Q1 2023 Huntsman Corporation Earnings Call
Greetings and welcome to the Huntsman Corporation first quarter 2023 earnings call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone.
As a reminder, this conference is being recorded it is now my pleasure to introduce your host Ivan Marcuse, Vice President Investor Relations. Thank you Sir you may begin.
Thank you Maria and good morning, everyone. Welcome to Huntsman <unk> first quarter 2023 earnings call joining us on the call today are Peter Huntsman, Chairman, CEO and President Paul Lester Executive Vice President and CFO . This morning before the market opened we released our earnings for the first quarter of 2023 via press release and posted to our website Huntsman Dot com.
We also posted a set of slides on our website, which we will use on the call. This morning, while presenting our results during 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. They involve risks and uncertainties and are not guarantees of future performance you should review our filings.
For more information regarding the factors that could cause actual results to differ materially from these projections or expectations. We do not plan publicly updating or revising any forward looking statements during the quarter.
We will also refer to non-GAAP financial measures such as adjusted EBITDA, adjusted net income or loss and free cash flow you can find reconciliations to the most directly comparable GAAP financial measures in our earnings release, which has been posted to our website Huntsman Dot com I'll now turn the call over to Peter Huntsman, our chairman and CEO .
Thank you Ivan good morning, everyone. Thank you for taking the time to join US, let's turn to slide number five.
Adjusted EBITDA for our polyurethane division in the first quarter to $66 million, we continued to see significant destocking across our markets specifically in North America. This destocking combined with the competitive pricing environment continued to put substantial pressure on polyurethane business during the quarter. However, the business.
<unk> improved sequentially in both our European and Asian regions, driving and nearly 80% improvement in EBITDA compared to the fourth quarter.
<unk> sales volumes in the quarter declined 21% year on year volumes also declined 6% sequentially, which is in line with normal seasonality.
All regions declined in the quarter versus the prior year with the Americas accounted for two thirds of the reduction is lower demand and significant destocking significantly impacted sales volumes, our European region did show a sequential improvement versus the fourth quarter this business conditions stabilized.
Stocking subsided and costs moved lower from our vantage point as business conditions appear to be steadily improving from last year's low point within Europe , our automotive business delivered volume improvements versus both the prior year and prior quarter.
Most other major markets in Europe , and showed stable to improved volumes sequentially.
Stability in the region was helped by natural gas prices falling from an average of about $23 per ml btu to about $17 per btu.
Note that while natural gas costs are significantly lower today, there are still six times higher than the U S. Gulf Coast prices. In addition, while benzene was relatively flat sequentially. We did see an increase throughout the quarter combined with continued competitive MDI pricing pressure.
Nevertheless, we continue to make progress on our previously announced European restructuring initiatives and expect to start seeing some of the cost savings positively impacting our margins as we move through the remainder of 2023.
We'll continue to aggressively manage costs in mass production.
Lower demand with lower cost moderately better demand, we do expect profitability in our European region to improve through the remainder of the year as a result of this steady improvement we are restarting our smaller MDI unit and it will have both our MDI lines operational in the second quarter.
This will give us maximum flexibility to match our supply with demand as we progress through the seasonally higher sales months euro.
And will be a core region for our polyurethane business and we will benefit for many years to come from the region's neither drive for better energy conservation and efficiency, we remain well positioned to bring your energy saving solution to both residential and commercial construction markets.
As well as innovative improvement to the light weighting of automobiles.
In China, we did begin to see some green shoots with steady improvement in the first quarter, which was in line with our expectations, We expect China to remain on a steady path.
Positive trajectory as the economic environment slowly returns to normal we are seeing positive demand trends.
The end markets, such as the cold chain infrastructure and certain consumer related markets are China <unk> joint venture contributed approximately $11 million and equity earnings for the quarter.
The largest headwind that impacted polyurethane first quarter result, and which has continued into the second quarter is the high level of Destocking in our Americas region, specifically in our construction businesses.
Remember that two thirds of our polyurethane Americas portfolio comprises of construction end markets approximately 40% is commercial construction, 60% is residential of which 70% is related to new residential building.
The composite wood products, which is linked closely to residential construction demand with under significant pressure throughout the first quarter with housing starts down approximately 30% year on year as pressures moderated going into the second quarter. Our spray foam business also appears to have bottomed and is now showing.
Some slight improvements in order patterns.
Commercial related installation markets. The Destocking continues to be aggressive and may lap through most of the second quarter, our visibility into the full supply chain is limited and it's tough to project when our customers will return to normal order patterns.
Well, we are seeing factors such as rising interest rates, placing pressure on new construction spending about 65% of our commercial business is tied to repair and remodeling such as re roofing, which we expect to normalize once Destocking concludes Additionally, we remain on the right side of energy efficiency.
Then we will benefit from both improved building codes in the U S government's inflation reduction Act.
Outside of construction, our global automotive business, which represents approximately 15% of the polygon portfolio delivered volume improvements both sequentially and versus the first quarter.
We.
We continue to expect volumes in automotive to be up low single digits for the year our.
Last summer's platform will see stronger profitability from quarter four into quarter, one on the back of margin expansion. Despite overall demand weakness.
We are taking decisive and proactive steps to make our polyurethane business more efficient stronger and better positioned for when the current challenging macro conditions abate.
We continue to monitor and adjust production rates accordingly.
Both at Rotterdam, and at Geismar to ensure we aggressively manage our working capital with cash generation as our top priority.
Furthermore, we're on track to deliver the $60 million in cost savings we've laid out for.
Polyurethane as planned.
<unk> exiting geographies that are not generating acceptable returns and consolidating additional back office functions.
We have now exited our southeast Asia polyurethane side. In addition to our announced exit from South America last year. We've also been working for many months towards an orderly exit from our Russian operations, while ensuring we remain fully compliant with multiple sanction regimes.
A highly complex political legal and regulatory environment today, Russia represents less than 1% of our corporate revenue and we are hopeful that we can complete the neck said during 2023 okay.
Looking further into the second quarter, we expect to see a seasonal improvement overall, we do expect continued destocking in the United States, but we see that Destocking moderating as we move through the quarter, we anticipate the current improving demand trends in Europe and Asia to continue putting it all together we expect.
Polyurethane suggested EBITDA for the second quarter to be in the range of $85 million to $100 million.
Let's turn to slide number six.
Performance products reported adjusted EBITDA of $71 million for the first quarter equaling, a 21% EBITDA margin despite significantly lower demand versus the first quarter a year ago.
This margin is in line with our long term expectations of 20% to 25% the decline.
And adjusted EBITDA versus the prior year was driven primarily by a 31% decline in volumes year over year. This was partially offset by a slight improvement in unit variable margins and lower fixed costs. The.
The volume decline was due to lower demand across all regions, particularly in our performance amines and <unk> and hydride businesses.
<unk> significantly lower demand year on year, we did see improvements quarter on quarter, especially in Europe , and Asia, indicating that the destocking experienced in the fourth quarter as in the past.
Markets, where we saw a positive sequential trends, where construction in coatings and adhesives, which both saw significant destocking in the fourth quarter. We also saw modestly positive sequential trends in our product lines that serve agriculture energy and electronic.
Calls, namely semiconductor lithium ion batteries.
Capital improvements into our differentiated performance amines products sort of polyurethane, serving polyurethane installation EV batteries and semiconductor markets continue to move forward on schedule.
We have a stay.
Stated in the past assuming macro.
Assuming stable macro conditions, we expect these projects to start up by the end of 2023.
Performance products isn't attractive division will continue to invest in high return organic projects and look at possible bolt on opportunities when available so far in the second quarter overall demand continues to be below the prior year level, but it was running steady with the first quarter across each of.
Our regions, we believe customer inventories are below average and we will see our volumes quickly pick up when end market demand returns overall performance products second quarter adjusted EBITDA should be in the range of $60 million to $70 million based on current demand visibility.
And with some moderate pricing pressure and ethylene amines and malaise and hydride.
With that let's turn to slide number seven.
Vast materials reported adjusted EBITDA of $48 million in the quarter, an increase of $7 million versus fourth quarter and down versus the prior year due primarily to lower sales volumes Destocking appears largely behind us, though we continue to see pressure on our infrastructure coatings.
Market.
Total volumes increased quarter on quarter and drove the adjusted EBITDA improvements.
The sales volumes decline of 21% was due in part to our ongoing reduction of bulk liquid resin commodity sales.
Our core specialty business was down but less than the segment average the Americas was the weakest region due to depressed demand primarily from our coatings adhesives and general industrial markets.
Our aerospace business continues to demonstrate improving trends sales were stable compared to quarter. One of 2022, primarily due to some supply chain constraints and timing impacting sales in the quarter.
Our order backlog is solid and we expect growth as we move through the rest of 2023 and then into 2024.
The increase in demand for our products is heavily relied to wide body production rates, which have positive payer wins with increased travel and new airplane orders from airlines, our expectations remain that this important and profitable sector will return to pre pandemic levels during 2012.
Before we.
We continue to seek out bolt on acquisitions for advanced materials to grow and expand the overall portfolio as well as improve the overall returns of the business.
We're also continuing to move forward with organic investments such as our marijuana business, which provide an innovative technology to capture methane cut it into hydrogen and a carbon material that can be utilized across many different markets.
While still in development, we expect to aggressively scale this business over the coming years.
With lower Destocking and seasonal improvements, we expect advanced materials delivered improved results in the second quarter versus the first quarter, we expect second quarter adjusted EBITDA for this division to be in the range of $50 million to $56 million with improved EBITDA margins.
I'll now turn it over time to our Chief Financial Officer, Phil list there Phil Thank.
Thank you Peter and good morning, let's turn to slide eight.
Adjusted EBITDA for the first quarter was $136 million compared to $387 million in quarter, one of 2022 and $87 million in the prior quarter.
The declines versus the prior year was driven by reduced volumes, 24% across the portfolio, particularly in construction related markets.
Americas volumes declined by 31% Europe , 28% and Asia by 21% as a reminder, approximately 40% to 45% of our portfolio is linked to global construction markets by commercial residential and infrastructure spend which all remained under pressure.
On year pricing across our total portfolio was flat while cost of sales increased by $40 million.
Polyurethane unit variable margins declined with year on year pricing pressure in all regions and increased raw material costs and advanced materials, we expanded unit variable margins as price improvements exceeded cost increases while in performance products. We managed to maintain last year's strong unit margin performance.
Sequentially volumes improved slightly in performance products and advanced materials, while polyurethane volumes were lower as Destocking continued throughout the quarter. In addition to the normal seasonal declines.
We did expand unit favorable margins from quarter, four and all three divisions, improving EBITDA by $65 million as reduced costs more than offset some downward pressure on selling prices.
Raw materials in particular European natural gas declines compared to the fourth quarter.
These cost declines led to an improvement in European profitability and positive adjusted EBITDA for the region. We remain focused on our European restructuring efforts during 2023.
SG&A costs remain under control, while inflation remains high across all of our operations around the world and delivery of our full year cost optimization savings during the remainder of the year remains Paramount.
G&A as a percentage of sales was 9% on a last 12 month basis.
Mind. It we also have an increase in 2023 of approximately $40 million of.
Noncash pension expense lowering adjusted EBITDA year on year foreign exchange movements impacted the business by approximately $4 million.
The U S dollar strengthened sequentially, we saw a benefit of approximately $3 million was the.
Dollar weakened during the first quarter compared to the fourth quarter.
Equity income from our propylene oxide joint venture in China declined compared to quarter, one of last year by $2 million, but improved slightly sequentially.
Adjusted EBITDA margins came in at 8% for the company.
With all three divisions, improving sequentially polyurethane at 7% margins in performance products and advanced materials, continuing to deliver higher returns of 21% and 17% margins respectively.
Let's turn to slide nine.
We concluded quarter, one with approximately $240 million of run rate savings from our starting point in 2020 and.
In Europe , we have now completed all of our works Council negotiations and are progressing the plans we laid out at the end of last year to reduce our European cost base by approximately $40 million.
Regarding our global business service operations, we're expanding our new regional service hubs in Costa Rica, and in Poland to include customer service and system supply chain roles as we continue to build out those two centers.
We're also addressing improvements that we can make to our manufacturing indirect costs with a focus on some of our larger facilities in.
In addition, as previously anticipated we did complete our exit from our polyurethane Southeast Asia sites at the end of the first quarter, we expect to meet or exceed our $280 million annualized run rate target by the end of 2023 and as we guided on our last call delivery of our 2023 savings amounts to in India.
Benefits of approximately $18 million compared to 2022, excluding the impacts of inflation and the increase in noncash pension expense.
Turning to slide 10.
First quarter operating cash flow from continuing operations was an outflow of $122 million driven by lower levels of profitability of seasonal adverse movements in working capital as well as our annual insurance premium payments free.
Free cash flow for the first quarter was an outflow of $168 million and our.
Our last 12 month free cash flow to adjusted EBITDA conversion ratio stands at 41%. Excluding proceeds we received from the Albemarle settlement in quarter two of 2022.
Capital expenditures from continuing operations was $46 million for the first quarter and we remain on track with our performance products projects targeted at energy saving installation semiconductors and electric vehicles. As a reminder, given the current economic environment and state of the construction markets we have reduced.
<unk> targeted capital spend by approximately 10% compared to 2022, so a range of $240 million to $250 million for the year.
During the quarter, we completed the sale of our textile effects division to our chroma as previously indicated we expect final net cash proceeds from the sale of approximately $500 million after tax and after customary closing statement adjustments.
We closed out the quarter with $2 billion in liquidity, our net debt leverage of one times based upon our last 12 months adjusted EBITDA as.
As we progress through the year, we would expect our leverage ratio decline from its current level given a decrease in the LTM adjusted EBITDA.
Our balance sheet remains investment grade and we continue to be committed to a balanced capital allocation policy.
Adjusted earnings per share for the first quarter was <unk> 20 per share of 2023 increased dividend is in place at 95 per share a 12% increase over 2022 and dividend yield is currently approximately 3.5%, we repurchased $101 million of shares in the first quarter.
Consistent with the guidance, we gave on a protocol and in line with a total return of capital yield to shareholders of approximately 10% at current levels of market capitalization.
Back to you.
Thank you Phil.
It takes us some time and then read the comments from analysts regarding this quarter's results and seemingly more important any view of Q2 in the second half of this year I'm reminded of the fairy tale, a goldilocks and the three bears goldilocks was on our quest to find the perfect temperature for her newfound GUL and comfortable sleeping quarters.
Everything was too hot or too cold to softer too hot.
It seems that every forecast is either too aggressive and Tesla unbelievable or two concerns that isn't necessarily unbearable.
I will attempt to share a forecast.
Hope not to share the same fate as goldilocks being discovered by our family of hungry bears there.
There are three macro indicators that we need to see for the continuation of improvement to more normalized earnings.
First of these conditions as our North American market, we need to see an improvement in the massive destocking that we've seen in the fourth and going into the first quarter. This is not to say that we need to return to last year's build rate of one 7 million homes, but rather just the stabilization to the present.
<unk> of housing starts.
While new homes starts have dropped 25% our demand has dropped much more as builders works through their supply of building materials. It is our hope that we will see a return to demand consistent with today's numbers and housing starts I believe that our spray foam business has moved through its inventory and our <unk>.
OSP business is quite close as orders are now starting to recover.
Some building materials used in commercial buildings and warehouses I think will take as long as the rest of Q2 to work through its remaining inventory.
We'll see an improvement.
And North American demand when we work through our inventory and another step up when we see a recovery in the number of home starts returning to last year's numbers.
We are seeing signs that much of our MDI that goes into the construction market is modestly improving and inventory levels are stabilizing.
The second macro indicator, we're following is European energy.
As we look to our European business as we continue to see the impact and headwinds of higher energy costs. While we are seeing lower natural gas prices than any time in the last two years. There is still six times higher than in North America. These higher prices are also taking a toll on consumer spending and confidence.
Europe has been enjoying low energy costs due to unusual weather conditions and slower economic activities Europe's overreliance on a fundamentally unreliable energy source, while also painful reliable backup energy production is rendering the region uncompetitive on the global economics.
Page.
I am concerned when I see forward electricity prices in France for this upcoming winter at near record prices that we are not improving our system that is simply not working.
While we are all hopes of lower energy cost this is hardly a solution.
We'll continue to cut cost and do whatever we can to offset these higher costs. The same time, we'll focus on those markets in Europe that will prosper such as aerospace energy conservation installation light weighting adhesion and the automotive industry.
Finally, the third macro indicator is the Chinese economy, we continue to see improvements in demand as this massive economy re emerges and Covid lockdown have.
<unk> visited some of our sites in China. This past week I have a renewed sense of optimism that this recovery will continue and should lead to higher prices and margins.
In short, we're seeing demand improve across a number of our business groups. This will obviously improve as inventory levels return to better match day to day demand.
We are maintaining our market share lowering our costs pushing for higher prices, where we can and looking for ways to create faster shareholder value.
We remain optimistic that this recovery continues while also preserving our investment grade balance sheet and continuing to reduce costs should this recovery proved to be transitory.
These steps will allow us to take full advantage of improving markets as they happen.
With that I'll turn the time back over to you and let's start the question and answer session.
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One moment, please while we poll for questions.
Our.
Last question comes from Mike Harrison with Seaport Research Partners. Please proceed with your question.
Hi, good morning.
Peter was wondering if you could maybe give us some thoughts on how you expect the second half to unfold, obviously, you've given us your Q2 outlook that includes still a lot of destocking.
But as that Destocking subsides. It seems like we could see a pretty substantial step up in EBITDA in Q3, maybe talk about some of the puts and takes that you're seeing in the second half. Thank you.
Well, Mike. Thank you very much I think yes, we will look at the second half.
I don't expect it will still be anywhere in the mode of Destocking, that's not to say that everything is going to be destock by July one, but I think it will be through the vast majority of that as I think about the biggest area of concern for me, which is our U S. MDI.
We're two thirds of that goes into the construction market.
Kind of break that out into three areas, who are 40% of that going into our spray foam business Hudson building solutions of which I think all of that inventory has basically been.
Depleted if you will 30% that goes into composite wood production and I think that inventory is fast normalizing the price for composite wood.
Wood panels and orders are I think are both stabilizing which are very good signs for us. So I think that's pretty much run its course as I look at the other 30% of that two thirds construction demand of MDI, North America, Thats going into what I'd consider to be the.
The composite insulation panel, that's going to be everything from roofing on warehouses to siding on office buildings in those.
Those sort of miscellaneous application that I think that 30% probably has another month or so to go again I don't have perfect vision into that.
So yes, I think by the end of this quarter and I look at the biggest areas that have been impacting the business around destocking, mainly north American MDI I think that we're pretty much done with that.
I also think in the second half, we're not going to continue to see.
The impacts of Lockdowns coming out of Lockdowns in China.
And the Chinese new year celebration, so forth, it's typically the drag on our Q1.
Numbers and so again.
As I sit here today, having just returned from China, a couple of days ago.
And met with our <unk>.
To face with our sales management in our various teams in China and so forth.
There is there is quite a bit of a sense of optimism and so forth I don't think that China is going to come flying back and have a full recovery in the quarter, but I think it's going to continue to be a gradual improve.
Improvement between now and the end of the year, which helped tip the balance.
A more optimistic view at least the second half of the year. So.
Think about advanced materials and performance products I think for the most part the inventory levels of that Destocking in those areas.
Largely either depleted or rather de minimus.
He has more to do with just pricing competition and overall demand.
Performance products, our margins on a per pound basis really haven't moved in the last year, what we've what we've struggled with in performance products as the overall demand in the overall volume in that business.
And as that volume recovers obviously.
Youll see that.
The profitability in that business recovers as well I think that will certainly be a second half event.
In the second quarter as I said in my prepared remarks.
We're seeing rather flat.
Demand from Q1 to Q2.
Some pressure on pricing in some of our products. So I think as we as we look across the board.
The inventory is going to become less and less of an issue.
I think raw materials, hopefully will stabilize.
We continue to keep an eye on Europe and.
But again as I tried to look at in the second half I want to be absolutely clear here yesterday.
We were all running around worrying about regional banks that were dropping by double digit percentages. In this morning, seemingly that crisis is over and all the regional banks are up double digits. The market lost half a trillion dollars in value yesterday and today, we are getting to half a trillion dollars.
Yes, I don't want to get so transfixed in the second half of the year.
We're ignoring the day to day.
Impacts that we're seeing in the macro global economies.
And I think what is important is that we stay focused on controlling those things around cost, having a quality customer base matching our production working capital with the demands in the market and when the recovery does come.
We are there to take full advantage of it as quickly as anybody else.
In the market, so Mike sorry about the long rambling there, but I think it's very good question.
That should tell you that there are some some positive issues in the second half but.
I've also havent much clarity for the next 48 hours.
Our next question comes from Michael <unk> with.
Wells Fargo. Please proceed with your question.
Hi, there. Thanks for taking my question. This is <unk> on for Mike. So I wanted to follow up on your.
You said that Youre managing production to meet lower levels of demand I just wanted to get a feel for where your MDI operating rates are about now.
Realistically, how low you can bring them in order to meet demand.
Well I think that the lower levels of demand was probably more of a fourth quarter issue.
We are seeing demand improving in the first quarter and going into the second quarter, we did reduce our rates and.
At our Rotterdam facility, when we saw demand plummet at the end of last year and those rates were our operating rates were in the high <unk> around 70% utilization rates. We are now, saying that we're able to sell more than that so we will be operating all of our MDI lines, albeit at.
A reduced rate, but all of our MDI lines, we'll be operating back in Rotterdam will be producing those as we're able to.
Satisfy the needs of the marketplace.
I would say that across the board, we're probably saying a 70% to 80% utilization rate.
And that's going to vary obviously, you look at the United States for the North American market, it's much higher than that if I were to assume that the imports that are presently coming into North America.
We are stripped out.
But nevertheless, I think you've got to look at least on the polymeric side of MDI, you've got to look at that as somewhat of a global market.
Our next question comes from David Begleiter with Deutsche Bank. Please proceed with your question.
Thank you good morning.
Peter that's gone into Chinese MDI, how impactful of imports of those products into the U S have been at.
And when do you think the recovery in China could forestall further imports of Chinese MDI into the U S.
Well I think the Chinese imports coming into the U S is around 20% and that's that's pretty much I think that's pretty well.
Matched.
Economy, as the economy slowed down and pick back up I don't I don't get a sense that there is a flood of Chinese material coming into into the U S and that's somehow as a drag on pricing and so forth.
So.
Yes.
As China recovers.
<unk> continued to see demand, obviously Chinese production is much better off being produced and sold in China, and Theyre going to make a lot more money selling it in China, and I would assume that that will be a deterrent win that.
And that demand continues as that demand continues to improve that'll be a deterrent to export but look there.
There is Chinese production that is.
It's probably going to be coming into the U S. On a on a permanent basis is.
A large Chinese producer.
As a commitment to this industry to supply certain segment of it but I don't see that that product a wash in this in this market to the detriment of the market.
Our next question comes from Frank Mitsch.
With Permian Research. Please proceed with your question.
Thank you so much.
Peter you indicated that you're going to restart the lines and Geismar in Rotterdam. This quarter I'm just curious how we think about the the sequential improvement coming from restarting those plants and what the restraint on profitability might've been in the first quarter.
And then also obviously congratulations on completing the sale of textile effects I was wondering if there was scope for now that that business is kind of if there was scope for improvement in terms of your corporate expenses in terms of maybe right sizing that.
Any help there would be very helpful. Thanks.
Yeah, I'll, let Phil comment on the overall corporate expenses to the bottom line of course, we are and we're trying to.
Look at making sure those expenses match, our our company size.
I want to be very clear when we talk about.
Restarting MDI lines right now, we've announced the restart of Rotterdam and in the.
Start of Geismar.
You have to take place we have not made a decision yet to restart that facility.
And in order to do that.
We'll need it.
Probably about two months or so.
Lead time to get that plant to get that idled facility up and going in full.
Tom.
So yes it is.
As I look at the amount of profit.
Frank I wont be very clubs I don't think we've been constrained by not having that second line running in Rotterdam. What we've seen is the amount of inventory that we have in Rotterdam and the capacity of the existing plant has now reached according to our sales forecast in the orders we have on the books have now exceeded that 70%.
Our production and.
We need more production in order to meet demand and so again, we'll be running all of the lines in Rotterdam, which is too but that doesn't mean that we're going to just be running about a 100% and flogging the market.
Both those plants both of those lines together will be running at around 80%.
Utilization rate.
On the corporate expenses, Frank I think we've guided on the last call to about $175 million in 2023, it's actually down from 2022. Once you strip out another 20 million until the benefit that we got from transactional FX and corporate last year. So we will be down year on year and.
As Peter said, we'll continue to focus on when we sold textile effects, we removed all of the costs all of the cost of our allocated directly to textile effects.
So you'll have a combination of all those costs have gone and corporate costs down year on year. Once you take account of.
Okay. Thanks.
And as Peter said, our focus is on completing our overall cost savings program of cost optimization program, where we're targeting an additional $18 million year on year of cost savings. Thank you.
Our next question comes from Alexia <unk> with Keybanc capital markets. Please proceed with your question.
Thanks, and good morning, everyone.
Peter could you talk about your costs in MDI in Europe , how do they compare currently to your U S assets China assets.
And exporting any MDI from the U S Europe .
Yeah, I think when we look at it.
There are gives and takes on all of these things.
On the U S. We have a bit higher chlorine and caustic costs, then, but we've got lower energy costs in the U S and Europe .
We're advantage when we look at such things as tariffs and so forth.
Yes.
Got it.
Selling moving product to China for example in the U S. You've got it at $25, 30% tariff or you're looking at a single digit. So there is there is internal and external forces.
Look at this whole thing is you look at these but by and large the gap between Rotterdam without getting into too much specificity on a cost per ton basis fair to say that the gap between the three regions has now shrunk to a point, where they're all within freight.
Just say if you think about the cost of freight between this.
The three regions, they're all lower than that so there is not a lot of advantage.
Unless you're desperately shortens particular tonnage there's not a lot of advantage of moving from one region to the other.
Yeah.
Our next question comes from on this one for RBC capital markets. Please proceed with your question.
Great.
Thanks for taking my question. So so first off on the outlook.
If you kind of look at the first half versus second half and I know this question was asked earlier, but.
What is it going to take is it really just come down to kind of China recovering.
Maybe some better construction or automotive trends.
What is it going to take for for maybe a little bit better performance in the second half and when you. When you. When you think about that the Destocking is it really you noted it was maybe a little bit more pronounced in North America. So is that kind of in construction areas are where specifically are you seeing that.
Yeah, I'd say that the Destocking is as probably as you look at it on a global basis.
Three quarters.
Of that Destocking is taking place in North America, and I think Thats, where do you see the greatest concentration of that taking place in the building materials in U S housing.
So I would say that we couldnt see other destocking take place, but Europe by and large after COVID-19 stayed in a pretty lethargic state, whereas the U S. The housing boom after COVID-19 and the last.
12 to 24 months is really.
Got up considerably and it's come down Theres a lot of of stock that was built up take of a year year and a half ago. When MDI was short and not just MDI, but a lot of building materials were very short a lot of people were buying excessive amounts of materials and stockpiling it.
So again, it's not just in MDI is here in the U S housing markets a number of raw materials from lumber all the way I'm thrilled that it's going so when we talk about dealer inventory process that takes place.
It's not just around MDI or around a particular chemical so it's largely the whole chain.
So again I believe that in North America, where I think that you have the greatest opportunity for improvement relative to where we are today.
Yeah.
We could get through that that destocking.
I think that starts to give us price leverage and it gives us improved volume.
But again youre going to be selling into a housing market. The housing start market that is 25% against smaller than it was a year ago and is that now improve the number of homes being built and thats going to be a whole number of issues from from demand to mortgage rates do consumer confidence and so.
Fourth as that number increases from its present 121 3 million homes per year sort of run rate back up to its 1617 run rate that we saw year ago, you'll see another push for demand and another opportunity for pricing improvement. So I think in North America again Youre going.
Be saying a lot of kind of a multi step.
Europe , I think youre going to have to just say a <unk>.
Across the board GDP improvement, coupled with an energy policy.
That needs to be established needs to allow manufacturing to be competitive.
Tuck in to help us a whole lot if you see a recovery in the economy in Europe and energy remains.
For electricity and for natural gas and natural gas byproducts that remain five to 10 times higher than the rest of the world.
So yes, there is.
Got to be some sort of a.
Change.
Continuous improvement takes place here again in China, I think that was just a question as to how quickly do they get back to a normalized run rate.
I'm optimistic because I am I think that it's going to be.
A steady but gradual improvement between now and the end of the year.
Our next question comes from Karen can burn with Mizuho. Please proceed with your question.
Hi, good morning.
You clearly have a very strong capital position now.
Closing the textile business jet cashless fee generated into bankruptcy year, how should we think about your capital deployment priorities and how does the M&A if at all now fit into your your story going forward, yes sure. Thanks.
Thanks, Gary for the question as we said our balanced approach to capital intensive policy, making sure that we maintain our investment grade which in general over time is a net debt leverage ratio of two times, we have said that we would deploy.
Deploy approximately $400 million of cash into share repurchases. This year, we feel about as competitive from an overall return to shareholders perspective, but we do have the flexibility on the leverage, particularly with the portfolio, we have going forward to deploy cash into M&A.
And in order of priority very clearly for advanced materials is an area that we would like to seek out bolt on acquisitions as we did during the Covid time frame frame, where we added CVC Gabriel to our portfolio horizontal place in advanced materials, and we would look to build up that business as bolt on acquisitions to come.
I'm available.
As they become available from a value perspective, and generally youll kind of the past couple of years, they've been pretty high and we've stayed on the sidelines, we think going forward there should be some value to the businesses, but balanced approach overall.
We've got a strong enough balance sheet to be able to see what to do them.
Yeah.
Our next question comes from Laurence Alexander with Jefferies. Please proceed with your question.
Good morning. This is Dan Rizzo on for Laurence Thanks for taking my question.
You mentioned that the push for increased energy efficiency as a tailwind in the U S and U S. Construction I was wondering if it's kind of a similar potential structural tailwind in China, where they're looking to do that as well or is it really not material in that region.
Yeah.
I would say that it's not as material, but yes. It is it is going to continue.
Continued to.
I have an impact on the business, particularly around Evs.
I mentioned, the EV market light weighting and so forth. There is also a very large investments being made in China on building out the power grid.
Some of that is going to continue to.
To help with us.
And as we think about our advanced materials and as we think about our polyester means going into wind and the amount of wind blades and so forth that are needed.
Not just in China, but more and more of the world is becoming dependent on China to produce wind blades and to produce the components for batteries and solar panels and everything else and so a lot of what the world's going to need as far as these various components around it.
Green New deal if you will so long as the United States has an anti mining policy and anti production policy around many of the components going into these these end applications.
I see real growth in China.
A lot of these components be it wind blades EV batteries.
Solar panels and.
And various other products.
Thank you very much.
Yeah.
Our next question comes from John Roberts with Credit Suisse. Please proceed with your question.
Peter given your exposure to housing I would have thought the three little pigs would've been a better fairy tale and goldilocks.
That's a that's a good point, especially that insulated house with a wind wouldn't have been able to get through.
Anyway Huntsman business systems has a lot of small competitors are you seeing any signs of distress. Among your competitors and are you gaining any share even though the market's down.
I wouldn't say anything that is appreciable or material to our bottom line.
<unk>.
As we move further and further downstream.
I think about hbf, where youre, making up 40% of that two thirds of our MDI.
We really don't compete against another MDI producer, we don't compete there.
It gets out of the polyurethane really we're competing against competing applications competing material mineral fiber and other smaller entity. So we will certainly see this going downstream more and more but at this point.
I wouldn't say that it's having any impact.
On the business and I would say John that.
For H B X in particular that market has changed over the last five to 10 years I think it's become a little more consolidated with some of the largest strategic players coming into the into the market and you actually see less of the smaller players.
That market too.
Today.
We think that's that's good we think that's good from a discipline into the into the into the market in terms of making sure that the appropriate products are sold and more applied correctly.
Yes, it's an excellent point so it companies like Owens Corning, so forth it used to be exclusively mineral fiber now moving into the spray foam business and that's frankly that's.
That's good for us.
Our next question comes from Hassan.
Uh huh.
Illegal global please proceed with your question.
Morning, Peter.
You know a lot of commentary about MDI volumes and the like and you also touched on.
You know the sort of goings on on the raw material side of things and I just wanted to get a sense of what you guys are seeing.
<unk> of.
Sort of global MDI cost us.
You guys, obviously, you know and you've touched on that are.
Relatively cost advantage.
You had like around 40% EBITDA margins in Q4 around 7% EBITDA margins in the polyurethane segment in Q1, So I would just like to imagine that you know.
A chunk of your competitors are maybe at breakeven or negative EBITDA margin levels. So any any thoughts around cost positioning and how that may actually give the market some buoyancy would be appreciated.
Yeah, I think I think that's.
Excellent question again.
I won't be hesitant I won't be saying anything about our competition not because I have a lawyer in the room, but just because I really don't follow them all that well.
On profitability per ton, but I, just I look at our three regions Rotterdam, Geismar and couching and you look at the.
The four components that I look at manufacturing a ton of MDI you've got.
Benzene I've got natural gas and I've talked about natural gas thats everything from electricity to hydrogen that speak to.
So it's a whole range of products not just the price of natural gas and natural gas.
And then you've kind of got your cost caustic and chlorine.
Which is I would say it would be the fourth component.
Third compounding a fourth component is going to be labor.
Which which you would think would be.
Flywheel, but in actuality these plants do not employ a lot of people they have quite a lot of people downstream and in ancillary businesses to keep these operations running.
Are people that you have actually working on a shift to keep an MDI plant.
Working so kind of reversing it.
And of those four steps I would see that labor is probably immaterial as far as one region competing versus the other and I would say that benzene is probably immaterial in the sense that it is a fungible global commodity and we buy benzene from all over the world source it from all over the world.
The difference between benzene cost in North America to Europe to China is not going to drastically differ.
I will say that where we see the biggest variability of difference has come in the cost of natural gas.
And during the peak of last year's energy crisis in Europe , the cost Delta between.
China and Rotterdam.
Where China is going to see in energy.
Thats more coal based Europe's going to see in energy.
More.
When coal and whatever else they've got going.
Nearly what's actually in excess of $1000 per ton now that was only for a relatively short period of a quarter or so but we've never in the history of MDI at least that I follow up if I ever seen a thousand dollar per ton difference just because of natural gas prices energy.
Prices.
Between one region in the next so that volatility that's going to be your single biggest variable and then you get into caustic and chlorine and thats going to be again, that's going to differ region to region, depending on supply and demand in the energy costs and values that go into that component, but that's not going to.
<unk> be much more than 100 $100 and change.
From region to region. So it really is.
<unk> energy component and I know I harp, a lot on that but I would just remind you. When we go back to 2019 and 2020 as recently as just two or three years ago Rotterdam was consistently our cheapest MDI in the world.
And cheaper than China cheaper than North America, and as far as the production cost basis and Thats the impact that.
Energy policy.
Sales are successful.
<unk> has had on and off.
Operation like that within.
Yes.
Year, and a half after being the lowest cost operating facility one of the lowest cost operator. So it is in the world.
Europe now finds itself is so I mean 1000, plus dollars a ton out of the market, which is about three times the cost of freight.
Product from one place to another.
Our next question comes from Jeff Zekauskas JP Mark. Please proceed with your question.
Thanks very much.
The cash flows were negative $1 22 in the quarter.
Part of that was.
A decrease in your accounts payable.
By about $50 million sequentially unusually accounts payable goes up I don't know by $100 million.
What are the sources of the changes in payables because that has to do with the reverse factoring.
That is our financing terms.
Sure.
Ayers changing in a higher interest rate environment and to status <unk> to your cash flow expectations for the year.
Yes.
It's bill.
Working capital came in as we expected and cash flow overall as we guided.
The big element that you were talking about there and accounts payable was really related to our insurance premium we pay in the first quarter every year.
That wasn't a surprise to us I think we counted on.
On the on the previous call overall as you look forward, we're focused on maintaining a.
Our working capital.
Appropriate degree given the underlying economic conditions that we are that we have obviously cash flow will be under more pressure with lower EBITDA year on year, which is what we've said but.
Launch focused on making sure that we.
Managing our working capital appropriately if you look at the cash conversion cycle. The number of days with no real difference from where we were last year and I think we're managing that in a in an appropriate manner. Thanks for the question.
Okay. Thank you.
Our next question comes from Matthew Deyoe with Bank of America. Please proceed with your question.
Good morning, everyone.
Peter you mentioned.
Briefly that you're expecting some price weakness in ethylene amines and <unk>.
These are kind of hard markets for us to get a handle on so as we look at price and your comments I mean, how much.
Or do they actually falling and kind of what level are they now versus perhaps.
Pre COVID-19.
Covid is even the right benchmark, if not maybe what's a better benchmark price.
Yes.
Prices from a pre COVID-19 basis, we certainly have seen prices on both of those products.
Come down since the pre Covid time period.
And.
I think that.
As we look at pricing in those areas.
Yes.
Become more competitive.
Mostly among domestic and mostly with derivative demand.
Those products.
Neither one of those have a great deal of.
Competition number of competitors and so forth. So it is.
A combination of just what we're seeing on the domestic market and what we're seeing on.
On downstream demand and volume pull through but fair to say that those those prices with those products.
We're a little bit lower than they were on a pre COVID-19 basis, I think that we were guiding really to moderate pressure quarter on quarter Q1 to keep see for those products, which is really demand driven.
Underlying market conditions, driven overall all focuses on what our unit variable margins look like and obviously, you've got some of the raw materials such as butane.
Such as ADC caustic dropping as well so our focus remains on unit margins in the quarter.
Fairly typical end markets.
Growth conditions.
It's really as we look back to the performance as to where we were a year ago in that business.
Yeah that 150 ish sort of.
On a quarterly basis.
It will be driven by demand and we just need to see demand pick up at the end of the day the margin margins are there.
Pricing discipline I think is there for the most part.
It's demand.
Yeah.
Our next question comes from Kevin Mccarthy with vertical Research partners. Please proceed with your question.
Hi, good morning, and thank you.
Peter within performance products, how would you compare and contrast, your volume experience for <unk> versus the means and are you seeing any green shoots there whereby you would expect to be able to take up operating rates sequentially.
Yeah.
I would say good question, Kevin on the malaise side I think the demand we're seeing.
It's going to be pretty flat and.
The biggest offtake that's going into <unk>.
Unsaturated polyester resin so think about.
Yeah, a lot of home.
Hotel.
Recreational vehicles and so forth.
I don't see those markets I see them gradually improving over time, but.
Again from an inventory point of view I think the Destocking. There is taking place in those markets will continue to gradually recover but I don't see that bouncing back.
All that quickly.
Operator, we're at the top.
Top of the hour and I'm cognizant of People's time, why don't we take one more question and then we'll let everybody go.
Okay, Great. Our next question is from Angel Castillo Morgan.
Please proceed with your question.
Hi, Thanks for fitting me in here just I guess, a quick follow up on restructuring you said, you're continuing to progress on European restructuring just curious if there's any other.
Beyond some of the.
Assets that you've shut down and that you've moved away from I guess any anything incremental that you might be looking at.
It provides clear opportunity for cost savings from a restructuring perspective.
Thanks for the question Angel.
We guided in terms of cash.
Cash that we were looking to spend on.
Our restructuring this year of around $100 million, excluding capital I think we're still.
Ill get for around those.
Sort of numbers and you can expect a lot less cashing out in 2000 22024, as we basically get those savings into our into our run rate honestly I'll focus this year is completing our European restructuring.
Delivering on some of the savings, which actually came through right at the end of the of the first quarter I did say in the earlier remarks, we're focusing some of our manufacturing costs and making sure that we're appropriately managing those indirect costs as well as we move forward for the remainder of the year. Thank you.
We have reached the end of our question and answer session. This concludes today's conference. Thank you for your participation you may disconnect your lines at this time.
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