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spk16: Hello, and welcome to the Huntsman's second quarter 2023 earnings conference call and webcast. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. You may press star one at any time to be placed in the question queue. We ask you please ask one question and one follow-up, then return to the queue. 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 and Corporate Development. Please go ahead.
spk09: Thank you, Kevin. Good morning, everyone. Welcome to Huntsman's second 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. Yesterday, July 31st, 2023, after the U.S. equity markets closed, we released our earnings for the second quarter 2023 via press release posted to our website, Huntsman.com. We also post a set of slides and detailed commentary discussing the second quarter 2023 on our website. Peter Huntsman will provide some opening comments shortly, and we will then move directly into a question and answer session for the remainder of the call. During this call, let me remind you that 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 guaranteed of future performance. You should review our filings with SEC for more information regarding the factors that could cause the 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 also refer to non-GAAP financial measures such as adjusted EBITDA, adjusted net income or loss with free cash flow, and you can find a reconciliation 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.
spk13: Thank you for joining us this morning. We hope that you like our new format that is designed to give our results to the market earlier and to provide more time for meaningful review, questions, and comments. Before opening the line for questions, I'd like to take a moment and summarize some of the broader observations that we see at this present time. As we have an early but still rather murky view of the third quarter, some fundamental trends are shaping up. In our North American markets, particularly around MDI and construction demand, I believe that we're seeing the end of prolonged inventory destocking. While this is not the case for all products and applications, we are seeing demand follow more seasonal trends. There are currently fewer homes and commercial real estate projects being built than we saw 12 or 18 months ago. However, order patterns would tell us that much of this destocking has ended and we're in the early recovery of building starts as we move into the next year. Commercial construction may take a bit longer to recover. We continue to see growth in our Asian and specifically our Chinese markets. This growth would be best characterized as modest while pricing trends for MDI are also inching upward. Short of a major government initiative to spur faster economic growth, it appears that the second half of 2023 will continue to see modest seasonally adjusted improvements. A broader European recovery still feels as though it is yet to come. Pricing is very aggressive as companies fight for what demand is available. Energy prices are down from their recent historical highs, but still multiple times higher, than energy costs in the Americas or Asia. Energy and economic policies and regulations in Europe do not seem to adequately address the growing uncompetitiveness and deindustrialization that is taking place. Europe is losing its ability to export while also seeing more raw materials imported from abroad, particularly in products where new capacity has been added and demand in domestic markets are unable to absorb new production. As I look at our overall portfolio products, unlike past recessions and downturns in the economy, we have maintained decent margins in many of our businesses. Our biggest problem today is simply demand. While we do not expect any sudden improvements in the second half of the year, we do see green shoots in many areas of North America and China, but less so in Europe. I believe that the worst of the de-inventoring, particularly North America, is behind us, We're obviously much closer to a more fulsome recovery. We're in a unique position to take advantage of this coming recovery given our product portfolio, lower costs, global footprint, and quality of customers and applications. So I think about a recovery and the steps that we need to get there. I can't help but think of Churchill's quote in 42, perhaps we are at the end of the beginning. To this end, we will continue to preserve our balance sheet and review our portfolio for both possible divestitures and acquisitions. We are ahead in our efforts to streamline our costs, and we'll continue to not only look at costs, but working capital as well. We are dedicated to returning value to shareholders in the form of earnings, dividends, and share repurchases. Operator, with that, why don't we open the line for any questions?
spk16: Certainly. Well, now we conduct a new question and answer session. As a reminder, please limit yourselves to one question and one follow-up. If you'd like to be placed into question queue, please press star 1 at this time. If you'd like to remove yourself from queue, please press star 2. One moment, please, while we poll for questions. Our first question is coming from David Begleiter from Deutsche Bank. Your line is now live.
spk10: Thank you. Good morning. Peter, as recovery occurs in polyurethanes, I know it's early, but how do you think about the trajectory of earnings growth in 2024?
spk13: Well, David, good morning. Thank you very much. I think much of this is going to depend on the speed of the recovery. So I do believe that, and again, I'm going to be particularly talking about North America here because I think that a recovery, again, this is just my opinion, I think a recovery is going to happen sooner in North America and China than it will in Europe. But as I look at North America in particular, I think that the supply chains and the inventory levels are getting precariously thin. Now, this may be a new normal, but typically when we see very thin supply chains of inventory, anything like a sudden spurt of demand or even a perceived spurt of demand, outages that might occur in the industry, an MDI plant comes down or something like that, Or if there should be a sudden increase in the price of crude oil. You look at the price of crude oil and where we've kind of come from the lows of where we were just a quarter ago to where we are today. We've seen an increase of about $10 per barrel or so. If that starts to translate into where people are thinking, I've eventually got to refill or start to refill inventory. and prices seemingly are going up, that might cause, I shouldn't use the word stampede, but it might cause some more aggressive buying than we would be used to and you would see something rather more suddenly. Personally, again, when we give the forecast for the second half and even looking to early 24, we're not anticipating that. but that wouldn't surprise me either. I mean, that kind of is more of the trend, as you know, Dave, as long as you've been in this industry, it's kind of more of the trend of the industry that they're very rarely or they're gradual declines in gradual improvements that take place over a year or two. It's usually sudden events that have a tendency to shock the industry. So yes, we do have a large percentage of our North American sales going into housing, construction, energy insulation, and so forth. That's not a market that we're trying to shy away from, and it's not something that we're ashamed of. I think that we continue to see an improvement in building materials and energy conservation and lightweighting and a whole number of opportunities, fire retardancy, better coatings and applications and so forth in the housing industry. It's going to continue to be an area of growth for many years to come. I think that's where the biggest turnaround will come. And I believe that it'll probably, again, in my opinion, happen sooner rather than later. But right now, the numbers would tell us we're looking for a gradual recovery throughout the second half.
spk10: Very good. And just on the Shanghai MDI-JV, are there any benefits, Huntsman, on the new configuration of the operations?
spk13: I'm gonna let Phil comment on any of the financial side of that. We've had a great relationship with our Chinese partners. and a very strong relationship with BASF. They've been an excellent operating partner with us, and we can both go to the marketplace and fight like hell, beating each other up over prices and applications and market share and so forth. But from a manufacturing point of view, it's been a great partnership, and I don't see any material change to the business. They'll be able to operate – an MDI technology of their own, and we'll be able to operate an MDI technology of our own on our side. So it's a natural separation and one that's been planned for for many, many years. As you can obviously tell, there's kind of an equal divide here of technologies and companies and so forth. Phil, anything you'd add to that from a financial point of view?
spk14: I think we said, David, in our prepared remarks, no material impact on adjusted EBITDA free cash flow and over time on liquidity. I think we may see some slight benefits to EBITDA and free cash flow next year as we move through the course of the year. We will get one crude MDI plant, as Peter said. We'll also get the strategically important hydrochloric acid recycle plant. So that's a good balance for us to have. And we will be able to improve some of the split ratios that we have coming off of that crude plant and therefore target some more of the differentiated businesses and grow those. So, look, it's a win-win for everyone. Essentially, it was a forced joint venture decades ago with BASF and three Chinese partners. But overall, from your perspective and modeling, no material impact.
spk16: Thank you. Next question is coming from Alexa Yefremov from KeyBank Capital Markets. Your line is now live.
spk03: Thanks, and good morning, everyone. Peter, you talked about improvements in China and polyurethane's business. Could you tell us what's going on there? There's talk about stimulus. Any signs that demand could be much stronger next year?
spk13: Well, I believe that when you have an economy the size of China that's been in lockdown for as long as it has, I don't think that we've seen the full impact of China reopening. As I look at polymeric pricing, you know, to where it stands right now, being around 16.8, 16.9. That's about where it was a year ago. But it's also, I think, healthy to note that's as high as it's been in the last year as well. In the last year, it's been down from there. So we're seeing this and it's a gradual recovery, which I think is healthy to see. I always get leery when I see, you know, a spike that occurs in a week or two period because usually what goes up that quickly comes down that quickly. So it feels to me like there's just a slow, steady recovery. I did notice in the Wall Street Journal this morning talking about the recovery is not happening as quickly and so forth. But what we're seeing around auto, around infrastructure, energy conservation, building materials and so forth, you know, we continue to see a pretty good recovery there.
spk03: Thanks, Peter. And then in your spray foam business, you're talking about volumes in North America being flat. How is profitability? Are you able to hold spray foam prices maybe to a better degree than underlying India?
spk14: Yeah, Alexei, so you note, and I think it's a positive, that volumes were flat year on year. Spray foam, as you'll recall, was the first really to to go down from a demand perspective. And so in terms of any orange or green shoots, as we'll call them, spray foam is indicating that on the volume front. Pricing's been under pressure, and you can probably see that as you talk to contractors. So pricing on spray foam has undoubtedly been under pressure as the market has been depressed. Over time, we'd expect that to reverse out as you move forward one, two years, and spray continues to replace fiberglass.
spk16: Thank you. Our next question today is coming from Jeff Sikorskas from JP Morgan. Your line is now live.
spk07: Thanks very much. Can you talk about sequential pricing trends in MDI in your three major regions, the United States, Europe, and China?
spk13: Well, I mean, as we look at this, we are able to, I think, see stronger margins. And as we look into urethanes into the U.S. and into APAC, I think that we're gradually making some recovery in those areas. Again, Europe continues to look pretty tough, and it continues to, I think, Pricing there is tracking raw materials and perhaps a bit more. And so I think, again, there's a real struggle, I think, going on in Europe and a fight for market share there. I'm more optimistic about pricing gains or at least margin staying flat to maybe gradually improving in the US. And I see it getting better in Asia.
spk07: When you assess the MDI market in 2023, how fast do you think global MDI demand will either grow or contract? And how much incremental capacity do you think has been added because of Chinese expansions?
spk13: Well, the Chinese expansion, I'm going to let Phil answer that one because he'll need a second just to look up the data. In the meantime, as we look at 2023 growth in MDI, we're really seeing about a flat market, zero growth. Last year, we saw a contraction of 3%, which in the 25 years that I've been in the MDI business, we've never seen two consecutive years of negative growth. Matter of fact, I'm not sure MDI has seen two consecutive years of MDI growth in 30 or 40 years. That's during the recession and so forth. So, you know, again, I don't want to sound overly bullish on the second half. I have a tendency to be an optimist, which after this many years in this industry, you have to be, or you'd probably be diagnosed with some form of insanity or mental illness. But I think that as you look at the latter part of this year, MDI continues to be a great product. It's replacing materials. It's making inroads and replacing applications in UPR and rubber and thermoplastic, elastomers, and so forth. And it's going to continue to do so. I think the fundamental positive growth for MDI is going to continue on a longer-term basis. And as you look out over the course of the next five years or so, we're still going to see, if we see something around a 4% or 5% growth, that's still going to outstrip the projected capacity additions that will be coming on in that time period. I think the fundamental balance is over the future. You're going to see more years that look like 2022 in MDI, the beginning part of 2022, than you do 2023. Just to follow up.
spk14: Jeff, so as Peter said, it is unusual to have two years where it's either negative to flat in MDI, and typically the history is that that snaps back and snaps back pretty quickly from a demand perspective. In terms of your question around supply, one more brought on there, Fujian Province facility this year, that's a 400 kiloton facility overall. They've indicated that they will build over time, quite frankly, out some of the fujian and some of the yantai assets further. The history of Wanhua is their discipline. They have a 50% to 55% market share. We expect that to come in over time and probably matching a 5% demand growth increase over the coming year. MDI utilization rates are low right now, and again, you'd expect those to snap back as demand recovers.
spk16: Thank you. Our next question today is coming from Matthew Dale from Bank of America. Your line is now live.
spk06: Thank you. So on a consolidated basis, the decremental margin on volume has been like 40% for the first two quarters. Is there any reason why your incremental margins would be less or more than that as volumes come back into the business next year? Or should they, I guess?
spk13: I want to make sure I understand the question. You said that the volumes had dropped down 40%. Would the margins drop that much?
spk06: No, no, no, I guess. So if you look at the EBITDA headwind from volumes, your top line drop through is like 40% on volume decrements for the last two quarters. I'm just trying to think about next year or whatever when volumes recover, as volumes recover, is there any reason why? it should be less or more than that kind of flowing back to the EBITDA line from volume contribution.
spk09: So, Matt, this is Ivan real quick. The decremental margins were pretty high because the volume fell off sharply. If you did see a volume increase at the same rate as the decline, I would guess the operating leverage would sort of be the same on the upside. Typically, as you know, a chemical company decremental margins are probably around 25% to 30%, but that tends to be an average over time, right? So it just depends on the volume recovery. But I would expect at the very least, I don't know, Phil, would you agree, 25% to 30% of the incremental dollar to flow to EBITDA? Yes. But it could be higher if volumes were to spike. It just depends on the velocity, right?
spk06: Understood. Thanks, Simon. And look, new home construction data points have obviously kind of ticked up. Peter, you talked about that a bit. I think, is there any reason why the mix of houses and who's building and maybe the price point, would that lend to spray foam insulation underperforming or outperforming the rebound that we see in just data from new construction in the US?
spk13: No, I don't believe that that's going to have nearly the impact as the number of homes that are being built. The spray foam will have about the same percentage of penetration. That percentage should continue to grow. Actually, if you look at smaller homes that are supposed to be more economical, you know, I believe that there's more to be saved in utilities and so forth, and this would be a great selling point. What we need to see in housing, in my opinion, is to first get back to what I would consider to be an equilibrium. So we saw housing in 2021, 2022 kind of peak out at around that 1.7-ish sort of a rate, 1.7 million units on a housing start on an annualized basis. And that number dropped down to about 1.3. It's the run rate where we see it today, 1.3, maybe up a bit from that. And that's a decrease of around 10% to 12%, 13%. When I look at the volume drop-off, the volume drop-off was more like 30% in the housing construction, so 30%, 40%. Well, that obviously fell far greater than the housing starts fell. because of the de-inventory. And so what we need to do first, and I think this is what we're going to see in the second half, is that we get back to what I would consider to be a new normal, which perhaps is where we were back in 21, 22, minus that 12%, that sort of volume adjusted from 1.6, 1.7 million starts, the 1.3 to 1.4. Now, last time, housing was at 1.3, 1.4. We were doing quite well. So I'd much rather see a higher number, but there's a tremendous amount of difference in pricing and demand when you're looking at a 30% to 40% drop versus a 10% to 12% drop. So when we talk about a new normal, I think that that's what we'll see. And that will be impacted as well by typical seasonality as to when homes are being built and the time of year they're being built. But I think that recovery is well underway when we start looking at the demand for CWP quarter on quarter for us. from first quarter, second quarter was up 16% on a global basis. Insulation was up about the same amount. Our spray foam was up a little bit less than that, but still up from quarter to quarter. So we're seeing that quarter to quarter build up from the first quarter to the second quarter, which is, again, starting to get back into a more normalized environment. We're also seeing You know, the SPF is spray foam. OSB price is starting to stabilize, if not going back up in a lot of applications, particularly in North America. So these are all positive signs. I would say would continue to give me more optimism that, you know, the housing recovery is underway. More importantly than the housing recovery is the end of this massive de-inventory.
spk14: And Matt, obviously, from our perspective on housing starts, single-family homes matters. It's still well below the replacement level that is required, and therefore, we look forward to 2024. Thank you.
spk16: Our next question is coming from Kevin McCarthy from Vertical Research Partners. Your line is now live.
spk05: Yes, good morning. Peter, I was intrigued by your comment at the top of the call that you're exploring possible divestitures. I also think you indicated in the remarks released yesterday that you're evaluating inorganic growth opportunities as well. So maybe without getting into specific details, can you discuss what you would like to do with the portfolio conceptually over the next couple of years?
spk13: Well, first of all, I think that any management team has got to come into the office every morning and look at your portfolio, look at the present market conditions and the projected market conditions, and make sure that your portfolio, that your attention, your capital spend, your management, your focus is around the right asset base. And so, you know, we used to be in a lot of intermediates. We used to be in... textile chemicals, we used to be in pigments and so forth. And time came when we looked at a lot of these products and we just felt we weren't the right owner for these assets. And there were also opportunities that we saw when we could expand further in MDI into spray foam, energy conservation, a more greening portfolio, if you will. We could expand into hardeners and into adhesions and structural composites and so forth in our epoxy businesses and so forth. We continue to look very aggressively in some of these downstream applications, particularly in our performance products and even more particularly in our advanced materials. As I think about light weighting, I think about adhesion, I think about a lot of the green polymers and chemistry, I think about fire retardancy and construction, energy conservation, so forth. These are all going to be areas of the future that we want to be looking into. As we look at other areas of assets, particularly those that might be underperforming financially or may not be particular sciences that we add a great deal, then we've got to make some painful decisions at times and look at these assets from a financial point of view and look at a possible divestiture. But I'd I've always been leery of somebody, particularly in an industry that changes as fast as our industry, if somebody says we've got the right mix, the right portfolio, there's no need for change. There's always need for improvement and for change, and so we're going to continue to stay focused on that.
spk14: As a reminder, Kevin, as Peter says, we're always looking at the portfolio. We have sold some smaller assets, right? We sold our DIY business in India. We exited out of our Southeast Asia businesses, our South American businesses, we've said very clearly that we're looking to exit the Russian market as well. And we'll continue to always look at financial performance around the world.
spk05: Very good. That's helpful. And then secondly, you had a nice quarter on your equity earnings line. And from what I can tell, MTB was a nice tailwind in China. Yeah. Can you speak to the trajectory there into 3Q and beyond? Would you expect ongoing strength there or not?
spk13: Typically, if there's a good demand for clean, quality gasoline, if crude oil prices are on the higher side and NGLs are on the lower side, that's usually a good combination for MTBE. So I think that as we look at those equity earnings, probably ought to stay fairly close to where they are today.
spk05: Thanks so much.
spk16: Thank you. Next question today is coming from Frank Mitch from Fermium Research. Your line is now live.
spk08: Thank you. And props to Ivan on the new format. And, Peter, for the record, I don't think you're insane, so I just wanted to make sure I got that out there based on your earlier comments. But what I do find insane is the 30% decline in volumes in performance products for each of the last three quarters. It seems rather large. When does it end? What will it take for us to get back to positive volumes or at least less negative volumes?
spk13: Well, Frank, thank you very much. And unfortunately, coming from you telling me that I'm of sound mind, I'm not sure that carries a lot of water. But nevertheless, I appreciate it, my friend. Yeah, and just for information purposes, it was my idea to change the format. Being dyslexic, I hate reading scripts, and so I was out of desperation more than anything else. So, yeah, as we think about performance products, look, I think that business probably was the last one of our businesses to see any real impact from de-inventoring. And we think about, you know, where it was that we saw the de-inventory taking place. A lot of that was in unsaturated polyester resin, which I think was probably, on the construction site at least, was a little bit behind what we saw in MDI. A lot of the fuel and lube additives business that that sells into, some of the energy oil field services, gas treating. sulfur removal and so forth from gas. A lot of the ag business, if you think back of a year ago, a lot of those businesses were going pretty high when MDI and housing starts were starting to falter and we were starting to see this de-inventory taking place. Performance products, I think, defied gravity a little bit longer than some of the other divisions. But I think we look at it on a sequential basis. You look at performance products on the volume side of that on a quarter-to-quarter basis versus going to second quarter. It's down essentially flat, down 2%. So I think, again, in this area, we've hit bottom. We've started to see improvements in the UPR business, which is where a lot of the Malay can hydride goes. Polyurethanes, additives, the spray foam catalysts, we're starting to see a pickup in those areas in pricing and also in demand. Gas treating, I think we definitely have hit the bottom. A lot of the lube additives and so forth. So you go buy the gasoline by gas station, initial fill on cars and so forth. That'll be a lot of our amine formulation that's going into that. and a more consistent oil field gas treating area. So Frank, I'm going to try to make excuses. We were hit with a pretty hard de-inventorying that took place in that business. And I think we certainly have seen the worst of it. And I think that as we go along there, we might see a recovery a quarter or so behind what we might see in MDI. But we will see a recovery there. And margins have continued to remain strong. And, you know, it's a question of demand coming back.
spk14: And just to add, Frank, I mean, our EBITDA margins for the division were 18%. In the second quarter, as volumes come back, we'll obviously leverage up and get back towards that 20% to 25% range that we've indicated. But those are still pretty strong margins that we have in a low operating environment.
spk08: That's very helpful, gentlemen. And you also called out the competitive pricing dynamics with ethylene amines. How long will that last? What's the primary driver there? And when might we see relief in that area?
spk13: Yeah, I think most of that's just volume that we're seeing in a lot of that area. And that's going to be wind application. I mean, as much as the world's beating the drum on wind energy in Europe, it's actually just almost for a year now been at a complete standstill. There are no major wind projects and you see a little bit of growth in North America and a little bit more than that in Asia. So, you know, some of these projects have been delayed. Some have been canceled. I think you'll see a recovery in this area. A lot of this is also just the de-inventory and once people have gotten their stock levels that unnecessarily built up in 2021, 2022. I think a lot of people were having supply chain issues. They were seeing volatility in pricing. They kept more inventory, whether it's MDI, whether it was a lot of the ethylene amines and a lot of various applications. They kept a lot of inventory and they now feel more confident about the supply of that inventory and the de-risking, if you will, of those supply chains. And that inventory is being reset.
spk16: Thank you. Next question is coming from Vincent Andrews from Morgan Stanley. Your line is now live.
spk12: Thank you, and good morning. Just given the weak macro conditions continuing, maybe you could give us an update on what you think the splitter contribution is going to be and maybe frame it a little bit.
spk13: Well, the splitter, again, is a project that I'm very glad that we put it in when we did. It's much better today that we're out trying to sell a differentiated product than we are, you know, more commodity MDI, if you will. And I think that the premium per pound that we represented to the market still holds, but there is definitely less volume out there. And I see that as a temporary issue that will be recovering, that will be correcting itself here over the next couple of quarters. And, you know, That project, I think, will continue to be a success.
spk14: Yeah, I mean, we'd originally said $35 million. That was in a much stronger volume environment. We'll still get up to that $35 million as volumes come back. As Peter says, that premium of differentiated over the component side still holds. So it's a volume leverage and a recovery as we look forward to 2024.
spk12: Okay, and then I think you've done about $100 million a quarter in share buybacks. year-to-date, should we be anticipating a similar amount in the back half despite the lower outlook?
spk13: Yes, we do not see a change in that. And obviously, at the end of the year, the board will assess where we are. They'll assess our outlook for 24, and we'll act accordingly.
spk14: And if you do the The calculations, that obviously gives us a greater than 10% return of capital, yield, dividend, and share repurchases for the year. So consistent message from the start of the year.
spk16: Thank you. Next question is coming from Michael Sisson from Wells Fargo. Your line is now live.
spk11: Hey, guys. Good morning. Peter, you know, your analyst day you talked about polyurethanes and kind of splitting that portfolio up in three different areas, commodities, formulated systems, especially solutions. So when I think about where your margins are at now, any thoughts of how those three buckets have performed this year and what the potential is for those to get back to double digits over time?
spk13: As we look at it, the upper end of that split, if you will, of those three areas, I think that the lower end of that split, we're seeing margin erosion that has taken place, and we're struggling with margins in those areas. As we think about the upper end of that, the elastomer's end, that would be the product that's going into your iPhone protector and cabling and so forth, the high-end running shoes, what have you. The higher end of that, the elastomer's end, we continue to see very strong margins there. There's been no erosion in the margins, and it's just a question of volume. So I think that in the middle part of that, that I would consider to be that which is going into the insulation, the spray foam, and so forth, that certainly is under pressure, but nothing like the commodity and polymeric down at the very bottom of that split. And so, yes, I think that we're probably, at this time, we're probably seeing an even greater bifurcation of margins and of the vitality and health of the three sections between that high end, the mid-range, and the low end than we did at the time of the investor day.
spk11: Got it. And then I guess when I did the math, it looks like your volumes this year and last year in total may be down a billion or so in sales. If you get that back, are we back to – you know, that $800 million, $900 million EBITDA range longer term?
spk13: I'd like to think that that's a – yes. I'd like to think that's something that should be happening in the MDI business. And as we think on a longer-term basis, you know, that it ought to be – that ought to be the average of the business. Again, I'm not sure this is a question for Huntsman at least, or we presently are at least. a question of volume as much as it is value. And I think that we've got a real opportunity here to take the molecules that we have and to upgrade those and reliably see a 15, 16 to 18% business on normal times, and we'd like to see that being pushed closer to 20%. As we move further downstream, as we get more and more and build up the elastomer's end of the business and so forth, you know, this is an opportunity for us to create more reliable and consistent earnings.
spk16: Thank you. Next question is coming from Patrick Cunningham from Citi. Your line is now live.
spk15: Hi, good morning. Last quarter you indicated that in AM and performance products, you know, destocking was likely to be relatively de minimis for the second half. But do you have any change to those expectations? Is there fresh destocking in markets like ag and industrial? And how much of the margin outlook, you know, maybe bakes in some of that destocking? Thank you.
spk13: I would say that destocking and performance products might go on a little bit longer into the third quarter. Ag is going to be small. It's going to be pretty seasonal, if you will. But I've been disappointed, I guess, as I look to Europe and I look at the competitive nature there. in pricing across the board. There's just a lack of demand, and there's a lack of, and not in all products, but in a lot of products, of pricing discipline. You know, that's indicative of the results of European segments of the business. For the advanced material side of the business, yeah, I think that we're largely through de-inventorying. And the performance products might go a little bit longer than advanced materials. And it might be a little bit impacted by region. But I think for the most part, when you look at where we were from in performance products from first quarter to second quarter being essentially flat, there'll be some seasonality across the board in the third quarter. Remember, much of Europe and, frankly, a lot of the world, but particularly Europe, shuts down the month of August. And we might see, a little too early to say, we might see more closures because of the economic pressure sluggishness right now in Europe. You might see more closures taking place in August for holidays than expected. That's yet to be seen, but, you know, so there will be some seasonality in the third quarter.
spk15: Got it. Very helpful. And in the past, you've talked about getting AM margins back to 20%. Is there a path to get there in 2024, given the improved cost profile and some of the growth initiatives you have, or is this largely outweighed by sort of a sluggish volume recovery?
spk13: No, I think that as we see, I think it's been very well publicized, the build rate that you've seen in the aerospace business in particular, we're going to continue to benefit from that. We continue to maintain the market share on existing platforms of airplane platforms and And I think it will continue as we look at the 777X and the wing design that's coming out of Boeing, some of the Airbus applications and so forth. I think that we'll continue to maintain a much better than 50% market share in these new applications as well. So if we can just maintain kind of our present course in 24 plus the continued recovery that we see in aerospace, Yeah, I think that we ought to be back up to 20%. Having said that, I think that advanced materials will recover more than just aerospace in 2024 as well. I think there's some great applications coming there. You'll start to see the pickup of our Miralon technology. You'll start to see greater investing in applications going into the power grid, industrial coatings, and so forth. And again, it's just you know, my gut feel of the area, but I think it's going to, we have an excellent opportunity in 2024 to get back to 20%.
spk14: And look, we were at 18% in the second quarter. That's with aerospace recovering, but still not anywhere near back to where it was needed. So we're pretty close to that 20%, even in the second quarter.
spk16: Thank you. Next question is coming from Hassan Ahmed from Olympic Global. Your line is now live.
spk01: Morning, Peter and Phil.
spk18: You know, really...
spk01: Good morning. Appreciate the commentary, a lot of commentary around, you know, polyurethane demand and, you know, potentially destocking being behind us and, you know, how historically, you know, the restock tends to be fairly sort of impressive. If we could just move away from the demand side, could you talk a bit about the supply picture? I mean, could we, you know, because obviously we've come across sort of number of announcements around potential capacity addition delays and the like. So, could we be in a situation where as the restock happens, you know, in the near to medium term, you know, it's in the face of relatively sort of, you know, limited supply?
spk14: So, Hasan, I think we said, so right now, relatively low utilization, unusual for MDI to go two years on the demand side where it's pretty low. So, Looking forward, we'd expect that demand profile to tighten up with 5% plus growth per annum going forward. On the supply side, honestly, there's really only one while that you can point to. BSS done some small D bottlenecking in North America. Capestra obviously announced the delay of any expansion in either North America or in China, which confirms your point. Dow's not announced anything at all. So it's really down to Wanhua. And as we said, Wanhua tends to be relatively disciplined. They will bring on capacity over the next five years, but they'll do it in a pretty disciplined manner, particularly with the 50% to 55% market share that they have in China. The fact that the other majors aren't really doing any expansions, that can lead to some of the tightness that you described.
spk01: Very helpful. Very helpful. And just moving on a bit on to the M&A side of things, You know, I mean, historically, you guys, as well as a bunch of industry participants, have talked about valuations being unrealistic. Now, with several quarters of relatively tepid or negative demand, interest rates where they are and the like, I mean, what are you guys seeing in the M&A market? It certainly seems private equity has gotten more active. So have valuations become a little more realistic? Are there more opportunities you guys are seeing on the inorganic growth side of things?
spk13: Not really. I'm not seeing a fundamental shift in the market. I think that you're seeing a little bit of valuations are coming down a bit. Obviously, capital costs something nowadays where a year ago it cost nothing. And I continue to just be befuddled as the companies that trade at five, six times EBITDA buying assets that are 15 times, 12 times, 10 times not seeing any impact on their stock and seemingly shareholders don't really care. So I think that we have to remain disciplined. I know that that sounds a bit of a cliche, but I think we've demonstrated that if we can't buy it, sometimes the multiple is going to be a little bit higher than we'd like to see. But in those rare instances, we will have a very quick and a very thorough plan of action to be able to grow the business simultaneously to integrating and cutting costs, and we'll justify that to the market with a very clear map going forward. If not, we will continue to invest in our own company and buy our own stock and make sure that we maintain and stay focused on a dividend. But we've got to remain disciplined because IT Just because everybody else wants to pay these multiples doesn't mean it's the right thing to do.
spk01: Very helpful, Peter and Phil. Thank you so much.
spk16: Thank you. Next question today is coming from John Roberts from Credit Suisse. Your line is now live.
spk17: Hi, Peter. I think of the MDI industry as being relatively unintegrated back into oil and benzene. If Abu Dhabi is successful in their bid for Covestro, does that significantly change the structure of the industry, in your opinion?
spk13: I'm not sure that it does. And again, I want to make sure my comments don't have anything to do with speaking on behalf of Abu Dhabi or Covestro. I have zero information on either of what's happening there. But I would just say that as you look at Yantai, I think that that from their integration into coal, you know, I would kind of consider them to be a little more integrated than other MDI producers. But look, at the end of the day, we're going to have the greatest value that will come to a molecule of MDI is going to be being able to push that into a formulated mix downstream and get a premium price for the MDI. In my opinion, that will be far better than looking at it on an integrated basis going upstream up through benzene and nitrobenzene and crude oil and crude oil production refining. Because all of those products, all of our basic raw materials have a have a market value to them, right? I mean, just because you produce benzene and I don't produce benzene, we essentially have to value that benzene the same. You may be able to get an integrated cost on that benzene, an integrated value on the benzene, but if you're just subsidizing your MDI because you've got benzene that you're making, I'm not sure that necessarily gives you an advantage unless you want to just move the benzene at a loss to market. So, I've never thought of MDI in particular as being terribly advantaged or disadvantaged by lack of integration. I think the value of MDI can be far more what you do downstream than what you do upstream.
spk17: And is the problem in epoxy more the delay in the wind turbine projects, or is it more the raw material position that the Chinese producers have that they're lower than the Western producers, which is more of a problem for the industry right now?
spk13: I'm not sure, you know, when we think about epoxy for us at Huntsman, that's just not a big end-use market for us, and it's not a market where we really compete on. Ten years ago, that was the whole BLR. You'll remember that, you know, that we used to, ten years ago, we used to talk all the time about wind and the impact of wind, and we largely traded those molecules up over the last decade into aerospace and into wind, I'd much rather be investing in the grid system that's going to hook all these windmills up and the electrical infrastructure that's going to try to make sense of all these wind projects than the wind projects themselves. Yeah.
spk14: Sorry, John, think about ADMAP portfolios being about 20% aerospace, 20% auto, about 20% into construction, then the remainder. Yeah. into infrastructure but excluding any wind where we don't participate in those markets now we participate in things like the power grid which ultimately is why we can deliver 18 percent margins even in a lower volume environment thank you next question today is coming from mike harrison from seaport research partners the line is now live hi good morning
spk18: Peter, I was wondering if you could talk about how you're feeling about your cost structure in Europe at this point. It seems like you're kind of indicating a more extended period of softer demand and elevated energy costs.
spk13: Well, something that we look at all the time. I mean, I think it was about a year ago at this time that we were announcing some pretty radical changes closures, restructurings, and so forth, moving a lot of our back offices to Krakow. Those projects are largely coming to conclusion here in the next couple of, next quarter or so. And I think that we're benefiting from having made those decisions. Now, if Europe continues to deindustrialize it, and we see, my bigger concern is that you start to see the customers, the OEMs and so forth start to leave Europe and they go to China, they go to North America, they go to the Middle East. And you continue to see this de-industrialization taking place in Europe. We may well have to reassess that market and the cost structure. I'm quite comfortable where we are today as I look out over the course of the next year or two. to what we can see and what we're hearing from customers and so forth. I think that we took the right moves at the time. I know we were being accused of being overreactionary in some of these decisions. I think, though, looking back on it, we moved with all haste at the first signs that we saw that there was this fundamental shift. And I'm glad we did it. And we're better in Europe because of it. It's an area that we need to continue, though, as I said earlier, We need to get up every morning and just continue to look at the area and how do we adapt and how do we structure around having the right people in the right locations and the right cost structure. I don't want to survive in Europe. We've got to prosper in Europe. We've got to have a good return in Europe, and we've got to have a supply chain in Europe that makes sense. And I think there's still work to be done. Thank you.
spk18: All right, thank you for that. And then on slide eight of the presentation, you show a $23 million benefit from SG&A and R&D costs coming lower sequentially. Was that maybe some incentive accruals coming lower? I guess I'm just trying to get a sense of how much of that sequential improvement in SG&A costs was related to temporary factors and how much was part of the longer-term cost optimization that you're doing?
spk14: Yeah, Mike, so you can think about that being 50-50. I think we said in our prepared remarks, the combination of all we're doing on cost optimization clearly flowing through, and then some reduction in incentive accruals for the year. All of that obviously offsetting an inflationary number, which continues to run through our P&L. Thank you.
spk16: Thank you. Next question is coming from Josh Spector from UBS. Your line is now live.
spk00: Yeah, thanks for taking my question. Just two on advanced materials. So just first, you know, the pricing in that segment has been notably better than the rest of the portfolio. Just curious how much of that is mixed as you exit BOR and some higher pricing products maybe stay within the portfolio versus absolute holding or raising pricing. And just even though, I guess second, even though your participation in BORs is relatively small today, you do note the exit of that as some of the negative on the volume side. I guess, do you think about holding those volumes back or strategically playing, having a different position in that market in the future versus today?
spk13: No, I think that as we continue to look, some of that's going to be product shift, but most of it's just going to be the overall health of the markets, the applications, the fact that we're still sourced in many of these areas. And we're going to keep the portfolio largely as it is. I think that, again, we need to continuously look at the BLR market. I think that when you look at some of the profitability of BLR across the board, you look at the drop-off that we've seen some of our competitors that are very heavily invested in BLR. Again, I think we made the right decision of getting out of it when we did. and having this stability and focusing on value over volume in that end of the business.
spk14: Yeah, Josh, I mean, we're long VLR in North America, short in Asia and to a degree in Europe, but it's less than 10% now of our volumes, and I think we'll continue to deselect. It's just not our focus strategically.
spk00: Thanks. And I guess just on the pricing side, you know, that holding because of better mix, or are you actually holding pricing in the downstream business, you know, better than other areas of the business?
spk13: I think that, again, it's holding the pricing. I think that we have the further downstream you go, the more unique provider you are, solution provider. We're not selling molecules. We're selling a solution to a customer. And that's a whole different dynamic than just selling molecules. So it's going to be – some of that's going to be mixed. The vast majority is going to be just pricing and value discipline.
spk16: Thank you. Our next question is coming from Matthew Blair from TPH. Your line is now live.
spk02: Good morning. Thanks for taking my questions. Peter, could you discuss MDI operates by region on just an overall industry basis and In regards to Huntsman, how are things going at the Rotterdam MGI plant that you restarted earlier this year? And is the Geismar line still down? Thanks.
spk13: I think that, yeah, globally, we're probably in the low 80s, bouncing around that area. Geismar, we're around 70% and working, I would say, still under inventory control. Rotterdam, we've got all the lines running in Rotterdam across the board, about 80%. And in Asia, well, we've been in shutdown in Asia doing maintenance work there. But when we can, that plant will be running full out.
spk02: Great. Thank you. And then another chemist company recently mentioned that China competitors in their space were benefiting from getting paid to take chlorine, which, you know, clearly improved the cost position. Is the similar dynamic occurring in MDI, and is that having any sort of material impact on global cost curves?
spk13: I'm not aware of that happening in MDI, but if you can give me the name of a supplier that will pay me to take chlorine, I will take as much as they will give me.
spk14: Yeah, I mean, in the process of producing MDI, you produce by-product HCL, right? And that goes downstream into the PVC market. It's quite normal as part of the Overall process in China, we have an HCL recycle unit where you don't need to move that down into the PVC market, but it's quite a normal part of the overall MDI process.
spk16: Thank you. The next question is coming from Arun Viswanathan from RBC Capital Markets. Your line is now live.
spk04: Thanks for taking my question. Good morning. I just have a more high-level question, I guess. When you think about the earnings level and what you're seeing in your end markets and from your customers, Um, you know, I guess I'm just kind of getting, wanted to get your thoughts on, uh, you know, how would you characterize this versus maybe a cyclical trough? Um, you know, I know that you started the call with noting that you do believe we're kind of nearing the end of the D stocking. So what are some of the primary drivers that kind of leads you to that statement? And as you kind of climb out of this, um, w what would you expect us to kind of keep monitor on? Would it be, you know, kind of weeks of inventory or. you know, maybe some better activity out of China. Automotive seems to be holding up pretty well. What are some kind of larger, higher level thoughts you'd have on whether we're leaving this trough or not?
spk13: Well, I think that as we look at past inventories, excuse me, past cycles, if you will, I think we've been hit doubly hard this time because we've seen a fall off of economic activity and whether it be in construction, in GDP in Europe, and, you know, it's still in even in places like aerospace still recovering from COVID and so forth. So we've seen a fall off of economic demand and activity coupled with what I think has been one of the most aggressive de-inventorying phases, thinking back of when crude oil at one point hit $140, $150 a barrel and crashed from there. What we're seeing today globally around the world, I think it's more severe than what we saw during the 07-08 recession, the crash of crude oil and so forth. And so we're seeing, Drew, excuse me, Arun, we're seeing a double combination, not just of slow economic activity, but also of de-inventory that's taking place. Nothing that speaks more to that than what we're seeing in U.S. housing, where housing starts to drop 15%, and the products going into that drop 30%, 40%. Again, that's unsustainable on a long-term basis for that to continue. As we think about the recovery, as to how that looks, I think that is all around volumes We first need to see the flat volumes where, you know, we've hit a bottom, and I think we definitely are there. We said earlier performance products from first quarter to second quarter down, you know, 1% to 2%. We're starting to see a double-digit growth in composite wood, insulation, single-digit growth in spray foam and so forth, you know, flat in our ACE materials, and we look at it quarter on quarter. And as we just gradually see that volume come back, again, this is going to be more of a volume drill than a pricing drill. And that's the fact that we've got a lot of the margins are still in place. They're still intact. It leaves me to be a little more bullish than I otherwise would be in that once volumes come back to a more normalized basis, that we're going to see a return to what we've seen as more traditional earnings.
spk16: Thanks. Thank you. We've reached the end of our question and answer session, and that does conclude today's teleconference and webcast. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.
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