Huntsman Corporation (HUN) Earnings Call Transcript & Summary

Well, welcome back, everybody. Again, we're very pleased to welcome to the stage Huntsman. We've got Phil and Peter, CEO, CFO, both longtime chemical guys, I know the space well. I think, Peter, you've probably since what, 2000, 2001? I forget when you took over the role, but a lot of -- just to date ourselves, but a lot of water under the bridge. So again, thank you guys both for coming up to spend some time with us today. I think maybe the first thing is we just had Lyondell up here who -- I know you guys aren't giving guidance for the quarter kind of updating it, but they did. And with their numbers, it looks like sequentially, they're going to be down almost 40%, 45% from Q3 to Q4. Now again, they've got some more commodity stuff, polyethylene prices fell off MTBE, which you have a tiny bit of. They've got a lot more of, has been pretty weak. But just maybe take, if you wait a few minutes, just kind of each of your businesses or key businesses and kind of go around the world geographically, what are you seeing? What's getting better? Maybe what's not getting better, where there's still challenges and we can kind of level set with that if that's okay.

Yes. Duffy, first of all, thank you very much for the opportunity we have to be here. It's always good to see you. And yes, if I had to sit here today, typically at this conference, which is typically timed a few weeks after an earnings call, I could give some sort of update from the earnings call, we're seeing a little bit better, a little bit less I literally would repeat verbatim what we said on the earnings call, I don't think we're seeing things get any worse or unfortunately getting any better. I do think that from a macro point of view, if I kind of chop the world up into 3 regions, North America or the Americas, Asia, read that most vast majority of that is going to be China and then Europe, which would include the Middle East in my comments. If I look at that, I do believe that early in the first quarter of next year, there's going to be some potentially real material changes that could impact our business, and I think, impact the industry in general. Those would include if the Fed continues to cut rates. What does that do for housing. I think you'll have a very good read on housing. Well, I should say very good read. I think you'll have a read on housing, probably late February, early March as far as what are preorders coming in for OSB insulation, building materials and so forth. And what has the impact had on falling interest rates on reinventory of that entire supply chain and then also some confidence. I think today, builders are just buying enough materials to tie them over to the next project sort of thing. I don't get a sense that OSB producers and so forth, they're really restocking. North America for us, the majority of that improvement has got to come around through an improvement in the housing market. Second would be automotive. Automotive in North America feels like it's weak and getting perhaps weaker, which again, is the guidance that we gave on our most recent call. So what in the U.S. side are we going to be seeing on interest rates between now and the end of the first quarter, what impact that have on housing. What impact that have on consumer confidence, and I would say that the third area is going to be tariffs. And that -- how quickly that hits and to what degree, it's at a 10%, 20% 30%. It's a doubling of the existing tariffs, I think a product like MDI 20% of the MDI coming into the United States comes in from China. That's about figure $250 in freight, give or take a couple of dollars depending on freight availability, shipping and so forth. Today, there's around 30%, 29-point-something percent tariffs coming in on MDI. You figure a cash cost of around $2,000 a ton that's $600 a ton on tariffs, it's $250 a ton, it's $850 per ton on MDI, if those tariffs were to double, which has been said they may well do that. That's going to add $600 roughly of additional tariffs. We're talking about $1,500. I think that our large Chinese competitor has some cost advantages. They have scale. They've got an excellent technology. They run a good business. They probably have some utilities, coal-based economics on raw materials and so forth. I'm not sure you get over $1,500 worth of [indiscernible]. So I don't think you come anywhere close to that. So what does that mean for U.S. pricing? In our case, in particular, virtually all of the product we produce in the Americas, stays in the Americas, same with Europe, same with Asia. We don't move MDI. For that matter, we don't move much of any of our products around globally. So I would say those are going to be some of the major factors in North America that will impact all of our divisions, but particularly around MDI. Going to Asia, particularly China, consumer confidence, I think, has been lackluster GDP growth. Real GDP growth within China, aside from a lot of overcapacity that's been built. I'm not sure the global markets needed right now. But when we look at that, consumer confidence really has been dead and flat lines in China for about 3 to 4 years. A 40-year housing bubble has burst, that's left a lot of people savings. I'm always shocked by the number of people that work in our company, they don't have stock accounts. They don't have 401. They don't have retirements. They own 2 homes. They put all their money in some area of real estate. I think we talked about this real estate bubble bursting in China. That's just not a real estate bubble. That's a savings bubble. And what that does for confidence in the government decisions and so forth by policymakers, I think it rattles a lot of people's confidence and so they have a tendency to say. How will the Chinese government respond to that? There's a lot of talk that there's going to be some response to that sometime around Chinese New Year's, early part of January, and there's also going to be a Chinese response potentially to tariffs. And what does that do? And again, that's an early Q1 sort of potentially sort of a response. Europe they've been amazingly successful in outsourcing CO2s to dirtier economies in themselves, deindustrializing and following all but this cultish behavior of banning of a war on CO2. I'm not sure they're really eliminating as much as they're just exporting it to another country. And I think you're seeing the consequences of that and have a failed energy policy in Europe that goes down through the industries. I'm more optimistic on North America than I am any place else, followed by China with Europe. Europe is more than just a catalyst or a rate drop. They need to really examine if they want to manufacture or is Europe is just going to be a museum, a very large museum for geriatric tourist.

That's pretty fun. All right. That works. So then when you look at -- if you could pick one area to get better, is it U.S. construction? Is that -- that would have the most leverage? Or is it China because that would sop up most of your biggest competitors, oversupply or what is it that you would like to see get better, would have the biggest leverage do you think, for your company?

If I could pick any one area, it would be U.S. construction coming back because that's such a catalyst, not just for building materials, but all of the materials that it takes to fill a home when they buy it. And I think that's one of the great catalysts for economic growth across the board is when you can get affordable housing and reliable housing. So I would say that's #1. #2 would be Chinese consumers going back in the market.

If you think about our revenue, about 40% is U.S.-related. And therefore, it has a disproportionate impact, particularly with the leverage towards construction in the United States.

Fair enough. And then if things stayed roughly where they're at. I mean, if we go through another bad year in 2025 and things don't get better, do you have the footprint you want? Or would you need to take some more significant actions at that point if it looked like things weren't going to improve? Or are you just -- are we kind of going to wait until things improve and we've got the right footprint for that? Or is there another program or something more that you would want to do self-help wise?

Well, Duffy, I believe that the worsening a management team can never do is say, there's nothing we can do. So therefore, our strategy is just wait for something to happen and we don't know what's going to happen or when it's going to happen. What's the impact that's going to be. Look, we've been in 2 years where both years, we've said second half is going to look better than the first half. I believe that, again, will be the case in '25, but we cannot run the business around that. I want to be very clear on that. We're not sitting here waiting and hoping. We have publicly said that we go to work every morning and we look at our asset base, and we have to be disciplined and we have to be creative in that area. And we have a Board that is very well focused on that. There is no emotional attachment to any division or any asset. I will say that we've also publicly said that we want to look more like advanced materials, getting into aerospace, getting into composites, getting into formulated products that are more downstream, getting into the electrical grid, getting into adhesions and so forth. And less of the commodity side exposure that you would see in a product like MDI. Now does that mean that we just go out tomorrow and sell our MDI? No, it does not. But it does mean that we have to look at are we the best owner of these assets. And are we prepared? And are we running the divisions in the manner that when the time comes or when a potential buyer would come that we have a place to deploy the capital, that we have targeted potential opportunities. I don't think we're going to shrink our way to prosperity. And so we've -- this may be a time when perhaps you're going to take a discount on an asset should you decide to sell it, but you're also going to be able to buy an asset probably at a discount relative to where that asset was a few years ago. So our Board looks very closely at that strategy. That's something that we talk about on a quarterly basis. And it's something that we're not -- we simply can't wait for the chemical industry, if it -- what if it's 2, 3, 4 years away? We can't wait for that. We've got to continue to push the envelope on looking at our assets and where the value can be realized and what we can and should be doing there.

Okay. Fair enough. And you touched on the specific of potential tariffs in MDI and your big competitor in China, but more broadly, when you look back to kind of Trump 1.0 and some of the stuff that they've said this time, where else in your business do you think you would either see tariffs maybe helping you in some regions or maybe counter tariffs where you would export something that, again, might be a surplus in another country where you might get hurt when you kind of walk around your businesses in the world, how do you see that playing out?

It's an excellent question. And just answering it very broadly, and Phil can probably give some better specificity. We don't have any product or any division that moves the material. When I say material, I'm talking about high single-digit percentages, that moves any material product overseas and the vast majority of what we produce stays within those geographic regions that I talked about earlier. I don't see tariffs impacting our business. In some cases, I would probably see it as a net positive on the short term. The problem with tariffs is, if there's a tariff that we put towards country C over here and country C suffers because of that do our domestic businesses within country C, have a knock-on effect because of the tariff. That's more challenging until we really know what the impact is going to be. Remember, when Trump raised the tariffs the first time, everybody said it would be inflationary. It wasn't. And everybody said that it would cause these massive trade wars, it wasn't. And then it would be reversed by buying. That's -- tariffs are about the only thing that both sides of the aisle. And the only thing that both Biden and Trump agreed on. And so I don't think they're going anywhere fast, as far as we're eliminating themselves. So we probably ought to be factoring that high into our planning as to what impact that's going to have. But again, the direct tariffs, I think, would have a greater impact of a positive with Huntsman.

Okay. And then just because it is so big for the work. If you do put a bigger tariff on company C or whatever, where do they take their product, if that 20% doesn't come to the U.S., usually chemicals are ubiquitous, right? So it's kind of poking on a balloon and they'll pop up somewhere else. Would you expect more of that to flow to Europe? Or how would you see the -- because the global balance of trade has to get reset somehow. So where does that go if it's not to the U.S.?

It does, Duffy. That's a great question because again, I'll take a product just like MDI, for example. If you were to take and say that 20% of the MDI that's consumed in the U.S. is coming in from China, you are to take that, that would be 400,000 or something thereabouts. If you were to take 400,000 tons and go dump it in China -- or excuse me, in Europe. Can Europe absorb that? No. I mean that's a world-scale plant that just overnight pops up in Europe in a market that's not growing in MDI. The market that doesn't have any margins to speak of. Does that mean margins get actually worse? I don't think so. And that probably forces the Europeans to retaliate in some form or another. So the real question is how resilient is that product in the country of its origin. And if that product -- is that producer, they're going to flood their own market, now if you have predominantly greater than 50% market share of 1 player there. I'm not sure that person is going to want to shoot themselves in the foot, right? It's going to hurt them more than it does anybody else or do they just cut back on production. And that's the unknown of any of the sort of trade disputes that take place.

Okay. And again, just because it's so sizable for you as a company. When you look at MDI where we're at today, things like inventory levels, kind of market behavior, just given the macro demand. How healthy do you think the underlying is in MDI if we start to get some demand coming back and that inflect rapidly? Or is it kind of best case, more of a longer grind higher over a couple of years, would you guess?

Well, I think that the market scenarios are in place today, I think, for a quicker comeback. I'm not sure that the actual sellers will see that instantaneously. A lot of us have contracts that are passed through pricing and you have contracts that are locking in margins for 6 months, multi-quarters and so forth, not in all cases, but in some cases. So if you were to see hypothetically margins double overnight because all of a sudden prices go up that amount. That doesn't mean you're going to see that fall to the bottom line in the next morning. There's just -- there's a lot of throughput to go through that. But directionally doesn't mean it's the right direction to take. Now you do have to have a couple of variables in place. I believe many of those macro variables such as very low inventories in the supply chain, right now, I think, with uncertainty, with the cost of capital, with carrying inventory and the lack of visibility of any growth in the next quarter or 2, inventories are extremely low in all the supply chains. Raw materials are very competitive today compared to where they've been priced at benzene and other raw materials compared to where they've been over the last couple of years. So you've got some you got customers out here that are saying, product is relatively cheap. I've got low inventories, and I think you see any sort of a pickup in demand that's unexpected. Yes, you start getting panic buying. And that's not something that we've seen even with the threat of tariffs, people have asked -- we're seeing pre-buying ahead of the tariffs. We haven't seen that in any of our products yet. But there does get -- just anecdotally, there's a feeling of uncertainty that's out there.

And clearly, definitely the MDI industry this year off of a low base has clearly improved, right? Probably between 5% and 10% this year. As long as that continues, then you start to get a clear tightening of utilization rates throughout the entire industry.

We have to have that growth come back before we get pricing. And that growth is coming.

Okay. And then you touched on it, Peter, a little bit M&A, which over the years, you guys have done some selling, some buying. You've talked about wanting to look more like your Advanced Materials business. When you look out over the next 1 or 2 years, just given the macro, what does the opportunity look like to add some assets that are sizable enough to kind of move the needle for Huntsman? And are multiples coming down after kind of a number of years being subsidized by very low interest rates. Are you starting to see prices come to an area that look interesting?

Yes, to answer that question in reverse. I think multiples are gradually coming down. Valuations are coming down just because earnings are falling. Multiples even come down just 1 term a combination of earnings going down. Asset values are dropping with that. So that makes for a target, but more of a target-rich environment. On the flip side, when there's uncertainty like there is today, this is not a time to stretch your balance sheet. And therefore, I think this is when you've got to get creative, and you've got to be able to look at anything. I think this is a timely you're probably going to be hearing about more talks about mergers, asset, perhaps exchanges and so forth. But you look just in Europe. I can -- I struggle to think of 4, 5 major chemical companies in Europe that are not going through a strategic review of their assets, i.e., selling them. The problem is, as many of the companies that traditionally are the buyers, consolidators of Lyondell and any of the companies like that, they're also out there looking at their assets as well. So I don't see any buyers out there even private equity on some of these. Now I may be shocked and there might be a whole slug them to come in once these reviews are over. But I think it might leave a number of companies scratching their heads, wondering what to do. I'm just glad we kind of -- as a company, we went through that some years ago, got rid of TiO2, got rid of base chemicals, aromatics, olefins, polyolefins, our textile businesses in Europe and kind of washed all that out some years ago. But it's a [indiscernible] and everybody is trying to sell assets. I've never seen a time when you've seen all 3 regions in the state that they are today during the great recession, China was booming, right? And you see so many people trying to get out the door, if you will, in Europe at the same time.

Okay. Interesting. And again, it's not your business model, but do you think that would be a successful business model, if you could get some capital and roll up a bunch of kind of lower quality assets in Europe, make it big enough that you could restructure it somehow? Or do you think that's a losing?

I'm reluctant to say, so I wouldn't put my money in that. I think that so long as Europe literally is as hostile as they are through their energy policy, their environmental policy, regulatory policies and their taxing policies towards industry. Size is not going to overcome all of those things. Europe has fundamentally got to decide, do we want to be making things or not.

Okay. Okay. Fair enough. You've talked a lot -- you like the aerospace industry with your business. Your call kind of coincided with Boeing strike ending. So there's been a lot of noise around the aerospace industry over the last -- where does that sit for you today? How is that business as Boeing strike ending? Does that improve that business for you? Or it wasn't that big of an issue in the first place? And so it's just kind of business as usual at this point? Or how would you handicap aerospace industry for you guys?

Well, assuming we don't see any more work stoppages and so forth in '25, we certainly ought to see a better '25 to '24. We did see in our Aerospace business at about an 8% growth this year over the last. And that will continue. The supply chain issues that both Airbus and Boeing are facing have been formidable. We'll take away the work stoppages and the government actions with Boeing. You would think that Airbus would have doubled its output with Boeing stumbling. Airbus has got -- it's probably a fair share of problems as well. And you're relying on more parts suppliers from more areas of the world to build an airplane than ever before. One of those suppliers, if there's a delay in any one of them, it's going to stop the whole process. And I'm always surprised to our aerospace business. I don't say this through the ignorance of the business, but just you've got -- you're building 1 product and you've got an 8-year backlog on orders for 1 product and the spec don't change on that product. From year-to-year, it's a very consistent business. From quarter-to-quarter, it's way from month-to-month. You go buy Airbus or Boeing, they'll have a whole yard of just wings out there, waiting to be attached and waiting for the part to attach. They're waiting for something. And it's a surprisingly volatile. But when I look at it, again, in aerospace, specifically, this is our Advanced Materials. Europe is our largest area of Advanced Materials. It's one of our most profitable not just aerospace, also adhesion and building out the electrical infrastructure and grid systems and so forth. So I also don't want to say that all European applications and businesses are bad. I think it's more of the heavy energy intensive side that's going to be problematic.

Fair enough. And just because our first presenter had a bigger issue, you guys got a smaller MTBE business in a joint venture, right? So I guess what's your view on that? It's had a couple of good years where it feels like it's over earned. It's kind of fallen off a little bit now. How would you peg the next 3 or 4? Does it go back to something where it's kind of like it was 2 or 3 years ago? Or do you think that really was overrunning kind of the run rate we're at now, even though it's seasonal is a better way to kind of peg it for the next couple of years?

I think we're probably on the lower end of that. But MTBE just anecdotally, been in mid-90s. When crude prices are high, typically, it's a favorable octane, but fills on the board of that joint venture and...

So MTBE is obviously, right, margins today are negligible in China. As a reminder, that's a 51-49 JV. We've got 49%, Sinopec 51%. We take it as equity income. We peaked at about $130 million of equity income with the dynamics that you talked about. We're more now to sort of 35% to 40%, and I think we guided for this quarter to be lower than and quarter 3 and the other 3 was only 5 million. So struggling right now, I don't imagine that it will stay down at those levels, Duffy, you'll have some seasonality there as well. But to Peter's point, we're probably at the lower end of the range that we've seen over the last 4 to 5 years.

Okay. Maybe just a couple of comments on maleic, what you're seeing there, what you expect from that market?

Well, Maleic is incredibly overbuilt in China, largely around an environmentally friendly biodegradable plastic bag that was supposed to be plastic product that was supposed to be mandated for use in China. Maleic was going to be one of the major raw materials for this. And the plastic application, I'm not sure has turned out to be as strong as they had hoped. There's tremendous amount of oversupply of maleic coming out of China. Most of that's going into Europe. We have a very strong market position. I think we have a good market position in Europe. We have a very strong market position in North America. There's about a high 20% tariff protection around the U.S. and U.S. also has some of the lowest raw material butane pricing and so forth. So we've got very good costs in the U.S. We have a very good market position. And -- but it's -- right now, I'd say that particularly in Europe. And then China, specifically, it's oversupplied.

Okay. And the -- because we've seen a lot of antidumping across our entire space, right? You think TiO2, epoxy and even some countries that have kind of shocked me, Brazil and India, where they're actually protecting fairly small indigenous industries and are big importers. So to me, it seems counterintuitive, but the countries seem to be moving down that path and some -- do you have some other -- is Maleic a candidate for that for like some antidumping in other areas? Or when you look through your portfolio, where might you get some help other than just Trump coming in with kind of broad-based?

I would think that maleic probably would top the list of what -- I'm not a big fan of dumping litigation, but there are some very clear cases when you have to be aggressive and you have to go after these sort of things. And I think that the world is moving. I think a decade ago, we were all talking about globalization, all coming together to sing Kum ba yah. And now there certainly is a fracturing that's taking place. And I think there's a mood of protectionism, not just in the United States. This is just a phenomenon with Trump. I mean you look at what Europe's doing and you look at -- as you start looking at what are the industries that countries really value and they want to protect and what are the products that they want to protect. These are fundamental questions that I think are being asked in a different light today than they have been perhaps in the past. And I think it's probably going to be more dumping allegations, litigation and so forth that will be coming forward in the next year or 2.

Okay. Then I guess one more for me or I've certainly got more, but if we can go to the audience for a question or 2 if anybody's got one. But when you think about Q4, where we're at and you kind of talked about what could get better as we get into next year, but again, your crystal ball where you sit today, what January, February look like, is Q4 kind of a good baseline to extrapolate? Or does Q4 feel kind of abnormally low just given some of the dynamics of this year so it's not a fair extrapolation point into Q1 in your view?

Typically, in Q1, we see a bit more of a pickup. I mean, Q4 directionally is heading south. December, we always have this phenomenon, at the end of December, it seems to shock everybody called Christmas, where people don't go to work for a week. And Q1, while the numbers may be a little bit better in Q1, it's more the direction that I'm looking forward. And Q4, always seasonally and so forth, it's heading south. Q1 is usually heading up. And such by the time you get to the end of Q1 in March. Usually March is your strong month as you start getting into the second quarter. I don't -- I mean I'm very hopeful that what happens. But as I've said earlier, between interest rates, construction, tariffs, new administration coming in taxing policies, spending policies and so forth. It's -- I think it's going to be an incredibly volatile first quarter.

Key element is going to be post Chinese New Year, but for China, customer confidence.

Okay. So I've certainly got a couple more, but if anybody in the audience has a question, we'd be happy to take it.

Just wanted to ask on capital allocation. I know you all have kind of target net leverage below 2x and maybe you're closer to 4 today, you're targeting investment or balance sheet, but you've got some negative outlook. Just how should we think about capital allocation into 2025 kind of given those kind of guidepost?

Okay. So you're right, obviously, the net leverage target that we have. If you look over the last 5 years, and I'm not saying this is a cycle average. But if you look over the last 5 years, it's about $800 million of EBITDA. We've got about $1.5 billion of long-term debt once we retire our bonds next year. So we'll have debt due in '29, '31, '34. 1.5 [indiscernible] that gets you a cycle average to below that 2x, and that's the focus from a capital management perspective. Dividend, that will be to the Board. We've got a pretty competitive dividend right now in terms of distribution, about 5% overall. We have paused our share buybacks. And honestly, on share buybacks, I think it's incumbent upon us to get significantly above free cash flow above dividends before we continue with share buybacks.

Anything else from the audience? Maybe just bigger -- Peter, you do a lot of socializing with your peers, other CEOs in the industry, you've known them for a long time. If you got them on to, where do they see the world similar to you where do they see the world different than you do, do you think?

I probably would be a bit more optimistic maybe than the general sentiment around the U.S. economy. Not vastly different, but I mean I think that if you really unleash U.S. energy, you get energy prices come down, that's going to be -- it's going to stifle a lot of the inflationary pressures we've seen in the past. I'm not a big fan of tariffs, but look, there are very clear examples as to where you need to protect industry. And I think we've seen how vital supply chains can be and everything from rare earth going into, weaponries, going into EVs, even basic petrochemicals. We need to start looking at these global supply chains, just how secure they are. Russia has proven out and so forth. I probably am a little more optimistic on North America. I'm probably a little more pessimistic on Europe. I think that Europe -- when you see industry like the steel industry, chemicals, refining, the basic industry, these are the basic building blocks of any country's economy. You just can't be a massive service economy. You start losing that. I'm trying to think back as a precedented history where you lose that and it comes back. If you lose it because you're not competitive because people have gone elsewhere and you've pushed them out, not through an active war. I can't find a time so when people think about what's it going to take to get industry to go back to Europe. How many goes back? These are permanent. When the automotive industry leads Germany for whatever reason, I'm going to say, it come back in 10 years. This is a century long buildup. And when it's gone, it goes somewhere else and companies invest for 20, 30 years and next generation somewhere else. I think there's some -- I personally have some real concerns around Europe, but I think that's going to come as a gain in the U.S., it's going to come into a gain to China. And I think you're going to see more and more of a gain coming out of the Middle East. And the world's energy to manufacture to build, whether it's AI, whether it's data processing systems, whether it's petrochemicals, steel, you see China based on coal, Middle East based on oil, U.S. based on gas. That's a very broad view. I recognize that. But that's -- those are going to be the basic powers of manufacturing and whether it's IT or manufacturing chemical steel or AI. That's where you're going to see the epicenters. Unfortunately, I think an economy like Europe is probably going to miss out more than people are expecting.

Fair. Listen, Peter, Phil, thank you guys so much for coming to spend some time with us. Great chat today. And thanks, everybody, for joining us.

Thank you.

Thank you.