Huntsman Corporation (HUN) Earnings Call Transcript & Summary

Good afternoon, and welcome. This is Dave Begleiter of Deutsche Bank's U.S. Chemicals Equity Research team. Welcome back to the Deutsche Bank's Global Basic Materials Conference. Up next is the team from Huntsman, led by CEO, Peter Huntsman. Peter is being joined today by Sean Douglas, the current CFO, but leaving, as well as by Phil Lister, the new CFO, who we have known for a long time; and Ivan Marcuse, who runs Investor Relations. So with that, gentlemen, welcome, and thank you for your time.

Dave, very nice to be here, and thank you very much for giving us the time.

Always, always. So first, MDI. I think we had a bit of a surprise capacity [indiscernible] by one of your competitors this week. It wasn't very big, but it still got a lot of attention. So maybe your thoughts on very small [indiscernible] new supply in North American market? Were you surprised? Was it mean? And does it even matter?

No, I don't think it really even matters. I think now has -- and again, please do not take my word for this because I don't know their plans are, and I don't know their manufacturing footprint any. My understanding was that they had a kind of a downstream facility in La Porte. They have an upstream facility in Freeport, and they're shutting down the downstream facility in La Porte. They're building some downstream capacity in Freeport. They're going to calibrate that new downstream capacity in Freeport to be comparable to the kind of accrued MDI capacity there. And so you're going to add, for Dow, I would assume they're probably adding a year or 2 worth of demand growth. I don't see how this impacts the industry a great deal. Just again from I've read, I've not spoken anybody now obviously about this. But it's -- if this is what is giving people pause in the MDI market, I'm -- that shocks me.

I would concur. All the topic is always, China MDI prices, even though it doesn't really impact you guys that much. But first, maybe your specific views on what's happening? I guess we're seeing some prices move lower in China? And how does it -- how much does it really impact Huntsman?

Well, look, we've got about 30% of our capacity. Our overall capacity is in China. And of that 30%, probably half of it is polymeric, more commoditized MDI. We're really looking at overall 15% of our overall capacity is impacted. So I don't want to say that it doesn't have any impact. We are in the process right now. We have the capacity to go further to downstreaming that polymeric and going further downstream with that material. As the Chinese market continue to evolve and so forth, we'll be taking advantage of that. But David, I'm always a little surprised when prices shoot up as they did in a matter of days. And then we told the market, it's going out because there's almost 1 million tons of capacity that were down for maintenance and operating problems at the beginning of the first quarter, right? Chinese New Year's was coming in, and a lot of these planned maintenance projects are done during the -- over the fourth quarter, first quarter. Prices shoot up, and we tell people this is a temporary issue. And then they end up coming down, it's -- it sounds like the industry gets surprised is the price came down because it was up artificially. And I think that is -- I don't -- I mean I want try to sound like I'm [indiscernible] the volatility. But look, the MDI market is fundamentally tight. And I think that you're probably going to see more and more, especially if you see these mega plants built, where you got 400,000 to 600,000 tons in a single line. And you've got a single impurity that can go through that line and shut an entire wind down, that's a couple of percentage points of global capacity. And the global capacity is operating probably in the high 80%, perhaps effective rate, closer to 90%. And you've got -- 2% or 3% is taken out of the market on a single plant. You're going to see volatility like this. And as the industry gets tighter and tighter, I think that this might be more of what you see in the future, not less of what you see.

Understood. You guided to Q2 MDI over-earning core of about $20 million. I know you've had some issues in [indiscernible] as well lately. Does that give any risk to that over earning or the Q2 guide of EBITDA of 5% quarter-over-quarter in MDI?

I don't think that we've seen the margins materially change. There have been some reports recently that there were some third-party outages. There's an ethylene line that went down. We don't consume ethylene. We don't produce ethylene anywhere in the world, particularly in Europe. But that affected some of our suppliers who are utilizing that ethylene in the production of chlorine. And so in the last couple of weeks, we've seen a few hiccups in that area that will probably cost us a few million. We'll see a few million probably in better pricing and demand than we had seen. And so I think, on a net-net basis, we'll stand by the forecast that we gave. The non-polyurethane businesses continue to do very well and continue to recover. And so I feel that the guidance that we gave for the second quarter, on a macro basis, we stand by that guidance.

Good to hear. Maybe take a step back just on MDI demand, maybe by region and by end market. Can you just give us a walk around the world by end market, Peter?

Well, if you look at the biggest drivers on MDI, you're looking at building home construction. I'm going to talk mostly about our downstream markets because -- if we're not participating in those markets, I don't feel qualified to be able necessarily speak about it. But as we think about OSB, oriented strand board, in the construction market, huge demand. We're struggling to keep up with it. Automotive continues to be very strong. I think that you might see a little bit of inflationary pushback. Prices still going up, might impact on a temporary basis. Slow down some of the demand for auto in China. I mean you might see a little peak here and there. But by and large, what we're seeing on the automotive globally is -- continues to be strong. What we're seeing in the construction market, particularly in North America, we're starting to see, I think, some improving conditions coming out of Europe. And I think we continue to see a fairly robust China in the areas of construction, the areas of automotive, downstream in the TPU, a lot of the wiring adhesive applications and so forth continue to be quite strong. So I mean, globally, I like what I see. I think it feels pretty good right now. North America has been -- is doing quite well. Europe, I think, is in a recovery. And China -- I think China has been doing quite well for the past year or so now.

And in terms of global operating rates, any major changes last talk about those numbers?

I don't know anybody who's got a major facility, a grassroots facility, I'll look to my colleagues around the table here, that are down right now. I think that all of the capacity that can be produced right now is being produced. Yantai brought in, what, 200,000 tons in the past quarter or so. And I think that's being absorbed by the market. And I think right now, you've got quite a bit of production that's going into the market. The market seemingly is taking it and balancing it. I think that further into the year, you're going to start seeing some turnarounds and maintenance projects coming. I know there were some large projects that were scheduled in China, the early part of the year, that have been pushed into the latter part of this year. But I think right now, it's a pretty accurate supply and demand and the industry feels pretty balanced right now.

Now it sounds like we'll see a tight market through this year, but I know inventory remain pretty low customers? I mean...

If demand continues to where it is today, I think that you will see burn market conditions between now and the end of the year. And if we see a fourth quarter that continues to pull through on some of the automotive and construction, and you see some of the announced closures take place, you might see some tightening conditions at the end of the year.

And could this be a multiyear period of tightness, Peter?

Well, I've said in the last couple of conference calls, if you look at the number of new facilities that are coming into the market, the growth that we're seeing in the market of mid-single-digit sort of growth depending on what application where you are around the world, anywhere from 4% to 6%, 7%, depending on -- again, on the area of the application and so forth. And if you look at the amount of capacity that is being built, there's really nothing being built in North America, aside from the Dow project, and I would hardly call that a material amount that is going to have any long-term impact on the market. I look at it -- and again, look at my colleagues, there's nothing coming on in Europe that I would say would be significant. And you have Yantai that is bringing on [indiscernible] announced some capacity over the coming years over the next 4 to 5 years that will be coming on in China. And as much as the Chinese will occasionally get the bad rap of rating facilities for volume over margin, we don't compete head-to-head with Yantai in a lot of areas of our business. But look, when you have as much of the market share that they have in China and -- well, globally, for that matter, and you get in a price war -- largely getting a price war with yourself. I guess what I'm saying is that they probably have more responsible pricing and discipline than perhaps some of the other players would. And I don't say that in the cautionary statement as much as just they have such large market shares to get -- for them to win market share, and lower the price on 50% of what they've already got or whatever the market share they've already got, they're taking a big hit themselves to pick up a relatively small piece of business.

That makes a lot of sense. When looking at your numbers versus Covestro, Peter, it shows about -- you're about half as volatile from an earnings perspective, which clearly tells me that your downstream strategy is working. Is it working enough, do you think? Or do you want to move more of your components, polymeric MDI, into differentiated applications? And you will with [indiscernible]

Look, our strategies are never working fast enough, in my opinion. They -- we're always pushing people to go faster and to reform. If you don't wake up every morning in this industry, thinking about where you can grow market, sell a product, raise the price or cut a cost, you probably just stay in bed. So as I think about where we are right now, we're going through our polyurethanes business, which we announced earlier, and we will actually be putting more tonnage downstream. And at the same time, we're going to be lessening our footprint We're going to be better utilizing our system houses. We're finding out if our system houses, our downstream facilities have more capability than ever. In a lot of our facilities, we can be blending materials that will go straight into spray foam and we can be expanding our building materials applications. We can be expanding a lot of our TPU applications at locations that hereto for we're perhaps solely focused in automotive. We're solely focused in 1 or 2 market segments. So we're better utilizing some of our system houses. We're looking to shut down some of those and cut some of our costs and so forth. But a smaller footprint does not mean that we're any less dedicated in that. I would just say, Covestro, I'm sure they've been -- they probably have a less complicated business than we do with the number of sites that we have. I don't think there's necessarily a right or wrong direction in MDI, concentrating upstream or concentrating downstream, but they are different. And I think longer term, my objective is to see us have less volatility and more stability of margins and greater cash flow generation. Those would be the 3 objectives we have of any of our businesses.

When you add in the splitter middle of next year, you've seen some growth in the spray business. What percent of your business should go into differentiated products in the next 2, 3 or 4 years?

Well, differentiated products to me is always the definition of a specialty product -- or differentiated product to me has always been a bit nebulous. Just because from a chemistry -- I'm not a chemist or a scientist, from that point of view, I know people always talk about the molecular structure and the uniqueness of the product? How many competitors you have? If a product is making money, and you're able to get a double-digit EBITDA margin, you're able to make a 20% margin on a railcar product, I don't care what that product is. That's pretty special to me. So my idea of differentiating specialty is more around -- is much around, I should say, the long-term stability of the product, the ability of that product to generate cash and the ability of that product to show consistency of earnings. Now having said that, we found that our downstream urethane is more -- is less volatile and generates greater cash. And we've kind of targeted around that 70%, 60% of our MDI business going downstream and utilizing that, whether it's in building materials and going through a system house or in some form of a formulated product. Now that doesn't mean that the other 30% of the business isn't good, the best of our commodity MDI is oftentimes better than, I would say, the lesser of our downstream businesses. So it's not like they're 2 completely separate buckets. One is commodity and Ergo is bad and the other one is downstream. Therefore, it's good.

Do you still -- always want to take -- keep a foothold in the commodity area just to have that exposure and that visibility and that intelligence?

Yes. I mean I think you have to. It would be really difficult, I think, to have an MDI facility where you don't at least have some mechanism to take your excess production. And like I said, if you could take 20%, 30% of your facility and baseload it, on a long-term contract, that's the sort of production cushion that you want when demand maybe is a little soft on the downstream side and you want to continue to move the volume on the upstream side. So I think you need to have that variability. Again, the objective there, in my opinion, is to take that 20%, 30% of your more commoditized business and maybe focus on very few customers, maybe give formula pricing and sell that product with a relatively low cost of service platform and get a good solid double-digit margin out of that production on a longer-term basis.

Makes a lot of sense. Switching to the other 3 segments, not that they're any less important. But you mentioned demand is pretty good in these areas, Performance Products, Defense Materials and [indiscernible] , maybe at least the first 2. Can you give -- provide more color on those? Yes.

Yes. I think that when we look at -- I'll start with Performance Products. I've been really happy with the performance of that particular division, particularly given with the divestiture that we had last year of our intermediates business. We -- to be honest with you, we were thinking maybe that business should be split up and maybe we absorb it into one of the other divisions. And I'm glad that we -- it's a smaller division, obviously now, but I'm glad that we kept it independent. It's the areas now that we've been able to focus intently in that particular division. We have found that getting into ULTRAPURE products, focusing on battery production, on carbonates. So we just had a recent announcement of expanding our production to satisfy the growing demand that we're seeing in the EV sector. These are sort of opportunities, and I'm not sure we would have necessarily been as well focused on as we should have been 2 years ago when we were also -- when management also have their eyes on intermediate surfactants, ethylene production, EO/EG production, and a lot of the other products that would have just buried that under -- from a volume point of view. So I think that you're going to continue to see the Performance Products business continue to be better defined. And I think it's going to continue to grow at a better than GDP rate, in, not necessarily in volume, but the quality of that business and the consistency of that business. Advanced Materials. The Epoxy business continues to diversify. And we've been very happy with the CVC and the Gabriel acquisitions. I think that they were both good acquisitions. And with the synergies that are now coming through -- the commercial synergies that are now coming through, the international growth that we see that will be taking place over the next couple of years. I think they're going to go from being good acquisitions to fantastic acquisitions. They're doing everything that we would have hoped that they would have done. And as we look at that business, we've kind of got this large springboard of future earnings that will be coming into the business. As you see, synergies continue to be realized. You see the growth that will be taking place internationally. And you see the return, most importantly, of the aerospace demand that is starting a slow but steady recovery. And I think over the course of the next 18 to 24 months, you're going to see a return of that business. And I think Advanced Materials and Performance Products are going to be 2 businesses we continue to be very well focused on, looking for potential acquisitions, further add-ons and looking at organic expansion as well. Textile Effects, I think -- I'm sorry, go ahead.

On the aerospace business, where are you seeing -- where do we stand on the recovery right now, do you think? How early in the process?

So I think from a normalized time to the trough of that business, we're probably 20% of the way back from the bottom, 20%, 25% of the way back from the bottom. And I think it's going to be maybe a lumpy sort of a recovery. But I think it's -- I wouldn't -- I don't want to leave the impression that it's -- no pun intended, it's flying back. But it's -- I think that it is recovering, but it's going to take some time. And I think we've seen precedent with this at 9/11, where it took almost exactly 3 years, almost to the month, to get back to pre-9/11 sort of traffic. We saw the collapse of the economy in 2008 and '09. It was almost 3 years to the month on that one. And I wouldn't be the least bit surprised if it's kind of 3 years until we're fully back. And you'll see domestic travel will probably recover sooner than that. But I'm talking about the long-haul transpacific, transatlantic, full recovery, business travel back between Asia and North America and Europe, where you see our biggest consuming plane -- airplane platforms of the 350 Airbus and 787, I think it'll probably be 3 years. I mean if you kind of think of this industry is -- or the industry kind of fell flat on space at the beginning of last year, you're kind of 30% to 35% of the way through that 3-year sort of barrier, you've kind of got another 18 to 24 months. And that would tell me you'll continue to see that recovery, but it's not going to happen overnight or next quarter.

Any reason won't we turn at the same margin level it left prior to the pandemic?

No. I think that the pricing mechanisms, the contracts, the volumes that we have on a per plane basis. As a matter of fact, if anything, I think the business may recover to be even stronger for us. If you look at the 777X that will be coming out, we'll have more carbon fiber on its wings than the pre-pandemic models. As you look at the demise of the 380 Airbus and the demise of the 747s, which didn't have a great deal of carbon -- deal around the 747 didn't have a great deal of carbon fiber. The 787, the 350 Airbus for us, those are the best platforms for our product in carbon fiber. And the next generation of the 320 Airbus and this 737 Boeing will also contain more carbon fiber. So if anything, when you see a full recovery, we see the same sort of numbers coming out of Boeing and Airbus to say, 2 years from now. I think if anything, you'll see more content per plane and more volume per plane. I think the margin on a per pound basis will remain about the same.

Very good. Sticking with Advanced Materials, how should we think about your Epoxy business versus some other players that might be a little more commoditized perhaps?

I would look at ours being totally separate. We look at the people that we used to compete with. I don't know of really any applications that I would say would be core to our business. We're competing against the large epoxy producers. Now there's going to be some applications where we do have some overlap, in something like wind. But we largely -- you compare how much was wind -- the large wind blades. How much of that was our business 3 years ago versus where -- how much of that would be available to us 3 years from now? I think you'd probably know there'd be a lot more wind blades that will be produced in 3 years' time. It will probably be an even smaller portion of our business, I would imagine. So we're really looking to how do we differentiate, especially with the recent acquisitions of Gabriel and CVC, the hardeners and so forth. I just don't look at this as an epoxy business.

Got it. Now it makes sense. And you mentioned Gabriel and CVC, how are they performing, especially since, I guess, CVC staying for a little bit longer?

They're both doing well. CVC had a little more exposure to aerospace, so it would have been hit a little bit more -- kind of more similar to our business that we have. Gabriel is less aerospace. And both of them were actually a little bit ahead of being on track of -- with the cost-cutting and synergy targets that we gave to the market we bought those businesses. And commercially, I think we're very happy across the board, the quality of the customers and applications and the overall science and technology that we acquired. We're quite happy with it. I'd like to see us continue to expand in that area.

Understood. And switching to Performance Products. When I think about this business, maleic anhydride, it means, I think of a GDP-type business. Then I read yesterday's release about EV ban materials and obviously drives some of the business, some growth opportunities attached to it. So how do you think about the underlying growth potential of this business going forward or the segments?

I think your core business in both of those areas, both maleic core and your amines core businesses, these are GDP -- fundamentally GDP businesses. But they're going to have some applications, maleic anhydride going into the next generation of lube additives and so forth. As I think about the amines going into ULTRAPURE products, going to the semiconductor industry and the battery industry for carbonates and so forth, these are going to be growing -- the means are going into polyurethane catalyst for spray foam applications and so forth. These are going to be applications that are going to be growing at probably twice the rate, if not more so. If I could wave a magic wand and that carbonates facility that will be going into the battery markets, quite a way, but as one have that today -- operating today, we'd probably sell it out immediately. And yes, it'll take us close to 2 years -- a year or so, just a loan to get the permits just to build it. And so that's something that we continue to grapple with. I think as an industry, and as a company, I had the opportunity this morning to speak with President Biden's Head of Climate and so forth. And -- Gina McCarthy, and asked her, point blank, one of the big problems we're having in order for us to produce the products that will be satisfying the battery markets and the wind markets and the solar markets and light weighting and sealants and adhesives and so forth, insulation. It's taking us years just to get permitting and manufacturing, and they want to try to change things by 2030. We've got some real issues here that we need to address. We need to somehow, as an industry and as a government, be able to expedite some of these things. But I think there's some unique niche applications that we're going to be investing in that I think will grow substantially better than GDP.

Are those state issues or federal issues on the permitting side?

Well, now you look at just in the state of Texas, if I want to get a permit to put in a new compressor, just a compressor, not a new plant or anything, you're looking at almost the year. And if I'm going to build this new carbonates facility, I can't start construction until I have my permits. Permit takes about a year -- minimum a year on a plant expansion like that. So you kind of figure a year of getting permit, a year to construct it, a couple of months to work out the bugs and get it going. And what ought to take a little over a year to build takes us closer to 2.5 years. And that's assuming you get your permits working on a fast track. And now if I look at what the EPA is looking to do, and some of the junk science and so forth that they're looking to apply into the chemical industry, it's just going to slow that down even further. Now look what the Europeans are doing, where they're almost anti-science, you first have to convince their equivalent to the EPA that you should even be producing these products in the first place, which just means that industry -- the chemical industry in Europe, I think, is going to be under tremendous pressure, and they'll pat themselves on the back because lower emissions, but they're really not lowering emissions, they're just moving -- they're just outsourcing their chemical manufacturing to China and the other places outside the EU. I mean it's asinine what some of these policies are doing, but it's above my pay grade.

Frustrating, I know, for everybody involved. Peter, you mentioned, and Sean, $1.1 billion of normalized earnings power of Huntsman, include the benefits of the MDI splitter synergies and cost savings. Is that a peak number? Or should that number grow over time as you grow the overall...

No. David, if anything, I think that's rapidly becoming a stale number. Remember that as we look -- when we produced that number, that was at the bottom of COVID and about a year ago. And people -- at that time, we were telling people that this business was in fairly short order within the next year or so, ought to be able to get back to what we consider to be our normalized EBITDA, which is kind of 2018-ish sort of a time frame. And that was when, when you take out the spike of MDI that we were seeing at the time, we were saying the business, the industry -- there our company, we can get back there in fairly short order. That was met with a fair amount of skepticism. And now that we're there, we've gotten back to that fairly quickly. When you look at our run rate as to where it is today, and that run rate does not include the full synergies and cost cutting that we're working on, it does not include a recovery in the aerospace industry as we -- pardon?

Future M&A.

Yes, it doesn't include future M&A and so forth. And as we continue to look at the cost cutting that we've got going on internally, the cost cut we've got grounds with the M&A acquisitions that we've done, the continued growth that we're seeing in our polyurethanes building solutions group. When I look at that, I think that, that $1.1 billion, certainly, we don't look at that as a peak number. That ought to be something that we're using as a foundation number and building from there.

Sounds good. And that segues into my M&A question. It looks like CVC, Gabriel, Icynene have been successful. How is the M&A pipeline looking from here?

Well, there's always plenty of -- there are always plenty of opportunities in the pipeline. I just don't like any of their prices. But I still cringe. It's probably -- I mean, I miss my father, and I think about my father every day. It's probably a good thing he wasn't around to see us pay double-digit multiple -- EBITDA multiples for some of our assets. I'm not sure we ever would have bought them, but -- again, I think that it's -- these were the right acquisitions. They were the right price. And when I look the synergies, these are accretive to our shareholders and are creating value, we're going to continue to look at those, and we'll continue to pay. If these businesses indeed have global synergies, all of these businesses in North America are European-centric, and we can take them and globalize them overnight as we're doing with spray foam, we did about, what, $7 million to $10 million EBITDA last year in our spray foam business outside the United States, we'll be doing probably double that this next year. That's -- and that's just all organic growth internationally for us that we see in some of these businesses. If we see that sort of an international opportunity to globalize these acquisitions, if we've got technological synergies, if we've got commercial synergies where we can take their products and mix them with some of our products and opening up to new customers and new routes to market, and if we've got cost synergies that we can be taking out as well, the combination of those 4 things, we can -- I think we can afford to compete very aggressively when it comes to the M&A market. And I continue to believe that as we've told the market, that is going to continue to be our priority. Now we're going to continue to weigh that very carefully with share buybacks, with the dividend -- our dividend policy and organic investments. And over the course of the last couple of years, we've done all of those. We've raised our dividends. We bought in hundreds of millions of dollars in shares. We've expanded internally, whether it's carbonates, going into electric batteries or Project Patriot, to downstream businesses and MDI, we've also done M&A. So where do we want to be going? It's probably a lot -- very similar to where we've been in the last couple of years.

And lastly, your stock price, despite all these efforts, is back to $27, it broke in $31. I gather, again, from my conversations this deal with MDI rolling over. How do you convince people that you're not -- what they think what people perceive you to be? And outperform the market going forward?

Look, the market is incredibly demanding, and it's incredibly shrewd and it's very efficient. And I don't always agree with it on a day-to-day basis. I'm always -- day-to-day basis, you can be very frustrated with it. You simply can't do it. We look at our management meetings. We'll look at our stock as to where we were when we announced the divestiture of our intermediates and surfactants business. And we think that when we look at our peers and we kind of look at that basket of Celanese and Ashland and Dow with Lyondell and so forth, we've kind of -- Clariant and so forth, we put them in a basket, and we look at that multiple and we compare that with our multiple over the course of the last 1.5 years or so. I think we've got a full turn of EBITDA, maybe a little bit better than that, a full turn of EBITDA improvement. Now today, when you see a drop in the market, yes, you'll be frustrated and you wonder what's happened. But on the other hand, if you look at it on a macro basis and step away with your performance on a monthly basis, I think that we continue to make progress. It's not as fast as I'd like to see us do it, but I think we need to -- as I said earlier, we need to start every morning looking at our portfolio and valuing where are we creating -- looking at where we create the most value and how we do that. And looking at perhaps what assets we ought to be monetizing and trying to upgrade. And we'll continue -- I think in the next 12 to 18 months, we'll continue to be very aggressive in that area.

Very good. With that, our time is up. So Peter, thank you. Sean, best luck in your new endeavors. Bill...

Thank you.

Look forward to working with you. I have been -- always a pleasure. We Really thank you for your time and...

David, David, always very nice to be able to speak with you. And I echo your kind comments about Sean. I'd like to think that working for this company maybe prepared them for some sort of an ecclesiastical divine calling, but I really struggle if I look over here at add him to my side, I shudder to think we had any influence on you. You would have got him on that, but he's a tremendous human being and a wonderful friend. Having said that, we're excited about Phil coming in and being able -- we hope we don't lose him to any divine calling, say, anytime soon. But David, thank you very much for recognizing that.

Good. Thank you guys. Best of luck, and we'll talk soon. Take care.

Thanks.

Thank you.

Great. Goodbye.

Bye.