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Urethane Highlights from Huntsman Earnings Call

Huntsman (HUN) Q3 2016 Results – Earnings Call Transcript


Peter R. Huntsman – Huntsman Corp.

Thank you, Kurt. Good morning, everyone. Thanks for taking the time to join us. Let’s turn to slide number three.

Adjusted EBITDA for our Polyurethanes division in the third quarter was $137 million. MDI urethanes delivered impressive earnings growth, with a third quarter EBITDA of $138 million. This represents an improvement of $17 million compared to the prior-year period.

MDI volume growth was strong for the quarter at 5% globally, driven by strong growth in Europe and North America. Growth in Europe was across the board. In particular, we saw a strong double-digit growth within our downstream specialty MDI product range into our adhesives, composites, elastomers, as well as automotive and furniture business units.

North American growth was driven by commercial insulation as we continue to see a recovery in this large market combined with the ongoing trend of MDI system substitution of alternative insulating materials.

Asian growth was relatively flat. However, we grew our differentiated portfolio by 10%, while de-selecting our lower margin component business. Overall, Asian profitability increased substantially compared to the prior-year period, as tightness in the Chinese market led to significantly improved margins.

Our MTBE business recorded an EBITDA loss of $1 million in the third quarter. The average C-Factor, which is an industry proxy for MTBE contribution margins declined by 50% compared to the prior-year period, from $1.45 per gallon to $0.73 per gallon. The decrease in C-Factors was primarily attributable to higher gasoline inventories and lower refined margins. The C-Factors remain low today and we expect this to have an adverse impact on MTBE earnings in the fourth quarter.

During the third quarter, we experienced a negative EBITDA impact of approximately $15 million to Polyurethanes’ earnings from weather related and other production outages that we expect – and we expect a $10 million negative EBITDA impact during the fourth quarter. All the affected facilities are now back operating.

We continue to strengthen our innovation capabilities as we drive for higher differentiated growth in downstream markets. These efforts were recognized earlier this month when our Polyurethanes division won a prestigious Supplier Innovation Award from BMW for developing a technology which dramatically reduces emissions from high-performance polyurethane seating foam used in its vehicles. The innovated chemistry developed by Huntsman enabled BMW to reduce total emissions from its seating foams by a factor of 10, without compromising comfort or quality.

Huntsman is the only supplier able to meet BMW’s ambitious requirements, and the award reinforces the importance of collaborative partnerships with key customers to develop innovative solutions that enhance product performance, and ultimately business competitiveness.

Robert Andrew Koort – Goldman Sachs & Co.

And then, Peter, if I might follow up. I don’t believe I heard on MDI you talk about the opportunistic margins you might be making in the short run from some competitor problems. Is that just being diplomatic, or is that something you guys won’t realize from a short-term basis?

Peter R. Huntsman – Huntsman Corp.

I think that we’ve realized some short-term basis on – particularly on the Asian side of the business. But, as we’ve said, most of our growth and earnings in Asia have come about through our downstream specialty side of the business. We’re trying to take as much as the component – the more commoditized end of our Asian MDI business and shifting that over to the more specialty side of the business. So, I’m not sure that we’ve seen a huge uplift because of various outages that have occurred in the industry and I would expect some of those benefits to moderate, perhaps, in the fourth quarter and first quarter over the course of the next couple of months here.

J. Kimo Esplin – Huntsman Corp.

Bob, as it relates to an outage in Asia by one of our competitors, you remember that our Asian facility is running full out, and so when we look at year-over-year volumes in Asia, we were actually down a little bit. So we weren’t grabbing market share because of that outage. Certainly, polymeric MDI margins did rise year-over-year because of that outage and other reasons. But, it wasn’t a volume drill in Asia for us. We didn’t grab market share.

Frank J. Mitsch – Wells Fargo Securities LLC

All right. Terrific. That’s very helpful, and I know that Kurt is going to say a lot more when he is just reporting to Simon, so I look forward to that. And if I could just follow up on the MDI outage question. Peter, you mentioned that you are not seeing a ton of benefit in Q4, but is there a chance that as contracts reset in Q1 that that could be a source of upside for you based on expectations of how long the outages will last on MDI?

Peter R. Huntsman – Huntsman Corp.

You’re talking about particularly in Asia?

Frank J. Mitsch – Wells Fargo Securities LLC

Yeah, Asia and Europe. Yes.

Peter R. Huntsman – Huntsman Corp.

Yeah. I would think that it might, but I’m not really counting on it. I’m counting more on the continued growth of our downstream differentiated to 70% of our business that drives on improvement of economics in margins because of its – the value that delivers to the customers. That’s not to say that we’re not going to push as aggressively as we can for margin expansion in the component side of the business, but it is a smaller, volumetrically it is a much smaller end of our business on the MDI side. But, yes, we’ll try to take as much as we possibly can.

Eric B. Petrie – Citigroup Global Markets, Inc. (Broker)

Helpful. For my follow up, do you expect overall MDI demand growth to slow following weakness noted by auto OEMs and appliance manufacturers, or are you tilting your portfolio to more specialty and consumer end markets to offset that?

Peter R. Huntsman – Huntsman Corp.

As I look at our year-on-year improvement, a lot of what we’re doing is – the biggest area of growth that we’re actually seeing globally in the automotive area for MDI is – the biggest area of growth on a percentage basis is Asia. And so as you think of the Asian consumer buying a more quality oriented car, a higher valued car, typically you’re going to see a higher valued automobile, a better automobile, if you will, using MDI rather than TDI applications. And so, we’ve seen double-digit demand growth in our Asian auto sector over the prior year; seeing strong single digit growth in Europe and we’ve seen a decrease in the Americas. So, you’re right. In the U.S., we’re seeing a decline in demand from a year earlier in the automotive area, but I think when you take the global picture of year-over-year automotive demand for MDI, we’re up about 8% or so.