Huntsman Corporation (HUN) Q3 2024 Earnings Call Transcript

Nov. 05, 2024 4:08 PM ETHuntsman Corporation (HUN) Stock

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Q3: 2024-11-04 Earnings Summary

EPS of $0.10 beats by $0.00 | Revenue of $1.54B (2.26% Y/Y) misses by $9.98M

Huntsman Corporation (NYSE:HUN) Q3 2024 Earnings Conference Call November 5, 2024 10:00 AM ET

Company Participants

Ivan Marcuse – Vice President-Investor Relations and Corporate Development
Peter Huntsman – Chairman of the Board, President and Chief Executive Officer
Philip Lister – Executive Vice President and Chief Financial Officer

Peter Huntsman

Hi, Ivan. thank you very much and thank you all for taking the time to join us this morning. We got quite a few people online for questions. So, I am just going to be very brief. The third quarter ended about where we expected it to finish and we’re now focused on the fourth quarter and year end. But we expected the year to be better than it’s shaping up to be. There’s still a number of positives as we move from quarter three to quarter four at year end. As we said to many of you during our investor conferences, an improvement in North American housing and construction will be the single most impactful change in our earnings. And harder to see that interest rates are dropping in both U.S. Presidential candidates for making new housing a major part of the economic platform for improvement.

We are hopeful that another rate cut between now and the end of the year will continue to improve the VMID [ph] growth we’re still seeing today. In addition to falling interest rates over the past few quarters, we’ve seen a return to more traditional MDI growth that exceeds the rate of GDP growth. As we’ve said in the past quarters, we need to see demand growth improve and capacity utilization rates increase before we see meaningful margin expansion. The demand growth is moving in the right direction, but I was disappointed to see our recent Q4 MDI price increases get little traction with customers. We continue to see very low inventories across the board and rising demand will eventually support price increases and margin expansion.

Additionally, we see a number — we see a record amount of global chemical assets, especially in Europe that are on the market. I would personally be surprised if all of these assets are sold. So, I imagine very few of these are actually making money. Given Europe’s desire to rid itself of manufacturing, which I see reflected in its adherence to anti-growth energy and regulatory policies, I doubt the prospects will change anytime soon. We may well see a number of facilities closed due to a combination of regulatory and high-cost structures.

Longer-term, I think there will be a much needed consolidation in a number of chemical products in Europe. Having returned recently from visiting government leaders, customers and partners in Malaysia, China, Saudi Arabia and Korea, I believe that these markets are seeing relatively low growth. but as they continue to sort out their conflicts and housing bubbles, we’ll continue to see opportunities grow. 2025 should be a year of gradual improvement across Asia and the Middle East. We continue to look at all of our production sites and examine our cost structures, supply agreements and operating rates. For the end of the year, we will be initiating a further $50 million cost reduction program in our global polyurethanes business.

This is in addition to the $280 million in costs we’ve taken out of the entire company over the past few years. We will continue to manage our way through challenges such as the recently settled Boeing strike, which will cost an estimated few million dollars in the fourth quarter. We’ll also capitalize on growing EV battery opportunities, tightening insulation standards, and energy efficiency in home and building materials. While too early to say much about 2025, I believe lower interest rates pent-up housing demand, Asian stimulus announcements, lower inventories and greater political certainty in Europe and the U.S. will all work towards improving market conditions.

With that, operator, why don’t we open the line up for any questions?

David Begleiter

Do you expect MDI assets to be closed in Europe in this iteration of restructurings and reviews?

Peter Huntsman

Of Huntsman’s restructuring?

David Begleiter

No, of competitors’ MDI assets.

Peter Huntsman

Look, I simply have no idea what our competition is doing. As I look around the world, you look at the cost curve in Asia, I think given the size and the relative recent construction of the capacities of MDI in Asia, There’s a relatively flat cost curve in Asia. I think Wanhua has an advantage just simply because of the scale and integration that they enjoy. But it’s a pretty flat cost curve. I think it’s pretty similar in the U.S., where you have a handful of players that all have about the same size facility, single-site locations and so forth. Europe continues to operate multiple smaller facilities and multiple — across multiple countries.

And as I look at that and you look at the raw material costs, energy costs, transportation costs, regulatory costs, everything else across Europe, I’d be very surprised if we’re sitting here a year or two from now and all of those particularly, the smaller non-integrated facilities are still operating. But again, I just look at that on a cost curve, U.S. versus Asia versus Europe, and certainly Europe is the outlier. But again, I haven’t had any idea what goes on in the competition.

David Begleiter

Very good. And just on your new restructuring program in Polyurethanes, $50 million. Can you detail the functions and regions, where that cost is being removed from?

Peter Huntsman

Yes. Most of that is going to be in Europe. It will be centered around our automotive in construction. We will be giving some more detail about this during our fourth quarter call in a couple of months. But safe to say, this will be about a $50 million cost savings over the next few years. The majority of this ought to be seen by the — on a run rate basis by the end of next year. And the cost typically when you’re looking at these sort of programs, it pretty much costs you the same as the savings. So, there’s about a one-year give or take a quarter to a one-year payback on this. Thank you.

Jeffrey Zekauskas

And in terms of your — can you describe your volume expectations in MDI for the fourth quarter in general and by region?

Peter Huntsman

I think that as we look at this, we’ll see a seasonal decline that’s usually about 15% to 20% depending on year-end inventory stock and so forth. Jeff, I am not trying to evade a direct answer on this, but typically in the middle of November, in the next week or two, we’ll start to see just how much people are trying to cut inventories and try to preserve working capital and so forth. And literally, as you start to see this in the last four to six weeks of the year, people will, in some cases, will just stop ordering and they will take their inventories down.

Now, I believe that inventories are anecdotally, as you look across MDI, inventories are very low. But some regions of the world, where growth demand is pretty anemic as well. So, I think that we’ll see what we typically see during seasonality, which is on a global basis anywhere from 10% to 15%.

Patrick Cunningham

Hi. Good morning. So, you mentioned MDI price increases were rebuffed into 4Q 2024. What are your expectations for prices by region in 4Q and what are you reflecting in terms of raw material declines?

Peter Huntsman

Well, I think that as we look at pricing for MDI in Q4, it’s looking pretty flat. I mean, as we look at some of the spot markets, there’s a little bit of upward pressure in China. But as I look at the spot prices in Europe and the U.S., it fits flat to down a little bit in tracking the cost of benzene. So, I think we will pick up a little bit of benefit from benzene, but that will not wholly, but partially be offset by flat pricing and probably higher natural gas prices.

Michael Sison

Hey, guys. Good morning. Peter, for polyurethane, you are getting volume growth. The earnings leverage or EBITDA leverage just doesn’t seem to be kicking in yet. What level of volume or sales do you think you need to see to start seeing the appropriate leverage for that business going forward?

Peter Huntsman

It’s an excellent question and one that we ask ourselves quite often as well. As we really see in this market, we start getting leverage when capacity utilization gets in the high-80s. Now, exactly what segment of the market does that have to hit and so forth. That’s all yet to be determined. But as we look around the world, I believe that the global operating rates are probably in the mid-eighty 5% to 87%, 88%. We might be — if we continue to see the sort of growth in demand and recovery in MDI that we’ve seen this past year, I believe that we ought to be seeing some expansion in pricing and margins early in 2025.

Again, that’s predicated upon demand continuing to improve, particularly in North America around housing. But it’s — look, we’re coming off of a very low base of where we were last year. So, when we look at the demand, I’m happy with the demand I’ve seen in 2024 in MDI, but we need to see that continue to get out of the hole that we got into the end of 2022 and 2023. And of course, during that time period, we’ve also seen capacity additions that have come into the market.

So, I think all of that offsetting each other as we look into 2025. I’m hopeful that as we kick off 2025 post Chinese New Year’s, start getting into construction season, hopefully we’ll start to see orders in the February, March timeframe start picking up materially.

Michael Sison

Great. And as a quick follow-up on 2025. I know it’s a little bit early to give specific outlook. A lot of the consultants do see margin expanding quite a bit potentially. Do you sort of agree with that cadence? And what type of EBITDA potential or power do you think you should see in polyurethanes if things pick up next year?

Peter Huntsman

I think, again, I would agree with that. I mean, as we talk about margin expansion 2025, a lot of that’s going to be predicated again, about what sort of demand we see in North America housing. China, we have got to see consumer confidence return and Europe’s just got to see some sort of return to some element of sanity when it comes to a manufacturing policy around energy and so forth. We may well see an improvement in North America, because of housing and Asia, because of consumer demand. And Europe continues to lag behind. I do believe fundamentally that we are seeing a lot of capacity utilization that traditionally has been European based, particularly in automotive and probably a couple of other materials that are moving to the U.S., moving to the Middle East or moving to Asia.

So, I think that you are seeing a global dislocation from Europe to other regions. And so, you might actually see an improvement take place in North America and Asia before you do Europe. So, I’m not sure that it’s necessarily going to be an even tide in all regions simultaneously as we’ve seen in the past.

Frank Mitsch

Thank you and good morning. Peter, I saw a news item recently about a chemical company doing a capacity expansion of non-PU-based insulation materials, and they’re targeting the European market. And the release read positively about future demand for insulating materials in Europe. Now obviously, as I read the prepared remarks and listened to you so far, didn’t seem like there was much to get excited about insulating materials in Europe, which obviously would be very helpful for you. What’s your take on that market and when might we see a recovery there?

Peter Huntsman

To be honest with you, I’m rather frustrated with Europe, as you could probably tell, Frank. In one of the areas, where you would think with higher energy prices, Europe would be one of the most proactive areas on legislating construction materials and insulation standards. In reality, virtually every state in the United States has a higher and tougher energy conservation standard than most European countries do. So Europe, when they get their act together, they really want to start looking at how do you conserve as much as and put that into an active energy policy. I believe that there is some real upside there. I think that we’re sitting in a position. We have blending facilities in Europe. We can make polyurethane spray foam materials. We don’t export it from the U.S.

We can make it there. We can utilize our own technologies and our own polyols and so forth. And we’ve got a real opportunity in Europe. But without the correct incentives inducements and regulatory environment, I don’t think you’ll want to see the sort of growth in Europe that we’ve been able to see in the U.S.

Joshua Spector

Yes. hi, good morning. I was curious on Europe, the deal that’s kind of apparent between Covestro and ADNOC kind of has them keeping capacity intact in Europe. Is that an impediment to Europe improving for the NDI market for Huntsman?

Peter Huntsman

I’ve got — I’m not again, I’m not trying to evade an answer. I’ve just got no idea what ADNOC and Covestro would be planning. I assume that between signing and closing, you’re not going to want to do no matter what your plans are, you’re not going to want to do a whole lot that would antagonize regulators and your labor unions and so forth. So, let’s keep everything kind of as is and — but I’m just speculating at that. So look, I’d always rather see less capacity than more capacity all things being equal, but I’ve no idea what they’re planning to do.

Aleksey Yefremov

Thanks. Good morning, everyone. Peter, I wanted to ask you about pricing in MDI. In prepared remarks, you say you don’t have much exposure to spot. But I also recall traditionally, you don’t have much exposure to contract as well with a big chunk of your business tied to just raw materials pass through. Can you just explain what’s the current state of your — sort of leverage to contract, benchmark contract pricing for MDI that we can observe in North America?

Peter Huntsman

Yes. I think, well, I’ll just touch on all three regions. So, I consider and I don’t want to oversimplify this, so forgive me. But let’s just put it in kind of three buckets. One is, how much is just spot and that’s what you oftentimes will read in ISIS or these sort of publications. The other one is going to be around formula pricing. And the other one around, I would say, variable pricing, which is going to be MDI is more than just three buckets of pricing. That variable pricing depending on, if it’s pure MDI or if it’s a formulated product or whatever, it’s going to be all over the place.

So, if you look at spot materials, it’s typically around 10% Europe, 10% Europe and about 40% in China. If you look at formula pricing, it’s around 20% of our total volume globally. That’s going to be preponderantly in North America, China; it will be lesser than that. And then that third bucket on the variable side, that’s what’s coming out of the splitter, for the most part or into formulations or into pure MDI. That pricing is going to be on a contract.

It’s going to be on a customer by customer. Very little of that is going to be throughput pricing. And that’s going to be on a negotiated basis customer to customer. So that’s kind of the three buckets. I do think people have a tendency probably to read too much into published pricing.

I think it’s probably a good macro indicator. But you just got to remember that MDI, unlike ethylene, benzene or some of the other chemicals that are traded, the pricing of which is regional and it is all over the place.

Aleksey Yefremov

Thanks. Very helpful, Peter. In your automotive polyurethanes business, I mean, it appears that European OEMs are losing share. These are some traditionally some of your best customers, right, biggest customers in PU. How are you addressing this sort of sea change in the auto world? How are you changing your strategy in terms of going after sort of the emerging OEMs in China and elsewhere?

Peter Huntsman

Well, I think, fortunately, we have very strong regional platforms in the U.S., Europe and Asia. I think these regional platforms are probably getting stronger and stronger. With Asia, it used to be just probably four years ago, five years ago, we made more money in European auto than we did in our than we did in the other two regions combined.

Today, that can be said about Asia. The relationships that we have with Asia, be it anything from a Hyundai in Korea to BYD in China and so forth, the relationship and the applications, not just in traditional applications like seating, but also now with more EVs and the sound insulation, in the materials and the battery and so forth. As we look at Asia, we make more money even though that’s only 40% of our global automotive business is in Asia.

We make more money in Asia than we do the rest of the world, the other regions combined. So, I think that we’re — as we look at our automotive business, it continues to be very stable for us. But again, I think under the water, there are a lot of very fast moving currents between ICE and EV, between Europe and Asia, U.S. and the rest of the world. And the global trades are going to continue to, I think, move very rapidly in those areas. We look at what the Chinese EV markets are doing in the Latin America and so forth. But rest assured that I think we have very good platforms to address EV and ICE, and to address the regional formations and that’s how we’ve been organized and we’ll continue to be organized.

Salvator Tiano

Yes. Thank you very much. So firstly, you mentioned your splitter before on the contract-by-contract base. I believe earlier in the year, you said that the new Geismar splitter wasn’t really adding any EBITDA so far. So, where do we stand right now? Has it started contributing? And if not, why is that and what should we expect for 2025 on the splitter?

Peter Huntsman

Yes, Sal, so obviously both the splitter investment, but at Geismar, what really needs to happen to get the full benefits of that splitter is a return from a consumer perspective on areas such as furniture. Auto needs to be quite a bit stronger in North America as well. And so, as our deep and coating, some of which ends up on the consumer side. And that really needs to be a lot stronger in order to benefit substantially from that split of investment. We still expect that to happen over time. That’s not the issue. It’s all around timing. It’s all around the consumer confidence that Peter spoke about.

If you think about next year, maybe $10 million to $15 million year-on-year benefit. But that’s really dependent upon how our furniture market develops, how automotive develops, as well as how our adhesives and coatings develop.

Hassan Ahmed

Good morning, Peter and Phil. Not to bore you guys, but just wanted to go back to a bunch of the questions that were asked about the European restructurings going on, assets being put up for sale and the like. I mean, look, one of the virtues obviously of the polyurethane sort of story has been, it’s obviously an oligopoly, right? And if I heard your comments correctly, it sounds as if you are leaning towards at least some of these assets being permanently shut down. So, my question I guess is that looking at the Covestro deal and I obviously understand a different company and the like, you have no idea what ADNOC is thinking. But I mean, how do you think about players like ADNOC, other sort of state players or Asian players coming out, buying up those assets and fragmenting an otherwise relatively consolidated industry?

Peter Huntsman

Well, yes, it’s a very good question and very complicated one. In many sense, I am not sure that ADNOC really changes the dynamics. I mean, you are just having the name of one company, Covestro, being changed to another one, ADNOC. If they decide to build in the Middle East or if they decide to build a new facility, I mean, you’re probably looking at anywhere from six years to eight years away between the — in the time that it would take to build a facility somewhere, even if it’s in addition to an existing site, given the opposition that you see in large scale chemical production and so forth. So, I’m really not sure that unless you saw splintering that took place of a company, I’m not sure that the whole ADNOC-Covestro deal really changes those dynamics any.

Kevin McCarthy

Yes. Thank you and good morning. Peter, can you speak to how you see international trade flows today in MDI and perhaps maleic anhydride and how they might evolve if tariffs were to escalate in that scenario bilaterally between?

Peter Huntsman

Yes. I think they’ll probably remain pretty much the way they are today. The U.S. has about a 30% tariff, give or take a few points on MDI and on maleic, and a number of other products. And so, those people that are importing in today, I don’t see tariffs going up through the roof. I don’t see them disappearing or necessarily coming off, depending on some recently filed cases in certain products and so forth, you might see them go up a bit.

But largely with the exception of Wanhua in China that has all the production in China, the exception of a single European site, they’re obviously moving product around the world. They have for years and they’ll continue to do so. But the trade flows from most of the producers of MDI that have regional production, I see that as continuing and there’s not a great deal of trade flow in MDI from one region to the next. I would say the same is probably true with maleic and with most of the other products we produce. I would say the exception of that with maleic would be what you see in China, there is a quite a lot of overcapacity in China for maleic. That was supposed to be the raw material for a biodegradable plastic that’s coming on stream a little bit slower than I think most people anticipated. But nonetheless, some of that maleic is spilling over in Europe. Other than that, I think most products are staying within region.

Mike Harrison

Hi. Good morning. You mentioned some new business wins in North America polyurethanes. I was wondering, I guess if you can speak to specifically what markets those are occurring in? And if they are in construction, can you maybe just talk about your competitive position within construction and insulation markets? Has that improved compared to a few years ago? Maybe, also wrap in an update on spray foam insulation adoption today versus a few years ago? Thank you.

Peter Huntsman

Yes. In construction, it’s mostly and I would say, kind of three buckets, if you will. One is going to be what we see in the OSB into the wood market that goes into construction, what we see in insulation going into construction. I think in both of those positions, we have very stable positions and positions, where we’re not just selling molecules, but we’re also selling solutions to the customers. The third area, I would say, would also be in furniture and appliances and so forth.

While we don’t supply a lot of material that goes into appliances and some of the low-end furniture applications, others do. And that sucks a lot of MDI out of the market that goes into that kind of third bucket of construction. Oftentimes, when we focus on construction, we’re talking about OSB. But construction and housing also takes up a lot of MDI in other areas that aren’t necessarily big markets for Huntsman, but are for others. And it’s a good drain for the product generally.

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