Huntsman Corporation

Greetings and welcome to the Huntsman Corporation first quarter 2024 earnings call. At this time, all participants are in a listen-only mode. The question and answer session will follow the formal presentation. If any of us 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 Ivan Marcuse, VP of IR and Corporate Development. Thank you. You may begin.

Thanks, Darrell. Good morning, everyone. Welcome to Huntsman's First Quarter 2024 Earnings Call. Joining us on the call today are Peter Huntsman, Chairman, CEO, and President, and Phil Lister, Executive Vice President, CFO. Yesterday, May 2nd, 2024, after the U.S. markets closed, we released our earnings for the First Quarter 2024 via press release and posted it to our website, Huntsman.com. We also posted a set of slides and detailed commentary discussing the First Quarter 2024 on our website. Peter Huntsman will provide some opening comments shortly, and we will then move to a question and answer session for the remainder of the call. During this call, let me remind you that we may make statements about 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 the 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 this 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, our Chairman and CEO.

Ivan, thank you very much, and thank you all for taking the time to join us this morning. Reviewing the results of the first quarter, a few things of note are emerging. I said in our fourth quarter conference call on the 22nd of February that our number one priority this year was to recover lost volumes. During the first quarter, we were able to make some modest gains and will be doing more throughout 2024. The gains that we saw in volume were attributed to a combination of new business, demand growth, and pockets of inventory restocking. We question how much of this was the end of inventory destocking and the beginning of inventory rebuilding versus demand growth. While it will vary customer by customer, I believe it to be about 50-50. I should also say that eventually the two conditions merge into one gray area. Demand improvement begets inventory restocking. However, the bigger issue is when do markets recover sufficient to achieve pricing recovery? Today's levels of profitability, particularly in Europe, are below reinvestment levels and in some cases are still below positive cash generation. I'm happy to see 25% growth in our North American MDI demand in Q1. We should remember that this is compared to Q1 of 2023. where demand had dropped 35% from 2022. All this noise means that we are moving back to where we were merely a year ago. To have a real return to normalized market conditions, we're going to need consistent demand improvement and, equally important, higher prices to expand margins. During the last call, we also outlined the need to improve our cash flow. While we're seeing improvements in this area as well, we may face headwinds in working capital later in the year as sales volumes and prices move up. Our third priority in 2024 is our continued focus on our costs in the face of global inflationary and regulatory pressures. We continue on track to meet all the objectives we announced to offset projected 3% to 4% global inflation. Our fourth priority is to continuously assess our portfolio and make sure we're maximizing the value of the assets we own and how we deploy capital for growth. Finally, we continue to focus on our environmental and safety performance. This is our license to operate, and regardless of business conditions, we will not compromise on the safety of our operations. This focus on risk also applies to our balance sheet. We will not jeopardize our investment grade rating for short-term gains. All in all, I'm not surprised by the results and conditions that we're seeing. Our quick action on cost, capacity rationalization, and discipline with pricing will serve us well as the industry continues to recover. Our objective is to take quick and decisive actions in advantage of these improving conditions and get us back to normalized earnings as quickly as possible. With that, operator, let's turn the remaining time over to questions and comments.

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. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. We ask that you please limit yourself to one question and one follow-up question. One moment, please, while we poll for your questions. Our first questions come from the line of Patrick Cunningham with Citi. Please proceed with your questions.

Hi, good morning. Thanks for taking my question. Some of your comments in the prepared remarks reflect a slightly more positive view on China, and I think the sentiment there is pretty mixed at this point. Can you highlight where you're seeing some strength, what end markets, and what you expect to be growth drivers throughout the year?

Yeah, we continue to see a lot of demand growth in auto. I think that much of that has to do with the fast-growing demand domestic markets in China, particularly around EVs. If you think about EVs, we essentially supply everything that goes into an ICE vehicle, goes into an EV vehicle, and our polyurethane division, which is our largest division with automobile applications. But we also have a number of applications that we're developing right now that are in the pipeline, some of them that are merging into EVs. that are coming from the other divisions as well around structure, strength, lightweighting, adhesion, insulation, and so forth. So Chinese automotive continues to be what I think is one of the stronger areas of growth in China. How long that continues, I think it's probably going to continue for some time in China. I think that there's a broader question as to how long and how well that goes with the Chinese export markets, how successful China will be exporting those EVs into the U.S., which has been extremely limited, obviously, and obviously going into Europe, which is there's a lot of talk about putting limitations on Chinese vehicles being built in China, yet you see a number of Chinese auto companies that have joint ventured with European auto companies. So that's going to be a much greater area. Certainly that, and of course, anything that has to do with energy conservation in China, insulation, building materials where there's energy conservation, central heating, piping insulation and so forth, infrastructure projects continue to do quite well. Obviously, if it's related to residential construction, it's pretty sluggish in China. But by and large, as we said, probably three quarters ago, we expect China to have a slow but steady recovery, both in volume and in pricing. And I think that's what we're seeing.

Great. Appreciate the detail. And then, you know, advanced materials volumes were down year on year, even facing the easier comp. Is there any element of whether it's value over volume of lower margin product exits there, or is this reflective of underlying demand? And then just on full year volume, do you expect volumes to be down this year?

I would imagine volumes in advanced materials ought to be growing for the year at the rate of the overall macro GDP. I think you're going to see areas like Applications are going to electrical infrastructure, aerospace industry, automobile light weighting, EV applications. That'll be growing better than GDP. A lot of your industrial coatings and so forth will be at GDP, maybe a little bit less than GDP. And then we're going to continue to deselect the more commoditized grades, the BLR resins and so forth that we don't really add a great deal of value from a technical or manufacturing competitive basis. So it'll be a mixed bag. But if you strip away the commodity side of that business, by and large over the last couple of years you continue to see steady growth in the more downstream applications.

Thank you. Our next question has come from the line of Frank Mitch with Fermium Research. Please proceed with your questions.

Hey, good morning. Obviously, very impressive volume growth in North America in polyurethanes, as you mentioned, but you said you were only getting back really where you were for 23. How do you think about the pace of business in polyurethanes, not just in North America, but as we play out through the year?

I'm feeling better and better about it, Frank. Again, I don't think that we're going to see a compounded 25% growth obviously throughout the year. I think a lot of what we saw in the first quarter was the cessation of inventory drawdowns and so forth. And what we're seeing right now is going to just be a slow and steady recovery as we kind of get back in housing. I think inventory levels I can't say this unequivocally with all applications, but by and large inventory levels feel like they're pretty thin in most applications in MDI. And I think as we look throughout the next couple of quarters, we're expecting to see, you know, continue to see a recovering and modest growth in that area, particularly around construction.

Okay, so slow and steady is kind of the volume forecast. So then on the margin side, you know, you did highlight some modest price increases on MDI in a couple of regions, but we have stubborn benzene right now. How do we think about the margin profile for polyurethanes?

I think that our improvements, Frank, over the next quarter or two, Again, early in the quarter, so, you know, I'm very good at projecting market conditions for anywhere from 20 to 24 hours. But as I think over the improvements that I would be expecting in the next quarter or so, you're probably going to be looking at two-thirds to three-quarters. That's going to be around volume and the rest of that around price. And I don't have to be pessimistic about price. Right now, you're right. We do have some headwinds. in benzene prices. We're looking at crude prices today, pushing $80 to $90, depending on WTI versus Brent. And that's going to filter down into the gasoline pool, typically This time of year in the springtime, you're starting your blending season and so forth. You're going to see benzene prices will have a little bit of pressure on the upward side. So we're going to have to recover those higher raw material prices, and we need to get above and beyond those. So in my opinion, that's going to be the number one challenge that we've got as a company is to get these prices up.

Thank you. Our next question has come from the line of David Begleiter with Deutsche Bank. Please proceed with your questions.

Thank you. Good morning. Peter, looking at longer-term EBITDA, what will it take and how long will it take to get back to that billion-dollar threshold you've exceeded in the past?

Well, I think that it's going to take two or three things. It's a very good question, something that we ask ourselves all the time. If we're merely waiting for market conditions to recover, that's not the objective we ought to be looking for. So we do need to see demand in US housing come back to where it was around that million sort of a threshold in housing starts and so forth. And as we look around that, where we've been over the last couple of years, and really looking more for stability there is the volatility, I think, that probably concerns us more than anything else in North America. We need to see Europe stop this nonsense, the policy that they've got around deindustrialization and get an economy that's kind of growing once again. China, I think China has a nice recovery, a slow and steady recovery. I think people are kind of expecting some major stimulus or something to come through that's also going to put it through the roof. I mean, I'd love to see it, but I just don't expect it. I think you're just going to see a gradual recovery taking place in China. But a lot of it also has to be due with what we are doing ourselves. As I look at our MDI splitter in Geismar, Louisiana, that we started up just as COVID was coming on full force, There's another $40, $45 million of additional EBITDA that we ought to be getting out of that splitter. Once we're able to sell that out, we've got a number of expansions that are coming on in the coming months and quarters around amines expansion, urethane catalyst expansions, E-Grader, which is our ultra-pure amines that are going to be going to chip cleaning, chip solvents. These are projects that are going to be, you know, $10 to $20, $25 million of benefit to the company once these lines are up and moving and we're able to sell them out. We still have another $30-plus million of EBITDA in the aerospace segment as we come back. We see the full recovery. I mean, we're still not at the same wide-body demand as we were pre-COVID. I look at our Maryland technology. We're in the process right now of starting up a 30-ton reactor that will be selling product in the commercial arena for the first time at these sort of values and volumes that we've ever had. And we're starting the construction of a 5,000 ton unit that will be coming on in the early part, latter part of 25, early part of 26. You know, I look at the R&D pipeline, I look at the cost reductions of $280 million. I know I sound like this is a lot of issues, but when you add all these up, David, you know, you kind of get the idea that there's There's another $150 to $200 million of additional EBITDA that we really control, that we ought to be aggressively moving forward with. And so I feel that we do need markets to recover, but we've also got to be able to successfully execute on all the projects that we've started and will be coming up this year.

Very, very helpful. And just a much newer term, back half the year, polyurethanesibidasha. Should that improve versus Q2 levels based on current expectations?

Yes. I would certainly hope so. You know, I've challenged the teams we saw from our earnings from where we were in the fourth quarter to the first quarter of this year. You know, we're up If Tony can do that every quarter, 300% improvement for the rest of the year, I'll be quite pleased with him.

Thank you. Our next questions come from the line of Vincent Andrews with Morgan Stanley. Please proceed with your questions.

Thank you. Peter, just curious, you know, as you talk to your customers in building and construction in the United States, you know, we're ultimately going to get some rate cuts. It obviously seems like more a question of when. How fast do they seem to indicate they think markets will start to move once we move into a less restrictive monetary policy?

I think there's quite a bit of bullishness right now in the building in trades. You know, I think there's kind of two paths that are being pursued right now. That of what happens if rates kind of stay where they are. Obviously, that means that you're going to be getting less house for the same amount of money. So maybe houses are a little bit smaller. Maybe they're a little bit cheaper to build and that the cost of that house is going to be down. And as we look across the board, though, we continue to see very low housing inventory of new homes, new home availability. And so I think builders are doing really two things. They're preparing and looking at a scenario where interest rates stay where they are and let's adapt and equip to that. And also should rates be coming down, I think that's really going to open up the demand to be quite a bit higher than it's been the last couple of years. The point is there's a big gap there that needs to be filled. Okay, yeah.

And then just, you know, we have seen housing starts improve, you know, over the last six, nine months. It's been a little lumpier recently. But are you starting to see the benefit of that flowing through in your businesses or is it, you know, just beginning? And maybe we'll see it more over the next quarter or two.

I think we're seeing the beginning. Well, I don't think. We are seeing the beginnings of that. I think right now the biggest benefit that we saw in the first quarter was the lack of de-inventoring. And I get a sense that that has really ended across the board in many of the products, but particularly in the construction and housing market. And as we look at the hopeful expansion of demand and housing starts over the next couple of quarters, I'm hopeful that will certainly be additive to what we've been able to accomplish thus far.

Thank you. Our next questions come from the line of Alexey Yefermov with KeyBank Capital Markets. Please proceed with your questions.

Good morning, everyone. pretty impressive volumes in polyurethanes in North America and Europe. Can you just tell us where are your volumes today in these two regions versus what you would consider a normal volume level?

Well, I think, again, I'm very happy to see the volumes growing where they are, but they are where we were basically a year ago. And so we really need to see continued growth, and continued movement on pricing. Again, I don't expect volume improvements to be a 25% sort of improvement. But certainly, the housing and the construction markets are one that we're starting to feel is loosening up. And we ought to see some improvements there now. If mortgage rates go down, I think that's going to have a near instantaneous impact on the business. I think that would be the single biggest variable in our North American markets.

Alex, you can do the math, 35% down year on year. This time last year, as we said, and then 25% up. We're still about 10%, 15% below where we were. We still need to see that trend continue to get back to where we started.

Okay, thanks for that. And then I wanted to ask you about your spray foam business. How is it doing in Q1 and heading into Q2?

Well, spray foam continues to be a competitive market. The single biggest application for spray foam is our new housing builds. And as we look at that, you know, that for us continues to be an area It's a competitive market. If you look at the mineral fiber with the low cost of energy and so forth, yeah, we're going head to head, but we still grew our volumes there versus the prior year at just under 10%, 8% growth in that business. We continue to see growth, but again, growth is great to see, but we've got to see pricing. We've got to see margin expansion take place there as well.

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

Thanks very much. Can you talk about the relative prices for MDI in both crude and I guess more specialized in Europe, China, and the U.S.? And can you say something about your relative margins in each of those areas?

Yeah, as we look at our polymeric MDI, they're all basically selling it, I'd say, within $100, $200 of each other per ton. And it's around $2,000 per ton. It's a pretty flat market right now. There's not an incentive at this point to be moving a lot of volume from one region to the other. And I think that when you see demand, which has been kind of sluggish this past year, that would tell you that you're going to see pretty flat pricing. I will say, though, that as I look for some optimism in those areas, I looked at capacity utilization. I believe the industry today is running at about somewhere in the mid 80s on capacity utilization. Where we're seeing growth in demand and so forth, we're seeing quarter-on-quarter growth for the first time in, excuse me, year-on-year growth on a quarterly basis for the first time in two years. There have been a number of operating outages that have recently been reported in the media and so forth. I don't want to paint a picture that we're expecting to see prices go up through the roof. We're kind of getting into those dynamics where demand and capacity utilization moving into the mid-'80s. You're starting to get into some areas where I think you're probably going to start seeing some regional divergences and higher prices in some of these areas, again, hopefully.

I guess for my follow-up. Can you comment on the liquidation of the SLIC joint venture and how that may affect debt or cash flows in 2024 and 2025?

Yeah, Jeff, a couple of comments on SLIC. As you rightly point out, so we closed on that deal during the first quarter. minimal impact, net income, cash flow perspective, EBITDA perspective. I think we said on the last call, you then go through a process with the Chinese authorities, which will probably last into 2025, where we need to liquidate that joint venture. What that means is that we put approximately $200 million of cash from our consolidated joint venture into SLIC, into the unconsolidated joint venture. That cash then gets liquidated out in 2025 back directly to the partners. So you think of Huntsman getting about $100 million of that back and our joint venture partner SCAC getting that. the remainder directly. So what you'll see is cash goes down because it's off our balance sheet for a period. It effectively gets trapped in SLIC, and then it comes back up in 2025. It has a nominal impact on leverage, probably about 0.2 times on leverage as we progress through that process.

Thank you. Our next questions come from the line of Michael Sasson with Wells Fargo. Please proceed with your questions.

Hey, good morning. Nice start to the year. Peter, where are industry operating rates now for polyurethanes, MDI, and just curious where you think those need to get to to establish a little bit better pricing and margin going forward?

Well, typically, given the fact that this industry, the number of outages that you have to have for your maintenance of your facilities, typically it's about 90%. I like to think somewhere around 90% is kind of a sold-out position. As we've said in the past, leverage, pricing leverage typically comes at about 85, somewhere in the mid to upper 80s. You start to see that pressure at 85%. As you move through that, as I would think about your capacity utilization right now, and I'm talking about today in the second quarter, not necessarily in the first quarter, I believe in Europe you're probably in the high 80s, 87, 88%. The U.S., you're running over 100%. The U.S. needs imports to be able to satisfy demand. In China, you're probably somewhere in the mid to upper 70 percentile, which you add all that up and you're probably about 85% capacity utilization today, which is a very low end of what I would say is where you start getting into your pricing improvements. Now, again, as you start having outages or better than outages, you start seeing demand improvements come along, that's really what we need. Given what we've been in the past where we've been talking about global operating rates around 80 to 81, 82 percent, being at 85, 86 percent, the idea that a plant or two going down or two or three percent growth in the industry, all of a sudden puts you up there in that 88, 89%. Sorry, I'm getting overly technical here with a few percentage points one side or the other. But the point is, I think that we're in a much better position than we've been any time in the last two years.

Got it. And then, I know it's a little bit early to look to the second half, but what do you think needs to happen to get better EBITDA sequentially in the third and the fourth? And do you think the third and the fourth quarter run rate, Srivata, would be sort of a good base to think about how earnings can grow into 2025?

Well, certainly where we end the second half will certainly be a trajectory as to where we go in 2025. I'm getting more bullish. I mean, again, I just go back to the nightmares of where we were a year ago this time when we were saying, You know, we're going to have a rocky beginning of the year, and the second half of the year is going to recover very strongly and erase all of our sins. That didn't happen, and the sins just multiplied and got worse and worse, and finally found ourselves in hell. So that's probably not a very good metaphor to use. But anyway, as we look at the beginning of this year, I think we've seen good, reliable, and consistent growth and recovery. And I think the second half, what we need to see is that continued growth. And again, I know I've said this before, but movement in pricing. And so as we look at where we're moving, the direction we're moving, I like the direction of which we're going.

Thank you. Our next questions come from the line of Hassan Ahmed with Alembic Global. Please proceed with your questions.

Morning, Peter. Peter, I just wanted to revisit some of the commentary that you made on polyurethane volumes. Obviously, North America, on a percentage basis, ridiculously strong, up 25%. But you alluded to the fact that we're still not really at normal volume levels. Europe, up 9%. Again, it seems from deflated levels. And Asia, relatively flat. So could you just help me understand the trajectory from here? I mean, we're obviously below normal in North America. Europe, it seems, well below normal. And same thing with Asia. So, I mean, how should we be thinking about near-term as well as medium-term volume growth trajectories by region?

Well, I think that we're going to continue to see uh, probably stronger than, than average growth in Europe and in the Americas. I look into the second quarter, it's early right now to order books. Uh, you know, but, but we're, we're going to see continuously modest, uh, underlying growth. We're, we're dealing with easy comps from a year ago. So I'd be focused more on, on quarter on quarter versus where we were a year ago. And, uh, you know, we've, we've obviously this last year, we got in a deep hole and, and, uh, I think we first need to get out of the hole, and I think that we're just about out of that hole, and we need to start growing from that point on. And I think that's where we are and that's where we're heading.

And Hasan, as we indicated, sequentially when you go Q1 to Q2, typically you'll get about a 5% improvement in volumes, and we highlighted in the prepared remarks that we would expect to get more than that this year. So the trajectory is in the right direction.

Fair enough. And as a follow-up, continuing with polyurethanes, you know, just on the cost curves, you know, obviously there was margin improvement, you know, call it one, one and a half percent EBITDA margins going up to like four. But I mean, you know, you guys being on the lower cost of production side of things, I'd like to think that, you know, a chunk of the industry is still in the red. And, you know, Further to that thought, I would imagine that unto itself, as a recovery is happening, would be a big positive in terms of you guys or the industry getting pricing power again.

I would certainly agree with that, Hassan. As I look in the U.S., though, I think that the cost curve in the U.S. is pretty flat. You look at the major players in the U.S., they all have relatively the same size. None of us are integrated back up into benzene. We're producing on benzene. It feels like we're kind of all in the same boat as far as competitive natural gas is. Electricity is kind of the same price for everybody. You know, the chlorine rack is the same for everybody. So as I think about Europe, I think that's where you probably see some of the biggest cost disparities between the low-cost and high-cost producers. Europe still operates some relatively small facilities, and to be honest with you, I'm surprised some of those facilities are still operating. But again, I'm not privy to their economics, but as I look at their size, Anyways, yeah, so Europe, I think you're going to see that. In Asia, you've got a lot of newer facilities, single line, large volume single lines that are operating. Wanwa, I believe, probably has a, I don't think it's order of magnitude, but they certainly have, just by virtue of their size of their lines and so forth, I think they probably have a bit of an advantage over the other players, but I think that we shouldn't get lost so necessarily on the cost of production because as you start going downstream and as you start looking at things like our splitter in Geismar, Louisiana, you start looking at our downstream applications going to elastomers and system houses and so forth. If those downstream businesses are being operated well and you're focused on adding value to the molecule, I believe you're going to make more money on your downstream business than you will on your manufacturing economics. Both very important, agreed, but Europe also, you do have that disparity between producers, but Europe also, in spite of some of the industrial problems and so forth, Europe also rewards innovation and rewards energy conservation, lightweighting, adhesion, footwear. There's a number of applications in Europe where we have some of our higher margin businesses.

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

Thank you. Peter, your opening comments mentioned some areas of Europe are below positive cash generation. Is that Malay and Hydride, and is there anything else?

I'd say that Malayak, and again, I just got these talking about some of the better ends of our urethane businesses. There are also going to be some commodity ends of the urethane business, you know, where we're really struggling to get pricing up, and we need to get pricing up, or we need to ask ourselves if we ought to be moving that product somewhere else, to be honest with you. But as we look, by and large, at some of the European – markets, when I made the comment, I had in mind our Malay business, where we are having to battle with a lot of import materials coming in and sluggish demand. And some of the downstream urethane applications are still not, in my opinion, those are not volumes and margins that are sustainable.

And then I had thought you had already exited epoxy BLR resin that's there. So what else are you exiting that I thought you exited before? And how much is left to go?

Well, again, when we look at our epoxy businesses, we do continue to produce some commodity grades of epoxies. And we will do that as we base load some of our facilities. our emphasis is going to continue to be able to take that volume and moving it into higher value added components and so forth. But, yeah, you do have some of the low end of your reactions, reactors that take place and your production that takes place that I consider to be commodity. And you're always going to be exiting the bottom end of that and pushing more volume on the upper end of that margin scale. So not sure that it's all necessarily, and we talked about exiting businesses, isn't necessarily all BLR. I would just say that as we look at our capacity availability and where we want to put our emphasis, that may be beyond just basic BLR as well.

Yeah, and John, for context, I mean, BLR used to be about 50% if you go back 10 years. Today, we still have some business, as Peter says. It's about 10% of our volumes, and we continue to move that down when appropriate.

Thank you. Our next questions come from the line of Salvatore Tiano with Bank of America. Please proceed with your questions.

Yes. Thank you very much. So firstly, I want to continue on that commodity epoxy discussion. Can you quantify, for example, when you said you selected some businesses in Q1, how much was that impact and what your volume growth would have been like for like without the commodity side? And as we look in the past couple of years where I think your volumes have declined by around 30%, also can you put into context how much of that was just you walking away from low margin business versus the high-end products?

If you look at the advanced materials business, it grew in aerospace. I think we said sales grew 6% overall year on year. We grew actually in automotive. We grew in the power grid area as well. You're talking there just those three areas, about 50% of our overall advanced materials business where there was growth. The commodity part was well down, and that was well down throughout the year as we did deselect some more VLR business. And year on year, we also moved away from some of the low-end commoditizing part of infrastructure coatings. So if you took out some of that commodity, you would have seen growth given power, given our volumes into aerospace and into automotive. And I would say that quarter on quarter, though sequentially usually you see a little bit of an uptick, we actually saw 5% growth quarter on quarter between 4Q and 1Q in terms of our volumes and advanced materials as well.

Perfect. The volume that gets deselected, there's not a lot of EBITDA that's associated with it.

Okay, perfect. And, you know, since... I guess you've already seen the value of making more downstream products here, and the commodity epoxy market has been suffering for a couple of years. We're seeing some other companies trying to shift, I guess, a little bit more downstream into epoxy systems as well. Is this something that you're seeing in terms of competitive pressure, or is the concern for you going forward?

Well, many of our applications that we go into, for instance, the power grid and electronics, aviation, and so forth. These are sold typically on a qualifying basis where you're selling out for five to 10 years on a contract. If you're selling to the aerospace market, you're going to be qualifying into a fighter jet project or into an Airbus or Boeing application that will be around for years to come. And they typically don't change suppliers. You don't change specs and formulations and so forth. The other end of the business, and I kind of look beyond kind of the power and aviation, remember that this is an incredibly fragmented business, more so than any of the other businesses that we have. And you're going to see competition coming from other competing materials, not just epoxy, but I would think that most of our application in competition is coming from non-epoxy applications. where we're either replacing other materials or we're seeing other materials that will be competing against us that are not necessarily epoxy. But typically, just as a rule of thumb, the companies that I see people comparing us to in the epoxy segments are typically not the companies that we really are aggressively competing with.

Thank you. Our next questions come from the line of Kevin McCarthy with the Vertical Research Partners. Please proceed with your questions.

Thank you, and good morning, everyone. I had a question regarding MDI unit margins. So benzene costs have been elevated a little bit north of $4 a gallon in the U.S. lately, and your prices are rising as well. And so if I net those two things out, you know, when you craft your guidance of 70 million to 80 million for polyurethanes, are you baking in sequential improvement in the unit margins for MDI in terms of cents per pound? It sounds like maybe the answer is yes, but I just want to make sure I'm understanding that correctly.

Yeah, Kevin, I think that's a correct assessment. We're simultaneously trying to offset rising raw material prices, and at the same time, trying to get ahead of those prices. And I think that's why I say we expect to see marginal price improvements. And most of the improvement that we see, as I look again into the second quarter and perhaps developing the third quarter, the improvement's going to be more around volume than price at this point.

And Kevin, we did see a small unit margin improvement as we moved from Q4 to Q1. And as Peter says, we do expect a small improvement as we move from Q1 to Q2. And I would also say there's a good focus on benzene, rightly, because that's the largest raw material. Gas remains relatively low. Chlorine in general has been slightly down. And then ammonia onto nitric has been slightly down as well. So you need to consider all of the raw materials that are flowing through into polyurethanes.

Very good. And then, Peter, as a second question, I think one of your five objectives for the year is to you'll look at potential to optimize the portfolio. And in my mind, I've been thinking about Europe as maybe the center of that effort. I'm just tempted to ask, it seems like things are improving cyclically, as you discussed in your prepared remarks. On the other hand, Europe has some problems that are arguably more structural in nature, as you've also addressed in the past. So how do you put those two things on the scale? In other words, if the European assets are more fully loaded and profit is starting to come back, how do you weigh that against what may be a less exciting outlook over the medium to longer term for capital deployment in the region, for example?

Well, it's a very good question, Kevin. It's a rather complex one as well, but I'll just briefly touch on it. When margins are where they are today and uncertainty around the economy are where they are today, and I don't want to sound, I don't want to give false signals here, but where they are today, we certainly want to protect the balance sheet. And so this is not the time to go out and lever up the balance sheet and put uncertainty into the market. It may, and I want to emphasize the word may, it may be a time when you're looking at industry consolidations, looking at potential, mergers, bringing assets together. Typically, if you're looking at where a lower tide is lowering the earnings of everybody, this might be an opportunity to look at those sort of structures that you typically wouldn't look at when you're near peak economics. When you're near peak economics, people have a tendency to stretch the balance sheet more and to be more aggressive on your M&A side. When your earnings are down, your balance sheets to be protected, you're going to do something that's more capital conservative, and that's looking at potential mergers and so forth. Now, again, in saying that, I don't want to somehow signal that we're looking to do some big merger. I'm just saying that as you go through the industry cycles that we're going through, we're obviously coming off of a very – steep floor. We want to protect our balance sheet. We're not going to do anything that is reckless with that balance sheet. But at the same time, we still have to be able to look at our assets. We've got to look at, are we the best owners of these assets? And relative to the overall value that the stock market puts on our assets, are we getting maximum value? And just because markets are down doesn't mean we stop asking those questions.

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

Hi, good morning. I wanted to follow up on polyurethanes. I think, you know, in the prepared comments, you talk about getting back to normal in that segment. What do you consider normal at this point? I guess if you get improvement to the second half, you know, maybe your run rating around 400 million, you have Obviously, some changes in the cost structure you alluded to. You're doing some cost savings. I guess what's the bridge back to normal at this point?

Well, I think that the bridge to get there is going to be higher volumes and it's going to be higher pricing. But when I think of a normalized MDI market, I'm thinking of margins that are in the mid-teens. This is a business that when it's running on all cylinders, and that is your splitters are sold out and you've got strong demand, you're probably looking at market conditions that you saw in 2022, time period of when you're looking at the very high teams and you're pushing 20%. But on a normalized basis, our urethane business ought to be somewhere in the mid, something just slightly north of 15%, 16% EBITDA margins. But again, we're going to need both, again, demand and pricing to get there.

That's helpful. If I could just ask quickly just on buybacks, you didn't do any in the quarter. I assume that's just because the working capital flows through the quarter versus the year. But how would you expect your plans around buybacks for the rest of the year to play out?

I think that we'll be assessing that on a quarter-to-quarter basis. And right now, I don't see us certainly in the second quarter and most likely in the third quarter of doing share buybacks. But, again, that's something the board will be discussing and assessing on a quarterly basis.

Thank you. Our next questions come from the line of Matthew Blair with Tudor Pickering and Holtz. Please proceed with your questions.

Hi. Thank you, and good morning. Peter, you mentioned that you're looking for bolt-on acquisitions in ADMAT. are there specific end markets where you're looking to get more exposure? So, for example, are you looking to increase your aerospace exposure or are you looking for perhaps more diversification?

I think that we'd be looking for anything that's got high margin, that we have the chemistry to be able to do something that is unique. I like to think, I mean, when we look at opportunities for acquisitions, I like to think, ask the question around what can we do that private equity can't do. Our recent acquisitions as we look at the Gabriel acquisition, the CBC acquisition, these were great acquisitions. The previous owners were great companies, but we had an opportunity to globalize the applications to integrate into our existing footprint. And they didn't really go into any one specific downstream application as much as they, I'd say there was more of a horizontal growth. We went out rather than up and down on that integration. So I think where we can continue to bring technology, to bring globalization, and to bring downstream applications and uniqueness to our customers, solutions to our customers, we're going to be focused on those. But no, we don't have a specific where we're saying We're going to put a greater emphasis on aerospace, for example.

Sounds good. And then could you talk about your MDI supply expectations for the next few years? There's been some reports that Wanwa is starting up a new 400 KT expansion this quarter. Is that in line with your expectations? And are there any other big projects on the docket for the rest of this year or into 2025? Yeah.

I think after that expansion from Wanwa comes on, I'm not sure that there's a whole lot of capacity coming behind that. But look, I mean, Wanwa is going to do what they're going to do. The Chinese market continues to be a good market force. Demand is continuing to modestly grow, and pricing continues to be pretty sticky. And so I don't see any new capacity coming on in North America or Europe. If anything, I question if everything ought to be operating in those two market segments. But if you look outside of China, there's nothing coming on.

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

Hi, good morning. Um, uh, another question for you on the spray foam opportunity was wondering if you could talk about, uh, progress that you're making on, uh, some commercial inroads in Europe and in Asia. Uh, you mentioned that, um, maybe there are some opportunities in building insulation in, uh, in China and, and, uh, just curious how you're positioned there.

Yes, this is going to be an area that we're going to continue to put a lot of emphasis on. Just beyond Asia, you look at specifically in Japan and some of these other areas, the Middle East, we're seeing stronger growth there than in other areas of those regions. I see this as a real opportunity. As you think around either the high cost of energy, as in the case of Japan, or in the Middle East where there's just a lot of new construction that's going on. These are both prime areas of opportunity for us. I should emphasize that as you look at the vast, vast majority of that business, it's North America, Canada, and the U.S. related. We are going to see growth in Europe and Asia, but the health and the vitality of that business is going to be dependent on North America.

All right, and then a question for Phil, and I apologize if this is a stupid question, but I was curious if you can give us some color on the special items, the gain on acquisition of assets and the prepaid asset write-off. What were those two items, and were they related to each other?

They were related to each other, Mike. You're quite right. That was all related to the closing of the SLIC transaction, the SLIC restructuring that we did. And you'll see a number of 71. You'll see a number of 52. There's also a number of 18 on tax. And when you net all those together, you get virtually no movement whatsoever on net income. So it all relates to the SLIC transaction with minimal impact to net income.

Thank you. Our next questions come from the line of Arun Viswanathan with RBC Capital Markets. Please proceed with your questions.

Great. Thanks for taking my question. So I just wanted to come back to, you know, the discussion around normalization of some of these markets. So if you think of maybe the first half around 200 million plus Aviva DA and maybe the second half above that, you're kind of tracking around 450, 500 million. And, um, I think in the past your peak EBITDA was around a billion four. If you remove some textiles, maybe you're down to a billion three. So is that the right range you're kind of thinking of? And so if you, if you think about that going from 450 to 500 to maybe eight or 900 million in the mid cycle, is that maybe two thirds volume and maybe one third price? Um, how would you kind of frame that, that, that, uh, trajectory?

I'm not sure, Arun, that you're off that much in any one area. I do think that maybe you're going to see a little more pricing. You said you're kind of a third, two thirds, one third on price and volume. I think it's got to be probably. But pricing just has to occur here. We need to be able to get traction to offset higher raw material prices and margin recovery. Volume's only going to take so much of that. So we need the volume to get the price. That's got to come first. But I would, being the optimist that I am, I hope that we would do better in 24. I hope that we have a stronger second half in 24. But having said that, since you look at kind of your mid-cycles peak and where we are today, no, I don't think you're too far off.

Great, thanks for that. And then just going back to the question of portfolio, arguably, despite some maybe improving markets here, the cost position in Europe is probably not necessarily going to get materially better. So would you be in a position to maybe reconsider some exits in Europe at some point in the future? Obviously, we have seen some announcements in certain areas by some of your competitors already. So just wanted to get your thoughts on that.

No, I think that as we look at Europe, look, I'm concerned about a lot of things in Europe, but I'm mostly concerned about high energy prices in the high regulatory environment. As I look at the high energy costs, Most of our businesses in Europe are not terribly energy-intensive assets. So again, I maybe have some concerns around the macro picture, but of our individual assets, I think that by and large, they're competitive. I look at advanced materials, and that continues to be a very strong business for us. We see stronger margins in advanced materials than we do in the other areas of the world. And between Europe and APAC, we have a much larger business in Europe than we do APAC. So again, if you're in the right segments, aerospace, adhesion, light weighting, you're going to do OK in Europe. If you're in energy intensive and you're producing fertilizers, which we're not, glass and cement, things that are going to be energy intensive, I think you've got some real portfolio concerns there. The cost competitiveness of Europe versus North America and Asia right now in polyurethane does not warrant the movement of large-scale shipments to be moving around the globe at this time. Obviously, that's where we were a year ago. We're not there today. I think energy prices are still too high in Europe. I don't think they're adequately being addressed by the government there. I don't think they have a realistic policy to address those things. But I don't see that as being bad enough to force an exit.

Thank you. We have reached the end of our question and answer session. And with that, that does conclude today's teleconference. You may disconnect at this time. Thank you for your participation and have a great weekend.