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.