Huntsman Corporation

Greetings and welcome to Huntsman Corporation fourth quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ivan Marcuse, Vice President, Investor Relations. Thank you, and over to you, sir.

Thank you, Operator, and good morning, everyone. Welcome to Huntsman's fourth quarter 21 earnings call. Joining us on the call today are Peter Huntsman, Chairman, CEO, and President, and Phil Lister, Executive Vice President, CFO. This morning, before the market opened, we released our earnings for the fourth 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 and are not guarantees of future performance. You should review our filings with the SEC for more information regarding the factors that could cause actual results to differ materially from these projections or expectations. We do not plan on publicly updating or revising any forward-looking statements during the quarter. We will also refer to non-GAAP financial measures, such as adjusted EBITDA, adjusted net income, and free cash flow. You can find reconciliations to the most directly comparable GAAP financial measures in our earnings release, which has been posted to our website, Huntsman.com. I'll now turn the call over to Peter Huntsman, our Chairman, CEO, and President.

Thank you, Ivan. Good morning, everyone. Thank you for taking the time to join us. Let's turn to slide number five. Adjusted EBITDA for our polyurethanes division in the fourth quarter was $218 million versus $201 million a year ago, or an 8% increase. Revenue grew 35% as our proactive selling price actions more than offset significant inflationary feedstocks and logistics cost increases. Our volumes improved 2% year over year, and we benefited from slightly higher equity earnings. We saw strong demand in our North American region with 7% growth. Asian and European volumes were essentially flat versus fourth quarter of a year ago. We are pleased to see strong pricing development in China, the world's largest MDI market, as we head into the first quarter of 2022. Our core construction markets, including insulation, adhesives, and coatings, continue to be the strongest markets for polyurethanes. underlying demand remains strong. We continue to see excellent growth in our commercial insulation and composite wood businesses. Our Huntsman Building Solution business continues to benefit from strong pent-up demand and product substitution gains. HBS fourth quarter revenues were 20% above the prior year in $560 million in 2021. I would note that when we purchased each of Demelec and Isonene Lepola in 2018 and 2020, the combined revenues at acquisition were approximately $400 million. HBS did continue to be hindered by logistics and shortages of certain raw material ingredients, which restricted growth. The backlog for our order book remained very strong, and we're implementing price increases that are more than offsetting higher costs and resulting in increased margins. Further, our efforts to expand internationally continues to gain momentum. We remain very positive about this platform, and we will look to add to it through bolt-on acquisitions and organic investments when feasible. Our elastomers platform, which continues, which includes our global footwear business is another core growth platform for all of your things revenues overall grew by 33 percent versus fourth quarter of 2020. demand is strongest in the industrial markets and this platform is implementing price increases globally to offset the headwinds of raw material supply chain costs that are pressuring margins during the quarter our volumes and our automotive platform continue to be impacted by the well-publicized global chip shortages. We did see improving trends as we moved through the quarter as the year-over-year volumes declined in each month moved from high teens to low single-digit declines. Overall revenues increased in 2021 by 24% to over $550 million. Our automotive platform is the core business we will continue to invest in to bring innovative solutions to our customers. As we discussed in detail at our recent Investor Day, the key goal of our polyurethane business is to upgrade the quality of our portfolio and continue to push molecules downstream. We will keep redirecting more of our plant's output to our differentiated businesses and bottom slicing lower margin component business. We will invest in our downstream businesses organically, where it makes sense through bolt-on acquisitions, where we can generate higher and more stable margins through long-term contracts in our component businesses. We are also doing this. Our MDI splitter investment in Geismar, Louisiana, is consistent with this strategy, helping us to drive our downstream growth and increasing overall margins. This project will be mechanically complete in April. We will have commercial beneficial operations towards the end of the second quarter of 2022. We remain confident that once fully operational and selling at capacity, this investment will contribute $45 million in incremental adjusted EBITDA on an annualized basis by the end of 2023. We expect $10 to $15 million of incremental EBITDA in the second half of this year. Our PLMTD joint venture with Sinopec in China, where we own a 49% interest, benefited from a strong 2021, where it contributed approximately $130 million in equity earnings for the year, including $22 million in the fourth quarter. We expect equity earnings to be approximately $50 million lower in 2022 as propylene oxide margins in China normalize. As we look into the first quarter 2022, we foresee global demand remaining on track in our three core markets, North America, Europe, and China. Globally, we have offset over $300 million of raw material pricing headwinds. The area of greatest impact is Europe at $140 million with higher gas and electricity prices being the largest driver for this increase. Rather than waiting for this to pass, we've initiated multiple steps to offset this impact. First, on September 22nd, we announced in Europe a 125 euro per ton surcharge on our MDI to offset rising energy costs. We have continued to adjust this as needed. Secondly, we have moved nearly 90% of our pricing contracts to be settled on a monthly basis. Previous to this action, about 20% of our volume was settled monthly, while the remainder was settled quarterly. This move will give us better flexibility to react to changing market conditions. Thirdly, we've accelerated our efforts to optimize our cost structure. During our investor day, we announced that we would complete our initial $40 million cost reduction program by mid-2022. We now have reached that target ahead of schedule, and we – and we build on that achievement as we focus on our previously announced $60 million cost optimization program. Fourth, as part of our $60 million cost optimization program, we will be moving tonnage to more differentiated markets where we can achieve higher margins. As we stated last year, our focus is to increase the margin per pound on our nearly 3 billion pounds of MDI and not to invest in more tonnage at any price. Throughout 2022, we will be exiting lower margin markets and will either increase margins or divert tonnage to our core markets in North America, Europe, and China. Rather than waiting for markets to return to more normalized conditions, We intend to emerge from this period of higher bond materials and supply chain disruption stronger than when we entered it. Looking into the first quarter, despite approximately $20 million of lower equity earnings and facing significantly higher feedstock costs than a year ago, we would expect our polyurethane's first quarter adjusted EBITDA to be strong at between $200 and $220 million of adjusted EBITDA. Turning to slide six. The performance product segments reported adjustment EBITDA of $105 million for the fourth quarter, which was modestly above the high end of our expectation and accompanied by strong adjusted EBITDA margins. We continue to see the benefit of our commercial excellence programs, including pricing initiatives, good cost control, which more than offset higher raw material costs and supply chain headwinds. volumes increased 3% versus the prior year period. This increase understates true underlying demand as we exited some non-core low-margin business during 2021, which impacted volumes in the quarter by roughly 3%. Demand fundamentals in coatings and adhesives, construction, wind and clean energy, fuel and lube additives, and other industrial markets are benefiting both our means and Malay and hydride businesses. As we described in detail on our investor day, this business is benefiting from several positive factors that we expect will continue to keep EBITDA margins in excess of 20% for the foreseeable future. First, an increased focus on the remaining business, and a value over volume strategy. Since the sale of our commercial intermediates business continues to benefit this business throughout all of our divisions, we're focused on value out over volume and performance products is no different. Secondly, we're making good progress, pushing volume into higher value and more demanding end use applications and customers. Third, demand has been demonstrated by our sales volume and selling prices that have been consistently strong. The three performance products capital projects we announced during 2021 in polyurethane catalysts and chemicals serving the EV and semiconductor markets in North America and Europe continue to move forward. We expect all of these projects to contribute to results in 2023. deliver more than $35 million of EBITDA in 2024. So we've said several times in the past, we would be highly interested in doing bolt-on acquisitions and performance products, but these opportunities tend to be few and far between. The opportunities that have come up recently have ultimately traded hands at multiples above our required hurdle rates. We will continue to assess bolt-on targets but we will also continue to remain very disciplined with our capital. We expect the improvements in profitability and earnings momentum that we saw in performance products during 2021 to continue into 2022 and beyond. The first quarter tends to be a seasonally stronger quarter when compared to the fourth. As a result, we currently expect performance products to report a first quarter adjusted EBITDA of of $115 to $120 million. Let's turn to slide number seven. Advanced Materials reported adjusted EBITDA of $54 million in the quarter, significantly above last year's fourth quarter and the best fourth quarter ever despite an aerospace market, which is still some time away from a full recovery. Typically, the fourth quarter is a seasonally weaker quarter, However, positive momentum in our sales and pricing actions continued into the fourth quarter across our specialty portfolio. As we discussed throughout 2021, our core aerospace business continued to show year-over-year growth with modest improvements in commercial production rates. We estimate that our aerospace EBITDA is approximately $45 million below pre-pandemic levels. In addition, we continue to increase prices across our portfolio in response to raw material and logistic cost inflation. These pricing actions have positioned us well for improved margins in the first quarter of 2022. The recent acquisitions of CBC and Gabriel helped to drive our record results in the quarter, and the integration of these businesses remain well on track. To date, we've achieved $12 million in synergies, and we're confident that another $11 million will be achieved by 2023. Underlying demand for the Advanced Materials Division is tracking well, and as aerospace recover, we expect this division to consistently generate additional EBITDA margins of 20% or better. We will continue to grow this division organically and through targeted bolt-on acquisitions. We expect the momentum with which we exited the fourth quarter to continue into the first quarter. The combination of improved automotive and aerospace demand, synergies, and improved margins will drive year-over-year growth. As a result, we expect first quarter adjusted EBITDA to be between $58 and $62 million, which is an impressive 36% year-over-year improvement at the midpoint of this guidance. Let's move to slide number eight. Our performance, or excuse me, our textile effects division reported an adjusted EBITDA of $22 million for the fourth quarter. This represents a 22% improvement versus the year-ago period. Overall volumes declined 7% in the quarter as we deselected lower margin and non-core business and increased our focus on growing the sustainable and specialty end of our business. Volumes in our sustainability-based products grew 22% year over year. Our margins also benefit from this portfolio shift in pricing adjustments to offset higher raw materials and logistics costs. Our specialty products are gaining market share as our customers, as well as global brands and retailers, look for ways to reduce waste and increase transparency in their 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. We remain positive on the long-term prospects of this business and are confident that EBITDA will continue to improve. Looking forward, the first quarter We have a very strong order book and expect to see solid improvements versus the prior year. We expect adjusted EBITDA in the first quarter to be in the range of $26 to $28 million. I'll now turn a few minutes over to our Chief Financial Officer, Phil Lister.