Urethane Comments from Huntsman Investors’ Call

Peter Huntsman

Thank you very much, Ivan. Good morning, everyone. Thank you for taking the time to join us. Let’s turn to Slide #3. Adjusted EBITDA for our Polyurethanes division in the third quarter was $156 million versus $146 million a year ago. This is better than we had anticipated when we gave an update in early September as demand trends in nearly all of our polyurethane lines including construction, automotive and elastomers came in better than expected. Margins also improved better than we’d expect given tightening MDI supply-demand conditions throughout the quarter.

These positive market trends and conditions have continued into October. The third quarter improvement in adjusted EBITDA versus the prior year was driven primarily by the ongoing integration of our Icynene-Lapolla acquisition at lower fixed cost, which more than offset lower margins year-over-year. We also benefited from lower benzene costs. Our differentiated volumes grew 2% and our component of volumes declined 4% in the quarter compared to the prior year.

Throughout the third quarter, variable margins in our differentiated business remained relatively stable at the same time variable margins in our component and polymeric systems improved off of the multi-year lows that we experienced in the second quarter. The notable increase in component MDI prices over the past couple of months have been primarily driven by real global demand improvements as economies continue to recover from the second quarter Global COVID-related lockdown as well as from various fits and starts and temporary outages within the industry.

Our China business where we have less in downstream differentiation and in other regions of the world has benefited most from the higher prices. Europe has also benefited, but to a lesser degree. Our higher downstream differentiated margins continue to show stability and importantly we saw meaningful improvement demand in our higher-margin Elastomers business and within automotive. As is typical, there have been several planned turnarounds within the industry and as the industry responded to improving demand trends there have been various production disruptions.

As we reported a few weeks ago, we have our own production issues in Geismar Louisiana due to a third-party supplier of industrial gas having a mechanical failure, which we estimate will impact us by approximately $15 million in the fourth quarter. As the various temporary production issues across the industry get resolved, we would expect that industry utilization rates will move back to a more balanced environment versus the seemingly temporary above-average tightness that we are presently experiencing. However, we do see demand improving and fundamentals well intact construction including insulation is strong, auto is rebounding well and nearly all our other end markets are seeing positive trends subject to uncontrollable and unforeseen events. We would expect component margins to normalize at reasonable levels.

We’ve shared before we estimate that roughly half of our Polyurethanes business is impacted by trends related to construction with our largest direct exposure being within our insulation business, which makes up close to 40% of our global Polyurethanes segment. Our portfolio is well-positioned to benefit from the expected growth within the global insulation market, which is our single largest market and we expect that it will be one of our highest growth market over the coming years.

A fast-growing end of our global insulation business is our industry-leading spray foam business Huntsman Building Solutions, which continues to exceed our expectations with the delivery of meaningful synergies from the recent Icynene-Lapolla acquisition as well as from strong market conditions. We expect the $20 million in identified synergies to be achieved ahead of schedule and be largely completed by early 2021. Continued growth in North America will be supplanted by an aggressive effort to accelerate growth by scaling up this business internationally.

Just to give you some additional interesting facts about spray foam. An average home requires about 1,500 pounds of spray foam materials insulated. That currently sells for roughly a $1.38 to $2.00 per pound depending on the type of application utilized. Additionally, our polyurethane spray foam utilizes our Eco-Friendly Huntsman produced polyol which uses the equivalency of roughly 10,000 PET bottles per average home otherwise destined for landfills. Our polyurethane spray foam is an economically compelling, structurally sustainable and environmentally friendly alternative to traditional insulation products.

We believe that our polyurethane spray foam will see strong growth for the foreseeable future, provides an optimal solution in a world that is increasingly sensitive to green and sustainable solutions where building standards are becoming more environmentally stringent. Today we estimate that our polyurethane spray foam only represents about 18% of the North American insulation market and substantially less than that globally. The opportunities for above-market growth in North America and globally seem promising.

As we sit here today, looking to the fourth quarter, we believe the favorable trends of our global construction and automotive markets continue. We also expect to see continued improved component and polymeric systems margins. Roughly offsetting these dynamics will be the $15 million impact from our partial Geismar outage and some typical seasonality. Putting all this together, we would expect that our fourth quarter polyurethane results to be in line with the third quarter.

Peter Huntsman

Thank you, Sean. As we move into the final months of the year, I think it’s worth looking back on some of our objectives and where we are in our effort to create more shareholder value. Beginning in January, we sold our chemicals intermediate business for $2 billion. This further transformed our balance sheet and allowed us greater flexibility to pursue aggressively our ability to grow the more strategic ends of our business. This transaction also allowed us to take advantage of tax losses that we are able to realize with the sale of the remainder of our stake in Venator, which we announced this past August. We are still on track of seeing a closing of this transaction hopefully before the end of the year. We do not see any major obstacles to getting this completed by then.

In May, we closed on the CVC Thermoset Specialties business as we sort to further expand and diversify our Advanced Materials division. While we’re disappointed to see the slowdown of our commercial aerospace business due to COVID-19 pandemic, the CVC acquisition will help fill the void created from this temporary loss in sales and EBITDA. As this valuable aerospace business begins to recover over the next year or two, it will be additive to what we are building with the CVC acquisition and other ends of our Advanced Materials division. We are also well on track to deliver the previously announced $15 million of synergies.

In July we announced our initiative to realign our cost and streamline our operations. At the time, we outlined $100 million of savings from these efforts, which includes acquisition synergies. We are now targeting approximately $112 million and I would expect this number may well grow. We expect some $20 million to be realized by end of this year and we should be running in excess of $100 million by the end of next year.

Lastly, I’d like to point out the performance of our newly formed Huntsman building solutions. This is an entity that we formed through the acquisition of Icynene-Lapolla and Demilec, two polyurethane spray foam businesses that we further combined with our polyols and polymeric MDI production.

In the past year, we have created the world’s largest polyurethane spray foam business, the world’s best insulin, and the fifth largest installation company. We’re comm — we are committed — we committed to you that we would realize $100 million of EBITDA by the end of next year. I’m pleased to say that during the third quarter, we hit that runway rate well ahead of our forecast.

Bob Koort

Peter, maybe to ask Tony a question, I think you mentioned he was on the line, there — there’s certainly been some volatility and production curtailments, as you mentioned, in MDI, but I also sense talking to investors a lot of varying consultants opinions on how much MDI is coming into the world over the next couple of years. I was wondering if you could talk maybe specifically, Tony, what your business intelligence is telling you about supply capacity coming into the MDI market in 2021 and to the extent we have a normal world, what do you think the demand growth would be in 2021? Thanks.

Anthony Hankins

Bob, good morning. Good to be with you. I see the market to be very balanced right now and over the next 2 years. There are no major new capacities coming into the market, some debottlenecking. But overall, I think the demand growth and supply growth will be matched and very balanced, and as we exit quarter three, we’re seeing roundabout within our business, anyway, a 3%, 4%, MDI growth over last year.

The recovery across all sectors has been really impressive through quarter three, particularly in our insulation business and I see that continuing. I mean I — there are unforeseen circumstances with COVID and what that may do in quarter four, but right now we’re not seeing it. We have strong order patterns and I think as people are aware, there’s a lot of maintenance going on right now and I would estimate it across the global business, we’re at about 20% of MDI capacities currently idle with maintenance.

But coming back to your question, Bob, I see the situation to be very balanced. I don’t expect the supply to exceed demand over the next 18 months to 2 years.

Bob Koort

Great, thanks. And, Peter, if I could ask sort of broadly through the portfolio, you mentioned MDI and its [indiscernible] insulating properties, but as we start to think about green energy and new deals and stimulus for those sorts of things, it would seem you’ve got wind, you’ve got insulation, you’ve got construction insulation, residential insulation, how can you guys tap that theme that’s continuing to grow in significance in terms of energy conservation or New Energy? Thanks.

Peter Huntsman

Well, Bob, I think that as we look at the entire green new deal, there’s a lot of it that I have some consternation about, to be honest with you, but there’s also a lot of it that when we look at it, particularly around construction and what we see in insulation and OSB, and as we continue to make progress in various grades, they’re going to see — you’re going to see in those coming year or so, fire retardancy and so forthcoming into a lot of these products, we’ll get better properties.

We’re environmentally coming up with a number of opportunities here and I think particularly around energy conservation. If you look at our amines business, what we’re doing to take sulfur and a lot of the bad actors out of gas treating, if you look at our polyurethanes catalysts and other products that take volatile organic compounds out of a lot of the chemistries of today, you look at the water conservation and color conservation.

The chemical industry needs to be, my opinion and Huntsman, in particular, I think we need to be more bold in what we’re able to do as providing solutions in transitioning in economy to be more green and to be cleaner and more profitable all at the same time.

So, believe me, I think regardless of who wins, we have internal ideas and strategies and have already met with lobbyists on both sides of the aisle, where we’d like to be part of the solution going forward, not waiting for Inauguration Day, but it ought to be — we — I hope that our influence will be felt right after the election. Because I think we bring a number of solutions to the table.

Frank Mitsch

Yes, good morning. And for what it’s worth my vote would be for a much love Ivan Marcuse versus the candidate there. A couple of years ago, you guys did a really good job of detailing the windfall from some of the outages on the MDI front and how that impacted Polyurethanes. Is there a way that you could kind of quantify what impact, if at all, that showed up in the third quarter?

Peter Huntsman

Specifically around the under-utilization of production of MDI?

Frank Mitsch

I mean obviously, we saw some — you had some demand constraints, but a lot of competitors had downtime. We saw a bunch of force majeures announced. And as you indicated in early September, you thought you would do $40 million higher EBITDA in Polyurethanes and it came in a little bit higher than that. I would assume that some of that was related to the force majeures, was it not?

Peter Huntsman

Yes, I think that as we look at it, I mean, ass I tried to articulate in some of my comments, I think we’re going to see this most profoundly in China where we have more commoditized production versus North American where we have more formulaic production. And then we look at taking a lot of our commoditized production of the polymeric and moving it downstream into the insulation business. I mean, ideally, we’d like to be moving as much of the product that is most impacted by these sort of shortages, we’d like to be moving that product further downstream into spray foam and others, but I think that as we try to put a handle around — an economic handle, if you will — I don’t like using the word spike because that would denote that we’re going to be up X dollars one quarter and down X dollars on another quarter.

But I think that the overall impact of this would probably — of these shortages and pricing, I think it’s probably somewhere around $20 million to — on a quarterly basis. And as we look at that going into the fourth quarter, we’ll probably see the full realization. I think it probably ramped up in the third quarter, that amount, we — at the beginning of the quarter, I’m not sure you would have seen a whole lot of that.

By the fourth quarter, you probably ought to see that in full effect of around $20 million, but again that’s a really — it’s a really tough thing to calculate, because as you get shortages on a global basis, bear in mind that you’re looking at anywhere from 30 to 60 days to be able to take MDI from point A in Asia or point B in Europe or the US and move it to other areas of the world. So people somehow think that you can instantaneously move product globally. That’s just really tough to do. And how much of this is a spike in margins and pricing, so forth, how much of it is due to a recovery of demand, how much of it is due to outages and so forth. It’s — at the end of the day, it’s tough to tell.

Frank Mitsch

Yes, fair enough. Fair enough. And then if I could, kind of interesting, at the first-quarter conference call, I think some of the discussion was around how the pandemic might impact M&A and move it to the side, and obviously, you guys have done a heck of a job remaking the portfolio or making some changes here there via M&A since that time frame. And so with the announcement of the sale in India, I think you indicated, when talking about Advanced Materials, that you’re looking to redeploy that money into M&A in that front.

When — what sort of timeframe, what sort of size are you looking at? Any sort of color you could provide there would be great.

Peter Huntsman

Well, right. We’re in the process right now of actively reviewing a number of opportunities. And as we look at this, we want something that’s going to have synergies, hopefully, some product pull-through, some synergies around that. Something that will be additive to our technology and something that we can globalize. And as we kind of look at that matrix, we’re looking actively right now at multiple options. And I would say that again, I stress in my comments that we’d like to keep an investment-grade balance sheet and we certainly don’t want to stress those statistics.

So I mean, it’s a bit too early for us to name potential candidates here, but I think we also mentioned that this acquisition would likely be in the Advanced Materials segment as well.

Frank Mitsch

So that’s something we can look forward to kind of the early part — earlier part of 2021, you think?

Peter Huntsman

I would hope the sooner the better, but you know the way that transactions go, it’s just — they kind of have a life of their own.

Mike Sison

Hey, guys, nice quarter. Peter, when you think about the insulation business and there are folks who think that housing will remain pretty strong for the next couple of years, given, I think, there is a trend to maybe moving [indiscernible]. Is there — do you think this is a business that grows double digits, high single-digits? So what’s the cadence of growth as we head into two thousand — into 2021?

Peter Huntsman

I think that you’re going to see high single digits. But as you look at this, I keep a couple of things in mind. First of all, we look at spray foam in general, that’s about 18% of the North American insulation market and that’s for the entire spray foam industry. That’s not just Huntsman, I may have misspoke in my comments here, leaving a word out. That’s entire industry supplying and not just Huntsman.

But as we look at that spray foam opportunity here, if you were to look at probably one of the easiest ways we talk about the greening economy, here is one of the easiest ways to conserve CO2. Just under 50% of all energy consumed globally is consumed to adjust the environment of our homes and offices and insulation is one of the easiest ways to do that.

The studies that we’ve done internally with our own customer base of people in spray foam, you’re looking at heating bills that are cut in half with people that take that cheap pink garbage out of their attics and they put it in our high-quality spray foam, and so that’s not a sales [indiscernible] by the way.

And so, as we look at it, there is really through very little effort. You can have a real impact on the environment. If building standards were to just marginally change or to match much of what you see in Europe or even in many of the states in the US and you were to see a build rate of 1 million homes, which is down significantly from where we are today. I’m kind of taking a worst-case scenario of 1 million homes annually, and we would have a 20% penetration in something like that.

You would see this business in very short order in the next couple of years, doubling. But I think on a realistic. I mean, we kind of look at present market changes without any changes in legislation or anything else, this business we think will continue to grow, in very high single-digit sort of numbers and that’s on a global basis.

Mike Sison

Got it, thanks. And then I guess a quick one for Tony. I think you said 20% of global capacity is out. How long do you think it will take to get some of that capacity back online? And then when you look at where pricing is now relative to last year sequentially, it’s up quite a bit, could you maybe talk about how the timing flows? I know you mentioned, Peter, $20 million, maybe this quarter, but the — will you see more of that effect in the first quarter versus this quarter?

Anthony Hankins

Mike, going back to your question of 20%. So it’s hard to tell because it’s — these plans around the world and our competitors clearly have a better view than I do on this, but I think that some of that’s going to come back in quarter four. Geismar plant is scheduled to come back online on November 15.

And the plants, when they come back, it takes some time to get them back to full operating rates. So I think we’re assuming that most of that outage is going to continue through quarter four, and then we’ll slowly start to work its back — way back into the market in quarter one of next year, but our history has shown that these plans take longer to come back than people forecast.

It is a complicated process to get an MDI plant back on stream and it always seems to take longer than we expect. So I think you should assume for the next three to six months that capacity is slowly going to work its way back into the market.

Peter Huntsman

And I would just like to clarify that when we talk about that $20 million, that is a fourth-quarter number and that’s assuming that the pricing that we’re seeing today holds out through the quarter. And I would say that when you look at how much of that was in the third quarter, it would have been felt very, very little in the final part of the third quarter.

Aleksey Yefremov

Hi. Yes, good morning, everyone. Peter, your current domestic spray foam business, I think you’re saying about $100 million normalized EBITDA run-rate, how should we think about the international opportunity? And can you give us some idea on how soon you can get there, maybe some targets for next year and next two, three years?

Peter Huntsman

So I think that over the next couple of years, I think we’re really focused on over the next 12 months. We look at the EBITDA of that business. I would say that I think there’s a real opportunity today. About 10% to 12% of that EBITDA is coming from international markets and it would be great if we could see that go up to a quarter.

It’s an enormous opportunity for us and we look at the penetration of polyurethane spray foam in Europe and in Asia, we already have the infrastructure there. We have the blending capabilities. We have the people there. We have the distribution networks throughout Russia and in China and Europe and Southeast Asia.

So I would hope that over time, we’re going to continue to see that strong, single-digit, pushing 10% sort of growth on an annualized basis in North America, and hopefully, we ought to see better than that internationally, once we’re up in operational.

But we’re start — we’re starting at a very low basis there, but it still is EBITDA positive even today.

Aleksey Yefremov

Thank you. And question for you, Peter or for Tony. Some of the trader ags [ph] are reporting strong demand for rigid insulation panels in Europe, is this a normal cyclical recovery after lockdown or is this also a result of maybe the secular impact from the EU policies?

Peter Huntsman

I think there is going to be — the Green Deal that we’re seeing in Europe greatly is a great incentivize — incentive for builders to — and architects and construction firms to be implementing the best practices and the best installations and the best energy conservation and it would be natural that they would be moving to Polyurethanes. So when we look at that rigid foam section, I don’t think it’s just Huntsman, but other companies are seeing a healthy demand particularly given where the macro economies are in these countries

Aleksey Yefremov

Thank you.

Anthony Hankins

Aleksey, I think, just to add to what Peter said, we’re also seeing continued strong demand for DIY, particularly, in Europe and North America. So a lot of that insulation and particularly in the composite wood products business continues to see very strong growth in both Europe and America. And I think that is a result of the continuing pandemic and people continue to use discretionary spend on improving their homes, which is benefiting our business very significantly.

Hassan Ahmed

Peter, a question around the polyurethane business, some of the trade publications have been talking about fairly tight conditions on the polyols side of things, and how with rising prices and polyols, scarce availability, there has been reduced demand for TDI. Now the question really is that — I’ve heard your comments, obviously MDI demand seems to be quite strong. So my question really is, have you been gaining share from TDI?

Peter Huntsman

I don’t really think so, a lot of the applications of the TDI goes into — don’t necessarily compete with us head-to-head. I mean, there is that fringe area around soft foams going into furniture and so forth, but I think it’s a pretty small segment. We really don’t have a marketing effort that would say we’re going to target TDI or TDI applications.

Again, there is overlap, Hassan, you’re absolutely right. It’s not something that is a major effort for us. As we look at polyols, I think we’re finding ways to relocate and replace our polyols. We particularly like the polyester polyols to the extent that we can build out end of our MDI and our Polyurethanes business into the polyester polyol or TEROL business. We’re using that technology of recycled bottles and moving that ahead. I think for us, that’s going to be something that will be a high priority for us.

Jeff Zekauskas

Thanks very much. Your EBITDA and Polyurethanes was above where it was last year and volumes were flat, and what you said is, the markets are a little bit tighter than they might be ordinarily, but your volumes should grow, so order of magnitude, should the Polyurethanes segment earn in 2021 what it did in 2019, just roughly?

Peter Huntsman

Yes, I would hope that it would be close to that. As we look at that, probably, let’s say, in 20 years — you’re asking a 2019 number versus a 2020 number?

Jeff Zekauskas

2021. In other words, 2021 should look like 2019, given that the third quarter is a little bit better, a little bit tighter, it’s going to loosen up, your volume is going to grow?

Peter Huntsman

I think that as we look at the volumes and so forth, especially if you factor in the HPF in Huntsman Building Solutions, we ought to be doing better in 2021 that we did in 2019.

PJ Juvekar

And then just quickly, you earlier mentioned about your green PU spray foam that will include PET bottles, how do you charge a product like that? Do you get some kind of a green premium or is it going to be priced in line with the existing product? Thank you.

Peter Huntsman

Well, I think over time you start seeing the quality of the product that we have and the base — how it’s made and the Greening [ph] effect. I don’t think that we’re getting a green premium today. I do think that all things being equal, and you’ve got an opportunity to use something that is made that will be in your house for decades to come, that’s made from recycled PET. You look at the environmental advantages that come from all this. I think that there is a premium and I think that over the course of the next year or so, as we start more aggressive advertising and more aggressive promotion and so forth in this area, again, I want to remind you that this is a business that two years ago — we weren’t even in this business.

So we view this business really as, still to some degree as excited as we are about it, we’re still rather in the infancy of the business. I think consumer habits and consumer sentiment is going to be very high and then, they’re going to care about this stuff. So yes, I hope that over time we would be able to have a green premium.

Kevin McCarthy

Good morning. Thanks for squeezing me in. I wanted to ask about your equity earnings which came roaring back sequentially to $21 million in the quarter versus a quarterly run rate of about $2 million in the first half. I’m cognizant you have a JV with Sinopec in China that makes propylene-oxide and other products. Was that a meaningful contributor? And if so, what are your thoughts on sustainability of the third quarter level, as you look into the fourth quarter level and beyond? PO seems really tight these days in some parts of the world.

Peter Huntsman

I think that we did see an impact in the third quarter from a joint venture we have in China for the PO/MTBE facility that we have with Sinopec. I think that as we look at this on a more normalized basis, I think that number will probably be around $40 million. I count on about $10 million a quarter on average, on something like that. I’m not sure we mentioned or not, but in the fourth quarter, I think we do have a T&I [ph] at that facility. So I certainly wouldn’t be looking for a repeat in the fourth quarter of we saw in the third quarter.

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