Huntsman Corporation (HUN) Earnings Call Transcript & Summary

Great. Thanks. Good morning. My name is Arun Viswanathan. I'm the chemicals analyst here at RBC. And we have Peter Huntsman; Sean Douglas; and Ivan Marcuse from Huntsman joining us this morning as well as myself. And so we don't really have a specific agenda here. But we will allow Peter some opening remarks, mainly to highlight some of the recent developments that they've called out. They did update their Q3 outlook recently as well. So maybe we'll just start there. Peter, maybe you can just reiterate what you're seeing that led you to provide that update of 40% better-than-expected EBITDA in your Polyurethane segment. So maybe you can just reiterate some of the details behind that statement.

We'll do. Arun, thank you very much for taking -- letting us come on to your program like this and hope you're well, hope your family is well, and we look forward to an active conference here over the next couple of hours here. So yes, I think that the biggest change we've seen, certainly, has come about an improvements in the construction industry and in probably the automotive industry following the construction, automotive in Europe and both U.S. construction, mostly in the U.S., but also coming on the commercial end in Europe. I would just note that we're not ones that take a great deal of pride in coming out in mid-quarter and giving direction whether it's up or down, better or worse than what we've given before, but we've seen such short visibility. There's such a little amount of inventory in the beginning of the third quarter. And our customer levels and in our levels and so forth that we've seen through this entire year of record high level of canceled orders where people would typically say, "We'll follow similar to what we were a year ago." And then they start canceling them a matter of a few weeks before delivery time, which we permit is as most people in the industry. Obviously, we don't allow orders to be canceled and the products in route or something. So we did see a lot of order cancellations in the second, beginning of the third quarter. A lot of those cancellations stopped throughout the third quarter. And we actually saw a reversal where market started improving and then asked us to review and to revisit our Polyurethanes numbers and each of our other divisions, by the way, and we continue to see a changing, though, certainly a more stabilizing marketplace today than we did a few -- even a month or 2 ago.

Okay. Great. Well, if we can just dive into that a little bit deeper. So is it -- you noted strength in construction and then automotive. So obviously, it sounds like volumes are tracking a little bit better than you expected. You noted low inventory. So I guess, could you put any metrics around that? I guess, if that's helpful. I mean have you seen a dramatic reduction in your inventories or customer level inventories? And then similarly, on the volume front, how much better would you say volumes are tracking? And then maybe we can touch on price after that.

Yes. Well, let's just take back on volume. What I'm going to do is I'm going to talk a little bit about our volumes versus a year ago. And so when you look at something like polyurethanes in automotive, certainly, the beginning part of the second quarter, we saw automotive, all polyurethanes going to all global automotive. So it's a global view, right? We saw that down 65% in the month of April, May. It's in the 50s to 60%. And as we look at in the third quarter, we see that down mid- to high single digits. So a vastly improved market when we look at automotive being down that amount. When you look at construction, very much a similar story, though, not down quite as severe. And you got to remember at the beginning of the second quarter, we saw the first time in the history of -- since the industrial revolution started. There was not a single production line going in Europe and North America, whether it's in aerospace, whether it's in automotive. So I mean, there was a complete cessation. So anything that we were selling into those segments was actually just building into inventory, which I'll get to in just a second. But when you look at the auto -- the construction markets, we saw those markets down about 20%, 25% at their low. And those markets have really recovered to be where they were a year ago. In some cases, like in the area of insulation, spray foam and so forth, we're actually seeing a slight improvement right now over what we saw a year ago. So every different levels of construction, automotive and so forth, we're certainly seeing that improvement. I think we're seeing that sort of improvement across the board with the exception of the aerospace industry. Aerospace actually started the second quarter down about 20% to 30%. And it started this quarter, the third quarter, down around 75% to 80%, I mean, which is just a -- I think that's just terrible. So when I think about aerospace, and now you're talking about $85 million, $90 million segment of our overall business, I would say the second half of this year, we'd be lucky in that particular segment in the second half of this year to have low single-digit EBITDA in the second half. And that's coming from an annualized last year where it was running at $85 million to $90 million. Now that doesn't mean that Boeing and Airbus are just completely disappearing, but it does mean that there's a record inventory. So I think of our inventory, which isn't just a bunch of drums sitting in the customer, our inventory is sitting on 50 to 80 wings that are waiting to be assembled on 787s or Boeing or Airbus 350s, and those planes are sitting parked in Victorville, California, waiting for customers to come pick them up. So we're seeing a massive decline in aerospace, and I bring that because that's kind of the most severely impacted end of our business. I'd say that the construction materials is the most positive end of our business. And that aerospace will probably not get to what I would say the new normal, which is a greatly reduced build rate. So probably middle of next year would be my guess. So there are still some areas that are really hard hit.

Okay, appreciate that color. And then, yes, maybe we can just also touch on price. Was a part of the improvement that you saw in EBITDA, the better-than-expected results also driven by price gains or margin gains from rather -- from kind of benign raw materials? Or how are you thinking about in Polyurethanes the price-cost relationship?

So, when I think about the improvements in EBITDA in Polyurethanes, and I'll ask my colleagues here that they can throw a pen at me or something if I get this drastically wrong here. They're all picking pens, by the way. So when I think about the improvement in EBITDA, I think about half of that is going to be volume, the improvement in volume. And the other half is going to be an improvement in what I would say, so split that other half maybe 50-50. We're seeing an improvement in pricing that's taking place during the third quarter, and we're seeing an improvement in margin that is obviously because of that improvement in pricing, but also because of the falling raw materials. So as you think about pricing, don't necessarily think if we have prices today at the same levels they were in January, February or March. Remember, since that time, we've also seen a reduction in benzene and some other raw materials. So the same pricing as of 9 months ago, it wasn't going to be the same margin today. It's actually going to be a little bit better margin today. So we've benefited from improved pricing, benefited from improved raw materials. So that's kind of half the improvement. The other half, I would say, would be volumetrically being led by construction.

So when you think about maybe looking out over the next couple of quarters, your business is definitely recovering here. Your guidance implies kind of like maybe $140 million or so of EBITDA in the Polyurethane segment for Q3, which is actually flat year-on-year about. So what's kind of the medium term outlook? I mean how are you thinking about the next legs of recovery? And how you're thinking about the pricing opportunities? I know there's not a lot of new supply on the market. You've said several times that there's no need for you guys to build any supply. So how are you thinking about the market evolving and the opportunities for price gains in the future? When do you get back to, say, those levels of price that you saw last year and maybe Q1 of this year?

Well, when I think back from a pricing point of view, I think that the rate that we're going, I'm hoping that by the end of the year, we'll see similar pricing by the end of the year that we kind of saw at the beginning of the year. And that means that we might well have assuming the benzene in the crude fields kind of stays a bit lower. We might actually have better margins on a per ton basis. But remember, fourth quarter, we typically have volume down on a seasonal basis. And I would expect, I mean, as much as I'm encouraged by the signs that I'm seeing, in the fourth quarter, we typically have this phenomenon that our industry seemingly forgets every year this event that's called Christmas, and everybody seemingly takes off at the end of December. And it's also a time when we have this massive inventory reduction that will take place. So everybody's working capital improvements can be shown out by -- at the end of the year. So I would expect this fourth quarter probably to start off better than most fourth quarters, certainly better than last year's fourth quarter, but may well end with a pretty tough December just because I think that there is going to be some reconciliation at the end of the year. Cash is going to be king and a lot of our customer and a lot of our competitors with lower earnings are going to have lower cash. And I think there's going to be a real -- there's going to be -- we're going to exit this year. This is just my personal prediction. I would imagine, we're probably going to end this year with a lot of our customers preserving as much capital, reducing inventories as much as possible. And you'll probably see a slowdown in December as companies like our customers and it comes like Huntsman are reducing inventory as much as possible to have a strong balance sheet showing at the end of the year.

Okay. That's helpful. And just one more then on Polyurethanes. As you look out over the medium term, you guys have made a lot of changes in your business. You've obviously added extra downstream capacity that led to potentially better and stickier margins for you at Huntsman. So I'm just wondering, if all of that is still intact, a couple of years ago, we had a little bit of a spike in prices because of an outage. Is that what it's going to take now to get to a sustained pricing cycle? Or how are you thinking about, say, the next couple of years in Polyurethanes?

Well, I think that you'll probably see some short-term volatility just for the reasons that I just outlined. Remember, too, that we've seen one of our competitors declare force majeure here during this quarter. That's a large world-scale facility he's had. He also had -- I don't think an unusual number, but most people take their T&Is, or Turn Around & Inspections, where they shut the plants down on a yearly basis and they do all their maintenance work. And they typically shut plants down in the fall because of weather events, usually start transitioning from summer season to winter season and a lot of your associates are taking time off in August. And so you typically -- August, September, you have a number of plants that will come down for any number of reasons. You typically schedule these maintenance times. So over the end of the second quarter, going to third quarter, you saw quite a bit of MDI that was off-line. I don't think that it was at all unplanned. I do though think that the industry somehow thinks the investor community at times, I think, has a misperception that when you restart an industry and demand comes back, it's as simple as thus going out and telling the plant, start producing more product. The plant increases capacity the next day. And all of a sudden, you've got all this product flowing into the market, in a week or so the problem solved. When markets go tight, it usually can take multiple months even if plants are back up and running at full capacity. It usually takes much to restock inventory, restock the appropriate grades, restock your supply positions around the world. Most of the polyurethane is in North America. MDI is produced in a pretty small geographic area of Louisiana and Texas. Most of it in Europe is likewise produced in a pretty small cordon in Northern Europe. And most of it in China is produced in -- along the Ningbo, Yantai and Shanghai areas. And so when you start supplying customers into Western China, you start supplying customers into the U.S., Midlands and you start supplying customers throughout Europe. You're talking about a multi-week supply chain that needs to be refilled and reequipped, if you will. And so when we see these shortages, what you think may cause a month or 2, it usually goes through a quarter or 2. And I think short term, you're probably going to see some of that volatility in the third and fourth quarter. But longer term, as you ask over the next couple of years, if Arun, you and I decided today that we're going to put our savings together and we're going to run out and go build an MDI plant, if it's a grassroots facility, you're probably looking at 5, 6 years. By the time you get environmental permitting, which can take a year or 2, engineering, construction, start-up and so forth. Then as you're look in a brownfield expansion of a new line, you're probably looking at 3 to 4 years. You have much of the same things to do as you would in the grassroot. So we have pretty good visibility over the next 4 to 6 years as to how much capacity and when that capacity and where that capacity will be coming on. And as we look out over the next couple of years, assuming that everything gets built that's been announced, everything gets built that hasn't been approved yet, it all gets built over the next couple of years. And if you think that the industry continues to grow at about a 5% or 6% growth rate, some years, it will be more than that. Other years, it will be less than that. But on average, about 5%, 6%, you're going to be short about 2% a year. Now again, that all doesn't come on and off at the same time. But by and large, you're going to see MDI over the next couple of years, assuming historical last 20 years sort of growth rate, you're going to see Polyurethanes get tighter, not longer during that time period. And should any of those plants be delayed, remember, the one facility in China that's being planned by Wanhua is nearly half -- over half of all the new capacity that's planned to come on in the next 5 years inside of the one complex in China. And if for some reason, that facility is delayed for whatever reason, it could -- you're looking at years sort of a time frame to try to replace that sort of volume. So sorry, long-winded answer, but over the next couple of years, I think this MDI industry is going to be getting tighter and tighter. In companies like Huntsman, we're not going to be looking to bring more tonnage into the market. I've already got GBP 3 billion of MDI capacity. What I need to be doing, what our companies need to be focused on is how do we get more margin per ton. That's how we're going to grow our earnings. Not necessarily going out and building a plant today that will come on in 5 years down the road, it's how do you take that product further downstream, how do you take volatility, how do you have an embedded margin, how do you do more spray foam type projects, how do we grow the businesses that way and improve the businesses that way rather than just more MDI flogging the market.

Great. That's very helpful. I was going to ask a question on -- you're expanding your downstream business, but it sounds like you just covered that, and I know that's still very important part of your strategy. So we can come back to that if we have some time. I guess I did want to allow you a couple of minutes on each of the other businesses. So is there any update on amines or maleic within Performance Products that you'd want to provide at this point?

Yes. I think both of those businesses, I'm kind of embarrassed to say as the CEO of the company, I think that when we sold off our Performance Products business, we sold off the intermediate, surfactants, olefins, oxides, glycols into that businesses. And now that we're kind of singularly focused on our amines and maleic, I think we're doing a better job. We're better focused. Should we have been doing that beforehand? Sure, we should have. But I think those businesses are proving to have more opportunities in pricing, in margin, customer relations and focusing on growth and margin recovery, pricing recovery and those sort of businesses. The raw materials for those businesses, a lot of them come from the area that was impacted by the hurricane. In those businesses, we'll see a little bit of headwind because of that. But we feel confident enough about the pricing, the demand and where those businesses are going, that even in spite of some of that headwind coming from the recent hurricane that hit the Texas, Louisiana border, I think that those -- our Performance Products will perform about where we said it was on the last guidance. And again, that's with a couple of million dollars of negative headwind. We won't know the full impact of the hurricane until the end of this month. But I think that as we look at the amines, when we look at maleic, it feels like it's going in the right direction. If I look at the Advanced Materials business, I've talked about aerospace. So let's take -- let's separate out aerospace. If I separate the non-aerospace business to Advanced Material, that business year-on-year is down single digits sort of a number. And as I look at the power and electrical, we're actually up over the year-on-year. And that represents about 1/3 of the remaining EBITDA of that business when you strip out the aerospace business. So Advanced Materials, non-aerospace, as I look at the recent CVC acquisition, the hardeners, and the toughener products that we're marketing around the world, I look at the power, the electronics business, it's -- I think there's going to continue to do well. It's going to be a nice recovery. We're certainly not going to abandon the aerospace. It will come back in due time, but it will take a few quarters. Textile Effects, the guidance we gave there, we said it would be slightly positive. I think that it's probably heading in that direction. Encouraged a little bit when I look at the order patterns here in September, October, November, I think that it does appear that there's a slight recovery that's taking place in the textile industry as retailers are opening up more and more. But that's -- if I've got 2 concerns in the business, first and foremost, would be aerospace, which I've already articulated. Second would be the textile end of the business. And I see that certainly recovering much quicker than I do the aerospace. Textile recovery is just a question of how quickly retailers will be reopening.

Okay. That's helpful. And since we ended there, maybe I'll just ask this question. So in the past, you just noted getting out of the surfactants and other areas. Is there anything else within the portfolio that you're looking to exit? Or is there another stool that you're looking to add? I imagine not, but sometimes we get questions about the textile business, and how core it is to the portfolio. And obviously, you're ongoing looking at your portfolio. But how are you thinking about the pieces now? And is this kind of what you were envisioning for the company a couple of years ago?