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.