Huntsman Corporation (HUN) Earnings Call Transcript & Summary

Hello, it's Laurence Alexander with the Jefferies chemicals team. It's my pleasure to introduce the Huntsman team. We have Peter Huntsman, who needs, I think, no introduction; and also Phil Lister, their CFO.

I think, Peter, just to sort of jump right in, given the time we have, can we just start with your view on the evolution of the portfolio? You sketched a path several years exiting commodity businesses, upgrading the downstream mix, moving out the volatility. Most of what you set out to do, you've done. So what do you aim to do over the next 5 to 7 years?

Well, Laurence, thank you very much. And also joining us is Sharon Koh and she's here to make sure that if I make a tragic mistake and if Phil can't correct me, quickly help. That's what Sharon's job is, she's smartest one in the room here. Laurence, we're going to continue just doing what we've done in the past quite frankly. I think that there are further assets that we can look at in this company that we need to evaluate, and we need to see how they fit or don't fit within our portfolio. I think that we -- all these assets are wonderful, but they may well have a higher value to somebody else. And so we're going to be continuing to look within our own assets, and I think that's something that any company ought to be doing. At the same time, we're also going to be looking as to where we can upgrade and where we can utilize our cash, both internally and externally. I just have a basic premise that M&A is usually better than organic investment. But we're finding that a lot of our opportunities to expand the company, particularly around ultrapure products going into semiconductors, products that are going into urethane catalysts, products that are going to the EV market and so forth. You can't go out and buy chemical capacity in these areas because it doesn't exist, particularly in North America. And a number of these suppliers in batteries and high-tech and catalysts and so forth, they don't want international supply chains. They want a supply chain that's going to be shorter, that's going to be more domesticated. In some areas, I think you're seeing that there's a political movement not just in the United States but in other countries as well. So I see all these as opportunities for internal investment. We're going to continue to be very aggressive externally looking as well. And I don't like a lot of the multiples I'm seeing today. But if we can find the right synergies, the right technology, the right geographic footprint, being able to put all these 3 things together, we can afford to pay, I think, a bit higher multiple, but not astronomical. So I think we're going to continue to keep doing what we're doing. We're going to continue to move further downstream, technology-driven, IP-driven. And I think particularly when we come around our Investor Day here later in the year, we're going to use that as an opportunity to showcase how and where we take that to the next step.

And you've mentioned a few times the aging infrastructure that supports the petrochemical assets or the older chemistries. And when you did the -- your divestiture last year, you did flag the kind of upcoming maintenance cycle that asset had ahead of it as well. As you're looking at new assets, is the sort of this support infrastructure more of a concern than it used to be?

I believe that it is, but as you go further downstream, where we're more reliant on formulations and system houses, you're not reliant on these massive projects that are being built. I look at -- in some of our past projects that we've sold off in the last 5 or 10 years. So much of our reliability was due to third-party utility connectors and substations that were 30, 40 years old, a lot of the cogeneration facilities that we shared with other people, whether it was in TiO2 or in commodity-based petrochemicals. It's just an aging infrastructure that's out there. And I don't see a lot of that being replaced. And frankly, I think it's a vulnerable area. I hope that this $1 trillion infrastructure package that's winding its way through the Senate might address some of those issues, but I'm not very optimistic because most of that seems like it's going into a lot of areas that probably aren't going to be helping the industry a great deal.

And so one of the themes, I guess, coming out of the earnings season so far, and you discussed in your earnings call as well, is the supply chain dislocations that hurt volumes in the second quarter. How do you think about kind of the net drag on volumes this year and that translates into pent-up demand for next year? And it seems as if next year and possibly the year after might end up being above-trend growth years as a result.

I think you're absolutely right, Laurence. I've been on the phone an inordinate amount of my time in the last 2 or 3 weeks, a couple of calls just this morning from CEOs of our customers that are calling, literally begging for more product. And a lot of these products, and particularly, as you go further and further downstream, it's not just Huntsman. It's -- their logistics are a nightmare. They can't get a certain additive that they've always taken for granted. The CEO of a large -- one of the largest defense contractors to the DoD called yesterday looking for a 5-gallon bucket of epoxy resin, 5-gallon bucket. So saying he was going to shut down this -- or this sort of a line. So I think that there's some fundamental issues that are beyond -- frankly, that are beyond just the recovery of COVID. And I think that there is such a just-in-time mentality amongst suppliers, customers in the downstream where everybody expects there to be 20 minutes of inventory in this entire supply chain. And when you start getting the slightest hiccup, and we're seeing that hiccup right now, with aging assets, we're seeing it with a restocking that's inordinately high right now. We're seeing it with new technologies. We're seeing -- there's companies say they want more of a domesticated sort of a supply chain. You're seeing this playing out right now in real time. And it's not just any one thing. When the Port of California -- or the Port of Los Angeles, one of the largest ports in North America, it operates at 60%, 65% capacity. It only operates for 18 hours out of 24 hours. I mean you compare that to Singapore and Shanghai and so forth. When they do operate, it takes them almost double the time to get a container off of a ship and into inventory. The antiquated operations and so forth, just at the Port of Los Angeles. I mean forget -- if we can run our supply chain perfectly. You look at a bottleneck like that that's taking place, our railroads and so forth, and I'm just -- I'm not trying to gripe on this. But I think that when you when you run things to its designed perfection and you're dealing with imperfect assets, you're going to have chaos. And I think that's what we're seeing in so many facets of that supply chain. I'm not seeing any one issue. It's not that demand has necessarily gone through the roof as much as the supply -- the entire supply chain is almost -- I'd say it's almost inadequate.

And it's been probably more than a decade since I've heard sort of the same kind of description of how tight supply chains are getting. When that happened, we started to see a lot more kind of commodity-like fly-ups in specialty ingredients. Are you starting to see that happening in the downstream parts of your portfolio?

I think so, but I think that there seems to be a lot more temperance also in pricing right now. I think that when we look at fly-ups that are taking place, there's no doubt that we can be charging more money for some of our products. But I think you've also got to be looking at the long-term implications of that. Polyurethanes, MDI, for instance. I think that it's fair to say that this product grows at double the rate of GDP. Now why does it grow double the rate of GDP? Well, it grows at the rate of GDP because the overall economy is going down, right, but it also is a great substitution. It's a great substitution for formaldehyde and for rubber and for a whole slay -- slug of adhesives and so forth. And so when -- if you price yourself out, you also deprive yourself growth. So you've got to be able to balance. At what point do you want to remain economically viable to be able to replace other products? And yet at the same time, I want to maximize shareholder return. And I think that there's a lot more of that balance today perhaps. And maybe I'm just seeing it because Huntsman is in more of a position where we're in that segment, and I'm not sitting here worried about ethylene glycol prices and ethylene prices and MTBE prices and propylene oxide. And so we're more focused on those downstream calibrations of pricing and operations, which is -- for us, it's a great position to be in.

Now can we put this in perspective as to how you think about sort of the shape of a cycle for the new Huntsman? I mean, you -- I think you've benchmarked mid-cycle EBITDA being on the order of about $1.1 billion, $1.2 billion. And how should we think about kind of where the peak and the troughs are relative to mid-cycle? Because you used to have pretty severe swings. But obviously, most of what drove that is out of the portfolio. So is maybe like 20% up and down kind of the new net range? Or how do you think about it?

Well, yes, I mean, I would think that that band is going to be tightening more and more. But as we -- as soon as I get done saying that, we get hit with something like the COVID pandemic. And who'd have thought that 1.5 years ago, we'd be saying that within 6 months at the end of 2019, that we'd be saying by the end of the second quarter of 2019, we're going to be in the low double-digit EBITDA for polyurethanes. And had I said a year ago at this point that 12 months from now, we're going to be completely sold out, we're going to be completely begging for products and margins will be multiple times higher than they are today, everybody would have laughed at me a year ago. Yes, that's exactly where we are. So I'm reluctant to say that, but you're absolutely right. Those flywheels, whether it's TiO2, ethylene glycol, PO/MTBE, those flywheels of our volatility and operational volatility of these massive sites that go down because of raccoons jumping from one power source to another and shuts down a substation, which trips your boilers, which tripped down $1 billion site, I just don't see those having the impact that they once did. So I would hope that we're looking at that band of 10% to 20% with a far more steady upside progression taking place.

So can we talk a little bit about sustainability? So first, in terms of inputs. Huntsman, just through portfolio transactions, you've already shifted your carbon intensity in your emissions. How much -- what's the path for improvement from here?

Well, we're obviously going to be looking very closely at our supply. When I look at our MDI facility in Rotterdam, we're now able to source most of our electricity that is coming from that -- from local wind farms and what have you. So the sourcing of supply of the incoming is going to be very important. What we do in our carbon footprint as a company is -- maybe I'm just saying this because I'm used to these larger sites that we used to have, is rather de minimis. When we look at what our products are doing downstream, there's no doubt in my mind that we're carbon -- net carbon negative. And there's a hell of a potential to be far more so. When I look at something just like polyurethane spray foam, you look at 40% of the electricity of the energy produced in the world is not for transportation, it's for environmental controls, around heating and cooling of buildings. Spray foam, most effective insulant in the world, could reduce that by 15% or 20%. If we just take present technology, this isn't some pie-in-the-sky technology. Look at the lightweighting of aircraft of automobiles getting better mileage. What we're seeing in adhesives and elimination of metals and alloys being replaced by carbon fiber and so forth. Look at the wind blades that aren't going to be produced, but for our industry and solar panels and so forth. I think that when you look at Huntsman on a net-net basis, we have a massive deficit of what we're saving for the overall environment. And if we ever want to get to this nirvanic state of this carbon-free society, which I personally think is impossible. But if we really want to get there, I mean, we ourselves, are carbon life forms by the way. If we ever want to get to that state, we're going to have to do it through the chemical industry. The chemical industry, every single product we produce today replaced a product that was heavier, more expensive, less efficient, less effective, and there's not a better industry to help us get there. So I think that we're uniquely positioned not just where we are today but I think that our industry is uniquely positioned to help us get to where we're going. And we're going to continue to see an advancement. We're going to continue to see a diminishment. Our CO2 output per GDP today is lower than it's been in over a century, and it keeps getting better. There's a great deal to celebrate here on ESG and what we're doing as a company and as an industry.