Q2 2019 Earnings Call
The conference Sir please hold for the next available conference specialist.
Conference and you may have any please.
Brian Healy.
And speaking of every last name.
Each D.A. Eli.
In the name of your company.
Era in our age.
Our era.
Am I right.
Thank you.
[laughter], which comfortably going to join.
The air brake technologies earnings call.
Okay.
Just one moment.
Thank you.
Not finding that we now have you calling in on a different number sets.
For Huntsman does that sound familiar.
Oh, that's right sorry, yes, it is huntsman icon.
Okay. Thank you no problem, what can I do through.
Thank you.
Taking this technology in the international markets to accelerate the growth of this business over the coming years.
We had a positive EBITDA contribution in the quarter from dental X. New international efforts.
Markets.
Wherein we experienced modest volume growth in the Americas include installation automotive and the composite Wood board market.
These were offset by volume declines in our furniture adhesives in coating markets, while competitive the margins in this region remain relatively stable.
Our investment in the new splitter at our Geismar facility is core to our strategy to expand margins and broaden our product range to accelerate growth in our downstream businesses in the Americas.
We are still targeting 2021 for this investment to be operational.
Turning to the Asian region of Polyurethanes, our China expansion fueled our growth region.
Fueled our growth in the region. However, it should be noted that our differentiated volumes were up even when excluding the impact of the recent expansion.
This region continues to benefit from insulation growth into large scale infrastructure projects and applications.
The adhesives coatings, and elastomers and footwear markets in Asia are also contributors to our growth.
We continue to gradually shift our China portfolio and the newly added capacity to be more differentiated.
Our automotive business in China declined roughly 8% with a prior year. Despite a mid teen decline in the overall market as we continued to benefit from product substitution and gain new customers. We believe that customer inventories are at very low levels in this region.
Overall demand in China is soft, which we believe is likely to remain unchanged until customer confidence and visibility improve while component prices are now back to about where they were at the start of the year. There does seem to be some stability at current levels.
In Europe , our downstream margins are stable, despite lower underlying demand versus the prior year.
Our volumes in the region were up but that was primarily a result of favorable comparisons due to an extended outage that impacted our results in the same period a year ago.
The overall macroeconomic environment remains soft we do not expect it to improve in the near term definitely at the end of the second quarter as we were bringing our Rotterdam facility back online from a planned maintenance program.
Our outage was extended due to issues from a third party supplier.
That outage is now behind us, but it will impact EBITDA in the third quarter by roughly $20 million and negligible impact on the second quarter.
The margins in our core base differentiated business continue to remain stable.
The graph lines in the upper left hand quadrant reflect the margins experience globally in our component and differentiated urethane portfolios.
Majority of our business is differentiated and was not materially impacted by the volatility of component MDF prices.
As shown here our downstream margins remain resilient in spite of continued volatility volatile MD I component market conditions.
Our Mds, our EBITDA in the Americas continue to be less volatile than other regions globally.
On the other hand, Europe , and Asia, primarily China are down sharply, reflecting the challenging macroeconomic.
And that environment and its impact on component margins. The good news is that we believe customer inventories in Asia are at very low levels and with any potential clarity and visibility on the horizon that could lead to a sharp improvement in results similar to what we saw in April and the first part of May.
For Europe the region remains soft however, it is not getting materially worse, and we continue to make strides in markets such as installation and elastomers.
I'm pleased to see how our urethanes portfolios performing in these challenging macroeconomic conditions.
Our long standing strategy to drive this business more downstream through internal investment in bolt on acquisitions is paying off and remains unchanged. We continue to move forward with our high return projects such as our Geismar splitter investment and building new system houses in certain regions as well as aggressively looking for bolt on acquisitions that will enhance our portfolio. We expect the third quarter of RMD, our urethanes business will be comparable to the second quarter, our MTB business reported an EBITDA of $15 million in the second quarter and we expect a similar result in the third quarter.
Let's turn to slide number four.
Performance products segment reported EBITDA of $71 million total volumes were slightly up versus the prior year largely because of favorable comparisons due to a planned turnaround that impacted last years second quarter.
This business is seeing similar market pressures that our other divisions are experiencing around the world. Additionally, a more competitive environment in glycols and certain the main markets specifically ethylene. It means has put pressure on margins in that segment.
Despite the short term challenges we are focused on extending on executing our strategy to push forward in our derivatives downstream in the more differentiated businesses and applications.
We did continue to see growth in our downstream targeted markets such as gas treating oilfield services in urethane additives.
Our Blake and hydride business remains relatively stable in North America and Europe .
We announced last Friday that we agreed to purchase a 50% of our Malaysian hydride joint venture in Germany that we did not own from Sasol.
This is in line with our strategy to invest in businesses with stable earnings and attractive margins. We expect this acquisition to be immediately accretive to our earnings and free cash flow. After we close which is expected to happen in the fourth quarter of this year.
The multiple paid for this business is less than five times EBITDA.
For the third quarter, we expect lower fixed costs and continued growth in certain differentiated markets to result in modestly better quarter on quarter earnings.
Let's turn to slide number six.
Our advanced materials business reported adjusted EBITDA of $55 million, a decrease compared to last year's record EBITDA of $62 million, but improved versus the previous quarter of $53 million.
Higher sales in our aerospace markets were offset by lower sales in other markets such as power automotive and construction driven by weak macroeconomic fundamentals in Asia and Europe .
EBITDA in the quarter was impacted by lower volumes unfavorable currency translations and higher fixed costs due to recent investments to support future growth in our R&D and manufacturing capabilities.
We will continue to invest in this business. So that it may capture both short term and long term opportunities, we considered advanced materials, a core platform for both organic and inorganic growth.
Like our other businesses customer order patterns in Asia remain very cautious demand in nearly all of our European markets, except for aerospace is also tepid.
Full year growth in this economic environment will be difficult to achieve although we do expect results in the second half to be marginally better than last year.
Want to emphasize that advanced materials remains one of our most resilient businesses, despite the challenging economic environment.
Europe , and Asia more than $15 million invested to date in future growth and foreign currency headwinds full year EBIT da in this business should be close to 28 or should be closer to 2018.
Let's move to slide number seven.
Our textile effects division reported EBITDA of $28 million slightly down versus last year's record second quarter. This decline was driven by lower volumes due in part to uncertainty surrounding trade across many of our Asian markets, causing softer customer demand and supply chain disruption, adding to the volume pressure, we saw raw material shortages for some of our products due to increased environmental regulation in China impacting certain suppliers.
Total volumes were down 11%, but net sales were down only 5% because of the improved mix of higher specialty sales and pricing alignment that have helped to offset the higher raw material costs and currency headwinds.
We believe that the total industry is down mid teens. However, it is important to note that while our non specialty volumes were down in line with the overall market our specialty volumes were up 3% in the quarter as customers continue to move towards more sustainable and environmentally friendly solutions that we offer and can supply on a global basis.
We believe the long term fundamentals for the business are unchanged and remain positive looking out over the next several years.
Though in the near term we expect the current headwinds in the industry to continue we will likely keep next quarter's EBITDA modestly below the prior year.
Before sharing some concluding thoughts I'd like to turn a few minutes over to Sean Douglas Our Chief Financial Officer.
Thank you Peter turning now to slide eight.
Second quarter, adjusted EBITDA declined year over year by $97 million.
Our Polyurethanes division.
Accounts for approximately 70% or $68 million of this decline.
Within the Polyurethanes adjusted EBITDA variance approximately $60 million of the decline is due to the loss of spike and tight margins within polymeric MDI.
And $8 million from MTV, largely due to lower MTV margins from our PEO MTB, China joint venture.
Our performance product segments segment was down year over year, largely due to lower upstream intermediates profitability and lower profitability in certain means.
We were also negatively impacted by approximately $17 million year over year due to foreign exchange translation as the euro and yen were weaker against the us dollar by about 7%.
Turning to slide nine.
During the quarter, we improved on our working capital by bringing inventory levels back in line with prior year metrics.
Despite a 23% decline in our EBITDA year over year, we improved our free cash flow by approximately 38% versus the prior year second quarter.
Our improved free cash flow also benefited from reduced maintenance spend as we had a significant plan multiyear maintenance turnarounds at our port Neches facility in the first half of 2018.
As we look into the second half of 2019, we will remain focused on our working capital management.
And we remain confident in our ability to deliver a free cash flow conversion of EBITDA up near 40%.
For the full year 2019, we now expect to spend between $350 million to $360 million and capital expenditures.
In the current economic environment, we will be diligent in evaluating our discretionary spend.
Turning to taxes.
In the second quarter, our adjusted effective tax rate was 25%.
For the full year 2019, and looking forward, we now expect our adjusted effective tax rate to be between 22 and 24%.
This is a bit higher than our previous projected rate due primarily to a change in the regional distribution of our earnings.
Our cash tax rate tax rate remains approximately three to 500 basis points below our adjusted effective tax rate.
We ended the quarter with about $1.5 billion of combined cash and unused borrowing capacity and a net debt leverage of 1.7 times.
As we announced last Friday, we acquired the remaining 50% interest in our Maleic anhydride joint venture and Germany from sophomore chemical holdings.
We already consolidate this joint venture within our consolidated earnings.
However, upon closing of this acquisition, which is expected within the fourth quarter of this year, we will receive the benefit of 100% of its cash flow going forward and no longer reflect a minority income deduction from our earnings.
Within our financial statements for 2018, the minority income attributed to the joint venture partner was approximately $11 million.
This business generates a strong free cash flow.
Which in 2018 is estimated to be around 80% of EBITDA.
Degreed purchase price.
Is $92.5 million adjusted for our share of cash net of debt.
Using 2018, EBITDA, we estimate a multiple paid of less than five times for our partner share of EBITDA.
During the first quarter, we repurchased roughly 4 million shares for approximately $81 million.
At the end of March we have approximately $608 million remaining under our $1 billion board authorized amount for a multi year share repurchase program.
We expect to continue to repurchase shares in a balanced and opportunistic manner.
We continue to hold a 49% interest in Venezuela, which represents approximately 52 million shares.
In conclusion, we are confident we will deliver on our annual free cash flow conversion target of near 40%.
We remain focused on a balanced approach to capital allocation and growing our downstream differentiated businesses and we remain committed to our investment grade balance sheet.
Peter back to you thanks, Sean.
The beginning of the year, we gave a total year forecast based on our best assumptions that we saw at the time.
As we look at the second half of this year, we see a number of variables that will affect our second half earnings performance.
Well, we're always seemingly a single tweet away from economic or political change in market conditions. I think it is we're sharing with you our latest views.
Should we see a more positive market environment over the next six months, we believe that our adjusted EBITDA results will be down around 15% or better from last year.
Events that we could see impacting our resorts results positively will include a beneficial outcome on a handful of trade deals lower energy prices improved Chinese GDP, a stabilization of the auto and construction industry and falling interest rates.
However, the present time, we're seeing more negative than positive as trade dispute SAP consumer and customer confidence.
The Chinese and European economies continue to slow energy prices remain volatile housing in automobile markets continue to be lethargic.
Should these trends continue we see our adjusted EBITDA down about 20% plus or minus that from last year.
In spite of where we are in the economic cycle aggressive steps are being taken to create further shareholder value. These steps are in our control. These steps include one.
We remain committed to an investment grade balance sheet generating a targeted ratio, 40% free cash flow to EBITDA.
During this past quarter, we generated $240 million of free cash flow.
Number two.
This past quarter, we purchased $81 million of our own stock and we'll continue to do so on an opportunistic basis number three we continue to invest in our organic growth. So we have a number of investments in both manufacturing and research, including our Geismar, Louisiana MD splitter expansion that will allow us to upgrade 70 tons of commodity.
MD to more profitable and specialty grades of MD I repeat that I am, particularly pleased to see how our strategy strategic downstream focus on Polyurethanes has resulted in a much more resilient in high quality Urethanes business.
And before we continue to take advantage of our strong balance sheet to acquire assets that further enhance value.
We announced this past Friday, the acquisition of 50% of our German Malaysian hydride joint venture from our partner Sasol over the past few years as businesses earned over 20% EBITDA margins in 75% free cash flow to EBITDA ratio.
We are acquiring this valuable asset at less than five times EBITDA.
Despite of some of the economic headwinds that we see around the world. We feel that we're building a stronger more valuable business that will continue to create shareholder value.
With that operator, please open the line for any questions or comments.
Absolutely ladies and gentlemen at this time, we will be conducting the question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
A confirmation can we indicate that your line is in the question queue.
You May press Star two if you would like to remove your question from the Q.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.
Our first question comes from the line of Bob Koort with Goldman Sachs. Please proceed with your question.
Good morning, This is Don Kim on for Bob.
Can you guys go through to the cadence of earnings and to the second half of the year breaking out between third quarter and fourth quarter.
Seems like you talk about inventory return to normal levels in terms of your own inventory and then talking about pretty low inventory levels and Asia.
For customers you just kind of talk about how that maybe could impact the cadence of earnings into the third and fourth quarter.
Well.
I'll, let John comment on on the numerical side of that on the business trends side that we see.
I think that we're seeing a lower demand on.
On products right now than what GDP numbers are performing or say that in times. When people are de Inventorying is they are right now times of uncertainty are carrying less inventory because of the uncertainty going into the future I think that in many regards we're seeing.
Very similar scenario that we saw at the beginning of the year, where inventories came down faster.
Than than normal and.
And subsequently any good news has a tendency to turn those.
That sort of sentiment around I would say that in my personal opinion is that is certainly more the case in Asia than the rest of the world and if there is a bounce back I think that you'll see that in Asia.
Versus Europe , where I think you're probably suffering more from from true GDP sort of zero percent grow perhaps even negative in many parts of the EU.
I'm I'm less optimistic about a turnaround in pricing and demand, whereas in Asia, I, certainly would be more optimistic about.
A positive results coming from trade negotiations in any number of things.
Stimulus spending that's taking place in China, the economic vitality of the southeast Asia markets and so forth. If we start to see a restocking of AD inventory, we most likely will see prices and margins improve with that.
Sean as you want to add from a numerical point of view.
No Peter you've covered it well I would just say you've pointed out well that we received a significant benefit in quarter. Two further inventory reductions there was an impact offsetting that on the PML and as you look at the second quarter, you had a big impact on performance products.
Largely about $15 million of impact on fixed cost Ruben and stocks because of that as we look forward I would expect that not to not to recur.
So I think from a cadence perspective related to inventory I think we've taken that impact in the second quarter.
That's helpful. Thanks, and I guess on last quarter, you guys talked about.
Global effective.
Right for M&A kind of in the mid Eightys, we can provide an update on where you see operating rates today and kind of how you expect that the trend in the second half from here.
Yeah, I would say the second half we'll continue to see.
Where we are today.
Europe is operating in my guess summit, you're probably operating around 90% capacity utilization in the us at a 100%.
I say that because you asked is importing and product right. Now so is capable of consuming all the MDF produced in North America and is further supplementing that with imports coming in from Asia, and Asia is probably operating somewhere.
In the mid 70.
Percentile.
Always tough to get the visibility is what's happening in Asia, because you have some very large facility single line facilities over there and any one of those lines coming in or out of the market are down for maintenance and so forth.
I can take a anywhere from 1% to 5% of the Asian market down on a single line. So I'd say globally, we're probably somewhere in the mid to high.
80% capacity utilization and again I I would see that that probably were up.
As I look across particularly Asia, im not seeing demand and I'm not seeing prices deteriorate further.
Have they hit a bottom I'd like to think so I think polymer prices in the more commodity grades or if anything ticking up slightly in those areas.
But I think that it's going to take something more than just a.
And then just GDP growth to get prices up I think you get to see some some resolution to some of the trade negotiations.
Very helpful. Thank you.
[noise].
Thank you. Our next question comes from the line of Kevin Mccarthy with vertical Research partners. Please proceed with your question.
[laughter].
Yes, good morning.
Peter question for you on capital deployment, you bought back shares in the quarter and then it sounds like you got a pretty good deal on the JV buyout with Sasol.
Can you comment on your expected balance of future repurchases against the 608 million you still have authorized relative to what you're seeing in the M&A pipeline today.
Yes, I think particularly at these prices that we're going to continue to be buying.
As we move forward, but.
I would say Kevin that as I hope I've been consistent in the past, saying that we're going to continue to look at a global.
Economic dynamics, and so forth and if we have a low stock price and that is brought about because of a massive global uncertainty on Ross I think it's tempting as that would be to go out and be very aggressive in share buybacks first and foremost is going to be the strength in the vitality of our balance sheet to making sure that we've got.
Plenty of dry powder first and foremost for our organic growth in our internal operations.
And then we'll be looking at share buybacks and we will continue to be doing that on a a.
Go forward basis and assessing that.
Almost on a daily basis.
Okay. Thank you for that and then second question.
If I may on.
It's the capital budget and opportunity for any incremental cost cuts. It looks like you did ratchet down the capex for 2019.
Can you talk a little bit about kind of where you are versus maintenance levels at this point and what the possible trajectory could be into 2020, and I guess related to that.
If the world does remain quite uncertain.
Demand continues to languish.
Other additional costs that you might be able to take out of the equation.
Well, if you think about what I would consider to be our core capex maintenance cost is about $175 million a year and anything much beyond that 175 200 kind of range is discretionary now you don't stop that spending on a dime, if you're halfway into a project and.
You want to try to save cash.
It's you've already preordered, a lot of materials, you're under contract so forth that discretionary spending while it doesn't stop on a dime. It certainly can be slowed fewer to make an announcement today for instance, you certainly can can pull back tens of millions of dollars in the fourth quarter not always the right thing to do because you'll get cancellation fees and so forth but.
Yeah, I would just say that if you really we're we're very bearish about 2020, and you saw a an economic calamity, taking place, which I don't say, but if you were to see that you would.
You'll be looking at a budget that you probably could.
You could probably cut 50 to 75, maybe upwards of $100 million of that for next year.
And on the cost side Peter.
You mean on the personnel side.
Well it could be any any sort of restructuring initiatives that you might have in terms of optionality.
I think that again.
I think in a business like that we're always trying to offset the rise of inflation.
That comes into the business, if thats not being clearly offset by growth and then we expect the businesses to be able to control their costs.
As we don't automatically see our margins expand on an inflation adjusted basis. So I think that you've always got an opportunity to tweak your cost basis by a couple of percentage points, but as I look through the company today, Kevin I struggled to see you know that there's there's 250.
Individuals that we have.
That don't have anything to do and we're just going to go cut those individuals.
But if you get into a major recession, if you get into an economic calamity as I said earlier, where are you looking back at 2008 sort of economics will certainly assess the needs then and assess the business ability to to to pay for those expenses and the customer's ability to pay for those services.
Great. Thanks, so much for the color.
Thank you.
Thank you. The next question is from Aleksey Yefremov with Nomura. Please proceed with your question.
Thank you good morning, everyone.
Peter I believe you said you expect.
Andy I Polyurethanes EBITDA to be flat sequentially does this include the negative $20 million from Rotterdam outage and if so does this mean that underlying business is actually improving sequentially.
Yes, it does it does mean that and so.
Yes, we'd see that sequential and thats with the adjustment.
Yes, if I if I may follow up on those what does what does a source of improvement and.
And Paul your face.
Typically I think you know we saw a pretty sluggish de inventorying of product during the second quarter I don't think that you're going to continue to see that that de inventorying I'm not sure that's a word or not but the inventorying of product take place in the third quarter. The way. It did in the second quarter typically to June July and August outside of Europe , typically a pretty strong month.
And so I typically a third quarters that is a strong month for us.
Well also say.
Further expansions in our last summer's business, we continue to be very bullish on that and our demolition business as we grow that internationally I'd just remind you that a little over a year ago, we bought that business. We had virtually no international sales on that and we're now gradually expanding that into Europe and into Asia and in that that that's going to continue to grow and I would just say that as we look at automotive.
You know I know theres, some very bearish sentiment I know coming out of Asia, and so forth, but as we look at the the replacement of competing materials, new applications and so forth.
We continue to be quite bullish on that.
Thank you.
Thank you. Our next question is from Jeffrey Zekauskas with Jpmorgan. Please proceed with your question.
Thanks very much.
Question on slide four is the meaning of the.
Graphs that you have.
That youre component and the high margins.
Dropped in half year over year, roughly you stressed the stability of the differentiated margins since the meeting of this that year.
Your component margins dropped in half.
Hi, Jeff This is Sean that's a good approximation.
As you look at the percentage of our portfolio, which we know is not a lion's share of the lion's share is downstream differentiated but the upstream or component and did see that as you've probably seen announced in some of the the public views of competitors.
Okay, and then I was looking in the.
The lower right hand quadrant of that slide.
And is the meaning of the volume piece that differentiated volumes year over year fell sharply and component volumes rose sharply is that the meaning of that or thats not the meaning of this lower cost trend.
Now the lower right hand quadrant, it's a literal statement there that year over year, you're seeing growth rate. So as you look at the differentiated volume growth at downstream growth, you're actually literally seeing a 7% growth versus last year and you are seeing on the gray bar, you're seeing a growth in the more commoditized upstream part and that's largely driven by the expanding.
Capacity that's come on in in China.
So Shannon.
Yeah, Jeff, Jeff, Jeff just to remind as we as we bring on China were first selling that product into the component market and where the demand is largest in that market and that we're going to continue to take that product and move it into the downstream differentiated growth within China and within southeast Asia. So you'll continue to see that shift of a expansion taking place across the board because it's a new facility, but I would hope that over time, we will continue to see that that component volume in China, moving further and further and to differentiate and as we look at where we've been investing in our systems houses.
In expanding that in Taiwan, and so forth. We will we'll continue to see that we have the infrastructure and we're building out the platform to be able to accomplish that.
So why is the blue bar for Claude and Grey bar rise a lot, what's the meaning of that in the second quarter of 18 versus the second quarter of 19.
And that.
Yeah, I I again, I would think that a lot of that has to do with the growth that we're seeing in the component end of the market versus a differentiated side of the market.
And Brandon So and then part of that also remember that during a chunk of that time period.
We were also able to see the Rotterdam expansion that took place.
In the latter part of 17 and 18 and in also demolition. So you'll see an unusual I mean, I wouldn't expect to see differentiated growth around 16, 17% on a quarterly basis.
And so with the expansion we saw in Rotterdam coming on at the end of 17 with a demo like acquisition so forth.
We did we did see differentiated growth quite aggressive during that time period, and that's going to fluctuate a little bit as we it'll be overshadowed by the growth that we're seeing component with the startup that you see from this chart starting in the third quarter of 18 fourth quarter of 18 and going into early 19 as well China.
Okay, great. Thanks, so much.
Thank you. The next question is from Jim Sheehan with Suntrust. Please proceed with your question.
Thanks Sarah.
Good performance on free cash flow this quarter, and you're you're still targeting that 40% conversion rate can you just talk about what your outlook is for net working capital in the second half and also maybe.
You know what pension and some of the other items might look like.
Sure. Jeff. This is Sean you will always see in our business in the fourth quarter a benefit on working capital just from seasonality. So as you look to the rest of the year, you're still going to see additional benefit coming from working capital. In addition, just ongoing efforts to continue to improve on on on inventory and receivables as it relates to pension.
I think we've we've mentioned before that on an annual basis, our cash spend on pension is about $100 million and so I wouldn't expect that really to be anything different than you've seen in prior years I think the rest of the components of the of the cash flow Jim shouldn't be all that surprising cash interest.
Should be what it what we've always indicated it would be from a cash tax perspective, as we look for the full year.
I would expect that number to be somewhere around $150 million for a full year on cash taxes.
And that fits in with the percentages. We've stated so I think from a.
Perspective of maintenance and so forth.
In that category I don't expect a lot of gyration coming into the second half year, we do have a little bit of spending ahead of a PEO MTV turnaround that we have scheduled for 2020.
That will happen as we as we finish out this year, but I wouldn't expect a lot of surprise on that maintenance line between now and the end of year either.
Thank you and in terms of anti spot prices in Asia.
It looks like some consultants are calling for prices to move higher in the fourth quarter.
Yeah, but one of your competitors express some skepticism of that what is your view on the potential for higher pricing in the fourth quarter.
Well.
Again, all manufacturers will have different end use applications combination with customers and so forth and so I'm I'm not surprised that there would be some variations in differences of what people are saying.
With different customer bases, and so forth I think where were we as I said in my comments. We are convinced that we've seen the bottom of prices, a third quarter and fourth quarter and if anything prices are starting to edge up and I would think that we would see a gradual improvement in the fourth quarter on component pricing.
Thank you.
Thank you. Our next question is coming from the line of Frank Mitsch with.
From Freemium research. Please proceed with your question.
Hey, good morning folks.
Peter I really appreciated the commentary when you were discussing polyurethane.
On how the second quarter started out and then faded kind of in the mid may.
Timeframe and I was wondering.
How you might apply that pace of business commentary to the company overall and more importantly.
Here, we are at the end of July .
How is July overall in terms of pace of business.
Well I am Frank good to hear from you I have not seen any numbers from July just some sales data and so forth, but as we look at it it feels pretty flat I think that it's.
I think it would be honestly I think June was a pretty tough month from volumes and overall sentiment in July was was likewise at the beginning and I think we feel like we have bottomed out if you will particularly in Asia and in demand and.
The question is just how quickly does that turn around again when I when I talked in my prepared remarks about.
Negative sentiment through the second half I am assuming that there is no trade deals that are going to materially change the business I'm, assuming that theres no GDP growth at turnaround China I would just say that that this is China is in Asia in particular.
Or I should say Asian, two inch in China are I think very susceptible to.
To the trade sentiment and so forth, it's taking place and I think that as you see a resolution and some visibility you will see consumer and customer confidence return right. Now we look at the number of distributors in freight forwarders, and third party handlers and particularly in China.
Inventory at those levels is very low at this point I don't see that getting worse and if anything.
Yes, there might be a bit of a shock the industry should there be any sort of positive sentiment that would cause them to start buying and replenishing that.
Alright, that's certainly is helpful and if I could ask a question on the Sasol JV acquisition. My first reaction is you're buying lake and hydride at under five times EBITDA It seems like a.
It seems like an attractive transaction I'm curious as to how the performance of that business has been.
In terms of a stability of EBITDA growth declines et cetera can you kind of Uh huh.
Paints a picture of how that business has been trending over the past couple of years and expectations.
For 2020.
Well I think that.
As we look look at the revenues over the last four years here they've gone for about 100 million up to about 150 million over the last couple of years and EBIT da I think 2014, 15, 16, we kind of saw a lot of new capacity coming on during that time period and EBITDA margins back in 2016 were just right around 2020, 1% and more recently they've been in the mid to upper 20 percentile. So it's oh, yes. It is a joint venture joint ventures, I'd say, just say I'm on I'm, not trying to fend sasol or huntsman.
Purchase price on either side joint ventures are always a tough thing to sell especially when there's a rider first refusal on that one party has over the other and if it were huntsman selling I'm not sure that we would have been able to get much of a different price than what we experienced.
So from a joint venture point of view again, we already booked the EBIT da but we'll we'll be able to to the book consolidate the cash side of that business and.
And more importantly, we'll be able to absorb some of the synergies or create some of the synergies couple of million dollars low millions of dollars and have the the control of the marketing and the sales within the European market. So it's a business that an industry that we feel very comfortable with we like the technology, we like the catalyst, where we make a profit high margins on those products and that technology and it's been a great relationship with sasol over the years and Anda.
Yes.
But it's a I think it's a great move it would be a good move for this company.
And I think the people at SAS will appreciate your answer to the question. Thanks, So much Peter.
Thank you.
Thank you. Our next question is from Matthew Blair with Tudor Pickering Holt. Please proceed with your question.
Hey, Peter I think in the past you talked about normalized global MDF demand growth in kind of like the 5% to 6% range do you have a number and what does that look like today.
And then perhaps Simplistically could you just force rank the end markets.
From best to worse like insulation.
Furniture autos you know if you just had to force rank what would it look like from best to worse.
Well.
First of all on.
It's we will give them the I think the long term number to use on MD I is realistically somewhere between 6% to 8% right around 7% or so at any given time, if you're going to see the inventory taking place or restocking taking place you will see short term volatility. If you look at on a month to month through the quarter to quarter basis, I would say today that MD growth as you take a snapshot right now.
It's probably in the two to three.
Percentage range of growth, but I think again as you look at it on an overall basis on average its a product that has grown not just last couple of years, but last decade, or so it right around a 7% growth as I look and I'm speaking about huntsman here I'm not speaking about the industry is I look at areas, where we've seen the greatest amount of growth for huntsman on a global basis I'd have to probably point out insulation.
Yes, the composite wood material Ace, which is our adhesives coatings and elastomer footwear.
We continue to see growth in those areas.
Furniture for us continues to be quite lethargic and for us that we're I'm not saying I'm not dedicated to that end use but it's a there's there's not a lot of high tech growth that's involved in that and I'm not sure that you're going to see huntsman really ever growing it at 10% or something and furniture I would say that as we look at automotive while globally is we compare automotive in the second quarter to last year, It's flat I would say that if you look at it the massive step down in demand that we've seen particularly in China.
I think that we've performed remarkably well in the growth that we've seen in automotive and add that to its going to continue to be an area that we are quite bullish on.
Sounds good and then with the China component MD I volumes ramping up.
What is your current systems MD I share I think in the past, it's been roughly 70% to 75% and.
You know I guess, where do you see that that share that that system share.
In say like three to five years from now.
I think it will probably remain fairly close to where we are right now it is overall within the company and that's not to say you know I think there might be a little bit of a person a perception that component MD <unk> as bad in the system and the eyes, good ER and I would remind you that a lot of our component business is very high margin business is very stable business in its business that we're going to be in for many years to come. So I think that when we look at those macro percentages that kind of that 70 or 75 to 230 25 sort of split between the two.
Thats not to say that we're we're standing still is to say that within that differentiation within that separation of chemistry, there were always upgrading or our formulations business and we're always upgrading our component business and we have different marketing and sales approach is in each of those areas, but I would hope that.
Year on year that we're always going to see the quality of the customer the the margins that were able to achieve focusing on on smaller perhaps smaller applications and higher margin applications. As we look at the overall split we for the next couple of years, we're going to continue to see have a 60 40 split in Asia between component and formulation and overall you know, we'll be moving China to be that same sort of balance that we see in the rest of the company of around a 70 525 split.
Great. Thank you.
Thank you.
Thank you. Our next question comes from the line of Laurence Alexander with Jefferies. Please proceed with your question.
Hi, there could you flush out a little bit of volatility in he means.
How unusual is it and how much was it.
Well launch always good to hear from you as we look at it our aiming to <unk> you know that that's probably one area of the business that that I.
Well I, it's kind of like your kids you never disappoint in any one of them, but you love them all equally I I think that the Ames business is probably I've been a little bit surprised to see how much overcapacity.
Has come into the means market in the last quarter. So but it is shown in the past that theres the aiming.
Our family of chemistry that we have there is very resilient I think longer term, it's going to continue to be a strong performer for us, but short term you know were down a with our ethylene the means and and yes. We're seeing some of the new facilities that have started up around the world that have that have come into the market I think a little more aggressively with more tonnage and maybe we had expected but yeah. That's that's competition.
But I don't see that being a long term trend, that's something that will bounce back from and and like set a means by and large over time, it's been.
Been a great contributor to this company.
And then I guess I'm getting out is how much of the EBITDA hits in the quarter was the means business.
It's about $15 million.
The hit on that and so it's yeah.
Right right around that area.
And.
What sort of assumptions as you as you're thinking about the full year outlook, what kind of assumptions are you using for.
Extended shutdowns in either the summer or I'm in either August or in December .
Well.
I don't see us having.
Any any of you know any large set downs that we have planned.
For the fourth quarter of this year.
Yeah, So I'd say that we ought to be able to see pretty consistent earnings during that time as it pertains to the impacts of shutdown our biggest problem, but to be honest with you. This year and 2019 has not been the shut down as much as it's been third party suppliers do.
To our facilities such as in Rotterdam, and so forth, where we've seen rather unreliability, rather unreliable supply is coming in of raw materials.
Right and I guess I have to ask the wrong question you know in terms of your sense of vulnerability this year.
[noise] a sense of vulnerability on.
Yes, if we have more disruptions along the Rhine this time round.
Oh, Hi, I think I am not expecting anything that would materially impact the business. Okay. Thank you.
Thank you. Our next question comes from the line of Josh Spector with CBS . Please proceed with your question.
Yes, Hey, guys. So just a question on Polyurethanes volumes. So if you had differentiated up 7% and DIY up around 18% segment as a whole is around 7% with that kind of Dan included.
What was down year over year to bring the segment to 7% overall.
Oh, you mean, you mean from a finish application finished products.
So just overall I mean overall polyurethanes reported 7% and I mean, I know that's the biggest piece would be differentiated part of that the MD component was up so much I would think it would have dragged the segment more I don't know that's probably all that were down or something else in that range I think well I think when you look at the Oh, yeah. The biggest flywheel in volumes quarter on quarter you'd be looking at MTV.
Which which we include as part of that overall volume is a is a polyurethane.
Okay. All right. Thanks, that's helpful and then some.
Hi, Thanks, guys.
Thank you. Our next question comes from the line of Hassan Ahmed with Alembic Global. Please proceed with your question.
Hi, good morning, Peter.
Good morning, Tom how are you.
Very well. Thank you. The next you know you addressed some of these things on the call, but just wanted to dig a bit deeper into the evolution of sort of business conditions through the course of Q2 in India.
You know obviously it was a beautiful quirky quarter because.
I know you had several maintenance turnarounds in China in particular in April right.
So it seems pricing went up a big on the back of effective utilization rates tightening then that capacity came back online pricing went down. So it seems that ahead of those turnarounds day was a restock exercise then a destock exercise. So so two questions are back where do you see effective utilization rates in Q3 relative to Q2 and the second part is you mentioned inventory is really lean and you know it seems that way. So if it all business conditions do normalize and I think you alluded to this could we actually see a pretty big risk in terms of restocking.
So, yes, I I would if you see business conditions.
Kind of normalize again, a I think you definitely would see something like that take place as far as and improvement in margins you know the prices, where they are today or where they were a few weeks ago. It's very similar to where they were earlier in the year. When we kind of saw a low multiyear a low point and in component prices in China, and I see those those prices and gradually edging up during the third quarter and the fourth quarter.
I would say that that again, just anecdotally my gut feel is that a customer sentiment probably has more to do then capacity utilization and as we look at the the sentiment and that what I was referring to earlier about how much confidence do I have in the next quarter, how much inventory am I going to be carrying how much in pricing direction do I want to take a hedge on that I think that has more to do then capacity utilization. So yeah. During during the yes during during the shutdown or phases that we saw earlier this year a lot of those people when they shut down have inventories that are built up their swapping pounds from other facilities and other producers and so I'm not sure that that that really drives margins in demand as sentiment nearly as much as his pessimism around a trade deal that seemingly has just gone on now for a year and a half two years.
And there's a bunch of false rumors and false starts that something is coming to a conclusion, we never seem to get there I think that's probably weighing as much on sentiment and margins in Asia is anything right now.
Understood understood.
Follow up I mean, you talked about obviously customer sentiment, but you know the other part of it is producers and demand.
You know a couple of the company's not not in India, I, but in our there's sort of a clinical product areas.
Seem to be announcing project deferrals.
Are you seeing any any sort of a semblance of tag or any any any indication of tag within the Indiana side of things.
I'm I'm really not.
They're not a lot of MD I projects right now that that are announced in the pipeline are out there that are actively I mean, there's there's been there's been some announcements of like no, but I'm talking about projects, where there's actually construction and huge spending that are taking place right now I'm not sure that there there's a lot of that in Polyurethanes is taking place.
Understood. Thank you so much.
Operator, why don't we take one or two more questions. I think we are nearing the top the hour and it as much as I'd like to do this for the next two hours or so I'm not sure that the interest of our listeners would be equal to mine.
Absolutely. Our next question comes from the line of Mike Sison with Keybanc capital markets. Please proceed with your question.
Hi, guys I'm Peter just your current thoughts on your 2020 goals Yeah, a lot of companies given a tougher 2019 has have kind of delayed some of those goals, but just just say any thoughts there.
Well you know again can you tell me what the macro environment will look like in a kind of tell you where we're going to be I think that your goals are always a tough thing when when we look at the growth we look at our objectives around cash flow generation. We look at those things that we can control and that's yeah. There's always two variables in business that I think that we try to focus on a we try not to mention that at the end of all of our prepared remarks as to what are we doing that we can control what's happening in the macro whenever I I write down and and.
My my sentiment for the end of these Ah prepare tax and I I think about you know are we able to execute on the acquisitions and the organic or expansions that we've outlined do investors are we able to achieve the 40% of free cash flow to EBIT da are we able to manage our working capital are we able to to push product for their downstream and improve margins and so forth.
And those things that we can control I I'd like to think that that we're on course to hit those 2020 objectives that we've laid out to our customers as we look at the macro economy or you know I I certainly can't in this company certainly can't.
You know offset what what.
1% growth in China is going to do versus a projected five or 6% growth when we actually get 2020.
I continue to be an optimist I think that moving into an election year, you're probably going to see a resolution to the trade deals and in Asia, and I think that you're going to see some volatility or lack of volatility in the middle east as issues are resolved there and you typically you see more stability going into an election year and I hope that that's the case. This next year and if that's the case I think 2020 is going to be a very good year.
Got it thank you.
Thank you. Our final question comes from the line of Mike laid head with Barclays. Please proceed with your question.
Thanks, I appreciate you squeezing me in here.
Question for Sean if I look at your new EBITDA guidance, you're calling for roughly similar EBITDA second half versus first half now depending on how the macro shakes out but free cash flow generation in the second half is expected to be more than double the first half what's driving that.
Yes, sure what you've got is truly you got a pretty good benefit still coming on on working capital in third quarter and fourth quarter.
We still see that move and you're not going to have perhaps as much t. Eni type expenses that we had in the first half as you see in the second half on me. So I think you're going to see the benefit on on working capital that should help offset some of the perhaps changed view you've got on EBITDA on the topline.
But confidence is high on being able to hit that near 40%.
I was just so I was just know too.
First quarter I think we called this out in the first quarter, we were little bit disappointed as to.
The the the suddenness of the slowdown that we saw up to at the beginning part of the first quarter and the inventory that was built up because of that I mean, if demand you typically you're producing product anywhere from a week or in some products like MTV a week before its shipped to some of our means for instance in some of our downstream your things you're producing those products one to two months before they are shipped and so if you see a falloff in demand that can be sudden such as destocking, you're going to see a working capital for that quarter I think what I hope we tried to spell that out clearly in the first quarter result, a of our last conference call you you're going to hit rather quick suddenly, which we were in the first quarter on working capital change. So it is let's at its best probably to remain focused on where you are going to be on a yearly basis, rather than the volatility in the sound that you get from a quarter to quarter basis.
Got it that's helpful and if I could just return to slide four.
It component margins are down I think you said call it roughly 50% year over year, but your component volumes are up call. It 15 seventeenish percent year over year. So I guess is there any concern that as you're ramping out the expansion in your Chinese facility that somewhat exacerbating the situation that you have there in Asia or is the goal really to just kind of fill that facility out as quick as possible and get unit margins positive. There you know I think that I personally and I mean it.
I'm I'm sure there might be some different views on this is we look at at AAD.
Our product I think that we put it into the market responsibly I look at when the biggest volumes improvements that we saw a of huntsman moving that that component material, particularly into the Chinese market was during the first quarter moving into the second quarter, which is actually a time, we saw prices component prices going up.
So I think that.
I think we've done a very good job in and putting that product into the market as our customers grow and as we have an opportunity to expand but no we're not going to be a manufacturer or if we're capable of running at 100% of running at 100% and just flogging the market.
Got it thank you.
Thank you.
Operator, thank you very much for.
Fielding the question.
Thank you since we have reached the end of our question and answer session I'd like to pass the floor back over to Mr. Hudson for any additional concluding comments.
No everybody. Thank you very much for taking your time.
Joining us today and this should conclude our call.
Ladies and gentlemen, again this does conclude today's teleconference. We thank you for your participation and you may disconnect your lines at this time.