Huntsman Corporation

Greetings, and welcome to the Huntsman Corporation first quarter 2023 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ivan Markutov. Vice President of Industrial Relations. Thank you, sir. You may begin.

Thank you, Maria, and good morning, everyone. Welcome to Huntsman's first quarter 2023 earnings call. Joining us on the call today are Peter Huntsman, Chairman, CEO, and President, and Phil Lister, Executive Vice President and CFO. This morning, before the market opened, we released our earnings for the first quarter of 2023 via press release and posted to our website, Huntsman.com. We also post a set of slides on our website, which we will use on the call this morning while presenting our results. During the call, we may make statements about our projections or expectations for the future. All such statements are forward-looking statements, and while they reflect our current expectations, they involve risks and uncertainties and are not guarantees of 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 on publicly updating or revising any forward-looking statements during the quarter. We will also refer to non-GAAP financial measures such as adjusted EBITDA, adjusted net income or loss, and free cash flows. 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, our Chairman and CEO.

Thank you, Ivan. Good morning, everyone. Thank you for taking the time to join us. Let's turn to slide number five. The adjusted EBITDA for our polyurethanes division in the first quarter was $66 million. We continued to see significant destocking across our markets, specifically in North America. This destocking, combined with a competitive pricing environment, continued to put substantial pressure on the polyurethanes business during the quarter. However, the business conditions improved sequentially in both our European and Asian regions, driving a nearly 80% improvement in EBITDA compared to the fourth quarter. Overall sales volumes in the quarter declined 21% year on year. Volumes also declined 6% sequentially, which is in line with normal seasonality. All regions declined in the quarter versus the prior year, with the Americas accounting for two-thirds of the reduction, as lower demand and significant destocking significantly impacted sales volumes. Our European region did show a sequential improvement versus the fourth quarter. As business conditions stabilized, destocking subsided, and costs moved lower. From our vantage point, business conditions appear to be steadily improving from last year's low point within Europe. Our automotive business delivered volume improvements versus both the prior year and prior quarter. Most other major markets in Europe showed stable to improved volume sequentially. Profitability in the region was helped. by natural gas prices falling from an average of about $23 per mm BTU to about $17 per mm BTU. I'll note that while natural gas costs are significantly lower today, they're still six times higher than the US Gulf Coast prices. In addition, while benzene was relatively flat sequentially, we did see an increase throughout the quarter combined with continued competitive MDI pricing pressure. Nevertheless, we continue to make progress on our previously announced European restructuring initiatives and expect to start seeing some of the cost savings positively impacting our margins as we move through the remainder of 2023. We will continue to aggressively manage costs and mass production to lower demand. With lower costs and moderately better demand, we do expect profitability in our European region to improve through the remainder of the year. As a result of this steady improvement, we are restarting our smaller MDI unit and we'll have both our MDI lines operational in the second quarter. This will give us maximum flexibility to match our supply with demand as we progress through the seasonally higher sales months. Europe is and will be a core region for our polyurethanes business. we will benefit for many years to come from the region's needed drive for better energy conservation and efficiency. We remain well-positioned to bring energy-saving solutions to both residential and commercial construction markets, as well as innovative improvements to the lightweighting of automobiles. In China, we did begin to see some green shoots with steady improvements in the first quarter, which was in line with our expectations. We expect China to remain on a steady but positive trajectory as the economic environment slowly returns to normal. We are seeing positive demand trends in the end markets such as the cold chain, infrastructure, and certain consumer-related markets. Our China POMTB joint venture contributed approximately $11 million in equity earnings for the quarter. The largest headwind that impacted polyurethane's first quarter results and which have continued into the second quarter is the high level of destocking in our Americas region, specifically in our construction businesses. Remember that two-thirds of our polyurethane's Americas portfolio comprises of construction and markets. Approximately 40% is commercial construction, 60% is residential, of which 70% is related to new residential buildings. For composite wood products, which is linked closely to residential construction, demand was under significant pressure throughout the first quarter with housing starts down approximately 30% year-on-year. This pressure is moderated going into the second quarter. Our spray foam business also appears to have bottomed and is now showing some slight improvements in order patterns. In our commercial-related insulation markets, the destocking continues to be aggressive and may last through most of the second quarter. Our visibility into the full supply chain is limited, and it is tough to project when our customers will return to normal order patterns. While we are seeing factors such as rising interest rates placing pressure on new construction spending, About 65% of our commercial business is tied to repair and remodeling, such as re-roofing, which we expect to normalize once destocking concludes. Additionally, we remain on the right side of energy efficiency drive, and we will benefit from both improved building codes and the U.S. government's Inflation Reduction Act. Outside of construction, our global automotive business, which represents approximately 15% of the polyurethane's portfolio, delivered volume improvements both sequentially and versus the first quarter. We continue to expect volumes in automotive to be up low single digits for the year. Our last summer's platform, we see stronger profitability from quarter four into quarter one. on the back of margin expansion despite overall demand weakness. We are taking decisive and proactive steps to make our polyurethanes business more efficient, stronger, and better positioned for when the current challenging macro conditions abate. We continue to monitor and adjust production rates accordingly. both at Rotterdam and at Geismar to ensure we aggressively manage our working capital with cash generation as our top priority. Furthermore, we're on track to deliver the $60 million in cost savings we've laid out for polyurethanes as planned. This includes exiting geographies that are not generating acceptable returns and consolidating additional back office functions. We have now exited our Southeast Asia polyurethane sites in addition to our announced exit from South America last year. We've also been working for many months towards an orderly exit from our Russian operations while ensuring we remain fully compliant with multiple sanctioned regimes in a highly complex political, legal, and regulatory environment. Today, Russia represents less than 1% of our corporate revenue. We are hopeful that we can complete an exit during 2023. Looking further into the second quarter, we expect to see a seasonal improvement overall. We do expect continued destocking in the United States, but we see that destocking moderating as we move through the quarter. We anticipate the current improving demand trends in Europe and Asia to continue. Putting it all together, we expect Polyurethane's adjusted EBITDA for the second quarter to be in the range of $85 to $100 million. Let's turn to slide number six. Performance Products reported adjusted EBITDA of $71 million for the first quarter, equaling a 21% EBITDA margin, despite significantly lower demand versus the first quarter a year ago. This margin is in line with our long-term expectations of 20% to 25%. The decline in adjusted EBITDA versus the prior year was driven primarily by a 31% decline in volumes year over year. This is partially offset by a slight improvement in unit variable margins and lower fixed costs. The volume decline was due to lower demand across all regions, particularly in in our performance and means and Malay can hydride businesses. Despite significantly lower demand year on year, we did see improvements quarter on quarter, especially in Europe and Asia, indicating that the destocking experience in the fourth quarter is in the past. Markets where we saw positive sequential trends were construction, encodings, and adhesives, which both saw significant destocking in the fourth quarter. We also saw modestly positive sequential trends in our product lines that serve agriculture, energy, and electronic chemicals, namely semiconductor and lithium ion batteries. Capital improvements into our differentiated performance and means products serving polyurethanes insulation, EV batteries, and semiconductor markets continue to move forward on schedule as we have Stated in the past, assuming macro – assuming stable macro conditions, we expect these projects to start up by the end of 2023. Performance Products is an attractive division and will continue to invest in high-return organic projects and look at possible bolt-on opportunities when available. So far in the second quarter, overall demand continues to be below the prior year level but is running steady. with the first quarter across each of our regions. We believe customer inventories are below average and we will see our volumes quickly pick up when end market demand returns. Overall, performance products second quarter adjusted EBITDA should be in the range of $60 to $70 million based on current demand visibility and with some moderate pricing pressure in ethylene amines and malacanhydride. With that, let's turn to slide number seven. Advanced materials reported adjusted EBITDA of $48 million in the quarter, an increase of $7 million versus fourth quarter and down versus the prior year, due primarily to lower sales volumes. Destocking appears largely behind us, though we continue to see pressure on our infrastructure codings market. Total volumes increased quarter on quarter and drove the adjusted EBITDA improvements. The sales volume's decline of 21% was due in part to our ongoing reduction of bulk liquid resin commodity sales. Our core specialty business was down, but less than the segment average. The Americas was the weakest region due to depressed demand primarily from our coatings, adhesives, and general industrial markets. Our aerospace business continues to demonstrate improving trends Sales were stable compared to quarter one of 2022, primarily due to some supply chain constraints and timing impacting sales in the quarter. Our order backlog is solid, and we expect growth as we move through the rest of 2023 and into 2024. Increase in demand for our products is heavily relied to wide body production rates, which have positive tailwinds. with increased travel and new airplane orders from airlines. Our expectations remain that this important and profitable sector will return to pre-pandemic levels during 2024. We continue to seek out bulk on acquisitions for advanced materials to grow and expand the overall portfolio, as well as improve the overall returns of the business. We are also continuing to move forward with organic investments, such as our Miralon business, which provide an innovative technology to capture methane, turn it into hydrogen, and a carbon material that can be utilized across many different markets. While still in development, we expect to aggressively scale this business over the coming years. With lower destocking and seasonal improvements, we expect advanced materials to deliver improved results in the second quarter versus the first quarter. We expect second quarter adjusted EBITDA for this division to be in the range of $50 to $56 million with improved EBITDA margins. I'll now turn over in time to our Chief Financial Officer, Phil Lister. Phil?