Huntsman Investors Call Highlights
May 4, 2022
Huntsman Corp (HUN) CEO Peter Huntsman on Q1 2022 Results – Earnings Call Transcript
Ivan Marcuse – VP, IR
Peter Huntsman – Chairman, President & CEO
Philip Lister – EVP & CFO
Ivan, thank you very much. Good morning, everyone, and thank you for joining us. Let’s turn to Slide #5. Adjusted EBITDA for our Polyurethanes division in the first quarter was $224 million compared to $207 million over a year ago, an 8% increase. Revenues grew 30%, primarily due to the price increases that we implemented to offset significant inflationary feedstocks and logistics costs. Our volumes improved 4% year-on-year.
Compared to the first quarter of 2021, volumes growth in the Americas region was 7%, followed by Asia at 4% and Europe at 2%. We expect the Americas to remain our strongest region, driven by construction-related markets as well as overall economic strength.
In Europe, we’re closely monitoring the impact of the war in Ukraine and on the broader economy. While visibility in this regard is difficult, to date, we still see stable demand driven by construction and adhesives in coatings markets. In Asia, specifically China, we expect to be negatively impacted in the near term from the government-mandated lockdowns as the country attempts to control COVID.
Despite continued logistics and supply issues, our Huntsman Building Solutions platform recorded its first quarter revenues of approximately $160 million, nearly 50% above the prior year, primarily due to a strong pricing actions. Consumer sustainability trends, combined with high global energy prices remain clear tailwinds for HBS and strategically, we will continue to up value our polymeric MDI in the spray foam insulation systems.
Our polyurethanes to automotive platform continue to be impacted by the global chip shortage and supply chain issues. However, for the first time in several quarters, we delivered year-over-year growth. This growth was due to modestly improving trends, favorable year-over-year comparisons and continued product substitutions.
Revenues increased 18% with volume increases at 4% year-over-year. We will continue to invest in our automotive platform and bring innovative solutions to our customers.
Our third global platform is our elastomers business, which includes both industrial and consumer segments. We continue to implement price increases to offset inflation and overall revenue climbed 28% versus the first quarter of 2021. The industrial markets remain the strongest sources of value and demand for this business with good growth in the Americas. We’ve chosen to deselect some footwear-related revenues in Asia where we do not believe value is being achieved in a highly inflationary environment.
Our value over volume approach remains core to our strategy for polyurethanes and this intent will drive our decisions on how and where we invest and also where we choose to supply both geographically and by end market. The new MDI splitter in Geismar, Louisiana, which is one of our strategic investments that will allow further upgrade to our Americas portfolio will be completed in June and will begin to contribute to result in the second half of this year.
As we disclosed previously, once fully up and running, we expect this project to add an incremental $45 million of annual EBITDA to the division results by 2024.
As we told you this last year at our Investor Day, equity earnings from our PO/MTBE joint venture with Sinopec in China declined in the first quarter compared to a year ago due to lower propylene oxide margins. The joint venture contributed approximately $12 million in equity earnings for the quarter, below the $35 million reported a year ago. We still expect equity earnings to be approximately $50 million lower in 2022 versus 2021. Raw material inflation remains a challenge though through our pricing efforts, we were able to offset more than $250 million in direct costs when compared to the first quarter of 2021.
About half of this inflation in costs were in Europe where we implemented surcharges and price increases in order to overcome these headwinds. We expect costs to increase in the second quarter over the first quarter but believe we will be able to offset these costs through our pricing initiatives.
In addition to our focus on upgrading our margins by driving molecules into higher value-added margins and products, we are focused on optimizing our cost structure in this division to further improve margins. We delivered in excess of $40 million from our first phase of cost optimization and synergies in polyurethanes, and we are in the process of concluding our plans for the next phase. We will provide details in our second quarter earnings call and expect to deliver a $60 million run rate by the end of 2023 as targeted at our Investor Day.
Looking into the second quarter, we’re watching closely at all of the challenges that the global economy is facing such as military conflict, COVID lockdowns in China, cost inflation and continued supply chain disruptions. Despite these challenges, while visibility is difficult, particularly in China and Europe, near-term trends in the second quarter remain relatively stable with the first quarter. As a result, we expect polyurethane second quarter adjusted EBITDA to be in the range of $210 million to $230 million.
Let’s turn to Slide #6. Performance Products reported adjusted EBITDA of $146 million for the first quarter with a 57% increase in revenues and adjusted EBITDA margins rising to 30%. This margin is above our target range of 20% to 25%, with both amines and maleic, delivering strong performance. Over time, we do expect some moderation in certain amine products in Asia primarily into the renewable energy wind market. We are confident that the supply and the demand dynamics in performance products remain favorable in the medium to long term.
Last year, we announced targeted capital investments in polyurethane catalysts and differentiated chemicals, serving the electronic vehicle, semiconductor and insulation markets. These projects continue to move forward and will remain on schedule to be completed on time. We expect all of these projects to contribute to results in 2023 and deliver more than $35 million of EBITDA benefits in 2024.
We’ve said multiple times, we would be highly interested in doing bolt-on acquisitions in performance products, but these opportunities tend to be few and far between. As a result, in the near term, we will stay disciplined and remain focused on organic investments in order to expand this business.
The second quarter for Performance Products tends to be similar to the first quarter. However, we do expect to see some impact in volumes in China as a result of the COVID lockdowns in that country. We currently expect Performance Products to report a second quarter adjusted EBITDA of $130 million to $140 million.
Let’s turn to Slide #7. Advanced Materials reported adjusted EBITDA of $67 million in the quarter, significantly above last year’s first quarter and the strongest quarter in the division’s history. We achieved 20% adjusted EBITDA margins with an extremely disciplined approach to value over volume and all despite aerospace results remaining well below prepandemic levels.
On a per unit variable contribution margin basis, Advanced Materials delivered a 50% improvement compared to the first quarter of last year and crucially, a further 15% improvement since quarter 4 despite further raw material escalations. We are deselecting lower-margin business while increasing our exposure to higher value sales where possible.
In addition, the recent acquisition of Gabriel and CVC are contributing strongly with a combined annualized run rate of $80 million adjusted EBITDA in quarter 1 and above our average adjusted EBITDA margins as we execute on pricing and synergies.
Revenues increased 21% compared to quarter 1 of 2021 and 6% versus quarter 4. Prices increased 34% compared to quarter 1 2021, while volumes were down 17% in the quarter versus the prior year and 5% sequentially.
The majority of the reduction volume was a conscious decision to exit commodity BLR manufacturing in the U.S., in line with our stated strategy. Raw material availability shortages, soft demand in Latin America and implementation of our value over volume strategy somewhat curtailed volumes across our business, particularly in automotive, which declined 15% compared to the prior year, though we’re relatively flat versus the fourth quarter. We did see growth in general industrial markets.
Our aerospace business saw a significant uplift over last year’s depressed quarter 1 and a meaningful sequential increase in profitability. Aerospace is currently trending towards an approximately 40% improvement compared to 2021, which would leave us at approximately $30 million of adjusted EBITDA short of prepandemic levels. The fundamentals of this industry remained strong, and we expect to see continued improvements over the next couple of years as we get back to prepandemic levels.
At this time, we still see stable underlying demand for many of our core specialty businesses in the Americas and Europe and continue to see increased prices to offset inflation. We do expect that the COVID-related restrictions in China will have a modest impact on advanced material results in the second quarter. We expect adjusted EBITDA for this segment in the second quarter to be in the range of $62 million to $68 million.
Peter, just on MDI manufacturing in Europe, can you talk to the competitiveness of that right now by the industry? And do you think your advantage at all having a plant in the Netherlands as opposed to capacity in Germany?
Yes. And David, very good to hear from you. Yes, I think that we are. I think that the Netherlands, we have an excellent arrangement where we are getting a portion of our electricity and power at that site from wind and contracts that we have in this area. Again, I don’t want to portray that we’re somehow impervious to natural gas supply and price and so forth. But I like our position there. We’re in a chemical cluster that is quite independent and quite stand-alone. And to-date, we haven’t — I just don’t see a threat again as of what we have seen thus far.
We’ve heard and read about some of the actions that might be taken if there’s a natural gas curtailment going into Germany and the impact that might have on some of the larger sites along the Rhine River and so forth. But again, that may impact us, but it would impact us on quite a 2 or 3 levels removed. And I like our position. I like the demand and the customer base that we see.
We’re in the process right now of looking at our entire European footprint and that European footprint, when we look at the European market for us, it includes the Middle East. It includes Africa, it includes India, and we, frankly, we need to look at that entire region. We need to continuously calibrate where we’re going to get the best value for the tonnage that we have available.
Again, I know I sound like a broken record in saying this, but we’re not out trying to move new tonnage. We’re out trying to move improved margins, improved tonnage, improved customer applications, and that means that we are going to continuously look at our customer profile and the regions where we do business.
I mentioned on — in my prepared comments that we pulled out some of our footwear applications and under our TPU business in Southeast Asia. Again, a few years ago, this is a very strategic end of our business. But if we’re not going to be able to get pricing, and we’re not going to be able to pass through raw material prices, we’re not going to be able to increase margins and forth. And get the very best value for that tonnage. We’ll move the tonnage somewhere else, and we’ll continuously look at where we can grow stronger relations and stronger applications.
Peter, it seems that demand is quite strong across many of your major product lines. So in that context, do you foresee the need to debottleneck or otherwise add capacity moving forward? And related to that, how do you think the capital budget of $300 million this year might trend as your splitter project rolls off?
I’ll let — I’ll ask Phil to comment on the capital projects and projections therein. But I would just note that — I would hope that we are continuously looking at internal projects where we can get an extra 1%, 2%, 3% of excess — of new capacity efficiencies that proverbial learning curve and efficiencies that we have in any manufacturing process.
But aside from some relatively select applications, we’re expanding in some of our amines area, where we are going to be adding the capacity to produce more catalysts and so forth. Most of our capital right now, I would say, 75%, 80% of our capital that’s been spent in the last year and will be spent over the course of the next 6 to 18 months, it’s going to be spent on upgrading our capacity, taking our carbonate today and moving them into EVs, taking our amines and moving them into ultra-peer applications into semiconductor chips.
And so we’re taking our commodity MDI North America and moving it out of some of those more traditional commoditized applications and moving it more into automotive and moving it into further downstream applications.
And I think that, again, that focus on value. And I think that as we look at the overall multiple of our company and we look at the value that the market puts on our EBITDA and the cash that’s generated we need to have higher margins. We need to have greater reliability and greater consistency of those earnings.
And we’ve set that out now for the last 2 years or so, and we intend to do just that. And a lot of those investments that we started a couple of years back, such as the MDI splitter in Geismar, Louisiana are coming to fruition, and we’ll be seeing a full impact of those.
I think, Peter, if I heard you right, you talked about polyurethane, Auto’s market demand was up maybe a low to mid-single-digit percent year-over-year that seems to outperform unit sales or unit production in Autos pretty nicely. Just wondering if you could differentiate between how much of that is linked with unit demand, maybe if there’s some inventory effect, which helped the quarter or really how much of that is a substitution effect that you referred to?
I think a lot of that really has to do with substitution of other products. And I think that as we also see a lot of the growth in our higher-end applications, such as Tesla applications. As we’ve said in the past, we’ve won the seating contest, the seating applications, I should say, for Tesla in China. We’re in the process right now of working for applications — working for qualifications and applications for other vehicles as well.
But we throw EVs around quite a bit in these calls. But this is something I think that when we focus on the battery, we focus on the insulation, the sound of the car. We focus on the seating and the lightweighting of the vehicle. I think that we’re uniquely positioned in all of these areas to be able to really add value, and we’re going to continue to do that.
So the higher-end automobile segment continues to do quite well for us. And I hope that we’re able to do better than what you would see if the overall car industry is seeing 0 growth, I hope that we’re seeing something slightly better than that.
It’s Dan Rizzo on for Laurence. Given how tight the market is, would you co-invest in the greenfield and MDI plant to look back in market share and downstream chemistries longer term?
I mean, look, I’d never say never. I’d have to be up to be a really compelling case to go to a greenfield. When I look at potentially expanding to add a line or increase in existing capacity with a customer or a partner or something like that, perhaps. But I think right now to take $1.5 billion, $2 billion for a greenfield.
When I talk about a greenfield, I’m referring to a brand-new facility, scrape the earth, you’re building a brand-new site, you’re starting with nitrobenzene, going to aniline, going to MDI, going to variants and splitting and so forth. You’re looking at a world-scale basis of 400-plus ton facility, you’re looking at $1.5 billion to $2 billion.
And you’re looking at 7 to 8 years to build that. If I were to take $2 billion and just buy in shares at our market cap today, you’re kind of looking at a 25% improvement in our stock price if nothing happens on multiples or anything else over the course of the next year or 2 versus over the course of the next 8 years, investing in a facility that when it comes on stream, who knows where the markets are going to be and I just kind of look at that from my conversations with shareholders and just kind of looking at the numbers, I’d be very hard-pressed to see us actively pursue — aggressively pursue a greenfield investment in an MDI plant.
Again, please don’t interpret that we’re not dedicated to the business. We’re not looking to invest in opportunities in MDI. I just think — I’d rather see us put $100 million, $200 million over the next couple of years into downstream spray foam and upgrading our MDI and looking at those downstream applications and moving into those applications and producing more MDI.
Wanted to ask — get a little bit more color on the Geismar splitter really. What does that start-up process look like between now and June? And can you walk us through the P&L impact on your EBITDA this year? Should we think that there are maybe some costs coming in on the front end and then we ramp gradually toward that $45 million annual EBITDA contribution. And if you could maybe also comment, are customers already in place for the upgraded product coming out of the splitter or is it going to take some time to sell this new material through?
Well, I think that when you look at it, you’ll be seeing — we operate one of these same sort of facilities in China and also in Europe. So this isn’t going to be something that takes us 6 months to start up and we’re trying to learn how to operate this. I would hope that we’d have a very quick startup. What will take time here is actually qualifying new products from a new facility going into our customers.
Now again, we’ve been feeding some of the market — seeding some of the market with products coming out of Asia and Europe. And so as we think of the second half of this year, I would think that it should be around a $10 million to $15 million benefit. As we think of next year, you’re probably looking at $35 million, $40 million-ish. And then by 2020, you’re running it at a full on run rate.
So I mean it will be gradual, just from the qualifying and from the supply sort of a period. But we’re not going out and just starting to hit the market on a sales once we start up with this process. We’ve identified the customers and market segments. We’ve been bringing product over from Europe and from China. And yes, we’re going to hit the ground running.
I would be a little disappointed if we didn’t beat the timing that I just gave you, but I’m also trying to be realistic to the qualifying time the customers and so forth.
I was hoping you could talk about this rising mortgage rate environment in the U.S. and how it might impact housing? And then specifically, do you think there would be like a 1-for-1 hit if housing slowed down to your polyurethane segment? Or are there ways that you would be insulated from any sort of housing downturn?
Yes. So when you think about North American residential, think about 10% of our polyurethanes of our overall business that we have. About 10% of our U.S. — of our overall business is U.S. residential and think about 2/3 of that is going to be new build and 1/3 of that is going to be retrofit.
If you see residential slow on new builds, you’re going to see retrofit expand. People decide not to move into a new home, not to buy a new home, not to invest in a new home. They typically will expand in retrofit, their existing home. I want to be absolutely clear, that’s not going to be on a one-for-one basis. I’d not rather see a new home be built for the sake of our business and our products than to see a retrofit being done.
But at the same time, if you’re going to see a new build drop by hypothetically, 10%, you’re not going to see a 10% drop in our business. It ought to be mitigated by the improvement that you’ll see in the retrofit side.
And other areas that I would say that impacts the North American residential business for us is obviously a very large segment of that is the spray foam business and with higher energy prices and so forth, that continues to do very well for us. We’re — I’d say we’re sold out in that business in the sense that we’re producing as much as we can still being limited by the availability of some of the blowing agents and catalysts and so forth that we’re — that we need for that business.
We have a backlog in that business of about 5 weeks meaning that if we don’t get another order coming in, we’re still going to be running that business for the next month plus, just trying to fill the orders that we presently have on book.
So as I look at residential, we continue to see strong demand in our building applications, building materials and so forth. Again, we have not seen that slowdown, but I can’t sit here at the same time and say we don’t have a cautious eye in that area. When you look at the number of new home sales, when you look at the number of mortgage applications and building permits and so forth, it does look like there’s going to be some volatility in that area.
But at the same time, there’s also going to be environmental retrofits, upgrades and we’ll continue to take market from other products and competing applications. So that’s a very important segment for us, and we’re going to continue to invest in it.
Just wanted to revisit the European MDI side of things. Obviously, Europe is a pretty large part of the MDI industry. Have you guys seen some reductions in operating rates already over there? And if not, if sort of the current geopolitical situation continues, do you expect to see certain curtailments, operating rate reductions and the like. And again, the only reason I asked this is in light of some of the commentary coming out of BASF a couple of weeks ago.
Yes. I have not read or heard what BASF had to say. Our business right now in Europe, it’s obviously not the same size as BASF. But as we look throughout Europe, we continue to be sold out right now. We continue to see strong demand. And again, I don’t want to sit here and burry my head in the sand and say that I don’t have concerns around raw material and around the possible consumer confidence or lack their other inflationary pressures and so forth.
But — and I thought I’d never hear myself say this, but at $30 gas, which is an exorbitantly high price, it’s substantially lower from where it was a month ago, where it was more than double that price. And I think that our Rotterdam cost basis, we’re working very hard to make sure that we can put through prices, we can keep demand. We can focus on new applications. And I think that we’re — we continue to do well in Europe.
Again, it’s the lowest margin end of our MDI business just because of that area of raw material costs. And I wish that wasn’t the case, but I think it’s probably going to be the case for — at least for the near future here.