Huntsman Corporation

and welcome to Huntsman Corporation's second 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. I would now like to turn the conference over to your host, Mr. Ivan Marcuzza. VP, Investor Relations. Thank you. You may begin.

Thank you, Lauren. Good morning, everyone. Welcome to Huntsman's second quarter 2020 earnings call. Joining us on the call today are Peter Huntsman, Chairman, President, CEO, Sean Douglas, Executive Vice President, CFO, and Tony Hankins, President of Polyurethanes. This morning before the market opened, we released our earnings for the second 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 the call this morning while presenting our results. During this 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 will 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 to our website, huntsman.com. I'll now turn the call over to Peter Huntsman, our Chairman, President, and CEO.

Thank you very much, Ivan. Good morning, everyone. 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 second quarter was $31 million versus $156 million of a year ago. This is better than we had expected at the time of our last quarter earnings call when we then shared that our second quarter volumes could be down in excess of 30% versus the prior year And then our adjusted EBITDA could be about break even. At that time, while China was in the early days of recovery, the April actual and May outlook for orders outside of China in our core sectors of automotive and construction were very weak. The second quarter decline in adjusted EBITDA versus the prior year was not surprisingly driven by expected sharply lower volumes as a result of the economic impact of COVID. and lower margins due to an increasingly competitive environment in the component side of our urethane business. MDI volumes in the quarter declined 15%, driven by declines in the Americas and Europe, which are only partially offset by growth due to recovery in China. While our higher and more stable differentiated margins continue to hold up well, the volumes in the differentiated end of our business fell As COVID-related shutdowns across the globe negatively impacted our key markets, such as insulation, automotive, and elastomers. However, we experienced a notable inflection in adjusted EBITDA within the quarter. Our polyurethane adjusted EBITDA was negative in April, slightly positive in May, and greater than $20 million in June, as mostly construction-related markets recovered better than we had anticipated in the Americas largely led by our spray polyurethane foam insulation business. Additionally, the recovery in China continued at a pace above our initial expectations, specifically in automotive and insulation. As we have shared before, we estimate that roughly half of our polyurethane business is impacted by trends related to construction, with our largest direct exposure being our insulation business. which makes up close to 40% of our total global polyurethane segment. Demand for greater energy efficiency continues to grow globally, driven by increasingly more stringent building codes around energy conservation, more widely adopted sustainability standards, as well as government mandates and stimulus into energy efficiency. Our portfolio is well positioned to benefit from this expected growth within the global insulation markets. Polyurethane is a versatile, world-class insulant that has an ability to achieve an R-value well in excess of nearly any commonly used competitive insulation material. Insulation is our single biggest market, and we expect it to be one of our highest growth markets over the coming years. In North America, our fastest-growing business is our relatively new spray polyurethane foam insulation business. that we have recently rebranded to be Huntsman Building Solutions, a global leader in spray polyurethane foam insulation. Huntsman Building Solutions is a combination of our 2018 spray foam acquisition of Demolec and our early 2020 spray foam acquisition of Isonene-Lapola. Upon closing the Isonene acquisition this past February, we immediately began integrating the two businesses. The integration of the two businesses is ahead of plan, and we currently expect to exceed our initial synergy target of $15 million. We are now looking for annualized synergies of $20 million by the end of 2021. Huntsman Building Products now captively consumes approximately 125 million pounds of polymeric MDI on an annualized basis. the benefit of which is not included within this $20 million synergy estimated amount. Although Huntsman Building Solutions sales in the second quarter were down versus last year due to the temporary impact of COVID-related shutdowns, we saw improved trends as the quarter progressed. And in June, we saw a slight growth over the prior year. Even with the COVID impact, This business contributed approximately $15 million of adjusted EBITDA in the quarter. Despite the ongoing near-term economic challenges, we still expected that our Huntsman Building Solutions business will be operating at $100 million of EBITDA annualized when we exit 2021. This growth in adjusted EBITDA will be helped by synergies, but also, more importantly, through organic growth, including market share gains from traditional insulation materials in North America and internationally. While our international growth efforts are still in the beginning stages in both Europe and Asia, we've seen some early success and positive EBITDA contributions globally. It is a remarkable eco-friendly product, especially when integrated with our Terrell Polyols business, wherein we take the equivalent of 1 billion used PET bottles, otherwise wasted as feedstock, and produce a polyester polyol that is blended with our MDI to produce the best insulation in the world. This is a very compelling, sustainable, and eco-friendly alternative to traditional insulation products. We look forward to updating you on the success of Huntsman Building Solutions over the coming years. We have seen improving trends within our North American composite wood products business. rebounding nicely from being significantly down in April to being down only single digits in June. During the quarter, we also saw improving trends in automotive. These trends significantly vary by region. Asia is ahead of the pack, ending the quarter at levels largely flat year over year. While both are still meaningfully down year over year within auto, we see a bit quicker recovery within the Americas over Europe. Within our elastomers business, global footwear continues to be significantly weaker than a year ago as it largely follows trends in global apparel. While we remain optimistic about the long-term growth opportunities for our polyurethane business, several key markets in the near term are likely to remain challenging and make it difficult to meet last year's profitability. Visibility remains obscure and depends on the ability of broad global economies to reopen and navigate the various geopolitical challenges currently being presented by this global pandemic. However, we do expect some benefit from lower benzene rolling through the third quarter. Assuming this, and if economic activities remain somewhat consistent with the trends we have experienced in June and are seeing in July, and I emphasize that this is an uncertain assumption, we could anticipate this business generating slightly above $100 million of EBITDA in the third quarter. Let's turn to slides five and six. Our advanced materials business reported adjusted EBITDA of $30 million, down from $55 million in last year's second quarter. The decline in adjusted EBITDA was primarily driven by 31% lower volumes impacted most significantly by volumes being down in aerospace by 48% year over year. Globally, build rates in aerospace are practically halted instantaneously in response to the global impact of COVID-19. For the first time in over a century, the North American and European commercial aerospace industry came to a complete standstill. The singular event caused a rapid build in the inventory from the airlines on through the supply chain to suppliers like Huntsman. We anticipate that it may take many months to work through this inventory. Once that is complete, we will likely be supplying an industry that will operate at materially reduced rates for perhaps the next few years. Our high margin DIY business, largely in India, was also significantly impacted due to the extensive lockdown in the country of India. We anticipate a recovery of our DIY business once the Indian economy returns to more normalized levels. Our power business, largely going into power grid infrastructure, was least impacted with volumes down approximately 2%. We did see modestly improving trends in most other markets in June. Despite the significantly lower sales, the business was able to generate an adjusted EBITDA margin of 16%, owing to stable pricing and the business's ability to quickly adjust certain fixed costs. On May 18th, we closed on our CVC thermoset specialties acquisition, which contributed slightly to the segment EBITDA. CVC is approximately 30% weighted to auto and approximately 15% weighted to aerospace. The business had built inventory prior to our close, and as a result, we estimate a related incremental cost of nearly $5 million during the second half of 2020 as we approximate right size of the inventory. Excluding this adjustment, CVC is performing roughly in line with our advanced materials business. On day one of ownership, we immediately began integrating the business, and we are confident that we will be able, that we will be at synergy run rates of approximately $15 million when we exit 2021. We would expect to exceed our $15 million target as we move through 2022 and beyond. We've identified additional cost savings within the segment and are very focused on identifying additional organic and inorganic growth opportunities. As we look at quarter three, improving trends quarter over quarter in most of our industrial markets will be more than offset by the continued challenges in our aerospace markets. As a result, we estimate that our third quarter results in advanced materials are likely to be slightly lower than the second prior quarter. Let's turn to slide seven. The performance product segments reported adjusted EBITDA of $29 million compared to $42 million in last year's second quarter. The decline in EBITDA was largely due to 20% lower volumes partially offset by lower fixed costs. Our performance amines, which make up about half of the performance product segments, declined approximately 8% in the quarter. This better-than-average performance is related to the rest of the portfolio was primarily due to to isolated strengths in some of the niche markets, such as composites going into the Chinese wind market, ag chemicals, and electronics. We plan to further invest in technologies within performance amines to drive growth, including our polyurethanes catalyst, which allow for VOC-free urethane production. Volumes and margins in our ethylene amines business continue to be weak due to the overall economic environment and competitive pressures. Malayic and hydride volumes were down sharply in the quarter, but overall margins remain relatively stable. We expect volumes in our Malayic business to improve quarter over quarter as sales into UPR markets, such as construction and recreational vehicles, are improving. While we expect third quarter EBITDA to be similar to the second quarter EBITDA, The third quarter is expected to see an improving trend across the quarter, unlike the second quarter, which saw sequentially worsening months. Let's move to slide number eight. Our Textile Effects Division reported an adjusted EBITDA loss of $4 million for the second quarter. We saw unprecedented conditions in the textile and apparel markets. This loss was the result of a dramatic decline in volumes. only partially offset by lower costs. Total volumes in the quarter fell 48% year over year as a shutdown of economies across the globe significantly reduced retail traffic, especially in our key regions in North America and Europe. Additionally, government-mandated shutdowns in key textile-producing regions such as China, India, and Bangladesh also contributed to the decline in overall demand for our product as textile mills were closed. The drop of volumes during the second quarter was unparalleled and was well below the worst quarter we experienced in the 2008-2009 recession. On a positive note, we are seeing a slight uptick in both U.S. and European consumer sentiment and have seen some improving trends in June continuing into July. While we are seeing improvements, we expect the recovery to be choppy depending on how quickly regions reopen and the comeback in retail traffic, most specifically for apparel. While timing is unclear, we are optimistic that the industry will recover over the coming quarters. We will continue to invest in evolving technologies for protective solutions supporting increasing demands for PPE as well as continuing to capitalize on our core strengths and leading technologies in water reduction and zero discharge dyes to help our customers achieve their sustainable goals. Third quarter sales will remain down versus the prior year, but improve versus the second quarter. We expect the business to return to a modest level of profitability in the third quarter. Before sharing some concluding thoughts, I'd like to turn a few minutes over to Sean Douglas, our Chief Financial Officer.

Thank you, Peter. Turning now to slide nine. As covered by Peter, volumes were sharply down year over year. We also saw continued pressures on polymeric MDI margins, which largely account for the decrease in variable margins year over year. Margins in our differentiated polyurethanes and other businesses remained fairly stable. We benefited from fixed cost suppression to the tune of about $20 to $25 million during the quarter. We also benefited from cost reductions year over year near $10 million. Now turning to slide 10. During the quarter, we spent from available cash approximately $300 million to acquire the CVC Thermoset Specialties business and ended the second quarter with $2.6 billion of liquidity including approximately $1.2 billion of cash. Despite having a modest positive EBITDA for the quarter, we still managed to generate a positive free cash flow. In line with our expectations for the quarter, we benefited from favorable networking capital change of about $125 million. Our business divisions continue to place a high priority on efficiently managing all components of working capital. We paid $55 million in capital expenditures during the second quarter and still estimate to spend between $225 and $235 million for the year. As shared on our previous quarter's earnings call in response to the global economic conditions, we reduced 2020 capital spending by approximately 30%. We still expect to spend approximately $175 million in total to construct an MDI splitter at our Geismar, Louisiana site that will provide us meaningfully more flexibility to further expand the mix of higher margin differentiated products within our North American business. Related to this project, $15 million was spent last year. Approximately $40 million is projected to be spent this year, and the remainder will be spent in 2021 and the first half of 2022. This project is still on target for mid-2022. Relating to the gain on sale of our chemicals and intermediates business earlier this year, we have paid approximately $10 million of taxes year-to-date and expect to pay approximately $365 million more all within the second half of this year. I'd like to point out that although these taxes are not related to current operations, they flow through our cash flow from operating activities on our statement of cash flows. Just as a reminder, we have a built-in capital loss within our approximate 49% interest in Venator that is available to us through the end of 2023. The eventual divestiture of these shares should provide a partial offset to this capital gain that should result in up to approximately $150 million in cash tax savings at the time of our divestiture of the shares. Our Huntsman share repurchase effort remains suspended. Since early 2018, under our $1 billion board authorization, we have repurchased approximately 26 million shares for approximately $580 million, representing well over 10% of our total shares outstanding. Our adjusted effective tax rate for the second quarter was approximately 18%. We project that our 2020 adjusted effective tax rate will be around 20%, and thereafter it will remain between 22% and 24%. From where we sit today, and certainly depending on multiple key variables, most importantly the degree of economic recovery in the second half of 2020, adjusted free cash flow for the year may be near break even to mostly positive. We remain committed to generating consistent strong free cash flow. We also remain committed to maintaining our strong balance sheet and a balanced approach to capital allocation. creating and returning value to shareholders. Peter, back to you. Thank you, Sean.

As we emerge from the economic carnage, what will no doubt be one of the most volatile quarters since the ill-fated whiskey rebellion of 1791, I think it is important to ask not just how we intend to survive, but rather emerge from this cacophony of chaos as a stronger and more able company. At the outset, Let me repeat what others have said. We're still dealing with very limited visibility, and uncertainties come and go as often as guidelines from the CDC. However, there are a couple of signs that are emerging, and I want to review with you what we are prioritizing as a company. As I look at our July orders and early forecasts, I can say that for the first time in the past six months, that all of our four operating divisions are showing anywhere from slight to modest improvements over the previous month. This leads me to believe that we are seeing a real recovery, and that while we may still have a long road ahead of us, that we are coming off the bottom. Having said that, I'd like to remind you what we said in the past quarter's call. We continue to believe that we will see a W-shaped recovery. As we see society reopen and people emerge from hiding, the economy will resume its recovery. Conversely, we will see a temporary spike in COVID cases. This sea sign will give us a mixed recovery of stops and starts. Globally, some geographies, such as China and much of Southeast Asia, are returning to more normalized conditions. I stated during our quarterly call in May that we were then seeing Europe emerging a few weeks ahead of North America. I believe that now the opposite is true, as the North American economies led by construction and auto are recovering a bit faster than the European Union. There are three fundamental areas in which we will be focused in the coming months. First, among these, is preserving a strong balance sheet. We will remain focused on managing our inventory as well as working capital and also to take advantage of what has been and likely will continue to be weak energy prices. Early in this crisis, as we pointed out in May, we unloaded some of our larger positions of raw material and we'll see approximately $20 million of benefit in the third quarter as we take advantage of lower-priced benzene and other raw materials. In the second quarter, we generated $38 million of adjusted free cash flow, largely due to effective inventory management of finished materials, as well as focused efforts to manage our receivables and payables. We've cut nearly $90 million from our CapEx for 2020. We've delayed projects to better coordinate them with this economic slowdown. We've suspended our share repurchase program until a time when we have clear market visibility. We are prudently suppressing costs while such uncertainty lingers. We have implemented a hiring freeze and a suspended merit and salary increases. In addition to strengthening our balance sheet, we have suppressed between $20 and $25 million of costs in the second quarter. Our second focus will be the implementation of a cost reduction and alignment program that not only will address the stranded costs from our recent divestitures, but also the opportunity to create synergies from our recent acquisitions in our polyurethanes and advanced materials divisions. During our last quarter report, we outlined several areas of focus, totaling $45 million of cost synergies, reductions, redeployment. We said that we were reviewing our structure and cost to allow us to obtain further economic efficiencies, better downstream growth. As we further this review, we feel confident about exceeding our $15 million of synergies with our recent CVC acquisition in our advanced materials division. We have increased our $15 million target for synergies from the Isonene-Lapolla acquisition to $20 million. We've also increased our target for cost optimization realignment from $15 million to $70 million. Combining these projects will deliver a run rate savings of over $100 million by the end of next year. We estimate that this will add approximately 1.5% to our adjusted EBITDA margin. Our third objective will be to continue to focus on building out our downstream and differentiated capabilities and product innovation. I think the right model for this is what we're doing around our newly formed Huntsman Business Solutions. We combine the best of our existing know-how in polyols and MDI with acquisitions of Demolec and Isonene Lepola to create the largest spray foam insulator in the world. This combination has exceeded our expectations, and we now move approximately 125 million pounds of commodity MDI grades into our own spray foam business, where we also consume our own polyols and amine catalysts from our performance products division. While I'm disappointed to see the effects that this pandemic is having on the aerospace business, I like the pipeline of products and innovation that we will capitalize on with regards to energy conservation throughout Asia. in the textile industry, across Europe with the Green Deal economic stimulus program, and in North America with insulation and renewable energy. We will continue to invest in lightweighting of materials, electric vehicles, power infrastructure, and as new aerospace applications come to market. We continue to expand in our formulations of adhesives, coatings, elastomers, and other products where we will see better than GDP growth as we displace other materials. We are also looking forward to making further global progress in waste reductions as we will be opening a polyester polyol facility in Taiwan that will not only facilitate our expansion of spray foam insulation across Asia, but when combined with our Houston facility, will give us the capability to consume the equivalency of 1.3 billion used PET bottles a year that otherwise would be going to a landfill. In short, we'll be focused on maintaining a strong balance sheet, expanding our margins, and building out a changing and improving company that will create value faster than these markets will recover. With that, operator, we'll open the line up to any questions or comments.

At this time, we will be conducting a question and answer session. If you would like to ask a question, please press Start 1 on your telephone keypad. A confirmation symbol indicate your line is in the question queue. You may press start to if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the start keys. One moment while we poll for questions. The first question comes from the line of Frank Mitch with Fermion Research. You may proceed with your question.

Good morning, and Peter, thanks for the history assignment. I've got to go back and figure out what exactly happened during the Whiskey Rebellion of 1791 and how germane it is to the current environment. So I appreciate the homework there.

Frank, I have no doubt, Frank, that your relatives were probably front and center in that rebellion.

I will definitely go back on the ancestry tree. So we're looking at a nice improvement in polyurethanes from 30 million EBITDA in 2Q to 100 million in 3Q. And you gave some color in terms of the improvement in benzene sourcing and volumes. I was wondering if you could step through a little bit more on the – on the ability to continue that trend in 4QM Beyond. How should we think about that recovery in polyurethanes, the sustainability of that recovery?

Yeah, let me just comment a little bit on the third. And as we start getting into the fourth quarter, my optimism will most likely get the better of me. But as I think about the third quarter, we ended June at somewhere in the low 20, let's say 23 sort of EBITDA for the month. And if I kind of triple that for the third quarter, you're at about a $70 million run rate. I'm assuming that the third quarter, will remain kind of the equivalency of June. Typically, July is a little bit better month. August is typically a slower month as you have much of the European and the U.S. markets take holiday during that time. And then you see something of recovery in September. So I couple those seasonal trends. with an idea that as I look at July, I think that we started July probably from a fundamental point stronger than we ended July. I think that there was a lot more enthusiasm going into early July. Markets were reopening. People were kind of going back to work and so forth. And then You saw this increase in the number of COVID cases. You saw shutdowns. And I think that affected consumer sentiment. So as I look at July, you know, I'm kind of started the month a bit more optimistic than how I finished the month. But as I said in my comments, I really do think this is almost going to be a week-to-week sort of a battlement. I mean, if we have a a really strong announcement about vaccinations or something in the next week or so. I think you'll see a lot of consumer optimism all of a sudden flow into the market. But anyway, so I take that $23 million of June. I triple that in Q3. I kind of come to $70 million. I look at the benzene benefit of around $20 million. That brings me to $90. And I think that over the third quarter, you're going to continue to see growth, and you're going to continue to see synergies, cost-cutting coming about in polyurethanes. I'd give that number probably around $10 million. So that's where I come up with $100 million. As I look in the overall fourth quarter, we won't have that $20 million of benefits coming from benzene, but I do think that you'll continue to see the momentum coming of insulation and a further recovery, particularly of footwear and some of the apparel. Now, I base that purely on, that's where my optimism may come in here, but I think that you'll see a more fulsome retail recovery by that point. Maybe you'll see something of elastomers coming back more aggressively, automobiles and so forth coming back more aggressively. And I'm hopeful in the fourth quarter that you'll continue to see the core business grow but the synergies and the growth of that business ought to offset the benzene. I would hope that we'll see a fourth quarter number in MDI at least that will exceed where we were in the third quarter.

That's very helpful, Peter. If I could just follow up geographically on the polyurethanes business, how are you seeing the trends play out? You mentioned that you start to see growth in China. Can you talk about that segment on a geographic basis in the outlook?

Yeah, I think that as we look at that on a geographic basis, I mean, as we look at construction insulation, which I think is perhaps one of our better focused businesses on a prior year basis, as we look at Q2, you know, for Asia, we really, we were up our prior year by about 12%. Europe, we're down by about 12%. And the America's down, you know, mid single digits. And, you know, as I look at that going into the third quarter, you know, I've got Tony Hankins here, who's our divisional president. So I'm going to ask him for some of the sentiments as to what we see going into the third quarter when we look at that on a regional basis. But I'll just say that as we look about what I would say are some of our stronger areas, uh in areas of concern when i look at year over year second quarter uh the the ace in the footwear and that's our uh adhesives coatings elastomers uh you know growth in china uh growth in china both year over year and over prior quarter but 30 to 40 percent down in the americas uh in europe which tells me a lot of that is footwear and you're seeing – shoes are one of those things that people typically don't buy online. They want to go in, they want to be fitted, and they want to make sure they're buying something. Until you see a retail recovery, I'm not sure that you're going to see a great deal of recovery in that area. That's why I say – it may be in the fourth quarter, latter part of third quarter, but I think that there will be a material recovery because in Asia, which is a month or two ahead of Europe and the U.S., you know, we saw 42% growth over the prior quarter when it came to these similar applications. Composite wood, again, we're seeing strong growth in the second quarter over the previous quarter in Asia and pretty much flat in Europe. The Americas where we have the majority of our composite wood, you know, we're down about 20% year over year and over the prior quarter. But again, we're seeing, I think we're finishing the quarter much stronger. In automotive, it's, you know, I think we started the beginning of the second quarter in a very tough position, down 60, 70 some odd percent. And we're ending the quarter, second quarter, in I think a much better condition of being down, you know, 25 to 30 percent. So promising trends, but still still some tough market conditions. From a macro basis, Tony, do you want to just comment on what we're seeing going into the third quarter?

Yeah, thank you, Peter. Frank, good morning. Let me just come back to your first question around China, where we see two real bright spots for our business. One is automotive, and we've seen quite a significant recovery in automotive compared to quarter two and quarter three last year. The premium luxury brands seem to be doing well. We supply BMW, Audi, and Mercedes in China. We've recently won the seating contract for the new Tesla Gigafactory in Shanghai. And as things stand at the moment, I would say that in quarter three, we're going to see 5% to 7% growth over the similar quarter last year. So automotive is doing well for us in China. The other area is insulation and construction. where the Chinese government are investing heavily in infrastructure to boost domestic demand. And again, the growth there over the last year we're seeing is very positive. So China has really been a V-shaped recovery in that respect for our business. As we look into quarter three, and right now we have pretty good visibility to the end of August. September, obviously, is very difficult to call with things that are going on. But Quarter three plays out the way we expect it to now. On a macro level, I would say that compared to quarter three last year, Asia is going to be down about 7%. North America is going to be down 5%, and Europe will be down 9%. So overall, we're projecting around about 7% down compared to quarter three last year, which is honestly significantly better than I was expecting a couple of months ago. So real positive trends here, as Peter said, in automotive, in construction. and insulation. And our furniture business, mattresses, have been selling like hotcakes in North America, particularly over Amazon and internet sales. We've seen a very significant uptick in our viscoelastic foam business. So all in all, things are looking much better than we expected a couple of months ago.

Thank you so much. It's very helpful. You're welcome.

Our next question comes from the line of Alex with KeyBank Capital Markets. You may proceed with your question.

Thank you, and good morning, everyone. In your construction businesses, did June and July benefit from pent-up demand that accumulated during the shutdowns, and do you see activity for new projects maybe flattening out or declining going forward or remaining robust?

I think that we're seeing a gradual, you know, recovery. I think that in construction, I wouldn't say that it is robust, but it is probably of all of our segments. You know, and in spite of the, you know, the opportunities we're seeing in spray foam and so forth, I just, you know, as we look at some of our areas like appliances and our footwear and ACE and so forth, those things are on retail. still struggling quite a bit. If you look at construction, a lot of the DIY materials are doing pretty good. And, you know, home building is pretty good. And a lot of the non-residential commercial buildings and so forth, I think these are really tough to project. And I think there's probably, as you can well imagine, if you're in the process of building an office building right now, you're probably putting the brakes on that. And you're probably wondering if you really want to be building office capacity. So in certain areas of construction, you're seeing, I think, much slower growth than you would in home construction.

Understood. Thank you, Peter. And your comments about benzene being a benefit in the third quarter and fading in the fourth quarter, Is this conservatism? Are you projecting kind of benzene prices to keep rising? What's kind of implied by that comment, and could there be perhaps upside to that outlook?

Well, no, I wouldn't say that there's upside to that outlook. I think where we benefited, when we looked at benzene in the first quarter, we were looking at – when you look at it on a quarterly basis, you'll see that there was a movement of around – you know, a dollar and change. When you look at it on a monthly basis, you know, there was some really severe volatility, especially when you look at it on a monthly basis by region. There was real severe volatility. And, you know, we learned in the 2008-9 recession when we were stuck, frankly, with too much benzene at the beginning of some, you know, when the alarm bell started to sound. When the alarm bell sounded here in the latter part of first quarter, we sold off our benzene inventories. We see that the price is going to be falling. I think that we probably did a better job buying in the early part of the second quarter than we normally would have done. And I think that we had an extraordinary opportunity during about a 30-, 40-day period when benzene prices on a spot basis were significantly lower than in the first quarter and are significantly lower than today. So, you know, and as we explained on our last call, that – inexpensive benzene that we purchased in the second quarter would flow through our economics in the third quarter. Now, as we look at benzene prices as they made it through most of the second quarter, now going to the third quarter, you know, those prices are more right around, you know, $1.50 to $2 per gallon. I think that's what they'll be probably for the next quarter or so. And I'm not sure that we're going to have any more benefit than what the market would be calibrating for, if you will. So I would say that $20 million is really more of a one-time benefit.

Thank you.

Our next question comes from the line of Mike Sison with Wells Fargo. You may proceed with your question.

Hey, good morning, guys. Glad you all sound healthy. In terms of the sequential improvement in polyurethanes, EBITDA to 100 million from 30-ish into Q, is that all volume, and do component MDI and polymeric system margins stay depressed sequentially in the third quarter?

Yeah, I think that it's largely, as we've said, I think it's largely a continuation of June going through the third quarter. I think that that you might see some component price improvement in Europe. We're out trying to push for some price improvements, but you might also see some erosion elsewhere globally. But no, if we look at that $100 million, we're not expecting to see a big price improvement during the quarter. And should something happen, I would just remind you, typically, if we were to successfully announce an August price increase, it wouldn't really be falling to the bottom line until the third quarter anyways.

Understood. And then maybe... Excuse me, fourth quarter. Yeah, fourth quarter. Right. Could you maybe just give us your perspective of where profitability for polyurethanes could get to? you know, once volumes sort of return and, you know, you've added a lot of businesses. It's a different business from, you know, five years ago. So, you know, what's the best way to think about and rebuilding some of the earnings power for that segment, hopefully in a post-COVID environment?

Well, I think that, you know, as we look at that business, I'd like to think that this is a mid-teens sort of an EBITDA type of a business. And, you know, when we start getting into, you know, exactly what does that mean on a dollars basis? I think a lot of that probably will depend on where you're up at DA and sales and so forth are. But I'd like to think that, you know, as we go back looking at our, you know, 200 plus, you know, million dollar sort of quarters, you know, and adding in the benefits coming from the building solutions and so forth, uh you know i'd like to think that this should be a 225 250 a short of a run rate business uh during normal times but i would just remind you that just seasonally i mean we talk about normal times uh you know that that still is going to be a fluid number great thank you thank you our next question comes from the line of kevin mccarthy with vertical research partners you may proceed with your question

Good morning, Peter. I appreciate the details that you provided on slide four with regard to several of the splits in the polyurethanes business. I'm curious, can you speak to the forward-looking outlook for the insulation growth in particular and sort of compare and contrast what you expect there in residential versus some of the challenges you mentioned in non-res on the office side?

Yeah, I think that, you know, once we kind of see a greater return to normalization, we expect about a 7% growth rate taking place in installation on average. And, you know, half of that's typically GDP driven and half of that's kind of replacement of other products. And so I think this is about what we've seen in the past, and we would expect this to be, you know, around those levels.

Okay. And then for Sean, I wanted to ask you about, I guess, capital deployments of the cash on the balance sheet at June 30th was $1.25 billion. I guess pro forma for the upcoming tax payment is closer to $900 billion. But can you just talk about sort of balancing the liquidity versus balance sheet efficiency moving forward and how you would expect that to evolve?

Yeah, Kevin, thanks. Look, you pointed out the obvious one, and that's the cash taxes that will go out the door the second half of the year. We also have coming due in early next year, and we have not taken it out now because it's not callable yet. we have about $500 million of debt coming due and it's callable in January. So that's a slug of cash that we'll probably use to reduce the gross debt that we have. And then we'll continue to be prudent in terms of how we evaluate and continue to look at the opportunities for alternative investment options as well as some points when markets bring back more certainty returning to share repurchases and the like. So it will be an ongoing exercise that we look to evaluate the use of those caches between M&A and other avenues available.

Great. I appreciate the call. Thank you both.

Our next question comes from the line of Jeff Sakakis with J.P. Morgan. You may proceed with your question.

Thanks very much. Can you talk about operating rates in the global polyurethane market And do you think that some of your competitors, I guess OneWa in particular, has restrained production and maybe those production rates lift up? How do you see the balance between profitability and production by the different urethane producers?

Yeah, let me just comment. As we think about capacity in the second quarter, I think that, you know, as you look at MDI capacity, as far as we can see, kind of what's published data out there, Europe's running at about 60% capacity. America's probably in about 70%. And Asia's probably about 70%. So globally seeing about a 66%. As we look at the Huntsman numbers in July, So again, these are just our numbers, and they're just for the month of July. Kind of give you some ideas to kind of, I'm not sure we're too dissimilar from the overall industry, perhaps with the exception of Asia. We see our European rates in July going at about 65%. The Americas going at about 75%. And Asia is, for us, about 95%. We're moving as much as we can right now in China. As far as what Wanwa and other producers are doing, all I know, Jeff, really probably what you know is what they're saying on their calls, and that is I think they're probably doing the same thing we are, which is matching production with demand. But I just frankly don't know what plans they would have or what plans they have at the present time.

Our next question comes from the line of P. DeJuvicar with Citi. You may proceed with your question.

Yes, hi, good morning. Peter, I mean, I think you bought CVC Thermosets in second quarter, and I think you guys paid roughly 2.6 times sales. So what are the normalized EBITDA margins at CVC, and how did EBITDA hold up in 2Q?

Well, as we look at the overall margins, it's around 30%, and that's where we would expect the business to continue to operate, if not better, once we're done with synergies. I would remind you, as we said in our comments, that CVC is largely tracking the rest of our advanced materials business, and they're down on their sales approximately 25% to 30%. And so as we look at the overall business, we kind of would be taking that sort of a macro view on the business as we proceed throughout the 2021.

Thank you. And then you compared recoveries between U.S. and Europe. But if you were to compare recoveries between, like, construction, automotive, and aerospace, can you just talk about that? It seems like aerospace is clearly lagging. Do you think it's possible to have a recovery in aerospace in 2021, or is that more like 2022?

No, I think that, I don't think you'll see a recovery in 2021. Again, that's just my opinion. On the slide that we gave you, I think it's slide six, there's a bottom left-hand graph there that kind of shows the total planes that are in service the total planes that are in storage, and then the total that are on order. And one of the things with the aerospace business is you see in 9-11 and you see during the economic recession, so one was obviously an economy driven by terror and war. The other one was an economy driven by, well, bad economics. And this one's an economy driven by a health crisis. You see that there's a three- to four-year recovery rate. And I would certainly hope that there would be a sooner recovery than three to four years here. But as I look in the past to try to figure out the future, I'm not terribly optimistic, especially when you look at the amount of planes that are in storage and the number of planes in total service. What we've seen in the aerospace market is just, it's unprecedented, what we're seeing right now. You cannot go back in time in the last 50, 60, 70 years and say, well, this is what happened then. My biggest concern is, as of just yesterday, with Boeing building at an even reduced rate of output, that the airlines aren't even taking the planes once the planes are ready to be taken. And they talked in the front page story yesterday of planes being stored off in Victorville and, you know, around the country, waiting for people to come pick up planes that were ordered and already built. So, again, I don't want to be overly pessimistic on aerospace. It makes up, you know, mid-teens of our entire business here. And there is going to be a core. And this is going to be a longer term. It's going to recover. And it's going to be a great business for us. But I think that of all of our areas of concern within the business, I think that that's probably the one where I have the most pessimism. And I think about footwear. I think about apparel. I think about even oil field services that I think are kind of some of those longer recovering sort of items. I think once retail... retail sales start to recover. I think you're going to see apparel and footwear not only come back, but it may actually come back with a vengeance sometime later this year or early next year. I don't think it's going to be next month, but I think you're going to start seeing as you start seeing retail stores and so forth reopen. So, yeah, my biggest concern would be around aerospace at this time. And I'm sorry, I forgot the other part of your question.

I was just about comparing construction and OEM.

Yeah, and I think, you know, OEMs in construction and especially we're talking about OEMs into the automotive markets and so forth, I think that you'll see a consistent recovery. I don't think it's necessarily going to be V-shaped, but I think you'll see fits and starts, but a consistent recovery over time in both of those areas with interest rates where they are. And people's aversion to getting on trains, subways, buses, and so forth might actually see automobiles doing quite well here in the next couple quarters.

Great. Thanks for the color, Peter.

Thank you.

Our next question comes from the line of Matthew Blair with Tudor Pickering Holtz. You may proceed with your question.

Hey, good morning. Thanks for taking my question. Peter, you know, I thought it was pretty interesting, your polyurethanes volumes. as well as EBITDA margins held up better than your peers in Q2. What do you attribute that to? Is that just a function of your more integrated business model and focus on downstream applications?

Well, I'd like to think that it's due to the competency of the senior management team of that division and Tony Hankins, but – sorry, Tony, I can't. I think that – look, I haven't tracked our competition – probably as well as I should. I'd like to think that more and more over our last couple of quarters, we've kind of pointed out the fact that we compete more and more with downstream applications and that this transformation of moving downstream is not going to happen overnight or even over a quarter or even over a year, but rather gradually. And I think that as we look at our ability to take you know, 120 million pounds during one of the worst recessions, economic calamities we've ever seen. And to be able to move that downstream, and we think about our total volume at 3 billion pounds of MDI, we're already moving kind of two-thirds of that downstream right now. So call it, you know, two-plus billion pounds moves downstream, which leaves us with kind of a billion pounds of what I would consider to be the polymeric commodity-grade materials And as we keep chipping away at that and trying to add value to that polymeric, that's not to say that all downstream is good, and it's not to say that all polymeric we want to get out of. There's some great downstream polymeric businesses that we want to stay in. But by and large, we need to stay focused on adding value to the pounds we produce. And I think it would be a real shame if we added – if our strategy was let's see how many pounds we can produce, and every year we've got to add, you know, 5%, 10% more capacity tonnage, I think we have a – I think Huntsman still has a long, long ways to go in adding margin on a per-ton basis. That's why in the Americas where we have our Project Patriot, where we're not adding more tons to America, but we're adding more downstream capability, more downstream tons. So, I think very clearly over 2021, 2022, our objective is not necessarily going to be how we sell more pounds, but how we sell better pounds and how we upgrade those pounds. And we'll incrementally expand our capacity as we can. And as we have opportunities to enter into new MDI capacities that don't type a lot of our cash, we'll look at those opportunities. I don't want to say we're averse to adding more pounds, but I think our focus needs to be on how do we add greater margin, greater consistency, greater reliability to the 3 billion pounds that we already have. And if we can get that 3 billion pounds operating consistently at a 15% to 20% EBITDA margin in the coming years, that will be a unique global franchise. They're not just sitting here saying that we produce more pounds, but rather the most profitable pounds. Sorry, long-winded answer.

Oh, no, it's great. Could you also touch on expectations for new global MDI capacity? It looks like Covestro has pushed back some projects, and IHS is now showing some Wong Wa projects also pushed back. Are you expecting any major MDI capacity to come online from now until the end of 2021? No.

I'd just be shocked if somebody was trying to add you know, tonnage in today's sort of market conditions, I think it would just be a colossal waste of shareholder money. But that's just my opinion.

Great. Thank you.

Our next question comes from the line of Hassan Ahmed with Alembic Global. You may proceed with your question.

Morning, Peter and Sean. Morning. Good morning. You know, question on slide 12, you know, very helpful getting those sort of charts about how you guys see year-over-year volume recovery. I mean, you know, maybe I'm nitpicking a bit, but, you know, as you look at July trends, they seem to be leveling off. And, you know, conscious of the fact that you said that probably this is a W-shaped recovery and things may change week to week sort of a thing, But my question is more about, you know, as you guys have provided us a Q3 forecast, you know, in that forecast, are you sort of assuming a leveling off of these sort of year-over-year volume trends similar to what you showed us in those charts for the month of July?

Well, I think it's an excellent question. That slide 12 is, I think, one of the best slides that Ivan had put together here. As I look at that, Simon, I think it's just going to be a really mixed bag. I think it's going to be some applications like aerospace and, you know, that are going to remain sluggish. Things like the textile, you'll see a gradual recovery. Things like the building services solutions that you'll see an improvement. But by and large, again, when we look at that $100 million in the third quarter, we're assuming that third quarter is going to see something of a plateau. off of the end of the second quarter. And, you know, I think there'll be some gradual growth that will be taking place there. You know, in certain applications, it'll be offset in other areas. I think the growth will outweigh, the pluses will certainly outweigh the negatives. But, you know, we're not here saying that you're going to see this big V-shaped recovery in the third quarter and we're going to go up through the roof. I think it's just going to be a grind forward and upward And, you know, we'll take two steps forward and one backward. And it will just depend on where we are in the portfolio.

Understood. Understood. Very helpful. And as a follow-up, sticking to the whole volume sort of theme, you know, one of the earlier questions was around, you know, the volumes you guys saw in polyurethanes, MDI, you know, down 15% or so. And if I were to take a look at some of your Western competitors, I think that number was closer to 25%. And I know you talked about being further downstream relative to your competitors and the like, but is it also fair to assume your Asia exposure? Just because obviously you talked about operating rates in Asia being far stronger than they were in, call it Europe or North America. So, again, I'm just trying to get a measure of, you know, that 15% to 25% delta. I mean, how much of it came from differentiation? How much of it came from your geographic footprint?

I think it's a good combination of both. And, again, I look to our competitors with a great deal of admiration and respect. I'm pointing out differences here. I'm not pointing out being better or worse or anything else. But I think as we look at our Chinese competitors, centric Asian footprint. One of the things that we've tried to do with that Asian business is to focus on domestic Chinese consumption of MDI. That's harder than the export segment of MDI. It's getting hit very badly right now. But in order to service that domestic market, you've got to have Chinese consumers customer service. You've got to have Chinese tech support, R&D, sales, marketing. You have to build a real business in China. And I think that over the years, we've been successful in doing that. And I think that right now, that's benefiting us. You remember in the fourth quarter last year, not everybody was so excited about our Chinese exposure. But right now, I think that it's quite good. I think that also that our HBS business, our building solutions business, is we look at that business going forward. I think that we have a lot of opportunities there, not just to manage costs and synergies and so forth, but to take more pounds of our polymeric and pull that through. I think that the focus of that business is obviously going to be the North American growth opportunities that we have. That's the center. It's the foundation of that business. But I'm really excited that, you know, in the first quarter that we moved that tonnage overseas into Asia and Europe, We saw a positive EBITDA. It was quite small, but later this year, we will be opening the polyester-polyol facility in Taiwan, and that will facilitate further insulation growth throughout greater Asia, and particularly China. So I think it really is a combination of construction downstream and in Asia. And so as we look in the second quarter, China was up 14% from a year ago. And, you know, greater Asia was down about the same amount. And so as you as you look at that, you know, so Asia all in all was up about 8 percent. You know, so, yeah, I think having that China centric profile and position going all the way back to the days when when Tony Hankins was, I think, the lone polyurethane employee in China at one point, you know, of really building that out over the last 30 years now.

Very helpful, Peter. And as Frank's looking up the history of the Whiskey Rebellion, you know, I quickly looked it up as well, and I guess it lasted three years. So hopefully this downtick doesn't last as long.

Yeah, I think that we'll resolve this much quicker than my forebears who were involved, no doubt, in that Whiskey Rebellion as well. Thank you so much, Peter. Operator, we're at the top of the hour. Why don't we take one more question, and we'll wrap it up.

Our next question comes from the line of John Roberts with UBS. You may proceed with your question.

Thank you. I'll keep it to one. On slide nine, the 62 million negative variance in variable margin, is there a way to roughly parse that on how much was the benzene chain margins versus the propylene chain margins versus the ethylene chain margins or the, again, the polyurethane segment versus advanced materials versus the performance products?

Yeah, probably not to go into the level of detail you're asking for there, John, but clearly, as alluded to in my script, the lion's share of that entire margin variance does come from polyurethanes, and it does come from that polymeric end of the equation, that kind of one-third portion of the business that we sell that has much less resilience in terms of pricing than the downstream. So most of that is coming from the polymeric end. And there's very little effect from the remaining businesses. Margins held up well. The downstream prices held up well. And so that's probably the best color I can give you at this stage on that piece.

Very good. Thank you.

Ladies and gentlemen, we have reached the end of the question and answer session. As well as the end of this conference call, you may disconnect your lines at this time. Thank you for your participation and have a great day.