Huntsman Corporation

Greetings, and welcome to the Huntsman Corporation Second Quarter 2021 Earnings Conference 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 assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ivan Marcruza, Vice President of Investor Relations Thank you, sir. You may begin.

Thank you, Christine, and good morning, everyone. Welcome to Huntsman's second quarter 2021 earnings call. Joining us on the call today are Peter Huntsman, chairman, CEO, and president, Phil Lister, executive vice president and CFO, and Tony Hakins, president of Polyurethanes. This morning before market opened, we released our earnings for the second quarter 2021 VF 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 to 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 also refer to non-GAAP financial measures such as diluted adjusted EBITDA, adjusted net income or loss, 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 will now turn the call over to Peter Huntsman, our Chairman, CEO, and President. Thank you, Ivan.

Good morning, everybody. Thank you for taking the time to join us this morning. Let's start out on slide number three. Adjusted EBITDA for our polyurethanes division in the second quarter was $208 million versus $31 million of a year ago. Our polyurethanes division continued to improve, posting 13% year-on-year volume growth and 18% adjusted EBITDA margins. Our differentiated volume, which includes our spray, insulation, automotive, and elastomers businesses grew by 22%. As a reminder, during the second quarter, we conducted a major turnaround at our MDI facility in Rotterdam, the Netherlands. This turnaround occurs once every four years with many third-party supply facilities carrying out turnarounds at the same time. Downtime associated with the turnaround negatively impacted volumes and adjusted EBITDA by approximately $35 million in the quarter. This was $10 million more than we communicated to you last quarter as several third-party issues delayed our startup and forced the plant to run lower rates for an extended period in May and June. The good news is that this turnaround is behind us, and operations at Rotterdam have returned to normal. Excluding the impact of the Rotterdam turnaround, our total volumes would have grown at 22% year-on-year, as we were essentially sold out on our MDI units worldwide. We continue to see a strong recovery in our Americas and Asian regions, with MDI volumes growing 15% and 13% respectively versus the first quarter. Significantly, higher margins also drove year-over-year adjusted EBITDA growth in the quarter. Higher average selling prices offset higher raw material costs and unplanned outages. We believe that longer-term supply and demand fundamentals in the MDI industry will remain balanced and margins will remain at a fairly healthy level for the foreseeable future. Growth in our core construction markets, including insulation, adhesives, and coatings, continue to lead the recovery in urethanes. All these sectors saw growth on a quarter-over-quarter basis even in Europe. where we had both planned and unplanned disruptions associated with the Rotterdam turnaround. North American insulation businesses, including spray foam and our composite wood products business, remain solid as we see residential construction spending remaining robust and commercial construction spending picking up. Our order book for spray foam has never been stronger, and we're implementing price increases to help to offset higher raw material pricing and logistical costs. Elastomers, which included our global footwear business, is another core growth platform for polyurethanes, and it continues to see strong recovery trends globally. Demand in both residential, excuse me, demand in both industrial and consumer markets within elastomers remains strong. Results would have been even better this past quarter had it not been for shortages some key raw materials and higher logistical costs. We expect our business to keep up the momentum for the remainder of 2021. Our global automotive business significantly increased year over year due to favorable comparisons. However, volumes were down mid single digits compared to the first quarter due to the ongoing chip shortages, which have resulted in lower production rates industry-wide. Having said that, global demand for in our markets is strong, and we were able to redirect volumes originally intended for the automotive market into markets utilizing similar chemistries. Our polyurethane strategies upgrade the quality of our portfolio. We will continue to redirect more of our plant's output to our differentiated businesses and bottom-slice lower-margin component businesses. We will invest in our downstream businesses organically and where it makes sense through bolt-on acquisitions. Where we can generate higher and more stable margins through long-term contracts in our component business, we are doing so. Our splitter investment in Geismar, Louisiana is consistent with this strategy. Once completed, the new splitter will allow us to produce more higher value MDI molecules while maintaining the same total plant output. This investment is progressing very well. We're seeing strong demand for materials that are the output of this project, and we're moving aggressively to complete this project as soon as possible to take advantage of these conditions. We now expect to complete construction at the end of the first quarter, 2022, earlier than originally planned. Once fully operational, we will expect this project to contribute $30 million in incremental adjusted EBITDA on an annual basis and expect to see stronger margins next year as a result of our earlier than planned completion. Our POMTB joint venture with Sinopec in China, where we own a 49% interest, continues to benefit from very strong margins and is driving above average equity earnings. We do see our equity earnings associated with this joint venture being lower in the second half of the year when compared to the first half of 2021. Overall, we remain very positive about the trends that we are seeing in polyurethanes globally. Demand is solid, and the industry is toggling between balanced and tight at this point in time. Substitution will continue to help drive MDI growth and our sustainable solutions. Products which deliver increased energy efficiency are expected to follow trends that will have a very positive impact on MDI demand for the foreseeable future. Looking into the third quarter, we see general demand fundamentals remaining solid or better, and lower turnaround costs are already impacting the bottom line of the business in a positive manner. Even with typical seasonality and lower joint venture earnings, equity earnings, we would expect our polyurethane third quarter adjusted EBITDA to be between $240 and $260 million. Turning to slide number four, let's talk about our performance product segment, which reported an adjusted EBITDA of $88 million compared to $29 million in last year's second quarter. The improvement in this division was partially due to a strong finish in the first quarter, with sales migrating into the second quarter. The division also benefited from stronger pricing and margins due to tighter markets, competitor outages, and better pricing discipline. Accordingly, our A-means and Malay portfolio has recovered quicker and performed better than we expected at the beginning of the year, delivering over 20% adjusted EBITDA margins in the second quarter. Performance products, strong financial results, not just in the second quarter, but increasingly across the last several quarters, reflects a refresh of the business strategy implemented after the sale of our chemical intermediates and surfactants businesses. This division is focused on targeted growth in our specialty amines, carbonates, and catalysts, while driving commercial excellence across the entire segment, including our malacan hydride business. These changes are already bearing fruit and are expected to have a meaningful impact positive impact on earnings moving forward. Volumes in our performance product segments were up 25% versus favorable comparisons in last year's second quarter and, importantly, are now at or above 2019 demand levels in most of the division's core markets. Leading the way are a means used in polyurethane catalysts, construction, and composite markets. Construction demand is also having a favorable impact on Malacca and Hydroid volumes sold into UPR. Opportunities to make bolt-on acquisitions in this segment tend to be more limited and, in some cases, do not exist as we are building new markets. As such, performance products remain focused on driving growth primarily through high-return, low-capital organic investments. These investments include projects to develop catalysts serving the VOC-free polyurethanes market, ultra-pure carbonates into lithium batteries, and high purity amines used in semiconductor manufacturing. We expect these investments will begin contributing in a meaningful way in the next two to three years. We see overall demand for performance products offerings remaining solid for the foreseeable future. In the third quarter, while there will be some typical seasonality, planned turnarounds, and more balanced mean markets, we still expect third quarter adjusted EBITDA to be between $75 and $80 million. Let's turn to slide number five. Advanced materials reported adjusted EBITDA of $58 million in the quarter, a significant improvement year over year, driven primarily by the continuing recovery of our core industrial businesses and improving contributions from our recent acquisitions. Excluding the acquisition of Gabriel Performance Products, sales revenue and advanced materials increased 42% compared to the second quarter of 2020, generating adjusted EBITDA margins of 19%. Aerospace results were flat in the quarter versus the prior year, although we saw another quarter of sequential improvement, which we expect to see again in the third quarter. We still think a full recovery to pre-pandemic levels in this segment will take another year or two, given our exposure to the wide-body planes used more in international travel, but we're encouraged that the recovery is tracking better than we had anticipated earlier this year. Excluding aerospace, sales in our other core specialty businesses experienced growth year over year and are now slightly above 2019 levels. Additionally, the integration of CVC Thermoset Specialties and Gabriel Performance Products continues on plan. We remain confident that we will achieve the total run rate synergies of $23 million. We communicated at the time each of these respective transactions were announced. Overall, our Advanced Materials Division is tracking well, and as aerospace recovers, we expect this division to consistently generate adjusted EBITDA margins in excess of 20%. We will continue to grow this division organically and through targeted bolt-on acquisitions. Third quarter adjusted EBITDA for advanced materials should look similar quarter over quarter subject to typical seasonality and be between 50 and $55 million. Moving to slide number six. Our textile effects division reported an adjusted EBITDA of $28 million for the second quarter. The recovery in earnings has been driven by higher sales, which more than doubled compared to the second quarter a year ago, and demand has returned to pre-pandemic levels in our key markets. We saw volume improvements across every product category when compared to the prior year and generated 14% adjusted EBITDA margins in the second quarter. Consumer sentiment in the U.S. and Europe continues to improve, and retail stored traffic and sales in each region are showing positive signs. Sustainability within the retail channel remains a focus for our customers and for us. This macro trend favors our leading technologies that are environmentally friendly in areas such as water reduction, which continues to gain share. Some of our Asian customers were adversely affected by the renewed restrictions associated with the return of higher numbers of COVID cases in certain regions towards the end of the quarter. While we are watching these dynamics closely, we still see adjusted FDA in the third quarter to be well above pre-pandemic levels. Before sharing some concluding thoughts, I'd like to turn a few minutes over to Phil Lester, our Chief Financial Officer.