Urethane Comments from Huntsman’s Investors Call

Peter R. Huntsman — Chairman of the Board, President and Chief Executive Officer

Thank you very much, Ivan. Good morning, everybody. Thank you for taking the time to join us. Let’s turn to Slide number 3. Adjusted EBITDA for our Polyurethanes division in the fourth quarter was $201 million versus $122 million a year ago. This improvement versus the prior year was largely driven by improved margins due to higher prices, primarily in the component end of our business as well as favorable cost. We experienced better than initially expected demand across all regions as many of our core markets continue to recover in segments such as automotive and our spray foam insulation business saw growth versus the prior year quarter.

However, largely due to previously announced production issues at Geismar caused by a third-party supplier, our total MDI volumes in the quarter were down about 8%. I will note that our total differentiated volumes, which includes our automotive, elastomers and spray foam businesses were up 6% in the quarter. Demand trends in our core markets, including construction and automotive have continued to improve even as COVID cases rose sharply in the fourth quarter and governments in certain states and European countries mandated further restrictions and had attempt to slow the spread.

At the time of our previous quarter’s call, when we gave our initial fourth quarter outlook, we had concerns such restrictions would dampen the recovery. Fortunately solid demand trend continued even beyond what we had anticipated when we revised our outlook in early December. There is COVID cases in many regions have plateaued or has started to fall and the number of people being vaccinated is increasing. We are cautiously optimistic that the demand trends will remain favorable and we expect our Polyurethanes results in 2021 to be materially better than the prior year.

With the world aggressively looking to become more efficient in areas such as energy consumption, lightweighting as well as finding opportunities to increase plastic recycling and producing the VOC-free consumer products are Polyurethanes segments is well positioned to benefit from these and many other globally sustainable trends over the coming years. Our largest global market, which makes up about half of our Polyurethanes segments are our urethane building and construction products, specifically installation, composite wood products and adhesives. Our installation business is our largest market, and MDI based insulation is one of the most efficient and versatile insulant there is.

Our Huntsman Building Solutions business, which is a global leader in spray polyurethane foam is growing double-digits well above market. It is benefiting from increasing consumer and contractor demand for sustainable eco-friendly solutions. Furthermore, we’re seeing growth in Huntsman Building Solutions due to positive housing trends in North America, international expansion and product substitution as it takes share from traditional products used to insulate homes and buildings. The integration of the Icynene-Lapolla acquisition will be largely complete by the second half of this year, resulting in more than $20 million of annualized synergy.

Our TEROL polyols, which is able to utilize recycled PET waste is a feedstock will also grow along with our spray foam and other global insulation businesses. In 2020, we expanded our TEROL polyols business by opening a facility in Taiwan to in part support our SPF growth in the Asian region as well as for other insulation products and customers. The growth prospects for Huntsman Building Solutions are very positive and we continue to be enthusiastic about the long-term prospects of our entire insulation portfolio. Next to construction, our second largest segment in Polyurethanes is automotive in which we are also expecting to see solid growth over the several — over the next several quarters. We continue to innovate with all of our customers and are benefiting from MDI continuing to substitute existing products. Additionally, our high margin elastomers business is starting to see improving trends as footwear is returning to growth along with several other niche industrial markets we serve.

While we understand that volatility still exists within the component end of our business, which certainly receives a fair amount of attention, the majority of our Polyurethanes segment is in our downstream businesses and continues to not only benefit from stable margins but also demonstrates the most growth. The upstream end of our business, that being component and polymeric systems did benefit in the fourth quarter from a tight market due to several MDI facilities being down for various reasons. We would expect the margins in this end of the business, specifically in China to eventually come off these higher prices as the facilities return to normal production rates. However, we do not believe that these margins will fall anywhere close to what we saw in the first half of 2020. Looking out over the next several years, we do not anticipate any new capacity to come into the market that will materially disrupt demand-supply balances. As we have consistently stated, we expect industry demand to be fairly balanced over the coming years.

In our third quarter call, we already disclosed our planned outage in Geismar resulting from third-party supply issues. That impact — that impacted the fourth quarter adjusted EBITDA by about $15 million. With stronger than initially expected recovery under way, we did — we not only impacted — it not only impacted our fourth quarter results, but it also limited our ability to build inventory for a regularly scheduled turnaround in the fourth quarter on one of our Geismar lines. As a result, we elected to defer this turnaround to the first quarter of 2021. This is deferred approximately $10 million of expenses from the fourth to the first quarter. With strong global market conditions in the fourth quarter coupled with the production issues at Geismar, we were sold out in short of product. This will have a temporary impact on the first quarter 2021 as we continue trying to build inventories ahead of our planned and previously announced second quarter Rotterdam T&I.

On a quarter-over-quarter basis, this will impact us by approximately $30 million in the first quarter as we balance inventories in the first quarter ahead of our T&I. We still estimate the impact from the Rotterdam T&I on second quarter adjusted EBITDA to be approximately $15 million. Taking this into consideration, despite our expectations for polymeric MDI margins to modestly recede of current highs and some headwinds associated with our need to build inventories ahead of planned turnarounds, we still expect our first quarter 2021 adjusted EBITDA to be slightly more than double what it was a year ago.

Sean Douglas — Executive Vice President and Chief Financial Officer

With respect to capital expenditures, we spent $249 million during 2020, near our guidance level. Included in this was approximately $54 million for our urethanes splitter at Geismar, Louisiana. The splitter is still on target for completion in mid 2022. We expect to spend approximately $80 million this year and approximately $30 million next year. In light of the $73 million of cash generated in the fourth quarter of 2020 for the sale and leaseback of the Basel, Switzerland site, we expect to reinvest this capital in strategic high return projects within our downstream footprint. These projects represent high growth opportunities that will further enhance our growth platforms within our downstream businesses. The incremental spend in 2021 associated with these projects will be approximately $30 million. Combining all this together, we expect to spend between $320 million and $330 million in capital during 2021. As our splitter span rolls off in 2022, we would anticipate spend for 2022 to be approximately between $275 million and $300 million.

Looking ahead into the first quarter of 2021 as Peter previously mentioned, we are trying to build inventories particularly within Polyurethanes. We, therefore, anticipate a larger than normal first quarter seasonal build with a significant build in net working capital in quarter one. Our expected free cash flow is expected to be more negative than seasonally normal. However, net working capital should release as the year progresses and we expect to end the year with a reasonably modest overall build in net working capital as we reach more normalized levels of inventory. Within the first and second quarters of 2021, we estimated an incremental cash spend of around $40 million associated with the Polyurethanes Rotterdam turnaround. With respect to our cost realignment optimization and synergy plans, we spent approximately $27 million in 2020 and we expect to spend approximately $70 million in 2021. Each of these plans are on track and will deliver a combined annualized benefit in excess of $120 million by mid 2023.

Robert Koort — Goldman Sachs — Analyst

Thank you very much. Peter, I think in the past when we had some very strong MDI markets, you’ve talked about some level of fly up and you talked about maybe a little bit of softening from where we were in the back half of ’20. Can you couple of quantify what you thought might have been some excess profitability there with the sort of glide path through ’21 would be for the MDI business?

Peter R. Huntsman — Chairman of the Board, President and Chief Executive Officer

Bob, it’s an excellent question. I think that as we look at the run-up of the component businesses, I’m kind of struggling to think, just how much of that was a tightness due to one-time event and how much of that was due to plant outages. I would say — I think that the majority of the fly up if we want to call that, the fly up took place in the fourth quarter, certainly took place in Asia and then secondarily, a bit of it. In Europe, probably around $40 million — around $40 million to $50 million in the fourth quarter would be our best estimate. But I would say that as we look at the margins in the fourth quarter of 2020, particularly the Asian margins and we compare that to where it is today. It is — it has stayed flat going into the first quarter. And we’ve actually seen margins improving on the component side of the business in Europe.

So I mean, our biggest challenge in the first quarter as I see it is not going to be around necessarily demand and pricing, I feel pretty optimistic as far as I can see in the first quarter on those things. It’s going to be around the timing of the turnaround that we have in Geismar. We have a single line that was pushed into Q1. And mostly in the Rosenberg. The issue that we have in Rosenberg, of course, is that this is a cluster turnaround, which means it could result in a — well OK. It’s a cluster turnaround and we are only going to be able to restart as fast as everybody else in that cluster is able to restart their facilities.

And the last time we had this a couple of years ago. As you’ll remember, we gave an estimate, we were ready to go, we were ready to start up our facilities and we kept having utility issues and steam issues and cloning issues with some of the other associated production facilities that again were not Huntsman site. So we can only operate in these sort of turnaround situations as fast as the slowest person can come up to speed. So again we’re optimistic. We think we’ve done all the planning, we can do to make sure these are successful and timely T&Is and we’ve also got to make sure that we have adequate inventory built up to be able to supply customers during that timeframe. So sorry long-winded answer there, but I think that’s — as we look at it, I think that we’ve — we’re seeing the momentum from pricing in margins continue into first quarter.

Peter R. Huntsman — Chairman of the Board, President and Chief Executive Officer

Yes, the M&A pipeline. I think that it’s fair to say that I’ll stand by my earlier comments that we’d like to continue into 2021 looking at both divestitures and acquisitions. And I am a bit concerned about asset prices and I can say that I’ve been in this industry, I think this team has been essentially enough to know that those things cycle up and down. So I mean, I always like to try to time possible divestiture and acquisition and fits you, but they don’t always typically work out that way. But no, we do have our eye on a couple of things, but I don’t want to see us pay too much or be too aggressive here. Having said that, I think that as we look at the share buybacks, look, everything’s on the table. And I think that we’ll take our capital and we’ll look at the internal projects we have, we’ll look at the M&A opportunities that we have and we’ll weigh those against possible share buybacks. My personal inclination is to lean toward the M&A. I think that the company needs to grow and I think it needs to get larger. But I don’t think you need to do that at any cost. So we’ll weigh those things very carefully.

Frank Mitsch — Fermium Research — Analyst

Exactly, but I did pass. So that’s the good news. No, I was asking a roundabout way of getting to historically, it looked like your 4Q and 1Q were — are kind of in line when you do all the puts and takes and historically, your second quarter in Polyurethanes is better than the first. Obviously that wasn’t the case in 2019. I’m sorry in 2020 due to the pandemic. But is there anything that you can point to right now that would either push you one way or the other, understanding that you do have a crystal ball on that in terms of the second quarter being better than the first quarter in Polyurethanes?

Peter R. Huntsman — Chairman of the Board, President and Chief Executive Officer

I think that it’s — I think if you look at the second quarter, it’s really the impact of the T&I. And it feels like the markets are really strong right now and I would have said a quarter ago that fourth quarter probably will diminish a bit in the first quarter. And, talking [Phonetic] about first quarter, it looks like we’re heading into second quarter with some really strong momentum. We did point out, I think in the call that we think that they will probably be a little bit lower margins and component prices in China, but again that’s yet to be seen. And look, just because we’re, if we feel that, that doesn’t mean that we’re going to go and force that to happen. If the volumes is there, the demand is there and the pricing is there, we will be taking advantage of it. We will be leaving it and then we’ll be supporting it.

Operator

Thank you. Our next question is coming from the line of Alex Yefremov with KeyBanc Capital Markets. Please proceed with your question.

Alex Yefremov — KeyBanc Capital Markets — Analyst

Thank you. Good morning, everyone. Peter, you mentioned that various outages in the MDI industry benefited margins in the fourth quarter. If you look at the state of supply and demand today, do you see any large unplanned outages that are sort of abnormal and effecting the level of prices in mid-February?

Peter R. Huntsman — Chairman of the Board, President and Chief Executive Officer

I think that there are a number of facilities that have been publicly spoken about. There is some capacity in Japan, there have been some operating problems and I think they’ve recently have come back into the market. And then there is a facility in Ningbo and I think that there was some talk from BASF publicly about 400,000 tons being offline and I think those are projects that are supposed to be coming up sometime this month. The market as of right now today, it’s still feels a very tight. There’s also been some further postponement with another 400,000 tons — kilotons in China that have been postponed into later in the year. And of course, our nearly 500,000 metric tons will be down for 42 days as we look into the March-April timeframe.

So I think that as we look at these T&I, I think that we probably need to differentiate between what happens is unexpected and how much of it is planned. I think the majority of what we’ve been saying is planned. I think as we look around global capacity utilization rates right now, certainly in the US, we’re importing materials. I think as an industry, we’re importing materials right now. We’re structurally short. Europe seems to be very tight, probably operating in somewhere in the low 90s and Asia is probably somewhere in the mid to upper 70s. And I think when you take that on a global basis, your operating somewhere around the 90% capacity utilization. When you take that and you take the stated nameplate capacity of the MDI market, I think that 90% capacity utilization is probably about as well as the industry can do when you factor in all of the scheduled T&Is and so forth that have to take place on an annualized — in semi annualized basis.

Hassan Ahmed — Alembic Global — Analyst

Very well. Peter. Thank you. Peter, again revisiting Polyurethanes, but more on the demand side of things. And just beyond sort of correlate Q4, Q1. You alluded to some sort of regulatory sort of trend as well as demographic trend being sort of decent tailwinds to overall demand. I mean as I took a look at Q3, obviously year-on-year volumes were down quarter-on-quarter and year-on-year around 3%. And typically, this is an industry that grows at call it 6% to 8% demand-wise. So my question is with the rollout of the vaccine and the like, hopefully the world does normalize a bit. And in this sort of reverse to normalcy, I mean, where do you see trend demand growth for Polyurethanes now, keeping some of those demographic, regulatory and secular changes in mind?

Peter R. Huntsman — Chairman of the Board, President and Chief Executive Officer

Well, I think that the two areas that I called out Hassan at the end of my comments around building. Our Building Solutions and Automotive. And just having recently won the Tesla EV contract in China and those are typically contracts, while they might not be huge volumetrically as other people get into the EV markets and try to replicate what’s already been successfully done in the company like Tesla, those sort of wins carry probably a lot more weight a year or two later than necessarily building out to the relative smaller capacity of a company like Tesla.

I think that when we look at the easiest way if this administration in coming — new administration is serious about really reducing CO2 emissions and so forth, building insulation and looking at the regulation around that is probably one of the best and easiest wins you could have. And as you look at some of those sort of opportunities, we look around Building Solutions and we think that — and we’re working with individuals in this administration, we think that we’ve got a real opportunity here over the course of the next year or so to really take advantage of a greener footprint through our society and our products have the solutions in those areas. So I mean it is not as I look out over the course of the next few quarters and the next few years, I’m extremely optimistic about what I see. But again, when I also look at some of the idiotic moves that various politicians have made on both sides of the aisle and some of the macroeconomic trends that have kind of hit society pretty hard. I don’t want to be in the business trying to micro estimate what’s going to happen over the course of the next quarter or two. But I think when I look out over the course of the next year or two, I see a lot more pluses than negatives.

P.J. Juvekar — Citi — Analyst

Yes, hi. Good morning. Peter your new SPF insulation with recycled PET material, what is the customer uptake on that product? How do you price it and is it cheaper to produce? And then just one more quickly on ethyleneamines. You mentioned weakness there. What’s causing that? Is there a more supply from [Indecipherable] that has impacted that market? Thank you.

Peter R. Huntsman — Chairman of the Board, President and Chief Executive Officer

I think that as we see that, I think that we continue to see an improvement in that and we continue to see it coming up. I mean we’ve seen some capacity that has been shut down in that market and has been absorbed in that market, and we also see some new capacity that’s come on the last couple of years, but by and by, I think that market is more balanced today than it has been over the last couple of years. I think that it seems like everybody’s running at near capacity and margins and prices are going up. So I think that it’s going to be a tailwind for us. But let’s also remember that this is — there certainly isn’t the driver of Performance Products nor of our corporate EBITDA. I’d like to see it improving, but it’s — as we look at our specialty amines and our maleic anhydride those are the two cores.

As far as is our pricing and our cost structure in our polyurethanes foam that’s an excellent question. It’s a question that I ask almost daily if Mr. Hankins as to why we can’t get higher prices for our wonderful recycle foam insulation products. So Tony, do you want to comment on that.

Anthony Hankins — Chief Executive Officer, Asia Pacific and Division President, Polyurethanes

P.J. Good morning. Thank you, Peter. Yes, we are selling the spray foam formulation consists of our MDI and our TEROL technology polyols, and we can now recycle up to 60% of post consumer scrap from PET bottles into that formulation. So, yes, it’s very competitive. We manufacture at two facilities. Now we have one in Houston and one in Taipei. And I mean, to give you an idea of the growth rates that P.J. in North America, we’re growing at around about 25% and that spray foam application which is very, very strong growth in North America. And now we’re making major inroads into Asia with the growth of spray foam on TEROL out to Taiwan. So it is significantly competitive with the recycle content. And we feel that we price that as a high quality premium product. So it’s part of our business, which is going from strength to strength and we have great enthusiasm for the future in TEROL and then the HBS spray foam applications.

Peter R. Huntsman — Chairman of the Board, President and Chief Executive Officer

I would just note that in 2019 we had zero EBITDA — International EBITDA in that business. In 2020 even with COVID, we made $8 million of EBITDA, and this year we’re looking at probably doubling that number on the international and international markets of that insulation. So again it’s the globalization of that, I think we’re most excited obviously about the North American market. But we have a great opportunity to see expansion of that business overseas.

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