Huntsman Corporation (HUN) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to today's day 1 of the chemical conference. And to kick off this conference, I'm pleased to have Huntsman's CEO, Peter Huntsman. Peter needs no introduction to this audience. And they recently hosted their Analyst Day not too long ago, where Huntsman talked about improving overall EBITDA margins to about 18% to 20% and then remunerating shareholders following improved debt metrics. So here to provide an update to Huntsman's strategic priorities is the CEO, Peter Huntsman. Good morning, Peter. How are you?

P.J., I'm doing well. Very good to see you this morning.

Great to see you.

So you recently hosted your Analyst Day, talked about improved EBITDA margins of about 100 basis points per year, and we'll come back to that in a minute. But I want to talk about some other businesses, and then we can tie that into how these margins improve. But how are you feeling after this latest COVID news and there's a lot going on there. And also want to talk about supply chains and logistics challenges that you talked about in -- at your Analyst Day. So sort of give us a state of the union as you see it, and then we'll dive into some of the business segments.

Very well. Well, yes, we continue to see a lot of volatility around issues like COVID in third, fourth, fifth waves and so forth. But by and large, I think that from a macro point of view, we are being very flexible. We're seeing disruptions in certain areas of the business. We're seeing opportunities in other ends of the business. And fortunately, most of those are offsetting each other. And so I think that most of what we said in our Investor Day, as far as projections and profitability and so forth, I'd say the same thing today that I would have said a few weeks ago. I haven't seen any major issues. There's a bit of a slowdown in Chinese construction, but there's also been opportunity in infrastructure investment in China and so forth. And so we're really seeing an opportunity, I think, to maintain, I think, a pretty steady business here in spite of a lot of the noise that's going on.

Okay. And you talked about 100 basis points of margin improvement and getting to something like 18% to 20% by 2024. How much of that is sort of internal cost control? How much of that is coming from your already completed M&A? And we'll get into M&A a little later. But you've done some really nice tuck-in and bolt-on acquisitions. How much of that improvement is coming from M&A?

Well, not a whole lot of this is coming from M&A. The vast majority of this is going to be coming from issues that I think are within our control, capital projects that are within Huntsman, investments in EV and chips. We're going to be looking at cost cutting that we've already initiated and started and that which we are starting, coming into 2022, 2023. As we said at the very beginning, a year or so ago, this is going to be an ongoing evolution for us. And so as I look at those basis points, you're probably looking at around 2/3 of that is going to be items that I think are within our control. Now in Investor Days in the past, I've sat and I've said, "Well, we expect the recovery of this product." And ICIS or others are saying that we're going to see margins pick up in TiO2 or some other product in the next couple of years. We're not saying that this go around. We are saying that there will be a recovery in aerospace back to pre-COVID levels. That will probably be sometime around 2024. But I don't have a crystal ball, obviously, as far as how quickly we'll be back building particularly widebody aircraft again. I would remind you that's largely transatlantic, transpacific flights. I think the single IO planes such as 737s and 320 Airbuses are recovering quite nicely. A lot of our products will be going into the longer-haul aircraft. So we're anticipating a recovery of the aerospace industry. We're anticipating the execution and fulfillment on time and on budget of our cost reduction programs. And we are expecting to be coming up with our investments in car electrification of automobile, semiconductors, means going into catalysts and so forth. And then we've got less than 100 bps that will be in future M&A. So again, I'd say over 2/3 of that are products within -- projects that are within our control.

Great. And then sitting in the end of big picture, you've done some really interesting acquisitions, starting with Demilec and then acquisitions in your Polyurethanes, Engineered Materials, Performance Products. Your net leverage stands less than 1x. So what is the M&A pipeline looking? How is the funnel looking? And would you continue to do these bolt-ons? Or is there room for a bigger acquisition at this point?

Well, I would never want to say never. But again, having said that, we have committed to the market. We're going to be disciplined. We've said that we've kind of looked at a cap of around 2x debt on our balance sheet. We've looked at projects below $500 million. And I think that as you look back over the last couple of years through Demilec, through CDC, through Gabriel, through a number of the other acquisitions that we've done with our divestitures have been a lot more aggressive and been larger than our acquisitions. And I think we're quite comfortable with that. I think we're comfortable with the idea as to what we can build on a longer-term basis. And this is not -- we're not looking for necessarily an acquisition that's going to be a home run or a game-changing acquisition. None of our acquisitions did the market at the time of the acquisition really get -- seemingly get all that excited about it. But looking back on what has become of the consolidation, the M&A opportunities around spray foam and building materials and advanced materials and divestitures and so forth, when you look at it in its entirety, it really does reshape the portfolio. So slow and steady, I think, wins the race. And we're not out looking for a big transformative acquisition.

Great. Great. And then moving into some of the segments, let's talk about Polyurethanes where you have a dominant franchise. Can you talk to us a little bit about supply-demand? I mean, how is the supply situation looking here after some of the force majeure events that we had in North America? And then moving over to China, do you see China adding any capacity given their dual-control policies and all that. So maybe talk a little bit about how do you see supply-demand going forward.

Well, demand will continue, I think, will continue to be better than GDP. And when I say that, again, I've said this before, and I want to make sure that it's clearly understood. We don't necessarily are not going to be putting a lot of money behind producing more tonnage. I don't think that our opportunities as a company is necessarily to try to keep up with a 2x GDP growth rate in MDI. I wouldn't like to be trying to keep up with a better-than-GDP sort of growth rate in margin -- opportunity margin expansion, bottom slicing our lowest margin customers and upgrading that portfolio. Now that's going to be some years, you'll see the impact of that more so than other years. But I think in the longer term, you're going to see, from Huntsman, a portfolio that maybe doesn't have the peaks when things are incredibly tight nor are the valleys when things get loose. And I think what we're looking for is consistency and reliability of margins and a consistent generation of better-than-40% cash flow. And if we can deliver those sort of metrics rather than trying to get the absolute penny whenever the market goes up, I think that we're going to achieve that by looking at more downstream opportunities here. As we look at the overall supply balance of production of supply coming into the market, everything that I see, and again, bearing in mind that you're looking at around 6, 7 years to build a new MDI grassroots facility, you have Covestro who's announced their intention to build either in North America or in China. They haven't really started on either of those. So safe to say they're several years out. And you have some large capacity that's been announced by Yantai in China. And I would just note that Yantai now has over 50% of the Chinese market. And look, I don't know the strategy of competition nor do I really care to know. But I think it is fair to say that Yantai has been surprisingly disciplined. I mean, for them to get in a price war in China where they've got over 50% of the market, they're basically shooting themselves in the foot. So yes, they do have capacity coming on, but I don't see that capacity necessarily flooding the market, perhaps supplying the market, mostly in China, Southeast Asia.

It's a good strategy to bottom slice our customers and move them up, and that sort of fits well with you our components versus differentiated MDI. You have the Geismar splitter coming up. How much of -- post that splitter, how much of your volumes, Peter, would be differentiated versus component? And what are the margin differences that you realized among those?

Well, I think that we're comfortable with around the 70-30 split between component and between differentiated and the polymeric side. I would just note though, that they're really not 2 specific buckets of either/or. I mean there's some very profitable polymeric business that's out there that we want to keep our focus on. And there's obviously some very good differentiated business, and not all differentiated downstream business is going to be necessarily terribly profitable. When we start up our splitter, I would assume that 2022, assuming that we start up in the second quarter of next year, that splitter will be producing product that will be going into the market. And like most higher-end margin materials, it's going to take a couple of months to spec in that material into a lot of our customers. Gradually, you'll see the margins of that. It's not all of a sudden, you'd open the splitter and it's producing. You sell everything out in 2 or 3 months like you would have perhaps a more commoditized unit. And you'll see by 2023, you'll see the majority of the EBITDA that will be coming from that, with the EBITDA I would expect to come from that splitter when it's fully sold out and fully sold up, to be probably somewhere between $45 million to $50 million. The majority of that will be achieved in 2023, certainly by the end of 2024. So it will take an 18-, 24-month process, not just to fill it out, but also to sell it up at the same time. And we're trying to do that across the company. Typically, with our downstream margins, again, any time in place you can look at that as a snapshot, the difference between more commoditized versus downstream margins, a lot of that's going to be dependent on the spot markets of polymeric and so forth. But typically, you're looking at a mid-single digit to high single-digit on average, higher margin for downstream materials. But again, we're looking for consistency, reliability and cash generation on those products.

Great. Great. And given the E&G focus of investors, I mean, you have an excellent product, sterile polyols where you can consume something like 1 billion PET bottles every year, and this will contain up to 60% recycled content. How do you secure the supply of our PET? And how do you -- what kind of pricing do you pay? And then on your product side, given the greener nature of the product, how do you price that product, Peter, in the marketplace?

Well, on the finished pricing, we believe that we're -- we can price it on the upper side of the market. And so again, when you're selling into the spray foam, you're dealing with architects, contractors and so forth. And they're going to be conscious of the price. And that range of price, we're not going to go out and say we got a 30%, 50% premium because we've got PET bottles. But what I'd like to see is that on the higher end of that price variability, that we're able to get that higher price because of the formulation going into the business. Now as we look at the sourcing of the PET, last year, we had the equivalency of somewhere between 1.25 billion, 1.5 billion PET bottles. And I want to be clear on this. We don't actually take bottles into our facilities and grind them up. We're buying that raw material from people who do that, who gather the PET bottles, grind it up. And we'll take that feed from the used PET bottles. So we're buying that from recyclers. We're also buying -- when you produce PET, when you produce polyols in general, you also have quite a waste stream that comes from that material. We're using that material as well. So for instance, our plant in Taiwan, we built that facility where we're pipeline-connected to 1 of the largest polyester bottle manufacturers' PET facilities in Taiwan to be able to take that off spec in the recycled materials and so forth directly from their facility into our facility. And so there is certainly a raw material advantage on that sort of supply, especially in today's market.

And then moving on to Performance Products. You were -- maleic anhydride business has been really surprisingly strong. I mean demand is strong in construction end markets. Do you see that continuing into 2022? Give us an early look on 2022 in Performance Products.

Well, I always will just want to -- and I know it's sounding broke record in saying this. Whenever I talk about a financial forecast, so much of that is the profitability in this industry largely rests upon 2 things: the macroeconomic situations around GDP growth and cyclicality; and capacity utilization, how much capacity comes in and floods the market at any given point. So assuming that there's not an economic anomaly here in the next 12 to 24 months, there is no maleic capacity of any material significance that is coming on in the European and North American markets. Those are the principal markets in which we compete. And so when I look at the amount of material coming into the market and I look at the overall structure, there have been a number of acquisitions in the maleic field where companies that consume maleic have gone up and bought maleic capacity. So when you look at the merchant maleic sold in North America, for instance, today, there are only 2 competitors that are selling maleic in the merchant market today. The rest of the capacities are largely integrated into other facilities. Europe is also a relatively tight market, tighter than it used to be. And so there seemingly is 2 things: structural change that's taking place between producers and consumers, and there's also a lack of capacity that has come on. And again, I've said this in the past. The idea of building grassroots facilities, I met with 1 of our largest raw material suppliers just yesterday, and it supplies both our urethanes and our advanced materials. They're down talking about permitting for an expansion within 1 of their facilities in Louisiana taking up to 3 years. I mean, think about that. This is -- these are things that used to take 6 months. But now they think of all the opposition and so forth. So we talk about new capacity coming on. I think that we look at some of these capacities that are here and the now, I'm not sure we fully recognize just how difficult it's going to be to supply a lot of these products as you start looking out into the next 5 or 10 years.

Right.

And we did guide Performance Products [indiscernible]. So we're looking for next year for it to be modestly up year for that division.

Great. Great. And the other product there is performance amines, and you talked about opportunities into growing performance amines by 2024. Investments in E-Grade amines, polyetheramines, additives. Can you just talk about the amines business as well?

Well, we've been -- I think we've been really excited about the transformation that's taken at amines. We've looked at amines in the past as being an outlet for ethylene oxide and a lot of our bulk raw materials. And so we looked at more bulk applications going into surfactant applications or agriculture, large bulk acquisition. We have integrated economics. We're starting with the ethylene and moving through EO, moving into the amines and so forth. Now that we're focused on the amine molecule itself, I think that we're doing a much better job in pricing and also looking for smaller applications with greater margin and less variability or cyclicality, if you will. And so as we look at these projects that are coming on between our E-grade, this is going to be the only product in the United States or North America that will be of this purity when we're up and producing. And we've already started the permitting process and the engineering for this plant. And now there's an announcement of a $10 billion facility that's being built in Texas, just literally 100 miles down the road from us here that probably will be using a great deal of just that sort of application. If we look at the electric vehicle, what we're going to be doing with carbonates going to electrolytes. So we look at our project in Hungary. Both of those projects I just mentioned are both going to be built here in Texas. The Hungarian expansion, which will be going into polyurethane applications and the catalysts and so forth, not just for Huntsman, but for other polyurethane players as well, I think this is going to continue to be a very strong business for us.

Great. Great. And then moving on to base Advanced Materials. You pointed out aerospace recovery as a key to future growth. How much of this earnings -- how much of the segment earnings come from aerospace? And what's the timing of recovery do you see in Aerospace?

Well, with aerospace, we're judging this by a lot of public information. Again, I don't want to pass us off as being experts as to how many 787s or -- of the 350 Airbuses that are being built. But it seems that from the order patterns, what we are hearing from our customers, probably looking at by the end of sometime around 2024 that we'll see a full recovery. Now if there's a fourth, fifth, 10th, 100th wave, whatever, of COVID, that may strive for that. Hopefully, we'll see transatlantic, transpacific pick up quicker than anticipated. If that's the case, we'll probably see the order and the recovery of aerospace recover better. We've seen about a 30% recovery of our aerospace EBITDA from where it was. It is absolute worst point. And we think that there's still around a $40 million, $45 million recovery yet to take place. And so if that's the case, kind of give you an idea as to how much we fell from kind of our 2019 peak sort of aerospace earnings down to where we are today and the recovery that we see coming back.

Great. Great. And then just coming back to M&A. I mean, you had Gabriel, CVC, Icynene, a bunch of acquisitions, when you look back, sort of which acquisitions really worked well? What were the lessons learned? And as you, from those learnings, what are you looking for in next few acquisitions?

All of those acquisitions really have -- I'd probably try not to do -- try to project how business is going to perform when you buy it. The first month that COVID shuts down an economy, that's kind of tough to forecast and project. So I mean, when we did the CVC acquisition, obviously, we did that ride as COVID was literally starting. But we went through with it, looking back on it. It was the right time, right decision, right price. If we could do it all over again, I'd gladly do any of these acquisitions all over again. They're proving themselves out from a synergy point of view, growth opportunity point of view and reliability point of view. And I look at, again, repeating any of those. Right now, I think that given the high multiples that you're seeing in the industry in the M&A markets for these -- particularly the smaller sort of assets that will attract multiple private equity as well as strategic players, look, these high multiples, if we're going to buy anything, just assume we'd be buying our own stock. And that's why we've been very aggressive in setting the goals that we have on stock repurchase.

Are you seeing other strategics or private equities, who's competing with you on these small acquisitions?

It really is -- I think it's probably -- it's 50-50. I mean, a surprising number of them are going to strategics at what I think are pretty -- well, my opinion, I'm probably wrong, but unjustifiable margins or multiples. I think that you get into a slower market or a different market condition from where we are today. I'm not sure that somebody paying 15x EBITDA for a pretty good business, you're not [indiscernible] too much debt. But again, that's -- I wouldn't put -- I wouldn't want to see us be put in that situation. So we're not going to be looking at something like that. But we will be looking at something. I don't have a problem paying a higher multiple than what we're trading today. But again, on the condition that there are clear-cut synergies, clear-cut opportunities and that it very quickly becomes accretive to our shareholders.

Great. I do want to remind listeners to click on the link -- Showcase link at the bottom right corner. If you have any questions, please send those to me. I'll drill them out here. But as we come towards the end of our discussion, a couple of things I want to talk about is, one is inflation. Raw material situation has been crazy, to say the least, with oil prices and natural gas prices, especially in Europe going up. When do you think the industry catches up? I mean we've been increasing pricing throughout. And the industry has been trying to catch up with these raw materials. What's your crystal ball saying on these raw materials?

No, I'm afraid that when we look at the raw material situation, particularly in Europe, when we look at gas that is trading at $25, $30 per MMBTU, P.J., these are numbers that are unsustainable. They're unsustainable for the consumer side of the business. That translates into everything from inflation on food into consumer products, travel, virtually everything. And when we look at that same thing taking place in the U.S. In Europe, it's all around energy. In the U.S., it's somewhat to do with energy. We have a policy here in the United States seemingly as we don't want to do -- we don't want to use oil and hydrocarbons to fuel our economy, but we're not sure what we replace it with. You can't replace with wind and solar. I mean, it still makes up the single-digit supply of our energy. And we're -- I'm frustrated, the lack of vision and the lack of transition from -- I think most people would agree that we need to get from point A to point W, but I'm not seeing that clear path. And so in the meantime, I think the single biggest threat to the overall economy is inflation, is consumer sentiment dropping and consumer spending dropping. And when -- we're clearly seeing that in Europe right now. And I'm just unsure as to what that means going forward. If energy prices come in line pretty quickly, we haven't even started winter yet, and things could get a lot worse in Europe from an energy point of view.

Right. I just got a question here from the audience. Any thoughts on an ASR, accelerated share repurchase with the Albemarle proceeds given where the stock trades today?

Well, we've committed what I think is a pretty aggressive plan of $1 billion on a pretty short period of time here over the course of the next 2 to 3 years. And I think that we're -- let's -- again, that's what we see as a minimum is we see an opportunity to do more. We're going to be doing more. But I mean, at this point, we'll -- that's something the Board will continue to consider. But no, publicly, we've stated clearly what our objectives are around share repurchases, and we'll be sticking to that.

Right, right. And then my last question is related to this supply chain and logistics normalization. It seems like supply chains are still tight. Shipping rates have maybe come down a little bit, but not that much. Although we are seeing domestic inventories of some chemicals, kind of normalizing after a terrible year with the hurricanes and all that, what are you seeing on those 2 fronts, the supply chain logistics and inventory normalization?

Well, I think both of those are happening. We're continuing to see supply chains are not recovering as quickly as some had anticipated. We've been -- I think we've been very clear for the last couple of months, saying that we thought this was something that would be resolved in 2022, not at the end of this year, but rather into next year on the supply chain issues. And I agree with -- I stand by that forecast. As far as inventories getting to normal in certain products, yes, we're seeing that within our own company. We'll see that we've got product to sell in our spray foam business, but we don't have the blowing agents that come from overseas. There's not a domestic producer of blowing agents. So we've got to wait until that product comes in. I see with a lot of our aerospace products and a lot of our multi-product formulations and so forth, we can have 80%, 90% of the product, they're available and the inventory can be set. But if you're missing 10% of the final solution, if you will, to the final ingredient to make that product, the customer is not going to take 90% of the specifications complete. And so what we're seeing is in certain areas, yes, inventory is getting back to normal, but that's not necessarily a good sign. A lot of that's because we're missing 1 or 2 components on the other side. And that's where a lot of our frustration is right now. We're seeing 1% to 2%, 3% of our supply chain that's being disrupted that's having a knock-on effect for 10, 15, 20x that amount of material as we go further downstream. And so again, that's going to be, I think, one of the challenges not only that Huntsman but any downstream producer is going to have, when you're reliant on 15 different ingredients to make a final product, you can only supply as much as your weakest of those 15 ingredients, and that's still where the frustration in the supply chain. I'm seeing parts of the supply chain loosen up, but other parts of it, I haven't seen a whole lot of progress.

Great. Great. I think we are almost out of time. So I want to thank you. If you have any final thoughts, anything that you would like to relay to investors before we end the session.

No. I think that we're going to finish a very strong year here. And as I look across the board into 2022, barring an economic stumbling block that may be out there somewhere, I don't see that right now. I do have concerns around some of the inflation issues we talked about earlier. But again, I'm not seeing the impact of that on the business today. I look at the step changes of that 300 bps of margin improvement. We're on schedule. We're on time. As we said at our Investor Day, we're going to incentivize, particularly senior management, around achieving those specific objectives. We continue to work with -- closely with our Board and the Board refresh and looking at opportunities that we have to move further downstream and improve the businesses. And so I think in 2022, when I look at 2021 being a great year, 2022, I'm even more optimistic for it as we move into it.

Great. Well, with that, I would like to end the session here. Peter, thank you for your insights. And I want to wish all of you in the room a very happy holiday season.

P.J., always nice to see you. Thank you.

Thanks, P.J.

Bye.