Huntsman Corporation (NYSE:HUN) Q4 2023 Earnings Call Transcript

Huntsman Corporation (NYSE:HUN) Q4 2023 Earnings Call Transcript February 22, 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. Welcome to the Huntsman Corporation’s Fourth Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note that this conference is being recorded. At this time, I’ll now turn the conference over to Ivan Marcuse, Vice President of Investor Relations and Corporate Development. Mr. Marcuse, you may now begin.

Ivan Marcuse : Thank you, Rob, and good morning, everyone. Welcome to Huntsman’s fourth quarter 2023 earnings call. Joining us on the call today are Peter Huntsman, Chairman and CEO and President; and Phil Lister, Executive Vice President and CFO. Yesterday, on February 21, 2024. After the U.S. equity markets closed, we released our earnings for the fourth quarter of 2023 via press release and posted to our website, huntsman.com. We also posted a set of slides and detailed commentary discussing the fourth quarter of 2023 on our website. Peter Huntsman will provide some opening comments shortly, and we will then move into the 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 and expectations for the future.

All such statements are forward-looking statements involve 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 filings for more information regarding the factors that could cause actual results to differ materially from these projected and 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, CEO and President.

Peter Huntsman : Ivan, thank you very much. Thank you for joining us this morning. Last evening, we released our prepared remarks for the fourth quarter 2023 results. Before opening the call to questions, I’d like to take a few minutes and share with you our latest plans and views as we enter the second half of the first quarter. At the outset, I remind you that we have complete financial results for the month of January, but still have two more months until we know the full results of the first quarter. I’m also still a bit haunted by the ghost of a year ago when many of you and most companies were projecting 2023 to have a weak beginning but a very strong second half, second half proved to be nothing short of a disaster. Let me begin by sharing with you our five main goals for this year.

First, we will be — this will be a year wherein we will recover some lost sales from 2023. A year ago, we showed strong pricing discipline early in the year and in many cases, we held the line and kept pricing from falling faster than they otherwise would have. In some cases, we lost business competition who are pushing volume over value. Going forward, we will be pushing much needed price increases in most of our product ranges, but we will also be negotiating to get back some of that lost volume. Our second priority would be to improve our free cash flow generation. This will be at the top of our incentive pay targets for 2024. We will do this through a continued focus on working capital controlling both indirect and direct costs and moving more volume and higher prices.

Our third priority is to maintain discipline in our cost structure. We will complete our previously announced cost reduction programs in each of our divisions and our corporate functions. We will also be focused on offsetting projected 3% to 4% inflation increases. Our fourth priority will be to continue as we have for the past several years, assessing our portfolio on an ongoing basis to ensure that we are the best owners for the businesses and assets that we have. We will continue to look for M&A opportunities to expand our more differentiated downstream businesses. Lastly and most importantly, we will invest to continue improving our environmental and safety stewardship and our operating reliability. This focus on managed risk will also apply to our investment-grade balance sheet.

Our Board of Directors remains committed to returning cash and value to our shareholders. To this end, we will be raising our dividend by 5% to share to $0.25 a quarter. While we do not plan to buy back any shares in the first quarter, we look forward to restarting our buyback program as soon as market conditions warrant. As I said at the beginning, it is still too early in the quarter to make bold predictions. However, the order patterns that I’m seeing in most areas of the world tells me that in most of our divisions, we have seen the end of a very long period of inventory drawdowns and prices and volumes look to be gradually improving. With the restarting of China’s economy post New Year celebrations, I feel more optimistic than I did at year-end and see more proverbial green shoes than I have over the past 12 to 18 months.

We have a lot of recovery before us, but I believe we’re taking the right steps in the right direction. Thank you very much. And with that, operator, why don’t we open the line up for any questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question today comes from the line of Mike Sison with Wells Fargo. Please proceed with your question.

Mike Sison : Hey, good morning. Peter, volumes in polyurethane seem to have stabilized a bit in the fourth quarter. How do you think volumes sort of unfold in the first quarter? Or are you — you had sort of mentioned that order patterns look a little bit better. And then when do you think we can see an inflection point for growth in ’24?

Peter Huntsman : Well, I think that, again, you’re going to continue to see a gradual improvement throughout the first quarter, both in pricing and in volume. When I look at it on a prior year basis, I would imagine we’ll probably be seeing an improvement in the first quarter, again, just looking at order patterns today and so forth. Probably around mid-single digit sort of growth. And that’s going to be pretty much across the board. We’re looking for growth to take place as we’ve seen the cessation of deinventoring in North America around housing and construction. And in China, we continue to see a bit of a rebound in construction, but mostly in automotive and mostly as we look at infrastructure projects. And in Europe, well, I think we’ll just see a continued gradual recovery across the board in Europe.

Mike Sison : Got it. And then if volumes do recover, what do you think needs to happen to shore up sort of either pricing or profitability and maybe give us a thought on what the Polyurethane segment should be able to do longer term in terms of sort of margins and earnings power?

Peter Huntsman : Well, I think MDI, I’ve not seen anything structurally that has changed in MDI. This is a mid- to upper teen sort of business during its normalized basis. And when you see MDI capacity utilization, usually somewhere in the mid- to upper 80s, particularly the upper 80s, pushing 90% you’re going to see pricing power. I think the industry today globally is somewhere in the low 80% capacity utilization with a little bit of an improvement over what we’ve seen in previous quarters. I remind you that the last quarter, we were talking about global operating rates being probably in the mid [indiscernible] so we are seeing a bit of an uptake there. And — but we need to see sustainability. Again, last year, at this time, we were talking about a stronger second half of the year and so forth.

And I think that what’s going to be important this time or this year is that we just see a long steady recovery in volume and allowing us to recover the pricing as well. And I would say that across the board in virtually all of our products, not just MDI.

Operator: Thank you. Our next question is from the line of Josh Sector with UBS. Mr. Sector, please proceed with your question.

James Cannon: Hey, guys. This is James Cannon on for Josh. Thanks for taking the question. Just looking at — you called out volumes down against a weaker year-over-year comp. I was wondering, is there any impact from the ongoing BLR rationalization? Or is that pretty much done at this point?

Peter Huntsman : No, I don’t think that we’ve seen any impact from BLR rationalization. I mean, in our case, we’re seeing a little bit of fluctuation in order patterns on aerospace and so forth. But I wouldn’t say that any of those are really material trends. A lot of that’s just going to be timing on year-end inventory and as you look at something like aerospace or and automotive, how many parts are in the OEM supply chain or car companies shifting from EVs to hybrids to ICE. And yeah, that will cause some disruption on a quarterly basis. But I don’t see anything in advanced materials that would give me any concern about order patterns or sales.

Phil Lister : If you think about it, less than 10% of our Advanced Materials portfolio now is BLR. We’ve deselected an awful lot over the years focused on the higher margin businesses, and that generates less than 5% of the profit. It’s not our focus from a portfolio perspective.

James Cannon: Okay. Thanks. And then just on the aerospace, there was an incident earlier in the quarter that led to the FAA limiting production at the major aircraft manufacturer. Is there any impact on the first quarter guide from that?

Peter Huntsman : No, no. And I would just remind you go throughout saying we didn’t have anything to do. I mean our products and so for that had nothing to do with that manufacturing problem going at. So no, I don’t — as we look at it overall, we don’t see any impact in the first quarter because of that.

Phil Lister : Yeah. And if you think about it, our exposure is in general into wide-body aircraft into the relevant aircraft, it’s less than 5%. So it’s again, for any recovery that we have, it’s all focused on the wide-body material that we sell into that end market.

Operator: Our next question is from the line of John Roberts with Mizuho. Please proceed with your question.

John Roberts : Thank you. You decided that you’re going to restart your smaller Geismar unit. Maybe it didn’t sound like that was maybe quite justified yet. Maybe that should come a little bit later, but maybe you can talk about where you think that volume is going to go.

Peter Huntsman : Yeah. That’s 100 — I’d remind you, it’s 130,000 tons of volume, roughly 250 million pounds. And so we’re looking at that sort of volume being a relatively small percent increase in the overall scheme of things. I would just say, too, that as we look at restarting that, it does take you time to restart an asset like this probably could take as long as throughout the entire quarter going into the second quarter. Second quarter is usually a pretty strong demand for OSB, CWP, insulation, our building materials. And just because we’re operating in that line, it doesn’t mean that we’re going to put all 130,000 tons into the market on day one. That will gradually be fed into the market as a market needs and so forth. But we looking at today’s order patterns, what we’re hearing from our customers and so forth, we feel that we need to start that asset up.

Phil Lister : John, we been operating globally at between 75% to 80%, the markets in the low-80s. So that should give you some indication that we’re simply moving up to the market levels.

John Roberts : Thank you. And then is the Boeing situation affecting our epoxy supply chain at all?

Peter Huntsman : No, we’re not seeing any issues today on that. What noise, I would remind you that we’re supplying our customers then supply Boeing or in some cases, our customers supply an OEM that supplies Boeing. And what impact that may have if Boeing were to slow down production and so forth. We may not feel it for a quarter or two. But no, I don’t see any reason today. We’re certainly not seeing anything that would impact that.

Operator: Our next question is from the line of David Begleiter with Deutsche Bank. Please proceed with your question.

David Begleiter : Good morning. Peter, just on MDI, what would it take to return to mid-cycle operating rates in MDI? And is there a path forward to a peak later in this decade?

Peter Huntsman : I think that as we look at — we kind of look at the three regions. I think that as we look at the U.S. housing market, I think that a recovery in housing to be at that 1.5 to 1.7 kind of where we were just a few years ago, which I think is still well below the 2 million level that people are saying is kind of a sustainable rate. If we look at housing, that recovery of housing. And I think, again, it’s — what was really painful over the last year and half was the deinventory that took place. It wasn’t necessarily a housing drop to 900,000 units or something like we saw during the Great Recession. It was a massive amount of deinventory that took place and how much inventory within the system when that the inventory started.

So I think in North America, it’s going to be a lot around housing. I think that as we look at Europe, it’s going to be — excuse me, as we look to Asia, it’s going to be around continued pull that in automotive, for us, both ICE and particularly EV have been very strong end markets for us in urethanes in China. China continues to improve as we have pointed out in the last couple of quarters that it would. But we’re certainly not seeing from an overall macro point of view. The 5%, 6% growth that we’ve seen in past years. So I think that’s going to be important. And then Europe, I think Europe is going through, particularly in Germany, something of a deindustrialization right now. And I think Europe needs to find incentive courses to — do they want to continue this insanity that they’re going through or do they want to really have policies and priorities that are going to encourage manufacturing and where they’re going to be going in that area.

But Europe for us in building materials, insulation, lightweighting, automotive and so forth, those are — some of those are doing fairly well right now. We’re seeing a gradual recovery in automobiles and so forth, insulation, but we need to see more coming out of Europe. So again, I think all of those indicators are going in the right direction right now gradually some faster than others. We just need to see it sustainably keep moving in that area.

David Begleiter : No very helpful. And just how should we think about the ramp in earnings from Q1 to Q2 for the total company?

Peter Huntsman : I’m sorry, the ramp of earnings in Q1, Q2 for the entire company?

David Begleiter : Yeah, the ramp from Q1 to Q2 EBITDA for the company.

Peter Huntsman : Again, I think that, that will be a factor of what we see in continued growth and pricing discipline largely across the board. But we would assume that as we continue to see an improvement in demand and improvement in pricing, that we’ll see an improvement in earnings as well.

Phil Lister : Yeah. We’re not going to guide to Q2 right now. Dave, we’ve got the Q1 guidance, but we would expect a seasonal improvement as you move into the higher construction time period.

Operator: Our next question comes from the line of Alex Yefremov with KeyBanc Capital Markets. Please proceed with your question.

Alex Yefremov : Thank you. Good morning, everyone. Just to piggyback on the last question, in your polyurethane segment, you’re expecting better margins in the first quarter. Should we think about that level of MDI margins in Q1 as sort of the baseline for ’24 or could those margins dip again in Q2 because we now see benzene rising, for example, maybe you won’t have enough pricing. But do you feel comfortable that at the very least, that Q1 level of MDI margins would not slip lower?

Peter Huntsman : Well, I’d like to say that we have that much control in pricing for the entire year and that we have that good of forecasting. But as we look at — and I’m focused right now as to how Q1 is ending and how Q2 is going to be starting. And as I look right now at some of the broader indicators, Europe were out with a price increase effective March 1 of €250. These are public announcements of €250 a ton Chinese — on the post New Year’s, which ended just this past week, we’ve seen a pretty strong demand, both in volume and in pricing that’s been publicly reported of around $150 a ton. In the U.S. will be pushing for $400 a ton price improvement in HBS now in our Huntsman Building Solutions. We also have some formula pricing in the U.S., and we’ll be pushing for other price increases as well that are not public.

So across the board. Now A lot of that’s going to be setting the last couple of days. We’ve seen benzene continue to be quite volatile. And we’ve got to make sure that our prices stay above the wave of raw material price movements. But by and large, we’re finishing first quarter in a much stronger position than we started first quarter on a pricing basis. And I would say that, again, some of that improvement, that optimism, I talked about in my prepared remarks at the very beginning, literally, we’ve seen that really starting to come just in the last couple of days. We see some of the actions that have taken place in China and so forth. So again, some good optimism going into the second quarter. I feel like it feels we’ve got the wind in our sales.

But again, we’ve — unfortunately, we’ve —

Alex Yefremov : On Europe specifically.

Peter Huntsman : Yeah. Pardon?

Alex Yefremov : In Europe, specifically, do you see any benefit from lower imports of material from Asia in either polyurethanes or Performance Products?

Peter Huntsman : I think we’d always be happy to see fewer imports and more just as a rule of thumb. So yeah, I think that would be the case, yeah.

Phil Lister : Yeah. I mean we’ve seen a little bit of a slowdown, Alexi. If you look at where we are today in February versus quarter 4 in terms of imports from Asia just because of the Red Sea, you’ll get as good as is as to how temporary that actually is.

Operator: Our next question comes from the line of Arun Viswanathan with RBC Capital Markets. Please proceed with your question.

Unidentified Analyst: Hi. This is Adam on for Arun. Looking into second and third quarter, looking at polyurethanes and wondering other than some of the items you’ve just outlined, what might you think are some of the upside drivers beyond seasonality for that segment? Thank you.

Peter Huntsman : I believe it’s going to just be a continued growth in demand, stability in raw material prices and discipline and finished product pricing. It’s just getting back to the basic fundamentals. A little bit of restocking would also help. I think that inventories are very low. And throughout polyurethanes as well, we’ll be completing our cost savings program throughout 2024. So we’ll see some of the benefits that have fall to the bottom line.

Unidentified Analyst: Great. Thanks for that. And looking at ag and aiming destocking, when do you think some of the negative impacts from that might start to subside?

Peter Huntsman : I’m sorry, the destocking around what?

Unidentified Analyst: Ag chemicals and gaming specifically?