Huntsman Corporation

Greetings and welcome to the Huntsman Corporation's second quarter 2022 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. I would now like to turn the call over to Ivan Marcuse, Vice President of Investor Relations. Thank you. You may begin.

Thank you, Carol. Good morning, everyone. Welcome to Huntsman's second quarter 22 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 earnings for the second quarter 22 via press release and posted to our website, Huntsman.com. We also posted Senate slides on our website, which we will use on the call this morning while presenting our results. During the 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 not guarantees of future performance. We should review our filings with the SEC for more information regarding the factors that could cause 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, Chairman and CEO.

Thank you, Ivan. Good morning, everyone. Thanks for taking the time to join us. Let's start out on slide number five. Just at EBITDA for our Polyurethanes Division, the second quarter was $229 million, compared to $208 million of the year ago, a 10% increase. We achieved the increase in adjusted EBITDA in corresponding 17% EBITDA margins despite a volatile economic backdrop of unprecedented energy costs in Europe, COVID-related lockdowns in China, and FX headwinds. Please note that we did receive an insurance settlement which benefited our second quarter results in polyurethanes by $15 million. on our selling price and our value over volume strategy intently throughout the quarter. We passed through approximately $900 million of annualized increases in raw materials and energy costs, of which approximately half were related to higher energy prices. Overall volumes declined 4% as we continued to pursue our value-based strategy. In the Americas, negative growth was driven by some weakness in consumer-related end markets, primarily furniture and ongoing supply constraints in our Huntsman Building Solutions business. In Asia, our growth was negatively impacted due to government-mandated lockdowns in Shanghai as the Chinese government attempts to control COVID outbreaks. Volumes in Europe were up compared to the prior year due to favorable comparisons as we completed our once every four year Rotterdam turnaround in the second quarter of 2021. Excluding the Rotterdam turnaround, our volumes declined year on year. Addressing European near-term demand, we currently expect volumes to contract across several end markets as persistent and extraordinary natural gas prices impact consumer, and industrial demand for polyurethanes. During the second quarter, natural gas prices averaged around $31 per mm BTU. And today, they are at a record high of approximately $60 per mm BTU, over six times the price in the United States. As a reminder, for every $1 per mm BTU change in natural gas, our variable costs in our European polyurethane business change by approximately $10 million on an annualized basis. While European facilities are not insulated from the price volatility in natural gas, it is worth pointing out that our largest natural gas derivative consuming facilities are in the Netherlands and in the United Kingdom, which have different supply dynamics and are relatively less dependent on Russian supplies compared to Germany. also considered that from a natural gas pricing perspective, approximately 60% of our MDI natural gas-related production cost requirements are linked to UK pricing via our upstream nitrobenzene and aniline facilities. Of course, our focus in Europe remains to maintaining the quality of our business and related pricing and margins as we navigate through a high level of economic volatility the second half of the year. Huntsman Building Solutions platform recorded second quarter revenues of approximately $154 million, up 16% year over year driven by pricing. We're well above the profitability we targeted when we launched Huntsman Building Solutions. That said, we were hindered by constraints and blowing agents, which negatively impacted volumes versus the prior year. So looking to the early part of the third quarter, we do see some destocking of inventory that our customers from the impact mortgage rate increases in the US are having on housing activity. We estimate that roughly half of HBS serves residential markets, while the other half serves the commercial construction markets. We will continue to remain focused on growing HBS internationally and up valuing our polymeric MDI in the spray foam insulation systems. Spray foam is an increasingly versatile insulation with superior energy saving properties, which we expect to gain market share over time as energy conservation remains a priority for consumers and governments. For the second sequential quarter, our polyurethane automotive platform saw improved volumes year over year. Our automotive business is well positioned to recover with the market over the coming years. We are focused on bringing innovative solutions to our customers. As we previously announced, we achieved a key milestone in the second quarter as we completed the commissioning of our new MDI splitter in Geismar, Louisiana. Today the new splitter is running well. The strategic investment will be a catalyst and allow further upgrades to our America's portfolio. As we disclosed previously, once the new splitter is fully up and running, we expect it to add an incremental $45 million of annual EBITDA to our results by 2024. Lower propylene oxide margins in China drove our equity earnings lower year over year. Our joint venture contributed approximately $18 million in equity earnings for the quarter, well below the $42 million reported the year earlier. Given current levels of PO margins, we expect that equity earnings could be approximately $60 million lower in 2022 versus the record earnings of 2021. In addition to upgrading margins by driving molecules into our higher value margin products, We are intent on further optimizing our cost structure in polyurethanes to improve margins. On an annualized basis, we delivered more than $40 million from our first phase of cost optimization synergies in polyurethanes. As we stated last quarter, we are targeting an additional $60 million by the end of 2023. These cost savings will be achieved through optimization of our footprint, for example, by exiting regions and markets where the returns do not justify long-term supply, such as Brazil and other regions with similar dynamics, and continuing to lower back office expenses. We expect a lion's share of these savings to impact 2023. Looking into the third quarter, we are closely watching all of the relevant economic and end market indicators, and in particular, the situation in European energy prices. We sit here today. We expect polyurethane's additional EBITDA for the third quarter, excuse me, polyurethane's adjusted EBITDA for the third quarter to be in the range of $170 to $200 million. Let's turn to slide number six, turning to performance products. We reported adjusted EBITDA of $152 million for the second quarter with an adjusted EBITDA margin of 31%. The industry dynamics and performance products remain favorable. In addition, with our commercial excellence programs and continuing focus on cost control, this division should continue to deliver strong results. We do believe that certain mean markets in China are moderating. Volumes decreased 3% compared to the prior year period as we continue to focus on securing value over volume and a short-term operational issue at our Malake facility in Europe, which has since been resolved. The construction markets that we sell into specifically in the US, which is primarily non-residential construction, continue to have good underlying demand. We also continue to see positive dynamics in our global fuel additives markets. We were impacted in China by the government mandated lockdowns and softer composite demands. Despite the lower volumes, we still saw profitability and margin quality significantly improve year on year in all three regions. Last year, we announced targeted capital investments in polyurethane catalysts and differentiated chemicals serving the electronic vehicle, semiconductor, and insulation markets. These projects continue to progress and remain on schedule to be completed on time. We expect all these projects to contribute positively to results in 2023, deliver more than $35 million of EBITDA benefits in 2024. As a reminder, we hold leading market positions in many of our main product lines, as well as our Malacan hydride. Performance products remains a highly attractive addition, and we continue to evaluate strategic organic investments to grow this business over the long term. Looking to the third quarter, this tends to be seasonally weaker than the second quarter, and there are some currency headwinds. That said, We currently expect another strong quarter from performance products with third quarter adjusted EBITDA in the range of $130 to $140 million, solidly above the prior year. Let's turn to slide number seven. Our Vax Materials Division reported adjusted EBITDA of $67 million in the quarter, significantly above last year's second quarter and equal to the strongest quarter in the division's history. We achieved 20% adjusted EBITDA margins with a disciplined approach to value over volume. We recorded the record results in advanced materials, even though aerospace profitability is still recovering at approximately 40% below pre-pandemic levels. In addition to improving product mix, we've been aggressive in achieving price to more than offset raw material inflation. We continue to deselect lower margin business while increasing our higher volume and value sales where possible. We are growing at or above several of our industry's adhesive markets as we deliver solutions to our customers and our industrial adhesives portfolios positioned to grow further over the coming years. In addition, our recent acquisitions of Gabriel and CBC contributing strongly, delivering above our average adjusted segment EBITDA margins as we execute our pricing strategies and capture synergies. Volumes for the segment declined 16%, with much of the volume declined, a result of our conscious decision to exit commodity BLR manufacturing in the US, as well as lower margin coding markets. We did see modest growth in aerospace demand versus last year, leading to a 25% year-on-year improvement in profitability. While aerospace remains well below pre-pandemic levels, the fundamentals of this industry remain strong, and we expect to see continued improvement over the next couple of years back to pre-pandemic levels. Currently, we still see relatively stable underlying demand in many of our core specialty businesses in the Americas and Europe. We do expect normal seasonality, currency headwinds, and some softening in Europe to impact the third quarter versus the second quarter. That said, we still expect to show a solid improvement versus the prior year. We expect adjusted EBITDA for this segment in the third quarter to range between $58 and $63 million. Let's turn to slide number eight. Our textile effects division reported an adjusted EBITDA of $22 million for the second quarter. Sales declined 7%, driven by a 16% decline in volume, and the business was adversely impacted by both new and continuing COVID-related lockdowns in China. As a reminder, roughly 60% of textile effects sales are in Asia, with China representing more than half those sales. Also impacting volumes were lower home and hospitality sales due to lower North American imports. Despite these volume headwinds, we remain focused on improving our differentiated and specialty businesses while deselecting low margin value-oriented volumes. In addition, we took aggressive pricing action to offset substantial raw material and logistical headwinds. As a result of these actions, we were able to improve variable contribution margins, which helped to offset the negative impact of the lower volumes. We remain optimistic on the long-term fundamentals of textile effects. We are confident our specialty-oriented portfolio will continue to develop as brands focus more and more on sustainability and product innovation. We expect orders to pick up as retailers stock up for the critical holiday period, and related winter and spring apparel trends. We currently expect adjusted EBITDA in the third quarter to be similar to the prior year and project a range of $20 to $22 million. I'll turn a few minutes over to our CFO, Phil Lister. Thank you, Peter.