Huntsman Corporation (HUN) Earnings Call Transcript & Summary

Good morning, everybody. This is Bob Koort, I head up our U.S. equity research effort on the chemical space. Joining from my team today is Anthony Walker, who's also going to cover Huntsman. And from the Huntsman team, we've got Peter Huntsman, who's the Chairman, President and CEO; and Ivan Marcuse, who runs the IR effort. As for the other presentations today, we're going to go through a question-and-answer session that Anthony and I will lead for clients on the webcast. You have an opportunity to put questions in, which we'd prefer, and we'd prioritize your questions to our own. But in the absence of your questions, we've certainly got a bunch ready to go for Peter.

And maybe starting out, Peter, just to sort of level set, the Huntsman of 20 -- mid-2020. Can you talk about the evolution of the company over time what the strategy has been to get to the portfolio you have today and then what you might do in the future in terms of additional M&A activity there?

Sure. Well, first of all, Bob, thank you very much. It's always a pleasure to be with you. And Anthony, nice to be with you, I guess, at least virtually. Yes, I think that where we are today, I think we've learned a lot of lessons in the past about leverage, about cycles. It seems like as you kind of go over the last decade or 2, the cycle seemed to become more erratic, and we have less visibility, where issues starting in China or issues starting -- liquidity issues starting in Europe or whatever, can affect the global economy in ways much quicker than perhaps we can fully appreciate. And I think that we set out some years ago to do a couple of things. First of all, we wanted to improve our balance sheet, which I think gives us optionality and gives us certainty in times like today. I think that we also wanted to ask ourselves, what are we doing that private equity cannot do. And I don't mean that as a slam to private equity as much as if our objective is just to go out and build a polypropylene plant that a private equity firm with the money could just go buy a technology off the shelf and make a polymer and sell it in the export markets, what are we doing that is unique to Huntsman and even unique to us in the chemical industry? And then thirdly, how do we leverage a global platform? How can we buy something in North America and be able to leverage that as quickly and as effectively? And how do we fully utilize our people, our creativity and the strengths that we have that would again be unique to Huntsman? So this kind of put us on a path where we divested ourselves of divisions and some of our business units that I think, while very good business units, just didn't fit that particular mold that has allowed us to restructure our balance sheet and it allowed us to focus further specialty and differentiation further downstream. Now that's a journey that we're on. So I don't want to sit here and say that we shouldn't be looked at as a non-MDI producer, which we still are, and we still go through the cycles and so forth. But I'd like to think that those are a little bit less pronounced than they otherwise would be.

And you guys have a slide deck up on the webcast folks can refer to. There is 1 slide in there that talks about your string of pearls strategy on deals. So can you talk a little bit about your M&A objectives today in the current portfolio versus maybe some of the prior acquisitions you've done?

Yes. I think that our past acquisitions probably have been fewer in number and larger and riskier in nature. I mean I think back on TexaCo, on Hoechst going all the way back to the '80s, on Rexene, ICI. These were acquisitions that where we literally just bet the farm. And I think that's -- if you're a private enterprise, you can do that. But since going public 12, 13 years ago, dealing with other people's money, I don't think that's really something that you can effectively do. And I think that as we look at that string of pearls, I think that includes both the opportunity to upgrade assets as well as bring assets on. So as we look at the -- what we've been buying that $200 million to $300 million, $400 million range, something that we can easily get our hands around, something that we can build to the existing portfolio that we can globalize will add technology. And also where we're not going to risk the balance sheet. We can take one of these on at a time. And I think that, that's a strategy that we will continue to implement as we see those targets come along.

So I want to address the balance sheet. I mean there's been a pretty dramatic improvement in that balance sheet over the last few years. There was some pressure, I recall, was having a meeting with investors back in the fall and seem to be a demand for you to be more aggressive on your share repurchase. I think at the time, you said you wanted to be more measured about where the economy was going to come out. And obviously now in hindsight, that looks like a pretty brilliant idea to pause that. But how do you think about leverage your investment-grade rating? How do you think about return of capital in the form of dividends and share repurchase?

Well, I think more important than dividends and share repurchase, particularly share repurchase, is the strength of the balance sheet and the flexibility that, that gives you. And I think that being able to maintain that investment-grade matrix, if you will, like metrics, I think that's it's going to be our preeminent objective here. We are very committed to a dividend. We paid out a dividend even during the recession in 2008 and '09 when our -- '07, '08 and '09 when our balance sheet was in much worse condition than it is today. And we've suspended our share buybacks until further notice. And so I think that we're going to continue to make sure that we can guard that balance sheet. And if we're going to do an acquisition, I think it's going to have to be something that's extremely compelling and is something that our shareholders would see as a good use of capital even in times like today.

Peter, it's Anthony. Maybe just to dive into the businesses, starting with the Polyurethane segment. Can you give us a view of where that business is today currently? It seems to us that the spreads have compressed to a level that certainly we haven't seen in close to a decade with profitability likely at breakeven levels. Given the mix shift that you've seen in your business with the high grading of assets over the last several years, how should we think about the recovery in margins as demand improves here over the next couple of quarters? And maybe highlight, in particular, what you're seeing in China as your facilities have started to ramp back up there?

Yes. And I'm not sure that we're really going to see because we really haven't seen a massive erosion in margins. And so I'm not sure that we're -- the biggest issue that we see right now in the business is volume. It's not necessarily an erosion in margin and pricing. That's -- and I'm not here saying that we haven't seen margin erosion on the more commoditized side of polyurethanes and our other products. But when you look at more of the business in general today, the drop in EBITDA has far more to do with the volume of product that's being sold and not necessarily the price in which it's being sold. So I think that as we look at that recovery, I think we gave some pretty clear guidance on that a couple of weeks ago at our call as far as where we saw the business, particularly polyurethanes going in the second quarter. I probably would be slightly more optimistic today than I was then. If I look at the April results, the May and June order book, I also said on that call that I think I expect something more of a W recovery, where we're going to see the markets demand sentiment, consumer sentiment and so forth come in phases. I think we're all very encouraged recently to see the automotive industry announce a series of reopenings of their manufacturing facilities. And I look at the differences between Europe and the U.S. inventory levels. And that's just -- they're just going to be completely different type of recoveries. I think the U.S. probably has more inventory of cars than Europe does, Europe makes more cars to order, U.S. builds cars and then try to sell them. And so you're going to see, I think, you might -- while the same -- in May, you might be seeing a number of car manufacturers start up production again. That doesn't mean that you're going to see the demand for raw materials come on at exactly the same time, same place globally.

And then one of the questions that we've gotten from investors more recently is just on capacity and supply growth for the industry going forward with some expecting a real surge in supply over the next several years. How do you guys think about supply growth specifically in 2021 and 2022 for the industry at large?

I don't see any world-scale plants during that time frame, the next 2 to 3 years, coming into the market. But I must say, we produce roughly 3 billion pounds of MDI today. And my biggest concern when I look at our MDI business isn't how do I get another couple of hundred million pounds of production. I have $30 million bottom line for every $0.01 improvement I can create value. And so if I'm able to differentiate, if I'm able to move further downstream, if I'm able to bottom slice the customers that I have and continuously improve on the products that we're making in MDI, that's the fastest way to improve that business. It's not going to be adding more tonnage. I think it's going to be taking the tonnage that we already have and up-selling it. So I look at our biggest capital investment we have right now in the business is to double the size of the variance production at Geismar, Louisiana. We're not producing any more tons of MDI, but we're able to upgrade the existing capacity into new markets and the more valuable markets. And longer term, yes, we'll hit some speed bumps like we did in the month of April and so forth, but 90-plus percent of the time, I think you're always going to be better off selling and looking at how do I maximize the value of the production that I already have versus just taking more tonnage of production. And that tonnage of production, typically when it comes on, you're taking years to be able to qualify that production and upgrade that production and to move that further down the line. So as I've said publicly before, I'm not a big fan of grassroots expansions. I'm not a big fan. I don't think in MDI, we necessarily need more tonnage. I think we need more profitable tonnage, and we need the opportunity to upgrade that.

Maybe as a follow on from that. Can you talk about what you learned through your Demilec acquisition? How that then inspired your Icynene-Lapolla deal? And sort of how that's precedent for what we might see in the future out of deals around that envelope, polyurethane envelope?

Yes, I think that we're going to have -- what we'll be announcing -- we've already announced it internally and to our customers and so forth, and we'll be more aggressively announcing it throughout the year in advertisements and so forth in the building trade magazines. And that's Huntsman Building Solutions, which will have a whole new logo. It will have -- for the first time, we'll be advertising in print and just almost down to the retail level. This will be a separate -- it's not a legal entity, but eventually, I'd like to see it where we have able to report that as a subgroup within Polyurethanes. And by the end of next year, assuming that we're back to our 2019 sort of growth rates and so forth, that ought to be a business where you see $0.5 billion in sales, roughly $100 million of EBITDA, 20% margins. And it ought to be growing at a 10-plus percent sort of a growth on a global basis, where we've got a profitable platform in Asia, Europe. And then of course, 80%, 90% of that business will be North American-based. And it will be a wide range of products that will go into everything from radon protection in the foundation of a home, to roofing in commercial buildings, to existing residential and brand-new residential construction. So -- and that will be a franchise in and of itself that we'll be putting technology into and branding into. There'll be other areas of polyurethanes where our customer base doesn't require a lot of technical support. They don't require R&D. They require reliability and consistency. And that end of the business, we need to be cutting our costs there. We need to be able to look at that in a different light. So as we're able to build out on these platforms and these franchises, if you will, I think that it will give us an opportunity to focus more intently in certain areas of the business on growth and in other areas of the business, perhaps on cost.

And in Polyurethanes, Peter, do we need to -- should investors even worry about the price of benzene? Is that an issue for you? And obviously, with the oil crashing, it's come down some. Does it matter?

Well, I think it does from a working capital point of view is, obviously, as benzene comes down, MDI prices come down. MDI becomes more affordable, it becomes more competitive again, everything from formaldehyde to plastics to polyolefins and so forth. And we're able to maintain the same margin as the prices of MDI come down. So I see it as a positive, particularly to working capital. But when we look at a lot of our bulk products that we sell, the more commoditized and more and more of those customers are being moved to contracts that will move with the price of raw material to take that variability out, particularly here in North America, where we're short of benzene, structurally short of benzene here in North America, you saw the light cracking we have. We're either -- we either have some of the world's lowest prices because our markets are being flooded with imports or we're some of the world's higher prices on benzene because we're structurally short of benzene, our price needs to get up in order to attract all those -- that flow of benzene coming in from Europe and the Middle East and Asia. So I think that we need to -- I want to take that variability of impact to our bottom line out of the business as best we can. But by and large, it -- we ought to be able to hold on to some of the price when it falls, and hopefully have enough contract protection. And when it goes up, should it go up suddenly, that we're protected there to some degree.

Peter, maybe one follow-up to that. I think one of the most interesting aspects in retrospect of the Indorama transaction is really the ability to get out of MTBE and ethylene at what seems like just the right timing from a cycle perspective. But given the high grading, as you've noted, of the segment, what's a little more difficult, I think, for investors to understand is what mid-cycle or long-term profitability could look like for the Polyurethanes business. And so maybe you could help us think through as volumes recover, what the margin profile of this business, in particular, could look like?

Well, our ultimate objective is to see this -- I think we said in our Investor Day some time ago to see this as a trending towards a 20% business, that it's going to have a mid-cycle of around 15-plus percent EBITDA margin. And I think that if we can continuously build out that downstream business and be able to have a competitive manufacturing base on the upstream and a reliable earning entity on the downstream, that ought to move us closer to that 20% margin, which is our ultimate objective with this business. So to be in that high teens on a consistent basis is where we ultimately like to be.

Great. I think that's helpful. Maybe just pivoting to the Advanced Materials business. Aerospace is obviously an area that we've seen some particular weakness in here recently, and you suggested that on a segment basis, AM could be 45% to 50% lower in the second quarter. Can you just talk about what the recovery path looks like for this segment in particular? And maybe what competitive advantages you have in the segment that allows you to generate differentiated margins closer to what you expect long-term for the Polyurethanes segment specific to the AM business?

Very good question. I mean when we think about aerospace, think about an entity here that is roughly 35-plus percent of our EBITDA on total aerospace. A 1/3 of that is kind of military MROs business and so forth, 2/3 of that is commercial. And as we look at the commercial side of that, obviously, in the month of April, again, you're talking about historical terms here in the month of April, where the first time in the United States that there was an aircraft that was being assembled ever in -- since we started building planes in the United States. Same can be said for Europe. All of the lines for Airbus and Boeing and so forth were shut down. Now as we look in May, those are obviously starting back up. And as you look into the 787 and the 350 Airbus, the Boeing and the Airbus models, those for us are kind of the -- when you try to think about commercial aviation, those are the planes that have the most product per plane. And then the 737 and the Airbus 320, smaller commercial planes, they have less composite materials, but they produce more planes. And so the build rates of these are very important to us. And I think that as we look at where these lines are operating today, I think that you're going to probably see more, particularly around the Boeing just from what they publicly have announced. Some of that build rate will drop in 2022 from where they are today at around 10 per month dropping to around 7. So not a whole lot on the immediate term, again, once these facilities get back up and operating again on the commercial side. And on the Airbus side, again, you're seeing a drop in the 350 platform there of about 20% or 30%. So again, those are going to be moving with orders and with the economy and with aviation. I don't think -- I think that the commercial aviation is probably one of the murkiest sections of the entire economy as to how does that look in the next 3 to 6 months. And how does that really recover. And if you're really looking at aircraft that are having to practice some sort of social distancing inside the aircraft itself, what does that mean for fares? What does it mean for capacities? What does it mean for aircraft size? There's just all sorts of questions, I think, that are unanswered at this point. But I'm sorry, so as we think about the aerospace segment, there is certainly going to be some downward pressure on that on -- over the course of the next year or so. But I -- don't say there's a 30% drop in commercial aviation, therefore, there will be a 30% drop in our aerospace business. And then I think that as we look at that continued opportunity with Advanced Materials, I think the CVC acquisition in some of the products we have in pipeline and so forth. As we look at the coatings, as we look at the automotive adhesives applications, toughening of the epoxy materials itself, products that we've had to buy in the past that we're now going to be manufacturing, the opportunity to take new products internationally. I think the -- Ad Mats for us, I think, is a great division, great margins. The area that I've been -- if I've been frustrated with any segment of it, it's been the opportunity to grow the bottom line. I think that when you look at adhesives and coatings and so forth in general, we're certainly not any different than our competition, but I'm hoping that through a couple of these string of pearl acquisitions, if you will, that we have a better opportunity to grow that bottom line.

Peter, does raw materials matter in this business?

Certainly, much less so as we go further downstream. I mean I look at the CVC acquisition, I couldn't even tell you what the raw material -- what the 2 or 3 biggest raw materials out of there. And that's kind of where we want to be, to be honest with you, on something like that, where you're locking into a lot of your products on a longer-term basis. So I think hopefully, our pricing and our formulations as we go further downstream raw materials will have less of an impact on that business.

Could we transition over to Performance Materials, it's one that we always have a challenge explaining to clients, obviously, a pretty good sized business for you, but exactly what it is you do there and what's the competitive advantage and outlook?

Yes. I think that it's the easiest, it's a much easier business to describe today than it was a few months ago before January 3. So think of it today as really 2 divisions. One is maleic anhydride, which goes into a lot of unsaturated polyester resins that will be reliant on both the textile and the construction industry. We're the largest in the world, I would think that we're the lowest cost producer in the world of maleic anhydride. And it's been a very consistent 20%, 30% EBITDA margin business for us. The second would be our amines business and that's going into polyetheramines and ethyleneamines and so forth. That's going into coatings and the adhesives, the fuel lube additives. You think about pull it to the gas station and they advertise a cleaner gasoline, gasoline additives that will clean your engine, better performance and so forth, that's our products. Polyurethane additives and catalysts. When you think about one of the fastest-growing into polyurethanes for us right now is the VOC-free applications. When you think about VOC-free mattresses and pillows, furniture, automotive applications. Again, that's made in part with our amines products. And then you start going down into much smaller applications into composites, into curing agents, oilfield technology, gas treating, agrochemicals, and so it's a very wide range chemistry of which our amines is -- we're one of the largest amines producer in the world.

And can you talk a little bit about end market trends there, volatility there relative to the durables markets that have punished the polyurethane business a bit. What are you seeing in the amines end markets in this environment?

Well, we've said in our earnings call that we expect volumes and probably EBITDA, you think of being down around 20%, 25% here in the second quarter. And I think in comparison to what we've seen in some of the areas like in automotive, where you've seen a complete cessation of demand in areas like that. But the construction industry hasn't fallen nearly as much as automobile production. And so a lot of what we're seeing in our maleic anhydride business, for example, going into the construction markets, RV industry and so forth, it's held up pretty well in comparison to other ends. I think longer term, as we come out of this in the next 12 months. We make well be seeing and we're starting to see some of the early indicators that people instead of going to destination locations and getting on a crowded airplane, where maybe they're taking vacations closer to home, maybe RVs are in higher demand and so forth. Again, starting to see some of the early indications that, that may indeed be the case. In our amines, again, there's so much -- as you think about the fuel and fuel additives, lubricant additives, that starts to come back as a VOC production of furniture and the automobile industry, coatings and adhesives. Again, it was hit in-situ with the automobile industry, but it also is more diversified than just that single end use market. So I think it's got quite a resilient downstream market base.

Peter, maybe just shifting to free cash flow. One of the things that you've done here more recently is slowed the Geismar splitter expansion project. And I think we've appreciated the increased clarity and guidance around free cash flow conversion that you provided more recently in some of the presentations. Maybe these questions dovetail on one another, but how do you think about the ramp-up of that Geismar project? What you'll be looking for to determine whether or not you move forward and what the time line looks like? And then longer-term beyond that project, how we should really think about free cash flow conversion and what the opportunities are to expand beyond that 40% level that you've been targeting previously?

Yes. I think that when we think about the expansion beyond 40%, I think that 35% to 40% we've been kind of leading the market to. Frankly, if we can keep that on a pretty consistent basis, if we have opportunities to expand it, we certainly will. But I think if we can return to that as quickly as possible. And our objective this year is to see we'll be working the big levers this year. In addition to our EBITDA, going to be working capital. It's going to be our CapEx. We've talked about cutting 90% -- excuse me, $90 million from our CapEx this year, about half of that will be slowing down our project in Louisiana. And then what's left is figure that, that's split on slowing projects, with the slowing economy, obviously, we don't need to be coming on stream as quickly. And just other products -- projects that we've just canceled outright. Working capital is going to be important to us. And credit management is going to be something that will be hugely important around working capital, it's not just inventory level. I think we have a very strong balance sheet right now, but I'm -- yes, I think that as we start looking at our customer base in India and some of the places around the world, we need to make sure that we keep a very close eye on our credit and our receivables.

Great. And then maybe just lastly, as it relates to cash flow, I think you talked to this at the beginning of the presentation, but the balance between M&A and share repurchases in a post-COVID world, how should we think about what net leverage could look like on a go-forward basis? And what your appetite might be to expand that over time?

Yes. I think that a lot of that's going to be when we look at the macro economy and how confident do we feel about directionally going forward. We've talked in the past about 2x sort of mid-cycle EBITDA is probably being at the upper end is where we'd feel comfort. I'd be more apt to protect that balance sheet today than I would, obviously, during normal times. But I would -- I think that it's not an either/or proposition that we're either doing M&A or we're doing share buybacks. Having said that, I would lean towards a -- and a lot of that depends on, again, where our stock is trading, the values and so forth, the IRR that we have on a share buyback. But I'd probably leave out $1 for either one. I'd certainly would lean more to M&A than share buybacks.

Peter, maybe we're just about out of time. But can you talk about -- you guys have a good size presence in China, what you've seen as they started to go back to work there? And if that can be a blueprint or what the puts and takes of that cadence might indicate for the western worlds?

Yes. I think that there's probably some learnings and some indications there. But I also just -- China is a quasi-totalitarian state. When the government tells you, you're going -- all to go back to work and start producing stuff and buying stuff, people usually start following it. I can't imagine a scenario where you've gotten China regions and regional governors basically telling Xi Jinping to f*** off, and we're going to start our own economy whenever we feel like it, not when you tell us to. So I think there's probably far more uniformed recovery in China that you're probably not going to see. You look at some of these governors talking about lockdowns going into June and July and so forth. And so I think that it is -- it probably is a recovery of what we potentially can do, but the U.S. will eventually do the right thing, but I'm afraid only after we've exhausted all the boneheaded ideas that are presently being entertained out there. What we're seeing in China, though, I think, is genuine economic recovery. I would have said 1.5 months ago that it's probably as much inventory restocking as anything else. But as I look at our April P&L without giving too much granularity here, the upside that we're seeing in our corporate performance for the most part have come out in China, and it's not just in urethanes, some of the other areas that have offset some of the slowness that continues to linger in the U.S. and Europe. So I do think that China is -- we're seeing the effects of infrastructure spending, consumers going back to stores and back to market. And our Chinese-based domestic business is pretty close to tracking what it was a year ago in most segments.

Well, that's terrific. I'm afraid we've run out of time there. So we really appreciate your time as always, Peter, and stay safe.

Yes. You too, Bob. Great talking to you. And thanks, Anthony.