Q4 2019 Earnings Call
Greetings and welcome to the Huntsman Corporation fourth quarter 2019 earnings Conference call at this time, all participants trying to listen only mode.
Question answer session will follow the.
Formal presentation, then it would require operator assistance during the conference. Please press Star Zero on your telephone Keypad. As reminder, this conference is being recorded it is now my pleasure to introduce your host they've been more KUSA chief.
Of Investor Relations. Thank you. Please go ahead.
Thanks, Don and good morning, everyone welcome to husbands fourth quarter 2019 earnings call joining us on the call today or Peter Huntsman, Chairman, President CEO, and Sean Douglas Executive Vice President and CFO. This morning before the market open we released our earnings for the fourth quarter 2019 via press release, it posted to our website Huntsman Dot Com you also process.
Slides on our website, which we will use on the 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 our current expectations. They involve risks and uncertainties and are not guarantees of future performance, you should review or filings with the FCC for more.
Permission regarding the factors that could cause actual results to differ materially from these projections or expectations. We do not plan publicly updating or revising any forward looking statements. During the quarter. You 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 website Hudson Dot com.
I.
I would remind you that on August seven 2019, Huntsman announced the sale of its intermediate chemicals and surfactants business just to interim adventures and later quoted on January 3rd 2020, and in accordance with gap. These assets and liabilities are reported as held for sale on our balance sheet and results of operations reported as discontinued operations on or.
Income statement. Therefore, the results we have highlighted in our fourth quarter and full year 2019 ended December 30, Onest earnings release.
Well, just grip and we will discuss in a call arc for continuing operations of our business I will now turn the call over to Peter husband, our Chairman President and CEO.
Good morning, everybody. Thank you Ivan.
Thank you everybody for taking the time to join us today.
Let's turn to slide number three and four.
Adjusted EBITDA for Polyurethanes Division in the fourth quarter was $122 million versus $141 million a year ago.
Consistent with last quarter, our results now exclude our north American propylene oxide and MTB E business.
That was sold together with our chemical intermediates and surfactant businesses to into Rama ventures on January 3rd of this year.
Our continuing operations for our polyurethane division are now nearly entirely comprised of M.D. I based formulated systems elastomers and M.D. I components.
The high volumes in the quarter were up 6%, primarily due to higher volumes in China, resulting from our expansion that was running at less than full rates a year ago in a comparative period.
In addition, we saw some favorable comparison in certain product lines versus the fourth quarter of last year as well as some market share gains while our downstream margins remain relatively stable.
Consistent with our prior quarter, we continued to experience some pressure on Paula Merrick component margins.
In addition volumes in certain markets remain depressed, which pressured overall profitability.
Regardless of short term challenges, we're committed to our strategy of investing in our downstream businesses as well as product innovation, we're confident that the positive long term trends for MDR urethanes around product substitution remain intact.
In the fourth quarter, our total global differentiated systems volumes increased 7% compared to last year and our global component MD I'd volumes grew 5% year over year due to favorable comparisons and some new business wins, specifically in Asia and in the global scale up.
Of our spray foam business.
Overall business conditions in the fourth quarter remain challenging with global manufacturing conditions facing continued headwinds, particularly in Europe.
Looking at Polyurethanes globally in the fourth quarter, our Americas volumes were up from the prior year, primarily due to growth in our installation businesses and favorable comparisons to our composite.
Wood products business.
Softer volumes in our higher margin Ace ER, our that he sits coatings and elastomers and footwear businesses were offset by higher volumes and lower margin composite wood products businesses.
We continue with our project to build a new split nursing Geismar, Louisiana.
Which remains on track and is expected to be functional by the end of 2021. As a reminder, this investment will help us to support and further grow our downstream businesses in key markets in the Americas, such as automotive than elastomers.
Also our recently announced acquisition of ice the need to pull up remains on track to close in the first quarter of this year could possibly close as early as this month.
When this acquisitions completed we will immediately start to integrate this business with demo lack our existing spray polyurethane foam business, we acquired in 2018.
We expect to combine business to have EBIT da margins in excess of 20% once fully integrated and be a leader in the high growth in this high growth market definitely our push to take our spray foam technologies into international markets will continue to be another source of growth for this business.
We look forward to the prospects of this business for years to come due to the competitive advantages our spray from has over alternative insulation products.
The Perfect example, the size and type of acquisition, which we hope to do more up and not only in polyurethanes.
Turning to the Asian region polyurethane volumes were being helped primarily by installation growth across several applications as well as growth into the adhesives coatings in the last summer and footwear markets.
Well overall volumes are higher in the fourth quarter the environment in the region remains very competitive in Poland Merrick margins are under pressure.
Brought on new capacity in August of 28 team. We're hope we are focused on what we can control and taking our component and less differentiated polymeric system volumes into more stable in high margin downstream products.
We have made and continue to make significant inroads into Asian.
Yes, and automotive markets. An example of this is our recently being awarded the seating business in the new test was being built in China.
In the near term the situation around the Corona virus in China is having an immediate impact on our business in this region anything that we say today will likely be outdated by events in the next 24 hours summaries of China, we've seeing cities in regions impose closures and restrictions and movements while other areas are reopen.
Being workforces are barely getting back to work, while transportation and logistics are significantly challenged.
We are being forced to slow production at our India I facility in Shanghai and RTP you plant in Gen Sean.
Short term visibility is difficult not knowing how long or how widespread the effects of this pandemic will remain however, we see this is a short term matter and expect business to read the resume unimpaired. Once this matter is under control.
Sit here today, we expect to have a noticeable impact on our first quarter EBIT da but hope that it will be contained to the first quarter, we shall see.
In Europe, our volumes in the region were slightly up but the overall macroeconomic environment remains increasingly soft we do not see any convincing signs in the near for near term improvement margins are being impacted by an increasingly competitive environment and component in Poland Merrick systems.
Excluding polymeric systems, the margins of our differentiated business remained relatively stable despite the weaker conditions in the industrial and automotive markets.
Our overall strategy to grow our downstream urethane business through strategic investments like our splitter and new system houses will continue and will be complemented by attractive bolt on acquisitions, having strong synergies and compelling financial metrics, which is our recent announcement to acquire isolating.
The pull up demonstrate.
We have a high degree of confidence we will continue to find other similar attractive.
Strategic opportunities that will further accelerate our move to a higher quality downstream business.
Our euro things portfolio was unique and world class franchise that will only get better as we further accelerate our downstream growth.
The positive long term fundamentals for MD I remain intact, well above GDP growth driven by product substitution. It will continue for the foreseeable future for the short term the demand in margins in component and polymeric systems remain challenged specifically in Europe and Asia.
With very little visibility, we expect first quarter results in this segment to be down when compared to the prior year.
With the year starting off on this week's note, we suspect that it will be difficult for us do improved much on last year's results.
Let's turn to slide number five.
Our vast material business reported adjusted EBITDA of $42 million, a decrease compared to last year's EBIT da $48 million. The decline in adjusted EBITDA was driven by 9% lower volume in the vault in the quarter, our specialty end of the portfolio for.
Formed better than the overall segment the average as we stated in our last earnings call roughly 40% of this segment's revenues are in Europe and in large part tied to manufacturing end markets throughout the third and fourth quarter. PMI is in this region were either contracting most notably in Europe.
For stagnating.
Softness in these indicators were evident in the results throughout the second half 2019, as the automotive construction and industrial markets remain weak.
Important to note that despite the volume headwinds the advanced material business continues to show margin resilience due to the high value specialty in formulated nature of the portfolio.
We are confident in the long term growth potential this business and our investing in new product and innovation to expand the portfolio. Additionally, there are certain bolt on acquisitions that we are considering regardless of the near term challenges advanced materials remains a core platform for both organic and inorganic.
Investment enhancement.
Looking forward, although not a major part of our advanced materials portfolio. The impact of the current situation in China is not certain Furthermore, I suspect that challenges in the aerospace sector are likely to remain in 2020.
However, we're seeing some signs that the worst is behind us.
And our industrial business and we expect to see sequential improvement in the first quarter versus the fourth quarter as well as modest growth for the full year.
Turning to slide number six.
Foremost product segment reported adjustment EBITDA of $43 million compared to $39 million in last year's fourth quarter with our chemical intermediates and surfactant businesses now being reported as discontinued operations. This segment is now largely comprised of our means in Malaysia can hide dry businesses.
The divestiture the upstream in intermediates business now provide us a renewed and much more simplified focus on these solved with businesses.
There will be good opportunities to grow our means business and take our Malaysia.
Hi drive business further downstream.
Total segment volumes were down 4% versus the prior year, driven primarily by weaker end market demands in ethylene domains, and Malaysia, partially offset by growth in our performance a meetings portfolio.
In performance. It means our polyurethane catalyst continues to show growth into markets that are looking for low vo see solutions, such as spray foam automotive and furniture.
We intend to further invest in this business over the coming years in order to keep pace with market demand as well as support growth and product innovation with our existing customers.
While soft market conditions in the North American unsaturated polyester resin and across most of the European markets put some pressure on volumes for our multi can heidrive business. The overall margins remained relatively stable for the first quarter, we expect overall market trends to remain unchanged.
We expect first quarter EBITDA it could be near last year, although we expect to see growth in our specialty of means because of softer markets in Malaysia and ethylene a means for the full year Twentytwenty. We expect total performance products EBIT da to be around 29.
King levels.
Moving to slide number seven.
Our textile effects division reported adjusted EBITDA of $18 million for the fourth quarter down from the prior year total volumes in the quarter were modestly down by 1% year over year, but up 2% from the prior quarter. This is evident that the destocking has largely bottomed out.
Our specialty end of the portfolio grew 3% year over year demand for our eco friendly products market, leading technologies continue to gain traction with our customer base. We fully expect these trends will continue for the foreseeable future.
Before the onset of the kroner virus, we were hoping to see the beginning of some restocking.
However, this is yet to be safe.
Our own yearend inventories are the lowest that we have ever managed.
Uncertainty in China around trade and more recently, the Corona virus gives us a low level of visibility in the near term.
Yet with order patterns, beginning normalized and our specialty business growing we would expect this business to return to growth for the full year of Twentytwenty with our global footprint and we expect to be able to capture the dynamic shifts in the supply chain that we've been saying over the past year.
Before sharing some concluding thoughts I'd like to turn a few minutes over to Sean Douglas, Our Chief Financial Officer, Sean.
Thank you Peter turning now to slide eight.
Fourth quarter, adjusted EBITDA drop by $25 million year over year strong volumes in our polyurethanes segments offset weaker volumes in all other segments.
Variable margins declined largely due to weaker margins in component MDR.
We faced some translational related foreign exchange headwinds as both the euro and the won most modestly weakened year over year.
Turning to slide nine.
We concluded 2019 with another very strong free cash flow year.
Fourth quarter was stronger than we had anticipated at the time of our last earnings call due to a larger working capital release and due to the timing of payment of certain taxes, which have been passed into 2020.
Throughout 2019, we also enjoyed a onetime benefit of approximately $70 million from collecting.
Past due for the taxes pertaining to years prior to 2019.
As previously shared with you given our portfolio of businesses post the sale of our chemicals intermediate and surfactants business, we expect a normalized targeted free cash flow conversion rate of approximately 35%.
This excludes the capital required for the construction of our new MD I splitter at Geismar, Louisiana, which is expected to be completed by the end of 2021.
The total cost of the splitters estimate is estimated to be approximately $175 million of which approximately $15 million was spent in 2019 $80 million, which will be spent in 2020 and the remainder in 2021.
Taking into consideration this projected spending on the splitter, plus the deferral of certain taxes into 2020 and payments of certain transaction expenses related to the sale of the business to into ramp that will pay out in 2020, we expect our free cash flow conversion in 2020 to be between 20 and 25%.
Including the new Npis splitter, we expect to spend between 300 and $325 million and capital expenditures in 2020.
With respect to working capital, although we benefited from contract in working capital due to lower prices and a bit softer environment, our inventory and accounts receivable metrics were very similar to the prior year.
We did see a slight improvement in our payables metrics.
We continue to proactively manage working capital and expect to maintain similar working capital metrics in 2020.
We expect a meaningful seasonal build and working capital in the first quarter, especially in light of the lower than anticipated levels. This past year end.
As a reminder, in the first quarter 2018, and 2019 primary working capital increased by approximately 150 million and $100 million respectively.
We completed the sale of our chemicals in intermediates sure Bakkens business on January 3rd 2020, and received approximately $1.93 billion and cash.
In addition to the cash receipt, we transferred to the buyer approximately $72 million of underfunded pension liabilities.
With respect to the $1.93 billion of proceeds received in January of this year, we paid down pre payable and revolving borrowings in the amount of approximately $170 million.
Given the high make whole premiums on outstanding notes. The case is not compelling to reduce such other borrowings at this time, we expect to pay just under $400 million of taxes. This year solely relating to the sale of these assets.
Just as a reminder, a portion of the gain on the sale of this business is a capital again, we expect to be able to use future losses on the sale of our remaining shares invented tore when sold as an offset.
There is a three year window in which to roll back such losses.
Given our basis in the Benatar shares all shares were sold at $8 per share or less we would estimate the net tax cash benefit to be approximately $150 million.
In the fourth quarter, we have recorded a deferred tax asset relating to this to be clear the tax benefit will only be available upon the sale of our shares in Venezuela at a loss.
Further risk risk with respect to taxes, our adjusted effective tax rate for the quarter was 25%.
This is a bit higher than our stated expected range of 20% to 24% largely due to the global distribution of income in the fourth quarter.
We still expect the annual adjusted effective tax effective tax rate going forward to be between 22 and 24%.
I would like to point out that our corporate and other expense for 2019 was lower than 2018 by $16 million.
This was largely influenced by higher LIFO benefit in 2019, as well as by reduced overall corporate spending.
Somewhat influenced by our heavy focus on the divestiture of our chemicals and either intermediates business. We would expect corporate expense to return to more normal levels in 2020, approximating between $43 million to $45 million per quarter.
In concluding my comments.
Announcement has not in its history had a stronger balance sheet and a better platform of businesses. We are less than 0.5 times levered pro forma for the net proceeds from the sale of the intermediates business.
We expect to be closing soon on the purchase of ice means to pull up for a purchase price of $350 million.
If we were to close on this by the end of the first quarter. This would add an additional approximate $25 million to $30 million 30, excuse me $30 million EBITDA to the remaining nine months of the year.
We have demonstrated year after year consistent strong free cash flow, we have shown discipline in a balanced approach to capital allocation since the beginning of 2018, we opportunistically purchase nearly a half billion dollars of shares at an average price of $23.50 per share.
Representing nearly 10% of our market cap.
And we maintain a competitive dividend.
We are committed to maintaining our investment grade balance sheet growing our business and creating value for our shareholders. Peter back to you. Thank you very much Sean.
While macroeconomic conditions, particularly in Europe, and Asia were a bit less than I would've expected. This past year I still look at 20.
19, as being a success for huntsman.
First we were able to successfully seller upstream chemicals intermediate surfactant business for $2 billion.
Transactions allowed us to fundamentally change our business.
Beginning with our balance sheet, we are carrying less than a half turn of EBIT da.
Of debt our company remains committed to investment grade statistics, while protecting and maintaining a competitive dividend.
Having this is our foundation. The obvious question is what are we going to do with us cash.
I think it it's best to look at our recent actions to get some insight.
This past year, we repurchased $208 million in stock. This represents about 5% of our total share count.
They repeat what I've said in the past, we will buy shares based on our share price our multiple our economic outlook and alternative uses of capital.
In addition to our share buyback this past year, we also paid out $150 million in dividends to our shareholders.
We will continue to assess this amount to make sure. It is both competitive and consistent.
I mentioned earlier, we continue to expand our ability to convert more of our crude MDR in geismar, Louisiana to more valuable formulated systems, well not adding more MDF volume. It does add more MD value. Additionally, we opened another downstream system house in Dubai.
To enhance our position in this region.
As a reminder of our 30 Mds I consuming system houses around the world. We have built 17 and acquired 13, we will continue to review internal expansion opportunities. So long as they justify an attractive hurdle rate by and large I'm not a proponent of large cap.
Oh projects that add excess volumes.
I believe that our greatest focus is going to be on our M&A opportunities. The same time that we were selling our upstream chemicals intermediates and surfactant businesses. We also repurchased are also purchased the remaining 50% of our Malaysia joint venture, making us the largest and lowest cost north American and European producer.
The Lake and hydride.
Perhaps the Best example of our M&A strategy is the upcoming completion of our polyurethane spray foam acquisition of ice and the Lapolla.
I expected to be close in the next week or so.
This acquisition will be combined with our existing spray foam business called demolition with that we purchased less than two years ago in April 2018.
The LTM EBITDA when we closed on this business was approximately $25 million in the calendar year ending 2019, we earned approximately $45 million, we turned to mid teen purchase price multiple into an under eight times multiple within 18 months.
As I said name, we will turn to 10 times multiple into a seven times multiple within 18 months.
As we merge all of these businesses by the end of 2021. These two businesses will add an additional $100 million of EBIT da and we will become the largest global polyurethane spray foam business.
We'll be a market leader in technology service and integration as this business will consume in excess of a quarter of a billion pounds of polyols and commodity mds grades of raw material.
In addition to this transaction, we're presently reviewing multiple opportunities in all of our divisions.
Finally, let me close with commentary on our earnings outlook for 2020 in January we completed a fulsome review of the business. The projected an increase in EBIT da over the previous year. In fact, our January results were on target of meeting this projection.
As I review, our latest forecast factoring in the effect of the krona virus I think it will be a challenge to meet last years earnings depending on the length geographic reach in severity of this illness. Our numbers may move simply put I am seeing changes on a daily basis.
We look forward to sharing our views of the market as events continue to unfold with that operator, we've concluded our prepared remarks, and we'll now take questions.
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And the interest of time, we ask that you limit yourself to one question and one follow up you may rejoin the queue. If you have additional questions. Once again that is star one to register questions at this time.
First question is coming from Bob Court of Goldman Sachs. Please go ahead.
Thank you.
Very much Peter just want to make sure I understood. The very last part of your prepared remarks, there. It sounded like you get your businesses together in January and things are suggesting growth in 2020 and now couple of weeks later.
You are thinking that may be challenged is that right size, how big Chinese or huntsman from a revenue and profit basis.
Well I think that just as we look at the overall impact that potentially could have on the business I think in January as we look at the result of January.
Whilst we were seeing in reading things of the krona virus, we were actually seeing the closure of sites and customers canceling orders and so forth.
As I as I look at things I wouldn't just say that this impact is something that is in China, but rather southeast Asia end to a lesser degree in Europe, what we're seeing a wider impact on this so I do think that this has moved from just the China. If you to more of a regional or even Asia European.
Im not saying much impact yet in in the North America I think that as we look at the impact of this has and it will it will mostly be in RMD polyurethanes business, it'll probably be somewhere between 10 and $15 million per month.
And when I say that that is when I look at the impact of it today and so when I look at that I think that we'll see that full impact hitting us in February and it appears that that full impact will be in March as well and we're assuming at this point that it will have concluded by the end of March and that by the.
Beginning of second quarter, we'll be back on on schedule now how much of this will be recovered and then later quarters, how resilient will a Chinese bounce back be and so forth.
Well it will come very suddenly is that kind of hit suddenly or will it be something gradual Bob that sits where we just don't have a view on that at this point.
And if that's all my follow up maybe related to that I think when you talked about the.
Yeah, the qualifying factors towards share repurchase.
For many positives the one and certainly was the macroeconomic environment.
How does that change your appetite that you suggest maybe things will get back on.
Online as you go through the year and expressed optimism about the quality of the businesses in the balance sheet.
I mean should you be going into the market now when there's anxiety and taking advantage of that or do you find that you need to have your own confidence and maybe give up some opportunistic Bert purchases now have certainty later or do you think about that well we are going to be looking at some of those opportunistic.
Opportunities I would say in the short term.
But as we also look at this I think that it's fair to say that we're starting to see.
Some assets that we've had an eye on over the course of last year, so become more competitive and so as we as we look at this I mean, I mentioned three or four factors that we take into effect.
When in repurchasing shares I'd also say that.
One of the the.
Probably one of one of the the additional factors. We see is the alternative uses of that capital the hurdle rates and the ROI and how we see that comparison to utilizing that money in the M&A market as well so I know the sounds rather nebulous, but we're going to continue with a balanced approach I think that we're going to continue.
Buying shares.
I just have been asked the question a number of times in the path at what price Dubai or do you not buy and I just think that it's just not of a black and white issue like that.
Great. Thanks, very much thank you Bob.
Thank you. Our next question is coming from Matthew Dale of Bank of America. Please go ahead.
Morning.
You'd mentioned that given one Q headwinds in margin pressure in polyurethanes it might be difficult to grow the business year over year does that include any of that benefits from the completion of the Anthony deal.
Yes that is assuming that the licensing deal does close.
I said, when we look at that $10 million to $15 million per month, I would say that probably no 90% of that is going to be borne by by Polyurethanes that is the predominant business that we have in.
In.
Asia and as we look at our largest manufacturing footprint in Asia virtually all of our manufacturing assets in Asia that have been impacted or slow down or shutdown.
Which depends on which as you look at are all in Polyurethanes as well.
Okay, and then if I might ask about aerospace did you see any headwinds in Fourq you from the 737, Max production shortage and or stop it just say and then are you assuming earnings contribution from that business kind of goes to zero in 2020.
Yes, I would say that as we look at that we've said in the path to that impact on an annualized basis will be in the mid single digit mid to low single digit sort of numbers and.
And I think that we saw that in the fourth quarter.
I'm not very optimistic that we're going to see much of recovery in 2020, I mean, if we do I think it'll be in the latter part of the year, then it'll probably be a two to 3 million dollar sort of an impact that Beth.
Alright, thank you.
Thank you.
Thank you. Our next question is coming from Kevin Mccarthy of vertical Research partners. Please go ahead.
Yes, good morning.
Peter what did your polyurethane spray foam volumes grow in North America in 2019, maybe you could talk a little bit about.
And your experience in that market and how you would expect to change assuming the licensing deal closes here soon.
Yes, and 29 team throughout the year, we saw that just just around 10%, 910% growth in North America, and and I think that if anything that we'll be continuing as we see the continued growth of the market, we'll see more resources going into that market market more than 2020, we'll have more sales reps will.
Better open and close cell technology that will be into the market and we're also going to be doing a big branding pushes well throughout 2020.
Some of you might see huntsman advertise for the very first time in our history I think we have a very compelling story to tell from a.
Renewal ability in environmental story, what we now have a facility that is capable in North America that is fully operational today of taking.
Up to 1 billion PDP bottles equivalency of 1 billion P.T. bottles of abused plastics and converting that into polyester polyol, which is a raw material for the spray foam industry. Later this year, we'll be opening a similar facility in Taiwan that will actually have better.
Raw material economics to produce polyester polyol for the Asian markets, which are growing very rapidly forced into spray foam insulation business.
Then what we're seeing in Texas because of the abundant supply P.T. bottles and so forth that are there so.
We not only are going to be looking at maintaining the sort of growth in the path I think we'll be looking to accelerate that as we encourage states and local municipalities. The to increase their building standards are insulation standards. This will be unique opportunity for the chemical manufactured actually go out and push for tighter environmental.
Standards and building codes so.
I'm, Kevin you kind of got me off an attach here I'll shut up but I I see that is certainly is continuing and and moving forward from what we've seen in the past.
Mr. Mccarthy do have any additional questions.
Okay moving on our next question is coming from Frank Mitsch for many of research. Please go ahead, hey, good morning folks.
Peter if I can put words in your mouth I mean, it seems like M&A is going to play another key role here in 2020. In addition to the acquisition that you already announced how should we think about the order of magnitude of the properties that you're looking at I mean is it something where you'd be disappointed if you weren't able to announce another $250 million worth it.
Deals or $500 million, where the deals so how should we think about.
The M&A on the order of magnitude front.
Well I do think that is we redeploy our capital first of all I want to reiterate one thing and that is I think we need to have a balanced approach I think do we need to guard and possibly look at it.
A dividend that's going to continuously I think yes look at it possibly improving that dividend over the course of the next year too I.
I think that you have a share buyback is going to continue to be important and and and the organic growth that we see within.
Huntsman, but I do think though that as we look at having.
Throughout the year I want us to end 2020 inhabits be able to look back and say the in the opening days of the year you divested of of an E O Eo derivatives surfactants intermediates business and you replaced those assets with the following assets that you have started to build throughout 2020, that's not.
Say that we and do everything in 2020, but I'd like to lay the groundwork.
If we've got to the world's largest spray foam business that we will have put together in 2020, I think that we'll have some additional opportunities in advanced materials and performance products that we're looking at throughout 2020, and I think these are going to be bolt on acquisitions, it will probably be in the range.
Maybe a little bit smaller to similar to what we've seen with the recent acquisitions with the with the your thing spray foam.
Business as well.
But again I think at the end, we want to be able to maintain our investment grade ratings.
And if that means that in order to buy something larger.
We may have to look at divesting of something and continued to relook at our portfolio Frank.
I'd be willing to look at that as well, but at the end of the day.
We want to make sure.
That we are able to complete these deals and that we're able to keep a strong balance sheet, but I don't want to see if pigeonholed into two you know it's got to be bigger than acts are smaller than why.
I did again I think the what we've been doing here in the last couple of years, it's pretty good indication as to what will be doing going forward.
Thank you that's very helpful and.
While we both know that you're not accrued MPCI pricing play.
We've heard from some of your competitors. So far this quarter that a sense that that kind of bottomed in and I guess, there's a competitor out today with a north American anti price increase a are you guys. Following along in terms of in terms of announcing an increase in b what is your projection.
On on crude and the I pricing.
Well I think that.
I've never internally and as we look at our pricing we look at the internal matrix more than what we would ever look at what a competitor would be doing but I've I've rarely frowned on the idea of raising prices at night I don't think I would you are either but I do think though that it's important to look back on slide number.
For the slide that I affectionately called the Snake chart, and if you and again. This is not pricing. This is this is margin that we're talking about and so as you think about that polymeric side.
That Red line, along there looked at the margins on this is over a 10 year period. The margins today on polymeric MDI globally. This is a composite this is an absolute region. This is a composite the global there's low today's they've been in the last decade and that would tell us that yes, we probably just from a pricing and price.
Recovery and raw material recovery.
Investment justification, we need to get prices up Conversely, if you look at the Blue line on that where we expect to be moving the business into more of our formulated and I would say that that blue line represents about 60, 65% of our overall volume and in Mds that blue line over a decade period.
I would challenge you again, they've been there've been a couple of ticks down from time to time there.
I would challenge is that over the last decade to find another chemical in our industry that has had that sort of growth I'm sure. There a couple of them, but by and large that blue line is what we want to be focusing the business and when you look at that margin differential between the blue in the red not only is that larger today than it's ever been.
But but we also see that.
It's almost double the blue margin today is almost double what the red margin. So again I think that short term economics, we sometimes get caught up as the what prices are doing in the next.
Quarter in the next month or so but as I look at this over the next decade, I think that that's a very compelling argument, but not answer your question directly around pricing. If you look at Red line, we're in need of getting some prices up and so we certainly would would encourage our.
Internal sales and marketing to be doing such.
Peter Thank you so much.
Q.
Thank you. Our next question is coming from Laurence Alexander of Jefferies. Please go ahead.
Good morning, Peter just a follow up on that pricing discussion can how much of what you're laying out is just the industry dynamic as opposed to huntsman zone value based pricing efforts and on the latter where are we.
In that process I mean at early stages or is it largely tapped out at this point.
Well I think that when you look at the Red again on the more commoditized polymeric, that's going to be driven by industry dynamics.
I think more than than anything else when I look at the blue.
I'd be foolish to say the blue doesn't have any correlation at all with the red.
I mean, when you see macro spikes up and down on the Red you'll also see some movement on the blue.
But as you see on the Blue I'd like to think that were I don't want our customers that are buying the blue that are buying formulated downstream products I don't want them to think that they're buying a benzene molecule I don't want them to think that they're buying polyurethanes I want them to buying effect I want them to pay for what our product is capable of.
Doing for them or changing their customer experience and so as we look at pricing on the blue side of the business I think that that again, while I don't want to say that it's completely disassociated from the red.
As we look at our Chinese business for instance, moving business from the Red to the Blue, taking taking polymeric pricing and moving that into a Tesla seeding application is we have recently done.
That is going to allow us to take those molecules into move them to the blue and will be our ideas around pricing that seat MD steering wheel and so forth, which will have about 12 pounds per.
Per car produced in China for Tesla.
Blue pricing will be completely disassociated from what we see in the red side of the business.
And then then just on the non MD I businesses do you have much scope for up to the optimization.
You are to the extent that management teams might have been a bit distracted with older.
Portfolio reshuffling and restructuring over the last few years or is that.
Or should we think of the current margins are sort of a good run right.
No I'd like to think that if anything we've spent a great deal of time.
We spent a great deal time on on pricing performance in the last two years and.
Doing something that I, a poor doing that hiring a consultant to actually come in and look at some of our practices and so forth as we looked in the M&A world.
The M&A world, even if you don't buy something it does teaches something of perhaps some of the areas that I think that we're doing very well in another is I think we'd probably do better end and I think pricing is one that I'd like to think that we can do better but it is we particularly focused on.
I'd say that the one area that probably was distracted this last year, where a lot of the management time and focus was around the performance products. Obviously when you. When you have the majority of the volume that business being.
Being hyped off and you see.
Sales teams and so forth divided.
So I think in the performance products I look forward to.
Margin improvement and stability in margins in pricing.
Perhaps being being the focus of that business more so than it has been in the past.
Thank you.
Thank you. Our next question is coming from Matthew Blair of Tudor Pickering Holt. Please go ahead.
Hey, good morning, Peter and Sean Peter you provided some helpful color on the demand impacts from Krona virus, you mentioned things like customers canceling orders could you talk about how the virus might be impacting the supply side of the equation or are you seeing like competitor plant shutdowns any thoughts there.
Yes, I think that.
If you start looking at I think a good indicator. This is probably our facility in RMB I've facility in Shanghai, It's actually south of Shanghai and as we look at that site that is the site, where even though we've got some between the total joint venture some two plus billion dollars invested in that side were relatively.
The small player on that site, you've got refineries and olefins facilities and other urethanes and oxygen all the ancillary power plants I think that entire site is being impaired as being shut back I don't want to say the entire side is called a lot of facilities or idling and.
And kind of operating in standby.
But I would be spy would be shocked if there's anybody in our industry of our competitors in China that are running at full rates right now and distributing unimpeded throughout China.
The other area just again anecdotally I.
I think that is probably safe to assume that the supply chain in China is extremely low.
If a customer has product there has been keeping inventory.
It remember, it's the logistics across the country that are being impaired and a lot of logistics within provinces are still open and so fine if I'm, a customer and I'm, producing footwear or or components. The automotive industry I think I will be depleting my inventory.
I'll be clean anything I can get from within that that province. So.
Again, I don't want to be overly optimistic here, but I would assume that that it how this virus plays itself out.
There's going to be quite a bit of restocking that needs to be taking place.
Because this is into the product like Mds.
Prague by our Polyols. These aren't products that were just stockpiling and stockpiling and.
Filling up warehouses of the stuff it doesnt store like that.
Sounds good thanks for the color and then.
I guess might be for sure for Sean, but the buyback figure in Q4 was lower relative to previous quarters.
Are you locked out during the quarter or is that number just kind of reflective of the cautious outlook and wanting to keep your options open on M&A.
Yes, Matthew it's largely your former comment.
Closing on the sales into Ram and as well as announcing this deal that we had.
On IC.
Certainly did block this out a bit so less opportunistic means of going at it but some of our programmed opportunities to buy we're there to take advantage. So yes, that's largely the answer.
Great. Thank you.
Thank you. My next question is coming from Jim Sheehan of Suntrust Robinson Humphrey. Please go ahead.
Thank you good morning, so regarding the Venator ownership you recorded the tax asset in such a it sounds like you're not expecting a this to go about $8 a share before you monetize it any sense of the timing of any action you might take there.
Well I don't think we care to speculate on the price and the market conditions for Ti Vo too.
If the price where to go above look I'd much rather sell this at $25 a share not take advantage of the the taxes.
Then to take advantage of the taxes and sell it at you know it at a lower rate. So I think that yes, as we look at our.
Strategy going forward.
I would would I would think that.
Yes. This is certainly not an ownership that we want to keep forever and as we look at our options and our alternative uses of capital and so forth.
You know were sellers and I doubt that I'm.
Saying anything spark it doesn't already see many times over at this point, so yes, it but I don't think that the tax issue in in of itself will be the sold driver as what I'm trying to say as to what we ultimately tried to do here.
Great and on M.D. I, particularly in Asia, you know weve seen weak pricing for a while margins there are pretty low and now we've got this a pandemic are low margin from the business, causing high cost competitors to rationalize are idle capacity in your view.
No along alongside that could you give us a sense for.
What operating where rates were in the region heading into the Corona virus crisis, and where that would be normalized.
Well I think that as we look at going into the fourth quarter. Yes, we kind of came out of the fourth quarter would probably we're pushing close to 80% capacity utilization in Asia.
And where we are today I think all the facilities are being idled and so forth and so it's exactly what the operating rates are today. The snapshot I just don't have a full picture that.
But I would imagine that our operating pretty much in line with with what the demand is right now with not unable to fulfill that demand.
So is we look at the overall operating rates I think that when you look at the size of the facilities in Asia, you're going to see.
Of the FDIC capacity that is in Asia, and that should probably read China for the most part.
I don't see anybody shutting back because of economics at this time I think most of the producers in China or have a pretty close.
Cost basis, and I don't see.
Economic to this point that would that would say that we're going to shutdown of facility. So yes. It today were largely idled ourselves and operating it and I say largely out of operating facility at 50% or less than I would imagine the rest of the industry's kind of in that same boat.
Thank you.
Thank you. Our next question is coming from Hassan.
Amid of Alembic Global Please go ahead.
Morning, Peter.
Tom.
Wanted to follow up on the MD I sort of supply demand situation.
And as I took a look at your Q4 numbers I mean volume growth. We didn't bother you retains was up 4% year on year, which you know.
With all the sort of macro headwinds and that like is clearly not a bad figure I.
I mean, leaving you know the impact of Corona Iris aside I'm going to with the macro continuing to look the way. It has been where do you see that underlying demand M.D. I wise in Twentytwenty, Twentytwenty, one and part and parcel with that obviously, we've heard about some and.
Hi, it's sort of facility Kirkdale, then some project cancellations some delays.
You know how are you thinking about the net and when I said near term call. It. The next year to three is in terms of global utilization rates.
Yes.
Well, our prior year, our quarter on quarter grow fourth quarter.
19 versus they can we were up 6%.
And a big chunk of that was from Asia.
Dealing because of the the new capacity that we were able to bring in during that time period. So I I think that probably had as much to do with the 6%.
Growth as did anything, but we still saw 6% growth in Europe.
But again I'm not trying to call for cold water on that that was in part because a year ago is you'll remember in the fourth quarter 2018, we were still the beginning of that that quarter. We were down at the beginning of 2018 My memory serves right from an overall site outage dealing with a third party.
Plan PNR and.
So a lot of that growth is taking place in China as I as I look at the overall capacity utilization again, assuming that theres not a macro.
Recession or something like that if we continue to see global growth of around.
4% to 6% in Mds Guy.
I don't see any grassroots facilities that are coming on.
Over the course of the next two to three years that time period that your specified.
There will be some construction projects no doubt we might be some some of you know some some brownfield expansions around.
The bottlenecks and so forth, but as far as is worldscale capacity entering in the market.
I just don't see if.
If anything we ought to be up we had to be looking at it.
We had to be looking at tighter times.
Understood understood and as a follow up you guys sort of gave up some qualitative year over year sort of earnings guidance.
Well as you sort of talked about that I mean, what sort of raw material pricing regime are you baking into that that guidance, meaning obviously crude oil has come down a fair bit Nat gas has come down a fair bit.
Are you sort of in that guidance sort of sub baking in a continuation of the sort of current raw material pricing regime or more inline with what we saw in 2019.
I think that you're probably going to see.
More in line with where we are today little bit lower than where we weren't 2019 across the board I think it'll be sometime before the demand for.
Crude and crude oil derivative products.
Come back into come back into line with supply and demand and I mean, if you just think of the GDP of of China.
Now being the largest crude importer in the world.
Yes, that's that's I think thats going to probably depressed crude prices and keep them pretty close to the this this 50, low 50 or sort of a have a price low to mid 50 sort of price target throughout most of the year that that we can foresee if it's anything higher than that it's probably because economic activity as picked up.
Better than expected and that would be good force or it's because of some sort of manipulation from the world's largest legal illegal cartel OPEC and.
So we'll see.
Very good Peter Thank you so much.
Thank you Tom.
Thank you. Our next question is coming from Mike Hassan of Wells Fargo. Please go ahead.
Hi, guys just.
I think you mentioned for Q1, you expect EBITDA to be down year over year, just curious though.
Running below fourth quarter levels, and and what do you think needs to happen to see sequential improvement from those level to Q.
Yes, I mean right now is I look at it kind of feeling the full brunt of.
The krona virus.
Yeah, we are looking at.
At a lower fourth quarter sort of a number.
We have online I mean, depending on where we are I would again and this is just so nebulous at this point.
But we're probably looking at somewhere around a number of 140 555.
For Q1 somewhere in that area, but again if this thing.
It's worth it could be worse, if it cleans up it could be up from there, but that's just that's just my gut reaction and I'm sure that.
Those that run our financial numbers within our company will have apoplexy over me, saying that.
Got it thank you and then.
Your slide.
Yes, the about 1.7 billion and Cas and back capacity.
That.
About 590 or share buyback laugh and things like you can do for three four or five bolt ons and then yes on the split or expansion.
Could you finish the buyback this year, given whether the clarity is pretty bag and and.
And.
Yeah, you do have forecasted irrevocable seems like you have anything out where multiple I would imagine you think is.
It is attractive.
Well I.
Look as long as I'm, Chief Executive Officer. This company I'll never be happy with our multiple I think thats just kind of any CEO I, probably would imagine is always griping about that the market doesn't get their share price but.
As I look at our overall multiple in comparison to our peers, particularly since we announced.
The sale of our business.
Of our of our downstream intermediates and surfactant business, we've seen in comparison to the peers that we compare ourselves to a basket of peers.
Our multiples has improved about one and a half the two terms.
During that time period, and so I think that we're certainly seeing again, you may not be reflective in the stock price because the earnings have come down.
Because of the kroner virus and so forth, but as we're seeing as to how the market values the or how they value the quality of our earnings we are seeing an improvement at that now as far as the allocation of capital you mentioned $500 million I would just remind you that was over a two plus year period.
Time, and so as we look at it this year.
I would we be would we'd be doing that.
What we've done in the last three years of share buybacks. This year that I don't I don't foresee us doing now, but again I don't ever want to pay myself in a corner, but I I would be I would be surprised if that would be the case and as I said earlier I think we're seeing some some excellent opportunities.
You know as is.
As we look at the M&A.
Arena as we look at our downstream integration and areas in polyurethane and outside of polyurethane and as we look at our relative return.
Of share buybacks versus other uses of capital we factor those things in into play and as of today I think the M&A markets, probably going to be our preferred route.
Got it thank you.
Thank you.
Thank you. Our next question is coming from John Roberts.
Please go ahead.
Thank you just mentioned you're looking outside of polyurethane for M&A and I think you said it earlier as well.
Could you just give us some color are you looking for it. He says in advanced materials are looking to go downstream in M&A in our you're really looking in textile chemicals for something.
Well I would say the priority that we would see outside of Mds is I would say the vast majority that is going to be and.
In advanced materials.
And the opportunities we're looking out today is around advanced materials again, I'd remind you that our most recent acquisition that we had previous to the spray foam within performance products with our Malaysian hydride. So we certainly won't be a shying away from those opportunities as well I still think that are a means business.
As a great business and I think theres. Some holds in that that that could be filled with with M&A.
Opportunities.
Thank you.
So.
Thank you. Our next question is coming from around the fund Nathan of RBC capital markets. Please go ahead.
Great. Thanks, Good morning, Yeah, a couple of years ago, Your Investor Day, you put out a.
It's that show.
Growth of 4% supply growth.
You know over that time period, I guess, we've seen some headwind state demand growth.
Yes, China automotive and so on.
Largely out of your control and we've also seen some announcements of new capacity.
I've now been.
You know maybe taken off the table could you just review kind of your view on supply demand fundamentals.
Term is challenged but.
You did say that this potentially transitory do you expect things to kind of revert to that.
Positive.
Mandel splice scenario or do you think supply demand growth over the next couple of years is going to be more balanced or maybe even tilted more towards greater supply. Thanks.
Thank you very much very good questions are I think is our internal analysis tells us that over the course of the next three years that are demand for MD I ought to be growing at about a six.
Percent, 5.5% to 6% and that the capacity growth during that same time period will be growing at about 3% to 3.5%.
And operator, perhaps doing take one more question, we try to limit these calls or keep people on for an hour why don't we do we've gone over that time why don't we do one more question here.
Our last question today is coming from P.J. Juvekar of Citi. Please go ahead.
Hi, Peter It's Eric Petrie I'm for PJ.
You talked about international expansion for your spray polyurethane foam I was wondering if you could talk about the EBITDA margin. If you were to take that product for Europe as far as Asia, and then could you talk about competitive landscape.
Well it should be the competitive landscape in many of the areas, where we're starting to grow the business is virtually nonexistent.
And which is very good but the euro thing supply chain again, it's coming from those regions I talked earlier about starting up a polyester polyol facility in Taiwan, and I would see that.
Being able to I would see that being able to supply our Chinese spray foam in southeast Asia spray foam markets.
Out of Taiwan on the polyester polyol side and the I cited that will be coming out of our facility in China as we look in Europe, we would be supplying those markets.
Out of those areas as well, but this last year was our first year that we had.
International growth in our spray foam businesses.
And that was for the most part all organic growth on our behalf and Weve I think we made about $5 million or so of EBIT da This last year. So again, starting from nothing it's but we're seeing very good growth in and we're going to be very aggressive in those international markets.
Okay and for my follow up question have you seen any pricing concessions in your differentiated downstream M.D. I with lower raw materials, and how often do those price contracts reset.
Yeah, I know the answer is no we haven't and as far as the price.
Contract, Yeah, I would just say that we're dealing with end use applications that would go into the 10000 are so different customers plus customers and every one of those customers every one of those applications everyone else formulations are going to have different price movements in times and so forth I don't I don't want lead the impact.
Russian that at the end of every year or somehow in the summertime.
But we're continuously kind of getting into a season to renegotiate prices art art terms on the downstream businesses go anywhere from three to five plus years and so it all really depends on the application the customer a young the automotive industry. You are typically specking in for a three to five year period on a particular model on a short term basis.
As you might be looking at a couple of months on other applications and.
And so.
And these are all going to be.
Different as you go further further downstream.
Helpful. Thank you.
Thank you.
Thank you at this time I'd like to turn the floor back over to Mr. mechanism for closing comments.
Great. Thank you if you have any follow up questions feel free to reach out to Investor relations otherwise, we look forward to updating you next quarter. Thank you for joining the call.
Ladies and gentlemen, thank you for your participation. This concludes today's event you may disconnect your lines or lock up the webcast at this time and have a wonderful day.
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