Hello and welcome to the Huntsman Corporation Third Quarter 2022 Earnings Call. [Operator Instructions] 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. Please go ahead, Ivan.

Thank you, Kevin. Welcome to Huntsman's third quarter '22 earnings call. Joining us on the call today are Peter Huntsman, Chairman, CEO and President; Phil Lister, Executive Vice President and CFO. This morning, before the market opened, we released our earnings for the third quarter '22 via press release and posted to our website, huntsman.com. We also posted a set of slides on our website which we will use on the call this morning while presenting our results. As a reminder, following the announcement of the sale of our Textile Effects business, we are now treating Textile Effects as discontinued operations on our income and cash flow statements and held for sale on the balance sheet. You will be able to find all the relevant details within our 10-Q that will be filed with the SEC. 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 with the SEC for more information regarding the factors that could cause actual results to differ materially from these projections or expectations. We do not plan on publicly updating or revising any forward-looking statements. We will also refer to non-GAAP financial measures such as adjusted EBITDA, adjusted net income and free cash flow. You can find reconciliations to the most directly comparable GAAP financial measures in our earnings release which has been posted to our website, huntsman.com. I'll now turn the call over to Peter Huntsman.

Thank you, Ivan. Welcome, everyone. Thank you for joining us this morning. Let's turn to Slide number 5. Adjusted EBITDA for our Polyurethanes division in the third quarter was $138 million. Overall, sales volumes in the quarter declined 16% with Europe accounting for over half of this decline the Americas for about 35% and then China for about 10%. These declines were caused by a combination of inventory destocking throughout the supply chain and falling demand. Europe is clearly in a recessionary economic environment which could potentially get worse over the coming months due in large part to high and volatile natural gas and energy prices. In Europe, natural gas prices have been moderating since peaking at the end of August but remain at historical high levels. And moving forward, prices remain dramatically higher than in the United States. We expect and are planning for high and volatile natural gas prices in Europe for the foreseeable future. As we mentioned on our last earnings call, we do have the benefit of 60% of our natural gas-related production costs via our nitrobenzene and aniline facilities, or in the U.K. where natural gas prices have been lower this year versus Mainland Europe. Despite this cost advantage, our profitability has been significantly impacted in Europe and we will have to lower our cost structure in the region to generate acceptable returns. Over the long term in Europe, outside of the current recessionary environment, we do expect to be a large beneficiary of energy conservation initiatives. The world and Europe, in particular, need increased levels of insulation to reduce energy consumption. We remain well positioned to bring solutions to both the residential and nonresidential markets. Demand in China continues to be impacted by lower overall economic growth as the government mandates a zero COVID…

Thank you, Peter. Turning to Slide 8. Adjusted EBITDA for the third quarter was $271 million, a decline of $78 million or 22% compared to the third quarter of 2021. Sequentially, adjusted EBITDA declined $139 million or 34%. The year-on-year reduction in adjusted EBITDA was driven by our European polyurethanes business which declined to breakeven levels during the third quarter as a result of high energy costs and declining demand. Adjusted EBITDA margins for Advanced Materials and Performance Products remained strong at 18% and 25%, respectively. Polyurethanes adjusted EBITDA margins declined to 11% in Q3, leading to an overall EBITDA margin level of 13% for the company. Our European polyurethanes business depressed total company margins by 3%. Sales volumes declined by 15% during the quarter, 23% in Europe, 14% in the Americas and 7% in Asia, as macroeconomic conditions deteriorated, particularly in Europe and in construction end markets overall. Gross margin improved by $48 million with $339 million of price gains, representing a 15% increase year-over-year offsetting higher cost of sales of $291 million. During the third quarter, natural gas-related raw materials and utility costs more than doubled compared to the prior year. Within our most energy-intensive production process, MDI, we have indicated every $1 per MMBtu movement in Europe is equivalent to approximately $10 million at normalized production levels. We are running production rates in Rotterdam at approximately 50%. And at those levels, the impact per every $1 per MMBtu is approximately $5 million to $6 million on adjusted EBITDA. Some other raw materials, most notably benzene, have declined from record high prices seen in the early part of Q3 though prices still remain elevated, while other raw materials continue to increase such as ammonia, chlorine and caustic. As a reminder, when considering cost impacts, we account for over…

Phil, thank you very much. In the past 12 months, the global economy has gone through a number of shocks and unforeseen events. These include 40-year high inflation and the related consumer reaction. The most devastating destabilizing European land war since the Second World War, trillions of dollars of value wiped from the global markets and unprecedented energy volatility with its related supply chain challenges. In light of these events, it is worth reviewing those things within our control and how we are responding to events outside of our control. First, we announced today in Europe a European-based restructuring that will take a minimum of $40 million out of our European businesses. I think it will be some time before Europe fully picks up the pieces of its failed energy policies. However, I believe that any new normal will be based on a gas plus transportation to supply their needs, where Russian gas supplies to Europe usually sold at a slight premium over U.S. prices, I think that Europe will now find itself competing with Korea, China and Japan to name a few for gas imports. If I look over the past decade, gas has been sold in these export markets at a premium of about $5 per MMBtu over historic gas prices in Europe and North America. If Europe is to endure a $5 per MMBtu gas charge for freight, this will cost Hunt spend approximately $40 million to $50 million per year. This is our initial target for cost reduction. We are announcing today the closure of 2 of our divisional HQ and a series of initiatives that will permanently remove an excess of $40 million from our European businesses. Let me be clear. This is not an abandonment of any of our $2 billion European commitment but…

[Operator Instructions] Our first question is coming from Josh Spector from UBS.

I know it's tough to answer but I guess if you look at the sequential move, 3Q to 4Q, you talked about some of this already but if you were to bridge or kind of put into bigger buckets energy cost, destocking, base volume declines, fixed cost leverage, what would those buckets be so we could start to think about what maybe a normal rate would be when you get past some of the worst of this?

That's a very good question. I think that that's going to be varying industry sector by industry sector. For instance, I think where you're continuing to see strong pull-through such as automotive and in aerospace, there's not much inventory control that's taking place right now. And so you're seeing most of any of the headwinds that we're facing in those industries is just trying to absorb raw material costs and pushing them through. In other areas, certainly like what we are seeing in construction material products and so forth. And some of those areas that are related to construction, furniture, insulation and so forth. We're seeing quite a bit of inventory correction that would certainly make those industries and businesses look worse than they normally would be on a normalized run rate. We think that as we move from Q3 into Q4, that probably about 50% to 60% of the decline that we've seen in demand is related to inventory adjustments. Again, I want to just emphasize that's a fluid number because it is going to vary sector by sector or customer by customer. But as I said in my comments, I believe that by the end of this year, early part of next year, most of that inventory will be depleted from the supply chain. I also would just emphasize that as market conditions slow, this almost becomes a self-fulfilling prophecy to extend that cycle as market conditions slow and as demand slows, that inventory reduction just takes longer to accomplish. So benefits that we would have hoped to have gotten by falling raw material prices that took place a month or 2 ago, they'll hit us later than expected and inventory that we hope would have been depleted by quarter's end will go into next year because of the falling demand. So again, apologies for being a bit murky but it's a pretty squishy situation that we're seeing right now.

Josh, just a couple of additional data points for you. So FX year-on-year, we'd anticipate with right now the rates that we're seeing about a $15 million negative impact year-on-year. And then you commented on under-absorption rates given the efforts that we're making to align inventory with end markets, you can assume about a $15 million to $20 million negative impact between Q3 and Q4 from what we're trying to achieve by matching production with the end market situation.

Our next question is coming from Kevin McCarthy from Vertical Research Partners.

Peter, can you talk about your asset footprint in polyurethanes? I think last quarter, you sort of advertise some work you're doing in Brazil. Do you see potential to continue that rationalization in markets like Asia?

Yes, we're looking at various areas in Southeast Asia. Without getting into too much detail, some of those facilities we've looked at shutting down and other of those facilities we're looking at selling off or perhaps giving the option of giving a facility over to a partnership or something. So again, some of those are in motion right now. But having said that, I think, again, longer term, where we want to see our volume concentrated or in those markets where we are going to see a value over volume strategy. That means that we are going to be looking for those markets where we can move the production that's coming out of our splitters. We can move the higher end, less volatile, higher-margin materials. And that's not something that's going to happen overnight but it's a 2-year or 3-year transition and commitment. And I believe that we're probably 1/3 of the way halfway through that. And so it's a combination of how quickly can we shut down those assets and move them in an orderly manner and how quickly can we reabsorb that tonnage into new applications and into qualifying applications. So it's not just a question of moving the product instantaneously. In many cases, we've got to go through a qualifying process. It would take several months.

Our next question is coming from Aleksey Yefremov from KeyBanc.

In Performance Products, it sounds like we expect weaker volumes but margins are largely holding up. You don't see a meaningful spread compression at this stage. I just wanted to make sure that, that's correct.

Well, again, these are tenuous times right now but I think that our margin discipline in our pricing discipline has been strong to date. In a lot of these products, we are 1 of 2, perhaps 3, global players on a global basis. So we don't typically see spot materials and spot pricing that's putting a great deal of pressure on pricing. So I hope that, that pricing discipline is going to continue. But I think that the biggest factor for the performance products going into the fourth quarter and early into next year is going to be volume more so than margin.

Your next question is coming from John Roberts from Credit Suisse.

How is the loading on the new splitter going? And do you think the slowing economy is going to delay your ability to load that?

Well, again, I think that the single biggest product that we're moving out of that split is in the automotive sector. And that continues to be a very good sector for us right now. We also see a lot of flexible foam that is going to be coming out of that splitter and that's again, got both residential and automotive applications to it. But again, as we look at the automotive market, I think it's going to be very interesting over the course of the next year. How much -- how many of the OEMs in the automotive sector are going to be relocating from Europe to North America and shifting a lot of their products back. And when I said in my comments, we're speaking with a lot of our customers, I think that over the course of the next year or two, you're going to see quite a few customers moving production, European production, particularly in areas of aerospace, automotive and so forth to either China or more likely to North America and then reexporting, if you will, that product back into North America.

Our next question is coming from Frank Mitsch from Research.

When you guys are pulling out of Maple Shade, you're going to raise my taxes. So I'm not sure how I feel about that.

If you negotiate a discount for us on your publications, we already pay a fortune for them, so maybe...

That is a nonnegotiable task. A couple of quick points on cash. Phil, in terms of the fourth quarter free cash flow, is it reasonable to expect that you'll be able to generate another $100 million there. And you are on track to get $540 million of cash early next year. You have a pretty pristine balance sheet right now. What are your thoughts on the possibilities of M&A with that cash?

Yes, Frank, so in terms of free cash flow, as we said, $409 million through the end of the first 3 quarters of this year. We would expect to see a fairly sizable net working capital inflow in the fourth quarter, particularly with everything that we're doing around production rates and given that end market conditions are deteriorating, both through some demand destruction and through some seasonality. So that net working capital should come through. We are going to be focused on making sure we continue to put capital expenditures into the 3 performance products projects that we've talked about. But in terms of being able to deliver $100 million plus of free cash flow in the fourth quarter, we would certainly hope that we're on target for that. And as Peter indicated in our prepared remarks, we would expect to be approximately 40% for the full year on free cash flow from continuing operations. In terms of deployment of cash, yes, $540 million net cash proceeds after tax. There will be some adjustment for the closing statement but that's what you can assume coming back on to our balance sheet. As we indicated in our prepared remarks, that gives us optionality around bolt-on acquisitions. It also allows us to continue to deploy effectively share repurchase back to shareholders as well as a competitive dividend. But we'll still have headroom given our leverage and given our leverage well below our 2x net debt target to be able to do bolt-on acquisitions. I would remind you that during the coronavirus time period, we actually went out. We bought our second spray foam insulation business. We bought 2 additional businesses in Advanced Materials and that was because our balance sheet was flexible enough to be able to purchase those businesses at a decent price. Again, we would look to that flexibility as we go through a slightly slower economic environment.

Your next question today is coming from David Begleiter from Deutsche Bank.

Peter, on your Slide 12, looking at 2023, you listed a number of positive and negative or challenges. Any early thoughts on '23 EBITDA relative to the roughly $1.2 billion you'll do this year?

Boy, David, I appreciate the question. You give me the variables and I'll give you the number. Without trying to sound too evasive here, I think that the year will probably look a lot like 2022 but backwards, if you will. I would hope that we will see improvements throughout the year as we see the impact coming in of our cost reduction initiatives and further opportunities we have to move product through our Geismar splitter as we see the capital that we're investing come to fruition, as we see the full integration of recent acquisitions and so forth. I think that even if it stays to be a pretty flat year, we're going to see those improvements sitting throughout the year. And so I'm not overly optimistic but I'm rather optimistic as we go through the year we'll do better than the market on a relative basis. And like I said in my prepared comments, I think that throughout the year, we'll start to get a handle on inflation. A lot of the inflation in the U.S. is due to our own failed energy policies here. And I think that a lot of that is going to be addressed here after the first of the year. And I do have confidence that China, when it does fully open economically, I think is going to open with quite a sharp uptick in demand given how long these -- the restrictions have been on economic growth.

Next question today is coming from Andrew Castillo from Morgan Stanley.

I just wanted to talk a little bit more about MDI and the competitive environment you're maybe seeing there. You noted that you're running your assets at about 50%. So curious what are you seeing kind of the broader industry. And particularly, as you think about pricing dynamics and your efforts in passing through costs and surcharges, can you just talk about maybe how that's progressing, how it's kind of evolving? And within that, maybe give a little bit more color on the energy assumptions for your fourth quarter versus what you maybe need to recoup and potential benefit?

Yes. Our energy forecast going into the fourth quarter, safe to say that they're pretty parallel to where the market -- forward-looking market numbers are right now. If you were to look at the forward trading numbers for the month of December and for the remainder of November, it shows a gradual uptick in those months. If the temperatures remain warmer than usual, they have so far this season in Europe. I think that you might -- we might actually see a bit of a tailwind coming from lower-than-expected gas prices. With the areas on pricing, look, we're going to continue to be pushing prices and surcharges wherever we can. But we're not going to do that at the destruction of our customer base. And I think that we've been a leader, particularly relative to our size here in Europe on pricing and on trying to move costs through as aggressively as we can. And we've clearly have put the value of our product over moving volume. I think you can look across the competitive polyurethane landscape. And as I look at our third quarter numbers, we were able to offset all of our raw material increases in the third quarter through pricing and through pricing discipline. I think that says something about the seriousness of -- and our commitment to our pricing over volume. Now having said that, I think that as you start getting into year-end as far as what customers, what customer segments are and so forth, we are disproportionately weighted towards probably the automotive industry. Some of the insulation industry, the footwear, the ACE markets and so forth, CWP. Other polyurethane players are going to be more weighted than us towards appliances and towards synthetic leather and towards other applications. So I wouldn't necessarily want to read that whatever we're doing is what the rest of the industry is doing and vice versa. So I wouldn't feel comfortable commenting on what others might be seeing with their margins, with their demand and with their capacity utilization. But as we said, we're going to be focused on. This is not a time to be also to be running plants to try to build inventory in our opinion. It's coming to the end of the year with the amount of uncertainty. We're trying to match very closely our production to customer demands.

Your next question is coming from Mike Sison from Wells Fargo.

Peter, I wanted to maybe take another stab at 23%. So if I take a look at the fourth quarter midpoint, multiply that by 4, it's a pretty low number. But as you said, it includes a lot of destocking and it's probably not the right run rate to think about trough earnings for Huntsman. So if you sort of take out -- I don't know if you can do this but if you can sort of normalize the destocking in the fourth quarter, what do you think that number would be? And is that a better way to think about what a trough earnings number would look like for Huntsman in '23?

No, I don't think it's a good way to look at it because the fourth quarter, you're going to have seasonality that you typically don't have in the other 3 quarters. You're going to have definite de-inventorying and capital management that most companies do even during normal business conditions during the fourth quarter. And I do think that there's going to be a great deal of volatility. My personal prediction would be that we've seen a low natural gas price in the quarter in Europe here of about $8, $7, $8 per MMBtu. And you're likely going to see prices spike on an end-of-day basis, perhaps north of $50. So you're going to see some of the most volatile natural gas prices in the fourth quarter. And I think to try to extrapolate those sort of variables and say that that's what the new normal is or that's what an entire year's output is going to be, I think there are just too many -- there are too many moving parts. As I look at our business and as I look at the latter part of 2022 and I kind of think of that on an inverted basis going forward in 2023, again, I think we're going to start the year with some real headwinds coming out of the fourth quarter in 2023. And I probably would see more signs of optimism than pessimism going forward throughout 2023. But again, I want to be very clear. I'm trying to see I'm trying to see an ending through the month of November and into December for Q4. 2023 just looks really murky. I mean just take a single variable as to what Russian gas and what Putin decides to do with sanctions on natural gas and crude oil. And you're going to have tens of millions, if not hundreds of millions of dollars of variable impacts on our business.

Next question today is coming from Matthew Blair from TPH.

Peter. You mentioned you're running your Rotterdam MDI plant at about 50%. You're relying on some imports and overall EBITDA negative in Europe for MDI. Is it possible to shut this plant down and fully rely on lower-cost imports? Can you talk about the considerations there?

Yes. Well, of course, it's possible to do that. I'm not sure that it's very practical to do that just because there are 2 things that you have. You have a number of fixed costs that are going to be there whether you run the facility or not. Those are going to be fixed costs that are going to include your minimum take-or-pay agreements, people that are building hydrogen and CO units. Next are your facilities that are supplying new utilities, your labor costs and so forth. We're not going to fire all of our people then and rehire them back in 6 months. So all of those fixed costs you're going to have, if you idle your facility regardless or not. Another thing that I would say and this is -- typically, again, I say typically, MDI plants don't operate very well under 50% capacity utilization. You're basically making -- this is a highly technical term here but you're basically making glue. And you're moving glue through your pipes and so forth and through your process. And as you slow that down, you have greater and greater risk of gumming up the facility, if you will. And typically, these plants just don't do very well, much under 50%. So I think that's about as low as you can go until shutting the plant down. I will remind you that of our European facility, we do have 2 lines there. Think of roughly a 35/65 sort of split on capacity, so we could shut down the smaller unit if we wanted to and run harder on the larger, newer units. We did that in Geismar Louisiana during the 2008 and '09 recession. We had 1 of our units that was down for over a year. The other variable that I…

And in reality, our cost competitiveness on the cost curve of Rotterdam which is the second largest facility, MDI facility across all of Europe remains extremely attractive relative to others, particularly with the position that we have in U.K. energy intensive and aniline production at a much lower natural gas price to mainland Europe.

Our next question is coming from Matthew DeYoe from Bank of America.

As you move volume out of the HBS business. Is that PU production going off-line? Are you moving those polymeric molecules into other markets? And when you do that, what is the -- is there a margin headwind from that mix shift? And what would that look like?

That will all depend on the demand of the market, pricing and the margins that we have at that given point. Ideally, most of that product that we're moving in to HBS, it does have other homes in spray foam and in rigid insulation applications. And so we have an opportunity to move that. If we're not moving in HBS, we have an opportunity to move that. But typically, it's also the same product I would mind you that goes into CWP, the composite wood production, OSB and plywood applications. I would remind you, though, that typically is our lowest margin MDI. It's our polymeric, it's our commodity-grade MDI which is one of the strengths of HBS is that you're taking what otherwise would be some of your lower margin materials and moving it upstream, if you will. So typically, I'd like to think that we can find a home for it. But there's not a -- it's not necessarily a black and white answer. That all depends on market conditions and alternative places where you place that tonnage.

And typically, if we're moving that product through HBS, it's not only a polymeric MDI. We're also matching that with an aromatic polyester which is our own technology which we purchased back in 2013 and that's what makes it a much more attractive proposition as we're selling a formulation downstream into the market rather than just a component polymeric MDI.

Yes. And operator, why don't we take 1 more question given the time constraints and so forth.

Certainly. Our final question today is coming from Laurence Alexander from Jefferies.

Just on the European restructuring, is it fair to characterize it as currently mostly a cost realignment because your customers haven't yet made their repositioning decisions. And so was there probably another round of European restructuring needed once they've made their decisions but also if capacity is going to be moving to the U.S. and China, do you have sufficient capacity in place to handle the next up cycle if there's also going to be a structural shift in capacity into those regions? So I'm thinking particularly on the MDI side.

Yes, excellent question, Laurence. I would say that no, on the program that we've announced today, you're looking at roughly around 300 positions. And we're really trying to calibrate this business around what we believe to be the new market reality. And look, as I look around Europe, I look at areas like insulation, aerospace, lightweighting, spray foam. A lot of the infrastructure spending. A lot that's going to be going into automotive. These are going to be continuing markets in Europe. And they're going to continue to prosper and so forth. And we're going to continue to need technical support and a business infrastructure to support these. Now they're also going to be, as you well know, more energy-intensive customers and energy-intensive applications that have already talked about moving. And some of those or some of the OEMs, if you're producing anything that's going into somebody that's producing glass or materials that are going to the automotive in those areas and coatings and some of the adhesions and applications, those are going to be moving out because they're more energy intensive. Again, not all of them but some of them are going to be moving out. And we've tried to calibrate all of those as best we can. And I think that what we'll be doing today and not just eliminating the positions but also in relocating, Again, we'll be relocating somewhere between 125 to 150 of those positions to Krakow, Poland where we have about a 35% lower labor cost on, again, depending on the position and from which country they're coming. So as we look at that arbitrage, I don't see us coming out here 6 months from now or 12 months from now and saying we're going to go through another cut and another repositioning because…

Thank you. 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.