Huntsman Corporation

Greetings and welcome to the Huntsman Corporation fourth quarter 2022 earnings call. At this time, all participants are in a listen-only mode. The question and answer session will follow the formal presentation. Anyone to 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, Daryl, and good morning, everyone. Welcome to Huntsman's fourth quarter 2022 earnings call. Joining us on the call today are Peter Huntsman, Chairman, CEO, and President, and Phil Lister, Executive Vice President, CFO. This morning, before the market opened, we released our earnings for the fourth quarter of 22 via press release and posted 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 in our income and cash flow statements and held for sale on the balance sheet. During this call, we may make statements about our projections or expectations for the future. All such statements are forward-looking statements, and while they reflect our current expectations, they involve risks and uncertainties, and that guarantees the future performance. You should review our filings with SEC for more information regarding the factors that could cause actual results to differ materially from these projections or expectations. We do not plan to publicly update or revise any forward-looking statements during the quarter. We will also refer to non-GAAP financial measures, such as adjusted EBITDA, adjusted net income, or loss 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. Thank you for taking the time to join us. Let's start out here on slide number five. Just at EBITDA for our polyurethanes division, the fourth quarter was $37 million. Significant destocking across our market, significant specifically in Europe and North America, combined with competitive pricing and historically high energy costs placed unprecedented pressure on the polyurethanes business throughout the fourth quarter. Overall sales volume in the quarter declined 22% year-on-year and 9% sequentially. The Americas and European regions accounted for all the decline as lower demand and significant destocking significantly impacted sales volumes. Our Asian markets, primarily China, did experience modest volume growth in the quarter due to slightly improved demand in insulation and automotive when compared to the fourth quarter a year ago. European demand remains subdued. And from our vantage point, we're still clearly in a recessionary economic environment. While energy costs remain historically higher, those headwinds have improved. This improvement will help to relieve some of the pressure on our European business as we move through the first half of 2023. That said, falling costs and lower demand has triggered increased pricing pressure on MDI. and that offsets some of the benefit from lower natural gas prices. As we indicated on our previous earnings call, we are restructuring our business in Europe to better reflect the high energy cost environment. In the short run, we are also idling our smaller MDI line in Rotterdam for an extended period until end market demand improves. We have no intention of remaining an industry shock absorber, as has been the case these past quarters. To be clear, Europe remains a core region for our polyurethane's business. We will benefit for many years to come from the region's needed drive for improved energy conservation and efficiency. We remain well positioned to bring energy-saving solutions to both residential and commercial construction markets, as well as innovative improvement to the lightweighting of automobiles. There is some optimism that economic conditions and demand in China will improve as 2023 unfolds due to the removal of the Chinese government's zero COVID policies. How this optimism translates into increased consumer spending and industrial activity remains to be fully seen. Post-Chinese New Year's, we are seeing early signs of improved conditions in pricing trends and moderate demand improvements in areas such as cold chain, infrastructure, and certain consumer-related markets, including furniture. China is the world's largest MDI market, accounting for approximately 40% of global capacity and demand. A steadily improving demand situation and potential economic stimulus would be a catalyst for our polyurethane's business. Lower propylene oxide margins in China drove our equity earnings lower year over year. Our joint venture contributed approximately $10 million in equity earnings for the quarter below the $22 million reported a year ago. One of the greatest headwinds impacting our Q4 was continuing and continuing to challenge our polyurethane businesses, the high levels of destocking. we've seen in our Americas region, and especially in our construction markets. Remember that two-thirds of our polyurethane Americas business goes into construction-related end markets, approximately half into commercial construction and half into residential, of which 70% is related to new residential builds. Our construction market for composite wood products used in residential and non-residential insulation markets were under significant downward pressure throughout the fourth quarter. These trends have continued into the first half of Q1 as we continue to see the impact of higher interest rates and their effect on downstream customer decision-making. We are hopeful that destocking in the Americas will ease as we move into the typically seasonally stronger months of March and April, giving us some confidence in this regards is that our spray foam business, which was the first to see destocking last year, reported flat volumes year over year in the fourth quarter. Our Huntsman Building Solutions spray foam business ended the year with $600 million of annual sales. While the housing market may endure a more difficult year than 2022 due to higher interest rates, we remain on the right side of energy efficiency drive and we will benefit from both improved building codes and the government's Inflation Reduction Act. Another positive trend continuing to emerge for our polyurethane business is the modest but steady recovery we are seeing in our global automotive platform, which saw 7% improvement globally in the fourth quarter, with every region seeing positive volumes during the fourth quarter. Approximately 15% of our polyurethanes portfolio ended up in automotive in Q4. As we announced last quarter, we are not waiting for markets to improve, but are taking decisive and proactive steps to make our company more efficient, stronger, better positioned for when the current challenging conditions abate. We discussed last quarter in the short term in polyurethanes, have adjusted MDI production to match demand. We'll continue to monitor to adjust accordingly during 2023, both at Rotterdam and at Geismar to ensure that we aggressively manage our working capital with cash generation as our top priority. Furthermore, we are moving forward aggressively on the cost reduction plans we discussed last quarter. We are on track of delivering as planned This includes exiting geographies that are not generating acceptable returns and consolidating additional back office functions. Most of these actions will be completed by the end of 2023. They will lower the overall cost basis for polyurethanes by at least $60 million. Looking forward into the first quarter, we expect to see improvement over the fourth quarter despite the typically seasonality and lighter quarter due in part to the Chinese New Year. We should expect continued destocking in the United States, but that destocking should moderate as we move through the quarter. Putting it all together, as we sit here today, we expect polyurethanes adjusted EBITDA for the first quarter to be in the range of $55 million to $65 million. Let's turn to slide number six. Performance Products reported adjusted EBITDA of $61 million for the fourth quarter, which was a healthy 20% margin despite destocking headwinds that exasperated the typically seasonality that we see in the fourth quarter. The decline in adjusted EBITDA versus the prior year was driven primarily by a 32% decline in volumes year over year. That was partially offset by 23% improvement in unit variable margins owing to our commercial excellence initiatives and market dynamics. The volume decline in turn was driven primarily by lower demand and aggressive destocking in construction, coatings and adhesives, and industrial-related markets, mostly in the Americas and European regions. We have seen signs that destocking appears to be moderating, but global demand remains muted, and customers are keeping inventories low as they wait for improved visibility. As we mentioned, even with these macro challenges, we were able to deliver EBITDA margins within our long-term expected range. These returns are due in large part to our ongoing commercial excellence programs and attractive industry dynamics we pointed to over last year, as well as good cost control. Molybdenum hydride and our high molecular weight ethylene amines continue to offer strong returns despite a slowdown in end market volumes. As indicated on prior calls, we have seen significant pressure on returns in amines into our China and European wind businesses. And it remains to be seen whether the Chinese and EU government's public stance for more renewable energy will come to fruition and drive improvements. Our remaining amines portfolio and performance products is fragmented and highly diverse, will benefit us both in the short and long term. Capital investments in our differentiated performance amines serving insulation, EV battery, and semiconductor markets continues to move forward on schedule. As 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 once they are fully ramped up and the respective markets return to a more normalized level of demand. Performance products remains a highly attractive division, in our view, and we continue to prioritize strategic growth via organic investment and inorganic opportunities over the long run. The first quarter is typically similar to the fourth quarter. The first quarter will face tough comparisons versus prior year due to lower overall volumes driven by the stocking and the more challenging global demand environment. However, we do expect to stay within our long-term EBITDA range of 20% to 25%, and we expect performance products first quarter adjusted EBITDA to be in the range of $60 million to $70 million. Let's turn to slide number seven. Advanced Materials reported adjusted EBITDA of $41 million in the quarter, which was below the fourth quarter a year ago due primarily to lower sales volumes. Improved pricing and mix help keep EBITDA margins only modestly below the prior year. Despite a fourth quarter decline, for the full year of 2022, advanced materials registered its best-ever year and adjusted EBITDA margins were 18%, a 120 basis point improvement over 2021. The sales volume decline of 28% was due in part to our exiting of lower margin commodity type product lines. Excluding our de-selection of certain product lines, our core specialty volumes declined less than the segment average, with much of the drop attributed to de-stocking in several of our industrial related markets, primarily in the Americas and Europe. Total sales fell less than volumes. due to favorable pricing and mix, which helped improve our unit margin by over 20%. Our aerospace business continues to demonstrate improving trends and increased almost 20% compared to prior year. We expect these trends to continue through 2023 and beyond as wide body production rates improve and airlines continue to increase orders. Our expectations remain that this important and profitable sector will return to pre-pandemic levels in 2024. Automotive revenues in the divisions increased 7% compared to the prior year as sales benefited from improvements in global supply chains combined with continued favorable trends in light weighting and growth of electric vehicles. Like in other divisions, continued destocking in cautious customer ordering patterns are weighing moderately on sales in the early part of the first quarter. In addition, we see continued headwinds in our European infrastructure coatings business and further destocking in our industrial markets, specifically in the Americas. But remember that advanced materials have less than 10% exposure to worldwide commercial and residential construction markets. We expect improved results in the first quarter in 2023 driven by our aerospace and automotive businesses, as well as continued effective cost controls. Combining all of this, we expect the first quarter adjusted EBITDA for this division to be in the range of $45 to $50 million with higher EBITDA margins than we saw in the fourth quarter. Now turn the time over to our Chief Financial Officer, Phil Lister. Phil?

Thank you, Peter. Good morning. Let's turn to slide eight. Adjusted EBITDA for quarter four was $87 million compared to $327 million in quarter four of 2021 and $271 million in quarter three of 2022. The decline over the prior year was driven by reduced volumes across our portfolio, as well as lower unit margins in our polyurethanes division. Sequentially, volumes declined by 14%, driven by significant destocking in Europe and in North America. Seasonally, we would normally expect to see a sequential volume decline of approximately 5% across our portfolio. As a reminder, about 40% to 45% of our overall portfolio is linked to worldwide construction by commercial, residential, and infrastructure spend. Unit margins in performance products and advanced materials improved both year-on-year and sequentially with pricing remaining firm. Polyurethane's unit margins declined as weakening demand led to price erosion in the fourth quarter, while cost of sales increased year-on-year by over $500 million annualized, driven by a significant increase in energy costs and raw materials. For the full year, Huntsman's raw material costs increased by approximately $1 billion, of which approximately half was as a result of increased energy costs. SG&A costs were lower by $19 million a year on year as a result of our cost optimization program. We closed the year at 9% SG&A to sales, an improvement on 2021 and ahead of our Invest Today commitments. Year-on-year foreign exchange movements impacted the business by approximately $20 million, with a stronger US dollar compared to quarter four of 2021. We also saw a decline in our equity earnings from our China propylene oxide joint venture, with lower demand in China placing pressure on margins. Adjusted EBITDA margins declined to 5% in the quarter, driven by polyurethanes at 3%, while performance products and advanced materials continued to deliver higher returns at 20% and 15% respectively. Let's turn to slide 9. With our European restructuring, we have increased our cost optimization target to a $280 million annualized run rate by the end of 2023. As a reminder, approximately half the savings are coming from SG&A reduction and half from cost of sales. We close the year with an annualized run rate of approximately $190 million compared to $160 million at the end of quarter three. More specifically, for our European restructuring, we have completed the majority of Works Council discussions. We have some benefit from the European restructuring late in the fourth quarter with some early headcount reductions. The majority of reductions and reshaping of our footprint in Europe will occur during 2023 with a targeted annualized run rate of $40 million of savings by the end of the year. In addition, our move to the new global business service hubs in Poland and Costa Rica continues at pace, with approximately 100 positions already filled. As part of our continued focus on functional spend, we have also completed the handover of certain IT activities to a managed services third-party provider, saving approximately $15 million on an annualized basis. Within Poly Europe Bains, we continue to reduce headcount as we work to align ongoing costs with current profit margins. In quarter one, 2023, we will complete the previously announced exit from our Southeast Asia business, which will add to the already completed exit of our South American business in 2022. Overall, we remain confident of achieving our $280 million annualized run rate target by the end of 2023. Outside of our formal cost optimization program, we remain focused on continuously improving our cost base to meet current economic conditions, which include persistently high inflation. We'll be extremely vigilant of any discretionary spend, particularly in our European polyurethanes business, given current levels of profitability. As Peter mentioned earlier, we'll be idling the smaller of our two Rotterdam MDI units for an extended period due to current end market demand, And we have also idled one of our three lines in Geismar, Louisiana, until we see sustained improvement in the North American construction market. Both units can be brought back online as demand dictates. Combined, we expect to save approximately $10 million in cost in 2023. Turning to slide 10. Fourth quarter operating cash flow from continuing operations was strong at $297 million. and we closed the year at $892 million, or a 77% adjusted EBITDA conversion rate. Free cash flow for the fourth quarter was $211 million, with $620 million for the full year, $542 million excluding net proceeds from the Albemarle litigation settlement. These figures equate to a free cash flow conversion rate of 54%, including the Albemarle settlement, and 47% excluding Albemarle, both in excess of our 40% target for 2022 set out at our 2021 invest today. Capital expenditure from continuing operations was $272 million for 2022, $290 million including textile effects, within the guidance level we gave this time last year. We are focusing intently now on our spend on projects and performance products, targeting energy saving installations, semiconductors and electric vehicles. Given the current economic environment, we expect to reduce capital expenditure in 2023 compared to 2022 with a targeted range of $240 to $250 million. Beyond CAPEX, some guidance on other elements of cash flow in 2023. Interest payments should be similar to 2022. Our cash tax rate in 2023 will be a slight headwind compared to 2022, with full-year bonus depreciation of our Geismar splitter project rolling off. As we stated on our Q3 earnings call, restructuring cash spend in 2023 will be higher than in 2022 as we continue to work through our European restructuring program. Pension contributions are expected to provide a slight tailwind in 2023, down $10 million to approximately $40 million this year. Note, with regards to pension, there will be an adverse non-cash impact on adjusted EBITDA of approximately $40 million in 2023 compared to 2022. Operating working capital at the end of 2022 was lower at 11% of sales, and this remains a key variable for 2023 cash flow, depending upon the level of economic activity and raw material costs that develop during the course of the year. In the short term, we expect to see a seasonal cash outflow in quarter one, which will also reflect the current lower level of profitability, as well as our annual insurance premiums. Our balance sheet remains strong, and we remain firmly committed to our investment grade rating. We closed 2022 with $1.8 billion of liquidity and net debt leverage of 0.9 times. As a reminder, the expected closure of our textile effects sale later this month will add net after-tax cash proceeds of approximately half a billion dollars, and we currently expect to make at least $400 million of share repurchases in 2023. Adjusted earnings per share for the fourth quarter were 4 cents per share, $3.13 for the full year. In quarter four, we repurchased approximately $250 million of shares at an average price of $27.39. Our adjusted effective tax rate was 20% for the full year. For modelling purposes in 2023, we expect an increase in our adjusted effective tax rate to approximately 24% to 26%, due in part to the accounting impact from a valuation allowance in our European polyurethanes business recorded in Q4 2022. Our long-term expectation remains an adjusted effective tax rate of 22% to 24%. We have also increased our dividend by 12% to $0.95 per share, which will add approximately $10 million of net cash outlay in 2023. With this dividend increase combined with share repurchases, we would expect approximately a 10% return of capital yield to shareholders in 2023 at current levels of market capitalization. Peter, back to you. Thank you, Phil.

In conclusion, As we close the chapter on one of our company's most challenging quarters, I'd like to take a few minutes and express what we are presently seeing in the industry and what we are doing in response. In the fourth quarter, we saw three major headwinds that impacted our performance. The first of these was the near record high cost of energy. We move into the first quarter, we are seeing some moderation in energy prices, however, Up to the present time, Europe continues to see gas and corresponding utility costs seven to 10 times higher than in North America. The relief that we are seeing has more to do with a mild winter in Europe and industrial demand destruction rather than the structural change. I do not see a return in the coming years wherein prices will compete with North American gas and utilities. To mitigate this, We announced four months ago a $40 million cost savings plan as we recalibrate our European cost structure. We continue to remain on track to having this completed by the end of this year. This does not mark a retreat from our European market, but rather a longer-term commitment to compete and create shareholder value in the face of new market realities. We continue to assess the energy regulatory and economic future of Europe, we will continue to possibly see further restructuring with our European footprint. The uncompetitive energy situation has caused the second headwind of our business, an inflationary drag on overall demand for our products. In the EU, this has been caused by rising energy costs and poor energy policies. In the US, we're seeing similar conditions due to rising interest rates. We believe that our Rotterdam MDI plant is one of the more competitive MDI plants in Europe. However, we will only produce that which we can competitively sell. We will idle one of our two lines in Rotterdam that represent about a third of our Rotterdam capacity. Our Geismar Louisiana MDI plant, we have closed one of our three lines that represents about 30% of our output. While both of these lines can be restarted, we will only do so when conditions justify such a move. We've also taken a similar step in our performance products, and to a lesser degree, our advanced materials divisions, so that we calibrate production to actual demand. This will allow us to generate better working capital and pass through raw material costs more effectively. The last negative impact in the fourth quarter was an unusually strong inventory reduction that was felt across all of our products, but particularly in Europe and North American construction. I believe that from where we see things in the first quarter, that inventory levels are very low on the chemicals portion of our customers' inventory. However, we have much less visibility in our customers' finished product inventory. What a building material supplier keeps in warehouses or in unsold houses are all part of an inventory chain that impacts our products. There are parts of the construction material segments where we continue to see destocking taking place. Other segments are operating their plants and mills around just-in-time delivery. In the aerospace, automotive, and spray foam insulation, we see much tighter change than we do in other areas. We will continue to manage our working capital accordingly and push for higher prices to recover more of our lost margins. As we look to the remainder of the first quarter, we continue to see gradual improvements across the board. China continues to show signs of improved demand and gradual improvements in pricing as the economy loosens its previously enforced COVID restrictions. Early visibility into market conditions for Q2 are murky at best. Regarding the second half of this year, I can see a number of scenarios that could mean hundreds of millions of dollars positively or negatively. To give a meaningful four-year outlook at this time would be speculation at best. What we will continue to do is to react with each variability in the macro marketplace and make decisions that create shareholder value. We will do this by remaining open-minded as to our overall portfolio and where we create lasting value. We will continue to assess our global footprint as it pertains to our costs, from where we source our raw materials to our internally produced products. We will preserve our strong balance sheet and deploy capital as was mentioned earlier in this call, to enhance shareholder value as we buy in at least $400 million of share repurchases this year and increase our dividend by 12%. We continue to aggressively look at M&A opportunities, particularly in our performance products and advanced materials divisions, but we will remain disciplined and not overpay for assets. I personally believe that the steps that we have initiated and continue to take going forward will allow us to take maximum advantage of whatever comes our way. We have a strong balance sheet, great customer segments, a strong focus on cash and working capital, and will relentlessly match our cost structure to the realities of the marketplace. In short, we are well positioned to take advantage as markets improve. With that, operator, why don't we take any questions?

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 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 questions. Our first question comes from the line of David Begleiter with Deutsche Bank. Please proceed with your question.

Thank you. Good morning. Peter, you mentioned some strength in MDI pricing in China recently. Can you give a little more color of what you're seeing in the country on the ground right now? Thank you.

Following the Chinese New Year, we've seen prices go up to, on average, around $15,800 a ton. Now, again, that's on average. You're going to see the specialty side of that going up higher, and you're going to see some of the more commoditized going down lower than that. But that's up from where we were in the fourth quarter of around 14,000 RMB per ton. So we are seeing some progress there in pricing. We are seeing some progress in demand. And, you know, obviously, we hope that it continues. As we think about the Chinese market, you know, think broadly around three broader areas, that which is consumer-related growth, that which is what I would call stimulus-related or, you know, infrastructure spending and so forth, and then that which is export. I think the export end, an end that we play very little in, by the way, continues to remain pretty sluggish. Consumer spending, And that would be in automotive and so forth. Some of the areas that we compete in is going to be at this early point, in this early view, that's going to be the stronger of the three. And then we're gradually seeing the uplift in infrastructure and stimulus spending. And that's going to be, as you think about insulation, as you think about some of the infrastructure projects and so forth that would require our products across the board, renewable energy, you know, the rewiring of, the re-tabling of a lot of the energy infrastructure. So let's remember that China has been down many segments of that economy. It's been down for nearly two years. And this is not going to be just a post-Chinese New Year's, people come back to work the next week and everything's running at full capacity or not running at full capacity. I think it's going to be a gradual improvement that we'll see throughout the first going into the second quarter. And, you know, particularly around that consumer uplift and around the infrastructure uplift, I think that we're going to continue to see improvements in demand and improvements in pricing.

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

Thank you. Good morning, everyone. Peter, with all the uncertainties, acknowledging all the uncertainties, would you say that the second quarter is likely trending better than the first?

Yeah, I would say that it certainly is. Look, I would think that, you know, every one of our quarters going throughout the year I would hope would be trending better. But I think that there's just a – when I talk in my prepared remarks around, you know, the murkiness that we're seeing in the overall market – The further out that we go through 2023, when we think about things like GDP in a possible recession, China continuing to improve construction in North America, these are going to be the flywheels that really are going to be determining if we've got something that's approaching a billion-dollar year or not. We need to see things like the completion of the de-inventory that's taking place. As I said, what we're seeing from the chemical side, a lot of that de-inventorying is already done on the chemical side. But again, we're not going to see building materials, and we're not going to see customers restock their inventory on the chemical side until they're finished goods. They go all the way down into the consumer areas. We're not going to see our uplift until that end of the supply chain and that end of the inventory is cleaned up. You know, we did talk about in the call our reliance on construction and home and commercial residential construction, particularly in North America. That will range anything from what we're seeing right now in retrofits, which is a stronger end of the business than new starts, spray foam, which is a stronger end of the business than what we're seeing in in OSB, for instance. So there are various parts within that construction segment that are growing and, or I should say at least recovering nicely. And there are other areas that I think we're going to have to continue to see inventories clear out a little bit more. We're also going to have to see something happen with interest rates where consumers feel that there's some stability and gives them some reason to go make what is usually the largest single purchase that people make in their lives around construction. So when we think about uptitting our potential, I think that the biggest variables I look towards is our inventory, construction returning back to not full out, but certainly better than it is today, particularly in North America. Energy being at a competitive rate, particularly in Europe. Again, I'm glad to see the lower prices in Europe, I'm afraid that lower price is because you've seen a 25%, 30% demand drop on the industrial side, which means a massive deindustrialization that's taken place. And I think that as we look across the Americas, you're going to probably see more production, more gas, more oil production in North America that will be moderating energy prices throughout 2023. And of course, China needs to continue to move forward. Again, in all those areas, we don't need to go through the roof in demand, but I think that we need to see a steady recovery taking place.

I'd like to say just to add, typically, of course, you would see a seasonal uptick from quarter one to quarter two, irrespective, as we move through the winter months. And construction tends to pick up between Q1 and Q2 as well, which you should factor into your thought process.

Yeah. Thank you. Our next question comes from the line of Kevin McCarthy with Vertical Research Partners. Please proceed with your question.

Yes, good morning. Peter, I have a two-part question on your polyurethanes business. First, for the portion that's exposed to construction, can you remind us how much goes into new structures versus retrofit of existing structures? And secondly, what would you need to see to consider restarting the idle lines at Rotterdam and Geismar?

Well, as we look at our North American business, figure that two-thirds of that is going to be around residential and one-third of that is going to be commercial. In Europe, that's going to be closer to a 50-50. sort of a number. It's going to be much more weighted towards commercial than residential. As we think about our residential side, about 30% of that is going to be retrofitting, and about 70% of that's going to be new home build. So again, that'll fluctuate a little bit. And both of those are opportunities for the spray foam. And I think that, again, as we see the new build slow down, as we see retrofit of home remodeling increase, we're losing some on the spray foam side, but we're gaining some on the spray foam side on the retrofit side.

Thank you. Our next question comes from the line of Jeff Tsakakis with JPMorgan. Please proceed with your question.

Thanks very much. Two-part question. Are textile effects inventories still in your inventory on your balance sheet, or are they in a separate category? And secondly, when you look at your relationships with contractors in the United States, Sometimes people feel that contractors are now finishing up their backlog, and then what will happen is a period of greater demand weakness. Is that something that you see, or that's something that's more invisible to you?

I'll take a stab at the latter part of that and let Phil take the textile effects part of the question. I think that a lot of the slowdown that we saw in contractors finishing up their jobs, I think that that takes into a lot of the slowdown that we saw in the fourth quarter going into the first quarter. I think that the inventories, as I mentioned in my prepared remarks, our inventories also would include downstream inventories that would be included in unsold homes. We believe, again, just anecdotally, I don't want to talk as though we know what's going on every situation, but we believe that that supply chain is thinning, the inventory is thinning. And hopefully, as we get into March and April, we're hoping that we start to see that we're going to see a greater demand. But everything that we're seeing and everything that we're hearing is that contractors at this point are working on very thin inventories, working through that supply chain.

Jeff, to answer the question on textile effects, we recorded textile effects as a discontinued operation or held for sale on the balance sheet, so that's excluding. It's excluded from our numbers and everything that we've been providing to you in terms of our underlying cash flow performance EBITDA. That all excludes textile effects. The 11% operating working capital percentage of sales I gave to you in the script is also excluding textile effects. Thank you.

Thank you. Our next question comes from the line of Mike Harrison with Seaport Research Partners. Please proceed with your question.

Hi, good morning. I was hoping that you could give us a little bit more of an update on the performance products, some of the capital investments you're making in polyurethane catalysts, the semiconductor cleans, and ethylene carbonate for batteries. You talked about the EBITDA contribution being a 2024 number and kind of contingent on demand being more normalized, but maybe give us a little better sense of the timing of some of those commercial sales and I guess what your expectations are, I guess, in 23 and going into 24. Thank you.

And Mike, good morning to you as well. And I think as we look at this, again, rather blanket statement, if we had the carbonates project done today, I think that it's safe to say that the demand for the volume is going to be there 100% today. Now, that doesn't mean that the pricing and the margins are going to be as strong as they otherwise would be during a more robust time period. But the demand is certainly there. And we see that project being completed sometime during the early part of the fourth quarter. And so by the time you get qualifications done, and I would say the same thing is going to be on the That's for the ultra pure carbonates material. As you look at the ultra pure amines product that's going into the semiconductor industry, again, that will be a fourth quarter event. And that product is going to take longer to qualify. So think of that project being done in the fourth quarter and probably taking the first half of next year to be fully qualified. And so you're looking at probably the middle part of 24. And before that facility is in what I would consider to be ready for a sold out position. Again, we can't qualify the materials until we're actually producing the material. So it's impossible to pre-qualify those materials. As we think about the third project, and that's around polyurethane catalysts, and other materials that will be coming out of our Pet Frodo Hungary site. Obviously, that's going to be dependent on the growth of our spray foam business in Europe. We see that business continuing to grow. It's obviously starting at a very small pace right now. And we've seen imagine the company spent time in both the UK and the EU promoting and pushing for them to be more aggressive in their Green New Deal, if you will. around building insulation and energy efficiencies. And I think that we're going to continue to make good progress there. That will probably not be a project when it's completed by the end of this year. That will probably not be a project that's sold out on day one. It wasn't designed to be that way. We need capacity as we grow the business over the next couple of years. And so all things being equal, we should be, I would imagine, at some sort of what I would say a normalized run rate sometime in the middle to the third quarter of next year as we get the plants and products qualified, the plants lined out, and as we start to see a return coming into the spray foam. So that should be about a $35 million-ish sort of a run rate once that takes place. I want to be absolutely clear. When the plants start up in the fourth quarter, beginning of fourth quarter this year, don't expect to see that sort of run rate on day one. It will take some time to get qualified on a number of these products.

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

Hi, good morning. This is Kevin. I've stopped on for Lawrence. Thank you for taking my questions. I guess my first one was just curious how willing you are to flex your balance sheet before you see order trends improve. And when you refer to green shoots in China, automated and aerospace, I was just wondering, you know, if you could maybe give a little more detail, I guess, how much improvement are you seeing there?

Yeah, I would say that what we're seeing in aerospace in China is a relatively immaterial portion of our aerospace business, the vast majority of our demand on aerospace is going to be between Boeing and Airbus, and specifically around the Airbus 350, the Boeing 787, and the new wing designs on the 777X. So as those models increase in order patterns as the 777X is able to come online, which I believe is a 2024 event, we'll see the benefit from that. The Chinese automotive continues to be a great business for us, and we're making more and more headways across all of our divisions, particularly into the EV models for that segment of the business.

For aerospace overall, globally, we highlighted about a $90 million EBITDA on pre-pandemic levels. That dipped to about $30 million during the pandemic. We're now back up to about $50 million, $60 million, and we're confident that by 2024, which is what we indicated, we'd be back at pre-pandemic levels of profitability.

And I want to make sure I understand your question on flexing the balance sheet. Was that more of producing product to meet demand before it comes or, I'm sorry, I'm not sure I got the point on that one.

Yes, yeah, exactly. Before, you know, exactly before trends improve and just wondering, you know, I guess.

No, no, I wouldn't be in favor of that. It's not that we're afraid of the balance sheet. I don't want to put any more product in the market than needs to be put in the market. And we need to see genuine demand improvements, and we need to see pricing and margins expansion. And at that point, we'll make decisions to add capacity. But in these sort of market conditions, and I'm just speaking for Huntsman, I'm speaking as an industry, in these sort of market conditions, we don't need more tonnage going into the market at this time. Let's meet the the customer demands that we have and those customers where we have contractual obligations and so forth to do so. And we're going to scale back production in areas where we're not able to get an acceptable return.

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

Thank you and good morning. I wanted to come back to the idling of the MDI facilities in Rotterdam and in Geismar. When did you bring those units down? What were your operating rates in MDI and 4Q? Where do you think 1Q is going to come out and where do you think you are relative to the industry?

Well, Frank, first of all, good to hear from you. I think that relative to the industry, that we're probably pretty close to the industry. There is such little transparency right now. I would guess that the operating rates right now are somewhere around 70% globally. And I think that bases our own Yeah, there's some people that I recognize that are putting a priority on volume and over value. We've looked at various programs. If you take government money, government subsidies in various areas around the world, you can do that. But that might be good on the short term, but longer term, You know, you're kind of locked into keeping facilities operating at pretty high rates. You can't cut your costs as much as I think you should be able to. And, you know, to some degree, you're making a deal with the devil. So we looked at – we made a decision to shut down our Geismar capacity in the fourth quarter of this year. Our Rotterdam facility is presently going through a turnaround phase. right now, and when that restarts, it will not be restarting with both of its lines, just the larger of the lines in Broderdam. Before the turnaround, it's safe to say that we were moderating production at that facility as well.

As we said on our call, Frank, if demand dictates, then we can restart those units relatively relatively quickly. But as Peter says, we're going to make sure that we're matching effectively production to end market demand.

Thank you. Our next question comes from the line of Arun Vishwanathan with RBC Capital Markets. Please proceed with your question.

Great. Thanks for taking my question. I just want to ask, you know, if you look at year over year, there's a decline of maybe, you know, over $200 million, even ex-textiles. So, if you were to think about that, is there any way you could help us understand how much of that is maybe broken out into different buckets, say, you know, price, volume, and then maybe, you know, decremental margin? And similarly, if you look ahead, it looks like you're going to be up, you know, in the range of $40 million sequentially. And is there any way to kind of break that out into maybe some of those buckets? Thanks.

Well, I haven't given a great deal of thought on the various buckets in the past. But if I look forward, probably safe to say that we're going to be benefiting as we look into the next quarter and the quarter one. We're going to be benefiting across the board by following raw materials. and first and foremost, and lower costs across all of our region. And we do continue in the first quarter to see some pricing instability and volume demand in certain areas of the company that would be going against that. So it's safe to say that we'll be able to, to see higher earnings in the first quarter and going into the second quarter as we see raw materials come down. I think that will probably be more of the driver in the first quarter. I think improvements in demand and pricing will be shown in the second quarter. Conversely, if we look going backwards, I would imagine that some of our businesses, particularly in our performance products and ad nets, a lot of the segments there when you look at our variable margin on a per pound basis, we haven't seen a great deal of movement. It's all about volume. And in polyurethanes, some of our end markets as well, we haven't seen much of an erosion on margins either. So it's a volume drill. Others are the more commoditized end of the business. You've seen both margin and volume dropping. But I would say that the biggest single reason that we've seen a whole and earnings from a year ago would certainly be around volume more so than anything else.

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

Morning, everyone. I guess two things. One, quickly, are you on the hook for anything if Venator ends up filing or going bankrupt and then two, if we net out the lower energy costs with the lower prices and volumes in Europe, do you expect polyurethane profits can improve in Europe quarter over quarter? Yeah, I'll leave it there.

Well, I can answer succinctly no and yes. But no, we're not on the hook for anything. With Venator, we have some shares that that you can obviously read in our filings. But no, we divested of that asset, what, four or five years ago at this point. And so simple answer to your first is no. And yes, I believe that as we look at our poly-Earthings business, we certainly would hope to be expanding volumes on the back of falling energy prices. cost discipline and moving prices where we can.

Max, on Venezuela, we marked a market and we've got $6 million in the balance sheet at the end of the fourth quarter, so it's de minimis from a handsome balance sheet perspective.

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

Hey, good morning. Happy Mardi Gras. In slide 8, where you have adjusted EBITDA bridge, probably your thing, this is down 180 million or so. And I think you guys said it was mostly volume. So if the restocking ends, or I'm sorry, destocking ends, how much of that 180 comes back? And if there is a restocking event as maybe things get better, hopefully, do you get all that back and then some?

Yeah, Mike, I think if you look at the year on year for polyurethane, it is a combination of volume down, year on year, both in the Americas and in Europe, as we've said. And it is also a unit margin decline, even though year on year, there's actually a slight price increase year on year, Q4 to Q4. Obviously, there's been a much more significant impact on variable costs. I think we indicated a half billion dollar increase on cost of sales year on year. As we move forward, and we said from Q4 to Q1, we would expect some unit margin improvements from Q4 to Q1 in polyurethanes, particularly with lower, though still high, natural gas prices. And of course, benzene has started to rise as well, but we would expect some unit margin improvements. It really then becomes a discussion around volume, the themes that Peter's talked about in terms of China, and also when instruction comes back over But we are expecting improvement Q4 to Q1 in part of your events.

Thank you. Our next question comes from the line of John Roberts with Credit Suisse. Please proceed with your question.

Thank you. Why is the minimum of $400 million the right number for 2023 buybacks? And should we look at the difference between the textile proceeds and the $400 million is what you might hope for? hope to do for acquisitions?

No, I think that we've looked at our overall plan on cash deployment. We look at our dividend. We look at share buybacks. We look at our organic internal capital needs and investments. And then we would like to think that we keep some powder dry for M&A. And quite frankly, if there is no M&A, That's why we say at least $400 million. If we can't find a good value on the M&A front, we'll keep buying our own company. So I think that as we balance that and we take our best look throughout the entirety of the year and cash needs and so forth and our expected cash generation, Yeah, we want to make sure that we're focused on all four of those areas between share buyback, dividends, internal, and external. So right now, beginning of the year, let's keep some dry powder for the M&A opportunities that we see. And that's something that we're very aggressively pursuing. But as I said in my comments, we're not going to overpay. So we'll keep looking.

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

Yeah, hi. Thanks for squeezing me in here. Just a quick one on Europe. Just, you know, you're pretty clear you're going to see some benefit of lower costs. But wondering, given your use of surcharges earlier in the year, last year, is that something we need to consider in terms of being a dampening effect of some of that benefit as it rolls through? Or is that something that shouldn't be a big issue?

No, I don't see us rebating surcharges. The surcharges we put in at the time for higher energy costs, we transferred those surcharges, were put into permanent price increases. And I think that the surcharge for us was the best way that we could respond quickly to the high surge that we saw in energy prices in raw materials. that were taking place. If we get in that situation again this next summer, I hope we don't, but if we do, that's something that we'll likely be implementing again. As I said in my earlier comments, we're not going to continue to be the shock absorber between energy prices, energy producers, and the ultimate consumers. We'll continue to deploy whatever we have to do to offset energy volatility.

Thank you. Our next question comes from the line of PJ Juvicar with Citi. Please proceed with your question.

Hi, good morning, Peter. It's our Patreon for PJ. What was the EBITDA earnings on your HBS sales of $600 million, and what do you expect sales to go next year with lower new build activity, and how much of it is non-U.S., and can you talk about your aspirations for growing internationally?

Yeah, so we don't disclose our EBITDA for HBS overall. You can obviously track the sales we give. We give that. We look at our integrated margins across that business and drive the business appropriately, as we said. Between Q3 and Q4, we did see fairly flat volumes overall. And certainly, Q4 over Q4 gives us some part that maybe some of the stocking has finished. In terms of our international business overall, look, spray foam is needed more than anywhere over in Europe. And you think about the UK, you think about some Western Europe, which is needed. It is a relatively smaller part of our business overall, sub 10% right now. However, we would expect that to grow over the next three to five years, particularly in a European landscape that really needs energy efficiency.

I would just note that as we look at expanding that business in Europe, we're able to do it with our present configuration of assets there, meaning that we will not have to make an investment in system houses or facilities to be able to continue to grow the European market. And we're also focused on the Asian markets as well. And again, it's not just us. There's just not a lot of polyurethane spray foam. Those are very ideal markets for us to be expanding in over the coming years. But right now, the lion's share of our focus and majority and improvement in earnings in that business and continued recovery will be in North America. And with that operator, why don't we take one more question and we'll wrap it up. I think we've got a little bit over time here.

Thank you. Yes, our final question comes from the line of Hassan Ahmed with Alembic Global. Please proceed with your question.

Morning, Peter and Phil. Thanks for taking the question. Look, a question around near and medium-term MDI supply. I mean, you guys talked about yourselves sort of matching your supply to the lower demand, right, within MDI. I mean, from what I'm seeing, the rest of the industry is doing the same. Would you sort of think that that discipline will continue? I mean, obviously you guys will. but for the rest of the industry as demand comes back. So that's on the near-term side of it. And on the medium-term side of it, what are you guys seeing in terms of the industry participants maybe rationalizing capacity, maybe reconsidering expansions and the like?

Well, obviously, I can't comment on what the competition is doing or how long and to what degree they've shut back capacity. So I think it probably varies from player to player, but I'd only be speculating at that point. Long-term, as we look at MDI, I would just remind, it may seem like I'm talking about a decade ago, but if we go back just a year ago, if we go back to pre-COVID times and the post-COVID times, this industry continues to be a very robust industry, MDI. It continues to replace other products, and it continues to grow at better than GDP rates. And we were essentially sold out before we saw the meltdown in Europe around energy prices. When I say we, I'm not just talking about Huntsman. I think as an industry, we were sold out. We were in discussions with a number of very large customers that were talking about, you know, wanting multi-year contracts and wanting to buy capacity within our facilities and so forth. sort of topics that we've never had before with customers. And so there has not been a lot change on the overall structure of the market. The market is still going to be growing where it will need at least one world scale facility to come on every nine to 12 months. And most of that demand is going to be taking place in China. And most of that new construction will be taking place in China. But as you look out over the horizon, and you think about the number of new facilities that are going to be built, there's one or two that have even been announced. And over the course of the next five to seven years, however long it takes to build one of these, I think that there is a very legitimate question about Europe. And as I look at the cost per ton of European MDI crude production. Now, again, I'm not talking about the finished product. I'm talking about the crude production that's energy intensity and dependency on the price of crude oil and specifically benzene. And I look at that crude production in Europe with the high energy, high regulatory costs. I compare that to the Americas, and I compare that to the Middle East, and I compare that to Asia. If there is going to be a multi-hundred dollars per ton cost differential that's now going to be built into Europe, I question some of the long-term competitiveness of low-cost polymeric MDI, particularly around today's pricing, and how that survives. You know, you've got producers in MDI for the more commoditized rates in Europe that are losing money today. And that's what today's energy prices. And so I'm kind of at a loss as to how that really changes, how that dynamic changes in Europe. And so my comments when I talk about we continue to look at our portfolio, we continue to look at where we source not only our raw materials, but where we source our internal supply of crude MDI and the components to make a molecule of MDI, I personally don't feel that we're done answering that question as to what that global footprint ultimately looks like. Because if you go back two years ago, Hassan, I'll just remind you that in 2021, European prices for a ton of MDI was actually the lowest cost. Excuse me, I'm talking about 2020. The close of 2020, European MDI prices for Huntsman on a per ton basis were around $8.75 per ton. In Gaizmar, they're around $9.50, and they were about $9.25 in Kaohsiung. Now, my point in that is that all three of those regions were within tens of dollars due to each other. You couldn't afford to move product from region to region and really be competitive because the manufacturing basis in all three regions was essentially the same, and you're looking at, you know, what, $250 to $350, $400 a ton to move products. Now you're looking at variable costs to produce a ton of MDI. This last year was as much as $1,000 per ton difference. And as we look at that cost difference today, you're talking about in excess from the lowest to the highest within Huntsman, in excess of $500 a ton, which obviously covers freight. And that's the sort of a spread and sort of a delta that I don't think you can, if that's going to continue on a longer term basis, and if what we see today is as good as it's going to get in Europe, you know, we've got to continue to ask ourselves what sort of footprint do we need in Europe to remain competitive to create shareholder value. And we're going to continue to look at that and to make sure that we're moving quickly. to try to address some of those sort of issues. So sorry, that's a long rambling answer, but it gets to the heart of what we're seeing in Europe and the deindustrialization in a lot of the chemical segments that we're seeing in Europe and how we need to be responding to it on the short term and longer term as we look at over the next couple of years. I'm not sure that those answers have all been completely satisfied, at least not to my satisfaction. Operator, I think that pretty much sums up our session here.

Thank you. Yes, that does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time and enjoy the rest of your day.