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.

Thank you, Peter. Turning to slide eight. Adjusted EBITDA for the third quarter was $271 million, a decline of $78 million, or 22%, compared to the third quarter of 2021. Sequentially, adjusted EBITDA declined $139 million, or 34%. The year-on-year reduction in adjusted EBITDA was driven by our European polyurethanes business, which declined to break-even levels during the third quarter as a result of high energy costs and declining demand. Adjusted EBITDA margins for advanced materials and performance products remained strong at 18% and 25% respectively. Polyurethane's adjusted EBITDA margins declined to 11% in quarter three, leading to an overall EBITDA margin level of 13% for the company. Our European polyurethane's business depressed total company margins by 3%. Sales volumes declined by 15% during the quarter, 23% in Europe, 14% in the Americas, and 7% in Asia, as macroeconomic conditions deteriorated, particularly in Europe and in construction end markets overall. Gross margin improved by $48 million, with $339 million of price gains representing a 15% increase year over year offsetting higher cost of sales of $291 million. During the third quarter, natural gas related raw materials and utility costs more than doubled compared to the prior year. Within our most energy intensive production process, MDI, we have indicated every $1 per mm BTU movement in Europe is equivalent to approximately $10 million at normalized production levels. We are running production rates in Rotterdam at approximately 50%, and at those levels, the impact for every $1 per MMBTU is approximately $5 to $6 million on adjusted EBITDA. Some other raw materials, most notably benzene, have declined from record high prices seen in the early part of quarter three, though prices still remain elevated, while other raw materials continue to increase, such as ammonia, chlorine, and caustic. As a reminder, when considering cost impacts, we account for over 90% of our inventory using the weighted average cost method. On a weighted average basis, it normally takes approximately three months to work through the majority of costs. With slower sales and high costs of natural gas in Europe in August and September, we will continue to see higher costs working their way out of inventory throughout quarter four. Regarding inventory, we reduced our global inventory volumes by approximately 10% in quarter three and expect a further 10% decline in quarter four to align with lower economic activity. SG&A remains under control due to our cost optimization program, despite a high and persistent inflationary environment. Foreign exchange was a negative impact of approximately $15 million, with approximately $20 million of translation impact partially offset by approximately $5 million of transactional gains as a result of the weakening of the Chinese renminbi. Let's turn to slide nine. Our cost optimization and synergy program remains on track. At the end of quarter three, we achieved an annualized run rate of $160 million of savings. Excluding our new European restructuring initiative, we expect to meet or exceed our target of $170 million of savings by the end of 2022 and 240 million by the end of 2023. During the quarter, we made progress recruiting at our new global business services hubs in Costa Rica and in Poland. We expect to be fully operational at those sites during 2023. In addition, as part of our support service model, we announced that we would transition parts of our internal IT services to a third party managed service provider. We are progressing geographical exits previously announced in polyurethanes. And in advanced materials, we announced the closure of our Maple Shade, New Jersey facility, which was part of our 2020 acquisition of CVC. In terms of our $240 million program, we expect approximately $65 million of cash costs in 2022. And we're expecting approximately $70 million of cash costs next year as we work through severance and restructuring. Regarding the proposed European restructuring we have announced today, we have advised the relevant Works Councils that we intend to consult with them to reduce our costs by exiting certain legacy commercial and R&D facilities, as well as accelerating our move of support services to Krakow, Poland. We intend to achieve approximately $40 million of additional savings over and above our $240 million program by the end of 2023 through certain site closures and headcount reductions in Europe. We expect to spend approximately $50 million of cash restructuring relating to those savings, the majority of which we expect to incur next year. We also expect to spend approximately $15 million of capital expenditure related to the restructuring which we will manage within our normal capital expenditure allocation. Turning to slide 10, cash flow from continuing operations during the quarter was $285 million compared to $179 million in the prior year period. Free cash flow from continuing operations came in at $228 million for quarter three compared to $106 million a year ago. Year to date, our free cash flow from continuing operations stands at $409 million. Over the last 12 months, total free cash flow was approximately $1.1 billion, and we have returned approximately $1 billion to shareholders in the form of share repurchases and dividends. Share repurchases for the quarter amounted to $250 million, bringing the total year to date to $752 million. Earnings per share for the quarter came in at 71 cents per share compared to a prior year of $1.02. Capital expenditures are tracking towards our plan of approximately $300 million of spend in 2022, $280 million from continuing operations. We are now focused on our performance products investments targeted at electric vehicles, semiconductors, and insulation catalysts. Our adjusted tax rate for the quarter was 21%, and our long-term range of 22 to 24% remains unchanged. At the end of September, we had just under $2 billion of liquidity. Our next senior note debt maturity is due in 2025 for approximately $300 million. And beyond that timeframe, we have maturities in 2029 and 2031. Our balance sheet is strong at 0.7 times levered on an adjusted EBITDA last 12 months basis. and we remain fully committed to our investment grade rating. Upon the close of the deal to sell our textile effects business, we expect to receive approximately $540 million after tax cash proceeds before any adjustments to the closing statement for net working capital. I would also note that our preferred equity of approximately $80 million, which we announced at the time of signing, has been syndicated out and the textile effects transaction is now an all-cash deal for Huntsman. Peter, back to you.

Phil, thank you very much. In the past 12 months, the global economy has gone through a number of shocks and unforeseen events. These include 40-year high inflation and the related consumer reaction, the most devastating destabilizing European land war since the Second World War, trillions of dollars of value wiped from the global markets, and unprecedented energy volatility with its related supply chain challenges. In light of these events, it is worth reviewing those things within our control and how we are responding to events outside of our control. First, we announced today in Europe a European-based restructuring that will take a minimum of $40 million out of our European businesses. I think it will be some time before Europe fully picks up the pieces of its failed energy policies. However, I believe that any new normal will be based on a gas plus transportation to supply their needs. Where Russian gas supplies to Europe usually sold at a slight premium over US prices, I think that Europe will now find itself competing with Korea, China, in Japan, to name a few, for gas imports. If I look over the past decade, gas has been sold in these export markets at a premium of about $5 per mm BTU over historic gas prices in Europe and North America. If Europe is to endure a $5 per mm BTU gas charge for freight, this will cost Huntsman approximately $40 to $50 million per year. This is our initial target for cost reduction. We are announcing today the closure of two of our divisional HQs and a series of initiatives that will permanently remove in excess of $40 million from our European businesses. Let me be clear. This is not an abandonment of any of our $2 billion European commitment, but rather a recalibration of a business based on the realities of cost, customers investor expectations and having a business built around those customer requests that will provide future growth and opportunity. We will complete this by the end of 2023. This will be in addition to the $240 million that we outlined at last year's investor day presentation. We also announced today that our committed that our commitment to invest $80 million of preferred equity towards the divestiture of our textile effects business has been replaced. This will essentially keep $80 million on our balance sheet that we had announced earlier would be needed to complete the sale of our textile effects business to SK Capital. At a time when so many deals are being pulled or unable to get completed, This says something about the quality of this deal and SK and Huntsman's ability to complete what we started. We expect this transaction to be closed within the next few months. We committed to a cost savings business restructuring plan of $240 million a year ago at our investor day presentation. And to date, we've accomplished a run rate of $160 million of that and are on track to be completed by the end of 2023. We announced this quarter the purchase of $250 million of shares and remain on track to accomplish $1 billion of share buybacks in 2022. Through the end of the third quarter, on an LTM basis, we've generated $1.4 billion of adjusted EBITDA at a 16.5% margin. There are many variables between now and the end of the year. but we expect free cash flow to be about 40%. We will finish the year with a strong balance sheet that will be further strengthened with the divestment of our textile effects business. We intend to use our balance sheet to continue to return cash to shareholders through a competitive dividend, share buybacks, M&A opportunities, and reinvestment in our business. While looking for opportunities to deploy capital, we will be very judicious. Now, looking into the murky waters of Q4 and into 2023, while we are seeing slowing markets in the U.S. around residential construction, as well as continued sluggishness in China around continued COVID prevention policies, our biggest challenges are around Europe. We will see two variables that will either be severe headwinds or may well provide us with better than expected earnings. The first of these is energy. As we have said in the past, every dollar of movement for M and BTU of gas costs of our European business is a cost of around $10 million per year, depending on utilization rates. We're forecasting a higher gas price in our Q4 range we shared with you earlier in this call than what we are seeing today. Should prices stay where they've been so far this month, we will see some benefit. Should prices spike to levels that we saw in late summer, there will be headwinds. Either way, we'll continue to push prices and margins wherever we can. The second variable is how customers are managing inventories. How much of our drop in demand are inventory controls by our customers, and how much is consumer sentiment and falling consumer demand varies customer by customer. Broadly speaking, we would estimate that about half is inventory control and should work itself out by year end or early 2023. Either way, we're operating our facilities to match our own working capital objectives and the needs of our customers. We are also supplementing some of our production needs with imports from outside Europe. Our immediate priority continues to be to complete our operational and restructuring objectives, continue to work with our customer base to understand their longer term needs, and make sure our pricing and margins are what the market will bear. Through 2023, the worst mistake we can make is to wait for conditions to fix themselves. We will be aggressive. We'll do whatever we can as quickly as we can to recover the profitability and returns our investors deserve and our company needs to restore our European business to where it should be. Throughout 2023, the U.S. will start to get control of inflation, and I believe we will see China rebound as it refocuses more on economic growth. Europe will start to stabilize, and there will be winning industries and those that will move out or move on. We've taken the right steps to assure that we're in a position to take advantage of any of these improvements as markets dictate. Operator, with that, we've concluded our prepared remarks, and we'll open the line up for any Q&A.

Thank you. We'll now be conducting a question and answer session. If you'd like to be placed in the question queue, please press star 1 on your telephone keypad. We ask you to please ask one question, then return to the queue. Once again, that's star 1 to be placed in the question queue, and we ask you to please ask one question, then return to the queue. Our first question is coming from Josh Spector from UBS. Your line is now live.

Yeah, hi. Thanks for taking my question. I noticed tough to answer, but I guess if you look at the sequential move, 3Q to 4Q, you talked about some of this already, but if you were to bridge or kind of put into bigger buckets, energy costs, destocking, base volume declines, fixed cost leverage, what would those buckets be so we could start to think about what maybe a normal rate would be when you get past some of the worst of this? Thanks.

Yeah, well, that's a very good question. I think that that's going to be varying industry sector by industry sector. For instance, I think where you're continuing to see strong pull through such as automotive and in aerospace, there's not much inventory control that's taking place right now. And so you're seeing, you know, most of any of the headwinds that we're facing in those industries is just trying to absorb raw material costs and pushing those through. In other areas, certainly like what we're seeing in construction material products and so forth, and some of those areas that are related to construction, furniture, insulation, and so forth, we're seeing quite a bit of inventory correction that would certainly make those industries and businesses look worse than they normally would be on a normalized run rate. We think that as we move from Q3 into Q4, that probably about 50% to 60% of the decline that we've seen in demand is related to inventory adjustments. Again, I want to just emphasize that's a fluid number because it is going to vary sector by sector and customer by customer. But as I said in my comments, I believe that by the end of this year, early part of next year, most of that inventory adjustment will be depleted from the supply chain. I also would just emphasize that as market conditions slow, this almost becomes a self-fulfilling prophecy to extend that cycle, as market conditions slow and as demand slows, that inventory reduction just takes longer to accomplish. So benefits that we would have hoped to have gotten by following raw material prices that took place a month or two ago, they'll hit us later than expected, and inventory that we hope would have been depleted by quarter's end will go into next year because of the falling demand. So again, apologies for being a bit murky, but it's a pretty squishy situation we're seeing right now.

Josh, just a couple of additional data points for you. So FX year-on-year, we'd anticipate with Right now, the rates that we're seeing, about a $15 million negative impact year on year, and then you commented on underabsorption rates, given the efforts that we're making to align inventory with end markets, you can assume about a $15 to $20 million negative impact between Q3 and Q4 from what we're trying to achieve by matching production with the end market situation.

Thank you. Our next question is coming from Kevin McCarthy from Vertical Research Partners. Your line is now live.

Yes, good morning. Peter, can you talk about your asset footprint in polyurethanes? I think last quarter you sort of advertised some work you're doing in Brazil. Do you see potential to continue that rationalization in markets like Asia?

Yes, we're looking at various areas in Southeast Asia without getting into too much detail. Some of those facilities we've looked at shutting down, and other of those facilities we're looking at selling off or perhaps giving the option of giving a facility over to a partnership or something. So, again, some of those are in motion right now. But having said that, I think, again, longer term, where we want to see our volume concentrated is are in those markets where we are going to see a value over volume strategy. That means that we are going to be looking for those markets where we can move the production that's coming out of our splitters. We can move the higher end, less volatile, higher margin materials. And that's not something that's going to happen overnight, but it's a two or three year transition and commitment. And I believe that we're probably a third of the way, halfway through that. And so it's a combination of how quickly can we shut down those assets and move them in an orderly manner, and how quickly can we reabsorb that tonnage into new applications and into qualifying applications. So it's not just a question of moving the product instantaneously. In many cases, we've got to go through a qualifying process that would take several months.

Thank you. Our next question is coming from Alexey Yefimov from KeyBank. Your line is now live.

Thanks. Good morning, everyone. In performance products, it sounds like we expect weaker volumes, but margins are largely holding up. You don't see a meaningful spread compression at this stage. I just wanted to make sure that that's correct.

Well, again, these are tenuous times right now, but I think that our margin – discipline and our pricing discipline has been strong to date. And in a lot of these products, we are one of two, perhaps three global players on a global basis. So we don't typically see spot materials and spot pricing that's putting a great deal of pressure on pricing. So I hope that that pricing discipline is going to continue. But I I think that the biggest factor for the performance products going into the fourth quarter and early into next year is going to be volume more so than margin.

Thank you. Next question is coming from John Roberts from Credit Suisse. Your line is now live.

Thank you. How is the loading on the new splitter going, and do you think the slowing economy is going to delay your ability to load that?

Well, again, I think that the single biggest product that we're moving out of that splitter is in the automotive sector. And that continues to be a very good sector for us right now. We also see a lot of flexible foam that is going to be coming out of that splitter. And that's, again, got both residential and automotive applications to it. But Again, as we look at the automotive market, I think it's going to be very interesting over the course of the next year, how many of the OEMs in the automotive sector are going to be relocating from Europe to North America and shipping a lot of their products back. And I said in my comments, we're speaking with a lot of our customers, I think that over the course of the next year or two, you're going to see quite a few customers moving production, European production, particularly in areas of aerospace, automotive, and so forth, to either China or, more likely, to North America, and then re-exporting, if you will, that product back into North America.

Thank you. Our next question is coming from Frank Mitch from Fermium Research, a line of allies.

Good morning, Peter. By you guys pulling out a maple shade, you're going to raise my taxes, so I'm not sure how I feel about that.

If you can negotiate a discount for us on your publications, we already pay a fortune for them.

That is a non-negotiable task. A couple quick points on cash. Phil, in terms of the fourth quarter free cash flow, is it reasonable to expect that you'll be able to generate another $100 million there, and you are on track to get $540 million of cash early next year. You have a pretty pristine balance sheet right now. What are your thoughts on the possibilities of M&A with that cash?

Yeah, Frank, so in terms of our free cash flow, as we said, $409 million through the end of the first three courses of this year, we would expect to see a fairly sizable networking capital inflow in the fourth quarter, particularly with everything that we're doing around production rates and given that end market conditions are deteriorating both through some demand destruction and through some seasonality. So that networking capital should come through. We are going to be focused on making sure we continue to put capital expenditures into the three performance products. projects that we've talked about. But in terms of being able to deliver $100 million plus of free cash flow in the fourth quarter, we would certainly hope that we're on target for that. And as Peter indicated in our prepared remarks, we would expect to be approximately 40% for the full year on free cash flow from continuing operations. In terms of deployment of cash, yes, $540 million net cash proceeds after tax. There will be some adjustment for the closing statement, but that's what you can assume coming back onto our balance sheet. As we indicated in our prepared remarks, that gives us optionality around Bolton acquisitions. It also allows us to continue to deploy effectively share repurchases back to shareholders as well as a competitive dividend. But we'll still have headroom given our leverage. and given our leverage well below our two times net debt target to be able to do Bolton acquisitions. I would remind you that during the coronavirus time period, we actually went out, we bought our Second, spray foam insulation business. We bought two additional businesses in advanced materials, and that was because our balance sheet was flexible enough to be able to purchase those businesses at a decent price. Again, we would look to that flexibility as we go through a slightly slower economic environment.

Thank you. Next question today is coming from David Begweiter from Deutsche Bank. Your line is now live.

Thank you. Good morning. Peter, on your slide 12, looking at 2023, you list a number of positives and negatives. or challenges. Any early thoughts on 23 EBITDA relative to the roughly $1.2 billion you'll do this year? Thank you.

David, I appreciate the question. You give me the variables and I'll give you the number. Without trying to sound too evasive here. I think that the year will probably look a lot like 2022, but backwards, if you will. I would hope that we will see improvements throughout the year as we see the impact coming in of our cost reduction initiatives and further opportunities we have to move product through our Geismar splitter, as we see the capital that we're investing come to fruition as we see the full integration of recent acquisitions and so forth. I think that even if it stays to be a pretty flat year, we're going to see those improvements hitting throughout the year. And so I'm not overly optimistic, but I'm rather optimistic that as we go through the year, we'll do better than the market on a relative basis. And like I said in my prepared comments, I think that throughout the year, we'll start to get a handle on inflation. A lot of the inflation in the U.S. is due to our own failed energy policies here, and I think that a lot of that's going to be addressed here after the first of the year. And I do have confidence that China, when it does fully open economically, I think it's going to open with quite a sharp uptick in demand. given how long the restrictions have been on economic growth.

Thank you. Next question today is coming from Angel Castillo from Morgan Stanley. Your line is now live.

Hi, good morning. Thanks for taking my question. I just wanted to talk a little bit more about MDI and the competitive environment you're maybe seeing there. You noted that you're running your assets at about 50%. So curious, what are you seeing in kind of the broader industry And particularly as you think about pricing dynamics and, you know, your efforts in passing through costs and surcharges, can you just talk about maybe, you know, how that's progressing, how it's kind of evolving, and within that maybe give a little bit more color on the energy assumptions for your fourth quarter versus what you maybe need to recoup and potential benefit?

Yeah, our energy forecast, you know, going into the fourth quarter, it's safe to say that they're pretty parallel to, where the forward-looking market numbers are right now. If you were to look at the forward trading numbers for the month of December and for the remainder of November, it shows a gradual uptick in those months. If the temperatures remain warmer than usual as they have so far this season in Europe, I think that we might actually see a bit of a tailwind coming from lower than expected gas prices. With the areas on pricing, look, we're going to continue to be pushing prices and surcharges wherever we can, but we're not going to do that at the destruction of our customer base. And I think that we've been a leader, particularly relative to our size here in Europe, on pricing and on trying to move costs through as aggressively as we can. And we've clearly have put the value of our product over moving volume. I think you can look across the competitive polyurethane landscape and as I look at our third quarter numbers, we were able to offset all of our raw material increases in the third quarter through pricing and through pricing discipline. I think that says something about the seriousness and our commitment to our pricing over volume. Now, having said that, I think that as you start getting into year-end as far as what customers, what customer segments are and so forth, we are disproportionately weighted towards probably the automotive industry, some of the insulation industry, the footwear, the ACE markets and so forth, CWP. Other polyurethane players are going to be more weighted than us towards appliances and towards synthetic leather and towards other applications. So I wouldn't necessarily want to read that whatever we're doing is what the rest of the industry is doing and vice versa. So I wouldn't feel comfortable commenting on what others might be seeing with their margins, with their demand, and with their capacity utilization. But as we said, we're going to be focused on, this is not a time to be, you know, also to be running plants to try to build inventory, in our opinion. It's coming to the end of the year with the amount of uncertainty. We're trying to match very closely our production to customer demands.

Thank you. Next question is coming from Mike Sisson from Wells Fargo. Your line is now live.

Hey, good morning. Peter, I wanted to maybe take another stab at 23. So if I take a look at the fourth quarter midpoint, multiply that by four, it's a pretty low number. But as you said, it includes a lot of destocking and it's probably not the right run rate to think about trough earnings for Huntsman. So if you sort of take out, I don't know if you can do this, but if you can sort of normalize the destocking in the fourth quarter, what do you think that number would be? And is that a better way to think about what a trough earnings number would look like for Huntsman in 23?

No, I don't think it's a good way to look at it because fourth quarter, you're going to have seasonality that you typically don't have in the other three quarters. You're going to have definite de-inventorying in capital management that most companies do, even during normal business conditions during the fourth quarter. And I do think that there's going to be a great deal of volatility My personal prediction would be that we've seen a low natural gas price in the quarter in Europe here of about $8, $7, $8 per MMBTU. And you're likely going to see prices spike on an intraday basis, perhaps north of $50. So you're going to see some of the most volatile natural gas prices in the fourth quarter. And I think to try to extrapolate those sort of variables and say that that's what the new normal is or that's what an entire year's output is going to be, I think there are too many moving parts. As I look at our business and as I look at the latter part of 2022, and I kind of think of that on an inverted basis going forward in 2023, again, I think we're going to start the year with some real headwinds coming out of the fourth quarter in 2023. And I probably would see more signs of optimism than pessimism going forward throughout 2023. But again, I want to be very clear. I'm trying to see an ending through the month of November and into December for Q4. 2023 just looks really murky. I mean, just Take a single variable as to what Russian gas and what Putin decides to do with sanctions on natural gas and crude oil, and you're going to have tens of millions, if not hundreds of millions of dollars of variable impacts on our business.

Thank you. Next question today is coming from Matthew Blair from TPH. Your line is now live.

Hey, good morning, Peter. You mentioned you're running your Rotterdam MDI plant at about 50%. You're relying on some imports and overall EBITDA negative in Europe for MDI. Is it possible to shut this plant down and fully rely on lower cost imports? Can you talk about the considerations there?

Yeah, well, of course it's possible to do that. I'm not sure that it's very practical to do that just because there are two things that you have. You have a number of fixed costs that are going to be there whether you run the facility or not. Those are going to be fixed costs that are going to include your minimum take or pay agreements, people that are building hydrogen and CO units next to your facilities that are supplying your utilities, your labor costs and so forth. We're not going to fire all of our people and then rehire them back in six months. So all of those fixed costs you're going to have if you idle your facility, regardless or not. Another thing that I would say, and this is typically, again I say typically, MDI plants don't operate very well under 50% capacity utilization. You're basically making, this is a highly technical term here, but you're basically making glue. And you're moving glue through your pipes and so forth and through your process. And as you slow that down, you have greater and greater risk of gumming up the facility, if you will. And typically, these plants just don't do very well, much under 50%. So I think that's about as low as you can go until shutting the plant down. I will remind you that of our European facility, we do have two lines there. Think of Think of roughly a 35-65 sort of split on capacity so we could shut down the smaller unit if we wanted to and run harder on the larger, newer unit. We did that in Geismar, Louisiana during the 2008 and 2009 recession. We had one of our units that was down for over a year. The other variable that I would just ask you to keep in mind as you think about the idea of movement of MDI globally, we thought very long and hard about moving MDI last August from the U.S. into Europe when European gas prices were at $100 and spiking at $100 per day. At that point, there was over $1,000 per ton of difference between US prices and European prices. Now, again, when I say $1,000, remember that about $400 of that has to be chewed up through freight, logistics, and handling, and so forth. What that $400 does not include is also your working capital, the specifications, and so forth. And you're thinking that it takes about two months, give or take a couple of weeks, on that number to get the product here. So had we been moving product in August Building inventory to move it, you're into September. Moving it, you would have been arriving product here in November where gas prices are around $10, $15. So it wouldn't have made a great deal of sense to move MDI when you do that. You've really got to be taking a speculative hedge, if you will, that what I'm going to be moving today is going to be competitive three months down the road. And so a lot of variables in that. So again, Matt, I'm sorry if this has been a convoluted answer, but it's just a lot tougher than most people say to move product around. If you're going to do it, it's got to be something that really under normal business conditions, under today's environment on a normalized basis, you're willing to do that. And you're willing either to shut down a plant in its entirety and supplement that from from overseas, or you're just going to bite the bullet and take the risk on some of these sort of things. But as far as shutting down our Rosenberg facility, our European MDI capacity, I don't see market conditions getting to that point. As I sit here today, I don't see market conditions getting to that point where we would be idling that plant, the entirety of that plant.

And in reality... Cost competitiveness on the cost curve of Rotterdam, which is the second largest facility, MDI facility across all of Europe, remains extremely attractive relative to others, particularly with the position that we have in UK energy-intensive aniline production at a much lower natural gas price to mainland Europe.

Our next question is coming from Matthew DeVoe from Bank of America. Your line is now live.

Morning, everyone. If you move volume out of the HBS business, is that PU production going offline or are you moving those polymeric molecules into other markets? And when you do that, is there a margin headwind from that mix shift and what would that look like?

That will all depend on the demands of the market pricing and the margins that we have at that given point. Ideally, most of that product that we're moving into HBS, it does have other homes in spray foam and in rigid insulation applications. And so we have an opportunity to move that. If we're not moving in HBS, we have an opportunity to move that out. But typically, it's also the same product, I remind you, that goes into CWP. the composite wood production, OSB and plywood applications. I would remind you though that that typically is our lowest margin MDI. It's our polymeric, it's our commodity grade MDI, which is one of the strengths of HBS is that you're taking what otherwise would be some of your lower margin materials and moving it upstream. if you will. So, typically, I'd like to think that we can find a home for it, you know, but there's not a, it's not necessarily a black and white answer that all depends on market conditions and alternative places where you can place that tonnage.

And typically, if we're moving that product through HBS, it's not only a polymeric MDI, we're also matching that with an aromatic polyester, which is our own technology, which we purchased back in 2013. And that's what makes it a much more attractive proposition as we're selling a formulation downstream into the market rather than just a component polymeric MDR.

And, Operator, why don't we take one more question, given the time constraints and so forth?

Certainly. Our final question today is coming from Lawrence Alexander from Jefferies. Your line is now live.

Good morning. Just on the European restructuring, is it fair to characterize it as currently mostly a cost realignment because your customers haven't yet made their repositioning decisions? And so was there probably another round of European restructuring needed once they've made their decisions? But also if capacity is going to be moving to the US and China, do you have sufficient capacity in place to handle, you know, the next up cycle if there's also going to be a structural shift in capacity into those regions? So, I'm thinking particularly on the MDI side.

Yeah, excellent question, Lawrence. I would say that, no, on the program that we've announced today, you're looking at roughly around 300 positions. And we're really trying to calibrate this business around what we believe to be the new market reality. And look, as I look around Europe, I look at areas like insulation, aerospace, light weighting, spray foam, a lot of the infrastructure spending, a lot that's going to be going into automotive. These are going to be continuing markets in Europe. They're going to continue to prosper and so forth. And we're going to continue to need technical support and a business infrastructure to support these. They're also going to be, as you all know, more energy intensive customers. and energy-intensive applications that have already talked about moving. And some of those are some of the OEMs. If you're producing anything that's going into somebody that's producing glass or materials that are going to the automotive in those areas and coatings and some of the adhesions and applications, those are going to be moving out because they're more energy-intensive. Again, not all of them, but some of them are going to be moving out. And we've tried to calibrate all of those as best we can. And I think that what we'll be doing today, and not just eliminating the positions, but also in relocating, again, we'll be relocating somewhere between 125 to 150 of those positions into Krakow, Poland, where we have about a 35% lower labor costs. on, again, depending on the position and from which country they're coming. So as we look at our arbitrage, I don't see us coming out here six months from now or 12 months from now and saying, we're going to go through another cut and another repositioning because of where we see customers falling out. I think we've given that a lot of thought over the last six months, and I think we have a pretty good idea as to who's going, who's staying, and which customers are going to be here on a longer-term basis, and frankly, who's going to have the financial strength? A lot of customers today, we're not just looking at margins of our customers. We also have to be looking at the creditworthiness of our customers. As we look at that excess material and do we have the product to supply all of our customers, I'd like to think that we will, but as we've said the last couple of quarters here, We're in the process of transitioning and we're going to continue to transition. So as we see a lot of this customer base move from Europe to North America, we are going to be moving volume from lower margin areas of South America and less profitable applications into North America. As everybody on this call knows, we just recently opened up our splitter in Geismar, Louisiana. We've been pulling out of some of the polymeric applications that we've supplied over the last 15, 20 years. And we're moving that tonnage into downstream businesses as well. So, again, to the extent that we can't supply everybody that's moving and we've got shortages, frankly, it's an opportunity for us to do some bottom slicing and take some of that polymeric lower margin business. If it's not as profitable as you'd like to see it, split it. upgrade it and move it into higher-end applications. And frankly, we have that ability to do that in China. We have the ability to do that in Europe and in North America. And those volumes can also be supplemented with purchased polymeric MDI, crude MDI from around the world as well. It doesn't just have to be our MDI. I feel very good about not just our ability to supply MDI, but more importantly than supplying MDI, we want to supply profitable MDI. We want to supply it where we can be fulfilling a niche, where we can get a little bit better edge on pricing, margin, and reliability. And that, at the end of the day, is the year of things business that we continue to try to build here. Operator, with that, we'd like to thank everybody for taking the time to hear us out this morning and wish everybody the very best.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.