Q2 2023 Huntsman Corporation Earnings Call
Speaker 1: You
Speaker 2: Hello, and welcome to the Huntsman's second quarter 2023 earnings conference calling webcast. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentations.
Speaker 2: You may press star 1 at any time to be placed in the question queue. We ask you please ask one question and one follow-up then return to the queue. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Ivan Marcuse, Vice President Investor Relations and Corporate Development. Please go ahead. Ivan Marcuse, Vice President Investor Relations and Corporate Development
Speaker 3: Thank you, Kevin. Good morning, everyone. Welcome to Huntsman's second quarter 2023 earnings call. Joining us on the call today are Peter Huntsman, Chairman, CEO and President, and Phil Lister, Executive Vice President and CFO . Yesterday, July 31, 2023, after the U.S. equity markets closed, we released our earnings for the second quarter of 2020.
Speaker 3: for 2023 on our website. Peter Huntsman will provide some opening comments shortly, and we will then move directly into a question and answer session for the remainder of the call. During this call, let me remind you that 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, we mainly recommend you have a special twelve- acting half-
Speaker 3: They involve risks and uncertainties and are not guaranteed at future performance. You should review our filings with SEC for more information regarding the factors that could cause actual results to differ materially from these projections or expectations. We do not plan on publicly updating or revising any forward-looking statements during the quarter.
Speaker 3: We also refer to non-GAAP financial measures such as adjusted EBITDA, adjusted net income or loss, and pre-cash flow. You can find a reconciliation to the most directly comparable GAAP financial measures in our earnings release, which has been posted to our website, huntsman.com. I'll now turn the call over to Peter Huntsman, Chairman and CEO of Huntsman.
Speaker 4: Thank you for joining us this morning. We hope that you like our new format that is designed to give our results to the market earlier and to provide more time for meaningful review questions and comments.
Speaker 4: Before opening the line for questions, I'd like to take a moment and summarize some of the broader observations that we see at this present time. As we have an early, but still rather murky view of the third quarter, some fundamental trends are shaping up. Our North American markets, particularly around MDI and construction demand, I believe that we're seeing the end of prolonged inventory.
Speaker 4: currently fewer homes and commercial real estate projects being built than we saw 12 or 18 months ago. However, order patterns would tell us that much of this de-stocking has ended and we're in the early recovery of building starts as we move into the next year. Commercial construction may take a bit longer to recover.
Speaker 4: We continue to see growth in our Asian and specifically our Chinese markets. This growth would be best characterized as modest, while pricing trends for MDI are also inching upward.
Speaker 4: Short of a major government initiative to spur faster economic growth, it appears that the second half of 2023 will continue to see modest seasonally adjusted improvements. A broader European recovery still feels as though it is yet to come. Pricing is very aggressive as companies fight for what demand is available.
Speaker 4: Energy prices are down from the recent historical highs, but still multiple times higher than energy costs in the Americas or Asia. Energy and economic policies and regulations in Europe do not seem to adequately address the growing uncompetitiveness and deindustrialization that is taking place.
Speaker 4: Europe is losing its ability to export, while also seeing more raw materials imported from abroad, particularly in products where new capacity has been added and demand in domestic markets are unable to absorb new production.
Speaker 4: As I look at our overall portfolio products, unlike past recessions and downturns in the economy, we have maintained decent margins in many of our businesses.
Speaker 4: Our biggest problem today is simply demand. While we do not expect any sudden improvements in the second half of the year. We do see green shoots in many areas of North America and China, but less so in Europe . I believe that the worst of the de-inventoring, particularly North America, is behind this.
Speaker 4: We're obviously much closer to a more fulsome recovery. We're in a unique position to take advantage of this coming recovery given our product portfolio, lower costs, global footprint, and quality of customers and applications.
Speaker 4: So I think about a recovery and the steps that we need to get there. I can't help but think of Churchill's quote in 42, perhaps we are at the end of the beginning.
Speaker 4: To this end, we will continue to preserve our balance sheet and review our portfolio for both possible divestitures and acquisitions.
Speaker 4: We are ahead in our efforts to streamline our costs and we'll continue to not only look at costs, but working capital as well. We're dedicated to returning value to shareholders in the form of earnings, dividends, and share repurchases. Operator, with that, why don't we open the line for any questions.
Speaker 2: Certainly. We're now going to be conducting a question and answer session. As a reminder, please limit yourselves to one question and one follow-up. If you'd like to be placed into question queue, please press star 1 at this time. If you'd like to remove yourself from queue, please press star 2. One moment, please, while we poll for questions.
Speaker 3: Our first question is coming from David back letter from Deutsche Bank. Your line is not live Thank you. Good morning Peter as recovery occurs and polyurethane and it's early, but how do you think about the trajectory of earnings growth in 2024?
Speaker 4: Well, David, good morning. Thank you very much. I think much of this is going to depend on the speed of the recovery. So I do believe that, and again, I'm going to be particularly talking about North America here because I think that a recovery would...
Speaker 4: Again, this is just my opinion. I think a recovery is going to happen sooner in North America and China than it will in Europe . But as I look at North America in particular, I think that the supply chains and the inventory levels are getting precariously thin. Now, this may be a new normal, but typically when we see...
Speaker 4: When we see very thin supply chains of inventory, anything like a sudden spur of demand or even a perceived spur of demand outages that might occur in the industry and MDI plant comes down or something like that. Or if there should be a sudden increase in the price of crude oil.
You look at the price of crude oil and where we've kind of come from the lows of where we were just a quarter ago to where we are today. We've seen an increase of about $10 per barrel or so. But that starts to translate into where people are thinking I've eventually got to refill or start to refill inventory and prices seemingly are going up that might cause I don't want to.
and even looking to early 24, we're not anticipating that, but that wouldn't surprise me either. I mean, that kind of is more of the trend, as you know, Dave, as long as you've been in this industry, it's kind of more of the trend of the industry that they're very rarely are there gradual declines and gradual improvements that take place over a year or two.
It's usually sudden events that have a tendency to shock the industry. So, yes, we do have a large percentage of our North American sales going into housing, construction, energy insulation and so forth. That's not a market that we're trying to shy away from. And it's not something that we're ashamed of.
I think that we continue to see an improvement in building materials and energy conservation and light weighting and a whole number of opportunities, fire retardancy, better coatings and applications and so forth in the housing industry. It's going to continue to be an area of growth for many years to come.
I think that's where the biggest turnaround will come. And I believe that it'll probably, again, in my opinion, happen sooner rather than later. But right now, the numbers will tell us, you know, we're looking for a gradual recovery throughout the second half.
Very good. And just on the Shanghai MDI JV, are there any benefits Huntsman on the new configuration of the operations?
I'm going to let Phil comment on any of the financial side of that. We've had a great relationship with our Chinese partners and a very strong relationship with BASF. They've been an excellent operating partner with us and we can both go to the marketplace and fight like hell.
beating each other up over prices and applications and market share and so forth. But from a manufacturing point of view, it's been a great partnership and I don't see any material change to the business. They'll be able to operate an MDI technology of their own, and we'll be able to operate an MDI.
separation and one that's been planned for for many, many years. You can obviously tell there's kind of a equal divide here of technologies and companies and so forth. Phil, anything you'd add to that from a financial point of view? I think we said David enough, prepared remarks, no material impact on.
adjusted EBITDA, free cash flow and over time on liquidity. I think we may see some slight benefits to EBITDA and free cash flow next year as we move through the course of the year. We will get one crude MDI plant as Peter said. We'll also get the strategically important hydrochloric acid recycle plant. So that's a good balance for us to have.
And we will be able to improve some of the split ratios that we have coming off of that crude plant and therefore target some more of the differentiated businesses and grow those. So look, it's a win-win for everyone and essentially it was a forced joint venture decades ago with BASF and three Chinese partners. But overall from your perspective on modelling, no material impact.
Dr. Chulain is our live. Thanks and good morning everyone. Peter, you talk about improvements in China and polyurethanes business, maybe mom is, could you tell us what's going on there? There's talk about stimulus, any signs that demand could be much stronger next year.
Well, I believe that when you have an economy the size of China that's been in lockdown for as long as it has, I don't think that we've seen the full impact of China reopening. As I look at polymeric pricing, you know where it stands right now being around $16.8, $16.9K.
I think healthy to note that's as high as it's been in the last year as well. In the last year, it's been down from there. So we're seeing this, and it's a gradual recovery, which I think is healthy to see. I always get leery when I see a spike that occurs in a week or two period, because usually what goes up that quickly comes down that quickly.
So it feels to me like there's just a slow steady recovery. I did notice in the Wall Street Journal this morning talking about the recovery is not happening as quickly and so forth. But what we're seeing around auto, around infrastructure, energy conservation, building materials and so forth.
we continue to see a pretty good recovery there.
Thanks, Peter. And then in your spray foam business, you're talking about volumes in North America being flat. How is profitability? Are you able to hold spray foam prices to a better degree than underlying India?
Thank you. Our next question today is coming from Jeff Sokolska from JP Morgan. Your line is now live. Thanks very much. Can you talk about sequential pricing trends in MDI in your three major regions, the United States, Europe , and China?
and a fight for market share there. I'm more optimistic about pricing gains or at least margin staying flat to maybe gradually improving in the US and I see it getting better in Asia.
When you assess the MDI market in 2023,
How fast do you think global MDI demands will either grow or contract and how much incremental capacity do you think has been added because of Chinese expansion?
Well, the Chinese expansion, I'm going to let Phil answer that one because he'll need a second just to look up the data. In the meantime, as we look at 2023 growth...
in MDI, we're really seeing about a flat market, zero growth. Last year we saw a contraction of 3%, which in the 25 years that I've been in the MDI business, we've never seen two consecutive years of negative growth. Matter of fact, I'm not sure MDI's seen two consecutive years in MDI growth.
in 30 or 40 years, that's during the recession, so forth. So, you know, again, I don't wanna sound overly bullish on the second half, I have a tendency to be an optimist, which after this many years in this industry, you have to be, or you'd probably be diagnosed with some form of insanity or mental illness.
But I think that you've, you know, as you look at this, the latter part of this year, MDI seems to be a great product. It's replacing materials, it's making inroads and replacing applications in UPR and rubber and thermal plastic elastomers and so forth. And it's going to continue to do so. I think the fundamental TMO
positive growth for MDI is going to continue on the longer term basis. And as you look out over the course of the next five years or so, we're still going to see if we see something around a 4 or 5% growth, that's still going to outstrip the projected capacity additions that will be coming on in that time period.
I think the fundamental balances over the future, you're going to see more years that look like 2022 and MDI, the beginning part of 2022, than you do 2023.
Just to follow up, Jeff, so as Peter said, it is unusual to have two years where it's either negative to flatten MDI and typically the history is that that snaps back and snaps back pretty quickly from a demand perspective. It turns you a question around supply. One more broad on their Fujian province facility.
this year, that's a 400 kiloton facility overall. They've indicated that they will build over time, quite frankly, out some of the Fujian, some of the Yantai assets further. The history of Wanhua is that they're disciplined, they have a 50-55% market share. We expect that to come in over time and probably matching a 5% demand.
growth increase over the coming year. MDI utilization rates are low right now, and again, you'd expect those to snap back as demand recovers.
Thank you. Our next question today is coming from Matthew Dale from Bank of America. Your line is now live.
Thank you.
So on a consolidated basis, the Decremental Margin on volume has been like 40% for the first two quarters. Is there any reason why your incremental margins would be less or more than that as volumes come back into the business next year? Or should they, yes? I want to make sure I understand the question. You say that the volume should drop down 40%.
that I had went from volumes, your top line drop through is like 40% on volume decrements for the last two quarters. I'm just trying to think about next year or whatever when volumes recover as volumes recover. Is there any reason why?
It should be less or more than that kind of flowing back to the EBITDA on it from volume contribution.
So Matt, this is Ivan real quick. The decremental margins were pretty high because the volume fell off sharply. If you did see a volume increase at the same rate as the decline, I would guess the operating leverage would be the same on the upside. Typically, as you know, a chemical company, decremental margins are probably around 25% to 30%, but that tends to be.
an average over time, right? So it just depends on the volume recovery. But I would expect at the very least, I don't know Phil would you agree, 25 to 30% of the incremental dollar to flow to even that.
Yes, but it could be higher as if volumes were to spike. It just depends on the velocity, right?
Understood, thanks Ivan. And with new home construction data points have obviously kind of ticked up. Peter, you talked about that a bit.
I think is there any reason why the mix of houses and who's building and maybe the price point with that lend to spray foam insulation underperforming or outperforming the rebound that we see in just data from new construction in the US
No, I don't believe that that's going to have nearly the impact is the number of homes that are being built. The spray foam will have about the same percentage of penetration. That percentage should continue to grow. Actually, if you look at smaller homes that are that are supposed to be more economical, you know, I believe that there's there's more to be saved in utilities and so forth and this this would be a...
equilibrium. So we saw housing in 2021 2022 kind of peek out at around that 1.7 ish sort of a rate 1.7 million units on a housing start on an annualized basis.
And that number dropped down to about 1.3, so this is the run rate where we see it today, 1.3 maybe up a bit from that. And that's a decrease of around 10% to 12%, 13%. When I look at the volume drop off, the volume drop off was more like 30% in the housing.
construction, so 30-40%. Well, that obviously fell far greater than the housing starts fell because of the de-inventoring. And so what we need to do first, and I think this is where the U.S., what we're going to see in the second half, is that we get back to what I would consider to be a new normal, which perhaps is where we were back in 21-22, minus
that that 12%, you know, that sort of volume adjusted from 1.6, 1.7 million starts the 1.3 to 1.4. Now last time, housing was at 1.3, 1.4, we were doing quite well. So I'd much rather see a higher number, but there's a tremendous amount of difference in pricing and demand. When you're looking at a 30...
seasonality is the one homes are being built in the time of year they're being built. But I think that recovery is well underway when we start looking at the demand for CWP quarter on quarter for us from first quarter second quarter was up.
16% on a global basis. Insulation was up about the same amount. The, our spray foam was up a little bit less than that, but still up from quarter to quarter. So we're seeing that quarter to quarter buildup from the first quarter to second quarter, which is again.
the SPF is spray foam, OSB price is starting to stabilize if not going back up in a lot of applications, particularly North America. So these are all positive signs I would say would continue to give me more optimism that the housing.
recovery is underway, more importantly than the housing recovery is the end of this massive de-inventoring. And Matt, obviously, from our perspective on housing starts, single family homes matters. But still well below the replacement level that is required and therefore we look forward to.
Yes, good morning. Peter, I was intrigued by your comment at the top of the call that you're exploring possible divestitures. I also think you indicated in the remarks released yesterday that you're evaluating inorganic growth opportunities as well.
So, you know, maybe without getting into specific details, can you discuss what you would like to do with the portfolio conceptually, you know, over the next couple of years?
Well, first of all, I think that any management team has got to come into the office every morning and look at your portfolio, look at the present market conditions and the projected market conditions and make sure that your portfolio, that your attention, your capital spend, your management, your focus is around the right asset base.
be in pigments and so forth. And you know, time came when we looked at a lot of these products and we just thought we weren't the right owner for these assets. And there were also opportunities that we saw when we could expand further an MDI into spray foam energy conservation.
a more greening portfolio, if you will. We could expand into hardeners and into adhesions and structural composites and so forth in our epoxy businesses and so forth. We continue to look very aggressively in some of these downstream applications, particularly in our
in our performance products and even more particularly in our advanced materials. I think about lightweighting, I think about adhesion, I think about a lot of the green polymers and chemistry, I think about fire retardancy and construction, energy conservation, so forth. These are all going to be areas of the future that we want to be looking into.
to stay focused on that. As a reminder Kevin, as Peter says, we're always looking at the portfolio. We have sold some smaller assets, right? We sold our DIY business in India, we exited out of our Southeast Asia businesses, our South American businesses. We've said very clearly that we're looking to exit the Russian market as well and we'll continue to always look at financial performance.
quarter on your equity earnings line.
From what I can tell, MTBE...
was a nice tailwind in China. Can you speak to the trajectory there into 3Q and beyond? Would you expect ongoing strength there or not? Typically, if there's a good demand for clean, quality gasoline, if crude oil prices are on the higher side and
earnings probably ought to stay fairly close to where they are today.
Thank you.
Thanks so much.
Next question today is coming from Frank Mitch from Firmium Research. Your line is now live....
Thank you and yeah props to Ivan on a new format.
And Peter, for the record, I don't think you're insane. So I just wanted to make sure I got that out there based on your earlier comments. But what I do find insane.
is the 30% decline in volumes and performance products for each of the last three quarters. Seems rather large. When does it end? What will it take for us to get back to positive volumes or at least less negative volumes?
Well Frank, thank you very much and I unfortunately coming from you telling me that I'm of sound mind. I'm not sure that carries a lot of water, but nevertheless I appreciate it my friend. Yeah, and just for information purposes, it was my idea to change the format. Being dyslexic, I hate re-scripts. And so I'm out of desperation.
So Frank, I'm trying to make excuses. I, you know, we were hit with a pretty hard de-inventoring that took place in that business. And I think we've certainly seen the worst of it. And I think that as we go along there, we might see a recovery of quarter, so behind what we might see in MBI.
But we will see a recovery there and margins have continued to remain strong. And it's a question of demand coming back. And just to add Frank, I mean I read that the margins for the division were 18%.
will see a recovery there and margins have continued to remain strong and it's a question of demand coming back. And just to add Frank, I mean I'll read it down, margins for the division were 18% in the second quarter as volumes come back.
will obviously leverage up and get back towards that 20 to 25 percent range that we've indicated but those are still pretty strong margins that we have in a low operating environment.
That's very helpful gentlemen. And you also called out the competitive pricing dynamics with ethylene amines. You know, how long will that last? What's the primary driver there? And when might we see relief in that area?
Yeah, I think most of that's just volume that we're seeing in a lot of that area, and that's going to be wind application. I mean, as much as the world's beating the drum on wind energy in Europe , it's actually just almost for a year now, in a complete standstill. There are no major wind projects, and you see a little bit of growth in North America.
Some have been canceled. I think you'll see a recovery in this area. A lot of this is also just the de-inventoring and once people have gotten their stock levels that unnecessarily built up in 2021, 2022, I think a lot of people were having supply chain issues. They were seeing volatility in pricing. They kept more inventory. Well, there's MDI.
inventories and the de-risking, if you will, of those supply chains and that inventory is being reset.
Thank you. Next question is coming from Vincent Andrews from Morgan Stanley . Your line is now live. Thank you and good morning. Just given the week macro conditions continuing, maybe you could give us an update on what you think the splitter contribution is going to be and maybe frame it a little bit.
Well, the splitter, again, this is a project that I'm very glad that we put it in when we did. It's much better today that we're out trying to sell a differentiated product than we are more commodity MDI, if you will. And I think that there's the premium per pound.
that we represented to the market still holds, but there is definitely less volume out there. I see that as a temporary issue that will be recovering, that will be correcting itself here over the next couple of quarters. That project, I think, will continue to be a success.
Yeah, I mean we'd originally said $35 million. That was in a much stronger volume environment. We'll still get up to that $35 million as volumes come back as Peter says that premium have differentiated over the component side still holds. So it's a volume leverage in the recovery as we look forward to 2024. Okay, and then I think you've done about $100 million a quarter in share buybacks.
and obviously at the end of the year the board will will assess where we are they'll assess our outlook for 24 and yeah we'll we'll act accordingly and if you if you if you do this
The calculations that obviously gives us a greater than 10% return of capital yield dividend and share repurchases for the year. So consistent message from the start of the year.
Your next question is coming from Michael Sisson from Wells Fargo. Your line is now live.
Hey guys, good morning.
Peter, your analyst talked about polyurethanes, kind of splitting that portfolio up in three different areas, commodities, formulating systems, especially solutions.
So when I think about where your margins are at now, any thoughts of how those three buckets have performed this year and what the potential is for those to get back to double digits over time?
Oh, I think, no, as we look at it, the upper end of that split, if you will, of those three areas, you know, I think that the lower end of that split, we're seeing margin erosion that is that has taken place and, you know, we're struggling with margins in those areas. As we think about the upper end of that, the elastomer's end, that would be the problem.
running shoes, what have you, the higher end of that, the elastomers end, we continue to see, you know, very strong margins that there's been no erosion in the margins and it's just a question of volume. So I think that in the middle part of that, you know, that I would consider to be that which is going into, you know, the insulation, the spray foam and so forth.
That certainly is under pressure, but nothing like the commodity in polymeric down at the very bottom of that split. And so, yes, I think that we're probably, at this time, we're probably seeing an even greater bifurcation of margins and of the vitality and health.
the three sections between that high end the mid-range and the low end than we did at the time of the investor day. Got it and then I guess when I did the math looks like your volumes
You know this year and last year in total may be down a billion or so in sales
If you get that back I leap back to you know that eight hundred nine hundred million EBITDA range longer term
I'd like to think that that's a yes. I'd like to think that's something that should be happening in the MDI business. It's really gone a longer term basis. That ought to be the average of the business. Again, I'm not sure this is a question for Huntsman at least, where we presently are at least, a question of volume as much as it is value. I think that we've got a real opportunity here to take.
percent business on normal times and we'd like to see that being pushed closer to 20 percent. As we move further downstream, as we get more and more and build up the elastomers end of the business and so forth, you know, this is an opportunity for us to create more reliable and consistent earnings.
Thank you. Next question is coming from Patrick Cunningham from Citi. Your line is now live.
Hi, good morning. Last quarter you indicated that in AM and performance products, you know, D stocking was likely to be relatively de minimis for the second half. Um, but have you, do you have any change to those expectations? Is there fresh D stocking and markets like ag and industrial and how much of the margin outlook, you know, maybe bakes in some of that D stocking. Thank you.
I would say that the de-stocking and performance products might go on a little bit longer into the third quarter. Ag is going to be small. It's going to be pretty seasonal, if you will. But you know, I've been...
I've been disappointed, I guess, as I look to Europe and I look at the competitive nature there in pricing across the board. There's just a lack of demand and there's a lack of, not in all products, but in a lot of products of pricing discipline.
Yeah, that's indicative of the results of European segments of the business. For the advanced material side of the business, yeah, I think that we're largely through the inventory and on the performance products might go a little bit longer than advanced materials.
and it might be a little bit impacted by region, but I think for the most part when you look at where we were from in performance products from first quarter to second quarter being essentially flat. There'll be some seasonality across the board in the third quarter. Remember much of Europe and frankly a lot of the world, but particularly Europe .
shuts down the month of August and we might see, little too early to say, we might see more closures because of the economic sluggishness right now in Europe . You might see more closures taking place in August for holidays than expected. That's yet to be seen, but.
So there will be some seasonality in the third quarter. Got it, very helpful. And in the past, you've talked about getting AM margins back to 20%. Is there a path to get there in 2024, given the improved cost profile and some of the growth initiatives you have, or is this largely outweighed by sort of a sluggish volume recovery?
No, I think that as we see, I think it's been very well publicized, the build rate that you've seen in the aerospace business in particular. We're going to continue to benefit from that. We continue to maintain the market share on existing platforms of airplane platforms. And I think that we'll continue as we look at the 777X and
the wing design that's coming out of Boeing, some of the Airbus applications and so forth. I think that we'll continue to maintain a much better than 50% market share in these new applications as well. So if we can just maintain kind of our present course.
24 plus the continued recovery that we see in aerospace. Yeah, I think that we ought to be back up to 20%. Having said that, I think that advanced materials will recover more than just aerospace in 2024 as well. I think there's some great applications coming there you'll start to see.
the pick up of our Miralon technology, you'll start to see greater investing in applications going into the power grid, industrial coatings and so forth. And again, it's just my gut feel of the area, but I think it's gonna, we have an excellent opportunity in 2024 to get back to 20%. And we were at 18% in the second course.
Thank you. Next question is from Hassan Ahmed from Olympic Global. Your line is now live.
morning Peter and Phil you know really morning appreciate the commentary a lot of commentary around you know polyurethane demand and you know potentially these talking being behind us and you know how historically you know the restock tends to be fairly sort of impressive
If we could just move away from the demand side, could you talk a bit about the supply picture? I mean, could we, because obviously we've come across a number of announcements around potential capacity addition delays and the like, so could we be in a situation where a sp traffic
as the restock happens, you know, in the near to medium term, you know, it's in the face of relatively sort of, you know, limited supply. So, Hasan, I think we said, so right now, relatively low utilisation, unusual for MDI to go.
two years on the demand side where it's pretty low. So looking forward, we'd expect that demand profile to tighten up with 5% plus growth per annum going forward on the supply side. Honestly, there's really only one more that you can point to. BSS done some small D bottlenecking in North America. Covestra obviously announced the delay of any expansion in either North America or in...
China which confirms your point. Dow has not announced anything and nor Huntsman so it's really down to one one as we said one one tends to be relatively disciplined they will bring on capacity over the next five years but they'll do it in a pretty disciplined manner particularly with the 50 to 55 percent market share that they have in in in China. The fact that the other majors aren't really doing any expansions that can
I mean historically you guys as well as a bunch of industry participants have talked about valuations being unrealistic. Now with several quarters of relatively tepid or negative demand, interest rates where they are and the like, I mean what are you guys seeing in the M&A market? It certainly seems private equity.
has gotten more active. So have valuations become a little more realistic? Are there more opportunities you guys are seeing on the inorganic growth side of things?
Not really. I'm not seeing a fundamental shift in the market. I think that you're saying a little bit of valuations are coming down a bit. Obviously, capital costs something nowadays where a year ago it cost nothing.
And I continue to just be befuddled as the companies that trade at, you know, five, six times, have a da buying assets that are 15 times, 12 times, 10 times, you know, not seeing any impact on their stock and then seemingly shareholders don't really care.
So I think that we have to remain disciplined. I know that that sounds a bit of a cliché, but I think we've demonstrated that if we can't buy it, sometimes the multiple is going to be a little bit higher than we'd like to see. But in those rare instances, we will have a very quick and a very thorough plan of action.
If not, we will continue to invest in our own company and buy our own stock and make sure that we maintain and stay focused on a dividend. But we've got to remain disciplined because I just cause everybody else, you know, wants to pay these multiples doesn't mean it's the right thing to do.
Very helpful Peter and Phil, thank you so much.
Thank you. Next question today is coming from John Roberts from Credit Suisse. Your line is now live.
Hi, Peter. I think of the MBI industry being relatively unintegrated back into oil and benzene. If Abu Dhabi is successful in their bid for Covestro, does that significantly change the structure of the industry in your opinion?
I'm not sure that it does. And again, I want to make sure my comments don't have anything to do with speaking on behalf of Abu Dhabi or Covestro. I have zero information on either of what's happening there. But
I would just say that as you look at Yantai, I think that from their integration into coal, I would kind of consider them to be a little more integrated than other MDI producers. But look, at the end of the day, we're going to have the greatest...
value that will come to a molecule of MDI is going to be being able to push that into a formulated
mix downstream and get a premium price for the MDI. My opinion, that will be far better than looking at it on an integrated basis going upstream up through benzene and nitrobenzene and crude oil and crude oil production refining. Because all of those products, all of our basic raw materials.
that benzene the same. You may be able to get an integrated cost on that benzene or a great value on the benzene. But if you're just subsidizing your MDI, because you've got benzene that you're making, I'm not sure that necessarily gives you an advantage unless you want to just move the benzene to the loss to market.
I've never thought of MDI in particular as being terribly advantaged or disadvantaged by lack of integration. I think the value of MDI can be far more what you do downstream than what you do upstream.
Then is the problem in epoxy more the delay in the wind turbine projects or is it more the raw material position that the Chinese producers have that they're lower than the Western producers which is more of a problem for the industry right now.
I'm not sure, you know, when we think about epoxy for us at Huntsman, that's just not a big end-use market for us, and it's not a market where we really compete on. Ten years ago, that was the whole DLR. You remember that we...
We used to, 10 years ago, we used to talk all the time about wind and the impact wind. We largely traded those molecules up over the last decade into aerospace and into, I'd much rather be investing in the grid system that's going to hook all these windmills up in the electrical infrastructure.
that's going to try to make sense of all these wind projects than the wind projects themselves. Yeah. Sorry, John , think about Admap portfolios being about 20% aerospace, 20% auto, about 20% into construction, then the remainder into infrastructure, but excluding any wind, we don't participate in those markets now, we participate in things like...
Thank you. Next question today is coming from Mike Harrison from Seaport Research Partners. The line is now live.
Hi, good morning. Peter, I was wondering if you could talk about how you're feeling about your cost structure in Europe at this point. It seems like you're kind of indicating a more extended period of softer demand and elevated energy costs.
Well, something that we look at all the time, I mean, I think it was about a year ago at this time that we were announcing some pretty radical closures, restructurings and so forth, moving a lot of our back offices to crack out. Those projects are largely coming to conclusion here in the next.
Now, if Europe continues to be industrialized, and we see my bigger concern is that you start to see the customers, the OEMs and so forth start to leave Europe and they go to China, they go to North America, they go to the Middle East, and you continue to see this...
you know, this deindustrialization taking place in Europe , you know, we may well have to reassess that market and the cost structure. I'm quite comfortable where we are today. If I look out over the course of the next year or two to what we can see and what we're hearing from customers and so forth, I think that we...
We took the right moves at the time. I know we were being accused of being over reactionary in some of these decisions. I think though looking back on it, we moved with all haste at the first signs that we saw. There was this fundamental shift and I'm glad we did it. We're better in Europe because of it.
It's an area that we need to continue those I said earlier. We need to get up every morning and just continue to look at the area and how do we adapt and how do we structure around the having the right people in the right locations and the right cost structure. I don't want to survive in Europe . We've got to prosper in Europe . We've got to have a good return.
in Europe and we've got to have a supply chain Europe that makes sense. And I think there's still work to be done.
All right, thank you for that. And then on slide eight of the presentation, you show a $23 million benefit from SG&A and R&D costs coming lower sequentially. Was that maybe some incentive accruals coming lower? I guess I'm just trying to get a sense of how much of that sequential.
improvement in SG&A costs was related to temporary factors and how much was part of the longer term cost optimization that you're doing.
Thank you. Next question is coming from Josh Spector from UBS. Your line is now live. Yeah, thanks for taking my question. Just two on advanced materials. So, just first, the pricing in that segment has been notably better than the rest of the portfolio. Just curious, how much of that is mixed as you exit BLRs and higher pricing products maybe stay within the portfolio versus absolute holding or raising pricing? And just, even though, I guess second, even though your participation in BLRs is relatively small today, you do note the exit of that as some of the negative on the volume side. I guess, do you think about holding those volumes back or strategically?
you know, playing, having a different position in that market in the future versus today. No, I think that as we continue to look, some of that's going to be product shift, but most of it's just going to be the overall health of the markets, the applications, the fact that we're still sourced in many of these areas.
And, you know, we're going to keep the portfolio largely as it is. I think that, again, we need to continuously look at the BLR market. I think that when you look at some of the profitability of BLR across the board, Everyone's going to be a308.
Yeah, you look at the drop off that we've seen some of our competitors that are very heavily invested in BLR. Again, I think we made the right decision of getting out of it when we did and having the stability and focusing on value over volume in that end of the business.
Yeah, we're long BLR in North America, short in Asia and to a degree in Europe , but it's less than 10% now of our volumes and I think we'll continue to deselect. It's just not our focus strategically.
Thanks, and I guess just on the pricing side, is that holding because of better mix, or are you actually holding pricing in the downstream business better than other areas of the business?
I think that again it's holding the pricing. I think that we have the further downstream you go the more unique provider you are solution provider. We're not selling molecules or selling a solution to a customer and that's a whole different dynamic than just selling molecules. So it's going to be.
Some of that's going to be mixed. The vast majority of it's going to be just pricing value discipline. Thank you. Next question is coming from Matthew Blair from TP8. Your line is now live. Good morning. Thanks for taking my questions. Peter, could you discuss MDI operates by region on just an overall industry basis and
In regards to Huntsman, how are things going at the Rotterdam MDI plant that you restarted earlier this year? And is the Geismar Line still down? Thanks
I think that globally we're probably in the low 80s bouncing around that area. Geismar were around 70% and working I would say still under inventory control. Rotterdam, we've got all the lines running in Rotterdam across the board about 80%.
And in Asia, well, we've been shut down in Asia doing maintenance work there. But when we can, that plant will be running full out.
Great, thank you. Another companies recently mentioned that China competitors in their space were benefiting from getting paid to take chlorine, which clearly improved the cost position.
I'm not aware of that happening in MDI, but if you can give me the name of a supplier that will pay me to take chlorine, I will take as much as they will give me. Yeah, I mean in the process of producing MDI, you produce byproduct HCL, right? And that goes downstream into the PVC market. It's quite normal as part of the overall process. In China, we have an HCL recycle unit where you don't need to move that down into the PVC market, but it's quite a normal part of the overall MDI process. Thank you. Next question is coming from Arun Veswanathan from RBC Capital Markets. Your line is now live.
I'm not aware of that happening in MDI, but if you can give me the name of a supplier that will pay me to take chlorine, I will take as much as they will give me. Yeah, I mean, in the process of producing MDI, you produce byproduct HCL, right? And that goes downstream into the PVC market. It's quite normal as part of the overall process. In China, we have an HCL recycle unit where you don't need to move that down into the PVC market. But it's quite a normal part of the overall MDI process. Thank you. Next question is coming from Arun Viswanathan from RBC Capital Market. Your line is now live. Thanks for taking my question. I'm hearing dude from the wrong...
I just have a more high level question, I guess. When you think about the earnings level and what you're seeing in your end markets and from your customers, I guess I'm just kind of getting, wanted to get your thoughts on how would you characterize this versus maybe a cyclical trough. I know that you started the call with noting that you do believe we're kind of nearing the end of the de-stocking. So what are some of the primary drivers that kind of lead you to that statement? As you kind of climb out of this.
What would you expect us to keep a monitor on? Would it be weeks of inventory or maybe some better activity out of China? Automotive seems to be holding up pretty well. What are some larger, higher level thoughts you would have on whether we are leaving this trough or not? What would you expect us to keep a monitor on?
Well I think that as we look at past inventories, or excuse me, past cycles if you will, I think we've been hit doubly hard this time because we've seen a fall off of economic activity and whether it be in construction, in GDP in Europe .
and you know, it's still in, even in places like aerospace, still recovering from COVID and so forth. So we've seen a fall off of economic demand and activity coupled with what I think has been one of the most aggressive de-inventoring phases, thinking back of when COVID was growing in making work 2021, in making works in Flynt's pocket. Speaking of first in more, launched by Great American and the people to make it go to school and things to health fast, with a lot of changes to this initiative, in remember the past in the beginning, the idea of getting origin out of this whole bust of listening to remember measure and system
Crude oil at one point hit $140, $150 a barrel and crashed from there. What we're seeing today globally around the world, I think it's more severe than what we saw during the 2007-2008 recession, the crash of crude oil and so forth.
And so we're seeing Drew, excuse me, Arun, we're seeing a double combination, not just of slow economic activity, but also of the inventory that's taking place. Nothing that speaks more to that than what we're seeing in U.S. housing.
where housing starts dropped 15% and the products going into that dropped 30, 40%. Again, that's unsustainable on a long-term basis for that to continue. As we think about the recovery as to how that looks, I think that is all around volumes. We first need to see the flat volumes of the housing.
where we've hit a bottom and I think we definitely are there. We said earlier performance products from first quarter, second quarter down, you know, one to two percent. We're starting to see a double digit growth in composite wood, insulation, single digit growth in spray foam and so forth.
you know, flat in our ACE materials. We look at quarter on quarter. And as we just gradually see that volume come back, again, this is gonna be more of a volume drill than a pricing drill. And that's the fact that we've got a lot of the margins are still in place, they're still intact. It leads me to be a little more bullish than I otherwise had been.
Thanks. Thank you. We have reached the end of our question and answer session. And that does conclude today's teleconference and webcast. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.