Huntsman Corporation (NYSE:HUN) Q1 2024 Earnings Call Transcript

Huntsman Corporation (NYSE:HUN) Q1 2024 Earnings Call Transcript May 3, 2024

Huntsman Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: 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. [Operator Instructions] 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.

Ivan Marcuse: Thanks, Daryl. 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 and CFO. Yesterday, May 2, 2024, after the US markets closed, we released our earnings for the first quarter ’24 via press release and posted 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 guarantees 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 the quarter. We will also refer to non-GAAP financial measures such as adjusted EBITDA, adjusted net income or loss, and free cash flow. You can find reconciliations to the most directly comparable GAAP financial measures in our earnings release, which has been posted to our website, huntsman.com. I’ll now turn the call over to Peter Huntsman, our Chairman and CEO.

Peter Huntsman: 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 22 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 we’ll 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, in some cases, are still below positive cash generation. While 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 nearly 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.

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Q&A Session

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, 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 are 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, 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.

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first questions come from the line of Patrick Cunningham with Citi. Please proceed with your questions.

Patrick Cunningham: Hi. Good morning. Thanks for taking my questions. Some of your comments in the prepared remarks reflect a slightly more positive view on China, and I think 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?

Peter Huntsman: 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 domestic markets in China, particularly around EVs. As we think about EVs, we essentially supply everything that goes into an ICE vehicle goes into an EV vehicle in our polyurethanes 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, light-weighting, 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 there’s a broader question as to how long and how well that goes with the Chinese export markets, how successful China be exporting those EVs into the US, 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, it’s going to be — that’s going to be a much grayer area. But certainly that, and of course, anything that has to deal 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.

Patrick Cunningham: Great. Appreciate the detail. And then, Advanced Materials volumes were down year-on-year, even facing an 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 volumes, you expect volumes to be down this year?

Peter Huntsman: I would imagine volumes in Advanced Materials ought to be growing for the year on — 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 ought to 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.

Operator: Thank you. Our next questions come from the line of Frank Mitsch with Fermium Research. Please proceed with your questions.

Frank Mitsch: Hi, 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?

Peter Huntsman: 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 — continue to see a recovering and modest growth in that area, particularly around construction.

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

Peter Huntsman: I think that our improvements, Frank, over the next quarter or two, again early in the quarter, so I’m very good at projecting market conditions for anywhere from 20 to 24 hours. But 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, that’s — 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.

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

David Begleiter: 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 $1 billion threshold you exceeded in the past?

Peter Huntsman: Well, I think that it’s going to take two or three things. 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 answer that we ought to be. It’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. [Technical Difficulty] 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. It’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 — do 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 million, $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.

They’re going to be — going to chip cleaning, chip solvent. These are projects that are going to be $10 million to $20 million, $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 million-plus of EBITDA in the aerospace segment as we come back, as 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 Miralon technology. We’re in the process right now 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.

If I look at the R&D pipeline, I look at the cost reductions of $280 million, I know I sound like there’s a lot of issues, but when you add all these up, David, you kind of get the idea that there’s another $150 million 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.

David Begleiter: Very, very helpful. And just much nearer term, back half of the year, polyurethanes EBITDA, should that improve versus Q2 levels based on current expectations?

Peter Huntsman: Yes, I would certainly hope so. I’ve challenged the team as we saw from our earnings from where we were in the fourth quarter to the first quarter of this year. We’re up 300%. If Tony can do that every quarter, 300% improvement for the rest of the year, we’ll be — I’ll be quite pleased with them.

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

Vincent Andrews: Thank you. Peter, just curious, as you talk to your customers in building and construction in United States, 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?

Peter Huntsman: I think there’s quite a bit of bullishness right now in the building in trades. 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 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.

Vincent Andrews: Okay, yeah. And then just we have seen housing starts improve over the last six, nine months kind of been a little lumpier recently, but are you starting to see the benefit of that flowing through in your businesses? Or is it just beginning and then maybe we’ll see it more over the next quarter or two?

Peter Huntsman: I think we’re seeing the beginnings of — 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-inventorying. 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.