Huntsman Corporation

Hello, and welcome to the Huntsman Corporation third quarter 2022 earnings call. At this time, all participants are in listen-only mode. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Ivan Marcuse, Vice President, Investor Relations. Please go ahead, Ivan.

Thank you, Kevin. Welcome to Huntsman's third quarter 22 earnings call. Joining us on the call today are Peter Huntsman, Chairman, CEO, and President, Phil Lister, Executive Vice President, and CFO. This morning before the market opened, we released our earnings for the third quarter 22 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. As a reminder, following the announcement of the sale of our textile effects business, we are now treating textile effects as discontinued operations on our income and cash flow statements and held for sale on the balance sheet. You will be able to find all the relevant details within our 10Q that will be filed with SEC. 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 that are not guarantees of future performance. You should review our filings with SEC for more information regarding the factors that could cause actual results. differ materially from these projections or expectations. We do not plan on publicly updating or revising any forward-looking statements. We will also refer to non-GAAP financial measures such as adjusted EBITDA, adjusted net income, and free cash flow. We 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.

Thank you, Ivan. Welcome, everyone. Thank you for joining us this morning. Let's turn to slide number five. Adjusted EBITDA for our polyurethane division in the third quarter was $138 million. Overall sales volumes in the quarter declined 16%, with Europe accounting for over half of this decline, the Americas for about 35%, and China for about 10%. These declines were caused by a combination of inventory destocking throughout the supply chain and falling demand. Europe is clearly in a recessionary economic environment, which could potentially get worse over the coming months, due in large part to high and volatile natural gas and energy prices. In Europe, natural gas prices have been moderating since peaking at the end of August, but remain at historical high levels, and moving forward, prices remain dramatically higher than in the United States. We expect and are planning for high and volatile prices natural gas prices in Europe for the foreseeable future. As we mentioned on our last earnings call, we do have the benefit of 60% of our natural gas-related production costs via our nitrobenzene and aniline facilities are in the UK, where natural gas prices have been lower this year versus mainland Europe. Despite this cost advantage, our profitability has been significantly impacted in Europe, and we will have to lower our cost structure in the region to generate acceptable returns. Over the long term in Europe, outside of the current recessionary environment, we do expect to be a large beneficiary of energy conservation initiatives. The world, and Europe in particular, need increased levels of insulation to reduce energy consumption. We remain well positioned to bring solutions to both the residential and non-residential markets. Demand in China continues to be impacted by lower overall economic growth as the government mandates a zero COVID policy and the impact it is having on its economy, as well as lower construction activity. Improvements around the COVID situation and possible economic stimulus to get the economy going in the right direction would be a catalyst for our business to improve in the region. 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, below the 32 million reported a year ago. Given current levels of PO margin, we expect the equity earnings could be approximately $70 million lower in 2022 versus the record earnings of 2021. The impact of rapid increasing interest rates in the United States as the Federal Reserve fights higher inflation is having a real impact on the residential construction markets. We're seeing this clearly in our OSB spray foam and furniture businesses. HBS, our spray foam insulation business, saw revenues decline 22% compared to last year as we saw de-inventoring through the quarter. In an early part of the fourth quarter, we've seen a slight improvement in order patterns, but we anticipate the greater than 7% mortgage rates will be a clear headwind going forward. As a result of slowing demand, and our expectation for this environment to continue for at least the next several months. We are taking swift near-term and long-term actions to address these challenges. I'll make further comments in my closing remarks, but suffice it to say, we will be taking out more costs in our polyurethane businesses going forward. In the short term, in polyurethanes, we've adjusted our MDI production to match demand. This will do two things. On the positive side, it will help to manage our inventories and costs as our focus on cash generation is a top priority. However, the lower production will have some negative impact on our fixed cost absorption and delay the positive impact of lower benzene prices moving through our income statement. Moreover, we are aggressively moving forward on the cost reduction plans we discussed last quarter. and have been in the process of implementing, which include exiting certain regions that are not generating an acceptable return, such as Brazil. And we also continue to consolidate certain back office functions. Our polyurethanes automotive platform again saw improved volumes year over year of 18%. Looking through a recessionary environment, we have an automotive business that is well positioned and poised to recover over the coming years. Looking into the fourth quarter, we expect Europe will generate a loss. We expect continued destocking in the United States. The economy in China looks like it will remain muted. As a result, seasonality will be much more pronounced this year due to all the headwinds impacting demand as well as costs. As we sit here today, we expect polyurethane's adjusted EBITDA for the fourth quarter to be in the range of $55 to $85 million and below 10% margins due to European market conditions. Let's turn to slide number six. Performance Products reported adjusted EBITDA of $110 million for the second quarter, which is 7% higher than the third quarter last year. The adjusted EBITDA margin in the quarter remains strong at 25%. The industry dynamics and performance products became more difficult through the quarter as challenges in Europe and China increased. Demand in Europe came down significantly by 23% with malleic volumes being under pressure. However, even with these macro challenges, we were able to deliver margins on the high end of our long-term expected range. The high returns are due in large part to the strength of our America's market, our commercial excellence program, and attractive industry dynamics that we have been pointing to over the last year, as well as effective cost control. Our North American Malay and hydride business, which goes into areas such as non-residential construction, and our global ethylene amines business, which goes into fuel and lubes markets, remains our best performing business in this division. Our capital investments in polyurethane catalyst and differentiated chemicals serving the electric vehicles, semiconductors, insulation markets continue to move forward on schedule. So we've stated in the past, assuming stable macro conditions, we expect these projects to start up in 2023 and deliver more than $35 million of EBITDA benefits in 2024. Performance Products remains a highly attractive business and we continue to evaluate strategic organic investments to grow this business over the long term. The fourth quarter is typically this division's seasonally weakest quarter. We expect this year will include lower demand in Europe and above average customer de-inventory in the U.S. As a result, We would expect performance products fourth quarter adjusted EBITDA to be in the range of $60 to $80 million with around a 20% margin. Let's turn to slide number seven. Advanced materials reported adjusted EBITDA of $58 million in the quarter, a 21% increase over last year's third quarter. We generated solid returns during the quarter despite a slowing global economy. Volumes declined 16%, half of which was because of our decision at the beginning of the year to deselect lower margin commodity business, and half was due to lower demand in some of the industrial coatings related markets. Improved volumes in higher margin products, synergies from recent acquisitions, and strong cost controls drove the improvement of adjusted EBITDA. We believe the business continues to outperform in several of our industrial adhesive markets as we deliver solutions to our customers. Despite some of the near-term demand headwinds, our industrial adhesive portfolio is positioned well to grow over the coming years. Additionally, we saw modest growth in our aerospace and automotive markets versus the third quarter of last year. Our volumes and margins in aerospace are about halfway back to pre-pandemic levels, despite the raw material headwinds. We believe the fundamentals in the aerospace industry continue to improve, and we expect the business to fully recover as production rates of wide body planes over the coming years moves higher. In the medium term, we expect aerospace to continue to recover, automotive to benefit from higher rates, of its materials in EV versus traditional combustion engine vehicles and expected increases in infrastructure spending. Like our other businesses, we do expect seasonality in addition to softer overall demand and currency headwinds to impact the fourth quarter. We project a fourth quarter adjusted EBITDA to be in the range of $40 to $45 million. With that, I'll turn a few minutes over to our CFO, Phil Lister.