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?