Q3 2019 Earnings Call
Good.
Question answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press Star Zero Wonder telephone keypad. As a reminder, this conference is being recorded and it's all my pleasure to introduce your host I'd be <unk> Vice President Investor Relations. Please go ahead Sir.
Thank you, Kevin and good morning, everyone.
Welcome to Huntsman third quarter 2019 earnings call joining us on the call today, or Peter Hudson, Chairman, President and CEO and Sean Douglas Executive Vice President CFO . This morning before the market opened we released our earnings for the third quarter 2019 via press release and posted to our web site, that's been dot com well supposed to set of slides on our website, which will.
We use on this call. This morning, while presenting our results. During this call we may make statements about our projections or expectations for the future. All such statements are forward looking statements and while they reflect the current expectations. They involve risks uncertainties and are not guarantees of future performance.
Sure. If you were filings with that you see for more information regarding the factors that could cause actual results could differ materially from these projections or expectations. We do we do not plan I'm, probably updating or revising any forward looking statements turned a corner.
We also refer to non-GAAP financial measures such as adjusted EBITDA adjusted net income and free cash flow you can find reconciliation to the most directly comparable GAAP financial measures in our earnings release, which has been posted to our web site at husband Dot Com.
To remind you that on August seven 2019.
It's been announced the sale of its chemical intermediates in surfactants business has to into Rama ventures in accordance with generally accepted accounting principles. These assets are now report is held for sale in the balance sheet and ask in discontinued operations on our income statement. Therefore, the results we have highlighted in our earnings release and will discuss the call our for continuing on the right operator.
One of our business I'll now turn the call over to Peter husband, our Chairman President and CEO .
I've been thank you very much good morning, everyone. Thank you for joining us, let's turn to slide number three and four.
Adjusted EBIT da far Polyurethanes division in the second quarter was $146 million versus $218 million a year ago.
I've been mentioned, our North American propylene oxide and MTB businesses are now reported as discontinued operations. Therefore, our continuing operations for our Polyurethanes divisions are now nearly entirely comprised of M.D. I based formulated systems elastomers and M.D. I compare.
As a reminder, and as we have called out in the past in the third quarter of 28 team, we were still experiencing exceptionally high margins in the component and a bar M.D. I portfolio.
Despite margins, including above normal operating rate conditions accounted for approximately.
$45 million of the year over year, very up [laughter] M.D. I volumes in the quarter were up 3% as a business continued to benefit from the expansion of our Chinese facility that began come online in the third quarter 2018.
Our downstream strategy continues to perform well our margins remained stable in the larger differentiated and of our Polyurethanes portfolio.
This stability as a result of our continuous dry downstream ongoing material substitution product innovation benefits from bolt on acquisitions global scale up opportunities and increasing regional diversification.
Third quarter, our total differentiated systems volumes were about flat compared to last year and our global components M.D. I grew 7% year over year.
Due to the new capacity added at our Chinese facility.
What we experienced in the third quarter within our Polyurethanes Division was a continuation of what we were saying at the end of the last quarter and most of our key end markets. However in Europe , the economic headwinds did intensify somewhat in September .
We believe that the de stocking we reported impacting the first half of your Polyurethanes is finished most specifically in China.
Oh for customers are still cautious and inventories continue to be managed to aggressively low in about every region, which we compete consistent with what we've said in our conference call in July visibility still remains challenging.
Looking at Polyurethanes regionally for the second quarter, our Americas volumes were down from the prior year.
We experienced a short term outage near the ended the quarter at our Geismar facility impacting volumes, a bad and EBIT da by about $5 million are spray foam insulation business demographic. We acquired last year continues to be a bright spot for us and is growing at a low.
Double digit rate, we continue to expand this business by leveraging our global footprint. We're on track to achieve our expected synergies just to illustrate the global opportunities for our demo like business. The system houses that we opened this past September in Dubai is equipped to support a demo like growth in that region.
Our growth in spray foam in the quarter was offset by weaker volumes and other high volume markets, such as Oh I see in furniture.
We are focused on growing our downstream business further in the Americas, and where we're progressing with a new split hurt our geismar facility.
This should be operational in 2021 and will cost approximately $175 million, the bill which is above our preliminary estimate that we shared with you. This past February .
Increased costs are primarily due to higher material costs, such as still do tariffs as well is very tight labor markets in the Gulf coast. Despite these higher costs. The IR are on this project remains very attractive well north of our 20% hurdle rate.
Turning to the Asia region of Polyurethanes, our differentiated and component volumes were up even when excluding the benefit of our recent expansion volumes are being helped by insulation growth in large scale infrastructure project and applications.
The adhesives coatings and elastomers in footwear markets in Asia are also contributing as we gradually shift our China portfolio and the newly added capacity to be more downstream and differentiated.
We believe that customer inventories are at very low levels in this region, what we've experienced real growth within this region demand in China remains well below average and erotic. We believe this will remain unchanged until trade discussions have some form of resolution, thereby helping.
Customer confidence and visibility.
In Europe , our downstream margins are stable despite lower underlying demand.
Our volumes in the region were marginally up.
But I was primarily a result, a favorable comparisons to the outage has that impacted our results in the same period a year ago.
The overall macroeconomic environment remains increasingly soft we do not expect it to improve in the near term <unk>.
Margins in our differentiated business remained stable despite the pressure on volumes and weaker industry conditions are long term strategy of growing our downstream business through strategic investments like our splitter, our new system houses well continue to be supplemented with bolt on acquisitions, having strong center.
Jason compelling financial metrics, we believed that the positive long term fundamentals for M.D. I remain intact as above GDP growth driven by product substitution will continue long into the future. Our for the short term the demand headwinds are unlikely to change on top of that before.
Fourth quarter is typically softer than the second and third quarters, putting it all together, we would expect our fourth quarter results the looks slightly better than our first quarter.
Let's turn to slide number five.
Our vast materials business reported adjusted EBITDA of $51 million, a decrease compared to last year's EBITDA of $56 million. The decline in adjusted EBIT da was largely driven by 11% lower volumes in the quarter.
I'd like to remind you that roughly 40% of this segment's revenues are in Europe you.
The automotive construction and industrial markets in this region continue to weaken through the quarter.
The underlying European macroeconomic challenges largely explained the underperformance of this segment relative to our expectations. The Asian market also remained weak its customers managed inventories aggressively due to soft end markets and lack of visibility do the international trade concerns you may.
Because region showed improvement over last year, primarily due to aerospace offsetting weaker industrial markets.
Despite the significant macroeconomic headwinds the advanced materials business has demonstrated real margin resiliency due to the high value specialty in formulated nature of the portfolio.
It's important to note that this business added around $10 million of additional fixed cost to support future growth. We believe this will be a wise investment that these products will soon be coming to market.
That's materials remains a core platform for board, both organic and inorganic growth and we will continue to invest in this business in the long term.
I want to again emphasize advanced materials remains one of our most consistent businesses, while we do not expect the macro environment changed in the near term, we expect full year adjusted EBIT da to be within 10% of last year's record earnings.
Let's turn to slide number six.
Performance product segments reported adjusted EBITDA of $38 million with our chemical intermediates and surfactant business is now being reported in discontinued operations. This segment is now largely comprised of our aiming and Malaysian hydride businesses total volumes were down 12%.
Versus the prior year. This business is seeing similar market pressures that are other divisions are experiencing around the world.
Our specialty a means continues to see positive trends in certain markets such as polyurethane catalyst special.
Especially in the spray foam automotive and furniture end market since customers look for low DLC solutions.
Specialty a means going into different curing agents in specialty coatings are also doing well.
However, these positive results are being masked by market weaknesses and competitive pressures in the ethylene that means market, which is consistent with what we highlighted in last quarters conference call.
With the recent acquisition of the remaining 50% of our European joint venture in Germany are Mallaig business is now roughly 60% North America.
And at 40% European soft market conditions in the North American unsaturated polyester resin market and weakness across most of the European markets have put some modest pressure on overall volumes and margins in this business. Despite these near term headwinds the margins for this business remain good and we expect.
Actual results to remain relatively stable for the fourth quarter, we do not expect much changed in the current markets service by the performance products Division.
Moving to slide number seven.
Our textile effects division reported adjusted EBITDA of $16 million for the third quarter noticeably down versus last year's third quarter results were muted due to an unusual slow September which is a month, where we typically start seeing a seasonal pickup in demand for this business.
Customers remain cautious due to uncertainty around global trade and shifting manufacturing locations.
Total volumes were down 7% in the third quarter, we continue to see customer destocking.
With such a deep supply chain. This business has seen more volume pressure than our other businesses. We believe there was little if any destocking left in the chain margins were also pressured due to lower volumes and the related competitive pressure versus the prior year. Despite these challenges our new eco friendly products and.
<unk> market, leading technologies continue to gain traction with our global customer base. However, these wins have been partially offset.
By volumes across by volume pressure across the portfolio. We believe that the total industry is down low double digits.
Even with the challenges this past year, we do not believe the long term fundamentals for the business or industry has changed we remain positive looking out over the next several years. The near term, we do not expect the industry headwinds do a base until visibility and customer confidence in key markets begin to improve.
As a result, we expect the adjusted EBITDA in the fourth quarter for textile effects to be similar to our third quarter results.
For sharing some concluding thoughts I'd like to turn a few minutes over to Sean Douglas Our Chief Financial Officer.
Thank you Peter as Ivan stayed at the beginning of the call with the pending sale of our chemicals in intermediates and surfactants businesses to indirect ventures. We now report these businesses as discontinued operations in the income statement and as held for sale on our balance sheet.
This is our first quarter in doing so resulting in an expected transition for wall Street to align their models and estimates with our earnings on a continuing operations basis.
Now turning to slide eight.
Third quarter, adjusted EBITDA declined year over year by $93 million.
The decline in EBITDA can be largely explained in two primary parts the first part being volumes.
Because of the weak global economic backdrop, we saw volume pressure on our downstream businesses, but with minimal impact on margin.
Volumes were down in our advanced materials business by 11% and our performance pauses products business by 11%.
Within our textile effects business by 7%.
We saw downstream volumes within Polyurethanes largely flat.
The second primary part for the decline in EBITDA is due to margins, which is largely a portion to the upstream component and of our Polyurethanes Division.
Margins within our downstream Polyurethanes division remains stable.
Margins also remained resilient with our advanced materials segment and largely so within our performance products segment.
Margins within our textile effects division were mixed with more stability in the specialty end of this portfolio.
Turning to slide nine.
In spite of lower EBITDA, we saw strong free cash flow.
The softening global economic backdrop receivables contracted.
Thereby freeing up cash. Additionally, we continue to proactively manage our inventory levels.
Our free cash flow conversion continues to be consistently strong with an adjusted LTM conversion rate of approximately 40%.
We have removed the impact of the chemicals and intermediates and surfactants businesses that are pending divestment in early 2020.
These discontinued operations have previously contributed to our strong free cash flow, albeit with much more volatility.
Going forward, we would expect our free cash flow conversion to experienced less volatility Mb above 35%.
This excludes the capital required for the previously announced construction of a new MBS splitter at Geismar, Louisiana, which is expected to be an operation and 2021.
Total cost of this split or will be approximately $175 million of which approximately $15 million is estimated to be spent in 2019.
$75 million in 2020, and the remainder in 2021.
While this will impact our reported free cash flow conversion rate, we have been proactive and have taken steps to generate additional cash to support this larger one offs scale project. For example, during the third quarter, we disposed of a bake heated properly previously used by textile effects in bars.
In Switzerland for $49 million.
It is not reported in free cash flow.
Additionally, last year ahead of the announcement of our splitter, we found ways to better manage our liquidity in China, resulting in a onetime free cash flow improvement of approximately $70 million reported within the fourth quarter of 2018.
As we look into the fourth quarter with respect to free cash flow, we do not expect a typical seasonally large working capital release as much of this release has already occurred within the third quarter. Therefore, our fourth quarter free cash flow will be lower than seasonally expected.
In combining our free cash flow from discontinued operations, our total free cash flow for the quarter was $310 million.
Utilize this robust source of free cash flow during the quarter to reduce our short term floating rate borrowings by approximately $225 million and to repurchase approximately 4.1 million shares of our stock $81 million since the first quarter of 2018, we have repurchased 472.
A million dollars of stock or approximately 20 million shares representing approximately 8% of our total shares.
The balance of $528 million dollars remains under our board authorization for share repurchases.
We intend to continue repurchasing shares in a similar sensible and opportunistic manner.
During 2019, we expect to spend approximately $270 million of net capital expenditures, which as previously stated includes approximately $15 million related to our North American polyurethane splitter.
As a footnote we expect to spend approximately $70 million of capital in 2019 relating to our discontinued operations.
Regarding taxes.
Our adjusted effective tax rate for the quarter was 21% and our forward adjusted effective tax rate remains at between 22 and 24%.
We ended the quarter with $1.7 billion of combined cash available borrowing capacity.
On September Thirtyth 2019, we acquired the 50% non controlling interest in our Sasols Huntsman Lincoln Hydrate joint venture located in Germany.
We paid sasso $100 million, which included acquired cash net of any debt and is subject to customary closing adjustments.
In connection with this transaction because a very attractive available loan pricing in Europe , we entered into a new Prepayable 364 day short term 92 million Euro denominated term loan facility to fund. This purchase pricing is euro bore plus 75 basis points with the euro LIBOR floor of zero.
Okay.
Our net debt leverage stated on a total company basis was 1.6 times as of September Thirtyth 2019.
Format for the divestiture of the chemicals intermediates and surfactants businesses, our pro forma net leverage would be approximately one half a turn.
In summary, we remain committed to generating consistent strong free cash flow, maintaining a strong investment grade balance sheet and allocating our capital in a smart and balanced manner Peter back to you. Thank you Sean.
We stated in our last earnings call at the end of July there are many different variables out of our control that could either improve or worsen, which would impact our second half results. Unfortunately, not much has improved on a global stages. Many of you see the macro data. So it's just slowing GDP weakening.
Mice into rather sudden fall off in the European economic performance.
Meeting with investors and analyst, we often get asked how our current portfolio businesses will perform and of recessionary type environment. I believe you are currently getting the answer between Destocking and slow GDP, we are arguably and industrial recession and many of our core regions and.
Markets.
However, while we are seeing lower volumes. It is important to note that our downstream margins are holding up well, we're generating strong free cash flow is our businesses are taking the appropriate steps the managed working capital as well as pulling back on discretionary spending including more cautionary spending.
On capital projects.
Well, we're not expecting the economic environment to change for the better in any material way in the near term we will continue to focus on what we can control.
And the on a number of different factors as we look into the fourth quarter. We expect adjusted EBIT da for continuing operations to be about 15% below the third quarter. This gives consideration to the lingering economic challenges and the typical seasonality of our businesses.
Now, let's turn to slide 10 and 11.
In conclusion, I'd like to spell out our priorities in the coming month.
Number one we'll continue to stay focused on operating safe and reliable operations, while maximizing the value of what we sell into our global markets. This despite sluggish demand in many areas around the world. We continue to see growth and continued product substitution and innovation.
Number two we are on a path to close on the sale of our chemical intermediates and surfactant businesses previously outlined this process will commit huntsman to provide ongoing transitional services through most of 2020 .
We will be fully reimbursed for these services, which were partially offset the retained costs over the short term.
As these services are completed we will be simultaneously restructuring our costs and aligning our business to better serve our growing downstream demands in short we will be keeping some cost into 2020, well at the same time restructuring our business services and.
Cost structure.
Three well continue to keep the strong balance sheet as we evaluate growth in M&A opportunities share buybacks.
And pay competitive dividends at times of economic uncertainty, we have no intention of stressing our balance sheet.
And number four we will carefully look for the best deployment of our capital. After we close on the sale of our intermediates and surfactant business as we will continue to look for opportunities to expand our businesses that have areas of synergies new technology and market penetration I believe we are seeing multiples for assets coming.
Down and feel no pressure to act two so.
As I look at the strength of our balance sheet cash generation product pipeline and opportunity to further align our business to move more aggressively further downstream I have never seen this company in a better positioned to create shareholder value than I do at the present.
With that operator, we'll open the lines for any questions.
Thank you will now be conducting your question answer session. If you like to be placed in the question Q. Please press star one under telephone keypad, a confirmation tone would indicate your line is in the question Q you May press star to if you'd like to remove your question from the Q.
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One moment, please what we pull for questions. Our first question today is coming from Kevin Mccarthy from vertical Research partners. Your line is now live.
Good morning.
Peter as you anticipate the influx of 1.6 billion in cash proceeds from the end drama deal.
Can you.
You operate on how you're thinking about organic.
Growth investments.
Versus M&A for example, with regard to your splitter project.
Notwithstanding the higher costs it sounds like you're looking at a return above 20% there do you see other projects.
Opportunities like that.
That could Clinton claim a substantial portion of the capital and.
You know maybe you could just elaborate in general on your latest thoughts there.
Well, thank you very much Kevin.
Look at this split or that we're building in Geismar, Louisiana to to be something almost akin to an acquisition. We have a very similar splitter in Europe , we have one in Asia with the completion of this facility in the Americas, we're going to be very well positioned by producing crude MD.
Splitting capacity in downstream I don't see a lot of large capex projects. So if you were due to give me $150 million write downs I go spend it internally.
I think I'd be rather hard pressed at the present time.
I don't see a lot of large scale projects.
Like that and frankly, I'm I'm not a big believer in that it seems that.
As you build virtually anything in the last decade in the US Gulf Coast costs, just continuously are going up and I've never been a big proponents that this industry needs more capacity of just about any product I think that we need greater.
Diversity of technology, and the ability to perhaps specialized products were producing.
But.
Frankly, I don't see this company going headlong into spending a lot of capex around building new capacities.
Around the world the side.
And as I look at that.
Threshold because of the risks of higher costs and uncertainty about making commitments today is to where markets will be 234 years down the road when you complete such projects.
I think that they warrant a much higher IR in general then then.
M&A does where you know what you're getting upon closing and you have a good outline of synergies technologies globalization and you can have a plan of action on day, one thats rather difficult to do when you're planning a new MD plant that won't be coming into the market for you know upwards of 456 years.
So I think that we're going to be certainly leaning more towards.
Towards M&A opportunities.
Again, I emphasize that on a cautionary notice I did in my script.
And I would also say that we want to make sure that whilst particularly while we're in what I would consider to be rather challenging economic conditions, we need to make sure. We retain the strong balance sheet. We've got plenty of capital that to continue to pay a competitive dividend and we were very committed to.
To share buyback program when the share prices at appropriate levels.
Thank you for that helpful. I guess on a related note for Sean I wanted to.
Clarify on my own mine some of the comments that you made about the capital budget. I think you mentioned 270 million is that an indicative pro forma level, you know post the separation of the in Durham assets.
And then I think you mentioned 70 million for discontinued operations, what is that and is it. In addition to the 270. Thank you.
Yes. Thanks, Thanks, Kevin Yes, you're right I think about going forward that this remaining business will have probably between 250 to 75.
What I'd call ongoing Capex and think about mandatory spend in that 250 to 75 of around 150 to 170.
The 270 I stated includes $15 million for this new splitter. It does not include any of the spending that's in a discontinued operations that 70 million for the discontinued ops is in addition to that and we're now just reporting on a remaining basis of continuing ops. So the seven.
And the as part of separate from the 278 is largely mandatory expenditure.
Okay. Thank you.
Thank you. My next question is coming from Laurence Alexander from Jefferies. Your line is alive.
Good morning could you discuss so little bit in boat for both advanced materials and in Polyurethanes, how youre seeing.
The competitive dynamic shift.
Response, a weak environment that is are you seeing capacity.
Elements are you seeing changes in pricing behavior extended outages or any other kind of indications of sort of how the market is reacting in this environment.
I think Laurence that it really is a little bit of a mix view. The further upstream that you are or the more commoditized product in the application I think the more competitive pricing and margin pressure that you are saying further on down the chain, where you have a product that has been spec.
And do a customer where do you have a multiyear commitment and where you are selling in effect for performance rather than a a raw commodity raw material that may be has a little bit of worked on to it.
I think that we're seeing far less of that and so as I as I look at something like our advanced materials.
In aerospace as I look at our downstream formulation applications in Mds Polyurethanes and so forth margins are for the majority of the business margins are holding up very well, it's volume that discerning.
The bottom line and I suspect that volume will obviously be coming back as the economy starts to stabilize or even if the economy doesn't stabilize when you see a lot of the de Inventorying.
Restocking that is out there taking place so.
Again, I would say and it's always good.
I, probably does get in trouble for saying something this broad, but I'd say I'd like to the two thirds of our business is more volume sensitive meaning that I think margins are a pretty stable by and large and we're going to be more affected by volume and maybe a third of our business.
You are seeing more competitive.
Factors that might might be impacting to some degree or another.
Margins and so it is and again product by product region by region Division by Division of those things will vary, but I think that obviously, we'd like to get more and more of our product.
Into that two thirds category.
And are you seeing any sort of significant curtailments of customer R&D cycles innovation cycles on new product development. In response was soft environment or has that been consistent.
I have not as a matter of fact I might be saying, yes.
Don't want to say this is going to continue but.
For the time being.
I think that there's there's you taking the economy like Europe , where you're seeing.
Virtually no growth in GDP, perhaps even a bit of shrinkage right now and the economy by Germany, and so forth yet product substitution things around sustainability things that have an environmental.
Improvement and push.
I think that there is actually more innovation in certain applications.
Second the footwear industry, where a lot of the producers today are looking to to have a single grade of material that goes into the soul of the running shoe versus four or five different elastomers, then and colors and so forth to go into the silver running show you look at those sort of I know that might might sound, rather drab, but those are.
He is what we're saying where there is there's increased reward increased opportunity.
And so I think right now I have not seen a decrease in.
And the reward for innovation and the opportunity to replace product substitution map I would imagine 2020, I've not seen the budget.
Yes, we've not complete it for 2020, but I would imagine that the majority of our growth in 2020 will be through product substitution.
Thank you.
Thank you. Our next question is coming from Bob Port from Goldman Sachs. Your line is now live.
Thanks very much.
Peter You commented I think that you're seeing component and the margins pressured.
Yes.
Your major competitor from Midland yesterday should some charts at least in Asia Pacific that seem to suggest maybe things have bottomed out there. So I'm curious where do you see the incremental.
And coming from and in.
Commodity MDR.
Well given the number of competitors that we have in Midland I won't even try to get to that might be but I think that in earlier conversations.
I think last quarter, we said that we thought that China was most aggressive and bottoming out its its inventory and I think that as we look at now and my earlier comments.
Bob I think that I said that we felt that China not just in Mds.
But perhaps in some of our other products, but more particularly MMDR.
It had the inventories that were very low and I think that we're saying.
If anything I think yeah, we saw a little bit of growth that took place in the third quarter in Mds. After you take out the effect of of our new capacity there.
I think thats, probably the first quarter in the last three quarters of cell, where we've seen.
A return to growth in China, So I'm not here to say that China is off to the races and recording get great guns, there, but I do think that it has more to do with the idea that were done with de stocking on on a large basis in China I'd also just know Bob.
As we look at a lot of the announced capacities that are coming into the market.
Seemingly a lot of those likewise have been.
They are delayed or.
Or has.
Ben outright cancelled and so I think that between.
Lowering.
Of the.
Well the kind of the destocking coming to an end here and perhaps some of the capacities are the castle cancel that pushed out.
I'm, probably quite bullish on Mdrs and look out over the next 12 to 18 months.
Again, depending on the macro economic environment as well.
I guess, maybe combining that with you made comments that multiples are starting to come down mature on multiple I.
I guess on a pro forma basis after they into Rama deal looks like maybe six times forward EBITDA that seems like a pretty large discount given.
That enthusiasm you expressed and maybe high grading in the portfolio. So.
Have you square that with pursuing acquisitions in the risks that come with that versus buying your own.
Arguably.
Discounted equity.
Well I think that we needed to continue to balance both of these very well.
I look at what I, what I see is our multiple.
I think we've seen an expansion over the course since Weve announced this deal and I think that the market will.
Yeah, I think the market will reward you a little bit when you announce it I think though reward you a bit more when you actually get a Don and I think that though rewards you quite a bit more when you redeploy the capital Smart way I think that's got to be done by a combination of both share buybacks as we have seen in the last quarter to I think we've yes last quarter, we bought in there.
The million dollars worth of shares all.
Under $20 to share and at the same time, we're also bought in.
Our 50% partnership of our Malaysian hydride business and simultaneous since last quarter, we sold off $2 billion worth a $2.1 billion with our business. So.
I think we've got to Bob do all three of those things very smartly and I think that over time.
The market will reward June the multiple will continue to improve.
Great. Thank you Peter.
Thank you.
Thanks to our next question today is coming from Jim Sheehan from Suntrust Robinson Humphrey. Your line is now live.
Good morning, Thanks for taking my question.
Can you talk about your thoughts on monetization or the remaining stake in Venator materials and how if at all that any loss associated with that sale could be used to shield taxes on your transaction within the ramp.
Okay, I'll I'll, let Sean talked about taxes, because that's certainly favorite subject to talk about.
And I think that as we look at it vented tore.
Sure values, obviously said it took a very low value.
I, obviously I don't want to comment on what we may or may not be doing on a future basis, but we do need to be able to look at the potential monetization there factored in.
With tax implications with it and where that capital can be best deployed so.
Again I.
Rather evasive answered but.
We'll continue to evaluate that very carefully.
Thanks Peter.
Jim as we think about this think about it this way the sale to into Ram I will create on a portion of that sale a capital gain.
Huntsman.
And as you look at the Bennett tore stock there is a high basis left in that stock near about the IPO price.
And so what that will allow us to do.
His upon the divestiture of Bennett toward down the road.
It will allow us to the degree that we are under that IPO price. It will allow us to have a capital loss that we can offset against the capital gain.
And now there is at three year kind of a timeframe thats allowed with the IRS to do that.
Which allows you to roll back.
And so think about potential value opportunity on the tax side in terms of savings, which helps the leakage on the interim a sale to be up to around $140 million.
All dependent again on the timing of the and the price of the exit of inventory hopefully that helps.
Very very helpful. Thank you very much.
And then.
On the demo lack of business, you're making progress synergy capture seems to be on track can you just talk about where EBITDA margins were in that business. When you acquired it and if you've experienced any margin expansion.
Associated with this synergy capture and and the double digit growth in the business.
Yes, I think that we see.
Tom the acquisition about a 16% of the time the acquisition and moving to about 20%.
Now again, there's going be a little bit of noise on that when you look at some of the transfer pricing and values and so forth, but I think youre more importantly will look of the demo like purchase which is just over a year ago and its today around when we purchased that it was about 11 and a half times EBITDA.
I think the that EBITDA, if I were to annualize is present run rate is an acquisition of around seven times.
EBIT da and we look at that on an integrated basis fully integrated MD I basis.
Yes, somewhere in the low 20% and a very stable 20% in growing at that so.
Again, I think that it's something that we look at overall growth in that business is low double digit growth.
And we still have just a small very small fraction of the overall market in the spray foam so lot of room to expand.
Yeah, I'd love to see more tonnage frankly from our MPCI business moving into spray foam in and out of the the general market. If you will.
And I think I think that's the strategy we continue to push.
Thank you.
Thank you. Our next question today is coming from William Blair from Tudor Pickering Holt. Your line is now live.
Hey, guys as Matthew Blair has gone.
Okay.
Good.
And Matt Peter you mentioned.
How about 10 million of fixed costs rolling through the would support future growth.
And that products.
Becoming the market could you just provide more details on exactly what kind of products those are and what the EBITDA uplift might be.
Yes, I think there.
The EBITDA uplift that I'm looking at I would think that that I think that that business operating around 20% low 20% EBIT da.
Business is something that.
I'd like to maintain that I'd like to see more growth in that business rather than margin expansion business I think that.
In order to have that growth, we need to be investing in a product pipeline when you're looking at new applications going into the aerospace business. That's not a process. It takes six months as a process that can take a year too when you look at winning certain defense contracts on on composite materials going into drones or armor.
Related vehicles, and so forth those are processes. It can take a year or two and out once your end you're in four.
Multiple years, and so I think that as we look at that on a broader sense. We're certainly moving the chemistry into that business into areas that we havent been into before we feel that we need to be hiring the marketing sales and the technology.
In the manufacturing platforms to be able to access so I think that we're making very good progress.
Into those areas now how soon the department of defense or house in the aerospace industry.
With has rather full plate right now with the volatility around a number of different issues. How soon they will be coming into the market and allowing its come in the market I think thats that.
Opened the debate right now, but I do think that over the course of 2020.
That will start seeing.
Some of the dividends of of that higher cost structure into the business.
Taking taking effect.
Sounds good thanks for the the color there and then I was hoping you could just talk a little bit more about the dynamics in the ethylene means business.
And especially your view going forward I think one of your competitors is now talking about building a new world scale facility.
Any comments there would be helpful.
Well, we continue to look at where we can take that business and I think that we've got a number of very unique.
Applications in grades in that business will continue to take that business further downstream and be looking for.
The lose.
Lubrizol additives and the end markets that will allow us to.
We'd hope to have fewer competitors.
Because of our innovation technology and longer contracts with our customers and so that's that's really where we're moving and a lot of these areas.
We go further and further downstream is we are an MD eyes. We are in advanced materials were not competing with.
With traditional.
With our traditional competitors that we're often compared to I mean, the area of Polyurethanes.
Yes, some of our competitors have announced system houses and moving down into system houses.
I feel don't see really any head to head competition downstream.
Because they're just so many hundreds of different routes that you can go when you start moving Mds chemistry, or a proxy chemistry, whether it's in coatings adhesives elastomers.
And so.
Yes, it will be interesting to.
Then we look at the pace and.
So ethylene that means we certainly we'll see some competition I think we've also got opportunities to further expand our downstream markets.
Great. Thank you.
Thanks. My next question is coming from Frank Mitsch from Freemium Research Your line is allies.
Yes, good morning, gentlemen.
Peter I appreciate the commentary that the fourth quarter EBITDA is going to be down 15% from the third quarter. Since we don't really have a history.
Of monitoring this company on a pro forma basis I'm trying to reconcile how much of that is typical seasonality.
Versus what is more germane to this economic backdrop and.
We heard earlier today from another company that suggested that October volumes were equal to September is that a comment that you might be able to make as well.
Yes first of all Frank Let me just express my condolences with the recent passive your mom and.
She she she raised.
Tough committed perhaps say times, she ready great great QED there so.
Sorry to hear about that Frank Thank you very much Peter and I'm looking forward to some wonderful work coming out of the Huntsman cancer Institute.
We are too.
As we look at our fourth quarter, Frank would typically if you look seasonally.
Across the board.
You are seasonally down usually 15% to 20% usually the more commoditized end of that would be closer to 20% less commoditized would be closer to up to 15%.
More commoditized closer to 20%.
I think that what were I'd be just a little uncertain right. Now is probably my biggest concern again as I sit here right now with Europe , and we've heard rumors.
About automobile companies it typically shut down the last week or two and in December starting to shut down earlier in the year, perhaps the first of December .
So yes, do we do we take those at face value right now.
Some of the LSB industry.
We understand.
Some of the building materials and so forth might have some pretty healthy inventories right now.
Longer term housing starts and so forth in North America, the numbers look fairly decent.
Depending on how much inventory you have going to the winner some of those customers might be slowing down a little bit earlier in December again, I don't have the rod data in front of me to tell me exactly how much that's going to impact and so I think thats. It thats a bit of a have a shifting number so I I take out some of the commoditized and of around that 20.
The percent seasonality and I kind of come up with that 15%.
Seasonality and I think with our are more differentiated less commoditized.
Portfolio than what we've had I would hope that that you're always going to Ccs seasonality in the fourth quarter I would hope it over in the coming year, so that that should start diminishing.
That's that's very helpful and as I think about the the stranded costs you called out 30 million in SGN a.
That how do we think about overall stranded costs and in terms of a timeline of your ability to take that out of the take take that out of your results.
Well I think we'll be predominantly in the second half of 2020.
Again, we want to make sure that.
We closed on the business, which we see taking place.
Very shortly after the first of the year.
And and then we've got some a number of shared services transitional services.
To look at.
As supplying to.
The into Rama here over the course, particularly over the first half of the year then those those will be diminishing throughout the year and as those diminish.
I think some of those costs are frankly will be eliminated outright and others have them will be shifted.
As to how we can better focus the company and I wouldn't be surprised by the end of 2020 that we might have.
Some completely different reporting structures and so forth within the company that that would give shareholders greater transparency into the overall applications as we look at.
Where we are in coatings adhesives elastomers transportation, the aerospace industry, so forth construction industrial.
Insulation.
We were seeing more and more where our urethanes. Our apoc sees are aiming and so forth a really selling into complimentary applications and.
I look at something.
As simple as adhesives, and a lot of times, we'll see RMD, hi in competing formulations and applications with our approximates I can't think of a better company, we'd rather compete within ourselves.
So as I look at some of those maybe we ought to be looking more and more the downstream applications.
Where we are less.
Asset intensive less asset focus in more downstream focused on marketing growth and price.
Pricing excellence, so I think you're not just going to see a focus on eliminating costs, which which obviously will continue to do but also on on restructuring costs.
Very helpful. Thank you Peter.
Thank you. My next question today is coming from Mike Sison from Wells Fargo. Your line is allies.
Hey, good morning.
For polyurethane.
Pro forma numbers for fiscally for for 18 was little of 800 million and looks like you'll be somewhere a little over 550 for this year on a pro forma basis. So just curious Peter when you think about it.
At some point, we exit the industrial recession and things get better.
Where can that polyurethane EBITDA go.
On a pro forma basis if.
Times improve.
Yes, and and.
As we as we looked at.
As we looked at 2018 that obviously is was was a banner year in Mds line I think do we also saw the benefit of of a fly up and so forth I would hope that.
As we look at the volumes coming back.
Able to take advantage of the margins that we have in place.
I would certainly hope that as we look at that kind of that 800 million dollar sort of number that we saw.
Before the 2018 that we can certainly be building on that number.
Again as I look at it kind of the recession.
Scenario, if you will in this company I think you might look at the last major Oviedo nine recession, we saw our earnings drop at about about 50% and I'd say that if we were to repeat that same sort of a scenario, you're probably looking at somewhere between 30% to 35% drop.
What I'm, saying I think that we ought to be seeing less volatility less falloff.
And a more stable earnings platform, so I would hope that.
That 800 million will be more of the norm.
As we as we look at 2018 too.
I'd mind, you that when you take out the spike that we're probably looking at a.
At a margin of around 15% in the business and as we look at our downstream business.
Our our margins around 20% and so as you look at moving more and more of that that to that downstream portfolio.
That's going to be essential to our growth our expansion.
Of margins and more importantly, this stability in the maintenance of those margins.
Okay, Great and then real quick I think you mentioned.
You don't want to stretch your balance sheet, but just curious.
A little bit of color. There would you there was a good opportunity how far does can you would you would you would you go in terms of the balance sheet two times deep done and then.
There are there other opportunities outside of Polyurethanes that are interesting for you to two to do some acquisitions.
Well, there certainly are plenty of opportunities outside of Polyurethanes.
I think the when you just look at what percentage of our business.
His polyurethanes Mds.
And you look at the downstream growth that is taking place.
In a lot of those areas most of those acquisitions that we've done today.
Weve.
In our customers and so we'll continue to focus not only a matter of fact, if you look at over the last couple of years the bolt on acquisitions that we've done in our Polyurethanes business. If I look at the kind of on an LTM basis, we bought those businesses. It today's EBITDA of around four times EBITDA and.
We're going to continue to look at those sort of opportunities as we find them and other end the businesses.
We certainly will be taking advantage of that as well.
As we.
Think about leverage levels and so forth.
Look we have fought.
As a base listed in our calls last couple of years knows the perhaps the most consistent basis as we want to have strong balance sheet, we want to have a balance sheet.
Where we can have access to the capital markets, regardless of what's going on the macroeconomic environment and we want to we want to keep to the investment grade metrics and so those are just fundamentally I don't want to speculate as to what size of an acquisition, so forth or how it would be financed and.
What have you.
Because at this point its hypothetical but I would say that we would certainly put limits on what we would do when we look at that threshold of UBS investment grade.
Thank you.
Thank you. My next question is coming from Mike Harrison from Seaport Global Your line is now live.
Hi, good morning.
Even in the Polyurethanes business you had the planned fire in Turkey. I believe there was also an outage in Rotterdam and then I think you referenced about $5 million worth it drags from guys bar, but can you just walk through the overall EBITDA impact that you saw from outages.
In the quarter.
And let us know if there any outages that we need to keep in mind for Q4 or I guess early 2020.
Well as we look at the Q4, we certainly don't see anything at this point.
And the between the second and third quarter, we did see.
Now as we talked about last time that took place in Rotterdam that was due to a third party suppliers that into went down they shut down.
Our facilities that were in the Rotterdam area, including ours.
And Geismar, we did see.
And now does there.
That affected the third quarter numbers as well so when we look at the third quarter the total impact on that.
Right around $25 million between Rotterdam and guys Mark.
The.
The fire that we had in Turkey.
We don't believe that thats impacting our EBITDA in any material way.
I've been able to source.
Material from our other system houses throughout the European Eastern European area.
A few weeks before that incident took place we opened up a new facility in Dubai fits.
That's going to be running very aggressively to to supply the Turkish market I don't see us, losing any business or material any margins.
Because of that will certainly be.
It's our intention at this time to do.
Rebuild that capacity.
Alright, and then we're about a year since you started up the additional MD capacity in China can you talk about how that facility has performed relative to your expectations.
Maybe give us an update on how you're progressing on shifting.
That polyurethanes business in China toward a more differentiated product slate.
Well I think it's fair to say that I think the product that has come out of there is very high quality reliability and operating rates have been very steady.
The facility is sold out as of today and we have the ability to move those products downstream because of the splitting capacity that we have and so I.
I think that we'll continue to the shift our portfolio more and more downstream into formulated area as we sell slots and that will be a multiyear effort right now we're selling into the component market.
And.
And we'll be shifting out of the component markets. If we can and building up more of our downstream opportunities, but again, we haven't splitting capacity in play.
Just to be able to do that without further.
All right thanks very much.
Thank you. Our next question today is coming from John Roberts from you'd be yes. Your line is alive.
Thank you on slide 11, where you've got the key end market overlap textile effects, it's got consumer which doesn't overlap with anything else, obviously and I'm guessing the automotive overlap is pretty small here so with the weakness in the business do we need to have some additional if you're running it for cash some additional restructuring here and right size.
Thing or maybe more variabilizing or the cost structure there.
No I think that right now our biggest issue that we see in that business.
Isn't that the costs are out of line as much as the demand in the de Inventorying that is taking place. We see two things that are taking place in textile effects right. Now one is it is a de inventory that is that is taking place and frankly a lot of capacity in the textile industry is moving out of China is moving to it.
India, Bangladesh, Pakistan, Somoza, you're seeing a dislocation of your customer base.
You're also saying a destocking that is taking place we haven't seen since 2008 2009 time period.
Are we losing customers.
No. We are we losing value in the products that we're selling.
We don't see that taking place and I think did a lot of this is a short term affected in the coming quarters, we think of that will be recovery.
Then just a follow up and I apologize if I ask this earlier before but it's the propylene oxide cost in the ethylene cost in the historical results essentially.
Equivalent to what you're going to get with the into Rama contract post closing.
The that the transfer economics that we've had in the past will continue going into into the future. We will not have the benefit of PEO manufacturing economics in the Polyurethanes business, but the poly excuse me the propylene oxide.
We will not have the manufacturing benefit of the appeal that is going to the MD business, but the Mds in the past it has been transferred into that business into the system houses and so forth that will remain the same economics or say.
First of all of our products across the board a within how soon we try to always transfer those at a market or.
A most favored nation sort of pricing, we don't we don't transform it costs. Okay. So the polyurethane segment this quarter doesn't have any benefit in the manufacturing margin.
No direct it is not great. Thank you.
Operator, we typically try to not take more than an hour people. Some I would take one more question. If that's okay. Certainly our final question today is coming from PJ Juvekar from Citi. Your line is now live.
Good morning, Peter This is Eric petering out for PJ.
Your polyurethanes.
Polyurethanes volumes here today, that's increased 5% if I were to strip out the counter Shang plant start up what are your underlying volumes and then how do you see the industry demand, finishing out 29 team.
Yes, we've seen and our MDF volume growth for a year to date.
Including the third quarter, we see that total in our internal growth has been about 7% and I see that what we've we've seen by and large.
No Europe up about five or 6% the Americas is flat and I would say that Asia wages up 24%, but a lot of asked because of the new capacity that we brought into the market. So.
Yes, but I'd say without back capacity, it's probably flat to up slightly.
Helpful and secondly could you just given overall description of utilization rates by region, and if you see ability to push pricing in any of the region.
Yes, I would say that as we look at the globally I get a sense at the the capacity utilization though.
I don't see a lot of data that is published in this area, but just anecdotally it feels like it's around globally in the mid eighties.
And I would say, yes, the Americas, we're sold out in the Americas.
Europe , you are probably somewhere around 90% may be a few percentage points below that and Asia I'd say, you probably somewhere in the mid seventys to 80 somewhere in that area.
And so I think that there is.
Some room for.
I think any monochrome of GDP growth should be the catalyst when you're operating in most regions economically around the world between 90 and 100% it it should be an environment for potential price increases and.
In the chemical industry Hope always springs eternal.
Thank you.
Thank you we reached end of our question and answer session to turn the floor back over to management for any further or closing comments great. Thanks, Kevin If you have any follow up questions feel free to reach out to Investor Relations otherwise, we'll talk to next quarter. Thank you.
Thank you that does conclude today's teleconference. You may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.