. Gulf Coast prices. In addition, while benzene was relatively flat sequentially, we did see an increase throughout the quarter, combined with continued competitive MDI pricing pressure. Nevertheless, we continue to make progress on our previously announced European restructuring initiatives and expect to start seeing some of the cost savings positively impacting our margins as we move through the remainder of 2023.

We will continue to aggressively manage costs and mass production to lower demand. With lower costs and moderately better demand, we do expect profitability in our European region to improve through the remainder of the year. As a result of the steady improvement, we are restarting our smaller MDI unit and will have both our MDI lines operational in the second quarter. This will give us maximum flexibility to match our supply with demand as we progress through the seasonally higher sales month.

Europe is and will be a core region for our Polyurethanes business, and we will benefit for many years to come from the regions needed drive for better energy conservation and efficiency. We remain well-positioned to bring energy-saving solutions to both residential and commercial construction markets, as well as innovative improvements to the lightweighting of automobiles.

In China, we did begin to see some green shoots with steady improvements in the first quarter, which was in line with our expectations. We expect China to remain on a steady but positive trajectory as the economic environment slowly returns to normal. We are seeing positive demand trends in end markets, such as the cold chain, infrastructure, and certain consumer-related markets. Our China POM [indiscernible] joint venture contributed approximately $11 million in equity earnings for the quarter.

The largest headwind that impacted Polyurethanes’ first quarter results and which have continued into the second quarter is the high level of destocking in our Americas region, specifically in our construction businesses. Remember that 2/3 of our Polyurethanes Americas’ portfolio comprises of construction end markets. Approximately 40% is commercial construction, 60% is residential, of which 70% is related to new residential buildings.

For composite wood products, which is linked closely to residential construction, demand was under significant pressure throughout the first quarter, with housing starts down approximately 30% year-on-year. This pressure has moderated going into the second quarter. Our spray foam business also appears to have bottomed and is now showing some slight improvements in order patterns. In our commercial-related insulation markets, the destocking continues to be aggressive and may last through most of the second quarter.

Our visibility into the full supply chain is limited, and it is tough to project when our customers will return to normal order patterns. While we are seeing factors such as rising interest rates placing pressure on new construction spending, about 65% of our commercial business is tied to repair and remodeling, such as reroofing, which we expect to normalize once destocking concludes. Additionally, we remain on the right side of energy efficiency drive, and we will benefit from both improved building codes and the U.S. government’s Inflation Reduction Act.

Outside of construction, our global automotive business, which represents approximately 15% of the Polyurethanes portfolio, delivered volume improvements both sequentially and versus the first quarter. We continue to expect volumes in automotive to be up low single digits for the year. Our elastomers platform, we see stronger profitability from quarter 4 into quarter 1 on the back of margin expansion despite overall demand weakness. We are taking decisive and proactive steps to make our Polyurethanes business more efficient, stronger, and better positioned for when the current challenging macro conditions abate.

We continue to monitor and adjust production rates accordingly, both at Rotterdam and at Geismar, to ensure we aggressively manage our working capital with cash generation as our top priority. Furthermore, we’re on track to deliver the $60 million in cost savings we’ve laid out for Polyurethanes as planned. This includes exiting geographies that are not generating acceptable returns and consolidating additional back-office functions. We have now exited our Southeast Asia polyurethane site, in addition to our announced exit from South America last year.

We’ve also been working for many months towards an orderly exit from our Russian operations, while ensuring we remain fully compliant with multiple sanction regimes in a highly complex political, legal, and regulatory environment. Today, Russia represents less than 1% of our corporate revenue, and we are hopeful that we can complete the exit during 2023.

Looking further into the second quarter, we expect to see a seasonal improvement overall. We do expect continued destocking in the United States, but we see that destocking moderating as we move through the quarter. We anticipate the current improving demand trends in Europe and Asia to continue. Putting it all together, we expect Polyurethanes adjusted EBITDA for the second quarter to be in the range of $85 million to $100 million.

Peter Huntsman

Thank you, Phil. Having taken some time and read the comments from analysts regarding this quarter’s results and, seemingly more important, any view on Q2 in the second half of this year, I’m reminded of the fairy tale of Goldilocks and the three bears, where Goldilocks was on a quest to find the perfect temperature for her new-found gruel and comfortable sleeping quarters. Everything was too hot or too cold, too soft or too hot.

It seems that every forecast is either too aggressive and thusly unbelievable, or too conservative and thusly unbearable. I shall attempt to share a forecast when I hope not to share the same fate as Goldilocks being discovered by a family of hungry bears. There are three macro indicators that we need to see for the continuation of improvement to more normalized earnings.

The first of these conditions is our North American market. We need to see an improvement in the massive destocking that we’ve seen in the fourth and going into the first quarter. This is not to say that we need to return to last year’s build rate of 1.7 million homes, but rather just a stabilization to the present level of housing starts. While new home starts have dropped 25%, our demand has dropped much more as builders work through their supply of building materials. It is our hope that we will see a return to demand consistent with today’s numbers and housing starts.

I believe that our spray foam business has moved through its inventory and our OSB business is quite close as orders are now starting to recover. Some building materials used in commercial buildings and warehouses, I think, will take as long as the rest of Q2 to work through its remaining inventory. We will see an improvement in North American demand when we work through our inventory, and another step-up when we see a recovery in the number of home starts returning to last year’s numbers. We are seeing signs that much of our MDI that goes into the construction market is modestly improving, and inventory levels are stabilizing.

The second macro indicator we’re following is European energy. As we look to our European businesses, we continue to see the impact and headwinds of higher energy costs. While we are seeing lower natural gas prices than any time in the last two years, they’re still 6 times higher than in North America. These higher prices are also taking a toll on consumer spending and confidence.

Europe has been enjoying low energy costs due to unusual weather conditions and slower economic activities. Europe’s overreliance on a fundamentally unreliable energy source, while also paying for reliable backup energy production, is rendering the region uncompetitive on the global economic stage. I am concerned when I see forward electricity prices in France for this upcoming winter at near-record prices that we are not improving a system that is simply not working.

While we are all in hopes of lower energy cost, this is hardly a solution. We will continue to cut costs and do whatever we can to offset these higher costs. At the same time, we’ll focus on those markets in Europe that will prosper, such as aerospace, energy conservation insulation, lightweighting, adhesion, and the automotive industry.

Finally, the third macro indicator is the Chinese economy. We continue to see improvements in demand as this massive economy reemerges from the COVID lockdown. Having visited some of our sites in China this past week, I have a renewed sense of optimism that this recovery will continue and should lead to higher prices and margins. In short, we’re seeing demand improve across a number of our business groups. This will obviously improve as inventory levels return to better match day-to-day demand.

Mike Harrison

Hi, good morning. Peter, I was wondering if you could maybe give us some thoughts on how you expect the second half to unfold. Obviously, you’ve given us your Q2 outlook that includes still a lot of destocking. But as that destocking subsides, it seems like we could see a pretty substantial step-up in EBITDA in Q3. Maybe talk about some of the puts and takes that you’re seeing in the second half. Thank you.

Peter Huntsman

Well, Mike, thank you very much. I think, yes, if we look at the second half, I don’t expect that we’ll still be anywhere in the mode of destocking. That’s not to say that everything is going to be destocked by July 1. But I think it will be through the vast majority of that. As I think about the biggest area of concern for me, which is our U.S. MDI, where 2/3 of that goes into the construction market, I kind of break that out into three areas. So, 40% of that going into our spray foam business, the Huntsman Building Solutions, of which I think all that inventory has basically been depleted, if you will.

30% goes into composite wood production. And I think that inventory is fast normalizing. The price for composite wood panels and orders, I think, are both stabilizing, which are very good signs for us. So, I think that’s pretty much run its course. As I look at the other 30% of that 2/3 construction demand of MDI in North America, but that’s going into what I’d consider to be the composite insulation panel. That’s going to be everything from roofing on warehouses to siding on office buildings and those sorts of miscellaneous applications. That — I think, that 30%, probably has another month or so to go. Again, I don’t have perfect vision into that.

So yes, I think by the end of this quarter, when I look at the biggest areas that have been impacted in the business around destocking, mainly North American MDI, I think that we’re pretty much done with that. I also think in the second half we’re not going to continue to see the impact of lockdowns, coming out of lockdowns in China and the Chinese New Year celebration and so forth, which typically is a drag on our Q1 numbers.

And so again, as I sit here today, having just returned from China a couple of days ago and met with our — face-to-face with our sales management and our various teams in China and so forth, there is quite a bit of a sense of optimism and so forth. I don’t think that China is going to come flying back and have a full recovery in the quarter. But I think it’s going to continue to be a gradual improvement between now and the end of the year, which ought to help tip the balance on a more optimistic view at least of the second half of the year.

Abigail Jacobsen

This is Abigail on for Mike. So, I wanted to follow up on your — you said that you’re managing production to meet lower levels of demand, just wanted to get a feel for where your MDI operating rates are about now. And realistically, how low you could bring them in order to meet lower levels of demand.

Peter Huntsman

Well, I think that the lower levels of demand was probably more of a fourth quarter issue. We are seeing demand improving in the first quarter and going into the second quarter. We did reduce our rates in — at our Rotterdam facility when we saw demand plummet at the end of last year. And those rates were — our operating rates were in the high 60s, around 70% utilization rates. We are now seeing that we’re able to sell more than that.

So, we will be operating all of our MDI lines, albeit at a reduced rate, but all of our MDI lines will be operating back in Rotterdam. We’ll be producing those as we’re able to satisfy the needs of the marketplace. I would say that across the board, we’re probably seeing a 70% to 80% utilization rate. And that’s going to vary, obviously. If you look at the United States and the North American market, it’s much higher than that, if I were to assume that the imports that are presently coming into North America, were stripped out. But nevertheless, I think you’ve got to look at, at least on the polymeric side of MDI, you’ve got to look at that as somewhat of a global market.

Operator

Our next question comes from David Begleiter with Deutsche Bank. Please proceed with your question.

David Begleiter

Good morning. Peter, back on to Chinese MDI, how impactful of imports of those products into the U.S. have been? And when do you think the recovery in China could forestall further imports of Chinese MDI into the U.S.?

Peter Huntsman

I think the Chinese imports coming into the U.S. is around 20%. And that’s pretty much — I think that’s pretty well kind of matched the economy as the economy slowed down and picked back up. I don’t get a sense that there’s a flood of Chinese material coming into the U.S., and that’s somehow is a drag on pricing and so forth.

So as China recovers and continues to see demand, obviously, Chinese production is much better off being produced and sold in China, and they’re going to make a lot more money selling it in China. And I would assume that, that will be a deterrent when that demand continues — as that demand continues to improve, that will be a deterrent to export.

But look, there’s Chinese production that is — I think is probably going to be coming into the U.S. on a permanent basis, is a large Chinese producer has a commitment to this industry and to supply a certain segment of it. But I don’t see that product awash in this market to the detriment of the market.

Frank Mitsch

Thank you, so much. Peter, you indicated that you’re going to restart the lines in Geismar and in Rotterdam this quarter. I’m just curious how we think about the sequential improvement coming from restarting those plants and what the restraint on profitability might have been in the first quarter.

And then also, obviously, congratulations on completing the sale of Textile Effects. I was wondering if there was scope for — now that, that business is kind of — if there was scope for improvement in terms of your corporate expenses in terms of maybe rightsizing that. Any help there would be very helpful. Thanks.

Peter Huntsman

Yes. I’ll let Phil comment on the overall corporate expenses. Bottom line, of course, we are and we’re trying to look at making sure those expenses match our company size is — I want to be very clear. When we talk about restarting MDI lines. Right now, we’ve announced the restart of Rotterdam and the restart of Geismar has yet to take place. We’ve not made a decision yet to restart that facility. And in order to do that, we’ll need probably about two months or so lead time to get that plant — get that vital facility up and going in full.

So yes, as I look at the amount of profit, Frank, I want to be very clear, I don’t think we’ve been constrained by not having that second line running in Rotterdam. What we’ve seen is the amount of inventory that we have in Rotterdam and the capacity of the existing plant has now reached — according to our sales forecast and the orders we have on the books, have now exceeded that 70% of production, and we need more production in order to meet demand.

And so again, we’ll be running all of the lines in Rotterdam, which is two, but that doesn’t mean that we’re going to just be running at 100% and flooding the market. I’d say that both those plants — both those lines, together, will be running at around 80% utilization rate.

Aleksey Yefremov

Thanks, and good morning, everyone. Peter, could you talk about your cost in MDI in Europe, how do they compare currently to your U.S. assets, China assets? And are you exporting any MDI from the U.S. to Europe?

Peter Huntsman

Yes. I think that when we look at the gives and takes on all of these things, in the U.S., we have a bit higher chlorine and caustic costs than in — but we’ve got lower energy costs in the U.S. and Europe. We’re advantaged when we look at such things as tariffs and so forth, where you’ve got a — if you’re selling — moving product to China, for example, in the U.S. you’ve got a 25%, 30% tariff, whereas in Europe, your looking at a single digit. So, there’s internal and there are external forces as you look at the — as you look at these.

But by and large, the gap between Rotterdam, without getting into too much specificity on a cost per tonne basis, it’s fair to say the gap between the three regions has now shrunk to a point where they’re all within freight distance. Or say, if you think about the cost of that between the three regions, they’re all lower than that. So, there is not a lot of advantage — unless you’re desperately short of particular tonnage, there’s not a lot of advantage of moving from one region to the other.

Arun Viswanathan

Great. Thanks for taking my question. So first off, on the outlook. If you kind of look at the first half versus the second half, and I know this question was asked earlier, but what is it going to take? Is it really just come down to kind of China recovering, maybe some better construction or automotive trends? What is it going to take for maybe a little bit better performance in the second half? And when you think about that, the destocking, is it really — you noted that it was maybe a little bit more pronounced in North America. So, is that kind of in construction areas? Or where specifically are you seeing that?

Peter Huntsman

Yes, I’d say that the destocking is probably — as you look at it on a global basis, three quarters of that destocking is taking place in North America. And I think that’s where you see the greatest concentration of that taking place in the building materials in U.S. housing. That’s not to say that we couldn’t see other destocking take place. But Europe, by and large after COVID, stayed in a pretty lethargic state. Whereas the U.S., the housing boom after COVID in the last 12 to 24 months has really gone up considerably.

And it’s come down. There’s a lot of stock that was built up. Think of a year, 1.5 years ago when MDI was short, not just MDI, but a lot of building materials were very short. So, a lot of people were buying excessive amounts of materials and stockpiling it. So again, it’s not just an MDI issue in the U.S. housing market. A number of raw materials from lumber all the way on through that’s going. So, when we talk about a deinventoring process that takes place. It’s not just around MDI or around a particular chemical, it’s largely the whole chain.

So, again, I believe that in North America, where I think that you have the greatest opportunity for improvement relative to where we are today, if we could get through that destocking, I think that starts to give us price leverage and it gives us improved volume. But again, you’re going to be selling into a housing market, a housing start market, that is 25% again smaller than it was a year ago.

And as that now improves the number of homes being built, and that’s going to be a whole number of issues from demand to mortgage rates to consumer confidence and so forth, as that number increases from its present $1.2 million, $1.3 million homes per year sort of run rate, back up to its $1.6 million, $1.7 billion run rate that we saw a year ago, you’ll see another push forward demand and another opportunity for pricing improvement.

I think in North America, again, you’re going to be seeing a lot of kind of a multistep. Europe, I think, you’re going to have to just say a continued across-the-board GDP improvement, coupled with an energy policy that needs to be established and needs to allow manufacturing to be competitive. It’s not going to help us a whole lot if you see a recovery in the economy in Europe and energy remains — for electricity and for natural gas and natural gas byproducts that remain 5 times, 10 times higher than the rest of the world. So, there’s got to be some sort of a change and continuous improvement takes place here.

Again, in China, I think that one’s just a question as to how quickly do they get back to a normalized run rate? As optimistic as I am, I think that it’s going to be a steady but gradual improvement between now and the end of the year.

John Roberts

Anyway, Huntsman Business Systems has a lot of small competitors. Are you seeing any signs of distress among your competitors? And are you gaining any share even though the market is down?

Peter Huntsman

I wouldn’t say anything that is appreciable or material to our bottom line. I would — as we move further and further downstream, I think about HBS where you’re making up 40% of that 2/3 of our MDI, we really don’t compete against another MDI producer. We don’t compete there in — with — and it gets another polyurethane, really, we’re competing against competing applications, competing material, mineral fiber, and other smaller entity. So, we’ll certainly see this going downstream more and more. But at this point, I wouldn’t say that it’s having any impact on the business.

Phil Lister

And I would say, John, that for HBS in particular, that market has changed over the last 5 years to 10 years. I think it’s become a little more consolidated with some of the larger strategic players coming into the market. And you actually see less of the smaller players in that market today. And we think that’s good. We think that’s good for us, a discipline into the end market in terms of making sure that the appropriate products are sold and are applied correctly.

Peter Huntsman

That’s — yes, it’s an excellent point. Companies like Owens Corning sulfur that you used to be exclusively mineral fiber, now moving into the spray foam business, and that’s — frankly, that’s good for us.

Hassan Ahmed

A lot of commentary about MDI volumes and the like, and you also touched on the sort of goings on, on the raw material side of things. And I just wanted to get a sense of what you guys are seeing in terms of global MDI cost curves. You guys, obviously, and you touched on that, are relatively cost-advantaged. You had like around 48% EBITDA margins in Q4, around 7% EBITDA margins in the Polyurethanes segment in Q1.

So, I would like to imagine that a chunk of your competitors are maybe at breakeven or negative EBITDA margin levels. So, any thoughts around cost curve positioning and how that may actually give the market some buoyancy would be appreciated.

Peter Huntsman

Yes. I think it’s an excellent question. Again, I won’t be saying anything of our competition, not because I have a lawyer in the room, but just because I really don’t follow them all that well on profitability per ton. But I just — I look at our three regions, Rotterdam, Geismar and Couching, and you look at the kind of the four components that I look at manufacturing a ton of MDI. You’ve got benzene, I’ve got natural gas. When I talk about natural gas, that’s everything from electricity to hydrogen to steam — I mean, it’s a whole range of products, right, it’s not just the price of natural gas or natural gas does all those.

And then you kind of got your caustic and chlorine, which is, I would say, would be the fourth component. And then your — third component. Your fourth component is going to be labor, which you would think would be a big flywheel, but in actuality, these plants do not employ a lot of people.

They employ a lot of people downstream and ancillary businesses to keep these operations running, but the number of people that are actually working on a shift to keep an MDI plant working. So, kind of reversing of those four steps, I would say that labor is probably immaterial as far as one region competing versus the other. And I would say that benzene is probably immaterial in the sense that it is a fungible global commodity and we buy benzene from all over the world, source it from all over the world. And the difference between benzene costs in North America to Europe to China is not going to drastically differ.

I will say that where we see the biggest variability of differences come in the cost of natural gas. And during the peak of last year’s energy crisis in Europe, the cost delta between China and Rotterdam, where China is going to see an energy that’s more coal-based, Europe is going to see an energy that’s more wind, coal, and whatever else they’ve got going, was nearly — was actually in excess of $1,000 per ton.

Now that was only for a relatively short period of a quarter or so. But we’ve never, in the history of MDI, at least that I followed, of ever seeing a $1,000 per ton difference just because of natural gas prices, energy prices between one region and the next. So that volatility, that’s going to be your single biggest variable.

And then you get into caustic and chlorine, and that’s going to be — again, that’s going to differ region to region depending on supply demand and the energy costs and values that go into that component. But that’s not going to be much more than $100 and change different from region to region. So, it really is that energy component. And I know I harp a lot on that. But I would just remind you, when we go back to 2019 and 2020, as recently as just 2 years or 3 years ago, Rotterdam was consistently our cheapest MDI in the world. And cheaper than China, cheaper than North America and as far as the production cost basis. And that’s the impact that energy policy failed or successful has had on an operation like that.

Within 1.5 years after being the lowest-cost operating facility — one of the lowest-cost operation soles in the world, it’s — Europe now finds itself is — I mean, $1,000-plus a ton out of the market, which is, what, 3 times the cost of freight to get products from one place to another.

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