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Huntsman Investors Call Urethane Highlights

February 16, 2022

Huntsman Corporation (HUN) CEO Peter Huntsman on Q4 2021 Results – Earnings Call Transcript

Feb. 15, 2022 5:01 PM ETHuntsman Corporation (HUN)

Q4: 2022-02-15 Earnings Summary

EPS of $0.95 beats by $0.05 | Revenue of $2.31B (38.31% Y/Y) beats by $124.03M

Huntsman Corporation (NYSE:HUN) Q4 2021 Earnings Conference Call February 15, 2022 10:00 AM ET

Company Participants

Ivan Marcuse – VP, IR

Peter Huntsman – Chairman, President and CEO

Phil Lister – EVP and CFO

Peter Huntsman

Thank you, Ivan. Good morning, everyone. Thank you for taking the time to join us.

Let’s turn to slide number five. Adjusted EBITDA for our Polyurethanes division in the fourth quarter was $218 million versus $201 million a year ago or an 8% increase. Revenues grew 35% as our proactive selling price actions more than offset significant inflationary feedstocks and logistics cost increases. Our volumes improved 2% year-over-year and we benefited from slightly higher equity earnings. We saw strong demand in our North American region with 7% growth.

Asian and European volumes were essentially flat versus fourth quarter a year ago. We are pleased to see strong pricing development in China, the world’s largest MDI market as we head into the first quarter of 2022. Our core construction markets including insulation, adhesives, and coatings continue to be the strongest markets for Polyurethanes. Underlying demand remains strong. We continue to see excellent growth in our commercial insulation and composite wood businesses.

Our Huntsman building solutions business continues to benefit from strong pent-up demand and product substitution gains. HBS fourth quarter revenues were 20% above the prior year and $560 million in 2021. I would note that when we purchased each of Demilec and Icynene-Lapolla in 2018 and 2020, the combined revenues at acquisition were approximately $400 million.

HBS did continue to be hindered by logistics and shortages of certain raw material ingredients, which restricted growth. The backlog for our order book remained very strong, and we’re implementing price increases that are more than offsetting higher cost and resulting in increased margins.

Further, our efforts to expand internationally continues to gain momentum. We remain very positive about this platform and we will look to add to it through bolt-on acquisitions and organic investments when feasible. Our elastomers platform which continues – which includes our global footwear business is another core growth platform for Polyurethanes.

Revenues overall grew by 33% versus fourth quarter of 2020. Demand is strongest in the industrial markets and this platform is implementing price increases globally to offset the headwinds of raw material, supply chain costs that are pressuring margins.

During the quarter, our volumes in our automotive platform continued to be impacted by the well-publicized global chip shortages. We did see improving trends as we moved through the quarter as the year-over-year volumes declined in each month as each – and each month moved from high teens to low single-digit declines. Overall, revenues increased in 2021 by 24% to over $550 million. Our automotive platform is the core business, we will continue to invest in to bring innovative solutions to our customers.

As we discussed in detail at our recent Investor Day, the key goal of our Polyurethanes business is to upgrade the quality of our portfolio and continue to push molecules downstream. We will keep redirecting more of our plants’ output to our differentiated businesses and bottom slicing lower margin component business.

We will invest in our downstream businesses organically where it makes sense through bolt-on acquisitions, where we can generate higher and more stable margins through long-term contracts in our component businesses we are also doing this.

Our MDI splitter investment in Geismar, Louisiana is consistent with this strategy helping us to drive our downstream growth and increase in overall margins. This project will be mechanically complete in April. We will have commercial beneficial operations towards the end of the second quarter of 2022.

We remain confident that once fully operational and selling at capacity this investment will contribute $45 million in incremental adjusted EBITDA on an annualized basis by the end of 2023. We expect $10 million to $15 million of incremental EBITDA in the second half of this year.

Our PO/MTBE joint venture with Sinopec in China, where we own a 49% interest benefited from a strong 2021 contributed approximately $130 million in equity earnings for the year, including $22 million in the fourth quarter. We expect equity earnings to be approximately $50 million lower in 2022 as propylene oxide margins in China normalize.

As we look into the first quarter 2022, we foresee global demand remaining on track in our three core markets North America, Europe, and China. Globally, we have offset over $300 million raw material pricing headwinds, the area of greatest impact is Europe at $140 million with higher gas and electricity prices being the largest driver for this increase. Rather than waiting for this to pass, we’ve initiated multiple steps to offset this impact.

First, on September 22nd, we announced in Europe EUR125 per ton surcharge on our MDI to offset rising energy costs. We have continued to adjust this as needed. Secondly, we have moved nearly 90% of our pricing contracts to be settled on a monthly basis. Previous to this action, about 20% of our volume was settled monthly while the remainder was settled quarterly. This move will give us better flexibility to react to changing market conditions.

Thirdly, we’ve accelerated our efforts to optimize our cost structure. During our Investor Day, we announced that we would complete our initial $40 million cost reduction program by mid-2022. We now have reached that target ahead of schedule and we build on that achievement as we focus on our previously announced $60 million cost optimization program. Fourth is part of our $60 million cost optimization program. We will be moving tons – tonnage to more differentiated markets where we can achieve higher margins.

So we stated last year, our focus is to increase the margin per pound on our nearly GBP3 billion of MDI, not to invest in more tonnage at any price. Throughout 2022, we will be exiting lower margin markets and will either increase margins or divert tonnage to our core markets in North America, Europe, and China. Rather than waiting for markets to return to more normalized conditions, we intend to emerge from this period of higher raw materials and supply chain disruption stronger than when we entered it.

Looking into the first quarter despite approximately $20 million of lower equity earnings and saving significantly higher feedstock costs in the year-ago. We would expect our Polyurethane’s first-quarter adjusted EBITDA to be strong at between $200 million and $220 million of adjusted EBITDA.

Peter Huntsman

Thank you, Phil.

I’m pleased with the results of this past year. 2020 was a year where most companies were looking to survive, because of an investment-grade balance sheet into leaner and stronger portfolio we were able to further strengthen our company. By the time we started 2021, we are more than ready to continue to move forward to accomplish with this present portfolio of assets, the best year in our history.

Now it’s time to focus on 2022. A year that looks to be better than the year we just completed. As we stated at our Investor Day presentation, we expect our businesses to earn approximately $1.4 billion in 2022. As we sit here today with the results of January in hand, we believe this number is on the low end of our expectations, again subject to macroeconomic and geopolitical conditions.

Through our pricing and cost actions, we see clear adjusted EBITDA margins improvements at the start of the current year. Our biggest challenge that we see then the volatile and high prices we see for energy and certain raw materials.

As we move closer to the end of the first quarter, we should have better clarity and may provide further updates to the market conditions after the conditions were experienced. We expect that global supply chains will be sorted out during 2022, but there are some obvious structural issues around energy, especially in Europe.

Despite these headwinds, we feel that these will be offset by a combination of pricing discipline, higher margins as we continue to focus on downstream products, aerospace recovery, and continued cost discipline. We announced at our Investor Day, all of our corporate officers including our top 80 managers are aligned not just to deliver improved results in 2022, but continued improvements in 2023 as well. We reported this past quarter, approximately $100 million of share buybacks, with the continuation – with the collection of our proceeds from Albemarle and our improved outlook.

We would expect that, our earlier commitment to accomplish our $1 billion buyback in the next three years to be accelerated and should be completed in less than two years. We also announced an increase of $0.10 per share in dividends. These are both part of our balanced allocation of capital as we remain competitive and returning value to our shareholders.

We also reaffirm our guidance of $300 million of capital expenditures, this will allow us to assure safe and reliable operations, the completion of our MDI splitter and Geismar, Louisiana, and the previously announced projects to move our means and performance products downstreams into catalyst EV batteries and semiconductor chips.

Angel Castillo

Thanks for taking my question. Peter, just a quick one on China and just, I guess, more broadly on polyurethanes as you think about – you noted maybe some pricing developments in the first quarter. If you could just unpack that a little bit. And also as we think about the contracts that you noted transitioning from 20% of them being monthly to 90% of them. Is that broadly across all of your polyurethane portfolio? Or what is kind of the impact of that and the benefits as we think about kind of financially and just how broad that could be?

Peter Huntsman

Yes. As we look at – the first part of your question is about Chinese pricing, again, as we see polymeric pricing in China, and I don’t want to get too transfixed on this. Because overall, the amount of impact this has on our overall business is going to continue to decline as one of our major thrust in China as it take that polymeric price and to continue to take that polymeric product, continue to split it, and to further derivatize it into higher-value markets.

But as we look into the first quarter, we’re seeing polymeric pricing around RMB21,000 – RMB22,000 per ton. To give you an idea a year ago this time, it was around RMB20,000 – RMB25,000 per ton, but again, that was a fallout of a year ago. You remember the freeze that we had here in the Gulf Coast that kind of played havoc on chemical pricing on a global basis. So last year, we saw a great deal of volatility. First quarter benefited from that one-time gain.

I think what we’re seeing in first quarter 2022 this year is – while it’s a lower price, it’s a more stable price. And I like the overall direction and the stability that, that is presenting. When I talked about the price movements and the contract, that is virtually all of that is taking place in Europe. And we – traditionally, Europe has been very much of a quarter-to-quarter basis in pricing.

And like I said, we’re about 90%, just around 90% of our contracts in Europe have now been moved to monthly pricing, which means we’re going to have a lot more flexibility to be able to move pricing and to be able to pass through some of that volatile energy shock that we’re seeing in the market. Again, this is what we’re doing, it’s the steps we’re taking. I’m not saying that that’s being done by the industry. Our competition, I’m sure, will do whatever suits them best.

Hassan Ahmed

Peter, a question on polyurethane. So keeping in mind the European natural gas situation, through the course of Q4 and call it, January through today, did you guys see broadly in the European industry any curtailments on the back of – any polyurethane curtailments on the back of sort of inflated natural gas prices? I mean, I’m cognizant of the fact that call it, roughly 20% of the MDI industry is out there. And I would imagine certain raw materials like chlorine, which are directly sort of linked in nat gas, procuring those may have been an issue.

Peter Huntsman

No, Hassan, we did not see anything matter of fact, in Europe, we think that the MDI capacity’s operating rates and utilization rates were probably in the mid-to-high 90% utilization rates. So I think most everybody was running and operating at design capacities. I haven’t read of anybody curtailing capacity and we haven’t heard anything from customers about that happening.

Mike Harrison

Was wondering in the Polyurethanes business, can you help us think about how to model the contribution of Geismar. I believe you said it would be a $10 million to $15 million contributor to EBITDA this year. But what does that ramp look like? And are there some start-up costs that we need to keep in mind that would weigh on Q2 and then turn into mix benefits later in the year? And then the second piece of my question is any key turnarounds in polyurethanes that we need to think about as we model out the rest of the year?

Phil Lister

Mike, thanks for your question. It’s Phil. So in terms of the split, as we’ve said, we’d expect to start up the facility – at the beginning of quarter two, were really commercial products coming off towards the back end of quarter two. So think about the benefits coming in the second half of the year and as we ramp that up through ’23 and ’24. And we guided to $10 million to $15 million of EBITDA benefit in the second half of 2022. As you move through 2023, think about that as $30 million to $35 million of benefits. And then we hit the full run rate in 2024 of $45 million overall.

To your second question, Mike, around any major turnarounds? Not this year. We continue to have turnarounds, you have to do many turnarounds every year with your MDI facilities, but we don’t have anything as significant as we did last year, if you recall, towards the back end of Q1 and the start of Q2 when we had the Waterdown cluster shot down.

Phil Lister

Mike, I’d also just want to take a second and just remind you that as we look at this entire splitting capacity, remember that we are not adding MDI pounds into the market. We’re taking existing MDI pounds and we’re upgrading that tonnage. That means that the polymeric materials that we have left is less in availability to our customers which gives us the opportunity again. We’ve got a growing demand, and at the same time, we’ve got a shrinking supply going to that, that I would – I don’t want to say that it’s more commoditized. It’s an important segment to us.

But traditionally, it’s been one of our lowest margin products that we produce. And as we move tonnage further downstream, the existing tonnage that we have upstream, if you will, we have an opportunity to renegotiate those contracts, and I believe to make those contracts more competitive to where they justify the ongoing production into those materials. And so not only are we seeing the benefit, the benefit that Phil just gave you is the benefit that we’re seeing just from taking the product and upgrading it to a higher level.

There’s also going to be a benefit to the North American MDI business that will come with the ability to renegotiate contracts on the polymeric side of the business that will also be benefiting the business. And I’m not sure that, that benefit is going to be much less than what we have stated as the benefit is going to be – that we’ll see this year coming from the splitter project. So again, I’ll be kind of be candid in what we’re upgrading and also what’s left.

Mike Sison

Nice quarter. Peter, a lot of specialty businesses are struggling to grow EBITDA here in the first quarter. So I just wanted some color on polyurethanes, how the differentiated businesses are going to do in Q1 and how they’re going to generate the growth? And maybe a comment on Performance Products, I know you have an acquisition there, but where are you seeing the growth year-over-year in Q1 there?

Peter Huntsman

We’re seeing the growth and volume. But more importantly than volume, let’s focus on value, right, I mean, one of the criticisms of Huntsman that I think has been unfairly thrown in our direction is the lack of volumetric growth. And the chemical industry by and large, we can go out and spend billions of dollars and grow volume for the sake of growing volume, but if you’re not growing value in that volume, I think that you’re missing a great deal of opportunity.

So as you focus merely on a statistic and look at our EBITDA margin in fourth quarter of 2020 at 14% and our fourth quarter of 2021 at 15%, it’s a 1% movement. If I look at it on a per pound basis $0.16 per pound versus $0.23 per pound, an increase of nearly 50%. And so I think we’ve got to do a better job as an industry and a better job, frankly, as a company of focusing on results on a per pound basis.

So again, if we talk about absolute growth in tonnage. Again, I’m not saying that we want to walk away from volumes. We obviously – it’s an intricate part of our industry and our business. But more importantly than just focusing on volume, I want to make sure that we’re taking that volume that we have and we’re investing and being able to upgrade it to get the ultimate value out of it. And that’s ultimately where we need to be. That’s why we’re going to increase our margins, and so we’re going to increase our trading multiple.


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