Huntsman Corporation (HUN) Earnings Call Transcript & Summary

Hey, good morning, everyone. Mike Sison, Wells Fargo, child from Cleveland. I'm going to conduct a fireside chat here with Huntsman Corporation. Representing Huntsman on the line is Peter Huntsman, Chairman, President and CEO; Sean Douglas, Chief Financial Officer; and Ivan Marcuse, Vice President of Investor Relations. Peter took on the role of CEO in 2000, been with the company since '94. Sean joined Huntsman in 1990, served several roles and took the CFO gig in '17. I think when both of them joined, the Browns probably won their last playoff game, unfortunately. And then we have Ivan Marcuse. He's been with Huntsman since 2017. He's a Cleveland native, and I think he's as convinced as I am that the Browns will win the Super Bowl this year. So I did want to thank Peter, Sean and Ivan for participating in our conference this year. I hope everyone is safe and sound. If you want to e-mail me a question at [email protected], please do so.

So let's get started here. Peter, I thought we would just start with a simple question. You've done a lot with the portfolio over the last year. It's kind of the new Huntsman. Maybe talk about some of the changes and what excites you about the new portfolio as we go forward.

Well, Mike, thank you very much, and it's very nice to be able to join you this morning. And Ivan, I think, would take a little bit of exception what you said. He told me just yesterday, he thought that the Dodgers would be taking the Super Bowl this year. I'm not sure that's necessarily what I thought what he said. But anyway, yes, I think that it's wonderful. My -- as I look back on Huntsman genealogy, I think I have to go 4 generations back to my great grandfather, Gabriel "Riley," who owned very prosperous bar in Pioneer, Utah. I think he was virtually debt-free at one point. But since then, I think it's been 4 generations since the Huntsmans have been involved with an enterprise that had such a strong balance sheet. And so I -- it's given us a great deal of flexibility. It's given us the ability to look at acquisitions and focus on our downstream businesses. And I think that it's been a tremendous amount of hard work over the last couple of years to get us here, both in buying right, in operating right and on divesting right. And the one thing that I think I've learned in this industry, the years I've been with it, is that if you're not constantly on the move, you're not promptly changing your portfolio. You've got about a 4- or 5-year time horizon. Because I look back on kind of 5-year increments over the life in the history of Huntsman, had we not radically changed, purchased, divested, exited certain areas or grown certain areas, you kind of go back and pick any time, go back 5 years, and had we not made those changes, had we not cut the cost, had we not changed the business, you'd probably be out of business in 5 years. The chemical industry is incredibly dynamic. It grows. It's global. It grows better than GDP. And so our challenge today as we look out into the future is what are the changes we've got to be making in the next 5 years. And so we're constantly looking at possible divestitures, joint ventures, acquisitions. Sometimes, like today, you're looking at how do you preserve your balance sheet, how do you -- you want the certainty and the surety that, that gives you. So I think you've got to be very able to multitask in this industry.

Great. And then as a follow-up, Peter, when you think about the impact of COVID-19 pandemic, can you maybe summarize for folks who aren't as close what you've done to manage the business near term, cost savings, improvements in working capital? As you said, your balance sheet's in good shape. But just what you're doing to -- what's your strategy near term as we go through this pandemic?

Well, look, this is something that we've never been through before. Let's be honest. I mean, the month of April, for the first time in industrial history, this isn't the first time in my life or the first time since the Depression or something. First time in industrial history, we didn't have a single car manufactured for about a 3-week period in North America or Europe. Wasn't a single assembly line in automobile that was making -- that were making cars. You never saw that in the Depression. You never saw it during time of war. Think of Airbus and Boeing, didn't produce for a time in April, didn't produce a single airplane. Never seen that in history, never. And so as you think about what we've been through, this truly are unique times and I don't think that they'll be repeating themselves anytime soon. And I think that May and June will subsequently be stronger and stronger months as we go through the quarter. Now having said that, we did go through a 2008, 2009. We did go through a financial crisis in Europe. We did go through 2001, the 9/11 attack. So I mean we are pretty good in this industry having gone through kind of shock waves and events that are unexpected. In the month of March, we anticipated the price of oil collapsing and raw materials collapsing, demand collapsing. And we emptied out our inventories to take advantage of lower-priced raw materials. We've redoubled our communication to our customers, make sure that the orders that they were placing weren't orders that were panic buying that would only be canceled a week or 2 later. We managed -- we tried to tie as best we could a real demand in the marketplace to our manufacturing to make sure we weren't building inventory, that we're working with our -- managing our working capital as best we can. Now we could have -- we've always done less on some of these things, right? Compared to 2008 and '09, we did a much better job this go-around than we did in the last crisis. As we look going forward, I think that there's going to be a fairly quick return in demand for certain products. I think we -- I think at the textile industry and clothing and apparel, as soon as shops reopen, I think you're going to see a pretty -- not an overnight -- if demand gets right back to normal, but I think you're going to see a fairly quick recovery on a number of retail items. Something like automobiles and home construction, I think that probably will be a couple of quarters out. Projects that have already been started will be [ finishing ]. I think people that are planning to build a house today might pause for a quarter or 2 and just see where they're going and wanting a little bit more financial certainty. And I think those will probably be recovering, if you will, kind of in the midterm, not the near term. And then there'll be other areas like aerospace where, I think, similar to 9/11, it might take 3 to 4 years for commercial aerospace to recover the traffic numbers that it saw at the beginning of the year. And so I look at our aerospace segment, we should be prepared to see sluggish demand there for probably the next 2 to 3 years. We might want to look at diverting some of that material over to automotive and lightweighting and other compounds and composite materials. But the aerospace industry, the majority of it is going to continue unabated. It's longer term. It's a solid industry. We're going to be flying on airplanes for the foreseeable decades to come. And the planes are going to be getting more fuel efficient, better experience for the traveler, and they're going to be getting lighter in weight and more composite materials. And so longer term, we're very dedicated to that market, but we're probably not going to see as quick a recovery in aerospace as you do in other areas.

Got it. And then let's dig in a little bit into the segments. Polyurethanes, I think you noted that, in 2Q, EBITDA could be at breakeven levels. And so maybe just walk us through some of the decremental margins. Is that decline largely driven by demand or volumes being down? And how does the change in oil prices affect the cost curve for Polyurethanes around the world, if at all?

Well, I'm not -- yes, I mean, as we look at Q2, the forecast we gave at the top line, and we kind of are in the same position right now. We still haven't seen the full April financial results. So again, we're dealing with a whipsaw of orders and volumes and costs and so forth from March to April that were probably as severe as we've seen from 1 month to the next in the past decade. And so I'm still kind of looking out at the rest of the quarter. And I expect from order patterns that we're looking at that April will be the low water point of demand and financial performance, May will be just a bit better, and I think June will be better yet. And I think as you get into the third quarter, you should continue to see an economic uplift in economic activity. You should be able to see the full impact of lower raw material costs that have moved through [ the system ] at that point. So I think that the forecast that we gave in April, again, I think we're also very clear in that. I'm not overly concerned about our margins. I think that, by and large, our margins have stayed intact across the board. It's the volumes that are my biggest concern right now, which is -- it is my biggest concern, but it also tells me that as volumes recover, the profitability of the business will recover. In last recession, we had quite a bit of our portfolio was commodity TiO2 and plastics and so forth, polypropylene, what have you. And those products, when you got into a downtime, you lost your volume and you lost your margin. So the recovery took a lot longer. You had to get your volume back and then once you got your volume back, then you're fighting for price expansion and margin expansion. I feel better about the recovery that it will be a more solid recovery as the volumes come back, the profitability will come back to the business because the margins are intact. As I look at lower raw material prices, it definitely puts the U.S. on a, I think, an even playing field with the rest of the world. I still think we're advantaged in our utilities, our natural gas costs and so forth. But you look at MDI specifically or even something like Advanced Materials where your raw materials are going to be epichlorohydrin, propylene-based, chlorine-based raw material. Those are commodities that I'm not sure necessarily are advantaged anymore in North America. And I think that, that probably puts some real pressure on those companies that are exporting petrochemical products from North America. Something that, by the way, we really don't do. What we sell in Asia, we largely produce in Asia. What we sell in Europe, we largely produce there, 90-plus -- 95% of the capacities in those markets.

Got it. And then given Polyurethanes is your biggest business, how do you see, and I know it's a very difficult question, but the varying recovery potentials for demand on the second half of the year? Could it stay as sluggish to 2Q? Could it be -- could it recover quick? Could it be more U-shaped? Just kind of your general thoughts from what you see and what you're hearing from your customers there?

Well, I think that it's probably going to be more -- rather than U- or V-shape, more W shape. I'm a little unclear as to why I'm using letters to describe an economic recovery. But when I say W-shape, that means, I think that we're starting to see a pickup. Just speaking yesterday with our Head of our Textiles business in Singapore, I think we're starting to see a recovery of like sports apparel. And people wanting to get out, exercising more, we're starting to see a recovery of casual clothing, cotton clothing and so forth. And I think that as you start to see this in Polyurethanes, specifically, that means I think you'll probably see a recovery sooner rather than later in areas like elastomers or TPUs that are going into the soles of Nike and Adidas and so forth in the footwear industry. We're seeing recovery that's taking place in China. So those are the segments of the industry that will recover fairly quickly. I think the construction industry, OSB boards and we think about -- or excuse me, yes, when we think about the composite wood boards and so forth, I would suspect, in April, we saw a year-over-year falloff in demand in composite clip products of around 40%. And again, we don't have perfect visibility, but the visibility of orders that we start to see in May, I would suspect, that would be down around 30% year-over-year; and in June, probably down around 20% year-over-year. So you'll see about a 50% recovery from April to June in something like composite wood where spray foam, where, in part of that business, you're going into someone's house and you're insulating their attic, people are probably going to be a little reluctant for the next couple of months to let somebody in their house to reinsulate their attic. Again, longer term, I think it's a great business that won't be impacted on new construction projects and so forth. But it's like I said, they're going to be segments of polyurethane, I think, that will recover fairly quickly. There'll be other parts of urethane that might take some time to recover. And so I think it will be very piecemeal.

Got it. And then in terms of your Polyurethane portfolio, your -- of the majors, you have really focused on moving down to the differentiated area, system houses and such, the spray foam business now is pretty meaningful for you. So can you maybe talk about how that business is holding up during this downturn? And maybe compare it to where component is? And then you delay -- I think you delayed your splitter expansion, as I recall, and that was the potential to maybe continue to move down that differentiated strategy. So just maybe give us a quick update on that strategy.

Yes. That splitter, we move back 6 to 9 months, depending on the market dynamics and needs and so forth that we see. But as the market has dropped and as it recovers, we'll recalibrate that project to meet market demand. And we look at that project, both as an opportunity for us to preserve capital on the short term and also to be able to delay it to be able to meet market demands on the longer term. There's no point in rushing through a project if the demand -- the economics -- excuse me, the economy has slowed, and the demand has slowed. There's no point in us rushing through it spending the money and having it idle for 6 months, waiting for the economy to catch up with it. So as we think through those various components, I think as you go downstream and on the downstream strategy, there's a slide that we've shown our investors many times. It shows the global picture. We have 20-some-odd dots on a map that represent all of our system houses around the world in downstream. Some of those system houses that are working for end-use applications going to government infrastructure projects and so forth, I think, are going to see a little bit of a slowdown. Other system houses that have been very successful for us now for the last 20 years, for instance, in Deggendorf, Germany, that largely supplies the German automotive industry, in the month of April and May, that facility has been hit very hard on demand. Now that's something that you want to shut that facility down. I don't think so, unless you think that the German automotive industry is going to disappear and is never going to recover. So again, I think rather than saying everything downstream is operating at X and everything upstream is operating at Y, we're seeing a whole massive variation of demand in different economic scenarios as you go further and further downstream.

Got it. Shifting gears a little bit to Advanced Materials. You just did an acquisition, CVC. I think folks understand the near-term pressures in aerospace to some degree. But can you talk about the fit there with Advanced Materials and what you think the longer term potential for that segment is? It seems to me an area where you can potentially invest and maybe grow via acquisitions over time.

Yes, the CVC business has been a very successful North American business. I'd remind you that about 70% of our Advanced Materials business is in Europe and Asia. And there's very little, if any, business that's going internationally outside of North America on what I think are -- is a very creative product mix and portfolio. So we look very much forward to closing on this business where we take this chemistry and we can internationalize it and run it through our existing business routes. I mean, here, we've got an opportunity to increase the demand and increase the pull-through on this overnight once we've closed on this and start marketing these products and start getting qualified on applications throughout Asia and Europe where you've got hundreds of Huntsman associates working in the marketing and sales, product development, customer service and so forth in those regions that CVC hasn't been able to access. As we look at the end markets on CVC, the biggest of those markets are automotive and industrial. And I say industrial, that's coatings in the pipelines and gaskets and packaging and so forth. As you think about those end markets, for us, this is going to be an adhesive material, a toughening agent. If you think about the cars that are going to be built in the future, these aren't -- vehicles aren't going to be welded together. They're going to be glued together. When you think about the applications of CVC, 1/3 of this is adhesives, roughly 1/3 of it -- well, less than 1/3 of it is coatings, then dropping down into composite, electronics and gaskets and so forth. This really is additive to what we have. It broadens our portfolio. It strengthens our North American position. We also have about $15 million of synergies that we should be achieving by the end of next year. And so as you think about this, it's purchased at about a 9.5, 10x EBITDA. And on a post-synergy basis, this is a 30% margin business that, on a post-synergy basis, will have been purchased at about 7x, 6.5, 7x EBITDA. Very accretive, any way you look at it.

Okay. And then a quick follow-up on aerospace. Boeing and Airbus has reduced their operating -- or their delivery rates by about 1/3 on average. Will your business mirror that? And aside, there will be likely some inventory destocking. How do you sort of follow their delivery outlook going forward?

Well, I kind of -- will just briefly just mention there's kind of 2 planes that we look at closely because each of them have about 20 tons of Huntsman product per plane. That's the Airbus A350 and the Boeing 787, both largely made of composite materials on the wings and fuselage and so forth. So think of our Advanced Materials business, around $200 million of EBITDA. Think of that, 35% of that is aerospace, so $70 million. Think of that $70-ish million of EBITDA, about 1/3 of that is military, repairs, spare parts, business aviation and so forth. That so far, we don't believe that, that's going to be impacted at all. And so you're down to the kind of 3 quarters of that 35%. And if you think that production rates going forward from Boeing and Airbus are down about 30%, you come up with kind of 1/3 of 1/3 of 1/3 -- 1/3 of 2/3 -- I'm sorry. You go with about $18 million to $20 million a year of the impact. Assuming that we take no cost mitigation, assuming that a lot of that same formula is used in composite materials in the automotive market and other transportation of composite materials, not just in aerospace. So I think that we'll be redoubling our efforts to be more aggressive in other areas of transportation. And longer term, aerospace will continue to be a very important and very vital area for us, but we'll also be looking as to how we can expand those molecules and other applications.

Got it. And then just for Performance Products, you have amines business and maleic anhydride business in that segment. What are your thoughts there near term and maybe longer term as part of your portfolio?

So both of those businesses, we're a low-cost producer. I think we have excellent technology. Maleic anhydride, we're the largest in the world, the lowest-cost producer in the world. We control the technology and the catalyst that goes into the manufacturing of that product. And that's going to be largely focused on the construction industry, the end-use applications going into recreational vehicles and motorhomes. And as Ivan takes his vacations, stops going to the south of France every year, starts going back up to Cleveland, he'll be doing that in a motorhomes instead of flying over on an airplane. And so there'll be some shifts and so forth of demand and dynamics in the maleic business. But longer term, it's going to be a very stable business. It's been a very good business for us. It's 20% to 30% EBITDA margins for us. And as we look at the amines business, that's got a very wide field of going everything from fuel additives to lube additives that make cleaner, more efficient gasolines to the agricultural industry and into the replacement of solvents and so forth. And as we look at that, amines, I think, it's -- we've looked at it in the past as the business is integrated in with ethylene, ethylene oxide and so forth. And I think it's probably a good time for us to focus on amine chemistry and not have to worry about olefins and oxides and so forth.

Got it. And then just a last couple here. We've got about 4 minutes left. Peter, when you think about your adjusted EBITDA for the pro forma for the new Huntsman, it was somewhere around $850 million, a little bit less than $850 million in '19. So as you think about rebuilding some of that earnings power and 2020 is going to be down quite a bit for a lot of the reasons that we talked about, what's the best way to sort of rebuild that earnings power and where Huntsman should get to post this recovery?

Well, near term, we need to focus on our cash management on rebuilding the downstream markets and the demand in those downstream markets. The biggest challenge, I think, we have from an EBITDA point of view right now is just the lack of visibility. I think we've got -- we typically -- I think we usually have about 30 to 45 days of visibility on order patterns and so forth. Today, I think our customers just like most chemical producers are concerned about working capital, cash management and so forth. And the inventories are extremely low. Visibility is not very far out. They're probably looking at 2 to 3 weeks rather than 4 to 8 weeks. And so I'm very reluctant to give a forecast as to what we need to be doing to come up with a forecast for 2020. But I think, again, as we think about the discipline of our costs, taking costs out of the business, making sure that we're managing our working capital, making sure that we're keeping our customers, we're keeping an eye as well on credit and making sure that a sale is really a sale. We're not going to get behind on working capital. And our immediate short term is to make sure that we maintain the quality of cash flow, quality of earnings and the quality of the businesses as well as we can going forward. And focusing on those principles on the short term, I think, will give us the long-term results we're looking for.

Great. And then you also mentioned your balance sheet is in good shape. What are your priorities going forward in terms of capital allocation?

Well, short term, I think we want to make sure that we keep a strong balance sheet. I think that $1 of value today on our balance sheet is probably worth $2 or $3 6 and 9 months ago or perhaps even 6 or 9 months from now. I think that a good acquisition today might cost you a little bit more a year from now, but I think you'll have the financial certainty and a better financial view and probably more apt to spend a little bit more on an acquisition 6 or 9 months from now. Keep the balance sheet strong on the short term, keep your flexibility strong on the short term. And let's keep that credit rating metrics alive and well. And I want to make sure that we're committed to paying a dividend, but let's make sure that, again, more important than paying a dividend or anything else is going to be maintaining a strong balance sheet, making sure that we keep that flexibility. And I think, again, focusing that on the long -- on the short term will give us the best options on the long term.

Great. Well, I appreciate your time, Peter, Sean and Ivan, I think the time is up here. If you wanted to do a quick last comment, we can do that. Or if not, we can just shut down now. So thanks again, everyone, for listening and Peter.

Mike, thank you very much. And look, let's -- it's always as dark is right before the dawn. And we're -- we have a great propensity in this industry to do a really good job forecasting doom and despair for some reason. We do a much worse job forecasting recovery and opportunity. And we'll come out of this crisis just fine. Economies will start rebounding. And longer term, the chemical industry will play an incredibly vital role in improving society, and Huntsman will play a key role in that. So we're very optimistic as we look into the long-term future here. So thanks for giving us time here, Mike.

Thank you. Have a good day.