Q2 2022 Huntsman Corp Earnings Call
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Greetings and welcome to the Huntsman Corporation's second quarter 2022 earnings call at.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
I would now like to turn the call over to Ivan Marcuse, Vice President of Investor Relations. Thank you you may begin.
Thank you Carol and good morning, everyone and welcome to the Huntsman second quarter trying to 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, hoping we released earnings for the second quarter 'twenty to be a press release and posted to our website Huntsman Dot com. We also posted a set of slides on the web.
Site, which we will use on the call. This morning, while presenting our results during the 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.
Risks and uncertainties are not guarantees of future performance you should review our filings with SEC for more information regarding the factors that could cause results to differ materially from these projections or expectations. We do not plan on publicly updating or revising any forward looking statements during the quarter.
We will also refer to non-GAAP financial measures 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 had which has been posted to our website Huntsman dot com I'll now turn the call over to Peter Huntsman.
Chairman and CEO .
Thank you Ivan good morning, everyone. Thanks for taking the time to join us.
Let's start out on slide number five.
<unk> EBITDA for our <unk> division in the second quarter was $229 million compared with $208 million a year ago, a 10% increase.
We achieved the increase in adjusted EBITDA and corresponding 17% EBITDA margins. Despite a volatile economic backdrop with unprecedented energy costs in Europe , Covid related lockdowns in China and <unk>.
<unk> headwinds.
Please note that we did receive an insurance settlement, which benefited our second quarter results and Paula year things by $15 million.
We focused.
On our selling price and our value over volume strategy intensely throughout the quarter, we pass through approximately $900 million of annualized increases in raw materials and energy cost.
Which approximately half were related to higher energy prices.
<unk> volumes declined 4% as we continued to pursue our value based strategy.
In the Americas negative growth was driven by some weakness in consumer related end markets, primarily furniture and ongoing supply constraints and our Huntsman building solutions business in Asia.
<unk> was negatively impacted due to government mandated lockdowns in Shanghai is the Chinese government.
Tempts to control Covid outbreaks.
Volumes in Europe were up compared to the prior year due to favorable comparisons as we completed our once every four year Rotterdam turnaround in the second quarter of 2021, excluding the Rotterdam turnaround our volumes declined year on year.
Addressing European near term demand, we currently expect volumes to contract across several end markets as persistent at an extraordinary natural gas prices impact consumer and industrial demand for polyurethane.
During the second quarter natural gas prices averaged around $31 per <unk> and today. They are at a record high of approximately $60 per <unk> over six times the price in the United States as a reminder, for every $1 per <unk>.
And natural gas are variable costs in our European polyurethane business change by approximately $10 million on an annualized basis.
While our European facilities are not insulated from the price volatility in natural gas. It is worth pointing out that our largest natural gas derivative consuming facilities or in the Netherlands and in the United Kingdom, which have different supply dynamics in a relatively less dependent on Russian supplies compared.
Germany also considered.
But from a natural gas pricing perspective, approximately 60% of our MDI natural gas related production costs requirements are linked to U K pricing via our upstream nitrobenzene enameling facilities.
Of course, our focus in Europe remains to maintaining the quality of our business and related pricing and margins as we navigate through a high level of economic volatility the second half of the year.
Hudson building solutions platform recorded second quarter revenues of approximately $154 million up 16% year over year driven by pricing.
We are well above the profitability, we targeted when we launched Huntsman building solutions that said, we were hindered by constraints and blowing agents, which negatively impacted volumes versus the prior year. So we'll look into the early part of the third quarter, we do see some destocking of inventory at our.
Customers from the impact mortgage rate increases in the U S are having on housing activity.
We estimate that roughly half of hbf serves residential markets. While the other half serves the commercial construction markets. We will continue to remain focused on growing hbf internationally and up valuing our polymeric MDI into spray foam insulation systems spray foam is an increasingly versatile.
Insulation with superior energy saving properties, which we expect to gain market share over time as energy conservation remains a priority for consumers and governments.
The second sequential quarter, our polyurethane automotive platform saw improved volumes year over year.
Our automotive business is well positioned to recover with the market over the coming years, we are focused on bringing innovative solutions to our customers.
We previously announced we achieved a key milestone in the second quarter as we completed the commissioning of our new MDI splitter in Geismar, Louisiana.
Today, the new splitter is running well.
Our strategic investment will be a catalyst and allow further upgrades to our Americas portfolio. So we disclosed previously once a new splitter is fully up and running we expect it to add an incremental $45 million of annual EBITDA to our results by 2024.
<unk> propylene oxide margins in China drove our equity earnings lower year over year, our joint venture contributed approximately $18 million in equity earnings for the quarter well below the $42 million reported a year earlier.
Given current levels of margins, we expect that equity earnings could be approximately $60 million lower in 2022 versus the record earnings of 2021.
In addition to upgrading margins by driving molecules into our higher value margin products. We are intent on further optimizing our cost structure and polyurethane to improve margins on an annualized basis, we delivered more than $40 million from our first phase of cost optimization centers.
<unk>.
In polyurethane and sweet.
Stated last quarter, we are targeting an additional $60 million by the end of 2023.
These cost savings will be achieved through optimization of our footprint for example by exiting regions and markets, where we where the returns do not justify long term supply such as Brazil in other regions with similar dynamics and continuing to lower back office expenses, we expect the lion's share of these say.
Moving to impact 2023.
Looking into the third quarter, we are closely watching all of the relevant economic and end market indicators and in particular the situation in European energy prices.
As we sit here today, we expect polyurethane.
Additional EBITDA for the third quarter.
Excuse me Palio things adjusted EBITDA for the third quarter to be in the range of $170 million to $200 million.
Let's turn to slide number six.
Turning to performance products with reported adjusted EBITDA of $152 million for the second quarter with an adjusted EBITDA margin of 31%.
The industry dynamics and performance products remained favorable in addition, with our commercial excellence program and continuing focus on cost control. This division should continue to deliver strong results.
We do not believe this certain we do believe that certain amine markets in China are moderating volumes decreased 3% compared to the prior year period as we continued to focus on securing value over volume and a short term operational issue at our Malaysia.
<unk> in Europe , which has since been resolved.
Struction markets that we sell into specifically in the U S, which is primarily nonresidential construction continue to have good underlying demand. We also continue to see positive dynamics in our global fuel additives market.
We're impacted in China by the government mandated lockdowns and softer composite demands.
Despite the lower volumes, we still saw profitability and margin quality significantly improved year on year in all three regions.
Last year, we announced targeted capital investments and polyurethane catalysts and differentiated chemicals, serving the electronic vehicle semiconductor and installation markets.
These projects continue to progress and remain on schedule to be completed on time, we expect all of these projects to contribute positively to results in 2023 deliver more than $35 million of EBITDA benefits in 2024.
As a reminder, we hold leading market positions in many of our main product lines as well as our Malaysian hydride performance products remains a highly attractive division, we continue to evaluate strategic organic investments to grow this business over the long term.
Looking to the third quarter this tends to be seasonally weaker than the second quarter and there are some currency headwinds that said, we currently expect another strong quarter from performance products with third quarter adjusted EBITDA in the range of $130 million to $140 million. So all the.
Above the prior year.
Turn to slide number seven.
Our vast materials division reported adjusted EBITDA of $67 million in the quarter significantly above last year's second quarter and equal to the strongest quarter in the division's history, we achieved 20% adjusted EBITDA margins with a disciplined approach to value.
Volume.
We recorded the record results in advanced materials, even though aerospace profitability is still recovering and approximately 40% below pre pandemic levels.
In addition to improving product mix, we've been aggressive in achieving price to more than offset raw material inflation.
We continue to deselect from lower margin business, while increasing our higher volume and value sales where possible, we're growing at and above we're growing at or above several of our industries adhesive markets, because we deliver solutions to our customers and our industrial adhesives portfolios.
Positioned to grow further over the coming years. In addition, our recent acquisitions of Gabriel and CBC contributing strongly delivering above our average adjusted.
Segment, EBITDA margins as we execute our pricing strategies and capture synergies.
Volumes for the segment declined 16% with much of the volume decline a result of our conscious decision to exit commodity DLR manufacturing in the U S as well as lower margin coding markets. We.
We did see modest growth in aerospace demand versus last year, leading to a 25% year on year improvement in profitability, while aerospace remains well below pre pandemic levels fundamentals of this industry remains strong and we expect to see continued improvement over the next couple of years.
Back to pre pandemic levels currently we still see relatively stable underlying demand in many of our core specialty businesses in the Americas and Europe , we do expect.
Normal seasonality currency headwinds and some softening in Europe impacted third quarter versus the second quarter that said, we still expect to show a solid improvement versus the prior year. We expect adjusted EBITDA for this segment in the third quarter to range.
Between 58 and $63 million.
Let's turn to slide number eight.
Our textile effects division reported adjusted EBITDA of $22 million for the second quarter sales declined 7% driven by a 16% decline in volume and the business was adversely impacted by both new and continuing Covid related Lockdowns in China has remained.
A reminder, roughly 60% of textile effects sales are in Asia, with China, representing more than half of those sales.
Also impacting volumes were lower home and hospitality sales due to lower North American imports.
Spite these volume headwinds, we remain focused on improving our differentiated and specialty businesses, while deselecting low margin value oriented volumes.
In addition, we took aggressive pricing action to offset substantial raw material and logistical headwinds as a result of these actions we were able to improve variable contribution margins, which helped to offset the negative impact of the lower volumes.
We remain optimistic on the long term fundamentals of textile effects. We are confident our specialty oriented portfolio will continue to develop as brands focus more and more on sustainability and product innovation.
In fact orders to pick up as retailers stock up for the critical holiday period.
And related winter and spring apparel trends, we currently expect adjusted EBITDA in the third quarter to be similar to the prior year.
And project.
Range of 20% to $22 million now I'll turn a few minutes over to our CFO fillister. Thank you Peter turning to slide nine.
Adjusted EBITA increased by $98 million to $432 million, an increase of 29% compared to the second quarter of 2021 sequentially.
Sequentially adjusted EBITDA improved by $17 million.
4%.
As Peter highlighted during the second quarter, we did benefit from an insurance settlement within our polyurethane division, which increased our adjusted EBITDA.
Approximately $15 million.
Our adjusted EBITDA margins improved year on year by approximately 2% to just over 18% a sequential improvement from 17% margins in the first quarter.
Overall volumes declined by 6% a combination of our value based strategy as we continue to deselect lower margin business.
Covid related Lockdowns in China.
Gross profit improved by $178 million as we increased prices by approximately $485 million.
More than offsetting approximately $305 million.
Of higher raw materials.
G&A remains under control despite significantly higher higher inflation on tight labor market.
SG&A to sales was below 9% in the second quarter and well ahead of our commitment to achieve this target in 2024.
The negative variance of $31 million and FX and other is driven by a $24 million year on year equity earnings production from our China propylene oxide joint venture.
The overall strengthening of the U S dollar.
Regarding foreign exchange our main translation exposure is with the euro which weakened by 11% in the second quarter versus the prior year.
The first six months of the year the impact from FX on our results was approximately $30 million.
Assuming a one O to U S dollar to euro rates in quarter three the estimated FX impact on our quarter three adjusted EBITDA results would be approximately $20 million.
Let's turn to slide 10.
Our cost optimization and synergies plans remain on track with closed closer to but on annualized run rate of $140 million with a run rate target of $117 million by year end and $240 million by the end of 2023, including $100 million from our new initiatives.
We announced at our Investor day.
During the second quarter, we took the following steps firstly consistent with our Investor day announcement to expand our global business services. We began the process of setting up regional service centers in Krakow, Poland and San Jose Costa Rica, we expect those locations to be fully operational George.
2023.
Secondly, as Peter indicated we are exiting some markets in polyurethane and.
In the second quarter, we communicated to our associates that we would exit the Brazil, Argentina, and Chile by the end of 2022.
In the process of evaluating positions in southeast Asia and India.
We have a number of additional cost savings initiatives in progress, including supply chain optimization, which we announced at our Investor day, we remain confident of achieving our goals by the end of 2023.
Turning to slide 11 regarding free cash flow net.
Net cash provided by operating activities was $231 million.
Compared to an outflow of $7 million in the prior year period.
Free cash flow was a positive $162 million, including a net benefit of $78 million from the final Albemarle settlement payment. We reviewed the settlement proceeds on our first quarter earnings call.
Working capital has risen by almost $400 million since the beginning of 2022 with raw materials setting record highs and our receivable balance climbing as we have passed on these higher costs.
Going forward, we are not projecting a further escalation enrollment cereals, although as indicated we are watching European natural gas closely we remain confident of achieving our 40% free cash flow conversion targets in 2022.
Capital expenditures remain on track towards our $300 million spend target for the year as we switch our attention from our newly commissioned Geismar MDI displacement to our various growth projects and our performance products Division.
Our balance sheet remained strong at six times net debt to EBITDA at the end of quarter, two and just over $2 billion and liquidity.
During quarter, two we did announce a new $1 2 billion dollar sustainability linked revolver, which were.
Which matures in 2027.
Our adjusted income tax rate for the quarter came in at 2020.
22% at the lower end of our expected long term range of 22% to 24%.
Our adjusted earnings per share was $1 28.
An increase of 42 or.
Or 49% compared to quarter two of last year.
We repurchased $291 million of shares in the second quarter.
A total of just over $500 million for the year.
On track towards our target of $1 billion of share repurchases to be made in 2022, and we remain focused on delivering meaningful returns to our shareholders.
And binding share repurchases and dividends.
Pace to achieve our return of capital yield to shareholders in excess of 15% in 2022.
Peter back to you.
Well. Thank you very much two years ago during our second quarter report I compared the economic shocks and volatility of that time to the famous 17 91 whisky rebellion.
As I look at today's lack of clarity and uncertain outlook around the world I'm reminded of the words of St. Paul to the Corinthians for now we see through glass darkly.
Im not sure if our solicitor and rider was referring to European gas prices, but it seems he.
At least had something similar in mind, we reported today adjusted EBITDA of $432 million margins in excess of 18% more than $500 million in stock repurchases over the past six months.
Our balance sheet is strong and our business is on track to meet our objectives that we set out at our most recent investor day meeting.
So we look into the third quarter, given a guidance of between $330 million and $375 million of adjusted EBITDA and I've watched as other companies who have reported guidance have been criticized for being too rosy or for being too glum.
We tried to guide you on our future performance as accurately and transparently as we see it at this time.
I see three issues that we will be facing during the second half that may well help us exceed these numbers or not like to address these issues and what huntsman is doing to take advantage of them, where we can and try to mitigate their impact when we capped.
The biggest challenge we see today is the energy prices and natural gas volatility in Europe and to a lesser degree globally.
I pointed out in my earlier remarks every dollar of price movement affect us about $10 million annually.
During these past two weeks European gas prices moved nearly 20% upwards costing us in excess of $100 million on an annualized basis of added cost.
This past Friday prices dropped 4% saving us nearly $25 million on an annual basis and this morning, the prices rose greater than 15%.
I do not see any reason why this volatility would not continue since Europe has become overly dependent on the same means of propulsion Magellan us to navigate the globe, mainly wind and natural gas supplies from an equally unreliable, but far more dangerously calculating Russia the couch.
To this we are aggressive as we can with our pricing.
Some may be content to play the shock absorber between consumer and energy producers.
We'll continue to push through price related surcharge and price increases where we can.
<unk> stated earlier, we've converted the vast majority of our European sales contracts from quarterly contract prices to monthly pricing and where we can also added surcharges.
In some cases this may well mean that we are walking away from certain sales.
We're also evaluating the feasibility of reducing production at some of our largest European facilities and increasing our imports from Asia and North America.
It has become fairly clear to us that Europe's energy problems will not likely be fixed anytime soon accordingly, we're more aggressively looking at our business footprint and cost structure, we are evaluating steps.
<unk> to our previously announced cost reduction targets of $240 million.
To further reduce our cost and reposition our global business footprint.
We announced this past month will be relocating a portion of our European business services, the Krakow Poland.
We will look at further consolidation and site rationalizations as we calibrate our business around what maybe a more permanent reality for Europe .
Our second challenge is inflation and north American markets and increasingly around the world.
Increasing costs and rising interest rates will likely slow consumer demand and lower consumer confidence.
In our largest north American business polyurethane, we started operating our new MDI splitter should give us greater.
Access to a wider range of consumer solutions and higher margin materials and our advanced materials Division. We will continue to see the benefits of BARDA adhesives, and additives acquisitions, which will have been fully which have been fully.
Integrated from an operational point of view as we reduce cost and continue to grow the business. We are seeing encouraging signs in the aerospace sector and in many parts of the modernizing power electronics sector as well.
Organic projects in our performance products division to add.
Organic projects in our performance products division to add capacity to higher margin carbonates and amines for EV batteries semiconductor chips and catalysts continue to be on pace and those products are and will be in high demand once that capacity comes.
Online next year.
We'll continue our pricing excellence and putting value over volume.
Our third challenge or the Lockdowns that continue in China as the government continues to balance the need for economic recovery with trying to stop the spread of Covid.
We will certainly benefit from the economic stimulus projects that the Chinese government has launched while at the same time.
Be slowed by economic by additional Lockdowns and travel restrictions.
Our Chinese business continues to do well in the face of these conflicting pensions. The vast majority of our sales are domestic and virtually all of our associates, who are local China will continue to be a vital market for us and like we are doing our north American strategy were focused on selling up to increasing margin.
And not just moving volume we have the same integration with splitter technology that allows us to produce as many variants and downstream products as we need to meet the market demand.
We continue to move forward from a global corporate perspective, we will be focused on value over volume as I said earlier. This may mean that we walk away from some customers and disengaged from some geographic regions, where we do not see strong enough returns or a high March in future.
We're either on track or ahead of schedule on the multiple projects that make up our previously announced $240 million cost optimization program.
Still on schedule to complete this by the end of next year.
We will continue to use our balance sheet to return value to shareholders through dividends and stock repurchases and carefully look at M&A opportunities.
We previously announced we're running a process to evaluate the possible sale of our textile effects division.
We continue to work towards this end, but we will not be answering questions pertaining to this process as it is ongoing.
In conclusion, while we may not be able to see clearly ended the market conditions before us we are in an excellent position to take advantage.
Certain areas and respond with strength in other areas.
We will remain focused on value over volume working with our customers to give them market, leading formulation technology solutions, we will not be diverted from our cost optimization and synergy plans to the contrary, we intend to move even faster and more aggressively as we align our businesses.
To the realities of the marketplace, we have the balance sheet and the business results to stay on course for buying a $1 billion of shares this year and continue into the next while also looking carefully at bolt on acquisitions and divestitures.
Weather conditions improve or remain volatile we are uniquely positioned to continue to create shareholder value operator with that why don't we start with questions and answers section of this call.
Thank you we will now be conducting a question and answer session I would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
You May press Star two if you would like to remove yourself from the queue.
Participants using speaker equipment may be necessary to pick up your handset before pressing the star keys.
I ask that you please limit yourself to one question.
Please while we poll for your questions.
Okay.
Our first question comes from the line of Kevin Mccarthy with vertical Research partners. Please proceed with your question.
Yes, good morning, Peter.
Peter I was wondering if you could elaborate on your decision to exit polyurethane businesses in South America.
What drove that decision and what sort of impact on sales and earnings might we expect as you move forward there.
Well, Kevin good to hear from you I hope Youre doing well.
Yes, I think that as we look at the long term margin prospects in this market. We look at the logistics the working capital that's tied up we look at.
The.
The tariff cost and so forth the repatriation of capital when we factor all of these things which are rarely talked about in these calls, but when you start factoring all of those issues, even if youre, earning the same margin and many of those markets. As you are in for example in North America.
Actual net back the actual value that's being created in some cases drops from what otherwise would be a 20% margin down to a mid to low single digit margin I don't see this changing and so as we evaluate the markets as we evaluate where the growth and where the value is going to be particularly the value of and I know.
I don't want to I am, beating a dead horse here and talking about value over volume, but I think so often we get trans fixed in this industry about growing sales and we don't look at the value of the sales and in many cases that cost us just as much to service and to supply and to produce.
A single digit margin account as it does too.
Get a 20% margin account and we need to be where those markets are going to.
Reward us for innovation reward us for the service and the technology that we invest in.
Award our ability to uplift our molecules.
Splitting capabilities and so forth.
And frankly, while we see growth opportunities in many of these markets, we don't see value opportunities as we do.
In North America again, that's not to say that we're going to completely abandon those markets, but it is to say.
But our focus and the infrastructure that we hold in each of those areas. The SG&A that we hold and the costs that we have the fixed costs that we have the service many of those accounts.
That will be changing and a lot of that tonnage will be going to.
Higher end application higher end margin applications, a little bit closer to home.
Kevin Kevin just to add.
South American polyurethane, so about $60 million of revenue less than 1% of punishments overall sales revenue and obviously the north American market itself, there's a high demand for the products that we would otherwise ship down to South America.
Thank you. Our next question comes from the line of Matthew Blair with Tudor Pickering Holt. Please proceed with your question.
Good morning, and congrats on the strong results.
Just digging into the Q3 polyurethane outlook, a little bit more so it's down about $44 million.
Quarter over quarter at the midpoint, I think $15 million of that would be the insurance proceeds not repeating.
Are there any way you could walk through the other moving parts.
That guidance you know the impact from just lower durables demand from higher benzene costs.
From.
Higher natural gas costs.
Yes, I think that we're going to be seeing.
Two two impacts in the third quarter.
The first and foremost is going to be the higher cost of our raw materials, particularly around natural gas products.
And again, we're talking about the variability of 10 2030 $40 million not the dose or de Minimis sums of money that I just threw out but.
Again as I, just look at the volatility of gas pricing over the last two weeks.
On an annualized basis.
Far greater than two.
<unk> thousand $340 million of value movement, just on natural gas.
So much of where we end up in the third quarter will be the industry and huntsman <unk> ability to move pricing.
And two through surcharges, and so forth and pricing to our customers and to move that down through consumers and as you do that.
That is obviously going to be impacting volumes and so I think that again, it's going to be an issue about higher prices.
Well at the same time because of the rapid inflation, we're seeing in energy and raw materials.
That higher price impacting.
Volumes on a longer term basis.
A few one other addition to my earlier things, obviously has our largest exposure in Europe .
Division perspective, with the euro having weakened even further you've got an impact of about $5 million to $10 million between call. It two and quarter three to consider.
Okay.
Thank you. Our next question comes from the line of Alexia <unk> with Keybanc capital markets. Please proceed with your question.
Thanks, and good morning, everyone. Peter in the press release, the press release talks about opportunities that might present themselves to take advantage of Huntington's strong balance sheet are you talking about bolt ons here or buybacks or both.
Or maybe something else.
I think we're speaking about both of those issues.
Obviously, if we if we have.
Set aside $1 billion for share repurchases and our share price is down relative to a quarter ago.
Or the overall market multiples for the chemical industry are down we've got a greater opportunity therefore capital deployment buying back shares at the same time, we are definitely seeing a drop in the multiples.
That are being paid for assets, but at the same time. We're also seeing the earnings of those possible acquisition targets drop as well so.
Yes.
I think that we need to continue to be very cautious on the M&A side. If there is something there that is accretive.
We have something that can supplement and expand on our technology that we can integrate that we can globalize.
We're going to look very carefully at it but again, just because multiples are dropping doesn't necessarily mean that we're going to be out buying.
Buying assets its got to be a.
Pretty compelling.
Opportunity for us.
Thank you. Our next question comes from the line of Laurence Alexander with Jefferies. Please proceed with your question.
Hi, guys. This is Dan Rizzo on for Laurence. Thank you for taking my question I was just wondering if the surcharges and the pricing and how volatile things are how fast surcharges. It would go on and come off as opposed to traditional pricing is it something thats relatively easy or does it take time to kind of wind through the system.
Dan very good question.
Really depends on the sector the customer to the product.
A whole variety of things. So it also depends on what the competition what others are doing.
We don't want to get into a position, where I'm, commenting on competitor pricing or supplier.
What their strategies may or may not be.
But obviously, if we're out aggressively pushing our strategy of value and others are out pushing a strategy of volume.
That those are conflicting forces in the marketplace.
Yes.
We've been very consistent in the last couple of quarters.
Ben.
Being very aggressive if you will on the pricing front, but.
Typically when we look at our raw materials.
Typically have around a couple of weeks to 30 days before our raw material price increase will go through worked its way through our inventory and hit our <unk>.
Balance sheet.
Our P&L, so I would certainly like to make sure that before that 30 day time period.
But we've done everything that we can do to try to push those costs on to the consumer and again, we've been in many different products in the past a lot of the more commoditized products that we have since exited.
We literally were as I said in my comments earlier this industry too much as a shock absorber between energy volatility on the energy producer side and the consumer.
Or the consumer outlet.
Amazon or Walmart or somebody like that and I would like to move prices and we just we.
I am just speaking again from our perspective at Huntsman.
We'd certainly like to try to change that.
Thank you. Our next question comes from the line of Frank Mitsch Fermium Research. Please proceed with your question.
Yes, good morning, it's funny, Peter I wanted to ask you.
Gives me about the competitive dynamics of European energy and Russian gas on.
On your German competition, but you indicated that you didn't want to go there. So instead I do want to come back to the to the range of $1 $70 million to $200 million in polyurethane for the quarter July is in the books.
Already so you have good visibility on that and if you assume normal seasonality.
In August and September .
Are you.
Towards the middle end of that range. The high end of that range in the low end of that range, how do we think about that spread between.
What needs to happen to get a 170, what needs to happen to get to 200.
Well, Frank I would very much like to comment on competition, especially Germany competition, but unfortunately I have a lawyer in the room, who is giving me a very stern look right now in drawing things at me. So I can't comment on that but it doesn't mean that I wouldn't want to.
As we look at the at these.
When we give the price these EBITDA brackets.
I don't want to get into too much sausage, making here, we literally make these as of last night and early this morning from the divisions and these are numbers that I think are the most accurate view that we have literally within the last couple of hours I would say, where we look at polyurethane and the spread that.
We gave you in polyurethane I would say that right now we're really in the middle of that fairway and.
If we see a massive spike in potent decides he doesn't want to put any gaps in Russia, we see a massive spike this next week in raw material prices.
We'll be fight like Hell to try to get that through but.
That's the sort of prices and so forth.
That's going to be a definite headwind if we if we see some relief.
Coming because there was an inventory build or imports of gas are we finally decided to get smart in the United States.
And get more aggressive and producing natural gas ourselves rather than just trying to export at all.
We may we may see some tailwind there so.
It's I would say right now if I had to put even money on it it would be right in the middle of that range.
Thank you. Our next question comes from the line Hassan Ahmed of Alembic Global. Please proceed with your question.
I'm wondering if you didnt felt.
Im wondering if <unk> just.
Rather than sort of specifically talking about any any sort of competitors or the like I just broadly wanted to talk about the.
But are you with an industry as you guys see it right now I mean, obviously Europe .
Not an insignificant chunk of polyurethane capacity and we obviously all know the sort of energy price situation over there. So the question really is that on a go forward basis.
How do you see the evolution of polyurethane sort of.
Utilization rates globally or supply demand fundamentals keeping in mind, obviously and again not specific to any European competitor, but keeping in mind I'd like to imagine maybe some Europeans are considering shutdowns secondly, reduced operating rates. So I mean.
<unk>.
So does these recessionary clouds recede.
Are you going to be in a situation driven probably by Europe that we are in very tight utilization rates.
At least in the near to medium term.
Yes.
Youre asking excellent question and if you if you look at the industry and you think about the Delta and I'm just talking about really broad numbers here youre looking at over $1000 per ton manufacturing cost difference between North America Asia and Europe , Brian .
In North America, and Asia right now, we are pretty competitive and you look at where Europe is right now it's around $1000 per tonne and in some cases, even higher than that.
And if you think that is going to be the case over the course of the next 12 months to 18 months.
You really have to be arguing somewhere some concentrating right now do we start rationalizing capacity in Europe and started importing in from North America and Asia.
You think that this is a six month phenomenon or somehow between now and early spring of next year that somehow prices will moderate and that gap, where all of a sudden go down to a couple of hundred dollars, a ton and $500 a ton or something like that by the time you factor in freight working capital logistics.
The excess capacity customers youre going to be exiting from in order to satisfy the needs.
Youre really not you're really not going to be able to shut down.
One side versus the next and so it really is a longer term call as you look out not over the next quarter or two but it's got to be one as you look out over the next three to four quarters.
Literally just talking about some of the decision, making some of the challenges that we're going through right now and are within our own company as we're not just not only look at polyurethane, but you look at some of the other products that we produce.
Across the spectrum within our company.
And you compare that with a a natural gas price in an energy price and when you look at the regulations not just on an energy basis. When you look at a lot of the very anti.
Competitive regulations that are coming out of the EU.
That are not going to be favorable towards industry on a longer term basis, you got to ask yourself. Some some pretty tough questions here and so it's not a question about huntsman or Huntsman German competitors I look at it on a broader sense between euro things it means a proxy between more.
Commoditized and differentiated materials.
Longer term is Europe going to position itself to be even.
Even remotely competitive from an energy point of view they are going to release, the natural gas and fracking and they're going to look at our nuclear they get to know what is the longer term perspective, there for somebody like us it's going to be investing in the decades to come billions of dollars in maintenance and reliability and modernization.
Or do you start moving out of the continent, and I think that the decisions that we're making today are kind of a crash course as to what.
What may be the road in the next five or 10 years.
You have to travel anyways, we may be doing that over the course of the next quarter or two so sorry.
Sorry to ramble Thats, an excellent question.
Not just the simple black and White, you turn off one facility you overrun another facility and we export.
The availability of shipping and backlogs at Quad Port.
<unk> transportation tariffs in working cap all of that has got to be factored in what grades, especially as you move further and further downstream into differentiated world.
We're pursuing value over volume.
Getting all of that right. So.
Again apologize for the long winded answer but.
It's an interesting question and it's not one was an easy answer, but I can't imagine that that the discussion that I just outlay outline.
Not taking place in any.
Any company that has substantial north American European or Asian assets, and they're looking at these cost differentials because.
They are historical and we just simply we have never seen a delta of a thousand dollars a ton manufacturing difference just in MDI and I imagine if you get into chlorine production fertilizers commodities ethylene olefins, whatever youre, probably looking pretty similar numbers across the board.
Thank you. Our next question comes from the line of Mike Sison with Wells Fargo. Please proceed with your question.
Hey, guys nice quarter.
Peter I guess I'm glad you didn't just.
Didn't have a cuts on the book of revelations for for the external environment, but just just a question on polyurethane.
When you think about placing your MDI molecules, maybe by end market or are there certain end markets.
<unk>.
Have good returns now are the ones that maybe don't have as good returns at that Youre looking at and and aside from the regional or the better markets for you too to place <unk>.
Hi.
Yes, I think there are certainly some markets and when I talk about these we try not to focus on quarter to quarter right. I mean, if you look at what's weak in the next month or a quarter or two.
You have to be able to develop the product specifications and you have to be able to weather some of the cyclical storms and so forth, but as we look at automotive, it's not just automotive, but as we look at some of the luxury brands as.
As we look at the EV the light weighting.
As you start thinking about EV vehicles and cars in general.
When you start thinking about self driving cars.
The performance of the car how fast it can go from zero to 60 miles an hour is going to be far less important than the automobiles in the future that is going to be the comfort the sound system, the information systems and the acoustic sound and so forth that's going to be a lot more important to car manufacturers going forward.
Third the light weighting abilities and safety and so it's not just saying we're dedicated to the auto sector, but what sector within the auto sector. As we think of something like installation theres going to be some times when installation the tide goes into the tide goes out and but longer term having the best.
Our factor installation in the world.
Being able to use the recyclability of used <unk> bottles, and so forth as the raw material, that's going to be a winner longer term. So we'll look at adhesions, we'd look at coatings. We look a lightweight you start breaking that down we get we get quite excited about those now it'd take other segments and again I don't want to sound like an anti these segments, but I look at.
Something like appliances, that's a segment for us so we're going to continue to be a part of that is also commoditized over the last couple of years I look at something like furniture, there's going to be segments of furniture mattresses embedding the tempur pedic.
Yes.
There is innovation and there is there has margins that are paid in some of that area of furniture. When you look at just the average sofa and furniture that 10 years ago was pretty attractive for polyurethane I'm not sure that's a very attractive business for us going forward.
We're going to be getting.
A lot of.
Sure.
Value coming out of so as we look at that commodity and we moved that in towards.
It towards margins.
That are 20% 20, plus percent and we want to see the stability of that urethane business again that doesn't mean, we're always going to be the most profitable.
I hope it does mean that we're not the least profitable and it should mean that we're one of the most consistent earners of around that high teens to 20%.
Of margin business.
Yes, there are plenty of areas that we look at today and even though they may not look all that exciting today, we want to continue and the construction homebuilding light weighting installation high end automotive and so we're going to continue to push into those areas into pushing within the best segments within those areas.
Thank you. Our next question comes from the line of Matthew Deyoe with Bank of America. Please proceed with your question.
Good morning, Thanks, So if I'm looking at the <unk> market in Europe , and the U S.
And really performance in general right. So.
It suddenly running much higher than where we thought we would be.
Exiting last year's Investor day.
I think about the variance between kind of where we thought we'd be and where we are now is that <unk>.
Threads to commodities that are net favorable that are at risk if the market should soften or is this a new elevated benchmark for the business how do we think about.
How PPE.
<unk>.
And a softer macro.
Well I think that as we look at the <unk> industry in general the downstream.
Couple of things first we've looked at our own <unk> and compared to where we were 10 years ago.
I think that we were almost 100% at that point, 100%.
Focused on PR basic construction applications.
<unk> motor boats, and so forth those are still going to be the lion's share of the volume, but we've also looked at the <unk> businesses.
Business is that how we can diversify that into everything from fuel additives for food additives.
Coming down in the specialty manufacturing and blends and so forth. It's also certainly has been a.
A focus on the PR industry, where there's been a consolidation in that industry and the customer base in that industry and.
A lot of the players that are.
That.
It used to just be in the merchant <unk> market and now integrated into your PR.
There are only two or three of us in North America, a few more in Europe .
<unk> are still in the merchant market that havent been.
Integrated if you will into a single entity. So as we look at the industry structure.
As we look at the diversification of the downstream applications and as we look at the pricing over volume strategy that we have.
Yes, I think that we're going to.
I think thats, an average over the course of the next five or 10 years versus the last five or 10 years.
We would hope that there would be not just better margins, but more reliable and.
And.
And less volatile margins.
Thank you. Our next question comes from the line of Angela <unk> with Morgan Stanley . Please proceed with your question.
Thanks. This is Melissa on for Andrea just as a follow up to some of your commentary on pricing what is your ability to hold price in performance products as costs start to ease how much of this is.
Structural versus surcharges that well start to come off.
And performance products virtually all of it is pricing.
There has not been as much.
Our charge in performance products is there has been in <unk> for instance.
A lot of that is also a mechanism in polyurethane we are a lot bigger larger business in Europe than we do in performance products.
Largely I won't say that it is.
North American business, but.
It's larger in North America than it is in Europe , we've been looking at surcharges a lot more aggressively in polyurethane.
Europe .
We do have.
Some escalators, which will work in both directions and in the <unk> business, but by and large in performance products.
I would hope that again, we're not just selling molecules. There we are selling in effect, meaning that if I'm selling to you as a customer then this is one of the tough times when prices go up.
If I'm just selling U.
A product in the raw materials go up and therefore im raising my prices.
As a customer when raw materials go down youre going to expect the price to go down if I'm selling in effect I am telling you something that my product does that other products don't do that gives you value that's going to have a much greater staying power. So hopefully through our performance products, even without raw material.
Increases over the last year or so we certainly have seen higher margins, because we're selling effect rather than just selling.
Cost increases that have come through and I would hope that as raw material prices dissipate should they dissipate over the course of the next year or so.
I would hope that we would be able to hold on to.
Large.
Large portions of that.
Thank you. Our next question comes from the line of David Begleiter with Deutsche Bank. Please proceed with your question.
Thank you Peter and advanced materials do you have any updated thoughts on.
How much aerospace will be up this year and what that relief.
Hello.
Pandemic levels in one where you would catch up to those levels.
I would hope that as we look at.
The improvement that we see in an aerospace.
Let's remember that during the pandemic.
We were down pushing about $50 million of EBITDA from where we were two two.
Beginning of the pandemic to where we were at the depths of the pandemic.
I'd like to think that we have recovered probably about 40% of that.
And.
That's going to be a lumpy recovery.
But I would hope that certainly by the beginning of 2024 thereabouts.
I'm, giving you a forecast on.
Commercial airliners.
Probably not qualified yet I would certainly hope that by the beginning of 2024 that were back to kind of that pre pandemic sort of.
Volumes and margins and so forth.
But again during during this time period.
There have been other projects that both Boeing and Airbus have been working on that we've qualified for and I would hope that when the volumes get back to where they were previous to the pandemic that we're actually doing better than we were previous to the pandemic I would hope that there are more applications as the industry looks at light weighting.
These high energy prices by the way a high fuel prices crude prices natural gas prices.
You are going to see.
Airline industry do everything they can to try to lightweight and putting a premium on an on.
I'm saving fuel typically when the economy slows you think.
There are more of the older more depreciated airlines in the fleet, but when you have fuel prices as high as they are right now.
We're seeing a shift towards that light weighting.
Anywhere they can they can replace the product with carbon fiber, they're doing so so I personally am quite bullish as to us recovering sooner and better.
But I think it's still going to be over the course of the next.
Six to seven quarters yourselves before we're fully back to normal.
With that operator, why don't we take one more question and.
Given the fact, we would try to end at the top the outlook down a little bit over.
Thank you. Our final question comes from the line of Josh Spector with UBS. Please proceed with your question.
Yeah, Hi, guys. Thanks for squeezing me in here just maybe this is related with the prior question, but advanced materials industrial markets in Europe , I think <unk> comments that you expect it to remain stable to me that seems pretty different than what we've heard from companies over the past couple of weeks and even how you talked about polyurethane so lots of different for huntsman.
In advanced materials in Europe that enables that stability.
Yes, I think that when we look at again that theyre going to be some sectors that are falling there, but when we look at Europe .
There are three areas in Europe that I'm quite bullish on over the next couple of quarters. One of them is aerospace Airbus obviously, located there which is a very large customer of ours.
Others the auto industry.
When we see this move towards light weighting carbon composite materials and so forth.
Insulation around he's installation around EV vehicles, we've recently won.
Some some exciting contracts that we wont know associated the impact for the next quarter or so but going forward to think about the.
Temperatures in which these electric motors are operating the batteries and so forth those all need to be heat shield that is they're usually just mere inches away from the driver.
We qualified to have our products.
Both serving as a heat shield and also as a structural barrier between the driver and electric motors and batteries and so forth and Alaska.
The power sector. So as you think about the grid systems that are being modernized grid systems that are being extended to include solar projects wind projects offshore projects and so forth.
A lot of those are going to have transformers cables structural products, where our materials have replace ceramics.
Another a number of of older heavier applications, especially as you start looking at the.
The marine.
Trickle marine applications.
No.
Those are the three areas that we're pretty bullish on.
Thank you we have reached the end of our question and answer session.
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