Huntsman Corporation (HUN) Earnings Call Transcript & Summary

Good morning. Laurence Alexander with the Jefferies Chemicals team. It's my pleasure to introduce Peter Huntsman, the Chairman, and CEO of Huntsman Corporation. And without any further ado, Peter, if you have any opening remarks, and then we'll dive right in.

No, it's very nice to be here. But why don't we just jump right into any questions or comments?

Okay. Great. So let's start with the big picture. This is probably the question you've probably heard the most already today is, how are you tracking against the targets you set in November? And why -- how have you been able to meet them against such a volatile backdrop?

No, very good question. So we set forth a number of targets in November, and we took all of the top 75 managers in the company. We signed their performance bonuses over the course of the next 2 years to those targets. So we've set out a $240 million cost reduction program to be done by the beginning of 2024. That will be done by the end of next year, and it should be done ahead of schedule. And I'm very hopeful that it should slightly be ahead of that $240 million number as we get into the situation within Europe, which I [ won't ] elaborate right now. But I think that it requires us to go back and look at our cost structures and look at the way we do business and how we do business, particularly in Europe. We committed to the market that we would be generating 40% free cash flow to EBITDA. I believe that that will continue. We continue to be on course to hit those sort of numbers. We'd be improving our margins by 300 bps by 2024, and we're on course of hitting that. As we announced yesterday, the sale of our Textile Effects business, that will move that up about 50 bps. And we continue to see an improvement in our second quarter results, helping us with those margins. And we also put forth a target of around $1.4 billion on an EBITDA basis. And that, likewise, has been met, and we're on course for hitting that as well. So we look at some of those macro targets that we set out. Again, these have been challenging times. We've had to move quickly on pricing. We've had to try to offset a lot of the volatility that's going on and so forth. And we will continue to stay focused on those things.

And you alluded to Europe, so let's jump right into that. There appears to be kind of a growing consensus about the shape of the winter shutdowns and also the headwind from higher electricity prices next year. How are you thinking about the puts and takes for Huntsman this winter? And what -- how do you see the tactics versus the strategic shifts?

Well, the tactics are going to be very short term. And I think that when we look at -- I mean, people ask us, what are we seeing in demand right now. And that will literally change week by week. If, for some reason, you were to see Putin completely cut off gas going down the Nord Stream 1 line and gas were to go up from its astronomical price today of $60 thereabouts and go up to $75, $80, $90, you probably would see an increase in orders quickly because people would want to be trying to buy ahead of that curve. That doesn't mean that also the economy has picked up, that's an inventory play. Conversely, if prices appear to have plateaued and they're actually going down, and these high prices have started to stifle demand, you're going to see people depleting inventory faster than demand is actually being depleted. So people are trying to read, I think, perhaps a little too much into the short term, what are you seeing on a week-by-week basis, when a lot of that is going to be an inventory -- an inventory game. And it's not going to be all of a sudden people, homebuilders have dropped their hammers and walked off the site, and they're no longer building homes, they're no longer building cars, but there's just a lot of variability in that entire supply chain. I do think, by and large, on average, the customers I speak with and are able to track, inventories are very thin, right now. People are not trying to hedge, people are not trying to gamble. You see some small sectors where people are trying to buy ahead of this or that. People might -- manufacturers might be trying to buy ahead of a winter shutdown. I -- personally, we're not doing that. I think that would be a mistake. But -- so that's on the short term. Longer term, look, nobody knows what's going to happen this winter. The European Union has done an absolutely opponent job in planning this, on communicating what they intend to do. Were they going to be allowing companies to sell into a gas lottery or exchange they've talked about? They're going to be rationing, are they going to be cutting off nonessential supplies to people? We've got one minister in Germany recently said that people ought to be stocking up on wood to heat their homes for the winter. That's just an absurd notion when you think about it. And so that's kind of what you're looking at in the winter. Now I think the broader term, longer term, and forgive me for just going on here, but I think there's this week-to-week, people are too transfixed on that, medium term for the winter nobody really knows. But longer term, Europe has become too reliant on unreliable sources of energy. Wind is great, solar is great and so forth, but without the proper backup of either coal or nuclear or natural gas and without that backup being able to literally start on the run, you were -- you're going to see these massive cycles. And industry can't afford to be running 97% of the time, 98% of the time. We may be able to tolerate a day per quarter, a day every other 6 months or so from a residential point of view, but you can't take a site like what we have in Rotterdam or [ Ludwig ] or something else and shut it down for 24 hours and then come back up every quarter. It just doesn't work that way. And so the broader term, when we look at this, to think back that our cheapest MDI that we produce globally in the first quarter of 2021, clear back to last year was Rotterdam. And now Rotterdam is at an uncompetitive, on a per ton basis, manufacturing cost basis of over $1,000 per ton. Now think about that. That's the highest it's ever been in history. Costs roughly $400 a ton to move chemicals transatlantically and transpacifically of $400, plus or minus $100 depending if it's cryogenic [indiscernible], bulk storage and so forth, the duties and distribution, and so forth. So if you really think that -- I'm talking now in this broader sense, if you really think Europe is going to be fundamentally somewhere between [ $6 to $100 ] a ton up to upwards of $1,000 a ton and over the course of the last couple of weeks, we've seen it go even higher than $1,000 a ton, you're probably going to be looking at anything that is a large energy consuming chemical process. That owner has got to step back and ask themselves, how do I compete longer term? And that's going to bring into a whole new slate of questions, particularly those manufacturers have a preponderance of their production in Europe versus North America and an even spread, if you will.

And so I have to kind of tease out a little bit as you think about MDI outages, which have been historically kind of hard to fix. And often, there's unplanned outages afterwards when they're ramping back up. Given the cost position in Europe, do you see kind of a higher risk that some assets that go down accidentally just stay down?

Well, yes, a couple of things. And just on a short-term basis, again, looking at kind of what are we seeing in the course of the next couple of weeks, as people start to see demand mitigate or inventories are trying to be controlled, MDI plants don't run very well under about 60% or 70% capacity as I say they can't do it under that, but the variability when you start taking down a process is complicated as MDI. And again, I did also probably extend that to everything from methyl methacrylate on down the line. But as you start looking at that, anything that's operating underneath about 60%, 70% capacity, you're going to see variability in that operation. And you're absolutely right. It can take an hour to shut down a plant. It can take weeks to bring a plant back up and bring it to capacity. But again, when you look at this on a longer-term basis, we're looking at the Rhine, is going to start putting restrictions in over the course of the next couple of days and so forth, and thank goodness for our facilities in Rotterdam. But as you think about that on a longer-term basis, $60 gas, you will lose money with a chemical, with an isocyanate process. And you either will lose money or you will not be at all competitive. And so if you look at the roughly 10% of the MDI produced in the world is in Germany, that's going to be your most vulnerable. Europe on a macro basis will be less so, but it will still be vulnerable. And that will be -- and then you look at how much MDI is being built globally, really isn't anything being built globally on a large-scale basis. And these are plants that we will decide today to get Board approval this afternoon and commit $1.5 billion on a world-scale grassroots facility. Realistically, you're probably looking at anywhere from out of quickest to be 6 to 7 years and maybe as long as 8 or 9. And in Taiwan, while very respected Chinese manufacturer came in the United States, I think they spent what, 3 years, 2 years, millions of dollars and ultimately left because the process was so arduous.

And just to be sure I pin this down because otherwise, people will read too much into our discussion. In terms of your CapEx plans, there's no plan to do that.

No. I would say, categorically, at least, while I'm in the position I am with this company, I would not go to our Board of Directors and ask them for $1.5 billion for a project. I'm not going to see any return on for the next 8 or 9 years. I've got a lot better place to put my money than that.

Can you touch on sort of going back to the demand trends, there's been a lot of concern over the last day or so about sort of slowdowns in furniture and appliances, particularly in Europe and Asia? What are you -- I know you hate the question about what are you seeing, but how are you thinking it plays out in the back half of this year?

I think in some of those applications, those are going to be the most vulnerable to the back half of this year, not just in those markets, but in North America as well. I think there's been a -- as people were somewhat locked into their homes for the last 2 years. They spend a lot of money in their homes and refurbishments and furniture and bedding and paints and add-ons and so forth and so on. And now people are taking what income they have after inflation and rising mortgage rates and so forth. They would have become a candidate. They're experiencing -- they're having experiences outside the home. I want to travel when I go see people. I want to experience outside the home. And so I think you're probably going to see some weakness in the second half across the board, particularly in Europe where you're just going to have less disposable income because of the high energy prices. Asia, we saw a little bit of a pickup at the back end of the lockdowns. I won't say that we've seen a fall off. We certainly haven't seen a pickup. Asia is kind of there. In the U.S., I think that home appliances, furniture, and so forth, those will probably be -- some of our more vulnerable when you compare that to aerospace, automotive, lightweighting, a number of other applications I'd be more bullish on.

And your Performance Products segment has been singled out as possibly over earning. Can you talk a little bit about what's going on in maleic anhydride and amines?

Well -- and I would just say that, is Performance Products over earning? I would never want to think that anything's ever over earning because I never can have too much margin in the product. But we've been very clear with the Performance Products going all the way back to our Investor Day saying that this is kind of a low to mid-20 sort of margin on a year-end to year out basis. That's not to say that we're trying to get back to that level as quickly as we can. We're obviously not. And we think that there are fundamentals in market structure, there are fundamentals in our slate of customers and there's fundamentals as to how we're running that business and how we're pricing the product that will allow us to earn more on a per ton basis than what we have earned on average over the last decade, the last 5 years since we've exited the large-scale ends of that business. And so I would say that as we look at some of those businesses, look, as construction slows, you'll see a slowdown in those businesses. But when you look at the North American -- look at the European market for maleic anhydride, there are only 3 producers in Europe that commercially sell. There are only 2 in the U.S. that commercially sell maleic anhydride. Not saying there's any collusion that takes place, but the industry has integrated upstream or downstream at the point where they just no longer -- no longer merchant markets available. We've also, I think, gone to great lengths to look to where we can diversify that maleic and putting it into fuel lube additives, other applications and construction, and so forth in some of your more traditional unsaturated polyester resin sort of applications.

As you think about the next couple of years if demand is softening across the board or in different areas in waves, what levers do you have to improve EBITDA that are under your control in terms of either growth projects that are coming on or additional productivity? You've already -- as you said, you already have a pretty aggressive plan in place. What else can you do?

Well, I think that one of the most important things we can do is moving further downstream and selecting the right applications in the right industries today. Our organic growth that we're doing internally, for instance, the vast majority of that organic investment where it is around business growth will be around investment in the chemicals that are going to the production of EV batteries, that are going into the production of cleaning and the manufacturing of silicon chips and the high-tech area, areas around polyurethane catalyst that's used for spray foam applications and so forth. And so as we think about longer term, first of all, I think you want to make sure you get the right segments. And so we think about where is there going to be energy conservation regardless of what you think of the Green New Deal or not, people are going to be wanting to use less energy than going to want to be conserving energy, 1/3 of our MDI is going into some form of an insulation today. And we've always contended the cheapest or the cleanest barrel of crude oils, that which is never consumed in the first place. So how do we pick the right segments? Lightweighting, welds, and fasteners will go the way of adhesions and so forth, carbon fiber and so forth will be more and more replacing alloys in steel and so forth. So let's pick those right industrial segments, and then let's go within those segments and pick the right customers that are going to be able to reward you, that are going to be able to reward innovation and that are willing to innovate with you and develop with you as you're able to do these things. And then I think from a macro point of view, you've continuously got to be ready and continuously look at how do you rip the business apart and put it back together. Again, a little over a year ago, our cheapest MDI being produced anywhere in the world was in Europe. And today, I think, fundamentally, when you look at the energy structure and the cost of doing business in Europe, you simply can't afford to have an SG&A in Europe as we did in the past. I think even if there's a piece tomorrow, there's a fundamental -- the energy balance in Europe is fundamentally broken. And so we've got to go through that business. And I think you have to all but ruthlessly go through that, figure out absolutely what you need to market, to sell, and to service your account, but much more than that you've got to ask, really, where is value being created? And how much of this can be operated, how much of the SG&A, and how much of the back office and the accounting, so how much that can be done in lower-cost areas around the world?

And that sounds like that could be a 5- or 7-year project.

I think it's got to be like a 2- or 3-year project, yes, an 18- to 24-month project.