Huntsman Corporation

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

Thank you, Victor. Good morning, everyone. Welcome to Huntsman's third 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 third quarter 2020 via press release and posted it to our website, Huntsman.com. We also posted a set of slides to 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 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 on the 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 slide number three. Just at EBITDA for our polyurethanes division, the third quarter was $156 million versus $146 million a year ago. This is better than we had anticipated when we gave an update in early September as demand trends in nearly all of our polyurethane lines, including construction, automotive, and elastomers came in better than expected. Margins also improved better than we had expected given tightening MDI supply demand conditions throughout the quarter. These positive market trends and conditions have continued into October. The third quarter improvement in adjusted EBITDA versus the prior year was driven primarily by the ongoing integration of our Isonene-Lapola acquisition at lower fixed costs, which more than offset lower margins year over year. We also benefited from lower benzene costs. Our differentiated volumes grew 2% and our component volumes declined 4% in the quarter compared to the prior year. Throughout the third quarter, variable margins in our differentiated business remained relatively stable. At the same time, variable margins in our components and polymeric systems improved off of the multi-year lows that we experienced in the second quarter. The notable increase in component MDI prices over the past couple of months have been primarily driven by real global demand improvements as economies continue to recover from the second quarter global COVID-related lockdowns, as well as from various fits and starts and temporary outages within the industry. Our China business, where we have less in downstream differentiation than in other regions of the world, has benefited most from the higher prices. Europe has also benefited, but to a lesser degree. Our higher downstream differentiated margins continue to show stability, and importantly, we saw meaningful improvement demand in our higher margin elastomers business and within automotive. As is typical, there have been several planned turnarounds within the industry. As the industry responded to improving demand trends, there have been various production disruptions. As we reported a few weeks ago, we have our own production issues in Geismar, Louisiana, due to a third-party supplier of industrial gas having a mechanical failure, which we estimate will impact us by approximately $15 million in the fourth quarter. As the various temporary production issues across the industry get resolved, we would expect that industry utilization rates will move back to a more balanced environment versus the seemingly temporary above average tightness that we are presently experiencing. However, we do see demand improving and fundamentals well intact. Construction, including insulation, is strong. Auto is rebounding well, and nearly all our other end markets are seeing positive trends subject to uncontrollable and unforeseen events. We would expect component margins to normalize at reasonable levels. We've shared before, we estimate that roughly half of our polyurethane business is impacted by trends related to construction, with our largest direct exposure being within our insulation business, which makes up close to 40% of our global polyurethane segment. Our portfolio is well positioned to benefit from the expected growth within the global insulation market, which is our single largest market. and we expect that it will be one of our highest growth markets over the coming years. A fast-growing end of our global insulation business is our industry-leading spray foam business, Huntsman Building Solutions, which continues to exceed our expectations with the delivery of meaningful synergies from the recent Isonene-Lapola acquisition, as well as from strong market conditions. We expect the $20 million in identified synergies to be achieved ahead of schedule and be largely completed by early 2021. Continued growth in North America will be supplanted by an aggressive effort to accelerate growth by scaling up this business internationally. Just to give you some additional interesting facts about spray foam, an average home requires about 1,500 pounds of spray foam materials to insulate it. That currently sells for roughly $1.30 to $2 per pound, depending on the type of application utilized. Additionally, our polyurethane spray foam utilizes our eco-friendly Huntsman-produced Polyol, which uses the equivalency of roughly 10,000 PET bottles per average home otherwise destined for landfills. Polyurethane spray foam is an economically compelling, structurally sustainable, and environmentally friendly alternative to traditional insulation products. We believe that our polyurethane spray foam will see strong growth for the foreseeable future, provides an optimal solution in a world that is increasingly sensitive to green and sustainable solutions, where building standards are becoming more environmentally stringent. Today, we estimate that our polyurethane spray foam only represents about 18% of the North American insulation market, and substantially less than that globally. The opportunities for above-market growth in North America and globally seem promising. As we sit here today, looking into the fourth quarter, we believe the favorable trends of our global construction and automotive markets continue. We also expect to see continued improved components and polymeric system margins. Roughly offsetting these dynamics will be the $15 million impact from our partial Geismar outage and some typical seasonality. Putting all this together, we would expect that our fourth quarter polyurethane results to be in line with the third quarter. Turning to slide number four, our advanced materials business reported adjusted EBITDA of $25 million down from $51 million in last year's third quarter. The decline in adjusted EBITDA was primarily a result of revenues being down in aerospace by 68% year over year. The aerospace market remains depressed. And while we believe it has bottomed in the third quarter, we do not expect it to begin to start to recover until the supply chain fully destocks and adjusts to expected much lower production build rates over the next couple of years. However, our advanced materials segment should be viewed in two segments. Looking beyond the depressed aerospace segment, there is a much better recovery story within our other formulated advanced materials business. Our specialty businesses, excluding aerospace, improved throughout the third quarter with revenues down only 15% and EBITDA down 21%. This includes our Indian do-it-yourself DIY business. which was heavily locked down during the first half of the quarter. Our sales into the power, electronics, transportation, industrial markets strengthened throughout the quarter as our EBITDA improved by 50% from the beginning to the end of the quarter. And this momentum has carried into October. The integration of our recent acquisition of CVC Thermosets is on track and delivered a modest contribution to EBITDA during the third quarter of about $2 million. As we stated in our last earnings call, the results of this acquisition are being negatively impacted by a needed inventory adjustment of about $5 million in the second half of this year. With cost synergies expected from integration efforts underway, we expect 2021 EBITDA related to this acquisition to be close to 2019 levels, despite approximately 15% of the business being exposed to the aerospace market. We remain confident that we will achieve $15 million run rate synergies by the end of 2021. We would expect to exceed this target as we move through 2022 and beyond as we anticipate identifying additional cost savings and commercial opportunities. Looking toward the fourth quarter, we would expect our non-aerospace specialty businesses EBITDA to be close to the same levels as prior year and for CBC to make a modest contribution. However, on the back of continued weakness in our aerospace business, and the sale of our Indian DIY adhesives business, we expect the advanced materials segment EBITDA to be slightly lower than the third quarter. Just to be clear, on a pro forma basis, meaning if we were to include the DIY business in our estimates for the fourth quarter, our adjusted EBITDA for the advanced materials group would likely be modestly higher in the fourth quarter. Let's turn to slide number five. The performance product segments reported adjusted EBITDA of $36 million compared to $38 million in last year's third quarter. The decline in EBITDA was largely due to approximately 19% lower volumes partially offset by lower fixed costs. Our performance amines volumes, which make up about half of the performance product segment volumes, declined by approximately 6% in the quarter versus the prior year, primarily due to volumes in the gas treating. Yet their related EBITDA increased approximately 11% with lower costs and a favorable product mix. Strength in performance amines comes as a result of specialty products used in composites going into the Chinese wind markets, coatings and adhesives going into construction markets, and our low-emission catalysts that provide VOC-free solutions going into markets such as insulation, bedding, and automotive. Volumes and margins in our ethylene amines business continue to be weak due to the overall economic environment and competitive pressures. Overall margins in MLAIC remain relatively stable, and volumes that go into the construction-related markets are now trending positively. Despite the fourth quarter being historically the weakest quarter of the year, we expect performance products adjusted EBITDA to be similar to the third quarter as its core markets continue to recover. Let's turn to slide number six. Our textile effects division reported an adjusted EBITDA of $8 million for the third quarter. While volumes in the quarter fell approximately 13% versus last year's third quarter, we did see a significant improvement in volumes and EBITDA versus the second quarter. The volume recovery we are seeing is being led by our home textile products and our athleisure, sportswear, and protective apparel. We are also seeing a gradual pickup in demand within our automotive textile products. We are optimistic that the industry will continue to recover over the coming quarters, generally in line with the reopening of retail stores and pent-up consumer demand. We believe that inventories in the supply chain are on the tide end. As our customers gain more confidence around the eventual recovery, we expect to see more benefits from restocking as well. Our offering of sustainable products in textiles continues to gain momentum. Just one specific example would be our range of patented Avetara dyes, which allows our customers to reduce water and energy consumption by up to 50%. We are focused within textiles and throughout all of our portfolio of developing profitable, sustainable solutions for our customers. While fourth quarter EBITDA and our textile division will be down versus the prior year, we expect that this business will continue to show further recovery and improvement versus the third quarter. Before sharing some concluding thoughts, I'd like to turn a few minutes over to Sean Douglas, our Chief Financial Officer. Sean?

Thank you, Peter. Turning now to slide seven. We were pleased to see a better than anticipated recovery during the quarter. Just to give you a flavor of that recovery, we saw monthly adjusted EBITDA more than triple from June to September. At a high level, our adjusted EBITDA is down $27 million year over year. As explained by Peter, this is largely attributed to the significantly depressed sales within our commercial aerospace business and to still recovering demand for retail apparel within our textiles apparel business. But for polyurethanes, volumes were down year-over-year in all segments amidst the global recovery that has been underway. Though now improving, overall margins were a bit weaker year-over-year, more than offset by lower fixed costs largely as a result of our responsive suppression to global COVID-related impacts. Turning to slide eight, we entered the quarter with approximately $2.5 billion of liquidity including approximately $1.2 billion of cash. In relation to the sale of our India-based DIY business, we expect to receive $257 million of cash within the next week. We expect tax leakage to be just under 10%. We also expect to complete the sale of approximately 42.5 million shares of Venator near year-end for approximately $100 million. This includes cash paid for a 30-month option for the potential sale of the remaining approximate 9.5 million shares at an agreed price of $2.15 per share. The transaction is subject to regulatory approvals which are progressing and on schedule. The capital loss on this transaction unlocks cash tax savings of approximately $150 million relating to the taxable capital gain on the sale of the chemicals, intermediates, and surfactants business that was completed earlier this year. Remaining cash taxes owed on this sale are approximately $185 million to be paid in the fourth quarter of this year. Depending on the timing of completion on the sale of the Venator shares, the net amount to be paid in the fourth quarter may be reduced this year by approximately $150 million. If the transaction closes subsequent to year end, the $150 million of cash tax savings will be received near the end of 2021 or the beginning of 2022. We are doing our best to close this transaction before this year end and are on schedule. We generated $189 million of adjusted free cash flow during this quarter. This is more than we had anticipated for the quarter versus when we addressed you during our prior quarter's earnings call. In addition to our adjusted EBITDA being stronger than initially expected, with a sharp inter-quarter recovery, more surprising was the increased cash provided by the change in working capital. Not only did we see a resulting larger drawdown of inventory, but also a bigger increase in payables than was expected. Our day's inventory dropped by an additional approximate five days than was expected, with a similar increase in days payable than was anticipated. Furthermore, we were effective in managing our receivables through this COVID canyon, and DSO also reduced by a few days. As we shared with you last quarter, we effectively managed our inventories lower at the onset of COVID. Now with this improved recovery, our inventory levels are particularly tight. As we sit here today and look into the fourth quarter, we do not expect the typical seasonal release in primary working capital as typically we experience. In fact, depending on the nature of the ongoing recovery, we expect to see a modest build in inventories For your awareness, we have a planned large-scale turnaround scheduled at our Rotterdam MDI site for March-April of next year. This occurs every four years, the estimated duration of which is between 40 and 45 days. The estimated cash impact will be around $40 million, and the projected EBITDA impact should be under $10 million. We typically build inventory ahead of turnarounds. During the quarter, we spent $54 million in capital expenditures. For 2020, we estimate that our total spend on capital expenditures will now be between approximately $250 and $255 million. This is approximately $25 million more than we had previously guided. The increase is largely a result of moving forward some deferred payments on our Geismar Louisiana splitter for a total spend in 2021 of approximately $55 million. With respect to the polyurethane splitter, we still estimate a total spend of approximately $175 million, or just over $180 million, including capitalized interest, and a startup in mid-2022. That leaves approximately $80 million of spend on a splitter in 2021 and the remaining approximate $30 million of spend in 2022. In other words, in total, we are still on budget and still on schedule. We are days away from renewing our primary insurance programs. Worth flagging is that the global insurance markets are experiencing an atypical shortage of capacity. It's not only specific to Huntsman, but it will impact our annual insurance premiums, by as much as approximately $15 million, all of which are paid in the fourth quarter. Putting this all together, we still anticipate a modest positive adjusted free cash flow for the year 2021. During the quarter, we did not repurchase any shares, but we did pay off a term loan of approximately $100 million. We have a U.S. equivalent of approximately $520 million of Euro-denominated notes maturing in April of next year and callable in January, which we currently expect to redeem next year with cash on hand. This will reduce our interest in 2021 by about $25 million. We remain focused on maintaining a strong investment-grade balance sheet, being disciplined, sensible, and balanced in our capital allocation strategy, and with the recovery underway, generating consistent, strong free cash flow. Peter, back to you.

Thank you, Sean. As we move into the final months of the year, I think it's worth looking back on some of our objectives and where we are in our effort to create more shareholder value. Beginning in January, we sold our chemicals intermediate business for $2 billion. This further transformed our balance sheet and allowed us greater flexibility to pursue aggressively our ability to grow the more strategic ends of our business. This transaction also allowed us to take advantage of tax losses and that we are able to realize with the sale of the remainder of our stake in Venator, which we announced this past August. We are still on track of seeing a closing of this transaction, hopefully before the end of the year. We do not see any major obstacles getting this completed by then. In May, we closed on the CVC thermal set specialties business as we sought to further expand and diversify our advanced material division. While we're disappointed to see the slowdown of our commercial aerospace business due to COVID-19 pandemic, the CVC acquisition will help fill the void created from this temporary loss in sales and EBITDA. As this valuable aerospace business begins to recover over the next year or two, it will be additive to what we are building with the CVC acquisition and other ends of our advanced materials division. We are also well on track to deliver the previously announced $15 million in synergies. In July, we announced our initiative to realign our costs and streamline our operations. At the time, we outlined $100 million of savings from these efforts, which includes acquisition synergies. We are now targeting approximately $112 million. I would expect this number may well grow. We expect some $20 million to be realized by end of this year, and we should be running in excess of $100 million by the end of next year. Last night, we announced the sale of our Indian-based DIY business, Tepidolite, in an all-cash transaction valued at potentially $285 million. Full transaction value represents a multiple of 15 times our 2019 EBITDA. Huntsman will receive $157 million in cash at closing, which is expected to take place within the next week. Then we will have the potential to receive up to an additional $28 million in cash within 18 months, depending upon achieving certain revenue milestones that approximate 2019 levels. We built this business from nothing over these past 15 years and have taken this business about as far as we can without material expansion or investment. Piddalife is a respected adhesives business based in India and is well positioned to now take this business to the next level. This is a win-win transaction that unlocks significant value for Huntsman that we will redeploy in the near term to further reshape our advanced materials business. Between the multiple of our sale at the beginning of the year and of our intermediates business, now this India-based DIY business, these two divestitures should demonstrate the quality of our businesses and divisions. We will continue to assess other assets in our portfolio, but given our balance sheet and global footprint, one should expect more acquisitions than divestitures. Lastly, I'd like to point out the performance of our newly formed Huntsman Building Solutions. This is an entity that we formed through the acquisition of Isonene, Lepole, and Demelec, two polyurethane spray foam businesses that we further combined with our polyols and polymeric MDI production. In the past year, we have created the world's largest polyurethane spray foam business, the world's best insulin, and the fifth largest insulation company. We are committed to We committed to you that we would realize $100 million of EBITDA by the end of next year. I'm pleased to say that during the third quarter, we hit that runway rate well ahead of our forecast. At the beginning of this COVID crisis, we told you that we would emerge from this mess a stronger company than when we entered it. At the present time, while I like the demand and margins going into the fourth quarter, we are also aware and keeping an eye on the rapidly changing market conditions, particularly in Europe, where the number of COVID cases and the national lockdowns have all increased in the past two weeks. The coming days, we will see the detrius of over a thousand-point drop in the stock market this past week, the effects of Hurricane Zeta, and the results of an election where a much-loved Donald Trump will either prevail or lose against a much-hated Donald Trump as America either approves or disapproves of his performance. Either way, this quarter is shaping up to be very interesting. One thing is certain, we will continue to focus on what we can control. We will continue to support our strong customer base, keep an investment-grade balance sheet, control our costs, and add value to our shareholders with smart capital allocation, selective divestitures, and bolt-on acquisitions. With that, operator, why don't we open the line up for Q&A?

Ladies and gentlemen, we will now have our question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. For any participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star keys. One moment, please, while we now poll for questions. Our first question comes from Bob Court with Goldman Sachs. Please proceed with your question.

Thanks. Good morning. Good morning, Bob. Peter, maybe ask Tony a question. I think you mentioned he was on the line there There's certainly been some volatility in production curtailments, as you mentioned, in MDI. But I also sense, talking to investors, a lot of varying consultants' opinions on how much MDI is coming into the world over the next couple of years. I was wondering if we could talk maybe specifically, Tony, what your business intelligence is telling you about supply capacity coming into the MDI market in 2021 and to the extent we have a normal world what you think the demand growth would be in 2021. Thanks.

Bob, good morning. Good to be with you. I see the market to be very balanced right now and over the next two years. There are no major new capacities coming into the market, some debottlenecking. But overall, I think that demand growth and supply growth will be matched and very balanced. And as we exit quarter three, we're seeing roundabout, you know, within our business anyway, a 3% to 4% MDI growth over last year. The recovery across all sectors has been really impressive through quarter three, particularly in our insulation business. And I see that continuing. I mean, you know, unforeseen circumstances with COVID and what that may do in quarter four, but right now we're not seeing it. We have strong order patterns and... I think as people are aware, there's a lot of maintenance going on right now, and I would estimate across the global business, right about 20% of MDI capacity is currently idle with maintenance. But coming back to your question, Bob, I see the situation to be very balanced, and I don't expect the supply to exceed demand over the next 18 months to two years. Great, thanks.

And Peter, if I could ask sort of broadly through the portfolio, You mentioned MDI and its superb insulating properties, but as we start to think about green energy and new deals and stimulus for those sorts of things, it would seem you've got wind, you've got insulation, you've got construction insulation, residential insulation. How can you guys tap that theme that's continuing to grow in significance in terms of energy conservation or new energy? Thank you.

Well, Bob, I think that as we look at the entire Green New Deal, there's a lot of it that I have some consternation about, to be honest with you. But there's also a lot of it that when we look at it, particularly around construction and what we see in insulation and OSB, As we continue to make progress in various grades, you're going to see in the coming year or so fire retardancy and so forth coming into a lot of these products that will get better properties. We're environmentally coming up with a number of opportunities here, and I think particularly around energy conservation. If you look at our means business, what we're doing to take sulfur and a lot of the bad actors out of gas treating. If you look at our polyurethane catalysts and other products that take volatile organic compounds out of a lot of the chemistries of today, look at the water conservation and color conservation. The chemical industry needs to be, in my opinion, And Huntsman in particular. I think we need to be more bold in what we're able to do as providing solutions in transitioning an economy to be more green and to be cleaner and more profitable all at the same time. Believe me, I think regardless of who wins, we have internal ideas and strategies and have already met with lobbyists on both sides of the aisle where we'd like to be part of a solution going forward, not waiting for Inauguration Day, but it ought to be, you know, I hope that our influence will be felt right after the election because I think that we bring a number of solutions to the table. Great.

Thanks very much. Thank you.

Thank you. Our next question comes from Frank Mitch with Fermium Research. Please proceed with your question.

Yes, good morning. And for what it's worth, my vote would be for a much-loved Ivan Marcuse versus the counter there. A couple years ago, you guys did a really good job of detailing the windfalls from some of the outages on the MDI front and how that impacted polyurethanes. You know, is there a way that you could kind of quantify what impact, if at all, that showed up in the third quarter?

Specifically around what – of the underutilization of production of MDI?

Well, I mean, obviously we saw some – you had, you know, some demand constraints, but, you know, a lot of competitors had – downtime, we saw a bunch of force majeures announced. And, you know, as you indicated, in early September, you thought you would do 40 million higher of EBITDA in polyurethanes, and it came in a little bit higher than that. I would assume that some of that was related to the force majeures, was it not?

Yeah, I think that as we look at it, I mean, as I tried to articulate in some of my comments, I think we're going to see this most profoundly in China where we have more commoditized production versus North American where we have more formulaic production. And, you know, and then we look at taking a lot of our commoditized production of the polymeric and moving it downstream into the insulation business. I mean, ideally, you know, we'd like to be moving as much of of the product that is most impacted by these sort of shortages. We'd like to be moving that product further downstream into spray foam and others. I think that as we try to put a handle around, an economic handle, if you will, I don't like using the word spike because that would denote that we're going to be up X dollars one quarter and down X dollars on another quarter. But I think that the overall impact of these shortages and pricing and everything would probably be somewhere around $20 million on a quarterly basis. And as we look at that going into the fourth quarter, we'll probably see the full realization. I think it probably ramped up in the third quarter, that amount. At the beginning of the quarter, I'm not sure you would have seen a whole lot of that. By the fourth quarter, you probably ought to see that in full effect of around $20 million. But again, it's a really tough thing to calculate, because as you get shortages on a global basis, Bear in mind that you're looking anywhere from 30 to 60 days to be able to take MDI from point A in Asia or point B in Europe or the US and move it to other areas of the world. So, you know, people somehow think that you can instantaneously move product globally. That's just really tough to do. And how much of this is a spike in margins and pricing and so forth? How much of it is due to recovery? of demand, how much of it is due to outages and so forth. At the end of the day, it's tough to tell.

Yeah, fair enough, fair enough. And then if I could, you know, kind of interesting after the first quarter conference call, I think, you know, some of the discussion was around how, you know, the pandemic might impact M&A and, you know, move it to the side. And obviously you guys have done a heck of a job remaking the portfolio or making some changes here or there via M&A since that time frame. And so with the announcement of the sale in India, I think you indicated when talking about advanced materials that you're looking to redeploy that money into M&A in that front. What sort of time frame, what sort of size are you looking at? Any sort of color you could provide there would be great.

Well, you know, we're in the process right now of actively reviewing a number of opportunities. And as we look at this, you know, we want something that's going to have synergies, hopefully some product pull through, some synergies around that, something that will be additive to our technology and something that we can globalize. And as we kind of look at that matrix, you know, we're looking actively right now at multiple options. And, you know, I would say that, again, I stressed in my comments that we'd like to keep an investment-grade balance sheet. And we certainly don't want to stress, you know, those statistics. So, yeah. I mean, it's a bit too early for us to name potential candidates here, but I think we also mentioned that this acquisition would likely be in the advanced materials segment as well.

So that's something we can look forward to, kind of the earlier part of 21, you think?

I would hope the sooner the better, but, you know, the way that transactions go, it's just they kind of have a life of their own.

Perfect. Thanks so much.

Thank you. Our next question comes from Mike Season with Wells Fargo. Please proceed with your question.

Hey, guys. Nice quarter. Peter, when you think about the insulation business and, you know, there are folks who think that housing will remain pretty strong for the next couple of years given the I think there's a trend to maybe move in the suburbs. Do you think this is a business that grows double digits, high single digits? So what's the cadence of growth as we head into 2021?

I think that you're going to see high single digits. But as you look at this, I keep a couple of things in mind. First of all, we look at spray foam in general. That's about 18% of the North American insulation market. That's for the entire spray foam industry. That's not just Huntsman. I may have misspoken my comments here, leaving a word out. That's entire industry supplying and not just Huntsman. But as we look at that spray foam opportunity here, if you were to look at probably one of the easiest ways, we talk about the greening economy. If you were to look at one of the easiest ways to conserve CO2, just under 50% of all energy consumed globally is consumed to adjust the environment of our homes and offices. And insulation is one of the easiest ways to do that. The studies that we've done internally with our own customer base of people in spray foam, you're looking at heating bills that are cut in half with people that take that cheap pink garbage out of their attics and they put in our high-quality spray foam. And so that's not a sales plug, by the way. And so as we look at it, you know, there's really, through very little effort, you can have a real impact on the environment. If building standards were to just marginally change or were to match much of what you see in Europe or even in many of the states in the U.S., and you were to see a build rate of a million homes, which is down significantly from where we are today. I'm kind of taking a worst-case scenario of a million homes annually, and we were to have a 20% penetration and something like that, you would see this business in very short order in the next couple of years doubling. But I think on a realistic, I mean, if we just kind of look at present market changes without any changes in legislation or anything else, this business we think will continue to grow in very high single-digit sort of numbers. And that's on a global basis.

Got it. Thanks. And then I guess a quick one for Tony. I think you said 20% of global capacity is out. How long do you think it'll take to get some of that capacity back online and then When you look at what pricing is now relative to last year sequentially, it's up quite a bit. Can you maybe talk about how the timing flows? I know you mentioned, Peter, $20 million maybe this quarter, but will you see more of that effect in the first quarter versus this quarter? Sure.

Mike, just coming back to your question with 20%, so it's hard to tell because these plants around the world and our competitors clearly have a better view than I do on this, but I think that some of that's going to come back in quarter four. Our Geismark plant is scheduled to come back online on November the 15th. The plants, when they come back, it takes some time to get them back to full operating rate. I think we're assuming that most of that outage is going to continue through quarter four, and then we'll slowly start to work its way back into the market in quarter one of next year. But our history has shown that these plans take longer to come back than people forecast. It is a complicated process to get an MDI plan back on stream, and it always seems to take longer than we expect. So I think you should assume for the next three to six months, that capacity is slowly going to work its way back into the market.

And I would just like to clarify that when we talk about that $20 million, that is a fourth quarter number, and that's assuming that the pricing that we're seeing today holds out through the quarter. And I would say that when you look at how much of that was in the third quarter, it would have been felt, you know, very little in the final part of the third quarter.

Got it. Thank you.

Thank you. Our next question comes from John Roberts with UBS. Please proceed with your question.

Thank you. Peter, do you have any thoughts on how quickly performance products in the non-aerospace part of epoxies can get back to pre-COVID levels?

Yeah, I think that as we look at it, I think by the early part of next year, I think that if present trends continue, and again, I want to emphasize that if you were asking me that question earlier, 10 days ago versus today, you know, kind of pre-European lockdown versus post-European lockdown. There's just a lot of noise and static in fourth quarter, and I'm generally a pretty optimistic person. So, I mean, take that for what it's worth. But as we look at the non-aerospace segment of advanced materials, I think that you're, you know, we're somewhat around a 90% of where we were today. We're somewhere about 90% of where we were a year ago. And I would expect that to be back on, you know, year over year, non-COVID sort of volumes by the early part of next year. Again, assuming that we continue recovery, not that we fall back down. The aerospace segment of that, you know, just again, looking at what's been said by Boeing and by others. I think that you're simply looking – I'm looking at kind of a two-phased approach. One is how long does it take us to get back to a post-COVID normalized build rate, if that makes any sense, because right now I think that Boeing essentially is going to have to stop production and just clear the inventory of planes that are sitting around Victorsville and all over the place waiting for customers to take those. Once the existing inventory of planes clear out, then you go to what I would call that new normal, which is a greatly reduced production rate. And then probably a couple years down the road, you kind of get back to a pre-COVID sort of a level of flying again. And what that world looks like and which planes are actually put back into the fleet and so forth, time will tell. But the non-aerobusiness of advanced materials continues to do well, continues to grow well, and I think we'll have a lot of applications as we look to that excess capacity going elsewhere.

And then could you just remind us what percent of the polyurethane segment sales are component in polymeric MDI that's not protected by spread margin contracts?

In the U.S., and again, those spread contracts are only about – virtually all that's in North America, and it's about 60% of that is – of the Paul American is under contract. Thank you. Again, that's in the U.S. Yeah, that – we haven't really – that really hasn't caught on in other parts of the world.

Thank you. Our next question comes from Alex Yefremov with KeyBank. Please proceed with your question.

Good morning, everyone. Peter, your current domestic spray foam business, I think you're saying about 100 million normalized EBITDA run rate. How should we think about the international opportunity? Can you give us some idea on how soon you can get there, maybe some targets for next year, next two, three years?

Well, I think that over the next couple of years, I think we're really focused in over the next 12 months. We look at the EBITDA of that business. I would say that, you know, I think there's a real opportunity today. About 10% to 12% of that EBITDA is coming from international markets. And, you know, it would be great if we could see that go up to a quarter. You know, it's an enormous opportunity for us. And we look at the penetration of polyurethane spray foam in Europe and in Asia. We already have the infrastructure there. We have the blending capabilities. We have the people there. You know, we have the distribution networks throughout Russia and China and Europe and Southeast Asia. So I would hope that over time we're going to continue to see that strong single-digit, you know, pushing 10% sort of growth on an annualized basis in North America, and hopefully we ought to see better than that internationally once we're up and operational. But we're starting at a very low basis there, but it still is EBITDA positive even today.

Thank you. And a question for you, Peter, or for Tani. Some of the trade rags are reporting strong demand for rigid insulation panels in Europe. Is this a normal cyclical recovery after lockdowns, or is this also a result of maybe the secular impact from some of the EU policies?

I think there's going to be the Green Deal that we're seeing in Europe greatly is a great incentivize. incentive for builders and architects and construction firms to be implementing the best practices and the best installations and the best energy conservation. And it would be natural that they would be moving to polyurethane. So when we look at that rigid foam section, I don't think it's just Huntsman, but other companies are seeing a healthy demand, particularly given where the macro economies are in these countries.

Thank you. Alex, just to answer what Peter said, we're also seeing a continued strong demand for DIY, particularly in Europe and North America. So, you know, a lot of that insulation and particularly in the composite wood products business continues to see very strong growth in both Europe and America. And I think that is a result of the continuing pandemic and people continuing to use discretionary spend on improving their homes, which is benefiting our business very significantly.

Thank you. Our next question comes from Hassan Ahmed with Alembic Global. Please proceed with your question.

Peter, a question around the polyurethane business. Some of the trade publications have been talking about fairly tight conditions on the polyol side of things and how with rising prices and polyols you know, scarce availability, you know, there has been reduced sort of demand for TDI. Now, the question really is that, you know, as sort of I heard your comments, obviously MDI demand seems to be quite strong. So my question really is that have you guys been gaining share from TDI?

I don't really think so. I mean, a lot of the applications that TDI goes into don't necessarily compete with us head-to-head. I mean, there's that fringe area around soft foams going into furniture and so forth, but I think that's a pretty small segment. We really don't have a marketing effort that would say we're going to target TDI in or PDI applications. Again, there is overlap, Hassan. You're absolutely right, but it's not something that's a major effort for us. As we look at polyols, I think we're finding ways to relocate and replace our polyols We particularly like the polyester polyols. I mean, to the extent that we can build that end of our MDI and our polyurethane business into the polyester polyol arterial business where we're using that technology of recycled bottles and moving that ahead, I think for us that's going to be something that will be a high priority for us.

Very helpful, Peter. And as a follow-up, you know, going back to the sale of the Indian DIY business, I Obviously, you guys got a great multiple. If I run the numbers, obviously, you're looking to replace the $19-20 million of EBITDA that you guys generated from that business in 2019. According to the press release, you guys said rather quickly you want to replace that. Is it fair to assume that that $19-20 million of lost EBITDA in any business that you acquire, it would be at, I'm assuming, a multiple significantly lower than your sale multiple. So the two-part question, is that fair to assume? And second is, how quickly will you be able to replace that?

Well, I think that it's, I think it's obvious from what I said earlier, that when I say we're actively reviewing opportunities, that we, you know, we're in negotiations with options that we think will be an opportunity to expand particularly advanced materials. And I don't want to get into, you know, where that multiple might be and so forth. It's just right now. You know, I think it's a bit of a sensitive time to be talking about potential acquisitions.

Fair enough. Thank you so much, Peter.

Hassan, I would just say whatever the acquisition is, we've always said that post synergies, that those multiples would be very close to where we trade or better. So, you know, when you look at it on a post synergy basis, certainly it's going to be a lot better.

Excellent. Thank you, Sean.

Thank you. Our next question comes from Jeff Sikowskis with JP Morgan. Please proceed with your question.

Thanks very much. Your EBITDA in polyurethanes was above where it was last year and volumes were flat. And, you know, what you said is the markets are a little bit tighter than they might be ordinarily, but your volumes should grow. So order of magnitude, should the polyurethane segment earn in 2021 what it did in 2019, you know, just roughly?

Yeah, I would hope that it would be close to that. You know, as we look at that, probably, let's see, I'm just looking at 20. You're asking a 2019 number versus a 2020 number.

2021. Right. In other words, 2021 should look like 2019 given that, you know, the third quarter is, you know, a little bit better, a little bit tighter. It's going to loosen up. Your volumes are going to grow.

Yeah, and I think that as we look at the volumes and so forth, especially if you factor in the HBS, the Huntsman Building Solutions, we ought to be doing better in 21 than we did in 19. Okay.

And what will it take to get the textile effects business back to normal?

People going to stores and buying clothes. Okay, so it's not going to be for a while. Yeah, so I think, again, there you will see, you know, as I kind of look at the recovery of demand in textile effects, you know, we were down 60%, 70% at the lowest point year-on-year demand. And now I look in the fourth quarter, you know, we're down single digits from where we were a year ago. Granted, a year ago, and I compare this year's fourth quarter to last year's fourth quarter, Textiles Effects was feeling more of the impact of COVID than the other divisions because it's so Asian-centric. And, of course... Being that the virus started in China, that was impacted, and in that area, the world was impacted before anyplace else. So as we look on year-on-year comparisons, we'll probably see that exceeding last year first in textile effects. So as we look at textile effects, we'll see a rather rapid recovery to a point. And then that last point will come about gradually and slowly, I think, through the early part of 2021 as stores and retailers start opening. We clearly have seen that there are certain clothes and apparel and textiles that people will buy online. People typically buy their athletic wear and so forth online. People typically don't buy formal clothes and things that need to be fitted, things that need to be tailored, things that people want to try on and so forth. People typically don't buy that online. And so there's certain segments that are doing well, other segments that are not doing very well. And it will, I think, recover, as you kind of mentioned, recover as the retail outlets start opening. Auto is gradually recovering. Home textiles is recovering. And these are recovering a lot faster than the retail end as well. And anything dealing, of course, with PPE, the personal protective equipment and everything, we're seeing growth in that area as well.

Okay. Thank you very much.

Thank you.

Thank you. Our next question comes from David Begleder with Deutsche Bank. Please proceed with your question.

Thank you. Peter, you mentioned talking about the India adhesives sale that you might be looking to assess other assets. I assume they're pretty small, but any more call on what those could be and the size of those other assets that could be reviewed?

No. Again, whenever we talk about divestitures or acquisitions, I never want to use the word never or say that there's parameters about what we may or may not do. I'm quite pleased with the portfolio and the shape of the overall portfolio. But, you know, at the same time, part of our job that we have is to look at our assets, to assess our assets. And as I look specifically at the DIY business in India, I think that we took an asset from nothing. We built it. And for us to continue to build it at that rate, we would have had to have started consolidating market share, putting in quite a bit of investment in capital and retail advertising and so forth. And the company that we sold it to, Pitalight, is already in that segment doing all those things. They put a higher value on it than we did internally. To the extent that we have other products and lines in the business that would fall under that same sort of of parameter, I think we owe it to our shareholders to look at where we can create the most value. But I think that generally, I don't see a lot of pieces for sale within the company. And I look at the size of the acquisitions. Look at what we've done over the last couple of years between the Isonene, the consolidation of our Malacan Hydride, CBC, Demolec, I think these are pretty good-sized acquisitions that are meaningful. You're not risking your balance sheet. You're not stressing your balance sheet, but we see meaningful synergies and meaningful opportunities to globalize and to build these businesses.

And just in your cost savings, I think you increased the target from 100 to 112, minus the increase, but where did that $12 million come from?

I think you're looking at hundreds of thousands of dollars here and there, and you're looking at It's opportunities, I think. It's not all coming from one specific segment. And I think each segment, as they start looking within their area of opportunities for consolidation and rationalization and streamlining businesses and so forth, you know, they're finding opportunities as you start digging through these sort of projects.

Thank you.

Thank you. Our next question comes from PJ Juvicar with Citi. Please proceed with your question.

Yes, hi, thank you. You know, Peter, can you talk about performance products business? You know, you had 19% volume declines, or sales declines, I should say, in this quarter, and 20% decline in second quarter. So you're not seeing much sequential pickup. But despite that, your EBITDA margins have been very resilient You know, EBITDA really is not down that much. So can you just address the top line versus the bottom line in performance products?

Yeah, our biggest volume in that performance products is our Malac and Hydride. And I would just note that our biggest single facility that almost exceeds the rest of the capacities combined globally within Huntsman is our Pensacola, Florida site. And that site was down significantly. for hurricanes that pass through the area and some of the residual impact of those hurricanes. So I think third quarter we had some one-offs on volume and on availability of product. Certainly the demand for the product grew throughout the quarter. Malacan hydride is used a lot in, you know, if you were to go into the, think of the bathroom fixtures and apartment fixtures that you would see. the kitchen fixtures that you would see in an apartment or a hotel. And so we're seeing very – anything that has to do with residential construction and insulation or OSB or textiles is doing quite well. Anything that has to do with closed-in small unit apartment construction, hotel construction has been recovering at a much slower rate than the residential. I think the – Malayak construction applications, I don't want to say that they're all tilted towards that apartment and hotel sort of construction, but they are tilted a bit in that. And so you're going to see, I think you're going to see a slower, quote unquote, construction recovery in Malayak, but you'll see it nonetheless. So I think you'll see that recovery coming. And I think the impact of the hurricane impact on production, limited the number of pounds that we had to sell.

And can you address that? It's been quite resilient. What accounts for that?

I think that those are strong products. I think we have unique businesses and applications. Margins are stable. And these are great businesses.

And then just quickly, you earlier mentioned about your green PU spray foam that will include PET bottles. And how do you charge a product like that? Do you get some kind of a green premium, or is it priced in line with the existing product? Thank you.

Well, I think over time, you start seeing the quality of the product that we have and the base you know, how it's made and the greening effect. I don't think that we're getting a green premium today. I do, though, think that all things being equal and you've got an opportunity to use something that is made that will be in your house for decades to come that's made from recycled PET. You know, you look at the environmental advantages that come from all this. I think that there is a premium, and I think that over the course of the next year or so as we start more aggressive advertising and more aggressive promotion and so forth in this area, again, I want to remind you that this is a business that two years ago we weren't even in this business. So we view this business really as still to some degree as excited as we are about it. We're still rather in the infancy of the business. And I think consumer habits and consumer sentiment is going to be very high, and they're going to care about this stuff. So, yeah, I hope that over time we would be able to have a green premium.

Thank you. Great idea. Thank you.

Thank you. Our next question comes from Kevin McCarthy with Vertical Research Partners. Please proceed with your question.

Good morning. Thanks for squeezing me in. I wanted to ask about your equity earnings, which came roaring back sequentially to 21 million in the quarter versus a quarterly run rate of about 2 million in the first half. I'm cognizant you have a JV with Sinopec in China that makes propylene oxide and other products. Was that a meaningful contributor? And if so, what are your thoughts on sustainability of the third quarter level as you look into the fourth quarter level? and beyond. PO seems really tight these days in some parts of the world.

Well, I think that we did see an impact in the third quarter from a joint venture we have in China for the POMTBE facility that we have with Sinopec. And I think that as we look at this on a normalized, a more normalized basis, I think that number will probably be around $40 million. I'd count on about $10 million a quarter on average on something like that. And, you know, I'm not sure we mentioned it or not, but in the fourth quarter, I think we do have a T&I at that facility. So I certainly wouldn't be looking for a repeat in the fourth quarter what we saw in the third quarter.

I see. That's helpful. And then, you know, Peter, just coming back to the subject of capital deployments, You know, you've obviously got a lot more financial flexibility pro forma for the deal that you announced yesterday, as well as the Venator transaction. It seems as though acquisitions are plan A, but in a scenario where we started to see more prevalent lockdowns, a more difficult winter, if you will, resulting in equity market volatility, how would you characterize that? opportunity for repurchases in coming quarters?

Repurchases of stock shares?

Of Huntsman shares, yes.

Yeah, look, again, I never want to say never, but I think that as we look at the balance sheet and as we look at our priorities of a dividend, of M&A, and then organic investment and organic growth internally, You know, we look at the IRR on what we're able to get today. I'm not sure that – I think it would be quite a while until we're buying in any more shares. I don't foresee that in the foreseeable future. But, again, if something were to radically change, you know, it's something we obviously ought to be considering. But in the present scenario, it would be tough to see that.

Understood. Okay. Thank you so much.

Thank you. Operator, why don't we take one more question? I think we've kind of gone over our time limit here, but we'll take one more question.

Thank you. Our final question comes from Lawrence Alexander with Jefferies. Please proceed with your question.

Good morning and just a quick one then. How much of your business is run on market facing dynamics similar to the building products business you highlighted and how do you think about the pros and cons of structuring the company on a market basis as opposed to a product line basis?

Lawrence, I apologize that I don't have a precise and clear answer. I've always been a bit of a believer that you've got to control your supply chains. You've got to control the costs in the supply chain. We've looked internally multiple times of looking at having an aerospace division, an automotive division, a construction division, have all of our products flown to that one division. I don't know, and there are a lot of our competitors that seemingly every two or three years they kind of pendulum back and forth. I think that those opportunities, particularly as we look at construction and auto, which is, you know, 60% plus of our overall business, we try to capitalize on relationships and applications and so forth. But if you've got an application that's going into a coating application on a car, a product going into the seat on a car, quite frankly, most car manufacturers don't tie the two together. They're not going to pay you any more or treat you any better because you're supplying with paint, you're supplying with foam, and you're supplying with wiring cable. And so I think you lose some of that efficiency of just looking at the supply chain, looking at your working capital, looking at your technology. I look at something like polyurethane, something like Tony's TransFix, and keeping an eye on benzene down through nitrobenzene, aniline, MDI, the formulations, systems, and so forth, keeping an eye on that entire line rather than kind of being muddled into what we're doing in an end market. But you really have to, in my opinion, walk and chew gum at the same time. You've got to be able to look for those opportunities. But I just don't think that they're as prevalent as they usually are. Building materials might be, we'll continue to experiment with that as we look at what we're doing with spray foam and how that might overlap with some of the applications in OSB and how that might overlap with some of the rigid foam. We're already in all three of those. We're market leaders in all three of those. To the extent that we can find consolidation and opportunity, we'll certainly be doing it. But again, you look at the customer base regionally, you look at it, it just varies from company to company and contractor to contractor and state to state, to be honest with you. So I think we'd rather be focused on kind of a very targeted approach rather than a macro approach.

Thank you.

Sorry, that was a real long-winded answer, but...

Well, it stopped me from asking a second question, so that's perfect.

Okay. I was victorious then. Okay. Well, thank you very much, Lawrence. Good to hear from you.

Thanks a lot for joining us on the call. I know we didn't get to all of you, so feel free to give me a follow-up call afterwards. And thanks for joining us.

Ladies and gentlemen, this concludes today's web conference. You may now disconnect your lines at this time. Thank you for your participation, and have a great day.