Q3 2021 Huntsman Corp Earnings Call
Greetings and welcome to the Huntsman Corporation third quarter 2021 earnings 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 record.
It is now my pleasure to introduce your host Ivan Marcuse, Vice President Investor Relations. Thank you you may begin.
Thank you Jessie and good morning, everyone welcome to Huntington's third quarter.
Earnings.
Conference call joining us on the call today are Peter Huntsman, Chairman, CEO and President, Phil, Let's our executive Vice President and CFO and Tony Hankins President polyurethane.
Morning, before the market opened we released our earnings for the third quarter 'twenty, one via press release and posted to our website Huntsman Com. We also posted a 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 all such statements are forward looking.
And while they reflect our current expectations. They involve risks and uncertainties are not guarantees of future performance you should review our filings with the SEC for more information regarding the factors that could cause actual results to differ materially from these projections and expectations. We did not plan publicly updating or revising any forward looking statements during the quarter.
Well, we will also refer to non-GAAP financial measures such as adjusted EBITDA adjusted net income and free cash flow you can find reconciliations to the most directly comparable GAAP financial measures in our earnings release, which has been posted to our website Huntsman Com I will now turn the call over to Peter Huntsman, our chairman and CEO.
Great.
Thank you very much Ivan good morning, everyone. Thank you for taking the time to join us.
Let's turn to slide number three.
Adjusted EBITDA for our <unk> division in the third quarter was $246 million versus $156 million a year ago.
Our polyurethane business EBITDA growth was primarily a result of 2% year on year total volume increase and improved margins total volumes have increased 5% would have increased 5% had it not been for hurricane either disrupting our geismar, Louisiana operations in the third quarter.
Our differentiated volumes increased by 4% in the quarter led by our installation, including spray foam and elastomers and adhesive businesses.
Our core construction markets, including installation adhesives, and coatings continue to be the strongest markets for polyurethane.
North American installation businesses include spray foam and our composite wood products business.
These remain strong as we see solid residential and commercial construction spending.
Our Huntsman building solutions business continues to benefit from strong demand and market share gains.
Hps revenues are well above the prior year and on track to exceed $575 million for 2021, combined with margins approaching 20%.
The backlog of our order book for spray foam remained strong and the price increases that were implemented during the quarter are helping to offset higher raw material prices and logistical costs and challenges.
Further our efforts to expand internationally continued to gain momentum and is contributing ahead of our expectations. We remain very positive about this platform and we'll look to add to it through bolt on acquisitions and organic investments when feasible.
Our elastomers, which includes our global footwear business with another core growth platform for polyurethane and it continues to see strong recovery trends globally.
This platform is implementing price increases globally to offset the headwinds in raw materials and supply chain costs that are pressuring margins a.
Our global automotive business is being hindered by the chip related shortages there.
Our reducing automotive production, we believe that these challenges will eventually be worked out that low inventories and strong underlying demand globally could drive higher production rates for several quarters once the supply chain issues are resolved.
Fortunately global demand in our other markets is strong and we were able to redirect volumes originally intended for our automotive market into markets utilizing similar formulations and margins.
<unk> strategy is to upgrade the quality of our portfolio.
We will continue to redirect more of our plant's output to our differentiated businesses and bottom slice lower margin component business.
We'll invest in our downstream businesses organically and where it makes sense through bolt on acquisitions.
Or we can generate higher and more stable margins through long term contracts in our component business. We are doing so.
Our splitter investment in Geismar, Louisiana is consistent with this strategy, helping to drive our downstream growth and increasing overall margins.
Project will start up in the second quarter of 2022, and once fully operational and selling at capacity it will contribute $45 million in incremental adjusted EBITDA on an annualized basis in 2024.
Our <unk> joint venture with Sinopec in China, where we own a 49% interest continues to benefit from above normalized margins and is driving above average equity earnings.
As we said last quarter the equity earnings contribution will be lower in the second half versus the first half of this year.
We expect the fourth quarter to be lower than the third quarter by between $10 million to $15 million.
While many countries and economies remain hobbled by Covid, and Europe, and Asia grapple with unprecedented high energy costs, the underlying fundamentals of our MDI global markets remained strong.
Globally industry MDI demand continues to grow at rates higher than GDP limited capacity will be added, particularly in North America and Europe, our downstream pull through of MDI will allow us to generate less capital intensive less volatile and.
Higher earnings MDI formulations <unk>.
As I've said in the past this is not necessarily about more MDI, but higher value added MDI.
Looking into the fourth quarter, except for automotive, we see general demand fundamentals in most of our core markets remaining solid with typical seasonality in our construction markets and lower joint venture equity earnings we would expect our polyurethane fourth quarter adjusted EBITDA to be between 202 hundred 20.
Millions of dollars for the fourth quarter.
Let's turn to slide number four.
The performance products segments reported adjusted EBITDA of $103 million for the third quarter.
Volumes are back to our pre pandemic levels in most of our core markets and increased 24% versus the prior year's period.
Improvements in commercial excellence, including pricing initiatives. Good cost controls have helped to offset the higher raw material costs and supply chain headwinds.
Positive demand fundamentals in any means use in coatings, and adhesives, polyurethane catalyst and fuels and lubricants.
Helping to drive higher profitability.
Construction demand is having a favorable impact on millenia and hydride volumes volumes sold into <unk> as well.
While this division is benefiting from favorable market conditions and tightening in certain products. The significant improvements are coming from an increased focus on the existing businesses since the since the sale of the upstream commodities and surfactant businesses in early 2020 pre.
Prior to the sale the business prioritize moving volumes to keep large plants running at high utilization rates today. The business is focused on the two remaining businesses any means and Malay and hydride include.
Including the targeted growth in our specialty amines carbonates and catalysts, while driving commercial excellence across the entire segment.
This focus on value over volume is generating higher quality of margins.
We stated in the past, we will look for bolt on acquisitions to spur downstream growth.
Those opportunities tend to be infrequent in performance products.
Inorganic growth opportunities inside we are investing in high return projects.
That will increase.
In attractive markets, such as electric vehicles electronics and polyurethane catalyst during the third quarter, we announced an expansion of semiconductor grade specialty amines at our Conroe, Texas facility for the electronics market. We also announced an expansion of Jeff caps.
<unk> catalysts at our pet photo Hungary site.
Look forward to highlighting these new investments and this change business at our upcoming Investor day.
While we do expect some typical seasonality in the fourth quarter, we see solid momentum in this business. We currently expect performance products. The reported fourth quarter, adjusted EBITDA was $95 million to $100 million.
Let's turn to slide number five.
Advanced materials reported EBITDA of $48 million in the quarter significantly above last year's third quarter, driven primarily by improvement.
Moving demand in our core aerospace and industrial businesses and contributions from our recent acquisitions.
While improved year over year adjusted EBITDA for the Division did fall slightly short of our expectations. This shortfall can be explained by higher than expected raw materials and supply chain cost that were not fully offset by price increases and logistics challenges that resulted in some sales.
Being delayed into the fourth quarter.
Further price increases are currently being implemented which we expect will result in improved margins in the fourth quarter.
Aerospace sales and earnings remained well above pre pandemic levels, but are steadily improving.
As excuse me they are below pre pandemic levels not above as I as a reminder, our businesses largest exposures to wide body aircraft production, which will likely lag. The overall industry production rates until there are significant improvements and intercontinental in long haul travel the integration of <unk>.
Last year's acquisitions remain on track and we remain confident that the $23 million of synergies will be completed in 2023.
And underlying demand for the advanced materials division is tracking well.
And as aerospace recover we expect this division to consistently generate adjusted EBITDA margins of 20% or better.
Add in the last five years prior to 2020, we will continue to grow this division organically and through targeted bolt on acquisitions, we expect typical fourth quarter seasonal slowdown and earnings to be rather muted. This year due to a combination of sales order backlog caused by challenged global supply chains.
And forthcoming increases in prices as a result, we expect fourth quarter adjusted EBITDA to be between $47 million and $54 million.
Moving to slide number six.
Our textile effects division reported adjusted EBITDA of $21 million for the third quarter total total volumes in this division are now back to pre.
Pre pandemic levels, driven by its specialty volumes, which are up 8% compared to the third quarter of 2019.
Our specialty products are winning market share as our customers as well as global brands and retailers look for ways to reduce waste and increased transparency in the supply chain as each groups make more meaningful commitments to improve their environmental and social footprint, we would expect to see our.
Leading specialty and sustained sustainability products continue to grow looking.
Looking towards the fourth quarter, we continue to watch for increased restrictions and our core Asian markets and disruptions in the global textile supply chain.
In addition, we are raising prices to help offset rising raw materials and supply chain costs.
Nevertheless, we expect adjusted EBITDA to increase year over year and to be in the $20 million to $22 million range.
For some concluding remarks, I would like to turn a few minutes over to Phil Let's start Chief Financial Officer.
Thank you Peter turning to slide seven.
We are pleased to see a continuation of a strong recovery in earnings adjusted EBITDA for the quarter was $371 million.
Adjusted EBITDA increased by $183 million year over year.
By $37 million or 11% quarter over quarter.
We're particularly pleased with a continuation of the strong adjusted EBITDA margins and our performance products Division.
Investing organic growth capital into this division with a determination of maintaining adjusted EBITA margins above 20%.
Overall, our volumes grew by 8% with recovery across the majority of our businesses since 2020.
Gross profit margin improved substantially over the prior year period, despite the increases in raw materials.
Year increases, which continue into the fourth quarter.
Energy costs, driven by natural gas rise around the world.
Since 2017, we have divested approximately 40% of our product portfolio with one of our primary objectives to deliver more stable earnings and we have in the past.
Our adjusted EBITDA margin was 16% for the third quarter and we have now delivered three consecutive quarters of margins of 16% to 17%.
We remain focused on improving our adjusted EBITA margin beyond these levels.
Let's turn to slide eight.
A reminder, that we have an ongoing acquisition synergy and cost optimization program, which we began in 2020.
We expect to have delivered approximately $90 million by the end of 2021 of which half is SG&A.
We initially targeted $120 million of total improvements by 2023.
Now expect to deliver approximately $135 million of which $60 million in SG&A and the remainder is improvement to gross profit.
We remain focused on controlling SG&A since 2019, we have offset increased SG&A from bolt on acquisitions with our cost savings initiatives those acquisitions combined with overall improved business performance I have increased our topline revenue driven SG&A as a percentage of sales to <unk>.
Below 9% in the third quarter.
Turning to slide nine cash.
Cash flow from operating activities was $186 million for the quarter with free cash flow at $110 million as we continued with our Geismar MDI split for investments.
We expect to spend approximately $350 million in 2021 on capital expenditures with reduced spending in 2022 as the splitter project rolls off on the new performance products projects ramp up.
Primary working capital has risen substantially during the course of the year from the low point of 2020 as the business has recovered.
We continued to control our working capital in this inflationary environment with our working capital to sales levels at the end of quarter three below the same time periods 2018 2019.
The amount of inventory, we hold on our balance sheet declined versus the second quarter, while our accounts receivable balance trended significantly higher as we increased average selling prices forever.
We now expect free cash flow for the full year to be between $250 million to $275 million or approximately 20% free cash flow to EBITDA conversion due to working capital headwinds.
With lower working capital inflation in 2022, combined with lower capital expenditures earnings lower turnaround cash costs, we remain confident in our target of 40% free cash flow to EBITDA conversion next year.
Our adjusted effective tax rate for the quarter was 15%.
During this quarter, we were able to increase sales and use tax benefits associated with providing exports of goods and services as a one time opportunity.
Our expected long term tax rate under current tax law remains between 22% to 24%.
Regarding capital allocation.
In the two years prior to the global pandemic Huntsman returned approximately 7% per annum of our market capitalization to shareholders comparable to peers in the industry through a balanced approach to dividends and share repurchases.
We then placed our share repurchase program on hold during the depths of the pandemic.
Earlier this year, we increased our dividend by 15% and we indicated on our second quarter earnings call, but we would restart our share repurchase program in the second half of this year.
During the third quarter, we repurchased approximately $102 million of shares at an average share price of $25 64.
With those purchases occurring during August and the first three weeks of September.
We have approximately $318 million remaining on our current board authorized share repurchase program of $1 billion.
We remain intensely focused on a disciplined and balanced approach to allocating capital to maintain our investment grade balance sheet invest in attractive organic and inorganic growth opportunities and return capital to our shareholders, including through share repurchases.
Peter back to you. Thank you Phil given that our Investor day is a little over a week away I'll limit my comments. This morning until a time when my team and I intend to share a more fulsome vision of the business.
However, this past quarter marks a significant achievement.
And then our strongest quarter on record still has room for improvement. So we further cut cost complete our MDI splitter CD aerospace recovery continue anticipate new capacities of specialty products and push through price increases over 40% of our EBITDA came from non polyurethane.
<unk> earnings marking significant balance.
We also purchased just over $100 million.
This past quarter of our stock our board upon reviewing our projected earnings and cash generation has decided to resume a share buyback program that will include a quarterly buyback that at a minimum should approximate our quarterly dividend.
As we look into the fourth quarter, we should expect some seasonality raw materials headwind and logistics challenges.
It should be largely offset by aggressive price increases operating excellence and a continued focus on cost reductions.
We expect our fourth quarter EBITDA to be.
To be between 320 and $355 million.
On another front, we began reporting in 2017 on the significant lawsuit we filed at that time against Rockwood and Albemarle after discovering that rockwood had committed fraud and breach contractual obligations owed us under an agreement to purchase Rockwood Tio teal colored pigments business in 2013.
<unk>.
After we closed on the transaction the following year Albemarle merged with Rockwood when it purchased the stock at the remaining Rockwood businesses we.
We sued Rockwood and Albemarle is rockwood successor, after discovering that when we were negotiating the deal Rockwood misled us about the viability of the key color pigments manufacturing technology it was selling.
We are between the case for two weeks in May of this year had closing arguments in July and yesterday afternoon. I'm pleased to report the panel of three former Federal Court judges unanimously ruled in our favor road detailed opinion rewarded us in excess of $600 million in damages, which.
We will net of which we will net approximately $400 million after fees and before taxes.
We are now beginning the process of having the panels award confirmed in the New York State Supreme Court. This process, which will also include any appeal by Albemarle will take at least several months, we are confident panel's ruling and damages awarded will be upheld.
Thank the court will be hesitant to disturb an arbitration award rendered in these circumstances, especially after the American Arbitration Association held numerous hearings supervised months of far reaching discovery conducted extensive motion practices and held a two week trial with live witnesses before.
<unk> distinguished former federal trial judges.
Quick one and Allison tried the case for US David strike, our general counsel at a full fully engaged team of in house lawyers are long time Board member when we own yourself with distinguished trial lawyer was actively involved in the case route consistent with our approach on major legal matters going back to the Apollo litigation.
Lastly, without the support unity and integrity of our association of our associates and engaged board of directors. We would not have won this award. Thank you very much and with that.
Operator, we will turn the.
We'll open the line for any questions.
Thank you, ladies and gentlemen, we will now be conducting our question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue. You 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.
Yes.
Our first question is coming from the line of Frank Mitsch with Fermium Research. Please proceed with your question.
Good morning, all and congrats on the quarter and Peter.
Congrats on the Albemarle lawsuit.
I remember reading the complaint four and a half years ago. When I was thinking Wow Albemarle is indeed due to win and then Wayne Kirkland and Ellis to kind of the case on a contingency basis not like well yes.
It's just a matter of time, so really happy about it.
Finally played out.
You mentioned that you mentioned that they are going to make an appeal, which you know on an arbitration process seems a little bit confusing, but regardless that will take several months you said that.
In the release I think you said there is a 9%.
Interest fee does that does that continue on.
These results and actually there were other individuals that were named in the lawsuit.
What what transpired there.
And I guess.
Given this windfall how should investors think about the cash that you're going to get in.
Well I think that.
Frank Thanks for the question I Hope I can remember the details of it.
And I commend you I think you were one of the few and certainly one of the earliest that wrote about.
The lawsuit back in 2016.
Yes.
Appeal.
I do not know what Albemarle will do thats their decision to appeal Im assuming good if they do it will certainly just add a few more months.
But my understanding again I'm not a lawyer do not profess to be awarded even have a cursory knowledge of law, but my understanding is that.
The bar for appeal the appealing in arbitration is higher than that of a typical courtroom.
Court proceedings so.
Again.
That's up to them to determine how they would like to handle this.
The motions in the filings.
Renderings of the judges will.
We made public on Monday.
As we file it thereabouts.
As we file our case and.
We will.
Seen that most all of that will be public at that time, and the 9% interest yes that is ongoing and that will be calculated after the judgment, it's been rendered which at half.
That will be calculated on a 9% on an ongoing basis just as it has.
In the past and Thats I believe that New York State.
Wasted that is set.
That doesn't change that's not something that you argue or appeal.
<unk>.
Yes, as far as the individuals who are concerned.
Leave that to whatever the panel had to say.
About that.
So yes as far as the usage of the funds, we would we expect to be more aggressive than we have been in the past.
About deploying capital and to what.
<unk> in which we can.
The value of our stock and that will be through acquisitions.
When I talk about acquisitions that also includes the acquiring of our own stock.
I hope that it was recognized in my comments, we will be it is our intention at this time barring a major acquisition or something.
Perhaps slow that down we would intend on an ongoing basis to at a minimum be purchasing.
Back our stock at a rate of about $40 million a quarter in some quarters.
<unk> said as we did this past quarter, we'll do significantly more than that but probably should be the expectations that on an annualized basis that we wanted to be able to match ours.
Our dividend that we pay out to shareholders and the amount that we buy in stock.
Pretty much match each other.
Thank you. Our next question is coming from the line of Bob <unk> with Goldman Sachs. Please proceed with your question.
Thank you good morning, Peter I wanted to ask you about your comments on the polyurethane division and the the journey <unk> been on the high grade.
Whitfield culminate shortly with the splitter project.
Do you anticipate as the vision there that your margins will actually increase or relative.
Relative to this sort of mid to upper teens channel you've been as you displace some of the commodity sales, which obviously can have very very good margins at times is it more of an out come that youll have a more stable margin structure and polyurethane.
Yes.
Certainly would assume that on an ongoing.
<unk> worried about an 18% margin today.
On the total polyurethane basis between.
Further cost consolidation operating consolidation and upgrading of the materials. We believe that that should have an average EBITDA going forward of about 20%. We are hoping to get at least 200 basis points and a lot of that needs to be on things that we control yield you'll remember or notices.
Recently, we've shut down one or two of our system houses, we have been able to consolidate some of those operations. We're not abandoning any of those customers are any of those those product lines as much as we're consolidating into our system houses, which in the past I'm focused on two or three.
Product applications and today are focusing on five and six product applications as we further expand our spray foam business in Europe I don't think that this will require any further investment in new locations. We will do this out of existing system houses and will continue to grow the business downstream without.
A great deal of capital investment, we will see an opportunity I think to further consolidate costs and.
To further move this business, obviously, one of the areas I would just note.
I wouldn't say frustration, but I hope of recognition from our investors is that when you do these sort of transformation you may see investment upfront and splitting you made the investment upfront in your capacities.
And your R&D and your route to market and your specialty products and then you go out and you sell loans you market those and those can take in many.
And many applications can take anywhere from six to 18 months to be able to get approval for fire retardant materials or automotive or aerospace applications adhesives coatings and so forth. So it's not just simply a question that we're going to be taking polymeric and shifting it over to differentiated and we will see that take place over the course of the next.
Quarter. Two this is something that's usually a 12 to 18 months sort of a transition as you build up capacity and capability and then you transfer products to qualifications and then eventually.
To move the volume there, but I think we're well down that road and we also see the benefits of that certainly throughout 2022, and so we'll certainly be giving more information about this next week at our Investor day.
Thank you. Our next question is coming from the line of Mike Sison with Wells Fargo. Please proceed with your question.
Hey, good morning, nice quarter guys.
Peter I think you mentioned in the opening remarks at the goal is to get to 20% EBITDA margins and I suspect, we'll get a lot of that next week, but just.
Just curious what were what do you think the opportunity is to continue to improve margin over the next couple of years and maybe some timing on that that potential.
Well I think that as we.
I'm not sure that I said, 20%.
Mind getting there as quickly as possible I think at this point, we've said the high teens, which I certainly would define as being that 18 19.
<unk> as a company one of the.
The slides and one of the presentation I'll be making investor day.
We will be the projects that we have in order to get us there.
And so again, it's a bit of a preview of that I think a lot of that is an opportunity around a number of different facets. Most of those things I see them is in our control as we look at things like the continued recovery of the aerospace business that will probably be coming back here over the course of the next 18 months to two.
Four months $50 million.
So off of just profitability to get us back to where we were on a pre pandemic basis again that subject to the growth of the aerospace industry and the recovery of wide body planes.
Necessarily somebody of our doing but those are contracts, where we're locked in we already have 85 plus percent of markets and many of those applications. We wanted to keep that so we look at the capital projects that we have in our performance products around.
Electrolyte car batteries ultra pure means.
And so forth we look at the splitting project that we'll be getting into more information. This next week coming on the second quarter and we look at continued bolt ons and then also as we look at the wide range of comp cost optimization, that's just not cutting SG&A, but it's cutting.
Our direct and indirect costs, it's focusing on our supply chain on our purchasing and so forth and right now we publicly have talked about $140 million target and that target will certainly be.
<unk> increasing.
As we have an opportunity to discuss that more fulsome way. So as we look at each one of those adding anywhere from 40 to 50 basis points of additional margin I think that when you add that to whats been our traditional run rate margin.
Seek that 16% or so.
I am very confident that over the course of the next 12 to 18 months.
That will be able to accomplish that and youll see that that will add up to some 300 350 basis points of improvement.
Yes.
Thank you. Our next question is coming from Hassan Ahmed with Alembic Global. Please proceed with your question.
Good morning, Peter.
Peter just obviously Q3 with hurricane Ida supply chain constraints and the like was a bit of a tricky quarter.
But just looking at the volume growth.
Particularly within polyurethane I mean sequentially up 10%.
Clearly clearly very impressive so if you could just.
Would love to hear your views on how we should think about volume growth, particularly as one starts thinking about 2022 I mean, we all know that this is an industry that typically gross volumes at call it 5% 6%.
But I mean are we going to see some sort of major restocking exercise I mean, how youre thinking about volume growth.
In 2002.
Yes, I think that it's on.
It's an excellent question one that we grapple with I mean, when I look at polyurethane.
In the third quarter were essentially sold out we're producing as much as we can we're selling as much as we can we saw an increase in that volume in the third quarter over second quarter, largely because of the Rotterdam.
The turnaround that we had that had.
That facility down for a little bit longer than we had.
But I think again as.
I just personally I'm not a believer that we ought to be investing capital to expand revenue and then expand tonnage for the sake of expanding tonnage.
Much rather see us deploy that capital and take the least profitable and of our businesses and figure out how we can upgrade and how we can make a higher margin product across the board.
So I think that whilst the industry is going to be growing MD items, you'll be growing at five or 6% globally.
I don't have a problem with us being essentially sold out we're obviously going to have some incremental bottleneck debottleneck projects that will come along of low single digit sort of growth rates.
Reliability projects and so forth, but we're going to be far more focused on how we increase.
The margin on the volume that we have we have plenty of MDI I think in the world, we need to have better Huntsman I'm not talking about the industry Huntsman These better MDI better margins lower cost and.
And be able to take what is already a great business and make it even better.
Thank you. Our next question is coming from the line of David Begleiter with Deutsche Bank. Please proceed with your question.
Thank you Peter performance products has had a very good.
2021, and a good back half of the year.
How are you thinking about the.
Sustainability of these numbers were more normalized earnings power of this business heading into next year.
Yes, I think yes.
Yes.
These products and the applications that we've gotten into.
I hope that we've been clear in what the transformation that we've seen in that industry when youre operating facilities, such as those that we sold to enter Rama.
Capacity important agents that we sold to them I think it was somewhere around 1 billion and a half pound.
And you have and that's not including the MTBE facility, including the Eo EG ethylene capacities and so forth propylene capacity you have.
More importantly than focusing on the value per pound, though youre always looking at that you got to keep those plants running you've got to keep them running at capacity. So year end markets, obviously are going to be more commoditized. It can be larger volume.
Customers and as we look at where we are today.
We've sought after and we've been able to win a lot of niche businesses in such as our polyurethane catalyst Thats just not our polyurethane counts, but also that of others.
As we look at the wind industry in the coatings industry and the fuel and lubricant additives business with <unk> of natural gas production and so forth going into the Malaysian high dry going into <unk> and the integration into.
Into those areas.
We've been able to take this business and focus less on commodity less on the commodity side more on the specialty side and I think it's really paying us very handsomely.
I think that as raw materials are probably going to be plateauing, peaking in <unk> here in the next two quarters or so our opportunity in this business is going to be able to.
To hang on to be the gains that we've made we've got to continue to stay focused on our commercial excellence programs and pricing and as those raw material prices come down over the course of the next year or perhaps over the next 12 to 18 months, we've got an opportunity not just to maintain these margins, but in some cases hopefully strengthen the margins.
Hopefully the raw materials aren't going to crash, because there's a recession, but if a moderate back to more normalized basis of a crude oil that's around $40 50, instead of 70 to $80 a barrel.
I think in this business not only will it.
We maintain this sort of level of performance.
But we might have an opportunity over the course of the next year or two to continue to strengthen it. So we're very bullish on our performance products, we like where its going we like the investments that we're making in this area and its going to continue to be one of one of our marquee businesses.
Our next question comes from the line of Kevin Mccarthy with vertical Research partners. Please proceed with your question.
Yes, good morning.
Peter I was intrigued by the comments you made in your prepared remarks about greater focus on value versus volume in the performance products segment.
Yes sort of zoom out the lens and look at the margin profile. There, it's improved quite dramatically and so given the changes that you just talked about with <unk>.
Divesting, the <unk> assets and managing the business differently.
Do you think that there's opportunity for EBITDA margins that would remain above 20% sustainably in other words similar to the advanced materials segment margin profile.
Or do you think theres too much cyclicality to endorse that.
Just to follow up on David's question, how would you.
Suggest we think about the median medium term margin profile and the trajectory and performance products.
Yes, I would think that that business ought to remain a 20%.
Plus sort of a business there is going to be.
Some cyclicality there as in any business, but I think as you look across.
The board.
We have an opportunity here the week after next to be able to convince you of this and the new products new applications.
We're getting into an.
<unk>.
Hugely bullish on our performance products and there's a reason why we kept the assets that we did and we think there's a great future in these businesses, we think that the.
The earnings that we see today.
But by and large are sustainable.
Thank you. Our next question is coming from the line of Matthew Deyoe with Bank of America. Please proceed with your question.
Okay.
Thanks.
So if we rewind back to <unk> the discussion around polyurethane business was that there was some degree of over earning.
Since then prices continue to move higher obviously theres been a lot of outages, but when one of your larger competitors tried to dispel any notion that MDI and polyurethane some commodity base.
Earning at the moment, so like what what's your opinion on this hasn't changed at all.
What do you think the most likely direction for MDI profitability is over the next 12 months.
I think I don't think right now the MDI markets are over earning.
I think that is it.
Industry demand I think is pretty balanced right now and.
Yes.
As you look right now.
Industry feels like it's around the mid eighties utilization in Europe, probably a 110, 120% utilization in Americas, taking some imports.
Asia is probably a little bit less in Europe.
I think that we.
<unk>.
Yeah I think.
We're doing about where we ought to be doing in MDI right now.
Thank you. Our next question is coming from the line of Mike Harrison with Seaport Research Partners. Please proceed with your question.
Hi, good morning.
I was wondering Peter if you can comment on where polyurethane inventory levels are right now in terms of volumes compared to the normal for this time of year.
We think about.
Coming recovery in the supply chain in construction and the seasonal build there.
You have some additional inventory that you would typically build into that spring season, and then maybe also talk about what that means for plant utilization does that mean that youre going to be running your plants harder than you typically would in Q4, and Q1, and we could potentially see some better utilization and better margins.
From those facilities in the next couple of quarters. Thanks.
Very very good question.
Again.
Resident to talk.
Where our competitors might be merely because I have the following side dish, where they are and.
Well I won't comment any more on competitors.
Tony do you want to comment on where you see inventories right now on potential build yes. Thanks Peter.
To levels now.
Edwin.
So yes it was.
We see demand continuing to be very strong, particularly in North America.
And you know that the strip the supply chain the regional balance is there.
Even there.
I don't think our customers are running low energies as well they are struggling to get key components needed to navies formulations.
And I think we're going to see very strong utilization rates of the plants with flathead.
We can't run those harder than we're getting at the moment anyway. So I didn't say that balances in Q4 in Q1 in that respect we're running as hard as we can particularly to manufacture the downstream products and in fact, we feel still in Hudson <unk> solutions with an eight week backlog at all of this so we can sell every molecule we can make.
I think that bodes well.
Industry utilization rates.
I see that continuing well into 2022, so yes inventory is low and we need everything we can make.
Tony Thanks.
Thank you. Our next question is coming from the line of John Roberts with UBS. Please proceed with your question.
Thank you on Huntsman building solutions, when you talk about margins approaching 20% EBITDA margins approaching 20% is that wood market based MDI and propylene oxide just remind me do you have an advantaged propylene oxide cost in that business.
I assume youre using market based MDI.
John Hi, it's well integrated margin strategically our focus is on upgrading the quality of <unk>.
Margins overall, and we make decisions I would say overall supply chain team looking at where we direct those molecules and we look at integrated margins.
And how we think about polymeric downstream into.
Into our into our HTS business.
For the.
For the supply chain.
So I'll just add to that and we do have an advantage here on <unk>, because as we grow that business, particularly the closer we certainly think poly ask the folio rather in Khalifa, which comes from <unk> <unk>.
Our recycled thoughtfully create title and then we do have a cost advantage and we see that end of the market growing very.
Rapidly.
Thank you. Our next question is coming from the line of Alex Yao from off with Keybanc. Please proceed with your question.
Thank you good morning, everyone, Peter about a month ago, the company announced energy surcharges for MDI in Europe.
Have you been able to fully implement any of this with what's been the market reaction.
Well this will shock and that our customers are less than excited about this but it's something that we're pushing through.
As we speak and as we're in a number of very sensitive negotiations.
With others.
Hi.
I really don't want to speculate one of the reasons why we gave a rather wide range in the fourth quarter.
On our EBITDA is because there is some uncertainty as to the outcome of all of these I think we'll get some of them.
And right now.
I don't want to speculate on all of them, but we're pushing we're pushing very hard.
Yes.
We are telling our customers.
Incredibly short sighted and bad energy policy in Europe is not of our making and the volatility of these prices and costs are not of our making.
And they really need to.
I've spoken with scores and hundreds of our customers around the world they've got to push these things through and people have to see the consequences of decisions and.
Huntsman is not going to be the shock absorber between energy.
Policy Bad energy policy and.
And the consumer so I feel very passionate about this.
That we're going to push even if we lose some volume.
We're going to continue to push.
As far as our competition I can't speculate what theyre doing if they're doing it through price increases or surcharges or whatever but.
Again.
So much I think one of the great criticism of this industry as well.
The lead times I think we can be lazy and even with <unk>. When it comes to these sort of issues and just figure that theyre going to go away in a quarter or two and we'll just absorb it and I don't think that's fair to shareholders.
Pat.
Have that take place.
Thank you. Our next question is coming from the line of Angel Castillo with Morgan Stanley. Please proceed with your question.
Hi, good morning, and thanks for taking my question.
Just curious on the Asian market competitive environment, just if you could give us a little bit more color as to what you're seeing both from a demand perspective.
That uncertainty.
Changes that have been taken place, but also from the perspective of.
Competitive that added capacity or external capacity earlier this year.
<unk> seen the market absorbed that and I was kind of at a good balanced level in that region and how we're seeing it progress.
I'll, let Tony comment on the polyurethane side of that I would just remind.
All of you that as we look at at the edge.
If you look at the Asian market very similar to Europe, very similar to North America, we're probably about 95%.
Self supplied within that region.
And yes, we do have some logistics backlogs and we I would say that we're probably in the low tens of millions of dollars, particularly in some of our specialty products and advanced materials and in performance products and Tony mentioned, some of our blowing agents and so forth.
Our spray foam business, where we are getting hit with.
Some of the.
The backlogs and so forth.
The ports, but by and large as we look at our Asian market, we produce a product between China, and Singapore, and Thailand and other locations.
And we supply within that region.
And so as we look at it from a macro basis.
It looks it looks it looks quite solid in a slow and steady recovery Tony you want to comment on MDI in Asia, Yes.
And particularly in China, I would say a balanced situation with the dual control policy clearly having any effect in.
Certain provinces, so the way to look at that is geographically.
<unk>, new Fujian and Guangdong has slowed down because of.
In position for that given that it is dual control energy policies and thats affected demand in those regions, particularly in things like appliances and footwear.
Tend to be concentrated in those provinces, but that's been offset by outages in quarter four.
<unk> got a significant turnaround so the way that I look at this and I think the market is going to slow down between five and 10% in Q4 because of their tool control, but that will be balanced by the capacity coming out for turnaround So I'd say.
Balanced situation going into quarter, four and I think that prices remain pretty steady around sale of SaaS via term so.
That's the question balanced conditions in China right.
Thank you. Our next question is coming from the line of Laurence Alexander with Jefferies. Please proceed with your question.
Thank you for fitting me in this is Dan Rizzo on for Laurence.
You mentioned before changing portfolio and doing some bottom slicing I was just wondering where you still are looking at kind of divesting or just final question within your own portfolio.
Well.
I'm not I'm not sure now is the appropriate time for us to identify particular assets that we would be.
We would be looking to sell off but.
We are very serious about improving the margin of this business in the last few years we've sold.
40% of our company, we've repurchased in other assets equivalent to about 15%, 20% of our business and we're transforming we're transforming the entire portfolio and as you do that.
That means you're shifting your costs around you're cutting your cost and repositioning them.
Youre looking at opportunities where to put higher value margins in materials, where you can capitalize on customer relations and so forth and so I think that as we look at the business within the transformation that is going on I see that as continuing going.
Going forward, we're going to continue to look at our assets and the value that those assets have to us and the shareholders that we represent and that they have.
Perhaps the other people and likewise, we'll continue to look outside of our company for assets that are.
That are valued I think that as we start looking.
Perhaps it.
M&A market there is a bit overheated.
I think we're starting to see a little bit of a diminishment in the value of some of the assets.
But we've been looking at but by and large.
I think asset asset prices are probably a bit inflated right now.
Thank you. Our next question is coming from the line of Matthew Blair with Tudor Pickering Holt. Please proceed with your question.
Hey, good morning, and congrats on the results I guess this might be a question fulfill but looking at the working capital headwinds. This year think about $650 million a year to date and I know, it's going to be hard to predict.
When that might reverse, but I just wanted to clarify.
You expect to fully recover those working capital headwinds.
In the future or is there a reason why you might might not recapture all of that $650 million.
Yeah. So.
So mark if you think back I mean at this time last year, we were sitting in an oil or oil environment.
Ultimately the.
Today, we are in the AAC overall.
You indicate that that's.
Let's move to up our working capital balances substantially.
The answer is as you move forward into 2020, you'll just see substantially less working capital inflation overall for us.
That's why we remain confident delivering a 40% free cash flow conversion in 'twenty. Two overall I think we said in our remarks as well if you look at our working capital and the control of our working capital as a percentage of sales, it's lower today, but it wasn't the same time points in 2018 and 2019. So we expect to continue to.
To recover those working capital amounts unless those receivables rolls through we collect on them will be improving our cash flow as we head into 2022 operated I know a number of people who are looking to move on to other calls here at the top we are why don't we take one more question and.
We'll let people.
Get back to work.
Thank you. Our final question comes from the line of Arun Viswanathan with RBC capital markets. Please proceed with your question.
Alright, Thanks for taking my question.
Given the strong free cash flow conversion here that you are expecting in 'twenty. Two we're kind of encouraged to see the resumption of the buyback plan this quarter of 100 million plus.
Do you expect that to continue again, given that the cash flow that you expect next year.
And they accelerate maybe.
Well I think that we'll see a minimum.