Huntsman Corporation

Greetings and welcome to the Huntsman Corporation third quarter 2021 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ivan Marcuse, Vice President, Investor Relations. Thank you. You may begin.

Thank you, Jesse, and good morning, everyone. Welcome to Huntsman's third quarter 21 earnings conference call. Joining us on the call today are Peter Huntsman, Chairman, CEO, and President, Phil Lister, Executive Vice President and CFO, and Tony Hankins, President of Polyurethanes. This morning before the market opened, we released our earnings for the third quarter 21 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 are not guaranteed for future performance. We should review our filings with SEC for more information regarding the factors that could cause actual results that differ materially from these projections and 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, CEO, and President. Thank you very much, Ivan.

Good morning, everyone. Thank you for taking the time to join us. Let's turn to slide number three. Justed EBITDA for our polyurethane division in the third quarter was $246 million versus $156 million a year ago. Our polyurethane business EBITDA growth was primarily a result of 2% year-on-year total volume increase and improved margins. Total volumes have increased 5%, would have increased 5% had it not been for Hurricane Ida disrupting our Geismar, Louisiana operations in the third quarter. Our differentiated volumes increased by 4% in the quarter led by our insulation, including spray foam and elastomers in adhesive businesses. Our core construction markets, including insulation, adhesives, and coatings, continue to be the strongest markets for polyurethanes. North American insulation businesses include spray foam and our composite wood products business. These remain strong as we see solid residential and commercial construction spending. Our Huntsman Building Solutions business continues to benefit from strong demand and market share gains. HBS revenues are well above the prior year and on track to exceed $575 million for 2021, combined with margins approaching 20%. The backlog of our order book for spray foam remains strong. The price increases that were implemented during the quarter are helping to offset higher raw material prices and logistical costs and challenges. Further, our efforts to expand internationally continue to gain momentum and is contributing ahead of our expectations. We remain very positive about this platform and will look to add to it through bulk on acquisitions and organic investments when feasible. Our elastomers, which includes our global footwear business, is another core growth platform for polyurethanes, and it continues to see strong recovery trends globally. This platform is implementing price increases globally to offset the headwinds in raw materials and supply chain costs that are pressuring margins. Our global automotive business is being hindered by the chip-related shortages that are reducing automotive production. We believe that these challenges will eventually be worked out, that low inventories and strong underlying demand globally could drive higher production rates for several quarters once the supply chain issues are resolved. Fortunately, global demand in our other markets is strong. We were able to redirect volumes originally intended for our automotive market into markets utilizing similar formulations and margins. Polyurethane's strategy is to upgrade the quality of our portfolio. We will continue to redirect more of our plant output to our differentiated businesses and bottom-slice lower margin component business. 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, helping to drive our downstream growth and increasing overall margins. This project will start up in the second quarter of 2022, and once fully operational and selling at capacity, it will contribute $45 million in incremental adjusted EBITDA on an annualized basis in 2024. Our POMTB joint venture with Sinopec in China, where we own a 49% interest, continues to benefit from above normalized margins and is driving above average equity earnings. As we said last quarter, the equity earnings contribution will be lower in the second half versus the first half of this year. We expect the fourth quarter to be lower than the third quarter by between $10 to $15 million. While many countries and economies remain hobbled by COVID, and Europe and Asia grapple with unprecedented high energy costs, the underlying fundamentals of our MDI global markets remain strong. Globally, industry MDI demand continues to grow at rates higher than GDP. Limited capacity will be added, particularly in North America and Europe. our downstream pull through of MDI will allow us to generate less capital intensive, less volatile, and higher earning MDI formulations. As I've said in the past, this is not necessarily about more MDI, but higher value added MDI. Looking into the fourth quarter, except for automotive, we see general demand fundamentals in most of our core markets remaining solid. With typical seasonality in our construction markets and lower joint venture equity earnings, we would expect our polyurethane fourth quarter adjusted EBITDA to be between $200 and $220 million for the fourth quarter. Let's turn to slide number four. The performance product segments reported adjusted EBITDA of $103 million for the third quarter. Volumes are back to our pre-pandemic levels, In most of our core markets, an increase 24% versus the prior year's period. Improvements in commercial excellence, including pricing initiatives, good cost controls have helped to offset the higher raw material costs and supply chain headwinds. Positive demand fundamentals in amines used in coatings and adhesives, polyurethane catalysts, and fuel and lubricants are also helping to drive higher profitability. Construction demand is having a favorable impact on maleic and hydride volumes sold into UPR as well. While this division is benefiting from favorable market conditions and tightening in certain products, the significant improvements are coming from an increased focus on the existing businesses since the sale of the upstream commodities and surfactant businesses in early 2020. Prior to the sale, The business prioritized moving volumes to keep large plants running at high utilization rates. Today, the business is focused on the two remaining businesses, Amines and Malacan Hydride, including the targeted growth in our specialty amines, carbonates, and catalysts, while driving commercial excellence across the entire segment. This focus on value over volume is generating higher quality of margins. As we stated in the past, we will look for bolt-on acquisitions to spur downstream growth, but those opportunities tend to be infrequent in performance products. In organic growth opportunities inside, we are investing in high-return projects that will increase in attractive markets such as electric vehicles, electronics, and polyurethane catalysts. During the third quarter, we announced an expansion of semiconductor-grade specialty and means at our Conroe, Texas facility for the electronics market. We also announced an expansion of Jeff Katz polyurethane catalysts at our Petferdo Hungary site. We look forward to highlighting these new investments and this changed business at our upcoming investor day. While we do expect some typical seasonality in the fourth quarter, we see solid momentum in this business. We currently expect performance products to report a fourth quarter adjusted EBITDA of $95 to $100 million. Let's turn to slide number five. Advanced materials reported EBITDA of $48 million in the quarter, significantly above last year's third quarter driven primarily by improving demand in our core aerospace and industrial businesses and contributions from our recent acquisitions. While improves year over year adjusted at the VA for the division did fall slightly short of our expectations, this shortfall can be explained by higher than expected raw materials and supply chain costs that were not fully offset by price increases and logistics challenges that resulted in some sales being delayed into the fourth quarter. Further price increases are currently being implemented, which we expect will result in improved margins in the fourth quarter. Aerospace sales and earnings remain well above pre-pandemic levels, but are steadily improving. Excuse me, they are below pre-pandemic levels, not above. As a reminder, Our business's largest exposure is to wide-body aircraft production, which will likely lag the overall industry production rates until there are significant improvements in intercontinental and long-haul travel. The integration of last year's acquisitions remain on track. We remain confident that the $23 million of synergies will be completed in 2023. An underlying demand for the Advanced Materials Division is tracking well, And as aerospace recover, we expect this division to consistently generate adjusted EBITDA margins of 20% or better, like it had in the last five years prior to 2020. We will continue to grow this division organically through targeted bolt-on acquisitions. We expect typical fourth quarter seasonal slowdown in earnings to be rather muted this year, due to a combination of sales order backlogs caused by challenged global supply chains and forthcoming increases in prices. As a result, we expect fourth quarter adjusted EBITDA to be between $47 million and $54 million. Moving to slide number six, our textile effects division reported an adjusted EBITDA of $21 million for the third quarter. Total volumes in this division are now back to above pre-pandemic levels, driven by its specialty volumes, which are up 8% compared to the third quarter of 2019. Our specialty products are winning market share as our customers, as well as global brands and retailers, look for ways to reduce waste and increase transparency in the supply chain. As these groups make more meaningful commitments to improve their environmental and social footprints, we would expect to see our leading specialty and sustainability products continue to grow. Looking towards the fourth quarter, we continue to watch for increased restrictions in our core Asian markets and disruptions in the global textile supply chain. In addition, we are raising prices to help offset rising raw materials and supply chain costs. Nevertheless, we expect adjusted EBITDA to increase year over year and to be in the $20 million to $22 million range. Before some concluding remarks, I'd like to turn a few minutes over to Phil Lester, our Chief Financial Officer.

Thank you, Peter. Turning to slide seven. We are pleased to see a continuation of a strong recovery in earnings. Adjusted EBITDA for the quarter was $371 million. Adjusted EBITDA increased by $183 million year-over-year and by $37 million, or 11%, quarter-over-quarter. We were particularly pleased with the continuation of the strong adjusted EBITDA margins in our performance products division. We're investing organic growth capital into this division with a determination of maintaining adjusted EBITDA margins above 20%. Overall, our volumes grew by 8% with recovery across the majority of our businesses since 2020. Gross profit margin improved substantially over the prior year period, despite severe increases in raw materials year on year, increases which continue into the fourth quarter as energy costs driven by natural gas rise around the world. Since 2017, we have divested approximately 40% of our prior portfolio. with one of our primary objectives to deliver more stable earnings than we have in the past. Our adjusted EBITDA margin was 16% for the third quarter, and we have now delivered three consecutive quarters of margins of 16% to 17%. We remain focused on improving our adjusted EBITDA margin beyond these levels. Let's turn to slide eight. A reminder that we have an ongoing acquisition synergy and cost optimization program, which we began in 2020. We expect to have delivered approximately $90 million by the end of 2021, of which half is SG&A. We initially targeted $120 million of total improvements by 2023 and now expect to deliver approximately $135 million, of which $60 million is SG&A and the remainder is improvement to gross profit. We remain focused on controlling SG&A. Since 2019, we have offset increased SG&A from bolt-on acquisitions with our cost savings initiatives. Those acquisitions, combined with overall improved business performance, have increased our top line revenue and driven SG&A as a percentage of sales to just below 9% in the third quarter. Turning to slide nine. Cash flow from operating activities was $186 million for the quarter, with free cash flow at $110 million as we continued with our Geismar MDI splitter investment. We expect to spend approximately $350 million in 2021 on capital expenditures, with reduced spend in 2022 as the splitter project rolls off and the new performance products projects ramp up. Primary working capital has risen substantially during the course of the year from the low point of 2020 as the business has recovered. We continue to control our working capital in this inflationary environment with our working capital to sales levels at the end of quarter three below the same time periods 2018 and 2019. The amount of inventory we hold on our balance sheet declined versus the second quarter while our accounts receivable balance trended significantly higher as we increased average selling prices further. We now expect free cash flow for the full year to be between $250 million to $275 million, or approximately 20% free cash flow to EBITDA conversion due to working capital headwinds. With lower working capital inflation in 2022, combined with lower capital expenditures and lower turnaround cash costs, we remain confident in our target of 40% free cash flow for EBITDA conversion next year. Our adjusted effective tax rate for the quarter was 15%. During this quarter, we were able to increase certain U.S. tax benefits associated with providing export goods and services as a one-time opportunity. Our expected long-term tax rate under current tax law remains between 22% to 24%. Regarding capital allocation, in the two years prior to the global pandemic, Huntsman returned approximately 7% per annum of our market capitalization to shareholders, comparable to peers in the industry through a balanced approach to dividends and share repurchases. We then placed our share repurchase program on hold during the depths of the pandemic. Earlier this year, we increased our dividends by 15%, and we indicated on our second quarter earnings call that we would restart our share repurchase program in the second half of this year. During the third quarter, we repurchased approximately $102 million of shares at an average share price of $25.64, with those purchases occurring during August and the first three weeks of September. We have approximately $318 million remaining on our current board authorized share repurchase program of $1 billion. We remain intensely focused on a disciplined and balanced approach to allocating capital to maintain our investment grade balance sheet, invest in attractive organic and inorganic growth opportunities, and return capital to our shareholders, including through share repurchases. Peter, back to you.

Thank you, Phil. Given that our investor day is a little over a week away, I shall limit my comments this morning until a time when my team and I intend to share a more fulsome vision of the business. However, this past quarter marks a significant achievement in that our strongest quarter on record still has room for improvement, so we further cut costs, complete our MDI splitter, see the aerospace recovery continue, anticipate new capacities of specialty products, and push through price increases. Over 40% of our EBITDA came from non-polyurethane earnings, marking a significant balance. We also purchased just over $100 million this past quarter of our stock. Our board, upon reviewing our projected earnings and cash generation, has decided to resume a share buyback program that will include a quarterly buyback that, at a minimum, should approximate our quarterly dividend. As we look into the fourth quarter, we should expect some seasonality, raw materials headwinds, and logistics challenges. It should be largely offset by aggressive price increases, operating excellence, and a continued focus on cost reductions. We expect our fourth quarter EBITDA to be to be between $320 and $355 million. On another front, we began reporting in 2017 on the significant lawsuit we filed at that time against Rockwood and Albemarle. After discovering that Rockwood had committed fraud and breached contractual obligations, it owed us under an agreement to purchase Rockwood's TIO2 color pigments business in 2013. After we closed on the transaction the following year, Albemarle merged with Rockwood when it purchased the stock of the remaining Rockwood businesses. We sued Rockwood and Albemarle as Rockwood's successor after discovering that when we were negotiating the deal, Rockwood misled us about the viability of the key color pigments manufacturing technology it was selling. We arbitrated the case for two weeks in May of this year, had closing arguments in July, And yesterday afternoon, I'm pleased to report the panel of three former federal court judges unanimously ruled in our favor, wrote a detailed opinion, and awarded us in excess of $600 million in damages, of which we will net approximately $400 million after fees and before taxes. We are now beginning the process of having the panel's award confirmed in the New York State Supreme Court. This process, which will also include Any appeal by Albemarle will take at least several months. We are confident that the panel's ruling and damages awarded will be upheld. We think the court will be hesitant to disturb an arbitration award rendered in these circumstances, especially after the American Arbitration Association held numerous hearings, supervised months of far-reaching discovery, conducted extensive motion practices, and held a two-week trial with live witnesses before three distinguished former federal trial judges. Kirkland and Elton tried the case for us, and David Stryker, our general counsel, led a fully engaged team of in-house lawyers. Our longtime board member, Wayne Rio, himself a distinguished trial lawyer, was actively involved in the case throughout, consistent with our approach on major legal matters going back to the Apollo litigation. Lastly, without the support, unity, and integrity of our associates, and engaged board of directors who have not won this award. Thank you very much. And with that, operator, we'll open the line for any questions.

Thank you. Ladies and gentlemen, we will now be conducting our question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is coming from the line of Frank Mitch with Spermium Research. Please proceed with your question.

Good morning, all, and congrats on the quarter. And, Peter, certainly congrats on the Albemarle lawsuit. I remember reading the complaint four and a half years ago, and I was thinking, wow, Albemarle is in deep doo-doo. And then when Kirkland and Ellis took on the case on a contingency fee basis. I'm like, well, yeah, that it's just a matter of time. So really happy that it, it finally played out. Um, you mentioned that, uh, you mentioned that, you know, they are going to make an appeal, which, you know, on an arbitration process seems a little bit confusing, but regardless, that'll take several months. You said that, um, in the release, I think it said, you know, there's a 9%, uh, uh, interest fee. Does that, does that continue on? these results. And actually, there were other individuals that were named in the lawsuit. What transpired there? And I guess, given this windfall, how should investors think about the cash that you're going to get in?

Well, I think that, Frank, thanks for the question. I hope I can remember the details of it. And yeah, I commend you. I think you were one of the few and certainly one of the earliest that wrote about the lawsuit back in 2016. Yeah, the appeal, I do not know what Albemarle will do. That's their decision to appeal. I'm assuming that if they do, it will certainly just add a few more months. But my understanding, again, I'm not a lawyer, do not profess to be a lawyer, or even have a cursory knowledge of law, but my Understanding is that the bar for appealing and arbitration is higher than that of a typical courtroom, typical court proceedings. So, you know, again, that's up to them to determine how they would like to handle this. The motions and the filings, the renderings of the judges will be made public on Monday. We file it thereabouts as we file our case, and I assume that most all that will be public at that time. And the 9% interest, yes, that is ongoing, and that will be calculated after the judgment has been rendered, which it has. That will be calculated on a 9% on an ongoing basis just as it has in the past. I believe that's a New York State rate that is set. That doesn't change. That's not something that you argue or appeal. As far as the individuals are concerned, I'll just leave that to whatever the panel had to say about that. Yeah, as far as the uses of the funds, we expect to be more aggressive than we have been in the past about deploying capital into ways in which we can increase the value of our stock, and that would be through acquisitions. And when I talk about acquisitions, that also includes the acquiring of our own stock. I hope that it was recognized in my comments. it is our intention at this time, barring a major acquisition or something that would perhaps slow that down, we would intend on an ongoing basis to, at a minimum, be purchasing back our stock at a rate of about $40 million a quarter. And some quarters, if we see Fed, as we did this past quarter, we'll do significantly more than that. But probably should be the expectations that on an annualized basis that we want to be able to match our our dividend that we pay out to shareholders and the amount that we buy in stock could pretty much match each other.

Thank you. Our next question is coming from the line of Bob Cort with Goldman Sachs. Please proceed with your question.

Thank you. Good morning, Peter. I wanted to ask you about your comments on the polyurethane division and the journey you've been on to high-grade it, which will, I guess, culminate shortly with the splitter project. Do you anticipate as the vision there that your margins will actually increase? Or relative to this sort of mid to upper teens channel you've been in as you display some of the commodity sales, which obviously can have very, very good margins at times, is it more of an outcome that you'll have a more stable margin structure in polyurethanes?

Yes. We certainly would assume that on an ongoing basis, we're at about an 18% margin today. on a total polyurethane basis. Between further cost consolidation, operating consolidation, and upgrading of the materials, we believe that that should have an average EBITDA going forward of about 20%. We're hoping to get at least 200 basis points. And a lot of that needs to be on things that we control. You'll remember or notice just recently here that we've shut down one or two of our system houses. We've been able to consolidate. uh some of those operations we're not abandoning any of those customers or any of those uh those product lines as much as we're consolidating into uh system houses which in the past have focused on two or three uh product applications and today are focusing on five and six product applications as we further expand our spray foam business in europe i don't think that this will require any further investment in new locations we'll do this out of existing system houses and we'll continue to grow the business downstream without a great deal of capital investment. We'll see an opportunity, I think, to further consolidate costs and to further move this business. Obviously, one of the areas I would just note of, I wouldn't say frustrations, but I hope of recognition from our investors is that when you do these sort of transformations, you make the investment up front in splitting. You make the investment up front in your capacities and in your R&D, in your route to markets, in your specialty products. And then you go out and you sell those, you market those, and those can take, in many applications, can take anywhere from six to 18 months to be able to get approval for fire retardant materials or automotive or aerospace applications, adhesives, coatings, and so forth. So it's not just simply a question that we're going to be taking polymeric and shifting it over to differentiated, and we'll see that take place over the course of the next you know, quarter to. This is something that's usually a 12 to 18-month sort of a transition as you build up capacities and capabilities, and then you transfer products to qualifications and then eventually are able to move the volume there. But I think we're well down that road, and we often see the benefits of that certainly throughout 2022. And we'll certainly be giving more information of that this next week in our investor day.

Thank you. Our next question is coming from the line of Mike Sison with Wells Fargo. Please proceed with your question.

Hey, good morning. Nice quarter, guys. Peter, I think you mentioned in your opening remarks that the goal is to get to 20% EBITDA margins, and I suspect we'll get a lot of that next week. But just curious where you think the opportunity is to continue to improve margin over the next couple of years and maybe some timing on that potential.

Well, I think that as we – I'm not sure that I said 20%, though I wouldn't mind getting there as quickly as possible. I think at this point we've said the high teens, which I certainly would define as being that 18%, 19% as a company. One of the slides and one of the presentations I'll be making in Investor Day will be the projects that we have in order to get us there. And so, again, it's a bit of a preview of that. I think a lot of that is an opportunity around a number of different facets. Most of those things, I see them as in our control. As we look at things like the continued recovery of the aerospace business, that'll probably be coming back here over the course of the next 18 to 24 months, $50 million or so of just profitability to get us back to where we were on a pre-pandemic basis. Again, that's subject to the growth of the aerospace industry and the recovery of wide-body planes. That's not necessarily something of our doing, but those are contracts where we're locked in. We already have 85-plus percent of markets in many of those applications. We're going to keep that. So we look at the capital projects that we have in our performance products around electrolytes, car batteries, ultra-pure batteries, amines and so forth. We look at the splitting project that we'll be getting into more information this next week coming on the second quarter. And we look at continued bolt-ons. And then also as we look at the wide range of cost optimization, that's just not cutting SG&A, but it's cutting our direct and indirect costs. It's focusing on our supply chain, on our purchasing and so forth. And right now we publicly have talked about $140 million target, and that target will certainly be materially increasing, you know, as we have an opportunity to discuss that more fulsomely. So as we look at each one of those adding anywhere from 40 to 50 basis points of additional margin, I think that when you add that to what's been our traditional run rate margin of, you know, think that 16% or so, I'm very confident that over the course of the next 12, 18 months that we'll be able to accomplish that, and you'll see that that will add up to some 300, 350 basis points of improvement.

Thank you. Our next question is coming from Hassan Ahmed with Olympic Global. Please proceed with your question.

Morning, Peter. Peter, just, you know, obviously Q3 with, you know, Hurricane Ida, supply chain constraints and the like was a bit of a tricky quarter. But, you know, just looking at the volume growth, particularly within polyurethanes, I mean, sequentially up 10%, you know, clearly very impressive. So, you know, if you could just, you know, would love to hear your views on how we should think about volume growth, particularly as one starts thinking about 2022. I mean, you know, we all know that this is an industry that typically grows volumes at, call it, 5%, 6%. But, you know, I mean, are we going to see some sort of major restocking exercise? I mean, how are you thinking about volume growth year-on-year in 22?

Yeah, I think that it's an excellent question, one that we grapple with. I mean, when I look at polyurethanes, In the third quarter, we're essentially sold out. We're producing as much as we can. We're selling as much as we can. We saw an increase in that volume in the third quarter over second quarter, largely because of the Rotterdam turnaround that we had that had that facility down for a little bit longer than we had expected. But I think, again, I just personally am not a believer that we ought to be investing capital to expand revenue and expand tonnage for the sake of expanding tonnage. I'd much rather see us deploy that capital and take the least profitable ends of our businesses and figure out how we can upgrade and how we can make a higher margin product across the board. And so I think that while the industry is going to be growing, the MBI industry will be growing at 5% or 6% globally, I don't have a problem with us being essentially sold out. We're obviously going to have some incremental de-bottleneck projects that will come along of low single-digit sort of growth rates, reliability projects, and so forth. But we're going to be far more focused on how we increase sales the margin on the volume that we have. We have plenty of MDI, I think, in the world. We need to have better. Huntsman, I'm not talking about the industry. Huntsman needs to have better MDI, better margins, lower costs, and be able to take what is already a great business and make it even better.

Thank you. Our next question is coming from the line of David Begleder with Deutsche Bank. Please proceed with your question.

thank you uh peter performance products has had a very good uh 2021 and a good back half the year how do you think about the uh sustainability of these numbers or more normalized earnings power of this business heading into the next year um yeah i i think uh the the you know look look these these products and the applications that we've gone into and i i hope that we've been clear and and what we the transformation that we've seen in that industry when you're operating facilities such as those that we sold to Indorama. We had a capacity in Port Natchez that we sold to them of, I think, of somewhere around a billion and a half pounds. And that's not including the POMTB facility. That's just including the EO, EGs, ethylene capacities, and so forth, propylene capacities. You have, more importantly than focusing on the value per pound, though you're always looking at that, you've got to keep those plants running. You've got to keep them running in capacity. So your end markets, obviously, are going to be more commoditized and be larger volume customers. And as we look at where we are today, we've sought after and we've been able to win a lot of niche businesses, such as our polyurethane catalyst. That's just not our polyurethane catalyst, but also that of others. You know, as we look at the wind industry and the coatings industry and the fuel and lubricant additives business, the desulfurization of natural gas production and so forth, going into the Molybdenum hydride, going into UPR and the integration into those areas. we've been able to take this business and focus it less on the commodity side, more on the specialty side, and I think it's really paying us very handsomely. We think that as raw materials are probably going to be plateauing, peaking and plateauing here in the next two quarters or so, our opportunity in this business is going to be able to hang on to the gains that we've made We've got to continue to stay focused on our commercial excellence programs and pricing. And as those raw material prices come down over the course of the next year or perhaps over the next 12 to 18 months, we've got an opportunity not just to maintain these margins, but in some cases hopefully strengthen the margins. Hopefully the raw materials aren't going to crash because there's a recession, but if they moderate back to a more normalized basis of a crude oil that's around $40 or $50 instead of $70, $80 a barrel, I think that this business not only will it maintain this sort of level of performance, but we might have an opportunity over the course of the next year or two to continue to strengthen it. So we're very bullish on our performance products. We like where it's going. We like the investments that we're making in this area, and it's going to continue to be one of our marquee businesses.

Our next question comes from the line of Kevin McCarthy with Vertical Research Partners. Please proceed with your question.

Yes, good morning. You know, Peter, I was intrigued by the comments you made in your prepared remarks about greater focus on value versus volume in the performance product segment. You know, if we sort of zoom out the lens and look at the margin profile there, it's improved quite dramatically, and so given the changes that you just talked about with divesting the Indorama assets and managing the business differently. Do you think that there's opportunity for EBITDA margins that would remain above 20% sustainably, in other words, similar to the advanced materials segment margin profile? Or do you think there's too much cyclicality to endorse that? Just to follow up on David's question, how would you suggest we think about the medium-term margin profile and the trajectory in performance products?

Yes, I would think that that business ought to remain a 20% plus sort of a business. There's going to be some cyclicalities there is in any business, but I think if you look across The board, we have an opportunity here the week after next to be able to convince you of this and the new products, new applications that we're getting into. And, yeah, I am hugely bullish on our performance products, and there's a reason why we kept the assets that we did. And we think there's a great future in these businesses. We think that the earnings that we see today, you know, by and large, are sustainable.

Thank you. Our next question is coming from the line of Matthew Deyo with Bank of America. Please proceed with your question.

Thanks. So if we rewind back to 1Q, the discussion around polyurethane's business was that there was some degree of over-earning. Since then, prices continue to move higher. Obviously, there's been a lot of outages, but when one of your larger competitors tried to dispel any notion that MDI and polyurethane's from a commodity basis is really over earning at the moment. So like what, what's your opinion on this? Has it changed at all? Uh, you know, what do you think the most likely direction for MDI profitability is over the next 12 months?

I think, I don't think that right now the MDI markets are over earning. Uh, I think that, that, uh, industry demand I think is, is, uh, it's pretty balanced right now. And as you look right now, industry feels like it's around the mid-80s utilization in Europe, probably 110%, 120% utilization in America, taking in some imports. And Asia is probably a little bit less than Europe. But I think that we're doing about where we ought to be doing in MBI right now.

Thank you. Our next question is coming from the line of Mike Harrison with Seaport Research Partners. Pleased to see with your question.

Hi, good morning. I was wondering, Peter, if you can comment on where polyurethane inventory levels are right now in terms of volumes compared to normal for this time of year as we think about, you know, coming recovery in the supply chain in construction. and the seasonal build there, will you have some additional inventory that you would typically build into that spring season? And then maybe also talk about what that means for plant utilization. Does that mean that you're going to be running your plants harder than you typically would in Q4 and Q1, and we could potentially see some better utilization, better margins from those facilities in the next couple quarters? Thanks.

Very, very good question. Again, I'm always hesitant to talk about where our competitors might be, merely because I have the far east idea where they are. I won't comment anymore on competitors. Tony, do you want to comment on where you see inventories right now, potential build?

Yeah, thanks, Peter. Mike, I think inventory levels now are as low as they've ever been in MDI. Certainly ours are. We see demand continuing to be very strong, particularly in North America. And, you know, the disruptive supply chain, the regional balances there have really evened out. And I think our customers are running low interest as well. You know, they're struggling to get key components needed to make these formulations. And I think we're going to see very strong utilization rates on the plants. We're flat out. We can't run those harder than we're running at the moment anyway, so I don't see any balance between Q4 and Q1 in that respect. We're running as hard as we can, particularly to manufacture the downstream products. And, in fact, we've got still in building solutions, we've still got an eight-week backlog in orders, so we can sell every molecule we can make. So I think that bodes well for industry utilization rates, and I see that continuing well into 2022. So, yeah, inventory is low, and we need everything we can make. Tony, thanks.

Thank you. Our next question is coming from the line of John Roberts with UBS. Please proceed with your question.

Thank you. On Huntsman Building Solutions, when you talk about margins approaching 20%, EBITDA margins approaching 20%, is that with market-based MDI and propylene oxide? Just remind me, do you have an advantaged propylene oxide cost in that business? And I assume you're using market-based MDI?

John Highsfield, we use integrated margins. Strategically, our focus is on upgrading the quality of our margins overall, and we make decisions as an overall supply chain team, looking at where we direct those molecules, and we look at integrated margins, including how we move our polymeric downstream into our HBS business for the supply chain.

So just to add to that, we do have an advantage here on polyols because as we grow that business, particularly with closed cell, we're still using polyester polyol rather than polyether, which comes from PO. The polyester comes from a recycled bottle-grade taro, and there we do have a cost advantage, and we see that end-of-the-market growing very rapidly.

Thank you. Our next question is coming from the line of Alex Yefermov with KeyBank. Please proceed with your question.

Thank you. Good morning, everyone. Peter, about a month ago, the company announced energy surcharges for MDI in Europe. Have you been able to fully implement any of this? What's been the market reaction?

Well, this will shock you in that our customers are less than excited about this, but it's something that we're pushing through as we speak and as we're in a number of very sensitive negotiations. with others, I really don't want to speculate. One of the reasons why we gave a rather wide range in the fourth quarter on our EBITDA is because there is some uncertainty as to the outcome of all of these. I think we'll get some of them. And right now, I don't want to speculate on all of them, but we're pushing very hard. You know, as we're telling our customers, the incredibly short-sighted and bad energy policy in Europe is not of our making. And the volatility of these prices and costs are not of our making. And they really need to, as I've spoken with scores and hundreds of our customers around the world, they've got to push these things through. And people have to see the consequences of decisions. And Huntsman is not going to be the shock absorber between energy policy, bad energy policy, and the consumer. So yeah, I feel very passionate about this. And it's something that we're going to push, even if we lose some volume, that we're going to continue to push. And as far as our competition, I can't speculate what they're doing, if they're doing it through price increases or surcharges or whatever. Again, so much I think one of the great criticisms of this industry is at times I think we can be lazy and even lethargic when it comes to these sort of issues and just figure they're going to go away in a quarter or two and we'll just absorb it. And I don't answer to shareholders that have that take place.

Thank you. Our next question is coming from the line of Angel Castillo with Morgan Stanley. Please proceed with the question.

Hi, good morning, and thanks for taking my question. Just curious on the Asian market competitive environment, just if you could give us a little bit more color as to what you're seeing, both from a demand perspective, given all of the uncertainty and changes that have been taking place, but also from a perspective of the competitor that added capacity or expanded capacity earlier this year, how have you seen the market absorb that, and are we kind of at a good balance level in that region, and how are we seeing it progress?

I'll let Tony comment on the polyurethane side of that. I would just remind all of you that as we look at the Asian market, very similar to Europe and very similar to North America, we're probably about 95% self-supplied within that region. And yes, we do have some logistics backlogs, and I would say that we're probably in the low tens of millions of dollars particularly some of our specialty products in advanced materials and in performance products. And Tony mentioned some of our blowing agents and so forth in our spray foam business, where we are getting hit with some of the backlogs and so forth at the ports. But by and large, as we look at our Asian market, we produce a product between China and Singapore and Thailand and other locations, and we supply within that region. And so as we look at it from a macro basis, it looks quite solid and a slow and steady recovery. Tony, you want to comment on MGI in Asia?

Yeah, I think that's absolutely right. I mean, particularly in China, we're seeing a balanced situation with the dual control policy clearly having an effect in certain provinces. So the way to look at that is geographically, Jiangsu, Fujian, and Guangdong have slowed down because of the imposition by the government of these dual control energy policies. And that's affected demand in those regions, particularly in things like appliances and footwear, which tend to be concentrated in those provinces. But that's been offset by outages in quarter four. One of our major competitors has got a significant turnaround. So the way that I look at this, I think the market's going to slow down between 5% and 10% in Q4 because of dual control. So that will be balanced by the capacity coming out for turnaround. So I see a balanced situation going to quarter four, and I think that prices will remain pretty steady around 12,000 RMB a term. So, you know, answer the question, balanced conditions in China right now.

Thank you. Our next question is coming from the line of Lawrence Alexander with Jefferies. Please proceed with your question.

Thank you for fitting me in. This is Dan Rizwan for Lawrence. You mentioned before changing portfolio and doing some bottom slicing. I was just wondering where you still are looking at kind of divesting or just bottom slicing within your own portfolio?

I'm not sure now is the appropriate time for us to identify particular assets that we would be looking to sell off. We are very serious about improving the margin of this business. In the last few years, we've sold 40% of our company. We've repurchased in other assets equivalent to about 15%, 20% of our business. And we're transforming the entire portfolio. And as you do that, that means you're shifting your costs around. You're cutting your costs and repositioning them. You know, you're looking at opportunities where to put higher value margins and materials where you can capitalize on customer relations and so forth. And so I think that as we look at the business within and the transformation that is going on, I see that as continuing going forward. And we're going to continue to look at our assets and the value that those assets have to us and the shareholders that we represent and that they have you know, perhaps to other people. And likewise, we'll continue to look outside of our company for assets that are valued. I think that as we start looking perhaps at a M&A market that is a bit overheated, I think we're starting to see a little bit of a diminishment in the value of some of the assets that we've been looking at. But by and large, you know, I think asset prices are probably a bit inflated right now.

Thank you. Our next question is coming from the line of Matthew Blair with Tudor Pickering and Holtz. Pleased to see with your question.

Hey, good morning and congrats on the results. I guess this might be a question for Phil, but, you know, looking at the working capital headwinds this year, I think about $650 million year-to-date And I know it's going to be hard to predict when that might reverse. But I just wanted to clarify, do you expect to fully recover those working capital headwinds in the future? Or is there a reason why you might not recapture all that $650 million?

Yeah. So, Matt, if you think back, I mean, at this time last year, we were sitting in an oil environment of approximately in the 30s. Today, we're in the 80s overall. And as you indicate, that's moved up our working capital balances substantially. The answer is, as we move forward into 2020, we'll just see substantially less working capital inflation overall for us. And that's why we remain confident in delivering our 40% free cash flow conversion in 2022 overall. I think we said in our remarks as well, if you look at our working capital and the control of our working capital as a percentage of sales, it's lower today than it was at the same time point in 2018 and 2019. We expect to continue to recover those working capital amounts and as those receivables roll through and we collect on them, we'll be improving our cash flow as we head into 2022.

Operator, I know a number of people are looking to move on to other calls here at the top of the hour. Why don't we take one more question, and we'll let people get back to work.

Thank you. Our final question comes from the line of Arun Viswanathan with RBC Capital Markets. Please proceed with your question.

Great. Thanks for taking my question. Given the strong free cash flow conversion here that you're expecting in 2022, we were kind of encouraged to see the resumption of the buyback plan this quarter of $100 million.

plus would you expect that to continue again given that the cash flow they expect next year and they accelerate maybe well I think that we'll see a minimum on a quarterly basis of 40 million dollars thereabouts and I'd say 40 million because that on an annualized basis equals to our cash payment dividend payment and we kind of again at a minimum we want to see those two balanced And as we see opportunities, as we see confidence in our earnings and our continued cash flow generation and so forth, we'll get more aggressive in buybacks. And as we continue to see that the stock is valued where it is versus – buying assets in the open market, we may well get more aggressive. But I don't want to be trying to predict where we're going to be six, nine months from now as far as share buybacks. But I think it is safe to assume that we've set a minimum floor of $40 million-ish thereabouts. And today's prices and the prices we saw this last quarter, we remain a good buy.

Thank you. Ladies and gentlemen, we have reached the end of our question and answer session, and this does conclude today's teleconference and webcast. We thank you for your participation, and you may disconnect your lines at this time.