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.

Turning to slide nine. Adjusted EBITDA increased by $98 million to $432 million. an increase of 29% compared to the second quarter of 2021. Sequentially, adjusted EBITDA improved by $17 million, or 4%. As Peter highlighted, during the second quarter, we did benefit from an insurance settlement within our polyurethanes division, which increased our adjusted EBITDA by approximately $15 million. Our adjusted EBITDA margins improved year on year by approximately 2% to just over 18%, a sequential improvement from 17% margins in the first quarter. Overall volumes declined by 6%, a combination of our value-based strategy as we continue to deselect lower margin business and COVID-related lockdowns in China. Gross profit improved by $178 million as we increased prices by approximately $485 million, more than offsetting approximately $305 million of higher raw materials. SG&A remains under control despite significantly higher inflation and tight labor markets. SG&A to sales was below 9% in the second quarter and well ahead of our commitment to achieve this target in 2024. The negative variance of $31 million in FX and other is driven by a $24 million year-on-year equity earnings reduction from our China propylene oxide joint venture and the overall strengthening of the US dollar. Regarding foreign exchange. Our main translation exposure is with the Euro, which weakened by 11% in the second quarter versus the prior year. Through the first six months of the year, the impact from FX on our results was approximately $30 million. Assuming a 102 US dollar to Euro rate in quarter three, the estimated FX impact on our quarter three adjusted EBITDA results would be approximately $20 million. Let's turn to slide 10. Our cost optimization and synergies plans remain on track. We closed quarter two at an annualized run rate of $140 million, with a run rate target of $170 million by year end and $240 million by the end of 2023, including $100 million from the new initiatives we announced at our investor day. During the second quarter, we took the following steps. Consistent with our investor day announcement to expand our global business services, we began the process of setting up regional service centers in Krakow, Poland and San Jose, Costa Rica. We expect those locations to be fully operational during 2023. Secondly, as Peter has indicated, we are exiting certain markets in polyurethanes. In the second quarter, we communicated to our associates that we would exit Brazil, Argentina, and Chile by the end of 2022, and we're in the process of evaluating positions in Southeast Asia and India. We have a number of additional cost savings initiatives in progress, including supply chain optimization, which we announced at our investor day. We remain confident of achieving our goals by the end of 2023. Turning to slide 11, regarding free cash flow. Net cash provided by operating activities was $231 million, compared to an outflow of $7 million in the prior year period. Free cash flow was a positive $162 million, including a net benefit of $78 million from the final Albemarle settlement payment. We reviewed the settlement proceeds on our first quarter earnings call. Working capital has risen by almost $400 million since the beginning of 2022, with raw materials setting record highs and our receivable balance climbing as we have passed on these higher costs. Going forward, we are not projecting a further escalation in raw materials, although, as indicated, we are watching European natural gas closely. We remain confident of achieving our 40% free cash flow conversion target in 2022. Capital expenditures remain on track towards our $300 million spend target for the year as we switch our attention from our newly commissioned Geismar MDI splitter to our various growth projects in our performance products division. Our balance sheet remains strong at 0.6 times net debt to EBITDA at the end of quarter two and just over $2 billion in liquidity. During quarter two, we did announce a new $1.2 billion sustainability linked revolver, which matures in 2027. Our adjusted income tax rate for the quarter came in at 22%, at the lower end of our expected long-term range of 22% to 24%. Our adjusted earnings per share was $1.28, an increase of $0.42, or 49%, compared to quarter two of last year. We repurchased $291 million of shares in the second quarter, making a total of just over $500 million for the year. We are on track towards our target of $1 billion of share repurchases to be made in 2022, and we remain focused on delivering meaningful returns to our shareholders. Combining share repurchases and dividends, we are on pace to achieve a return of capital yield to shareholders in excess of 15% in 2022. Peter, back to you.

Phil, thank you very much. Two years ago, during our second quarter report, I compared the economic shocks and volatility of that time to the famous 1791 Whiskey Rebellion. As I look at today's lack of clarity and uncertain outlook around the world, I'm reminded of the words of St. Paul to the Corinthians, For now, we see through glass darkly. I'm not sure if our Cilician writer was referring to European gas prices, but it seems he at least had something similar in mind. We reported today adjusted EBITDA of $432 million, margins in excess of 18%, more than $500 million in stock repurchases over the past six months. Our balance sheet is strong and our business is on track to meet our objectives that we set out. at our most recent Investor Day meeting. So we look into the third quarter. We've given a guidance of between $330 million and $375 million to adjusted EBITDA. And I've watched as other companies who have reported guidance have been criticized for being too rosy or for being too glum. We've tried to guide you on our future performances accurately and transparently as we see it at this time. I see three issues. that we will be facing during the second half that may well help us exceed these numbers or not. I'd like to address these issues and what Huntsman is doing to take advantage of them where we can and try to mitigate their impact when we can't. The biggest challenge we see today is the energy crisis and natural gas volatility in Europe and to a lesser degree globally. As I pointed out in my earlier remarks, Every dollar of price movement affects us about $10 million annually. During these past two weeks, European gas prices moved nearly 20% upwards, costing us in excess of $100 million on an annualized basis of added cost. This past Friday, prices dropped 4%, saving us nearly $25 million on an annual basis. And this morning, the prices rose greater than 15%. I do not see any reason why this volatility would not continue since Europe has become overly dependent on the same means of propulsion Magellan used to navigate the globe, mainly wind, and natural gas supplies from an equally unreliable but far more dangerously calculating Russia. To counter this, we are aggressive as we can with our pricing. Some may be content to play the shock absorber between consumer and energy producers. We will continue to push through price-related surcharge and price increases where we can. As we stated earlier, we've converted the vast majority of our European sales contracts from quarterly contract prices to monthly pricing and, where we can, also added surcharges. In some cases, This may well mean that we are walking away from certain sales. We're also evaluating the feasibility of reducing production at some of our largest European facilities and increasing our imports from Asia and North America. It has become fairly clear to us that Europe's energy problems will not likely be fixed anytime soon. Accordingly, we're more aggressively looking at our business footprint and cost structure. We are evaluating steps in addition to our previously announced cost reduction targets of $240 million to further reduce our costs and reposition our global business footprint. We announced this past month we'll be relocating a portion of our European business services to Krakow, Poland. We will look at further consolidation and site rationalizations as we calibrate our business around what may be a more permanent reality for Europe. Our second challenge is inflation in North American markets and increasingly around the world. Increasing costs and rising interest rates will likely slow consumer demand and lower consumer confidence. In our largest North American business, polyurethanes, we started operating our new MDI splitter to give us greater access to a wider range of consumer solutions and higher margin materials. In our advanced materials division, we will continue to see the benefits of our adhesives and additives acquisitions, which have been fully integrated from an operational point of view as we reduce costs and continue to grow the business. We are seeing encouraging signs in the aerospace sector and in many parts of the modernizing power and electronic sector as well. Organic projects in our performance products division to add capacity to higher margin carbonates in a means for EV batteries, semiconductor chips, and catalysts continue to be on pace. And those products are and will be in high demand once that capacity comes online next year. We will continue our pricing excellence and putting value over volume. Our third challenge are the lockdowns that continue in China as their government continues to balance the need for economic recovery with trying to stop the spread of COVID. We will certainly benefit from the economic stimulus projects that the Chinese government has launched, while at the same time be slowed by additional lockdowns and travel restrictions. Our Chinese business continues to do well in the face of these conflicting tensions. The vast majority of our sales are domestic, and virtually all of our associates are local. China will continue to be a vital market for us. And like we are doing our North American strategy, we're focused on selling up to increasing margins and not just moving volume. We have the same integration with splitter technology that allows us to produce as many variants and downstream products as we need to meet the market demand. We continue to move forward from a global corporate perspective. We will be focused on value over volume. As I said earlier, This may mean that we walk away from some customers and disengaged from some geographic regions where we do not see strong enough returns or a high margin future. We're either on track or ahead of schedule on the multiple projects that make up our previously announced $240 million cost optimization program. We're still on schedule to complete this by the end of next year. We'll continue to use our balance sheet to return value to shareholders through dividends, stock repurchases, and carefully look at M&A opportunities. We previously announced we're running a process to evaluate the possible sale of our textile effects division. We continue to work towards this end, but we will not be answering questions pertaining to this process as it is ongoing. In conclusion, while we may not be able to see clearly into the market conditions before us, We are in an excellent position to take advantage in certain areas and respond with strength in other areas. We will remain focused on value over volume, working with our customers to give them market-leading formulation technology solutions. We will not be diverted from our cost optimization synergy plans. To the contrary, we intend to move even faster and more aggressively as we align our businesses to the realities of the marketplace. We have the balance sheet and the business results to stay on course for buying a billion dollars of shares this year and continuing to the next, while also looking carefully at bolt-on acquisitions and divestitures. Whether conditions improve or remain volatile, we are uniquely positioned to continue to create shareholder value. Operator, with that, why don't we start with the questions and answer section of this call.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We ask that you please limit yourself to one question. One moment, please, while we poll for your questions. Our first question comes from the line of Kevin McCarthy with Vertical Research Partners. Please proceed with your question.

Yes, good morning. Peter, I was wondering if you could elaborate on your decision to exit polyurethane businesses in South America. What drove that decision and what sort of impact on sales and earnings might we expect as you move forward there?

Well, Kevin, good to hear from you. I hope you're doing well. Yeah, I think that as we look at the long-term margin prospects in this market, we look at the logistics, the working capital that's tied up. We look at... the tariff costs and so forth, the repatriation of capital. When we factor all of these things, which are rarely talked about in these calls, but when you start factoring all of those issues, even if you're earning the same margin in many of those markets as you are, for example, in North America, your actual net back, the actual value that's being created, in some cases, drops from what otherwise would be a 20% margin down to a mid to low single digit margin. I don't see this changing. And so as we evaluate the markets, as we evaluate where the growth and where the value is going to be, particularly the value. I don't want to sound like I'm beating a dead horse here and talking about value over volume, but I think so often we get transfixed in this industry about growing sales, and we don't look at the value of the sales. In many cases, it costs us just as much to service and to supply and to produce a single digit margin account as it does to get a 20% margin account. And we need to be where those markets are going to reward us for innovation, reward us for the service and the technology that we invest in, reward our ability to uplift our molecules, our splitting capabilities, and so forth. And frankly, while we see growth opportunities in many of these markets, we don't see value opportunities as we do in North America. Again, that's not to say that we're going to completely abandon those markets, but it is to say that our focus in the infrastructure that we hold in each of those areas, the SG&A that we hold, and the costs that we have, the fixed costs that we have to service many of those accounts, That will be changing, and a lot of that tonnage will be going to higher-end application, higher-end margin applications a little bit closer to home.

Kevin, just to add, for South American polyurethanes, about $60 million of revenue, less than 1% of Huntsman's overall sales revenue, and obviously the North American market itself, there's a high demand for the products that we would otherwise ship down to South America. Okay.

Thank you. Our next question comes from the line of Matthew Blair with Tudor Picker and Holtz. Please proceed with your question.

Hey, good morning. Congrats on the strong results. Just digging into the Q3 polyurethanes outlook a little bit more. So it's down about 44 million quarter of a quarter at the midpoint. I think 15 million of that would be the insurance proceeds not repeating. Is there any way you could walk through the other moving parts in that guidance, you know, the impact from just lower durables demand, from higher benzene costs, and then from higher natural gas costs?

Yeah, I think that we're going to be seeing two impacts in the third quarter. And the first and foremost is going to be the higher cost of our raw materials, particularly around natural gas products. And again, we're talking about the variability of $10, $20, $30, $40 million, not that those are de minimis sums of money that I just threw out. But again, if I just look at the volatility of gas pricing over the last two weeks, we're seeing on an annualized basis far greater than, yes, $20, $30, $40 million of value movement just on natural gas. So much of where we end up in the third quarter will be the industry and Huntsman's ability to move pricing through surcharges and so forth and pricing to our customers and to move that down through consumers. And as you do that, that is obviously going to be impacting volumes. And so I think that, again, it's going to be an issue about higher prices that will, at the same time, because of the rapid inflation we're seeing in energy and in raw materials, that higher price impacting volumes on a longer-term basis.

Matthew, one other addition to make. Polyurethanes obviously has our largest exposure in Europe from a division perspective. with the euro having weakened even further, you've got an impact of about $5 to $10 million between quarter two and quarter three to consider.

Thank you. Our next question comes from the line of Alexey Yefremov with KeyBank Capital Markets. Please proceed with your question.

Thanks and good morning, everyone. Peter, in the press release, the press release talks about opportunities that might present themselves to take advantage of a Huntsman Strong balance sheet. Are you talking about bolt-ons here, or buybacks, or both, or maybe something else?

I think that we're speaking about both of those issues. Obviously, if we have set aside a billion dollars for share repurchases and our share price is down relative to a quarter ago, or the overall market multiples for the chemical industry are down, we've got a greater opportunity there for capital deployment and buying back shares. At the same time, we are definitely seeing a drop in the multiples that are being paid for assets, but at the same time, we're also seeing the earnings of those possible acquisition targets drop as well. So, you know, I think that we need to continue to be very cautious on the M&A side if there's something there that is accretive where we have something that can supplement and expand on our technology that we can integrate, that we can globalize. We're going to look very carefully at it. But, again, just because multiples are dropping doesn't necessarily mean that we're going to be out buying assets. It's got to be a pretty compelling opportunity for us.

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

Hi, guys. This is Dan Rizzo on for Lawrence. Thank you for taking my question. I was just wondering in regards to the surcharges and the pricing and how volatile things are, how fast surcharges would go on and come off as opposed to traditional pricing? Is it something that's relatively easy or does it take time to kind of wind through the system?

Well, Dan, very good question. It really depends on the sector, the customer, the product, just a whole variety of things. It also depends on, you know, what the competition, what others are doing. I certainly don't want to get into a position where I'm commenting on competitor pricing or supply or, you know, what their strategies may or may not be. But obviously if we're out aggressively pushing a strategy of value and others are out pushing a strategy of volume, you know, those are conflicting forces in the marketplace. You know, I think we've been very consistent in the last couple of quarters being very aggressive, if you will, on the pricing front. But typically, when we look at our raw materials, we typically have around a couple of weeks to 30 days before a raw material price increase will work its way through our inventory and hit our balance sheet or our P&L. So I would certainly like to make sure that before that 30-day time period, that we've done everything that we can do to try to push those costs to the consumer. And again, we've been in many different products in the past. A lot of the more commoditized products that we have since exited, we literally were, as I said in my comments earlier, this industry too much is a shock absorber between energy volatility on the energy producer side And the consumer or the consumer outlet of an Amazon or a Walmart or somebody like that doesn't like to move prices. And I'm just speaking, again, from our perspective at Huntsman. We'd certainly like to try to change that.

Thank you. Our next question comes from the line of Frank Mitch with Permian Research. Please proceed with your question.

Yes, good morning. It's funny, Peter. I wanted to ask you about the competitive dynamics of European energy and Russian gas on your German competition, but you indicated that you didn't want to go there. So instead, I do want to come back to the range of $170 to $200 million on polyurethanes for the quarter. July is in the books already, so you have good visibility on that. And if you assume normal seasonality, in August and September, you know, are you towards the middle end of that range, the high end of that range, the low end of that range? How do we think about, you know, that spread between the, you know, what needs to happen to get a 170? What needs to happen to get to 200?

Well, Frank, I would very much like to comment on competition, especially German competition. But unfortunately, I have a lawyer in the room who's giving me a very stern look right now and throwing things at me. So I can't comment on that, but it doesn't mean that I wouldn't want to. When we give these EBITDA brackets, I don't want to get into too much sausage making here. We literally make these as of last night and early this morning from the divisions. And these are numbers that I think are the most accurate view that we have literally within the last couple of hours. I would say with where we look at polyurethanes and the spread that we gave you in polyurethanes, I would say that right now we're really in the middle of that fairway. And You know, if we see a massive spike and Putin decides he doesn't want to put any gas in Russia and we see a massive spike this next week in raw material prices, we'll be fighting like hell to try to get that through. But, you know, these sort of prices and so forth, you know, that's going to be a definite headwind. If we see some relief coming because there's an inventory build or imports of gas or we finally decide to get smart in the United States and and get more aggressive in producing natural gas ourselves rather than just trying to export it all, you know, we may see some tailwinds there. So, you know, I would say right now if I had to put even money on it, it would be right in the middle of that range.

Thank you. Our next question comes from the line of Hassan Ahmed with Alembic Global. Please proceed with your question.

Morning, Peter and Phil. Um, you know, just, uh, rather than sort of specifically talking about any, any sort of competitors or the like, I just broadly wanted to talk about the, uh, polyurethane industry as you guys see it right now. I mean, obviously Europe's, uh, uh, not an insignificant chunk of polyurethane capacity, and we obviously all know, you know, the, the sort of, uh, energy price situation over there. So the question really is that on a go forward basis, um, how do you see the evolution of polyurethane utilization rates globally or supply-demand fundamentals, keeping in mind, obviously, and again, not specific to any European competitor, but keeping in mind, I'd like to imagine maybe some Europeans are considering shutdowns, certainly reduced operating rates. So, I mean, are we, as sort of these recessionary clouds recede, Are we going to be in a situation, driven probably by Europe, that we are in very tight utilization rates, at least in the near to medium term?

Yes, and Zan, you're asking an excellent question, and if you really look at the industry, And you think about the delta, and I'm just talking about in really broad numbers here. You're looking at over $1,000 per ton manufacturing cost difference between North America, Asia, and Europe, right? North America and Asia right now are pretty competitive. And you look at where Europe is right now, it's around $1,000 per ton, and in some cases, you know, even higher than that. And if you think that is going to be the case over the course of the next 12 to 18 months, you really have to be arguing somewhere in some conference room right now, do we start rationalizing capacity in Europe and start importing in from North America and Asia? If you think that this is a six month phenomenon, or somehow between now and the early spring of next year, that somehow prices will moderate, and that gap will all of a sudden go down to a couple hundred dollars a ton, $500 a ton, or something like that. By the time you factor in freight, working capital, logistics, The excess capacity customers you're going to be exiting from in order to satisfy the needs, you're really not going to be able to shut down one site versus the next. It really is a longer term call as you look out, not over the next quarter or two, but it's got to be one as you look out over the next three to four quarters. And I'm literally just talking about some of the decision making, some of the challenges that we're going through right now within our own company. Because we not only look at polyurethanes, but you look at some of the other products that we produce across the spectrum within our company. And you compare that with a natural gas price and an energy price. And when you look at the regulations, not just on an energy basis, when you look at a lot of the very anti competitive regulations that are coming out of the EU that are not going to be favorable towards industry on a longer-term basis, you've got to ask yourself some pretty tough questions here. And so it's not a question about Huntsman or Huntsman's German competitors or anything. I look at it on a broader sense between urethanes, amines, epoxies, between more commoditized and differentiated materials. You know, longer term, is Europe going to position itself to be even remotely competitive from an energy point of view? Are they going to release the natural gas through fracking? Are they going to look at a nuclear? Are they going to look? You know, what is the longer term perspective there for somebody like us? It's going to be investing in the decades to come billions of dollars in maintenance and reliability and modernization, or you start moving out of the continent. And I think that the decisions that we're making today are kind of a crash course as to what may be the road in the next five or ten years that we're going to have to travel anyways. We may be doing that over the course of the next quarter or two. So sorry to ramble this on. Excellent question. It's not just a simple black and white. You turn off one facility, you overrun another facility, and we export the availability of shipping and backlogs and quad ports. logistics, transportation, tariffs, and working cap, all that's got to be factored in. What grades, especially as you move further and further downstream in a differentiated world, we're pursuing value over volume, getting all that right. Again, apologies for the long-winded answer, but it's a It's an interesting question, and it's not one with an easy answer. But I can't imagine that the discussion that I just outlined is not taking place in any company that has substantial North American European or Asian assets and are looking at these cost differentials because they are historical. And we just simply have never seen a delta of $1,000 a ton manufacturing difference just in MDI. And I imagine if you get into chlorine production, fertilizers, commodities, ethylene, olefins, whatever, you're probably looking at pretty similar numbers across the board.

Thank you. Our next question comes from the line of Mike Sisson with Wells Fargo. Please proceed with your question.

Hey, guys. Nice quarter. Peter, I guess I'm glad you didn't have a quote from the Book of Revelations for the external environment, but just a question on polyurethanes. When you think about placing your MDI molecules maybe by end market, are there certain end markets that you know, have good returns now? Are there ones that, you know, maybe don't have as good returns that you're looking at? And, you know, aside from the regional, are there better markets for you to place your MDI?

Yeah, I think that there are certainly some markets. And when I talk about these, we try not to focus on quarter to quarter, right? I mean, if you look at what's weak in the next month or quarter or two, you have to be able to develop the product specifications And you have to be able to weather some of the cyclical storms and so forth. But as we look at automotive, it's not just automotive, but as we look at some of the luxury brands, as we look at the EV, the lightweighting, as you start thinking about EV vehicles and cars in general, when you start thinking about self-driving cars, Cars, the performance of the car, how fast it can go from zero to 60 miles an hour is going to be far less important in the automobiles in the future than is going to be the comfort, the sound system, the information systems, and the acoustic sounds and so forth. That's going to be a lot more important to car manufacturers going forward. the lightweighting abilities, safety. And so it's not just saying we're dedicated to the auto sector, but what sector within the auto sector? As we think of something like insulation, there's going to be some times when insulation, the tide goes in and the tide goes out. But longer term, having the best R factor insulation in the world being able to use the recyclability of used PET bottles and so forth as a raw material, that's going to be a winner longer term. So we look at adhesions, we look at coatings, we look at lightweight, and you start breaking that down, we get quite excited about those. Now, I take other segments, and again, I don't want to sound like I'm anti these segments, but I look at something like appliances.

That's a segment for us.

mattresses embedding the Tempur-Pedic where there's innovation and there's margins that are paid in some of that area of furniture. When you look at just the average sofa and furniture that 10 years ago was pretty attractive for polyurethanes, I'm not sure that's a very attractive business for us going forward, that we're going to be getting a lot of of value coming out of. So as you look at that commodity and we move that in towards margins that are 20 plus percent, and we want to see the stability of that year of things business, again, that doesn't mean we're always going to be the most profitable. I hope it does mean that we're not the least profitable, and it should mean that we're one of the most consistent earners of around that high teens, 20% sort of margin business. Yeah, there are plenty of areas that we look at today, and even though they may not look all that exciting today, we want to continue in the construction, home building, lightweighting, insulation, high-end automotive. So we're going to continue to push into those areas and to push within the best segments within those areas.

Thank you. Our next question comes from the line of Matthew Dio with Bank of America. Please proceed with your question.

Good morning. Thanks. So if I'm looking at the Malay market in Europe and the U.S., and really performance in general, right, so it's definitely running much higher than where we thought we would be exiting last year's Investor Day. If I think about the variance between kind of where we thought we'd be and where we are now, is that – you know, spreads to commodities that are net favorable, that are at risk if the market should soften, or is this a new elevated benchmark for the business? How do we think about how PP performs in a softer macro?

Well, I think that as we look at the Malay industry in general, the downstream, a couple of things. First, we've looked at our own Malay, and compared to where we were 10 years ago, I think that we were almost 100% at that point, 100% focused on UPR, basic construction applications, RVs, motorboats, and so forth. Those are still going to be the lion's share of the volume, but we've also looked at the Malay businesses, how we can diversify that into everything from fuel additives to food additives, coming down into specialty manufacturing and blends and so forth. There's also certainly has been a focus on the UPR industry where there's been a consolidation in that industry and the customer base in that industry. And a lot of the players that used to just be in the merchant malayic market are now integrated into UPR. There are only two or three of us in North America, a few more in Europe. that are still in the merchant market that haven't been integrated, if you will, into a single UPR entity. So as we look at the industry structure, as we look at the diversification of the downstream applications, and as we look at the pricing over volume strategy that we have. Yeah, I think that we're going to, I think that on average over the course of the next five or ten years versus the last five or ten years, we would hope that there would be not just better margins, but more reliable and less volatile margins.

Thank you. Our next question comes from the line of Angela Castillo with Morgan Stanley. Please proceed with your question.

Thanks. This is Alyssa on for Angel. Just as a follow-up to some of your commentary on pricing, what is your ability to hold price in performance products as costs start to ease? How much of this is structural versus surcharges that will start to come off? Thanks.

In performance products, virtually all of it is pricing. There has not been as much surcharge in performance products as there has been in polyurethanes, for instance. A lot of that is also a mechanism in polyurethanes. We have a lot bigger, a lot larger business in Europe than we do in performance products. That's largely, I won't say that it's a North American business, but it's It's larger in North America than it is in Europe. We've been looking at surcharges a lot more aggressively in polyurethanes in Europe. We do have some escalators, which will work in both directions in the maleic business. But by and large, in performance products, I would hope that, again, we're not just selling molecules there. We're selling in effect, meaning that if I'm selling to you as a customer, then this is one of the tough times when prices go up. If I'm just selling you a product, and the raw materials go up, and therefore I'm raising my prices, as a customer, when those raw materials go down, you're going to expect the price to go down. If I'm selling an effect, I'm selling you something that my product does that other products don't do that gives you value, that's going to have a much greater staying power. So hopefully, through our performance products, even without raw material increases over the last year or so. We certainly have seen higher margins because we're selling effect rather than just selling cost increases that have come through. And I would hope that as raw material prices dissipate, should they dissipate over the course of the next year or so, I would hope that we would be able to hold on to large portions of that.

Thank you. Our next question comes from the line of David Begleiter with Deutsche Bank. Please proceed with your question.

Thank you, Peter. In advanced materials, do you have any updated thoughts on how much aerospace will be up this year and what that will leave you below pre-pandemic levels and when you would catch up to those levels?

I would hope that as we look at the improvements that we see in aerospace, Let's remember that during the pandemic that we were down, pushing about $50 million of EBITDA from where we were to, you know, the beginning of the pandemic to where we were at the depths of the pandemic. And I'd like to think that we have recovered probably about 40% of that. That's going to be a lumpy recovery, but I would hope that certainly by the beginning of 2024 thereabouts, I mean, I'm giving you a forecast on commercial airliners that I probably not qualified yet. I would certainly hope that by the beginning of 2024 that we're back to kind of that pre-pandemic sort of volumes and margins and so forth. But again, during this time period, You know, there have been other projects that both Boeing and Airbus have been working on that we've qualified for. And I would hope that when the volumes get back to where they were previous to the pandemic, that we're actually doing better than we were previous to the pandemic. So I would hope that there are more applications as the industry looks at lightweighting. These high energy prices, by the way, high fuel prices, crude prices, natural gas prices, you are going to see the airline industry do everything they can to try to lightweight and putting a premium on saving fuel. Typically, when the economy slows, you'd think that they'd keep their older, more depreciated airlines in the fleet. But when you have fuel prices as high as they are right now, we're seeing a shift towards that lightweighting. And anywhere they can replace a product with carbon fiber, they're doing so. So I personally am quite bullish as to us recovering sooner and better. But I think it's still going to be over the course of the next six to seven quarters or so before we're fully back to normal. With that operator, why don't we take one more question? And given the fact we've tried to end at the top of the hour, we've gone a little bit over

Thank you. Our final question comes from the line of Josh Spector with UBS. Please proceed with your question.

Yeah, hi, guys. Thanks for squeezing me in here. Just maybe this is related with the prior question, but advanced materials, you know, industrial markets in Europe, I think there are three key comments that you expect it to remain stable. To me, that seems pretty different than what we've heard from companies over the past couple weeks and even how you talked about polyurethanes. So what's the difference for Huntsman and advanced materials in Europe? that enables that stability? Thanks.

Yeah, I think that when we look at, again, there's going to be some sectors that are falling there. But when we look at Europe, there are three areas in Europe that I'm quite bullish on over the next couple of quarters. One of them is aerospace, Airbus obviously located there, which is a very large customer of ours. The other is the auto industry. Again, when we see this move towards light weighting, carbon composite materials and so forth, insulation around heat insulation around EV vehicles. We recently have won some exciting contracts that we won't necessarily see the impact for in the next quarter or so. But going forward, think about the temperatures in which these electric motors are operating, the batteries and so forth. Those all need to be heat shielded as they're usually just mere inches away from the driver. We qualify to have our products both serving as a heat shield and also as a structural barrier between the driver and electric motors and batteries and so forth. And the last is the power sector. So if you think about the grid systems that are being modernized, the grid systems that are being extended to include solar projects, wind projects, offshore projects, and so forth, a lot of those are going to have transformers, cables, structural products where our materials have replaced ceramics and a number of older, heavier applications, especially as you start looking at the electrical marine applications. Those would be three areas that we're pretty bullish on.

Thank you. We have reached the end of our question and answer session. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.