Q4 2021 Huntsman Corp Earnings Call
Greetings and welcome to Huntsman Corporation fourth quarter 2022 earnings Conference call.
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A question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
I would now like turn the conference or what are your host Ivan Marcuse, Vice President of Investor Relations. Thank you and what do you. So.
Thank you operator, and good morning, everyone welcome to Hudson's fourth quarter 'twenty, one earnings call joining us on the call today are Peter Huntsman, Chairman CEO and President Phil Mr Executive Vice President and CFO . This morning before the market opened we released our earnings for the fourth 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 statements and while they reflect our current expectations. They involve risks and uncertainties and are not guarantees of future performance.
You should review our filings with 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.
I'll 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'll now turn the call over to Peter Huntsman, our chairman CEO and President.
Thank you Ivan good morning, everyone and thank you for taking the time to join US, let's turn to slide number five.
<unk> EBITDA for our polyurethane division in the fourth quarter was $218 million versus $201 million, a year ago or an 8% increase.
Revenue grew 35% is our proactive selling price actions more than offset significant inflationary feedstocks and logistics cost increases our volumes improved 2% year over year, when we benefited from slightly higher equity earnings.
We saw strong demand in our North American region, with 7% growth Asian, and European volumes were essentially flat versus fourth quarter of a year ago. We are pleased to see strong pricing development in China, the world's largest MDI market as we head into the first quarter of 2022.
Our core construction markets, including installation adhesives, and coatings continued to be the strongest markets for polyurethane.
Underlying demand remained strong we continue to see excellent growth in our commercial insulation and composite wood businesses.
Our Huntsman building solution business continues to benefit from strong pent up demand and product substitution games Hbf fourth quarter revenues were 20% above the prior year and $560 million in 2021.
I would note that when we purchased each of them are <unk> and <unk> Lapolla in 2018 and 2020, the combined revenues at acquisition were approximately $400 million.
<unk> did continue to be hindered by logistics and shortages of certain raw material ingredients, which restricted growth.
Log for our order book remains very strong we're implementing price increases that are more than offsetting higher cost and resulting in increased margins.
Further our efforts to expand internationally continues to gain momentum we remain very positive about this platform and we will look to add to what through bolt on acquisitions and organic investments when feasible.
Our last summer's platform, which continues which includes our global footwear business is another core growth platforms all of your <unk>.
Revenues overall grew by 33% versus fourth quarter of 2020.
Demand is strong and the industrial markets and this platform is implementing price increases globally to offset the headwinds of raw material supply chain cost that are pressuring margins.
During the quarter, our volumes and our automotive platform continued to be impacted by the well publicized global chip shortages.
The improving trends as we moved through the quarter as the year over year volumes declined in each month.
Each in each month move from high teens to low single digit declines overall revenues increased in 2021 by 24% to over $550 million.
Our automotive platform as the core business, we will continue to invest in bringing innovative solutions to our customers.
We discussed in detail at our recent Investor day, a key goal of our polyurethane business is to upgrade the quality of our portfolio and continuing to push molecules downstream, we will keep redirecting more of our plant's output to our differentiated businesses and bottom slicing lower margin component business.
We will invest in our downstream businesses organically, where it makes sense with bolt on acquisitions, where we can generate a higher and more stable margins through long term contracts in our component businesses. We are also doing this.
Our MDI splitter investment in Geismar, Louisiana, which is consistent with our strategy, helping us to drive our downstream growth and increasing overall margins. This project will be mechanically complete in April we will have commercial beneficial operations towards the end of the second quarter of 2022, we will.
Main confident that once fully operational and selling at capacity. This investment will contribute $45 million in incremental adjusted EBITDA on an annualized basis by the end of 2023.
We expect $10 million to $15 million of incremental EBITDA in the second half of this year.
Our <unk> joint venture with Sinopec in China.
We own a 49% interest benefited from a strong 2021, where it contributed approximately $130 million in equity earnings for the year, including $22 million in the fourth quarter we.
We expect equity earnings to be approximately $50 million lower in 2022 as propylene oxide margins in China normalize. So we're looking to the first quarter 2022, we foresee global demand remaining on track in our three core markets North America, Europe and <unk>.
Kinda.
Globally, we have offset over $300 million.
Raw material pricing headwinds.
Area of greatest impact is Europe at $140 million with higher gas and electricity prices being the largest driver for this increase.
Rather than waiting for this to pass we've initiated multiple steps to offset this impact first on September 22nd we announced in Europe 125 Euro per ton surcharge on our MDI to offset rising energy costs. We have continued to adjust this as needed.
Secondly, we have moved nearly 90% of our pricing contracts to be settled on a monthly basis previous to this action about 20% of our volume was settled monthly while the remainder was settled quarterly this move will give us better flexibility to react to changing market conditions third.
We've accelerated our efforts to optimize our cost structure during our Investor day, we announced that we would complete our initial $40 million cost reduction program by mid 2022.
I have reached that target ahead of schedule and we and we build our Mab achievement.
We focus on our previously announced $60 million cost optimization program.
Fourth as part of our $60 million cost optimization program, we will be moving tons tonnage to more differentiated markets, where we can achieve higher margins.
We stated last year, our focus is to increase the margin per pound on our nearly 3 billion pounds of MDI not to invest in more tonnage at any price throughout.
Throughout 2022, we will be exiting lower margin markets and will either increase margins or divert tonnage to our core markets in North America, Europe and China.
Rather than waiting for markets to return to more normalized conditions, we intend to emerge from this period of higher raw materials and supply chain disruptions stronger than when we entered it.
Looking into the first quarter, despite approximately $20 million of lower equity earnings and <unk> significantly higher feedstock costs and a year ago.
Would expect our polyurethane first quarter adjusted EBITDA to be strong at between 202 hundred $20 million of adjusted EBITDA.
Turning to slide six.
The performance products segments reported adjustment EBITDA of $105 million for the fourth quarter, which was modestly above the high end of our expectation and accompanied by strong adjusted EBITDA margins. We continue to see the benefits of our commercial excellence programs, including pricing mission.
Good cost control, which more than offset higher raw material cost and supply chain headwinds vol.
Volumes increased 3% versus the prior year period. This increase understates the true underlying demand as we exited some noncore low margin business during 2021, which impacted volumes in the quarter by roughly 3%.
Demand fundamentals in coatings, and adhesives, construction wind and clean energy fuel and lube additives.
And other industrial markets are benefiting both our means and Blake and hydride businesses.
So we described in detail at our Investor Day. This business is benefiting from several positive factors that we expect will continue to keep EBITDA margins in excess of 20% for the foreseeable future.
First an increased focus on the remaining business and a value over volume strategy since the sale of our commercial intermediates business continues to benefit this business.
Throughout all of our divisions were focused on value over volume.
Performance products is no different.
Secondly, we are making good progress pushing volume into higher value and more demanding end use applications and customers.
<unk> demand is demonstrate has been demonstrated by our sales volume and selling prices that have been consistently strong.
The three performance products capital project, we announced during 2021 and polyurethane catalyst.
And chemical serving to EV and semiconductor markets in North America, and Europe continued to move forward. We expect all of these projects to contribute to results in 2023 deliver more than 20 deliver more than $35 million of EBITDA in 2024.
So we have said several times in the past we would be highly interested in doing bolt on acquisitions in performance products, but these opportunities tend to be few and far between the opportunities that have come up recently has ultimately traded hands multiples above our required hurdle rates, we will continue to assess bolt ons.
Targets, but we will also continue to remain very disciplined with our capital.
We expect the improvements in profitability and earnings momentum that we saw in performance products. During 2021 to continue into 2022 and beyond the.
The first quarter tends to be a seasonally stronger quarter when compared to the fourth as a result, we currently expect performance products to report a first quarter adjusted EBITDA of $115 million to $120 million.
Let's turn to slide number seven.
<unk> materials report adjusted EBITDA of $54 million in the quarter significantly above last year's fourth quarter, and the best fourth quarter ever despite an aerospace market, which is still some time away from a full recovery.
Typically the fourth quarter is a seasonally weaker quarter, however, positive momentum in our sales and pricing actions continued into the fourth quarter across our specialty portfolio.
As we discussed throughout 2021, our core aerospace business continued to show year over year growth with modest improvements in commercial production rates.
We estimate that our aerospace EBITDA is approximately $45 million below pre pandemic levels and.
In addition, we continue to increase prices across our portfolio in response to raw material and logistics cost inflation.
These pricing actions have positive have positioned us well for improved margins in the first quarter of 2022.
Our recent acquisitions of CVC and Gabriel helped to drive our record results in the quarter and the integration of these businesses remain well on track to do.
Date, we've achieved $12 million in synergies and we're confident that another $11 million will be achieved by 2023.
Underlying demand for the advanced materials position is tracking well and as aerospace recover.
We expect this division to consistently generate additional EBITDA margins of 20% or better we will continue to grow this division organically and through targeted bolt on acquisitions.
We expect the momentum with which we exited the fourth quarter to continue into the first quarter. The combination of improved automotive and aerospace demand synergies and improved margins will drive year over year growth. As a result, we expect first quarter adjusted EBITDA to be between 58 and 62 million.
Yeah.
Which is an impressive 36% year over year improvement at the midpoint of this guidance.
Let's move to slide number eight.
Our performance excuse me, our textile effects Division reported an adjusted EBITDA of $22 million for the fourth quarter, which represents a 22% improvement versus the year ago period overall volumes declined 7% in the quarter as we deselected lower margin noncore.
<unk> and increased our focus on growing the sustainable and specialty and of our business.
Volumes in our sustainability based products grew 22% year over year or.
Our margins also benefited from this portfolio shift and pricing adjustments to offset higher raw materials and logistics costs are.
Our specialty products are gaining market share as our customers as well as global brands and retailers look for ways to reduce weight waist.
Waste and increased transparency in their supply chain.
As these groups make more meaningful commitments to improve their environmental and social footprint, we would expect to see our leading specialty and sustainability products continue to grow.
We remain positive on the long term prospects of this business and are confident that EBITDA will continue to improve looking forward. The first quarter. We have a very strong order book and expect to see solid improvements versus the prior year, we expect adjusted EBITDA in the first quarter to be in the range of 26 to 28.
Yeah.
I'll now turn a few minutes over to our Chief Financial Officer, Phil Lester.
Phil.
Peter turning to slide nine.
Our fourth quarter, adjusted EBITDA improved $109 million or <unk>, 45% compared to the fourth quarter of 2020.
Our adjusted EBITA margin was 15% for quarter, four and 16% for the full year <unk> at our Investor day.
Each of our divisions increased adjusted EBITDA compared to a year ago with our performance products division delivering the largest game.
As Peter indicated we expect our performance products margins to be in excess of 20% for the foreseeable future. Following another strong performance in quarter four at 26%.
Our total company year on year improvement in adjusted EBITA was driven by gross profit expansion as price increases more than offset over $400 million in feedstock and logistics cost headwinds.
Sequentially since quarter, three we were also able to more than offset over $100 million and cost inflation with further price increases.
Let's turn to slide 10.
Our cost optimization and synergy plans remain on track.
We highlighted in November we increased our target from $140 million to $240 million with full run rate to be achieved by the end of 2023.
We delivered approximately $100 million of benefits in 2021 impacting both gross profit and SG&A and we exited with an annualized run rate of approximately $120 million.
In an inflationary environment. It is critical that we continue to deliver on our program and drive improved margins.
As we said at our Investor Day, we will manage this preferred or expansion of our functional global business services model.
Fly chain optimization, and as Peter highlighted improving polyurethane margins with an additional $60 million.
Improvement target.
Regarding SG&A, which includes divisional functional and corporate costs, we closed the year at 10% SG&A to sales equal to the number we had guided at Investor day, and we expect that number to decline towards 9% through 2023, as we deliver upon our cost program.
I would note that our textile effects division requires the highest SG&A to sales ratio.
Excluding <unk>, we would expect to ratio closer to 8%. Once we are complete with our cost optimization program.
Turning to slide 11.
Net cash provided by operating activities in quarter, four was $790 million with free cash flow of $698 million.
After deducting $92 million of capital expenditures, which includes our geismar supports the investment.
Free cash flow for the quarter included approximately $343 million of cash related to the Albemarle settlement.
Excluding this benefit our full year free cash flow was $281 million.
Slightly above the guidance range of $250 million to $275 million.
We provided on our quarter three earnings call.
In the bottom left of slide 11, we show a breakdown of the accounting for the Albemarle supplement or.
Our expected cash benefit net of legal fees and taxes, it's $410 million three.
$333 million received in quarter, four 2021 with the remainder to be received in quarter two of 2022.
All of the legal fees and taxes associated with the settlement are expected to be paid in Q2 of 2022.
We closed the year with a strong and flexible balance sheet with $2 $5 billion of liquidity, which allows for our continued balanced approach to capital allocation.
We returned just over $200 million to shareholders through share repurchases in the second half of 2021, including $101 million in the fourth quarter at an average price of $32 76.
Our adjusted effective tax rate was 19% in quarter, four and with an expected reduction in our Chinese propylene oxide joint venture equity earnings and onetime tax benefits in 2021, our 2022 expected adjusted effective tax rate is in the range of 22.
24%.
Moving forward in 2022, as we said at our Investor Day, we expect the free cash flow to adjusted EBITDA conversion, excluding net cash from the Albemarle settlement to be above 40%.
We will see a seasonal cash outflow in quarter, one with cash inflows throughout the remainder of the year, leading to a much stronger operating and free cash flow performance in 2022.
<unk> for 2021 Peter.
Peter back to you. Thank you Phil I am pleased with the results of this past year 2020 was a year, where most companies were looking to survive because of an investment grade balance sheet and the leaner and stronger portfolio. We were able to further strengthen our company by the time. We started 2021, we're more than ready to continue to move forward to accomplish.
With this present portfolio of assets the best year in our history now it is time to focus on 2022, a year that looks to be better than the year. We just completed as we stated at our Investor day presentation, we expect our businesses to earn approximately $1 4 billion in 2022.
<unk>.
As we sit here today with the results of January in hand, we believe this number is on the low end of our expectations again subject to macroeconomic and geopolitical conditions through our pricing and cost actions, we see clear adjusted EBITDA margins improvements at the start of the current tier.
Our biggest challenge that we see then the volatile and high prices, we see for energy and certain raw materials as we move closer to the end of the first quarter, we should have better clarity and may provide further updates to the market conditions as to the conditions that we're experiencing we.
The global supply chains will be sorted out during 2022.
There are some obvious structural issues around energy, especially in Europe .
Despite these headwinds we feel these will be offset by a combination of pricing discipline higher margins as we continue to focus on downstream products aerospace recovery and continued cost discipline.
Announced at our Investor day, all of our corporate officers, including our top <unk> managers are aligned not just to deliver improved results in 2022, but continued improvement in 2023 as well we reported this past quarter approximately $100 million of share buybacks.
The continuation with the collection of our proceeds from Albemarle and our improved outlook.
Would expect that our earlier commitment to accomplish our $1 billion buyback fit in.
The next three years to be accelerated and should be completed in less than two years.
We also announced an increase of <unk> <unk> per share in dividends. These are both part of our balanced allocation of capital as we remain competitive and returning value to our shareholders.
We also reaffirm our guidance of $300 million of capital expenditures. This will allow us to assure safe and reliable operations. The completion of our MDI splitter in Geismar, Louisiana, and the previously announced projects to move our means and performance products downstream.
And the catalyst EV batteries and semiconductor chips.
We reported to you at the beginning of this year our decision to explore our strategic options with our textile effects division. So I've said over the past few years. This is obviously not the first time, we viewed this option but.
But given our focus and investment on our polyurethane performance products and advanced materials as well as our strong M&A markets that we currently see it makes sense to review this option once again at the present time, we are in discussions with multiple interested parties and are moving ahead with an orderly process.
Lastly, I would also like to acknowledge our newest board members and look forward to their skill sets being used to execute on the plan that we presented.
I want to publicly recognize the strong contributions of our outgoing board members, what they've achieved in getting our portfolio and balance sheet to where it is today Likewise, our newest board members bring current experience to add further value as we continue to reshape our portfolio return cash to shareholders.
And improve our margins and multiples.
With that operator, we'll open the lines up for any questions.
Thank you.
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One moment please poll for questions.
Our first question is from Bob Court.
With Goldman Sachs. Please go ahead.
Thank you very much good morning.
Peter I was hoping maybe you could talk about.
The expectations for the year you guys gave some first quarter guidance. It's obviously.
Well received by the market, but you didn't comment on the full years or any reason to expect anything different than what you offered up at the Investor Day, and maybe you could talk to some puts and takes sort of is the cadence as you go through the year.
Yes.
Bob.
Yes, great Great question.
I think as we look short term over the course of Q1 quite optimistic about the conditions and pricing and margin development. So forth biggest concern.
I would have would be the EU.
Raw materials gas electricity just in the past 24 hours.
Gas in the EU has gone from $29 at a high down to a low around $24.
And the last 24 hours of the news.
That might be pulling out some of the troops.
From the Ukrainian front that movement alone that I, just mentioned on an annualized basis equivalent equivalent around $50 million.
And cost of the company, so again that sort of shock and volatility.
As is.
So it's something that concerns me on the short term.
Again, I think that we've been very disciplined on on working with surcharges pushing prices through cut.
Cutting off lower margin businesses.
That don't want to compensate us for the value that we're giving them.
And.
We think that the forecast that we've given that $1 4 billion for this year certainly is on the low end of what we're seeing as of today and.
I would see a range of between that one four to one five.
Sort of $1 billion as we sit here today now as we go throughout the year. If demand continues as it is as we've seen over the last three to six months and raw materials were to moderate and come down a little bit.
I, probably feel even more optimistic.
But again I think given the volatility that we're seeing in Q1.
I'll have a much better picture of that here hopefully in the coming weeks given the.
The fact that we'll be meeting with a number of shareholders here in the next couple of weeks, we'll probably be updating the market for the end of the quarter.
Great. Thank you.
Thank you.
The next question is from Aleksey yesterday mol.
Keybanc capital markets. Please go ahead.
Thank you good morning, Peter can you discuss the changes you made to long term management incentives how whats what are they how could that impact performance of the company.
I think that rather than moving.
Our.
Quarterly and yearly numbers, we'd like to focus more on a multi year basis.
It will take some of the volatility now again that means that we're going to be more focused on moving some of the spot material and I'll remind the market that sometimes when you get into a situation where spot materials.
Unusually.
At a multi year high we may not be benefiting in that as much as some of our competitors.
But on an overall basis I'm, absolutely confident that as we move products further downstream will provide better margins overall will provide better stability.
Needs to be coupled with obviously with the capex disciplined and with cash.
Cash flow generation, so it really will be around the improvements of <unk>.
EBITDA.
The minimum of a 40% free cash flow generation again, I would hope that it would be higher than that and.
Being able to deliver on the projects pricing the volumes and so forth that we're seeing again the bottom line is that being improved EBITDA margins.
No I don't I don't want to get too transfixed on the margins themselves as much as the actual EBITDA, that's being generated and.
And the free cash flow that goes along with that.
Okay.
Thank you.
Next question is from <unk>.
Angel Castillo with Morgan Stanley . Please go ahead.
Hi, Thanks for taking my question Peter just a quick quick one on China, and just I guess more broadly on polyurethane. So as you think about.
There may be some pricing developments in the first quarter. If you could just unpack that a little bit in and also as we think about the contracts that you've noted transitioning from 20% of them being monthly to 90% of them is that broadly across all of your polyurethane portfolio or.
The quarter is kind of the impact of that and the benefits as you think about kind of financially.
How broad that could be.
As we look at the first part of your question was about Chinese pricing again, we see.
Polymeric pricing in China, and I don't want to get too transfixed on this because overall.
The amount of impact this has on our overall business is going to continue to decline I was one of our major thrust in China as it take that polymeric price and.
<unk> continued to take out polymeric product continue to split it into further derivatives it into.
To higher value markets, but as we look into the first quarter, we're seeing polymeric pricing around 'twenty, one 'twenty 2000 RMB per ton.
To give you an idea a year ago. This time it was around 20 25000.
RMB per ton, but again that was a fallout of a year ago. You remember the fleet that we had here in the Gulf coast that kind of played havoc on.
Chemical pricing is on a global basis. So last year, we saw a great deal of volatility first quarter benefited from that one time gain I think to what we're seeing in first quarter 2022. This year.
While it is a lower price to more stable price and.
I like the I like the overall direction and stability.
It is presenting.
When I talked about the price movement and the contract.
That is virtually all of that is taking place in Europe .
And we.
We traditionally europes been very much of a quarter to quarter basis.
And pricing in MISO, we are about 90% around 90% of our contracts in Europe have now been moved to monthly.
Pricing, which means we're going to have a lot more flexibility to be able to move pricing.
To be able to path.
Through some of that volatile.
Energy shock that we're seeing in the market.
Again. This is this is what we're doing is the steps, we're taking I'm not saying that's being done by the industry.
Our competition I'm sure, we will do whatever suits them best.
Okay.
Yeah.
Operator, if we have another question.
Yes. Thank you.
We have the next question from lineup, David Begleiter with Deutsche Bank. Please go ahead.
David Your line is Unmated you may ask your question.
Hi can you hear me.
Please go ahead, great sorry about that.
If you do about $1 5 billion. This year, Peter how do you see the longer term earnings power for Huntsman and QC path to $2 billion and if so how do you get there.
Well I'm not sure that we put necessarily $2 billion out there as a target I'll take it in incremental steps.
As we're able to earn it but I think that as we look into the future.
We are quite optimistic about the cost.
Programs in the corporate restructuring that we have in place will be delivering here over the course of the next 12 to 18 months, we're looking forward to the recovery of the aerospace.
And the aircraft industry, which will return another $40 million to $50 million and that's just getting us back for reward in 2018 2019.
New models that were being specced into I would expect us to continue to grow from that level I certainly don't want to represent that is is a plateauing number I think that as we look in performance products. When we look at our further downstream investments into evs into the marijuana.
Products that will be coming into the market here in 2023, and as we look at the investments, we're making into polyurethane catalyst in the semiconductor.
Markets.
That certainly will be incrementally expanding our EBITDA as we look at the continued growth of our HTS and <unk>.
Our sustainable products that we're making across the board and foam insulation and so forth all of which are growing at multiple times the rate of GDP, So again and I'm not I'm not putting in any M&A activities or anything like that in there, but yes, we remain.
Very optimistic on all of our businesses and all of our divisions across the board. So we'll take them in.
If we're going to get to the 2 billion overnight, David but we'll take it in $100 million increments as we can get it.
<unk>.
Okay.
Yeah.
Thank you.
Question is from Hudson.
With Alembic Global Advisors. Please go ahead.
Good morning, Peter.
Good morning.
Peter a question on polyurethane.
And mind, the European natural gas situation.
Through the course of Q4 and call it January through through today.
Did you guys see broadly in the European industry any curtailments on the back of any polyurethane curtailments on the back of sort of inflated natural gas prices I mean, I'm cognizant of the fact that call. It roughly 20% of the MDI industries out there and I would imagine second raw materials like.
Chlorine, which are directly.
Linkedin at gas procuring those may have been an issue.
No we did not see anything matter of fact.
In Europe , we think that the MDI capacity.
Operating rates and utilization rates were probably in the mid to high 90% utilization.
Utilization rates. So I think most everybody was running and operating at designed capacity.
Rather than anybody curtailing capacity and we haven't heard anything from customers of that happening.
Very helpful. Thank you.
Thank you.
Yeah.
Thank you.
The next question is from Frank.
Thanks Mitch.
<unk> research. Please go ahead.
Good morning, gentlemen, and congrats on a nice ended the year I wanted to follow up on the on the European energy situation, which.
Based on your comments Peter might become a moot point, but I was curious about the what success that you have.
Pushing through the energy surcharges, and then I guess more broadly if we do see.
Some of these energy inputs, Nat gas butane et cetera come off.
How do you think about the scope to hang on to pricing and hang on to margin.
If we see a deflationary environment on the energy side.
Yes, great Great question, Frank I think as we.
I think we were about 90%.
Successful and the energy surcharges there are some people that some volume that we walked away from and.
Yes, it was not.
It was it was it was tough for ourselves.
Groups and so forth but.
We remain resolute to itself.
I think we're going to continue to make sure that that stays in place.
So long as energy prices are higher we would need to be disciplined and we need to move this on down to down to the consumer level.
So.
As we look at this on an ongoing basis.
As prices start to come down and I look at operating utilization rates across Europe , and America and globally in general in MDI, It's probably I would guess, it's somewhere in the low 90 90 190 to.
Percent utilization.
Utilization, particularly.
Tight in Europe , and the Americas and <unk>.
I would hope that if we see deflationary impacts on.
Our products across the board members not just polyurethane.
That had these price increases it's really happened across the board, though I think polyurethane because it has such a large presence in Europe .
In energy consumer in Europe , it's felt the brunt of it.
I think that most of our products across the board.
We'll certainly be able to have some opportunity for margin expansion.
There are also a number of our customers. It certainly isn't the majority, but a number of our customers are also in.
I would say is more commoditized entered the business are in pricing contracts, where you have energy pass through so.
Some of them automatically will see price increases when the price of energy natural gas go up and they will see it come down as it comes out.
The vast majority of our tonnage that we move around the world.
We would certainly be benefiting from a deflationary raw material environment.
Very helpful. Thank you.
Thank you.
Thank you.
Next question is from Mike <unk> with Barclays. Please go ahead.
Great. Thanks, good morning, and congrats on a strong <unk>.
Just one question on the balance sheet and capital deployment. It looks like you ended the year call at about 0.4 times net debt to EBITDA and I think with your forecast for earnings growth and more money to come from Albemarle Youre, probably on pace to roughly stay at that leverage level or similar to it by the end of this year, so even with the stepped up dividend and buybacks.
So I guess, what I'm trying to get at is how do you think about the right leverage ratio for Huntsman and when and how do you think you'll get there.
Well I think the.
If anything we're probably under Levered right now.
And.
I think they will do is we look at the share buyback, we can Tim as well first of all we continue to look for opportunities to.
By bolt on acquisitions, and when I say bolt on acquisitions, because we did commit at Investor day that yes, we would.
Alright.
Deal size of a bolt on acquisition will be somewhere in the $3 million to $500 million $500 million kind of being at the end of that extreme.
I don't see us.
Going after an acquisition that would.
Certainly get us above an investment grade.
Sort of a rating and.
As we look at that.
If we're not able to get the bolt on acquisitions at the right multiples in the right values.
And then we will be even more aggressive in share buybacks.
But again, we want to make sure that our leverage remains at or below that two times, we're significantly below that today and if anything this probably gives us an opportunity depending on where the board wants to go.
Due to an accelerated share buyback.
Great. Thank you.
Yeah.
Thank you. The next question is from John Roberts.
UBS. Please go ahead.
Thank you on slide nine on the right hand side, where you've got the bridge by account.
The $103 million from gross profit mix, how much of that was the acquisitions, which I assume is the mix and how much was price cost was that minimal.
Yes, John highest tangible for the question on the $103 million.
Acquisitions a year.
Year on year, where approximately $10 million to $15 million from a cost and a cost benefit perspective overall, we'd highlighted our cost improvement program year on year being about $70 million about two thirds of Atlas gross profits of about a third of that was SG&A and the remainder as we say in gross profit was really exceeded.
The raw material increases that we saw with substantial price increases.
Alright, thank you.
Thank you.
Next question is from Kevin Mccarthy.
Vertical research partners. Please go ahead.
Good morning, Peter would you provide an update on your organic growth projects. If we look beyond the splitter project.
It sounds like it'll be completed in the second quarter what are the other initiatives.
That are resident in the $300 million Capex budget that you put forth. This morning.
Yes.
Let's remember that over half of that Capex is going to be around just making sure that we have the proper maintenance levels.
The replacement levels of our equipment and so forth and then the remainder of that is going to be going largely into the performance products areas.
Where we will be expanding capacity in pet fertile Hungary to produce more polyurethane catalyst.
Materials.
This will be going into hbf.
For <unk>.
Blowing agent and to home installation will be going to other applications as well.
In Conroe, Texas, we have two projects will be ongoing one of them will be producing ultra PURA means and also ultra pure carbonate.
One will be going into the.
Into the semiconductor will be the only people will be the only company in North America that is producing ultra pure aimings and will also be the only company in North America that will be producing ultra pure carbonate.
Ultra rare carbonates again, one of the raw materials that are needed for the EV market. So as you think about all of those EV.
The battery plants that have been announced in North America virtually all the railroad metals in the chemicals that are required.
To produce those batteries are imported materials, largely coming from Africa and China.
We will be one of the few suppliers outside of those regions that we'll be supplying capable supply the ultra pure carbonate and so forth there'll be going into a lot of those applications. So largely those three areas around expanding our means you'll be going into polyurethane catalysts and other applications.
Ultra pure means and.
And carbonite will be going into semiconductor into the EV applications will also continue to be putting investment into the mirror lawn <unk>.
<unk>, which is the paralysis of methane that will be producing.
A unique I think are proprietary.
Product that will be.
A new.
New product for us that will be used in our advanced materials area.
We highlighted this this new product during the Investor day more of the work, we won huntsman dot com and get a two minute cursory video on marijuana technology and its applications and so forth I would think that later this year, which should be completed with what we think will be a commercial size.
Commercial viable.
Reactor and should have product going into the markets.
Early as the beginning of the end of this year beginning part of next year I will remind you that those applications usually require anywhere from nine to 12 months.
Product.
The approval process youre going into high end applications in the aerospace industry and naphtha and so forth so whilst we might be producing products.
Part of this year by the time those are approved and kind of into the market and generating revenues, it's probably going to be closer to the end of next year and there'll be a gradual ramp up.
Sorry, John rather Ah, Kevin rather long winded answer there but.
Those are just among some of the projects that we've got on that.
<unk> right now.
Very helpful. Thanks, a lot Peter.
Thank you. The next question is from Mike Harrison with Seaport Research partners. Please go ahead.
Hi, good morning.
Was wondering in the polyurethane business can you help us think about how to model the contribution of Geismar I believe you said it would be.
$10 million to $15 million contributor to EBITDA this year.
What does that ramp look like and are there some startup costs that we need to keep in mind that would weigh on Q2, and then turn into mixed benefits later in the year and then the second piece of my question is any key turnarounds in polyurethane. So we need to think about.
As we model out the rest of the year.
Mike Thanks for the question, it's Phil Snow.
In terms of the split as we said we would expect.
To start the facility at the beginning of quarter, two we've really commercials products coming up towards the back end of quarter. Two so think about the benefits coming in the second half of the year.
As we ramp that up through 'twenty, three and 'twenty, four and we guided to $10 million to $15 million of EBIT benefit in the second half of 2022 as you move through 2023 think about.
$30 million to $35 million of benefits and then we hit the full run rate in 2024 of $45 million.
Overall.
The second question Mike around.
Any major turnarounds.
Notwithstanding we continue to have turnarounds you have too many turnarounds. So every year with your MDI facilities, but we don't have anything of significance as we did last year. If you recall towards the back end of Q1 start of Q2, when we had the water down cluster.
I would also just want to take a second and just remind you that as we look at this entire splitting capacity remember that we are not adding MDI pounds into the market, we're taking existing MDI pounds and were upgrading that tonnage that means that the polymeric materials that we have left.
Is less.
And availability to our customers, which gives us the opportunity again.
We've got a growing demand and at the same time, we've got a shrinking supply going to that that I would I don't want to say that it's more commoditized and important segment to us, but traditionally it's been one of our lowest margin.
Products that we produce then as we as we move tonnage further downstream the existing tonnage that we have upstream. If you will we have an opportunity to renegotiate those contracts and I believe to make those contracts more competitive.
To what do they justify the ongoing production.
And to those materials and so not only are we seem to benefit the benefit that Phil just gave you is the benefit that we're seeing just from taking the product and upgrading it to a higher level Theres also going to be a benefit to the north American MDI business that will come with the ability to renegotiate contracts.
On the polymeric side of the business that will also be benefiting the business and I'm not sure that that benefit is going to be much less.
Then.
What we have stated.
As to the benefit is going to be that we will see this year coming from the splitter project.
Again, I would kind of be tandem and what we're upgrading and also whats left.
Excellent thanks very much.
Thank you.
Next question is from P. J <unk>.
With Citigroup. Please go ahead.
Yes, hi, good morning.
And we've got a great to see quick pricing actions in Europe , you had surcharges, you mentioned quarterly pricing going to monthly pricing.
Which products benefited from that monthly pricing and what was the reaction from customers on monthly pricing.
Yes.
Well it probably wasn't the most popular thing we've ever done with our customers.
But again I think that it's necessary.
I would say that was it.
It's done at the movement from quarterly to monthly was done across the board. It's been polymeric is done in our our variance is done in our ISO contracts of high end contracts, it's across the board on all the contracts and.
It's.
It's.
Again, I mentioned that there is something that.
It may not be the most popular thing amongst customers, but I think that it gives them an opportunity also to better understand what we're going through on the raw material and so it does require more communication and more education as to why and what's going on in <unk>.
We will not be the shock absorber to the industry as we said on our last earnings call as we said at Investor day. So.
I think thats, where our industry traditionally has been we take raw material costs.
Our customers have a tendency to not really see the day to day impact of it and I think we've got to do a better job in that area.
Great.
Then unrelated question on China.
There are reports that Chinese industrial economy is slowing down.
The government is trying to cut rates and revive the Quebec economy what.
Signs are you seeing in China have you has it impacted your business.
Just talk about that thank you.
Well I think that as we look at China, we're trying to focus on those areas that even in an economic slowdown are going to continue to see growth and opportunity.
Automotive continues to be especially on the higher end continues to be a growing market for us.
As we look at the insulation energy conservation the entire cold chain, a lot of the crops and so forth that have grown in China are done on the western side and brought into the large coastal <unk>.
Popular high population areas that cold chain is something that over the next couple of years is going to require a great deal of investment.
We look at the.
The large infrastructure projects around rail and everything from sound absorption too.
The absorption.
On the rails themselves the shock absorbers that go underneath the rails and what have you.
We're seeing.
Pretty strong demand in that area as well so.
I'd say, if youre looking at like large commodity sort of applications that are readily turned around and exported you probably are seeing a falloff in demand and a lot of those areas.
Worthy of investing in the economy, where youre investing in long term in insulation infrastructure, the cold chain automotive and so forth. It remained strong our associates there.
We've got a great.
Chinese national workforce that are they're doing an extraordinary job of building a business from from the ground up there not just something that's going to be.
Yeah.
Based on the vicissitudes of the export markets. So.
Our business there has been it's been quite stable.
Thank you.
Hi. Thank you. The next question is from Mike season.
<unk>. Please go ahead.
Hey, guys nice quarter.
Yeah, Peter a lot of specialty businesses are struggling to grow EBIT down here in the first quarter. So I just just wanted some color on <unk>.
Polyurethane.
Differentiated.
Businesses are going to do in Q1, and how theyre going to generate the growth and maybe a comment on performance products. I know you have an acquisition there, but where are you seeing the growth year over year in Q1 there.
We're seeing.
Seeing the growth.
And volume, but more importantly than volume, let's let's focus on value.
I mean, one of the criticisms of Huntsville.
It's been unfairly throw in our direction is the lack of volumetric growth and the chemical industry by and large I mean, we can go out and spend billions of dollars and grow volume for the sake of growing volume, but if you are growing value in that volume.
I think that Youre missing a great deal of opportunity. So as you focus on.
On a statistic.
Our EBITDA margin in fourth quarter of 2020 at 14% and our fourth quarter of 2021% to 15%. It's a 1% movement. If I look at it on a per pound basis.
16 cents per pound versus 23 cents per pound an increase of.
In Italy, nearly 50%.
And so.
I think we've got to do a better job.
As an industry the better job frankly, as a company are focusing on results on a per pound basis. So again, we talk about absolute growth in tonnage.
Again, I'm not I'm, not saying that we want to walk away from from volumes. We obviously, it's a integral part of our industry and of our business, but more importantly than just focusing on volume I want to make sure that we're taking that volume that we have and we're investing in being able to upgrade it to get the ultimate value out of.
And.
That's ultimately where we need to be and that's what we're going to increase our margins and so where we can increase our our trading multiple.
Yeah.
Great. Thank you.
Okay.
Thank you.
The next question is from Matthew Blair with Tudor Pickering Holt.
And Cole please go ahead.
Hi, Peter.
Was hoping you could talk about dynamics in the malaria market, especially any comments on the demand side.
And then should we think of that.
This rising crude oil price environment should we think about that as being supportive to huntington's malaria margins because of it.
It would raise benzene did cost for some of your international competitors.
Yes, the <unk> market, we continue to be very strong and as we look at the largest downstream derivative of Malaysian hydride <unk> do you think about recreational vehicles everything from boats too.
The construction markets.
Kitchen fixtures and so forth.
All of this remains quite strong I think it will remain strong for the.
For the next couple of years, we also are being very aggressive, though as we look at the <unk> market is to moving as much of a malaise into areas like fuel additives lube additives, and so forth and trying to diversify that customer base.
As aggressively as we can we want to make sure that our formulations are downstream applications.
Are going to be fulsome in and out.
We're going to be able to sell it more than just one application here so as.
As we look at higher priced raw materials.
We're mostly a north American based company in North America.
Butane is our raw material.
Typically that is a benefit.
Higher crude prices are a benefit to the Malaysia business for two reasons one.
<unk> Jesely traded a lower <unk>.
<unk> valued the crude oil and.
Milligan hydride is also in energy producing.
Our production, meaning that it generate steam it generates energy.
Where we have a Malay facilities, we do in Pensacola, Florida, and as we do in Geismar, Louisiana that are near and built in conjunction with larger chemical plants that are able to take that energy and effectively and efficiently use it.
The <unk> business will benefit from that so.
Long long story short the higher energy prices I think they are going to be something that is.
It's certainly not going to be detrimental to the Malaysia business.
Very helpful. Thank you.
Thank you.
The next question operator, I think I think we've got time offer I think we have time for one more question, we usually try to finish at the top of the hour, we've got a little bit over that.
We'll take one more question here.
Thank you.
So we have the next question is from Arun Vishwanathan with.
RBC capital markets. Please go ahead.
Great. Thanks for taking my question.
That's on a good year I guess I just wanted to understand your thoughts on capital structure here.
Your debt levels, obviously have come down and you've done a great job of deleveraging.
You've been able to increase your free cash flow conversion as well and you did kind of go through some of the organic projects you have.
In mind, but it looks like your Capex is cutting remain.
300 or below so.
And you potentially have some cash coming in from textiles.
Textiles disposition as well so when you consider all of that.
Where do you see our leverage going in say the next couple of years I mean.
It would be safe to think that maybe you could see that rise up to the two level or or what do you think is optimal and if you do have all of that cash how do you plan to spend it I guess.
If you could just help us with that thanks.
So I think we've said that we want to spend our cash.
And we want to make sure that it's mixed overall for <unk>.
Areas, one of those being in making sure that we're investing organically within the business.
That we are looking at bolt on acquisitions.
Third we're paying a competitive dividend and fourth share buyback and if we're not able to have the opportunity to buy bolt on acquisitions I've been surprised at the high multiples that are being paid for <unk>.
Relatively decent businesses, but I'm not sure that they warrant.
Some of the multiples that have been paid recently.
We're not going to chase after those we're going to continue to be disciplined in our capital and our M&A opportunities and we will be increasing our share buyback I would imagine.
And.
Get even more aggressive in those areas, we'll be looking at our organic.
Investments as to where we can upgrade materials, and obviously, making sure that we pay a competitive dividend.
If things continue as they are today.
I would see more capital being pushed towards share buybacks.
Thanks.
Thank you ladies.
Ladies and gentlemen, this was the last question for today's conference.
This concludes today's conference you may now disconnect your lines. Thank you.
And have a great day.
Okay.
Sure.