Huntsman Corporation (HUN) Earnings Call Transcript & Summary

Good afternoon and thank you for joining us. Laurence Alexander with the Jefferies Chemicals team. Given the short tight room, I think everyone here sort of is familiar with Peter. And Peter, if you have any opening comments before we dive in, I'll pass it over to you.

No, I've got a white shirt and tie on in honor of my high esteem for you, Laurence. And so for some, I haven't been in one of these for a while. Just trying to help our Textile Effects business, yes.

Yes, we're all sort of getting used to sort of the new normal. We'll see what it turns into. And I guess, maybe let's just sort of start there in terms of just the amount of chaos. A few weeks ago, you made some comments about how order trends were improving in July. Not surprisingly, the most popular question for this conference was, what are you seeing so far in the very first few days in August. But also, more seriously, because August always has the lull, what do you think is a reasonable benchmark for how choppy trends should be September, October based on how customers have been giving feedback on their confidence levels?

Well, the confidence levels that I'm getting from customers and from associates that are interfacing with them and so forth, is that there's still just very little transparency. Consumer sentiment, so there's still -- the bookends of kind of bad news from our business, I think, are kind of the bookends of industry in general, and that would be Textile Effects, which is largely industry -- or excuse me, largely retail, representing those areas where somebody physically goes into a store to buy something. They look within our business, somebody typically goes into a store, and there are 2 things that we sell that, I would say, have been impacted by this. The first one, of course, is around the textile business. We go in to buy a suit. Now people buying athletic wear, that's actually holding up quite well. People buy that online. But you take the suit that Sean here is wearing, it's very well fitted, it fits him very well, whereas mine, I bought it online, broad shoulders, it's kind of a bit frumpy looking. The people want to buy clothes that they can wear, they can fit into, they can see fashions, they want a selection. And that's retail. The other thing that, on the retail side, I noticed that -- within our business, I think is -- we're seeing a slow recovery is footwear. People are going to buy a pair of shoes -- as you all know, a 10.5 in Adidas versus a 10.5 in Under Armour versus 10.5 in -- yes, they're not always 10.5. And so those, you will see a recovery once retail physically opens and people go back to stores. The other end of that spectrum of kind of the long lag issues would be aerospace, for obvious reasons. I think it's going through a time right now, a tremendous chaos of inventory restocking and evaluations. How much do we really need? And how -- and it will probably be another quarter or 2 until you work through that inventory issues. And then it will be -- from that point on, it will be really what's the build rate, which I think will probably -- I wouldn't be surprised if it stays at these sort of levels for a year or 2. Now beyond those, retail, which is recovering, aerospace, beyond that, I look at automotive, building materials, a lot of electronics, a lot of stuff is going to VOC catalysts and so forth. When it's -- I think in the third quarter, we're kind of seeing down anywhere from equal to where it was last year in the best of scenarios maybe down high teens from a year ago. But I'm not seeing sight from what I've just mentioned about aerospace. Not seeing anything that's down 40%, 50%, 60%, 70% like it was at the beginning of the second quarter.

And you -- can we sort of walk through sort of the productivity and cost cutting efforts? If we take Q2 as a baseline, how should we think about the cadence of net savings that will be realized in the back half of the year and then the incremental benefits in 2021 or even 2022? How should we think about the degree of momentum here in terms of -- as a benefit to EBITDA and then the offsetting cash flow impacts?

Well, so again, I think it's going to sound really smooth, but it will be somewhat lumpy. The reason I say it will be somewhat lumpy, remember that we're talking about what I would call temporary cost measures, like no travel and things that you're just saving money and we threw that number out on this last call. And that's going to be gradually being reabsorbed in the business, obviously, as we get people back out traveling, calling on customers, working on new sales, accounts and so forth. Those are actually costs that I want to come back into the business sooner rather than later. And that's going to be coming back in the business over the course of the next, however, many quarters it is until we're back to the new normal. But as we look, I think it was Slide #10 on this -- our investor presentation that we have here. So we're thinking about a net $20 million savings on cost-cutting this year, that would all be, obviously, the second half of the year. And that's really starting at 0 and going up to a $40 million run rate by exit of 2020, averaging for the year, $20 million. Next year, starting out about $40 million and ending the year at about $100 million. And of that, you'll see about $80 million of that will fall to the bottom line. From that figure, that -- just in rough numbers, about 1/3 of that is going to be synergies through recent acquisitions and so forth. And think of 2/3 of that, maybe up to a $1 million or so here. The rest of that is going to be largely around indirect costs within the business, largely around labor, around the elimination of costs that were associated with, frankly, running a business that was quite a bit bigger just a few months ago when we -- before we spun off the intermediates and upstream businesses.

And can we talk a little bit about sort of how that then ties into your thoughts around the free cash flow conversion cadence for the next few years? I mean, you put in place -- several years ago, you made each of the divisions responsible for free cash flow targets. I think one of the comments that I've had from investors since then has -- or since the earnings call has been, there's going to be the tax hit this year to the cash bridge. Then at some point, there might be some more -- Geismar might come back into the mix. So people are a little bit nervous around what the actual free cash flow generation is going to be over the next, say, 3 years. In what could be a healthy environment where in the medium term taxes start rising again, the corporate tax rate starts rising again. So how do you think about the gives and takes, first of all, but then also your priorities?

Yes. So let's step back just a little bit. And so as we think about the company over the last 4 to 5 years here, we've been generating about a 40% free cash flow to EBITDA in the sale of the assets to Indorama. I think we articulated to the industry why that would be more akin to maybe a 35% going forward. Those were more commoditized businesses, don't require a lot of cash to keep going. When they generate cash, they generate cash really well. When they don't, they don't generate anything. And so I think that going forward, we would expect a more normalized number to be around that mid- to upper 30s sort of a number. Now as we articulated to the market at the end of last year, over the course of the next 2 years, that would be extended maybe a little bit beyond 2 years, is the Geismar, I don't want to say expansion as much as it is the enhancement of taking existing MDI and creating greater value with that MDI. And between now and the time when that comes onstream, it's -- we've told the market that, obviously, will be lower than that 35% conversion. Once that's over with, I think that we'll get back to those run rates that we have previously articulated to the marketplace, if not better, because I would hope that, that splitter project, especially after it's sold itself out, that will be -- that ought to be generating a higher EBITDA.

And for Polyurethanes, can you walk through how you think about the bridge back? I think you mentioned on the last earnings call, a normalized run rate should be doable at about $225 million a quarter once demand recovers. What needs to happen to get to that run rate?

Well, if we look at that run rate, I would say that a realistic run rate for Polyurethanes would really be around that $800 million-ish sort of a number. So let's go back and take 2018, and we're running at $800 million -- a little over $800 million at that time. And let's say that we strip out close to $200 million of that $800 million because that was kind of a onetime run-up. I wouldn't say that that's a pro forma number, and we shouldn't get credit for that as being a pro forma. Now we got to get credit for the cash we generated that time, obviously. But -- and so since that time, that would say that your real run rate's around -- normalized around $600 million. What's changed since that time? We've taken -- we built out the Huntsman Building Solutions, the acquisition of Demilec, the Icynene-Lapolla, we've got $40 million, $50 million of costs that will be coming out of the business. And if you add those back in and running that business at a normalized run rate, you're kind of offsetting what I would think was that spike then of that $180 million, $185 million-ish over the course of the next year or so between the add-ons of Huntsman Building Solutions, Demilec, Icynene-Lapolla and so forth and in addition to the $40-plus million of costs that will be taken out of Polyurethanes. You kind of come back to that $155 million, $160 million-ish. It brings you back up to that $750 million to $800 million-ish sort of a number. Now in addition to that, you're going to have the typical growth that you would see in the MDI markets and the Polyurethanes markets. After another 20 months or so, you can see that the add on, the effects of operating the Patriot project coming on, allowing us to go further downstream more aggressively in North America. And so I think all that would be an add-on. But I look at that kind of that normalized run rate within Polyurethanes. From where we were 2 years ago to moving forward, I would think that should be right around an $800 million sort of number. And then I would add the rest of the businesses, Performance Products, probably around a $200 million run rate. Advanced Materials, let's assume that there's a prolonged aerospace for a couple of years. I don't think it will be that long, but let's just assume that, that's the case. Then that's -- the CVC added into it, take $50 million off of it for aerospace, you're kind of at a $200 million-ish sort of a number. Textile Effects, I think it goes back to -- not at a peak, but a normalized level of around $90 million-ish, and you've got about $175 million to $180 million of corporate in that. You kind of got a corporate run rate -- normalized corporate run rate of around 1.1 or so, 1.1 to 1.150 or so. And when the business gets back to operating in that rate, I would think that the expectation is around a 35% cash generation. That would be something that we ought to be able to achieve.

And how do you think about the ongoing shift of the Polyurethanes mix into the differentiated grades? Can you get to 75%, 80% downstream differentiated through organic growth on your existing assets now? Or do you need to do additional bolt-ons to get there?

No. I think when we're talking about 70%, I think that we can do that with existing assets. You might have to expand some system houses and so forth. I don't think we need to have more dots on a map, if you will. I think that we've got the opportunity. Just look at it -- again, I don't want to sound like a broken record here. But if you go back to the Huntsman Building Solutions, as we mentioned on our last earnings call, that we're consuming around 130 million, 140 million sort of pounds internally just in that application alone. And that's taking our most commoditized grades of MDI, mixing it with a polyol that we produce and a catalyst that we produce and producing the most versatile and the highest R-factor competitive foam in the world. And as you look at that sort of growth, that's just more tonnage that we're taking and moving it into a downstream business. Now we can expand that business as we are today in China and particularly in Europe with the existing system houses and blending facilities and so forth. Again, you might need to invest in some of the existing buildings, but I don't see us having to go out and start acquiring and building ground up new facilities for something like that.

And can we drill into how you think into Huntsman's sustainability profile, particularly how you look at where you can take recycling and energy efficiency within the business? You already have some recycling -- recycled product as feedstock. Where can that go over, say, 5, 7 years?

Well, as we look at -- we really started on this drive about 11 years ago, and it was really through economic necessity because at that time, the people really weren't talking about ESG and so forth like they are today. When crude oil got up to $140, $150 a barrel, we charged each one of our divisions to come up with how do you capitalize on energy conservation because if energy stays at those levels, the economics are going to be enormous to the company if you can come out and -- with energy sustaining. Well, now it's not about the high cost of energy, it's more about not using the energy. So as you look at each, it seems that we're planning back then that have come to fruition. So these are projects that we benefit from today that are sustainable products today, that make sense today, they're profitable for us today. Textile Effects, we make a full array of products our competition does not make. That means you can make textiles without hot water, water conservation, no heavy metals, the dyes that were traditionally used in this industry that were an ecological nightmare, you don't have that problem with Huntsman's products. Look at Advanced Materials, what we're doing around lightweighting, what we're doing around the efficiency in the aerospace industry and the automobile industry, the electric car, the battery housing, the engine housing around those 4 motors that are in a Tesla vehicle and so forth. You look at the volatile organic compound free catalysts that are coming out of Performance Products, the solvents that are being displaced by state-of-the-art blends and amines and so forth, allowing the industry to keep doing what it's doing, but at a much better level. And then, of course, our largest division in Polyurethane, just the one area alone, I'm not going to talk about structurals, foam and what we're doing with OSB, oriented strand board about being able to go to nursery growing woods and so forth instead of [ old forest ] plywood. You just look at our ability to produce the -- we're the largest producer in the world, spray foam, #1 insulate in the world that's produced using over 1 billion recycled bottles every year, PET bottles that go into polyester polyols, the MDI side, the A side, the B side, polyol, the MDI. Again, we're just getting started in these areas. We barely even penetrated the global insulation markets. And this is the growth engine of our Polyurethanes business, is around insulation, not just spray foam, but structural and you look at where we're going in energy conservation, fire retardancy, construction sciences and so forth. It's -- I still feel that we're in our infancy in a lot of these areas.

And as you roll these initiatives together, sort of how much demand pull do you see? And I guess what I'm thinking about is, do you see -- relative to your end market growth, can Huntsman grow faster over, say, the next 5 years compared to the last 5? Or is it more that this is offsetting churn in the portfolio?

No. I'd like to think that the portfolio in and of itself, without any of these applications, is a GDP sort of portfolio. And when I look at these applications on top because when I -- all those products I just talked about, that's about product substitution, it's about product replacement. They're replacing something else. And that typically, for us, as I look out over the last decade, has been a sort of a GDP-plus sort of growth. So the portfolio, especially as that continues to expand within the company, it ought to be growing at 2x the rate of GDP. But again, I think in this industry, we get too transfixed around the growth of volume and the capability of capacity growth rather than the opportunity that we have, which we're focused on and I think is the biggest area of opportunity for this company is the ability to have higher margins and more sustainable margins. And I think of -- just candidly speaking, if I have an area where I think that the company could improve relative to our peers, I'd like to see a higher-margin business. And that doesn't mean we need more tonnage, it means we need better tonnage. We don't need more MDI. We've got 3 billion pounds of MDI right now. We need to get -- take the MDI right now and upgrade it, move it further downstream, make it less volatile, make it more susceptible to the lows and to the highs, which means we go through these mega spikes. We may not be the absolute company out there that's getting the last penny off the table on a spike, but we're going to be, quarter in and quarter out, the most sustainable from an earnings perspective, margin perspective, growth perspective. And that's really -- not just in urethanes, but across the board.

Can you see that within the existing portfolio? I've had some companies earlier today talk about how the more sustainable products are already 500, 700 basis points higher margin than the rest of their portfolios. Can you see that kind of spread? Or is that more you need to grow the value and use and create the demand pull?

I think it probably points to specific areas of applications like that. But Laurence, what I'm saying is that this just has to be part of your portfolio, period. I mean the chemistry that we have -- that we're making in the textile industry, the dyes and the fabrics and the chemical treatments that we have, I bet that we don't have any products that we're selling of material volume that's 7, 8, 9 years old. I mean that whole entire inventory chain has got to be uplifted. It's got to do better. And the customers are demanding, younger consumers today are demanding that Victoria's Secret or Ralph Lauren or Nordstrom's, that they take responsibility of their supply chains. 10 years ago, the supply chain -- the retailers had no idea where their fabrics were coming from or how they were even made. Today, those same fabric -- we would never have gone to a Tommy Hilfiger and sold them -- or Ralph Lauren -- and sold them our product or have some qualifier products. We do that today because they have responsibility of their supply chains better than ever before, so -- the consumers are asking for. I think the same thing is going to happen, whether it's in automotive, whether it's in all of those lines. So kind of difficult to say that here's -- that it's 600 basis points. If I were to look at an area like insulation, I bet if you gave us a few minutes, we probably would say traditional applications of insulation are 14% margin, spray foam is 18% margin. There's your 4%, 5% difference. I bet it would -- I bet maybe a percentage off or so, but I bet it's…

Right. Just riding it, yes.

Yes.

Is there -- so how do you think about the degree of visibility you need to take a more aggressive stance with the balance sheet? I mean you've come into this crisis with a very resilient balance sheet. You've done some acquisitions. But how do you look at where you want the balance sheet to go over the next several years? And is it contingent on the end markets or is it contingent on opportunities coming up?

I think both. And I don't want to sound too nebulous. But the -- so much of our past has been determined by the opportunities that are out there. I mean I'd love to be able to say that we're going to go out and we're going to find 20% margin, 15% growth, composite materials for the aerospace -- next generation of the aerospace business that we can buy for 6x EBITDA. It simply don't exist. I mean if they do exist, does the chemistry fit? Is the synergies fit? Is the economics fit? And a lot of this is really what's out there and what can you make work that's available that's out there. But I just -- I'm not the right CEO to going on out and try to chase after assets regardless if they -- what the value is. I just -- in this industry, that will kill you really quickly, overpaying for an asset. But that's not to say that we just chase it based on price. You can't do that either. I mean you got to have some strategic rationale as to where you're looking and how things fit in, but it really has to be a combination of both those things you brought up earlier.

And then the other side of that is if we end up in this kind of stop, start, stop, start kind of rhythm for the next several years, what would be your balance sheet target and your priorities for cash deployment?

Well, if we're truly in this W-shaped recovery, a lot of ups and downs and so forth, I think we'll probably take a pretty conservative stance on our balance sheet and really looking for very small bolt-on acquisitions. If it's a W shape, but we're taking 2 steps up, 1 back, 2 steps up and -- which is really what I'm seeing more of in the industry right now, I mean, I'm seeing a jagged but a progressive rate, we'll obviously be willing to take on a little more risk to that balance sheet. But I think that we recognize, particularly times like this, you are reminded very well of the value of a strong balance sheet, investment-grade matrix. And any acquisition we do has to be within those guidelines or has to be very, very shortly, very visibly after an acquisition is made that you get back there in a very quick time period. And I think that's the sort of discipline that we want to be able to maintain that level.

Do you have any end markets, which were -- where you're seeing signs already of a restocking cycle in the fall?

Restocking in the fall?

So not just sort of -- I think what they're getting at is not just an end market recovery, but actual restocking and enough confidence to really drive -- lifting inventory levels?

I'll look to Ivan and Sean here. I don't see anybody out there that is saying, "I am so confident of what's going to be happening in November." I'm seeing more caution -- well, not caution, but more longer-term signaling from manufacturers and competitors. Case in point, in ICIS this morning, that was published for the first time in some months, freight rates for MDI that's being purchased in China and moved to Europe or North America. Now if I'm buying MDI today in China, the reason I'm buying that is because I'm foreseeing an operating problem, an upset or something in Europe and the U.S. But I'm buying an insurance policy that's good for 2 months from now. That product I buy in China, unless it's a physical swap, but then why am I bringing pounds today? What I'm really saying is I'm buying product today because I see problems in October. And those sort of signs that are signs that I'm seeing in the MDI market today, that's probably -- when I go out a couple of months, I'm seeing just again listed on the industry public data here, I'm not trying to speculate about competition, 1 million tons either through force majeure, operating upsets or planned maintenance in the next couple of weeks that are going to be impacting the market. Now that's roughly 15%. If you got a market today, in our last earnings call, we were talking about the industries running at 70%, 75% capacity in July. We're running maybe a little bit higher than that. And you talk about 15% of the capacity impacting that. You're looking at an industry that's moving pretty close to 90%. And that number that I just gave you does not include anything that the anti may or may not be doing in China because there's reports that they're taking down 650,000 tons of maintenance in China. So -- and then you start looking at some of these broader numbers. You got to remember that in times like what we've been through in the last couple of months, taking an MDI plant or any chemical process that you're typically running at 90% -- even Steven, and you'd know this with your background launch. And you often take that for a month or so down to 30%, 50%, 30% inventory control. Now we've got demand. I mean I better -- I've got a competitor that's out. So I'm going to take it up to 90%, times like that. When you're restarting a facility, when you're doing maintenance work on a facility, when you're out of your normal comfort zone of operations, that's when any one of 100,000 variables within a facility go haywire, and it's not surprising to me that you're seeing operating upsets because you're seeing a lot of variability in manufacturing rates over the last couple of months here. And I think that's probably going to continue.

And just the -- and is the regulatory scrutiny also higher than a few years ago so that people take down -- they're more aggressive about taking down capacity if there's any risk of a problem?

I think so. The regulatory is an issue, but I think the bigger issue here is just the variability of operations. And when you take your facility, you've been operating at it as low as you can to keep production going, but inventory is low. And then all of a sudden, you're bringing that up. I mean look at the refinery explosions, look at the offshore drilling explosions, look at the chemical explosions, a vast majority of those happen when you're taking down an asset, bringing up an asset or you're changing -- materially changing the variability within that asset. And I'm not here to predict disaster or doom or disparity. I'm just saying that's -- it's a typical byproduct of variability in chemical processes as you have operating upsets. So I think times like right now, when you start seeing these global movements of products that we haven't seen moved around for a year or so, that's probably giving me as much visibility in October, November, what people are expecting. But no, I can't think of a single segment where somebody is saying, "Wow, we're expecting a huge Christmas rush in November for something that we're making and so we're going to build up now." That operating variability that I just talked about, with your customers are all running on fumes, which most of them are because doing the same thing we are, they're trying to generate as much cash and want us little tied up in working capital, they want inventories to be low, things like crude oil prices are pretty low right now, so I'm probably buying it at a good value right now, you're running on fumes. And now you've got possible operating upsets on the manufacturing side. That reverberates very, very suddenly in price tracks and changes, whatever, on the downstream side, just brings a different dynamic than maybe what we've seen in the last couple of months.

And then just the last question that came in just for the minutes we have left is, can you talk a little bit about the operating leverage Huntsman has to the European Green Deal?

Well, I think that a lot of that deal has to do with alternative energy, wind and solar and so forth. And a lot of those facilities are not built where you have infrastructure built. So a lot of that Green Deal is going to go to power infrastructure, power lines and so forth. That's going to be a good help to the Advanced Materials. You've seen and read a lot about the incentive they're giving for electric vehicles. That's composite materials, advanced materials. It's building insulation, it's seeding, it's insulation and so forth. It is MDI and VOC catalysts coming from Performance Products. And so I think that when you see a lot of the new deal, the wind blades and so forth, that's Huntsman partner that's going in there. It's VOC catalysts that are going in there. Lightweighting of existing cars, internal combustion engines and so forth getting better mileage, that's around composites and what have you. I think there's a short-term gain but particularly a longer-term gain on many of these things.

Great. I think that's probably a good place because I think we'll get [ the book ] shortly. So thank you very, very much for the discussion.

Very good to see you, Laurence.

And hopefully, we'll see each other in person next time.

Very well. Thank you very much.

Take care.