Huntsman Corporation

Greetings and welcome to the Huntsman Corporation first quarter 2020 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Ivan Marcuse, Vice President of Investor Relations. Thank you, sir. You may begin.

Thank you, Donna, and good morning, everyone. Welcome to Huntsman's first quarter 2020 earnings call. Joining us on the call today are Peter Huntsman, Chairman, President, CEO, and Sean Douglas, Executive Vice President, CFO. This morning before the market opened, we released our earnings for the first quarter 2020 via press release and posted it to our website, Huntsman.com. We also posted a set of slides on our website, which we will use on this call this morning while presenting our results. During the call, we may make statements about our projections or expectations for the future. All such statements are forward-looking statements and, while they reflect our current expectations, they involve risks and uncertainties and are not guarantees of future performance. You should review our filings with the SEC for more information regarding the factors that could cause actual results to differ materially from these projections or expectations. We do not plan on publicly updating or revising any forward-looking statements during the quarter. We also refer to non-GAAP financial measures, such as adjusted EBITDA, adjusted net income, and free cash flow. You can find reconciliations to the most directly comparable GAAP financial measures in our earnings release, which has been posted on our website, huntsman.com. I'll now turn the call over to Peter Huntsman, our Chairman and President and CEO.

Thank you very much, Ivan. Good morning, everybody, and thank you for taking the time to join us. Let's turn to slides three and four. Adjusted EBITDA for our polyurethanes division in the first quarter was $84 million versus $124 million of a year ago. Total MDI volumes in the quarter were up 2% as growth in the Americas and European regions for the first two months of the quarter were able to offset volume declines in Asia and slowing global demand trends experienced during March. Our differentiated margins remained relatively stable. However, we continue to experience pressure on polymeric and component margins as softer demand in differentiated markets added to the existing margin pressure in upstream polymeric with more MDI being diverted into the polymeric markets. Despite the near-term headwinds, we remain committed to our long-term strategy of investing in our downstream businesses and further differentiated product innovation. We are confident that the positive long-term trends for MDI urethanes around substitution and sustainable product solutions remain intact. Looking at polyurethanes regionally for the first quarter, our American volumes were up single digits for the prior year, while automotive was lower in the quarter. Several of our construction-related markets saw growth versus the prior year. Our acquisition of Isonene Lepola, which closed on February 20, added 3% to our growth in the Americas and approximately 1% globally. The integration of this business with our existing spray polyurethane foam business has hit the ground running, especially given the current environment. We are looking to move as quickly as possible to fully integrate this business and to achieve our synergy targets by the end of 2021. We expect to achieve approximately $15 million in annualized synergies. The combined integrated business is projected to have EBITDA margins well in excess of 20% and will be a leader in the sustainable high growth market. Within a few years, this will be a business with EBITDA in excess of $100 million. It's a remarkable, eco-friendly product, especially so when integrated with our Terrell Polyols business. We take the equivalent of 1 billion PET bottles otherwise wasted as feedstock and produce a polyester polyol that is blended with MDI to produce the best and most versatile insulation in the world. This is a very compelling, sustainable, and eco-friendly alternative to traditional insulation products. We will continue to leverage our global footprint to grow this business in international markets. In order to appropriately manage our discretionary spending in the current environment, we have decided to push out our splitter project in Geismar, Louisiana by six months, now estimated to commence operations in mid-2022. This will reduce our current year capital spend by $40 million. The project IRR remains well above our hurdle rate, and we see this splitter as fundamental to our long-term differentiated growth in North America. Turning to the Asian region of polyurethanes, our overall volumes were down 8%. Our insulation business was up 11% over the prior year, while nearly all other business categories were down double-digit, except for our footwear and ACE businesses that were down single-digit. Due to the COVID-19, most Asian markets saw sharp declines due to mandatory shutdowns and other restrictions which impact production, supply chains, and end-use demand. While the region declined overall for the quarter, China saw improving trends starting at the end of February through March. We are cautiously optimistic that the worst is behind us in China. In Europe, we saw overall mid single-digit growth in the region. However, with the acceleration of the pandemic, we saw weakening volumes toward the end of the quarter. Now looking forward to the second quarter, all but a handful of our polyurethane operations have remained running, albeit at a significantly reduced rate. Up to this time, we have not lost any customers or orders due to the closure of these facilities. Our urethanes business is currently experiencing a significant impact on demand due to the global economic havoc reaped by COVID-19. This impact on demand is being felt in just about every one of our core markets. To be clear, we've never seen this sharp of a decline in global demand in such a short period of time. Our differentiated margins remain resilient. However, except for in China, both our differentiated and component product volumes are being significantly impacted. seasonal uptick that we typically see in the second quarter is not happening this year, as we have essentially lost the entire month of April everywhere but China. Our expectation for May and June are for sequentially improving conditions. To give you some idea of the declines that we've seen, our automotive-related businesses in North America and Europe saw a orders in the month of April versus the prior year declined between 75% and 90%. Even in China, which is believed to be on the backside of the pandemic, we saw orders materially lower than a year ago. In our construction-related businesses, which would include insulation and composite wood products, orders were down around 40% in April in both America and Europe. Though the current global economic crisis is much different than the 2008 and 2009 financial crisis and ensuing recession, it is our best comparable period that we can point to. Important to note that we have learned a great deal from past crisis that has significantly improved our business over the past 12 years. I'd like to highlight some of the key differences between our PolyUr-Things business today versus then. First, we no longer have our POMTBE business that we sold at the beginning of this year. Secondly, we've increased our overall capacity by roughly 370,000 kilotons, or 38%, with expansions in all three of our upstream sites in Kaohsiung, China, Rotterdam, Netherlands, and Geismar, Louisiana. Also, and most importantly since 2009, we've meaningfully reduced our proportional exposure to the more commodity end of the portfolio and have greatly improved our overall product mix through our ongoing investments into differentiated businesses, including state-of-the-art splitters in Rotterdam and Kaohsiung, strategic bolt-on acquisitions, and global scale-ups. This increase in differentiated products amounts to approximately 800 million pounds. Lastly, in 2008 and 2009, we had meaningfully higher inventory levels including excessive levels of high-cost benzene, which resulted in a significant drag in profitability for ensuing quarters. This time around, we've entered this crisis with tighter inventory levels and significantly less benzene. Though our polyurethanes division today has continued commodity and exposure, we believe that we have meaningfully lifted the level of recessionary trough EBITDA, Keep in mind that each recession is very different in terms of cause and effect. But because of the investments that we've made over the last decade, we believe our current trough EBITDA will be well above the previous trough, which was around $150 million during the 2008-2009 period pro forma for the elimination of the POMTBE results. In summary, our visibility into the second quarter remains tough. Currently, we can only see about three or four weeks ahead at best. With the expectation that our volumes could be down more than 30% versus the prior year, we expect our EBITDA could be around break-even in the second quarter. However, this is highly dependent on the speed and timing of recovery and the number of product segments in the coming weeks and months. Let's turn to slide number five. Our advanced materials business reported adjusted EBITDA of $48 million, down from $53 million in last year's first quarter. The decline in adjusted EBITDA was driven by 11% lower volumes in the quarter due primarily to softer demand in our commodity, industrial, and aerospace markets, partially offset by improved demand trends in markets such as electronics and power. While China demand started off weak, we saw improved trends throughout the first quarter, which has continued into the second quarter. The specialty end of our portfolio did perform better than the overall segment average, but still declined 6%. As one would expect to see from a differentiated business with 85% of its sales revenue coming from a strong core of specialty products, our margins remain very resilient despite the volume headwinds we experienced. We remain on track to close on the recently announced acquisition of CVC thermal set specialties over the coming months. We look forward to integrating this high margin specialty business into our advanced material portfolio. This business augments our already attractive portfolio in areas such as structural adhesives, coatings, and composites. Furthermore, it will significantly strengthen our business in the Americas and provide us commercial opportunities to leverage our global platform by taking this product into our well-established Asian and European markets. In the current environment, we'll look to accelerate the integration of this business and to achieve a full run rate of expected synergies as quickly as possible. We expect to achieve a run rate of approximately $15 million synergies within the next two years. COVID-19 will have a material impact on several of the core markets in our advanced materials business through the remainder of the year. However, it is worth highlighting several key differences between our advanced material business today versus the 2009 recessionary environment when EBITDA fell by 50%. First, our exposure to commodity basic epoxy resin and wind markets is substantially lower today. Our portfolio today is significantly more diverse and differentiated versus prior years, with around 85% of our sales now going into specialty markets. Additionally, in contrast to our business in the past recessions, we've taken approximately $40 million of costs out of the business. Although today we do experience significant headwinds in our aerospace business, which is now a bigger portion of our EBITDA today versus 2009, I would like to point out that roughly 30% of our aerospace business today goes in to other markets, such as military applications and repair and maintenance, which will be less impacted than new commercial aircraft build. Despite the likely volume challenges for the remainder of the year, the advanced material business will remain focused on the integration of CVC, managing down costs, growth in certain markets to help offset weakness in others, and in retaining the value of its specialty products in order to keep overall margins steady. Visibility remains low, and segment EBITDA in the second quarter will be down more than 45% versus the prior year as volume weakness across most of its core markets will be partially offset by improving trends in Asia and the lower fixed costs. Let's turn to slide number six. The performance products segments reported adjusted EBITDA of $58 million compared to $45 million in last year's first quarter. Volume in the quarter, while down 3% versus previous year, remained very solid throughout the quarter. Higher volumes and performance amines were offset by lower volumes in ethylene amines and malate. Performance products margins were favorably impacted by lower raw material costs, stable pricing, good cost control, and roughly $5 million in lower cost benefits that would not expect to be repeated. As a reminder, unlike our other three divisions, our raw materials are procured locally to the plants, and a drop in raw material prices is seen much sooner in this division. Like all other businesses, we expect performance products to be impacted by the material slowdown in the global economy. However, there are some significant differences between this segment today versus 2008 and 2009 time period that should be pointed out. The most obvious difference is that we've sold the chemicals intermediates and surfactant businesses. Performance products today is primarily made up of our amines and malic and hydride franchises. Our means portfolio today is much more diversified and developed across different niche markets and use markets and regions with a much improved manufacturing footprint. Our higher margin performance and means are a significantly larger portion of the total of means portfolio as well. Our Malake business today is larger and the industry is more balanced versus 2009 when the North American housing market was crashing and new malate supply was coming into the market at the same time. Finally, performance products today has a larger overall exposure to the construction markets in North America and Europe versus 2009 and much less exposure to the personal care products. However, we expect the more diverse niche industrial markets to serve, will help to offset near-term volume weakness in the construction market With a reduced portfolio breadth of today's business, this division is more focused versus 10 years ago, and we continue to look to control cost and grow in its high-margin niche markets over the coming years. We expect weaker overall market conditions in the second quarter to put pressure across nearly all of our European and North American businesses within this segment, which will only be partially offset by strength in certain markets in China, such as wind. As a result, we expect second quarter EBITDA could be more than 25% below the prior year. Let's move on to slide number seven. Our textile effects division reported adjusted EBITDA of $20 million for the first quarter, slightly down from the prior year. Total volumes in the quarter were fairly flat year over year, but our specialty volumes grew 5% as we continue to benefit from increased demand for our leading technologies that offer our customers eco-friendly and sustainable solutions. At the end of March and in April, we saw a sharp decline in volumes in our core markets due to mandatory government shutdowns impacting textile mills in regions such as India and Bangladesh. This has been compounded by significant border cancellations by retailers who are experiencing a sharp decline in customer traffic. We've started to see some positive trends from retailers in China. Our volumes in the second quarter are likely to be at levels not seen since 2008. However, like our other businesses, textile effects today is much different than during the recession of 2008 and 2009. First, about $120 million of fixed costs have been removed, and the businesses have been geographically repositioned and aligned to today's textile industry. Also, our higher margin specialty businesses have grown significantly over the last 10 years. We've strategically deselected from lower margin and less profitable products. Lastly, the destocking that started in early 2018 has left inventories throughout the supply chain at very low levels, which gives us some confidence that once the global economies begin to open back up for business, we should expect to see improving demand trends, and a quicker rebound than in past recessions. In the near term, the usual seasonal strength we typically experience in the second quarter is not expected to happen, and we expect second quarter results to be significantly lower versus the prior year. Before sharing some concluding thoughts, I'd like to turn a few minutes over to Sean Douglas our Chief Financial Officer, and at that same time, wish him a happy birthday. He turns 48 years old today, and certainly the best CFO, at least on this side of the table. So, Sean?