Q4 2020 Huntsman Corp Earnings Call
Greetings and welcome to the Huntsman Corporation year end 2020 earnings Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Ivan Marcuse, Vice President Investor Relations. Thank you Sir you may begin.
Thank you Jessie and good morning, everyone welcome to Huntsman and fourth quarter 2020 earnings call joining us on the call today are Peter Huntsman, Chairman, President and CEO, Sean Douglas Executive Vice President and CFO, and Tony Hankins, President and polyurethane. This morning before the market opened we released our earnings for the fourth quarter, 'twenty and 'twenty via press release and post.
Is it to our website Huntsman Dot com. We also posted a set of slides on our website, which will 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 theyre not.
And Ts of future performance and should review our filings with the SEC for more information regarding the factors that could cause actual results.
To differ materially from these projections or expectations, we do not plan on publicly updating or revising any forward looking statements during the quarter.
We will also refer to non-GAAP financial measure measures such as adjusted EBITDA adjusted net income and adjusted free cash flow you can find reconciliations to the most direct comparable GAAP financial measures and our earnings release, which has been posted to our website Huntsman dotcom.
And now I'll turn the call over to Peter Huntsman, Our chairman President and CEO. Thank you very much Ivan good morning, everybody. Thank you for taking the time to join us.
Let's turn to slide number three and.
Adjusted EBITDA for our polyurethane division and the fourth quarter was $201 million versus $122 million a year ago.
This improvement versus the prior year was largely driven by improved margins due to higher prices, primarily and the component and of our business as well as favorable cost we.
We experienced better than initially expected demand across all regions as many of our core markets continued to recover and segments, such as automotive and our spray foam insulation business saw growth versus the prior year quarter.
However, largely due to previously announced production issues at Geismar caused by a third party supplier, our total MDI volumes and the quarter were down about 8% I will note that our total differentiated volumes, which includes our automotive elastomers and spray foam businesses.
We're up 6% and the quarter.
Demand trends and our core markets, including construction and automotive have continued to improve even as COVID-19 cases rose sharply and the fourth quarter and governments and certain states and European countries mandated further restrictions and then attempt to slow the spread and time of our previous quarter's call when we.
<unk> initial fourth quarter outlook, we had concerns such restrictions would dampen the recovery Fortunately solid demand trends continued even beyond what we had anticipated when we revised our outlook and early December as Covid cases in many regions have plateaued or have started to fall.
And the number of people being vaccinated is increasing we are cautiously optimistic and the demand trends will remain favorable and we expect our polyurethane results in 'twenty and 'twenty, one to be materially better than the prior year.
The world aggressively looking to become more efficient and areas such as energy consumption.
Lightweight Inc, as well as finding opportunities to increase plastic recycling and producing POC free consumer products. Our polyurethane segment is well positioned to benefit from these and many other globally sustainable trends over the coming years.
Our largest global market, which makes up about half of our polyurethane segment, our urethane building and construction products, specifically installation composite wood products and adhesives.
Our installation business is our largest market and MDI based insulation is one of the most efficient and versatile influence there is.
Our Huntsman and building solutions business, which is a global leader and spray polyurethane foam is growing double digits well above market.
It is benefiting from increasing consumer and contractor demand for sustainable eco friendly solutions. Furthermore, we're seeing growth and Huntsman and building solutions due to positive housing trends and North America International expansion and products substitution as it takes share from traditional products used to insulate homes and building.
Yes.
The integration of the ice and even Lapolla acquisition will be largely complete by the second half of this year, resulting in more than $20 million of annualized synergies.
Our Terrell poly old, which is able to utilize and recycled waste as a feedstock will also grow along with our spray foam and other global insulation businesses.
And 'twenty and 'twenty, we expanded our total polyol business by opening a facility in Taiwan to and part support R. F. P F growth and the Asian region as well as for other installation products and customers.
The growth prospects for Huntsman and building solutions are very positive and we continue to be enthusiastic about the long term prospects of our entire installation portfolio net.
<unk> construction, our second largest segment and polyurethane is automotive and <unk>.
We are also expecting to see solid growth over the several over the next several quarters. We continue to innovate with all of our customers and are benefiting from M. D I continuing to substitute existing products. Additionally, our high margin and elastomers business is starting to see improving trends as footwear.
Returning to growth along with several other niche industrial.
Markets we serve.
While we understand that volatility is still exists within the component and of our business, which certainly received a fair amount of attention. The majority of our polyurethane segment is and our downstream businesses and continues to not only benefit from stable margins, but also demonstrate the most growth.
Stream and of our business that being component and polymeric systems did benefit and the fourth quarter from a tight market due to several MDI facilities being down for various reasons.
We would expect the margins in this and the business specifically in China to eventually come off these higher prices as facilities returned to normal production rates on.
We do not believe that these margins will fall anywhere close to what we saw on the first half of 'twenty and 'twenty looking.
Looking out over the next several years, we do not anticipate any new capacity to come into the market that will materially disrupt demand supply.
And balances.
And as we have consistently stated we expect industry demand to be fairly balanced over the coming years.
And our third quarter call, we already disclosed our planned outage and Geismar, resulting from third party supply issues.
Does that impact that impacted the fourth quarter adjusted EBITDA by about $15 million.
Stronger than initially expected recovery underway, we did we not only impacted and not only impacted our fourth quarter results, but it also limited our ability to build inventory for our regularly scheduled turnaround in the fourth quarter on one of our Geismar lines.
As a result, we elected to defer this turnaround to the first quarter of 'twenty 'twenty one.
This is deferred approximately $10 million of expenses from the fourth to the first quarter was.
With strong global market conditions in the fourth quarter, coupled with the production issues at Geismar, we were sold out and short of products.
This will have a temporary impact on the first quarter 2021, as we continued trying to build inventories ahead of our planned and previously announced second quarter Rotterdam P&I.
On a quarter over quarter basis, this will impact us by approximately $30 million in the first quarter as we balance inventories in the first quarter ahead of our TNI.
We still estimate the impact from the Rotterdam TNI.
And on second quarter, adjusted EBITDA to be approximately $15 million.
Taking this into consideration despite our expectations for polymeric MDI margins to modestly recede off current highs and some headwinds associated with our need to build inventories ahead of planned turnarounds and we still expect our first quarter 2021, adjusted EBITDA to be slightly more.
More than double what it was a year ago.
Let's turn to slide number four.
The performance products segments reported adjusted EBITDA of $41 million compared to $43 million and last year's fourth quarter. The decline in EBITDA was largely due to a modest decline and Molec EBITDA as a result of lower margins, while overall segment volumes were down.
Approximately 4%, we benefited from lower fixed cost our.
Our performance amines volumes were down largely due to continued weakness and the gas trading and oilfield markets, However, and demand trends were favorable and various other performance and means markets, such as coatings and adhesives construction and fuel and lubes.
Which have demonstrated more resilient throughout this past year.
Growth was somewhat limited by temporary raw material and supply chain constraints in certain regions that prevented this business.
And to show year on year growth and the fourth quarter <unk>.
Volumes and margins and our ethylene amines business continues to be soft due to overall economic environment and competitive pressures facing this business. However, we do believe that this business has bottomed and several after several consecutive quarters of decline and we are beginning to see signs.
And of recovery and improvement.
Global volumes and <unk>.
Were fairly flat year over year.
Volumes that go into <unk> markets are trending positively and we see favorable demand trends and molec for 2021.
And the first quarter 2021, we expect solid demand and both amines and <unk> and estimate performance products adjusted EBITDA to be up by approximately 10% to 15% above the prior year. This.
This is particularly favorable given the tough prior year comparison related to strong pre buying by certain customers ahead of government mandated pandemic related shutdowns last year.
Let's turn to slide number five.
Our advanced materials business reported adjusted EBITDA of $27 million down 36% versus the prior year Dick.
Decline and adjusted EBITDA was due entirely to the 65% drop and aerospace related sales, which was partially offset by modest growth and the rest of our specialty portfolio.
The contribution from the CVC acquisition was largely offset by lost adjusted EBITDA from our recent DIY consumer adhesives divestiture and India.
We believe that our aerospace business has bottomed out while we expect a full recovery and aerospace to take years. We are beginning to see orders return, indicating that supplier and inventory channels have cleared and that Destocking has bottomed, we expect to begin to see a modest sequential improvement.
And the first quarter versus the fourth quarter.
From our 2020 was a milestone year for our advanced materials segment. So we were able to significantly reposition and strengthen its core specialty portfolio through three strategic transactions and a highly attractive net price.
<unk> acquired business like the rest of our advanced materials has been somewhat impacted by the global pandemic, particularly with respect to the aerospace portion of it.
However, the business is.
It's proving to be a good fit we are well on target to achieve the $15 million synergy run rate by the end of 2021.
We've only owned Gabriel performance products for just about a month now.
But we're encouraged by the opportunities. It presents we're highly confident that we'll achieve a target of $8 million per synergy run rate within two years.
The investments that we've made and our vast materials division setup to show earnings growth over the coming years as well as being a meaningful core platform for additional organic growth.
While adjusted EBITDA will be down approximately 20% year over year and the first quarter due entirely to aerospace we expect to see significant sequential improvement of about 40% and expect this division to show growth for the full year.
Let's move to slide number six.
Our textile effects division reported and adjusted EBITDA of $18 million for the fourth quarter, which was flat with the prior year volumes and the quarter grew 3%. The volume recovery. We are seeing is being led by our apparel business as well as home textile products.
We are optimistic that the industry will continue to recover over the coming quarters generally in line with the reopening of retail stores and improved consumer spending.
Our order book is returning to 2019 levels and inventories and the supply chain are tight which may result in some restocking in the coming quarters as order patterns start to normalize and customer visibility increases our biggest improvement and orders is being led by our more specialty and sustainable products that help our.
<unk> achieved their goals and areas like water reduction we.
We are focused on within textiles, and throughout all of our portfolio and developing sensible sustainable solutions for our customers.
We expect to again report volume and revenue growth and the first quarter, which will help to offset higher raw materials and supply chain costs and our adjusted EBITDA should be slightly above the prior year period Sean.
Sean.
Thank you Peter turning now to slide seven we were pleased to see a strong recovery and the fourth quarter with overall volumes not far from where they were a year ago. The.
And the volume decline is largely due to aerospace within our advanced materials segment.
Margins were stronger and stronger, mostly resulting from higher prices and polyurethane.
Fixed costs were lower largely resulting from cost suppression and ongoing cost reduction initiatives.
Turning to slide eight.
We ended the year with approximately $3 billion and liquidity, including approximately $1 6 billion of cash where are we.
Seed approximately $257 million of cash from the sale of our India based DIY business, we may receive up to an additional $28 million and earn out dependent upon achieving certain revenue targets in line with 2019 levels.
We also completed the sale of 42 4 million shares of Bellator, including a 30 month option for approximately $100 million.
And the option is exercisable with respect to nine 7 million shares for up to 30 months the sale of our <unk> shares unlocked immediate cash tax savings of approximately $150 million by offsetting the capital loss on the sale of Benatar with a capital gain from the sale of our chemicals and intermediates business completed early in 2000.
'twenty.
We also completed a sale and leaseback arrangement.
Property, and Basel, Switzerland that generated approximately $73 million and cash.
This site is primarily for administrative and technical R&D I would like to point out that we have been efficient and our tax planning that has allowed us to minimize leakage on our recent divestitures.
With respect to our sale of our chemicals and intermediates business tax leakage was approximately 12% for the sale of our India DIY business leakage was approximately 10% with respect to our sale and leaseback on our Basel site tax leakage was negligible.
And January of this year, we completed the acquisition of Gabriel performance products were $250 million that further strengthens our coatings and adhesives footprint within our advanced materials business.
Our balance sheet is as strong as it has ever been with a net leverage ratio of two eight times adjusted EBITDA or one two times pro forma for the Gabriel acquisition.
Pro forma net debt stands at about three quarters of $1 billion, leaving us well under one times Levered normalized EBITDA.
And January of this year, we redeemed and four 445 million euros or the U S. Dollar equivalent of 541 million U S dollars at par.
This will have the effect of reducing annualized cash interest by approximately $26 million for.
For 2021, because of the timing of associated interest payments the savings is approximately $19 million.
For 2021, we estimate our full cash interest spend to be approximately $84 million.
With respect to capital expenditures, we spent $249 million during 2020 near our guidance level.
Included in this was approximately $54 million for our urethane splitter at Geismar, Louisiana. The splitter is still on target for completion in mid 2022, we expect to spend approximately $80 million this year and approximately $30 million next year.
In light of the $73 million of cash generated and the fourth quarter of 2020 or the sale and leaseback of the <unk>.
Basel, Switzerland site, we expect to reinvest this capital and strategic high return projects within our downstream footprint.
These projects represent high growth opportunities that will further enhance our growth platforms within our downstream businesses.
The incremental spend in 2021 associated with these projects will be approximately $30 million.
Combining all of this together, we expect to spend between 320 and $330 million and capital during 2021.
As our splitter spanned rolls off in 'twenty and 'twenty, two we would anticipate spend for 2022 to be approximately between 275 and $300 million.
Now on to free cash flow on our last earnings call. We indicated that we did not expect a typical release of working capital within the fourth quarter and light of already low inventory levels and our anticipation to build inventories ahead of the Rotterdam Hull and turnaround that happens every four years and that is scheduled for March April this year.
We believe that the fourth quarter it would be a use of cash and we therefore guided to a 'twenty and 'twenty full year modest positive free cash flow.
As it turned out we actually ended the year with a much stronger adjusted free cash flow of $285 million and and adjusted free cash flow conversion up 44%.
In contrast to the vantage point, we had at the time of our last call. The actual overall recovery within most of our businesses has been much stronger, particularly within polyurethane.
As already share by Peter in light of the fourth quarter Geismar add outage, coupled with the increasing polyurethane demand we were unable to build inventories and 2020 as previously targeted.
All of our businesses and the year with lower inventory levels than we had anticipated.
With respect to receivables, although sales recovered stronger than anticipated we achieved some of the best metrics. We have ever achieved are experienced on managing accounts receivable.
And with respect to payables, we saw continuous improvement in the days payable outstanding combining all of this together along with higher than expected EBITDA, we were pleasantly surprised by the better than expected free cash flow results.
Looking ahead into the first quarter of 2021 as Peter previously mentioned, we are trying to build inventories, particularly within polyurethane.
We therefore anticipate a larger than normal first quarter seasonal build with a significant build of net working capital and quarter. One are expected free cash flow free.
Free cash flow is expected to be more negative than seasonally normal. However, net working capital should release as the year progresses, and we expect and the year with a reasonably modest overall build and net working capital as we reach more normalized levels of inventory.
Within the first and second quarters of 2021, we estimated and incremental cash spend of around $40 million associated with polyurethane Robert.
Rotterdam turnaround with respect to our cost realignment optimization and synergy plans, we spent approximately $27 million in 'twenty and 'twenty and we expect to spend approximately $70 million and 2021.
Each of these plans are on track and we will deliver a combined annualized benefit and excess of $120 million by mid 2023.
Given the temporary elevated spending capex cost realignment and optimization plans and dependent on many variables, including but not limited to the overall macroeconomic environment, we target a 2021 free cash flow near 20%.
Keep in mind that for five years, and our ROE now Huntsman has generated an excess of 35% free cash flow.
The challenges of 2020, only made us better we have a strong balance sheet and a better platform of businesses for growth, we're committed to maintaining a strong balance sheet and delivering strong free cash flow Peter back to you. Thank you Sean as we say a robust and heartfelt good riddance to 2020, it is worth pausing and <unk>.
Viewing a bit of our past before looking forward.
Above all else I would like to recognize our huntsman associates around the world they've been outstanding they've stayed focus on our safety and operating reliability.
And I'm, both humbled and proud to be associated with each and every one of them.
And we exit 2020, a much stronger company and when we started through six transactions, we have made meaningful progress and improving our business portfolio. We are on track to deliver on excess of $120 million of annualized synergies cost realignment and business optimization savings by mid 2022.
Three we delivered strong free cash flow and have a balance sheet and will serve our objectives well as we move into the coming years.
Looking into 2021, the year has started off strong continuing on from the robust momentum of the fourth quarter.
It is difficult to parcel out just how much of the growth and demand may be due to supply chain and inventory restocking purchases ahead of expected price increases are just flat out in security of availability of supply due to imbalances and shipping and logistics.
However, I am convinced that we are seeing true and underlying fundamental improvements and demand for our products.
We are seeing a two speed economy, a huge section of our GDP related to travel and aerospace hotels restaurants, and entertainment bricks and mortar retails and tourism are still hurting.
On the other hand, we're seeing growing demand for automotive construction infrastructure and greener and renewable products I.
I compared the upheaval of our society last year as being akin to the whisky rebellion of 17 91.
Now it just seems that not only do you need a good shot of whiskey to make sure you haven't lost share taste and smell, but also to try to make sense of the seemingly ever changing economic political and regulatory environment.
While we have a pretty good view of the first quarter of 2021 as we go further into the year, our vision gets a bit more hazy.
Given the fourth quarter 2020, and seemingly strong first quarter of 2021.
We have plenty of reasons to be optimistic for the remainder of the year.
However, there are few areas that I would like to call out is giving me more encouragement than I otherwise would fail.
And our automotive business, we are seeing strength as many people are abandoning public transportation.
Also dozens of new EV and more fuel efficient internal combustion engine vehicles coming into the market.
And and already has a large position and ice vehicles, but we see even greater opportunities and electric vehicles.
Whether it has battery technology, using our carbonite semiconductors, using our Aimings electric motors casings, using our advanced materials or our low VLC polyurethane applications and seating installation and light weighting.
Another macro trend, we think continues as construction and remodeling.
With record low interest rates and perhaps the largest migration of people moving out of large congested and poorly run cities and the past 50% to 60 years. We think this will be stronger relative to the rest of the economy, whether it is the electronics needed for smart houses structural OSB energy conserving.
<unk> or our Malaysia, moving downstream to the growing <unk> markets, we are well positioned to not only supply the needs of today, but welcome and encourage higher building standards around green application.
As poorly as zero space industry performed this past year, we are seeing some forward momentum movement and inventory. We continue to believe that this will be a long and rocky recovery, but we will see improvements throughout this year. We will also play a vital role and infrastructure and a greener and less.
And of a carbon footprint economy.
Our pipeline of innovation, we will see us taking advantage of more powerful batteries carbon capture and building out and expanding power grid lightweight and vehicles and transportation strengthening and cutting emissions from everything from concrete to asphalt to textiles.
Similar to 2020, we're going to be focused on upgrading our portfolio. This will likely include further divestitures and acquisitions, our focus will not be about slowly, adding more tonnage, but as much as increasing our margin and improving our cash flow.
And short 2020 was something of a transformative year for US 2021 has the potential of taking the company to far greater levels of transformation and value creation.
With that Jesse.
Concluded our prepared remarks, and we'll turn it over to questions and answers.
Thank you ladies and gentlemen at this time, we will be conducting a question and answer session. We ask that you. Please limit yourself to one question and then re queue for anything further if you would like to ask a question. Please press star one on your telephone keypad. The confirmation tone will indicate that Youre line is and the question queue.
May press Star two if you would like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys.
Our first question is coming from the line of Bob Court with Goldman Sachs. Please proceed with your question.
Thank you very much Peter I think in the past when we've had some very strong MDI markets, you've talked about some level of fly up.
And you talked about maybe a little bit of softening from where we werent on the back half of 'twenty can you help us quantify.
And what you thought might've been some excess profitability, there and what the sort of glide path through 'twenty, one would be for the MDI business.
Bob is its an excellent question I think that as we look at it.
The run up of the component businesses.
Im kind of struggling to think just how much of that was was a tightness due to onetime events and how much of that was.
It was due to plant outages I would think that the majority of the of the quote unquote fly up if we want to call that fly up that took place and the fourth quarter certainly took place and in Asia.
And then secondarily a bit of it and Europe, probably around 40 or around 40% to $50 million and the fourth quarter.
And would be our best estimate.
But I would say that as we look at the margins and the fourth quarter of 2020.
Particularly the Asian margins, and we compare that to where it is today. It is it has stayed flat going into into the first quarter.
And we've actually seen margins improving on the component side of the business in Europe.
I mean, our biggest challenge and the first quarter's IC. It is not going to be around necessarily demand and pricing I feel pretty optimistic as far as I can see and the first quarter on those things, it's going to be around the timing of.
The turnaround that we have and Geismar, we are a single line.
Was pushed into Q1 and and mostly into Rosenberg.
The issue that we have and Rosenberg of course is that this is a cluster.
Turnaround, which means it could result in our cost well, okay. It's a cluster turnaround and we are only going to be able to restart as fast as everybody else and that cluster is able to restart their facilities and.
And the last time, we had this a couple of years ago as Youll remember, we gave an estimate and we were ready to go we are ready to start up our facilities and we kept having utility issues and steam issues.
And Corning issues with some of the other.
Associated production facilities that again, we're not huntsman sites. So we can only operate and the sort of turnaround situations as fast as the slowest person can come up to speed. So again, we're optimistic we think we've done all the planning we can do to make sure. These are successful and timely.
And is and we've also got to make sure that we have adequate inventory built up.
And to be able to supply customers during that timeframe. So.
Sorry, long winded answer there, but I think that as we look at it I think that we've we're seeing the momentum from pricing and margins continue into first quarter.
Thank you. Our next question is coming from the line of Kevin Mccarthy with vertical Research partners. Please proceed with your question.
Yes. Good morning, Peter you were kind enough to give us a forward outlook for EBIT by segment.
Roll all of that up and make some assumptions it seems as though you're steering the street to about $250 million or so for the first quarter is that fair or would you endorse the over under on that level.
I would say that.
That's a very fair assessment, Kevin and.
And I would think that the single right now and the single biggest variable that I see on that is.
As the amount of P&I work that we have and again some of that and our control more much more so at Geismar and some of it is outside of our control and and.
And I think that's probably going to be the biggest variable side I would imagine during investor conferences, and so forth throughout the quarter, we'd certainly like to be able to.
Update the market on that.
Thank you. Our next question comes from Frank Mitsch with Fermium Research. Please proceed with your question.
Hey, good morning.
And I wanted to ask.
<unk> question, a little bit differently in terms of the fourth quarter versus the first quarter.
As I was feverishly, writing down the puts and takes.
For the for the for the two quarters in terms of turnarounds et cetera.
And I basically came operationally.
They were that they were pretty much going to be the same again when you strip out the various impacts.
And and.
And historically.
Virtually every time your second quarter is better than your first quarter and obviously last year was a it was a big anomaly.
And understanding that your Crystal ball is hazy is there anything.
Operator.
I'm here, Frank I apologize, we're no longer able to hear you and it looks like you may have disconnected from the conference. So I'll move onto our next question, which is coming from the line of David Begleiter with Deutsche Bank. Please proceed with your question.
Thank you Peter just on capital allocation.
How is the M&A how is the M&A pipeline and.
How are you thinking about share buybacks with this newfound financial strength here. Thank you.
I'm sorry, David the first part of that question did you give the M&A pipeline.
I'm sorry, yes.
<unk> pipeline.
I think that it's fair to say that.
I'll stand by my earlier comments that we'd like to continue into 2021 looking at both.
Divestitures and acquisitions.
And I.
I am a big concerned about asset prices and.
I can say that.
I've been in this industry I think this team has been and as soon as to be enough to know that.
Dosing cycle up and down so I mean, I always like to try to time.
<unk>.
And possible divestiture and on acquisition.
And since you, but they don't always typically worked out that way.
No. We do have our eye on a couple of things, but I don't want to see us I don't want to pay too much or be too aggressive here.
Having said that I think that as we.
As we look at the share buybacks.
Look everything's on the table and.
I think that will we'll take our capital and we will look at the internal projects. We have we'll look at the M&A opportunities that we have and and book.
Weigh those against the possible share buybacks.
My personal inclination is to lean towards the M&A I think that the company needs to grow and I think it needs to get larger, but I don't think you need to do that at any cost so.
Weigh those things.
Carefully.
Thank you. Our next question is coming from the line of Laurence Alexander with Jefferies. Please proceed with your question.
Hi, guys. This is Dennis wanted to loans how are you.
Well and.
Okay.
And just the semiconductor shortages and noted by others as having and instruction on the auto industry. I was wondering if you guys are seeing any effect on on your demand trends as well.
I'm sorry.
Can you repeat that question.
Sure.
Semiconductor shortages has been noted by others.
People, who serve on the auto industry as a headwind I was wondering if youre seeing that at all.
Yes.
I will.
I'm going to turn that over to Tony Hankins, because most of what we sell and auto comes out of polyurethane.
I've not heard anything on a material just anecdotally, but Tony anything more specific.
Peter.
Pat has been really de Minimis and sent to you as we see no effect in China, we've seen a little bit.
And Europe, but nothing of a material nature automotive sales continued to be very strong and all three regions fair to say that the majority of our automotive sales over in Europe.
And I think that a lot of this is.
Seemingly at least at this point is hitting U S manufacturers.
That's right Peter.
Thank you. Our next question is coming from Frank Mitsch with Fermium Research Frank. Please go ahead and restate your question.
And I really apologize that was it was just the exact timing that I had to do my my mic.
And my taste and smell test.
For coronavirus, so apologies for that.
And that time to the hour again exactly.
Exactly but I did pass and so that's the good news and I wish.
And I was asking a roundabout way of getting to.
Historically.
Looks like your <unk> and <unk> are kind of in line. When you. When you do all the puts and takes and historically your second quarter and polyurethane is better than the first obviously that wasn't the case in 2019.
I'm sorry in 2020 due to the pandemic, but is there anything that you can point to right now.
That would either push you one way or the other understanding that you do have a hazy crystal ball on that in terms of the second quarter being better than the first quarter and polyurethane.
I think that it is.
And I think as we look at the second quarter, it's really the impact of the TNI.
Yes.
And.
It feels like the markets are really strong right now and I would have said a quarter ago that fourth quarter, and probably will diminish a bit and the first quarter and.
And we've got first quarter it looks like we're heading into second quarter with some really strong.
Some really strong momentum, we did point out I think and the call.
And that we think that there'll probably be a little bit lower margins and component prices and China.
But again, that's yet to be seen and.
And look and just because we are if we feel that that doesn't mean that we're going to go out and force out to happen.
The volume is there the demand is there and the pricing is there we will be taking advantage of it will be leaving it in and we will be supporting it.
Thank you. Our next question is coming from the line of Alex Yao from off with Keybanc capital markets. Please proceed with your question.
Hey, good morning, everyone. Peter you mentioned that various outages and the MDI industry benefited marginally from the fourth quarter. If you look at the state of supply and demand today and do you see any large unplanned outages that are there and sort of abnormal and affecting the level of prices and in mid February.
Ari.
I think that there are a number of facilities that have been publicly spoken about theirs.
Some capacity and Japan.
Yes.
There have been some operating problems and I think they recently have come back into the market.
And then Theres, a facility and Ningbo and and and I think that there was some talk from BSF publicly about 400000 tons being offline and I think those are projects that are supposed to be coming up sometime this month.
The market as of right now today, it still feels very.
Free tight.
Theres also been some further postponement of another 400000 tonnes.
Kilo tons and China that had been postponed into later in the year and of course, our nearly 500000 metric tons will be down from 42 days.
As we look into the March April timeframe. So I think that as we look at these <unk> I think that we probably needed to differentiate between what happens it's unexpected and.
And how much of it as planned I think the majority of what we've been saying.
As planned and I think as we look around global.
Capacity utilization rates right now.
Certainly in the U S. We're importing materials I think as an industry. We're importing materials right now we're structurally short.
Europe seems to be very tight probably operating and somewhere in the low nineties.
And Asia is probably somewhere in the mid to upper <unk> and I think when you take that on a global basis year operating somewhere around a 90% capacity utilization.
When you take that and you.
And you take the stated nameplate capacity.
Of the MDI market.
I think that 90% capacity utilization.
It's probably about as well as the industry can do when you when you factor in all of the scheduled <unk> and so forth that have to take place on a.
On an annualized.
And semi annualized basis.
Okay.
Thank you. Our next question is coming from Hassan Ahmed with Elbit excuse me Alembic Global. Please proceed with your question good.
Morning, Peter.
Good morning on how are you on very well and Peter. Thank you. Peter you know again, revisiting and polyurethane, but more on the demand side of things and just be on <unk>.
Sort of correlate.
Q4 Q1.
And you alluded to some sort of regulatory sort of trends as well as demographic trends.
Being being sort of decent tailwind to overall demand.
I mean as I took a look at Q3, obviously year on year volumes were down.
Quarter on quarter and year on year around 3% and typically this is an industry that growth call it 6% to 8% demand wise.
So my question is you know with the rollout of the vaccine and the like.
And hopefully the world doesn't normalize a bit and in this sort of you know <unk>.
And revert to normal normalcy, I mean, where do you see trend demand growth for polyurethane now keeping some of the older demographic regulatory and secular changes in mind.
Well I think that the two areas that I called out and so on at the end of my comments around building.
And our building solutions and automotive.
And.
And just having recently won the Tesla EV.
<unk> contract and China and those are those are typically contracts that while they might not be huge volumetric Lee.
As other people get into the EV market and try to replicate what has already been successfully done and as a company like Tesla.
And those sort of wins Kerry <unk>.
Probably a lot more wait a year or two later than necessarily building out to the relative smaller capacity of a company like Tesla I think that when we look at AD.
The easiest way, if this administration and coming in.
The administration is.
Serious.
About really reducing cotwo <unk> and so forth building insulation.
And looking at the regulation around that is probably one of the best and easiest wins you could have and as you look at some of those sort of opportunities.
And we look around building solutions, and we think that and we're working with as individuals. This administration, we think that we've got a real opportunity here over the course and next year or so to really take advantage of of a greener footprint throughout society and our products have the solutions and those areas. So I mean, it's.
As long as I look out over the course of the next.
A few quarters and the next few years I am extremely optimistic.
About what I see.
And again when I also look at some of the idiotic moves that.
Various politicians have made on both sides of the aisle and some of the macroeconomic.
Trends that have kind of hit society pretty hard.
I don't want to be and the and the business of trying to micro estimate.
What's going to happen over the course of the next quarter or two but I think when I look out over the course of the next year or two I see a lot more pluses and negatives.
Thank you. Our next question is coming from Mike Harrison with Seaport Global Securities. Please proceed with your question.
Alright, good morning.
I was wondering if you can talk a little bit about the ethylene amines business. It sounds like margins are stabilizing there.
And maybe there is some improvement coming but maybe a little more color on what youre seeing in terms of demand trends and some of the competitive dynamics there.
Yeah, I think that as we look at that market. We certainly are seeing an improvement and that market and.
As we think and think about your end use markets.
And that's mostly going to fuel and lubes. So when somebody comes up with a fuel detergents.
Better lubes package and so forth.
And that's going to contain the additives that you'd see at the gas pump or the.
And the lube additives that you would say that's what our end markets are for the most part and that business. So as you see more driving more traveling more people getting out of their caves and getting about and.
Getting back to work if you will.
We're going to see more and more demand and a greater opportunity to improve margins there.
Thank you. Our next question comes from P. J <unk> with Citi. Please proceed with your question.
Yes, hi, good morning.
Your new SPF installation with recycled materials.
And what is the customer uptake on that product, how do you price it and is it cheaper to produce.
And then just one more quickly on ethylene amines and <unk>.
You mentioned weakness there, what's causing that is there are more supply from siddhartha.
That has impacted that market. Thank you.
But I think that.
As we see that I think that we continue to see and improvement and that and we continue to see coming up I mean, we've seen some capacity that's been shut down and that market and has been absorbed and that market.
And we also see some new capacity that's come on and the last couple of years, but by and by I think that market is more balance today than it has been over the last couple of years I think that it seems like everybody is running at near capacity and margins and prices are going up so.
<unk>.
I think that it's going to it's going to be.
Tailwind for us, but let's also remember that this is.
This certainly isn't the driver of performance products, nor are our corporate EBITDA.
I'd like to stay and improving but.
As we look at our our specialty amines, and our Malaysia and hydride. Those are those are the two cores as far as is our pricing and our cost structure and our and our polyurethane foam and that's an excellent question. It's a question that I ask almost daily and Mr. Henk and as to why we can't get higher prices for our wonderful recycle.
Foam insulation products, so Tony do you want to comment on that.
P. J good morning, Thank you Peter.
Yes, we selling the spray foam formulation consist of MDI and apparel technology polio, and we can now recycle up to 60% of post consumer scrap from Peter both was into that formulation.
So yes, it's very it's very competitive we manufacture at two facilities and now we have one and and Houston and one in Taipei and.
And I mean to give you an idea of the growth rates that P. J and North America, we're growing at round about 25%.
On a spray foam application, which is very very strong growth in North America, and now we're making major inroads into Asia with the growth of spray foam on title out of Taiwan. So.
It is significantly competitive with the recycled content.
And.
We feel that we price that.
As a high quality premium products so.
It's part of our business, which is good.
Going from strength to strength and we have.
We have great enthusiasm for the future integral and then the hbf spray foam applications.
I would just note that in 2019, we had zero EBITDA international EBITDA and that business.
And 2020, even with Covid, we made $8 million of EBITDA and this year, we're looking at probably doubling that number on the international and international markets of that installation.
So again, it's the globalization of that I think we're most excited obviously about the north American market, but.
But we have a great opportunity.
To see expansion of that business overseas.
Thank you. Our next question is coming from Jon Roberts with UBS. Please proceed with your question.
Thank you do you think your new portfolio can carry higher leverage than the old portfolio. So that we might see deployment of even more than the divestment proceeds.
Well I think that it certainly could I'm not necessarily certain and that's what we should do.
We can do it I think that more importantly.
I think that we want to stay to that two times EBITDA.
Normalized EBITDA sort of a debt level.
I think we've made that commitment to the market. If we were to exceed that two times EBITDA.
At least in my opinion from where I'm sitting right now we'd have to we'd have to have a very very certain and quick way of either selling off and asset or doing something that would get us back to that two times EBITDA.
But.
I think that.
I think we need to be able to balance growth and investment opportunities I think with the amount of cash flow generating company.
And we can have our cake and eat it too we can continue to buy assets. We continue to reshape our portfolio and we can also maintain a strong balance sheet.
Thank you. Our next question comes from Matthew Blair with Tudor Pickering Holt <unk> co. Please proceed with your question.
Hey, good morning, Peter with understanding the board decision, how do you feel about the prospects for dividend and an increase in 2021.
Well I think it's something that the board.
Certainly needs to be talking about.
<unk> to be honest with you.
Probably better not comment one way or the other on that one because I can just see myself getting in trouble.
But it is something that we that we want to continuously evaluate and on a quarterly basis that our board meetings. We do look at the chemical industry in general and we want to make sure that we're competitive with our peers.
We certainly don't want to be the highest but we certainly don't want to be and we're closer to the lowest so that's something that we're going to continue to be evaluating on an ongoing basis.
Thank you. Our next question comes from the line of Matthew Deyoe with Bank of America. Please proceed with your question.
Hi, Thanks for.
Taking my question.
So there's been some positive talk about free cash flow progress, but your 2021 guidance of 20% conversion.
Particularly robust I guess, when we look at peers and where we are on the polyurethane cycle with with some of the fly ups I guess.
What.
What's holding cash flow back in 2021, I guess ex the Capex.
Capex uptick, which makes sense and what you've talked about.
Yes, I'll take that one this is Sean look if you think about some of the projects we have.
Explained and our script today you'd see that if you add those back we actually are looking at or above 35% free cash flow year in 2021, So I actually feel that we are on track with what we've said what we've done is where we are and the biggest spend year of a project in Geismar, Louisiana, the splitter and Thats and.
$80 million spend.
We also have announced some usage of $70 million of proceeds we just got to sort of accelerate some of the growth and our downstream business you can't buy.
And that you have to build yourself and so we added we added $30 million a share to capex.
And when you tie and the optimization span that we're spending this year to get that $120 million of savings on an annualized basis, you put all that together, you're taking that kind of near 20% up to about 35%. So I feel we're right on track.
Thank you. Our next question comes from the line of Angel Castillo with Morgan Stanley. Please proceed with your question.
Hi, good morning, Thanks for taking my question.
Peter I was just hoping you could.
Unpack a little bit more on the advanced materials segment, and your outlook and what Youre seeing from.
From an end market perspective, and you talked about aerospace, but if you could touch on some of the other end markets that you and you have there and what youre seeing and on top of that I guess I was also wondering.
You talked about that segment as a core platform for growth and M&A and there's a lot going on right now with some of the acquisitions that you've recently done so curious from a capacity perspective.
<unk>.
Is there any constraints as to limitation as to how much more M&A you can do kind of in the near term for that segment.
And do you kind of take a pause until you've got and Gabriel fully integrated or.
Or is it is there an opportunity to do something and kind of near term sale.
Well, yeah, and I think excellent question I think that as we look at advanced materials and the script, we talked about it.
Being a platform for internal investment organic expansion and so I think that we see a lot of opportunities, particularly around power and around electronics. So when you think of the power grid system that has to be built if youre going to be connecting all of these.
Windmills and solar plants and all of these these are these new sources of electricity.
And the build out.
And of a smart grid or just the addition of a dumb grid I guess.
Either one of those and smart grid or a dump grid, we're going to be.
<unk> and the build out of the electronic infrastructure the power lines.
On the Transformers and so forth.
It's a very profitable and of our business and then we also look at the electronics side.
Of what we're doing.
This is an area as well when you think about the shortages that are taking place.
Around the automotive industry and excellent question was earlier asked and you look at and.
The average electric vehicle, it's going to take four times the amount of <unk>.
Semiconductor capacity is and ice vehicle. So as you look at those and use applications. I think those are all areas of growth and a lot of what we're going to be doing and advanced materials. These are new fields and as we look at our performance products and we look at expanding some of our products that will be going into.
And the battery technology. These arent areas, where you go out and you buy competition because nobody is doing it right now and we think that we've got and expertise a lot of the <unk> means that potentially will be used for carbon capture and sequestration.
We've talked in the past about our ability to produce.
Nano technologies.
Round carbon and this part of carbon capture and so forth a lot of these areas are areas that we have technology, we have knowhow and we want and develop these end use markets and we think that with this transition going into this greener economy.
Not only will there be some sort of a.
And of a subsidy and help and doing some of those sorts of things.
Through taxes and so forth.
But we think that the markets will be there as well so when we talk about internal opportunities for advanced materials and performance products and the other divisions as well.
See real opportunities there, but again I would also just say that with the recent acquisitions, we've done areas around carrying agents and coatings again, we have an opportunity to take those acquisitions and two.
And to give our existing customer base, and our expanding customer base, a wider portfolio of services and products formulations components.
And I think that as I look at and advanced materials, Yes, I see it as a potential platform for more M&A.
And I'm, especially excited to see about what it could do by improving the bottom line by integrating what we purchased bike.
By becoming more streamlined and the cost and by capitalizing on small, but manageable expansions that will be going into new and Boulder.
<unk> going forward.
Thank you. Our next question comes from the line of Arun Viswanathan with RBC capital markets. Please proceed with your question.
And operator again, given that given that we come to the top of the hour. We'll take this as the last question and.
And thank everybody for having been there.
He joined US this morning, so a room.
Yeah, Thanks, Peter and.
Thanks for taking my question.
So just trying to get your high level higher level thoughts.
Look at the guidance it looks like.
The numbers you provided <unk>.
Two.
Q1, EBITDA and the $250 million range or so and I guess you had provided some thoughts before that maybe normal earnings would be 925 on a on nor on an annualized basis EBIT.
EBITDA wise, but.
You've already kind of recovered most of that so maybe you can just kind of offer your thoughts on how much of your portfolio is still depressed and or are you feeling that you've already caught up and is that kind of.
Run rate for the quarter and now implying a $1 billion for the year is that is that a fair characterization of where you stand.
Well.
I'll try to be very clear here, because I don't like giving.
Macro predictions and so forth, but if we see 2021 continue as it has performed and the fourth quarter of last year first quarter of this year, we continue to see the demand and the margins in those areas. Yes, I think that we are back to that normalized range that we're talking about.
I would just want to put in a caveat that we do have.
And some some tni's or turnarounds that we've already pointed out and.
And some expenditures and those areas. We also have.
Quite a bit of money, yet to spend and an opportunity yet to be achieved through synergies and through consolidation of some of our operations again that will be taking place and so when we when we went back and we looked at where we were in 2018.
$111 2 billion sort of level.
And as part of that kind of that rebound back to a $1 1 billion and sort of normalized rate that included.
That included some synergies and cost optimization and so forth not sure all that will be done this year I'd like to see it all done this year, but.
Timing it will be over the course of the next two years.
But again, if we continue to see the demand and the margins.
Stay up at these sort of levels that we're seeing.
As we finish off the fourth quarter as we begin the second quarter.
I would be even more optimistic about what I'm, what I'm seeing and in 2021.
And again I want to be absolutely clear because I've read somehow supports they'll say hunter.
Huntsman may not be as bullish as the competition look like.
I think that we've got to look at a company's ability to capitalize on market share.
And yet and if we're not as bullish as somebody out there that's analytes and the market. It doesn't mean that we're going to go out there and somehow hurt the market or drop our price to match, our forecast where are and are positioned to take advantage of pricing take advantage of margin expansion and we will be doing that throughout the year.
The economic <unk>.
Forecast.
Continues to be such that we continue first quarter sort of economics throughout the year, it's going to be it's going to be.
A very good year for us and we can take full advantage of that so and I think we're and an excellent position to do so through through our recent acquisition through continued cost cutting and moving further downstream so.
And with that thank you all very much for joining us this morning and.
And if you have any questions or comments, please feel free to contact our Ivan and our.
Our IR group, Thank you very much.
Great. Thank you.
Ladies and gentlemen, this concludes today's teleconference. Once again, we thank you for your participation and you may disconnect your lines at this time.
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