Q2 2020 Huntsman Corp Earnings Call
Earnings call.
At this time, all participants are any listen only mode.
Question and answer session will follow the formal presentation.
No one should require operator assistance during the conference we cut star zero on your telephone <unk>.
Mine. During this conference is being recorded I would now like to turn the conference over to your host Mr. Ivan Marcuse VP Investor Relations. Thank you you may begin.
Thank you Laura good morning, everyone welcome to husband second quarter 2020, <unk> earnings call.
Joining us on the call there Peter husband, Chairman, President and CEO, Sean Douglas Executive Vice President CFO as Tony Hankins President of polyurethane.
This morning before the market open to really start earnings for the second quarter 2020 via press release and posted to our website. That's been dot com, we all supposed to set of 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 also.
Admits are forward looking statements and while they reflect our current expectations. They involve risks and uncertainties and are not guarantees of future performance you should review our filings with that you see for more information regarding the factors that could cause actual results to differ materially from these projections or expectations.
We do not plan on publicly updating or revising any forward looking statements during the quarter.
Well also refer to non-GAAP financial measures such as adjusted EBITDA.
Adjusted net income.
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 husband Dot Com I'll now turn the call over to Peter husband, our Chairman President and CEO.
Thank you very much Ivan good morning, everyone. Thank you for taking the time to join us.
Turning to slide three and four.
Adjusted EBIT da for Polyurethanes Division in the second quarter was $31 million versus $156 million a year ago.
This is better than we had expected at the time, our last quarters earnings call. When we then shared that our second quarter volumes could be down an excess of 30% versus the prior year.
Our adjusted EBIT D.A. could be about breakeven at that time, well China was in the early days of recovery. The April actual and May outlook orders outside of China in our core sectors of automotive and construction, we're very weak.
Second quarter decline in adjusted EBIT da versus the prior year was not surprisingly driven by expected sharply lower volumes as a result of the economic impact of code that.
And lower margins it due to an increasingly competitive environment and the component side of our Urethanes business.
<unk> volumes in the quarter declined 15% driven by declines in the Americas, and Europe, which were only partially offset by growth due to recovery in China.
Well, our high or a more stable differentiated margins continued to hold up well the volumes in the differentiated and a bar business. So that's cobot related shut downs across the globe negatively impacted our key markets such as insulation automotive and Alaska.
However, we experienced a notable inflection in adjusted EBIT da within the quarter.
Our polyurethanes adjusted EBIT da was negative in April slightly positive in may and greater than $20 million in June.
It's mostly construction related markets recovered better than we had anticipated in the Americas, largely led by our spray polyurethane foam insulation business.
Additionally, the recovery in China continued at a pace above our initial expectations, specifically in automotive and insulation.
As we've shared before we estimate that roughly half of our polyurethane does this is impacted by trends related to construction with our largest direct exposure being art insulation business, which makes up close to 40% of our total global polyurethane segment.
Demand for greater energy efficiency continues to grow globally, driven by increasingly more stringent building codes around energy conservation more widely adopted sustainability standards as well as government mandates stimulus into energy efficiency, our portfolio is well positioned to benefit.
This expected growth within the global insulation market.
Oh, you're things is a versatile world class infill land.
It has an ability to achieving our value well in excess of nearly any commonly used competitive insulation material installations are single biggest market and we expected to be one of our highest growth markets over the coming years.
North America, our fastest growing business, it's a relatively new spray polyurethane foam insulation business that we have recently rebranded to be Huntsman building solutions.
Global leader in spray polyurethane foam installation.
And building solutions is the combination of our 2018 spray foam acquisition of demolition and our early Twentytwenty spray foam acquisition of ice to name a pull up.
Upon closing the ice and the in acquisition. This past February we immediately began integrating the two business that the integration of the two businesses is ahead of plan and we currently expect to exceed our initial synergy target of $15 million. We're now looking for annualized synergies a $20 million by the end of 2021.
That's been building products now Captively consumes approximately 125 million pounds of pulmonary MDR on an annualized basis the benefit of which is not included within this $20 million synergy estimated amount.
Although huntsman building solutions sales in the second quarter were down versus last year due to the temporary impact of code that related shut down.
We saw improved trends as the quarter progress and then Jim we saw a slight growth over the prior year, even with cold, but even with the cobot impact. This business contributed approximately $15 million of adjusted EBITDA in the quarter.
Despite the ongoing near term economic challenges, we still expect is that our huntsman building solutions business.
I'll be operating at $100 million of EBIT da annualized when we exit 2021 its growth in adjusted EBIT da will be helped by synergies, but also more importantly through organic growth, including market share gains from traditional insulation materials in North America and.
Internationally.
Well our international growth efforts are still in the beginning stages in both Europe and Asia, we've seen some early success and positive EBITDA contributions globally.
It is a remarkable eco friendly product, especially when integrated with our Terrell Polyols business, wherein we take the equivalent of 1 billion youth P.T. bottles, otherwise wasted as feedstock.
And produce a polyester polyol that is blended with our MD <unk> produced the best insulation in the world.
It's a very compelling sustainable and eco friendly alternative to traditional insulation products. We look forward to updating you on the success of Huntsman building solutions over the coming years.
We have seen improving trends within our north American composite wood products business rebounding nicely from being significantly down in April the being down only single digits in Jim during the quarter. We also saw improving trends in automotive these trends significantly vary by region.
Asia is ahead of the pack ending the quarter at levels largely flat year over year, well, both are still meaningfully down year over year within auto we see a bit quicker recovery within the Americas.
Over Europe.
Within our elastomers business global footwear continues to be significantly weaker than a year ago as it largely follows trends in global apparel.
Well, we remain optimistic about the long term growth opportunities for our Polyurethanes business. Several key markets in the near term are likely to remain challenging it make it difficult to meet last year's profitability.
Visibility remains obscure and depends on the ability of broad global economies to reopen and navigate the various geopolitical challenges currently being presented by this global pandemic. However, we do expect some benefit from lower benzene rolling through the third quarter assuming.
Yes, and this economic activities remain somewhat consistent with the trends we have experienced in June and are seeing in July and I. Emphasize is this is an uncertain assumption we could anticipate this business generating slightly above $100 million.
EBIT da in the third quarter.
Let's turn to slide five insects.
Our advanced materials business reported adjusted EBITDA of $30 million down from $55 million.
And last year second quarter the decline in adjusted EBITDA was primarily driven by 31% lower volumes impacted most significantly by volumes being down in aerospace by 48% year over year.
Global a build rates in aerospace spark practically halted instantaneously in response to the global.
Impact of code at night team for the first time in over a century, the north American and European commercial aerospace industry came to a complete standstill. The singular event caused a rapid build in the inventory from the airlines on through the supply chain to suppliers like consummate.
We anticipate that it may take many months to work through this inventory once that is complete we will likely be supplying an industry that will operate it materially reduced rate for perhaps the next few years.
Our high margin de iwai business largely in India.
It's also significantly impacted due to the extensive walk down in the country of India, We anticipate a recovery of our DIY business once the Indiana economy returns to more normalized level.
Our power business largely going into power grid infrastructure was leased impacted with volumes down approximately 2%.
We did see modestly improving trends in most other markets in June despite significantly lower sales the business was able to generate and adjusted EBITDA margin of 16% owing to stable pricing and the businesses ability to quickly adjust certain fixed costs.
On may 18th we closed on our CVC Thermoset specialties acquisition.
Which contributed slightly to the segment EBIT da CVC is approximately 30% weighted to auto and approximately 15% weighted to aerospace.
Business had built inventory prior to our close and as a result, we estimate a related incremental cost of nearly $5 million. During the second half of 2020 is we approximate rightsize SDN inventory.
Excluding this adjustment CBC is performing roughly in line with our advanced materials business on day, one of ownership. We immediately began integrating the business and we're confident we will be able.
We will be at synergy run rate of approximately $15 million when we exit 2020 watt.
We would expect to exceed our 15 million dollar target as we move through 2022 and beyond we've identified additional cost savings within the segment are very focused on identifying additional organic and inorganic growth opportunities.
As we look at.
At quarter, three improving trends quarter over quarter, most of our industrial markets.
We'll be more than offset by the continued challenges in our aerospace market. As a result, we estimate that our third quarter results in advanced materials are likely to be slightly lower than the second to prior quarter.
Let's turn to slide seven.
Performance product segments reported adjusted EBITDA of $29 million compared to $42 million in last year's second quarter decline in EBITDA was largely due to 20% lower volumes, partially offset by lower fixed costs.
Our performance, a means which make up about half of the performance product segments declined approximately 8% in the quarter.
It's better than average performance is related to the rest of the portfolio was primarily due to isolated strengths in some of the niche markets such as composites going into the Chinese when market AG chemicals and electronics.
We plan to further invest in technologies within performance, a means to drive growth, including our Polyurethanes catalyst, which allow for VLCC free urethane production.
Volumes and margins in our ethylene the means business continued to be weak due to the overall economic environment and competitive pressures.
Malaysia can hydride volumes were down sharply in the quarter, but overall margins remain relatively stable, we expect volumes in our Malaysia business to improve quarter over quarter.
Sales and do you PR markets, such as construction and recreational vehicles are improving.
While we expect third quarter EBITDA to be similar to the second quarter. The third quarter is expected to see an improving trend across the quarter. Unlike the second quarter with saw sequentially worsening month.
Let's move to slide number eight.
Our textile effects Division reported an adjusted EBITDA loss of $4 million for the second quarter, we saw unprecedented conditions in the textile and apparel markets. This loss was the result of a dramatic decline in volumes only partially offset by lower costs.
Total volumes in the quarter fell 48% year over year is a shutdown of economies across the globe significantly reduced retail traffic, especially in our key regions in North America Europe.
Additionally, government mandated shutdowns and keep textile producing regions, such as China, India and Bangladesh.
Also contributed to the decline and overall demand for our product.
As textile mills were closed.
A drop of volumes during the second quarter was unparalleled and was well below the worst quarter, we experienced in the 2008 2009 recession.
Positive note, we are seeing a slight uptick in both us and European consumer sentiment and they've seen some improving trends in June continuing into July.
We are seeing improvements, we expect a recovery to be choppy, depending on how quickly regions reopened and the come back and retail traffic most specifically for apparel, while timing is unclear. We are optimistic that the industry will recover over the coming quarters, we will continue to invest in.
Evolving technologies for protective solutions supporting increasing demand for pp as well as continuing to capitalize on our core strength.
And leading technologies and water reduction and zero discharged ties to help our customers achieve their sustainable goals.
Third quarter sales will remain down versus the prior year, but improve versus the second quarter, we expect to business to return to a modest level of profitability in the third quarter.
Before sharing some concluding thoughts I'd like to turn a few minutes over to Sean Douglas Our Chief Financial Officer.
Thank you Peter turning now to slide nine.
As cover by Peter volumes were sharply down year over year. We also saw continued pressures on polymeric MDI margins, which largely account for the decrease in Barry will mark variable margins year over year.
Margins in our differentiated polyurethanes and other businesses remained fairly stable.
We benefited from fixed cost suppression to the tune up about 20% $25 million during the quarter.
We also benefited from cost reductions year over year near $10 million.
Now turning to slide 10.
During the quarter, we spent from available cash approximately $300 million to acquire the CVC Thermoset specialties business and ended the second quarter with $2.6 billion of liquidity, including approximately $1.2 billion of cash.
Despite having a modest positive EBITDA for the quarter, we still managed to generate positive free cash flow.
In line with our expectations for the quarter, we benefited from favorable net working capital change of about $125 million.
Our business divisions continue to place a high priority on efficiently managing all components of working capital.
We paid $55 million and capital expenditures during the second quarter and still estimate to spend between 225 and $235 million for the year.
Shared on our previous quarter's earnings call in response to the global economic conditions, we reduced 2020 capital spending by approximately 30%.
We still expect to spend approximately $175 million in total constructed empty I splitter at our guys model, Louisiana side that will provide us.
Meaningfully more flexibility to further expand the mix of higher margin differentiated products within our North American business.
Related to this project $15 million was spent last year approximately $40 million is projected to be spent this year.
And the remainder will be spent in 2021 in the first half of 2022. This project is still on target remit 2022.
Relating to the gain on sale of our chemicals and intermediates business as business earlier. This year, we have paid approximately $10 million of taxes year to date and expect to pay approximately $365 million more all within the second half of this year.
I'd like to point out that although these taxes are not related to current operations they flow through our cash flow from operating activities on our statement of cash flows.
Just as a reminder, we have a built in capital loss within our approximate 49% interest in battle to work that is available to us through the end of 2023.
The eventual divestiture of the shares should provide a partial offsets this capital gain that should result in up to approximately $150 million in cash tax savings at the time of our divesture of shares.
Our husbands share repurchase effort remain suspended since early 2018 under our $1 billion Board authorization, we have repurchased approximately 26 million shares for approximately $580 million, representing well over 10% of our total shares outstanding.
Our adjusted effective tax rate for the second quarter was approximately 18% we projected our 2020 adjusted effective tax rate will be around 20% and thereafter, it will remain between 22 and 24%.
Where we sit today and certainly depending on multiple key variables. Most importantly, the degree of economic recovery and the second half of 2020.
Adjusted free cash flow for the year, maybe near breakeven to slightly positive.
We remain committed to generating consistent strong free cash flow. We also remain committed to maintaining our strong balance sheet and a balanced approach to capital allocation, creating and returning value to shareholders. Peter back to you. Thank you Sean.
We emerged from the economic Carnage, what will no doubt be one of the most volatile quarter since the ill fated whiskey rebellion of 17 91, I think it is important to ask not just how we intend to survive, but rather emerged from this could cost money of chaos as the stronger and more able company at the.
Ill Sept, let me repeat what others have said, we're still dealing with very limited visibility and uncertainties come and go as often as guidelines from the CDC.
However, there are a couple of signs there are merging and I want to review with you what we are prioritizing as a company.
Look at our July orders and early forecast I can say that for the first time in the past six months that all of our four operating divisions are showing anywhere from slide to modest improvements over the previous month.
This leads me to believe that we're seeing a real recovery now while we may still have a long road ahead of us that we are coming off the bottom.
He said that I'd like to remind you what we said in the past quarters call. We continue to believe that we will see a double b U shaped recovery as we see society reopened and people emerged from hiding the economy will resume its recovery. Conversely, we will see a temporary spike in cobot.
Yes. This see signed will give us a mixed recovery of stops and starts.
Globally, some geographies such as China and much of Southeast Asia are returning to more normalized conditions I stated during our quarterly call in May that we were then seeing Europe emerging a few weeks ahead of North America.
I believe that now I.
I believe that now the opposite is true as the North American economies led by construction and auto were recovering a bit faster than the European Union.
There are three fundamental areas in which we will be focused in the coming months.
First among these is preserving a strong balance sheet, we will remain focused on managing our inventory as well as working capital and also to take advantage of what has been unlikely we'll continue to be weak energy prices early in this crisis as we pointed out in may we unloaded some of our larger position.
Okay, and broad material and we'll see approximately $20 million a benefit in the third quarters, we take advantage of lower price benzene and other raw materials in the second quarter, we generated $38 million of adjusted free cash flow.
The largely due to effective inventory management to finish materials as well as focused effort to manage our receivables and payables.
We've cut nearly $90 million from our Capex for 2020, we've delayed projects to better coordinate them with this economic slowdown.
Suspended our share repurchase program until a time when we have clear market visibility, we are prudently suppressing costs, while such uncertainty lingers.
We have implemented a hiring freeze in the suspended American salary increases and.
In addition to strengthening our balance sheet, we have suppressed between 20 and $25 million of costs in the second quarter.
Our second focus will be the implementation of a cost reduction in alignment program not only will address the stranded costs from our recent divestitures, but also the opportunity to create synergies from our recent acquisitions in our Polyurethanes in advanced materials divisions.
During our last quarter report, we outlined several areas of focus totaling $45 million of cost synergies reductions redeployment.
We said that we were reviewing our structure and cost to allow us to obtain further economic efficiencies better downstream growth.
As we further this review we feel confident about exceeding our $15 million of synergies with our recent CVC acquisition in our advanced materials Division.
We've increased our 15 million dollar target for synergies from the ice any pull acquisition to $20 million. We've also increased our target for cost optimization realignment from $15 million the $70 million.
Combining these projects will deliver a run rate savings of over $100 million by the end of next year. We estimate that this will add approximately 1.5% to our adjusted EBITDA margin.
Our third objective will be to continue to focus on building out our downstream and differentiated capabilities.
And product innovation.
I think the right model for this is what we're doing around our newly formed Huntsman business solutions, we combined the best of our existing know how in Polyols and Mds.
With acquisitions of Demel economics in the Lapolla to create the largest spray foam insulator in the world.
This combination has exceeded our expectations and we now move approximately 125 million pounds of commodity Mds high grades into our own spray foam business, where we are well, we also consume our own polyols and the mean catalysts from our performance products Division.
While I'm disappointed to see the effects of this pandemic is having on the aerospace business I'd like to pipeline of products and innovation that we will capitalize on.
With regards to energy conservation throughout Asia in the textile industry across Europe with the Green deal economic stimulus program and in North America was insulation and renewable energy, we will continue to invest in light weighting of materials and electric vehicles powered infrastructure from this new era.
Well spaced applications come to market.
We continue to expand our formulations of adhesives coatings elastomers, another product, where we will see better than GDP growth as we displaced other materials.
We're also looking forward to making further global progress and waste reductions as we will be opening a polyester polyol facility in Taiwan that will not only facilitate our expansion of spray foam insulation across Asia, but when combined with our Houston facility will give us the capability to consume the occur.
Excellent see of 1.3 billion use P.T. bottles, a year that otherwise would be going to a landfill.
In short will be focused on maintaining a strong balance sheet, expanding our margins and building out a changing in improving company that will create value faster than these markets will recover.
With that operator, we'll open the lineup to any questions or comments.
We will conduct a question and answer session.
We will.
Please press star.
Telephone keypad.
Indicate your line of question Q.
Sorry.
Your question from the Q.
Using speaker equipment.
This area for you to pick up your handset.
Sorry, Keith.
Well, we pull for questions.
Well first question comes from the line of Frank Mitsch with Permian Research you May proceed with your question.
Hi, good morning.
And Peter Thanks for the thanks for the history assignment I've got to go back and figure out what exactly happened during the whiskey rebellion of 17, 91, and the and how it how germain. It is the current environment. So I appreciate the hallmark there right now I have no doubt frankly at your relatives were probably from centered on that rebellion. So.
[laughter].
I will definitely go back on the on ancestry tree.
So we're looking at a nice improvement in Polyurethanes from 30 million EBITDA into Q2 hundred million in Threeq Q.
And you gave some color in terms of.
The improvement in benzene sourcing.
And volumes I was wondering if you could step through a little bit more.
On the.
On the ability to continue that trend in four key went beyond how should we think about that recovery and polyurethane since the sustainability of that recovery.
Yes, let me just comment a little bit on the third and as we started getting into the fourth quarter.
My optimism most likely get the better have made but.
As I think about the third quarter. We ended June it's somewhere in the low 20, let's say 23.
Sort of EBITDA for the month, and if I, if I caught triple that for the third quarter, you're at about a 70 million dollar run right I'm, assuming that the third quarter will.
Will remain.
The kind of the equivalency of June.
Typically july's a little bit better month August is typically a slower month as you as you have much of the European end markets take holiday during that time, and then you see something of recovery in September so.
So I couple those seasonal trends.
With.
An idea that as I look at July I think that we started July probably from a sentimental point stronger than we ended July I think there was a lot more enthusiasm going into early July.
Markets reopening people were kind of going back to work and so forth and then you saw this increase in the number of of Cobot cases, you saw shutdowns and I think that affected consumer sentiment. So if I look at July.
So.
Im kind of started the month a bit more optimistic than high finished amount, but as I said in my comments I really do think this is almost going to be a week to week sort of of of a battle that I mean, we have oh really.
Strong announcement about vaccinations or something in the next week or so I think you'll see a lot of consumer optimism all the sun flow into the market, but anyway. So I take that 23 million of June hi, triple that in.
In Q3, I kind of come to 70.
Million I look at the benzene benefit of around $20 million that brings me to 90, and I think that over the third quarter, you're going to continue to see growth and you're going to continue to see.
Synergies cost cutting coming about and Polyurethanes I'd give that number probably around $10 million. So I'm, so thats, where I come up with a $100 million as I look at in the in the overall fourth quarter.
We won't have that $20 million of benefits coming from benzene I do think that you will.
We continue to see the momentum coming of insulation and further recovery, particularly.
Where and some of the Apparels now I based purely on.
That's where my optimism may come in here, but I think that you'll see a more fulsome retail recovery by that point, maybe you'll see something of elastomers coming back more aggressively automobiles and so forth coming back more aggressively and I'm hopeful in the fourth quarter that you'll continue to the core business grow.
But the synergies and the growth of that business offset the benzene and I would hope that we'll see.
Fourth quarter number that then in Mds I at least.
We will exceed.
Where we were in the third quarter.
That's a that's very helpful. Peter and if I could just a follow up geographically on the Polyurethanes.
Business. How are you how are you seeing the trends play out you'd mentioned that you start see growth in China can you talk about the that segment on a on a geographic basis any outlook.
Yes, I think that as we look at that on on a geographic basis.
As we look at construction installation, which I think is perhaps one of our are better focused businesses on on a prior year basis as we look at it Q.
Two.
For Asia, we really we were up.
Our prior year by about 12% Europe were down by about 12% in the Americas down.
Mid single digits.
And.
It is as I look at that going into the third quarter.
I've got Tony Hankinson, Who's our divisional.
President so I'm going to asking for some of the sentiment is what we see going to third quarter. When we look at that on a regional basis, but I'll just say that as we as we look about what I would say or some of our stronger areas.
In areas of concern when I look at year over year second quarter, the ace in the footwear and that's our adhesives coatings elastomers.
Growth in China.
Growth in China, both year over year and over prior quarter, but 30% to 40% down in the Americas.
Europe, which tells me a lot of that is footwear and.
You're you're seeing shoes or one of those things that people typically don't buy online they want to go and they want to be fitted and they want to make sure that buying something until you see retail recovery Im not sure you're going to see a great deal of recovery in that area Thats why say you but.
Maybe in the fourth quarter latter part of third quarter, but I think that there will be.
Material recovery, because in Asia, which is.
Month, or two ahead of of Europe in the U.S.
We saw 42% growth over the prior quarter when it came to be similar applications.
Composite wood again, we're seeing strong growth in the second.
Quarter over the over the previous quarter in Asia, and pretty much flat and in Europe.
The Americas, what we have the majority of our composite wood.
We're down about 20% year over year in over the prior quarter.
But again, we're seeing I think we're finishing the quarter much stronger in automotive. It's it's I think we started the beginning of the second quarter in a in a very tough position down to 60 70, some odd percent.
And we're ending the quarter second quarter.
I think a much better condition to being down.
25% to 30% so.
Promising trends, but still.
Still some tough market conditions from a macro basis, Tony do you wanted just comment on what we're saying it's going into the third quarter.
Yes, Thank you say that Frank good morning.
Let me just come back to your first question around shied away, we see two real bright spots for our business one is automotive.
And we've seen quite a significant recovery in automotive compared courts to west coast Coordthree last year.
The premium luxury brands seem to doing well, we supply BMW Audi Mercedes in China.
We have recently won the seating contract for the new.
The new Tesla Gigafactory in in Shanghai.
And as things start at the moment I would say that in quarter, three we're going to see 5% to 7% growth over.
Similar quarter last year, so automotive is doing well for us in China. The other areas is installation in construction, where the Chinese governmental.
Investing heavily in infrastructure to boost domestic demand.
And again, the the growth there over the last year, we're seeing is.
Is that is very positive so.
China has really been a V shaped recovery in that respect for our business.
As we look into quarter, three and right now we have pretty good visibility to the end of August September obviously, it's very difficult to coal with things that are going on but quarter. Three plays out the way, we expect to do to now at a macro level I would say that compared to quarter. Three last generation is going to be down about 7%.
North America is going to down 5% in Europe, the down 9%. So overall, we're projecting round about 7% down compared to quarter three last year, which is.
Honestly signaled at better than I was expecting a couple of months ago. So.
Real post to try to save as Peter said in automotive and construction and installation and furniture business mattresses have been.
Satellite Hotcakes in North America, particularly over.
Does that answer that sales, we've seen a very significant uptick in.
Fiscal elastic foam business so.
Oil at all things are looking much better than we expected a couple of weeks ago.
Oh.
Thank you so much it's very helpful.
You're welcome.
Our next question comes from the line.
With Keybanc capital markets.
With your question.
Hi, Thank you and good morning, everyone in your construction businesses.
June and July benefit from pent up demand.
That cumulated during the shutdowns and you say activity for new projects.
Maybe flattening out or declining going forward or remaining robust.
I think that we're seeing a gradual.
Recovery, I think that and construction I wouldn't say that is robust, but it is probably of all of our segments.
Yes.
In spite of the the.
Yes, the the opportunities we're seeing spray foam so Phil I, just as we look at some of our areas like appliances, and and our footwear ace and so forth those things are on retail.
Still still struggling quite a bit as you look at construction lot of the DIY why materials.
We are doing pretty good and.
Homebuilding is pretty good.
And a lot of the non residential commercial buildings and so forth I think these are really tough the project and I think theres, probably you could well imagine if you're if you're in the process of building an office building right. Now you are probably putting the brakes on that.
And you are probably wondering if you really want to be building office capacity. So uncertain has the construction you are seeing I think much slower growth than you would and in home construction.
Understood. Thank you Peter in your comments about benzene.
Being a benefit in the third quarter and feeding in the fourth quarter is this conservatism is projecting kind of benzene prices to keep rising what's kind of implied by by that comment could there be perhaps upside to that outlook.
Well I know I would say that theres upside that outlet I think where we benefited when we looked at benzene in the first quarter. We were looking at it when you look at it on a quarterly basis, you'll see that there was a movement of around.
Dollar <unk> dollar and change when you look at it on a monthly basis.
There was some some really severe volatility, especially when you look at it on a monthly basis by region. There was real severe volatility and yes, we learned and the 2008 nine recession.
When we were stuck frankly with too much benzene at the beginning of some of the alarm bells started the sound.
When the alarm bell sounded here in early.
Part of the latter part of first quarter, we sold off our benzene inventories we exceeded the prices can be falling.
I think that that we probably did a better job buying in the early part of of the second quarter.
And then we normally would've done and I think that we had an extraordinary opportunity during about a 30 40 day period, when benzene prices on a spot basis were significantly lower than in the first quarter enter significantly lower than today. So.
And as we explained on our last call that inexpensive bending that we purchased in the second quarter would flow through our economy economics in the third quarter now as we look at benzene prices as they made it through most of the second quarter now going to third quarter.
Those those prices are more right around.
A buck 50 to two bucks per gallon I think thats, what will be probably for the next.
Quarter, so and I'm not sure that that we're going to have any any more benefit than what the market would be calibrating for if you will.
So I would say that $20 million is really more of a onetime benefit.
Thank you.
Our next question comes from the line.
Please.
Wells Fargo you May proceed with your question.
Hey, good morning, guys.
Gladys gladiolus unhealthy in terms of the that the sequential improvement in Polyurethanes EBITDA. The 100 million from Thirtyish into Q is that all volume and then component and the I'm Tom access to margins stay depressed sequentially in the third quarter.
Yes, I think the this is largely as we've said I think the largely continuation of June going through the third quarter I think that you might see.
Some some component.
Nice improvement in Europe.
We're all trying to push for some price improvements, but you might also see some erosion elsewhere globally.
But no we look at that $100 million, we're not expecting to see.
A big price improvement during the quarter and should something happen I would just remind you typically if we were to successfully announced a an august price increase.
Wouldn't really be falling to the bottom line till the third quarter anyways.
Understood and then.
Maybe excuse me Formula here, Yes fourth quarter I could you, maybe just give us our irrespective of where profitability for polyurethanes could get too.
Once once volumes start to return and you've you've added a lot of businesses, it's a different business from.
Five years ago. So you know, what's the best way to think about and rebuilding some of the earnings power for that segment.
Hopefully in a post call that environment.
Well I think that we look at that business I'd like to think that this is a mid teens sort of an EBIT da type of business and when we start getting into.
Exactly what does that mean on a dollar basis I think a lot of that probably will depend on what are your EBITDA in sales and so forth our.
But I'd I'd like to think that we go back looking at our.
200, plus.
Million dollar sort of of quarters.
You know and adding independent fits coming from the building solutions and so forth.
I'd like to think that this should be the to 25 to 50, a short of a run rate business.
During normal clients, but I would just remind you that.
Just seasonally I mean, we've talked about normal times.
That's still is going to be a fluid number.
Great. Thank you.
Thank you.
Our next question comes from.
Hello.
This vertical research partners you May proceed with your question.
Good morning.
Peter I appreciate the details that you provided on slide four with regard to several the splits in the Polyurethanes business.
Im curious can you speak to the forward.
Looking outlooks for the installation growth in particular and sort of compare and contrast.
What you expect there in residential versus some of the challenges you mentioned the non whereas on the office side.
I think that once we kind of see.
Okay, great a return to normalization.
We expect about a 7% growth rate.
Taking place in installation.
On average and that half of that typically GDP driven in half thats kind of.
Replacement of other products and.
So.
I think this is about what we've seen in the path and we would expect this to be.
Yeah were around.
Around those levels.
Okay.
Then.
For Sean one to ask you about I guess capital deployment. So the cash on the balance sheet at June Thirtyth was one in a quarter billion.
Yes pro forma EPS for the upcoming tax payments closer to 900.
Can you just talk about sort of balancing the liquidity.
Yes, this balance sheet efficiency.
Moving forward and how you would expect that to evolve.
Yes, Kevin. Thanks look you pointed out the obvious one that's that cash taxes that will go out the door. The second half of the year. We also have coming due in early next year and we have not taken it out now because it's not callable, we have about $500 million of debt coming due and its callable in January.
So that's a slug of cash that will probably used to reduce the gross debt that we have.
And then we'll continue to be prudent in terms of how we evaluate and continue to look at the opportunities for alternative.
Spin options as well as.
Some points when when markets bring back more certainty returning to share repurchases and the like so it will be an ongoing exercise that we look to evaluate the use of those cash it between M&A and other avenues available.
Great I appreciate the color. Thank you both.
Our next question comes from the line Jeff.
With JP Morgan.
With your question.
Thanks very much.
Can you talk about operating rates in global polyurethane market and.
Do you think that some of your competitors I guess one law.
Particular has restrained production.
And maybe those production rates.
How do you see the balance between profitability.
Production by the different urethane producers.
Yes, let me just comment is we think about capacity in the second quarter I think that yes. As you look at MD capacity as far as we can see kind of what's published data out there Europe's running at about 60%.
Passed the Americas, probably about 70% in Asia is probably about 70% for globally, saying about 66% as we look at.
The huntsman numbers in July.
So again these are just our numbers and they're just for the month of July.
Kind of give you some ideas the kind of I'm not sure were too dissimilar from the overall industry, perhaps with the exception of Asia.
We see our European race in July going at about 65% the Americas going at about 75% and Asia is for US about 95% Io were moving as much as we can right now.
In China.
As far as what won one another's.
Theres are doing.
All I know.
Jeff really probably what you know is whether saying on the calls and that is.
Into probably doing the same thing we are which is matching production with demand.
So I, but.
I, just frankly don't know what what plans they would have for what plans to have present time.
Our next question comes from the line PJ Juvekar with city you May proceed with your question.
Yes, hi, good morning.
Peter I mean, I think you bought.
CVC Thermosets in second quarter.
Thank you guys been roughly 2.6 times sales.
So what are the normalized EBITDA margins at CVC, and how did EBITDA hold up in Tokyo.
Well as we look at the overall margins is around 30%.
And Thats, where we would expect the business to continue to operate if not better once we're done with synergies I would remind you. Those we said in the our comments that CVC is largely tracking the rest of our.
Fast materials business and.
They are down on their sales approximately 20.
25% to 30% and.
So as we look at at the overall business, we've kind of would be taking that sort of a macro view on the business as as we as we proceed throughout the.
2021.
Thank you and then you compared recoveries between us and Europe, but if you're to compare recoveries between like construction automotive and aerospace can you just talk about that it seems like aerospace is clearly lagging.
Do you think it's possible to how would encoding aerospace in 2021 or is that more like 2022.
No I think that I don't think you'll see recovering 2021.
Again, that's just my opinion.
On on the slide that we gave you on there's I think its slide six.
Good there's a bottom left hand.
Graph, there that kind of shows the.
The total planes that are in service. The total claims that are in storage and then the total that are on order and one of the things that the aerospace business. This is Steve 911, you see during.
The economic recession. So one was obviously an economy driven by Terror and war. The other one was the economy driven by well bad economics and this one's in the economy driven by a health crisis.
You see that there's a three to four year recovery.
And I would certainly hope that.
There would be a sooner recovery than three to four years here, but as I look in the path to try to figure out the future I'm not I'm not terribly optimistic when I, especially when you look at the amount of planes that are in storage and the amount of number of planes in total service.
What we've seen in the aerospace market is just.
It's unprecedented what we're seeing right now you cannot go back in time.
In the last 50, 60, 70 years and say well. This is what happened then my biggest concern system as of just yesterday.
With Boeing building at an even reduced rate of of.
Of output that the airlines aren't even taking the planes once the planes are ready to be taken.
They talked in the front page store yesterday of planes being stored often victorville in.
Around the country waiting for people to come pick up playing to David that were ordered an already built so again I don't want to be overly pessimistic on aerospace.
It makes up.
Mid teens of our entire business here and there is going to be a core and this is going to be a longer term, it's going to recover and it's going to be great business for us, but I think that all of our.
Areas of concern within the business I think that Thats, probably the one where I have the most pessimism and I think about footwear I think about apparel I think about even oilfield services.
You know that that are I think you're kind of some of those longer recovering sort of items I.
I think once retail.
Retail sales start to recover I think you're going to see apparel and footwear not only come back but it may actually come back for the vengeance. Sometime later this year early next year I don't think is going to be next month, but thank you guys start seeing as you start seeing retail.
Stores and so forth reopened.
Yeah, My biggest concern would be around aerospace at this time.
Im sorry, I forgot the other part of your question.
I would just about.
Completing construction and OEM.
Yes, I think I think.
Yes, and construction and essentially we're talking about Oems into the automotive markets and so forth.
I think that you'll see you'll see a consistent recovery I don't think it's necessary going to be V shape, but I think you'll see a.
It fits and starts but a consistent recovery.
Over time in both of those areas with interest rates, where they are and peoples aversion to getting on train subways buses and so forth might actually see.
Automobiles doing quite well here in the next couple of quarters.
Great. Thanks for the color Peter Thank you.
Our next question comes from the line of Matthew Blair.
Pickering Holt you May proceed with your question.
Hey, good morning, Thanks for taking my question.
Peter you know I thought it was pretty interesting your polyurethanes volumes as well as EBITDA margins held up better than your peers in Q2.
What do you attribute that to is that just a function of your through more integrated business model and focus on downstream applications.
Well I'd I'd I'd like to think that is.
Due to the competency of the senior management team of that division and Tony Hank and but.
Sorry, Tony I guess is.
I think that.
Look I haven't track our competition.
Probably as well as I should I'd I'd like to think that more and more over our last couple of quarters. We've kind of pointed out. The fact that we compete more and more with downstream applications and that this transformation of moving downstream.
Not going to happen overnight or even over a quarter vivien over a year, but rather gradually and.
I think that as we look at our ability to take.
120 million pounds.
During one of the worst.
Recessions.
Economic climate is the overseen and to be able to move that downstream.
And we think about our total volume at 3 billion pound to them.
We are already moving kind of two thirds of that downstream right now so call. It two plus billion pounds moves downstream, which leaves us with kind of a billion pounds of of what I would consider to be that Paul Merrick commodity grade material and as we keep chipping away at that and trying to add value to that polymeric, that's not say that that all.
Downstream as good and it's not say that all polymeric, we want to get out of there some great downstream polymer businesses that we want to stay in but by and large leading to stay focused on adding value to the pounds we produce.
I think that.
I think it'd be a real shame if we added if our strategy was let's see how many pounds. We can produce and every year, we've got to add 510% more capacity tonnage I think we have.
I think announcements does a long long ways to go and adding margin on a per ton basis. That's why in the Americas, where we have our pod project Patriot, where where we're not adding more tons due America, but we're adding more downstream capability more downstream today. So I think very clearly over 2021 2022.
Our objective is not necessarily going to be how we sell more pounds, but how we sell better pounds and how we upgrade those pounds and will will incrementally expand our capacities, we can and as we have opportunities to enter into new MD capacities that don't type lot of our cash we'll look at those opportunities I don't want to say, we reversed to adding more pounds, but.
I think our focus needs to be on how do we add greater margin greater consistently see greater reliability to the 3 billion pounds that we already have and if we can get that 3 billion pounds operating consistently to 15% to 20% EBIT da market or EBITDA margin in the coming years that will be.
Hey that will be a unique global franchise, not just sitting here, saying that we produce more pounds, but rather the most profitable pounds.
Sorry.
I know it's great.
Could you also touch on expectations for new global Mds capacity Quickset Covestor shows prospective projects.
I just as now showing some one off projects also also pushed back are you expecting any major.
EMG capacity come online from now until the end of 2021.
No I I'd just be shocked if somebody was.
Trying to add tonnage in today's sort of market conditions, I think just be a colossal waste of shareholder money, but that's just my opinion.
Great. Thank you.
Our next question comes from the line.
Thank you.
You May proceed with your question.
Good morning, Peter and Sean.
Morning.
Question on slide 12.
Full getting those sort of charts about.
How do you guys see here over your volume recovery.
I mean, you know maybe on Nit picking a bit but you know as you look at July trends, they seem to be leveling off and you know conscious of the fact that you said that probably this is a w. shape recovery and things may change week to week. So to the thing but my question is more about you know as you guys have provided us in Q3 for cost.
In that forecast are you sort of assuming leveling off of the sort of year over year volume trends.
Similar to what you showed us endless charge.
For the month of July.
Well I think is on an excellent question I.
Slide 12, as I think one of the best slides that I've been put together here.
I.
I look at that Simon I think it's just going to be a really mixed bag I think again be some applications like aerospace and and.
There are going to remain sluggish things like the textile you'll see a gradual recovery and things like.
The building.
Services solutions that Youll see an improvement, but by and large again, when we look to that $100 million. The third quarter. We're we're assuming that third quarter is going to see something of a plateau off of the end of the second quarter.
And I.
I think there'll be some gradual growth it will be taking place there.
On certain applications that will be offset in other areas I think the growth will outweigh.
The pluses will certainly outweigh the negatives but.
I, we're not here, saying that you're going to see this big V shape recovery in the third quarter and we're going to go up to the roof I think its is going to bid.
Grind forward, an upward and we will take two steps forward in one backward.
I will just depend on where we are in the portfolio.
Understood understood very helpful. As a follow up sticking to the whole volumes sort of theme.
One of the audio questions was around.
The volumes you guys saw anybody who attends MD.
Down 15% to so and you know if I wouldn't take a look at some of your Weston competitors I think that number was closer to 25% and I know you've talked about.
Being further downstream you know relative to your competitors in the light but.
Is it also fair to assume your Asia exposure you know just because obviously you talked about operating rates in the Asia.
You know being far stronger than they would in quoted Europe and North America. So again I'm just trying to get a measure off.
No that 15% to 25% Delta I mean, how much of it came from differentiation how much of it came from your geographic footprint I.
I think it's a good combination of both and again I look to our competitors with a great deal of admiration respect I know mean I'm, putting our differences here I'm, not pointing out being better or worse or anything else.
But I think as we look at our Chinese.
Centric Asian footprint, one of the things that we've tried to do without Asian business is to focus on.
On domestic Chinese consumption of MD.
That's harder than the export segment of MBS, it's getting hit very badly right now but.
In order to service that domestic market you've got to have.
Chinese.
Customer service, you've got to have Chinese tech support R&D sales marketing you have to build the real business in China, and I think that over the years, we've been successful in doing that and I think that right now that's that's benefiting us remember in the fourth quarter last year not everybody was so excited about our.
Chinese exposure, but right now I think that it's quite good I think that also that our hps.
Business, our building solutions business.
Is is we look at that business going forward I think that we have a lot of opportunities they're not just the managed cost synergies and so forth, but to take more pounds of our polymeric.
And pulled out through.
I think the focus of that business is obviously going to be the north American growth opportunities that we have that's a sentence foundation on business, but I'm really excited that on the first quarter that we move that those those that tonnage overseas in the Asia and Europe, we saw positive EBIT da I'll theaters quite small but.
Later this year, we will be opening day polyester polyol facility in Taiwan, and that will facilitate further insulation growth and so throughout greater Asian, particularly China. So I think it really is the combination of construction downstream and in Asia and so as we look in the second quarter.
China was up 14%.
From a year ago, and greater Asia was down about the same amount and so as you as you look at that so Asia all in all was up about 8% scan it.
Yes.
So I think having that China's centric profile and positioned going all the way back to the days when.
Tony Hankins was I think the loan polyurethane employee in China at one point.
Really building that out over the last 30 years now.
Very helpful, Peter and as Franks looking up the history of the whiskey, but then he and I quickly looked it up as well and I guess it lost at three years. So hopefully this downtick doesn't last as long.
Yes, I think yeah, I think that will resolve this much quicker than bear Paul's no doubt that last few as well.
Just.
Yes.
Thank you book.
Operator, we are the top of the our why do we take one more question and and we'll wrap it up.
Our next question comes from the line of John Roberts.
You May proceed with your question.
Thank you I'll keep it to one on slide 962 million negative variance in variable margin is there a way to roughly parse that how much was the benzene chain margins versus the propylene chain margins versus the ethylene chain margins or the again that polyurethane segment versus advanced materials verse.
Yes.
The performance products.
Yes, let me, let me probably not to go in level of detail you are asking for their John but clearly as alluded to my script.
The lions share of that entire margin variance does come from Polyurethanes and it does come from that Paul America and of the of the of the equation that kind of about one third portion of the business that we sell that has much more.
Less resilience in terms of pricing that downstream. So most of that is coming from the Paul American and there is very very very little effect from the remaining businesses margins held up well the downstream prices held up well.
And so that's probably the best color I can give yet at this stage on that on that piece.
Hi, good thank you.
Operator.
A question and answer session.
This conference call you may disconnect your lines at this time. Thank you for your participation have a great.
Yes.
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