Greetings, and welcome to the Huntsman Corporation First Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ivan Marcuse. Vice President of Investor Relations. Thank you, sir. You may begin.

Thank you, Maria, and good morning, everyone. Welcome to Huntsman's First 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. 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.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 substance 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 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.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 5. Adjusted EBITDA for our Polyurethanes division in the first quarter was $66 million. We continue to see significant destocking across our markets, specifically in North America. This destocking, combined with the competitive pricing environment, continue to put substantial pressure on the Polyurethanes business during the quarter. However, the business conditions improved sequentially and in both our European and Asian regions, driving a nearly 80% improvement in EBITDA compared to the fourth quarter. Overall sales volumes in the quarter declined 21% year-on-year. Loans also declined 6% sequentially. Which is in line with normal seasonality. All regions declined in the quarter versus the prior year, with the Americas accounting for 2/3 of the reduction, with lower demand and significant destocking significantly impacted sales volumes. Our European region did show a sequential improvement versus the fourth quarter. As business conditions stabilized, destocking subsided and costs moved lower. From our vantage point, 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 showed stable to improved volume sequentially. Profitability in the region was helped by natural gas prices falling from an average of about $23 per MMBtu to about $17 per MMBtu. I'll note that while natural gas costs are significantly lower today, they're still 6 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…

Thank you, Peter. Good morning. Let's turn to Slide 8. Adjusted EBITDA for the first quarter was $136 million compared to $387 million in quarter 1 of 2022, and $87 million in the prior quarter. The decline versus the prior year was driven by reduced volumes of 24% across the portfolio, particularly in construction-related markets. Americas volumes declined by 31% and Europe by 28% and Asia by 21%. As a reminder, approximately 40% to 45% of our portfolio is linked to global construction markets via commercial, residential, and infrastructure spend, which all remained under pressure. Year-on-year pricing across our total portfolio was flat, while cost of sales increased by $40 million. Polyurethanes' unit variable margins declined with year-on-year pricing pressure in all regions and increased raw material costs. In 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 Polyurethanes volumes were lower as destocking continued throughout the quarter in addition to the normal seasonal decline. We did expand unit favorable margins from quarter 4 in 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, declined compared to the fourth quarter. This cost decline 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. SG&A as a percentage of sales was 9% on the last 12-month basis.…

Thank you, Phil. Having taken some time and read the comments from analysts regarding this quarter's results and, seemingly more important, any view on Q2 in the second half of this year, I'm reminded of the fairy tale of Goldilocks and the three bears, where Goldilocks was on a quest to find the perfect temperature for her new-found gruel and comfortable sleeping quarters. Everything was too hot or too cold, too soft or too hot. It seems that every forecast is either too aggressive and thusly unbelievable, or too conservative and thusly unbearable. I shall attempt to share a forecast when I hope not to share the same fate as Goldilocks being discovered by a family of hungry bears. There are three macro indicators that we need to see for the continuation of improvement to more normalized earnings. The first of these conditions is 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 1.7 million homes, but rather just a stabilization to the present level of housing starts. While new home starts have dropped 25%, our demand has dropped much more as builders work 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 OSB 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 will see an improvement in…

[Operator Instructions] Our first question comes from Mike Harrison with Seaport Research Partners. Please proceed with your question.

Hi, good morning. Peter, I 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, if we look at the second half, I don't expect that we'll still be anywhere in the mode of destocking. That's not to say that everything is going to be destocked by July 1. 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, where 2/3 of that goes into the construction market, I kind of break that out into three areas. So, 40% of that going into our spray foam business, the Huntsman Building Solutions, of which I think all that inventory has basically been depleted, if you will. 30% goes into composite wood production. And I think that inventory is fast normalizing. The price for composite wood panels and orders, 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 2/3 construction demand of MDI in North America, but that's going into what I'd consider to be the composite insulation panel. That's going to be everything from roofing on warehouses to siding on office buildings and those sorts of miscellaneous applications. 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, when I look at the biggest areas that have been impacted in 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 impact of lockdowns, coming out of lockdowns in China and the Chinese New Year…

Our next question comes from Michael Sison with Wells Fargo. Please proceed with your question.

This is Abigail on for Mike. So, I wanted to follow up on your -- you said that you're managing production to meet lower levels of demand, just wanted to get a feel for where your MDI operating rates are about now. And realistically, how low you could bring them in order to meet lower levels of 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 in -- 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 60s, around 70% utilization rates. We are now seeing 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 will be operating back in Rotterdam. We'll be producing those as we're able to satisfy the needs of the marketplace. I would say that across the board, we're probably seeing a 70% to 80% utilization rate. And that's going to vary, obviously. If you look at the United States and 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, were stripped out. But nevertheless, I think you've got to look at, 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.

Good morning. Peter, back on to Chinese MDI, how impactful of imports of those products into the U.S. have been? And when do you think the recovery in China could forestall further imports of Chinese MDI into the U.S.?

I think the Chinese imports coming into the U.S. is around 20%. And that's pretty much -- I think that's pretty well kind of matched the economy as the economy slowed down and picked back up. I don't get a sense that there's a flood of Chinese material coming into the U.S., and that's somehow is a drag on pricing and so forth. So as China recovers and continues to see demand, obviously, Chinese production is much better off being produced and sold in China, and they're going to make a lot more money selling it in China. And I would assume that, that will be a deterrent when that demand continues -- as that demand continues to improve, that will be a deterrent to export. But look, there's Chinese production that is -- I think is probably going to be coming into the U.S. on a permanent basis, is a large Chinese producer has a commitment to this industry and to supply a certain segment of it. But I don't see that product awash in this market to the detriment of the market.

Our next question comes from Frank Mitsch with Fermium Research. Please proceed with your question.

Thank you, so much. Peter, you indicated that you're going to restart the lines in Geismar and in Rotterdam this quarter. I'm just curious how we think about the sequential improvement coming from restarting those plants and what the restraint on profitability might have 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 rightsizing that. Any help there would be very helpful. Thanks.

Yes. I'll let Phil comment on the overall corporate expenses. Bottom line, of course, we are and we're trying to look at making sure those expenses match our company size is -- I want to be very clear. When we talk about restarting MDI lines. Right now, we've announced the restart of Rotterdam and the restart of Geismar has yet to take place. We've not made a decision yet to restart that facility. And in order to do that, we'll need probably about two months or so lead time to get that plant -- get that vital facility up and going in full. So yes, as I look at the amount of profit, Frank, I want to be very clear, 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 and the orders we have on the books, have now exceeded that 70% of 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 two, but that doesn't mean that we're going to just be running at 100% and flooding the market. I'd say that both those plants -- both 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 about a $20 million benefit that we got from transactional FX in corporate last year. So, we will be down year-on-year. And as Peter said, we'll continue to focus on that. When we sold Textile Effects, we removed all of the cost, all of the costs that were 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 FX. And as Peter said, our focus is on completing our overall cost savings program, our cost optimization program, where we're targeting in total additional $80 million year-on-year of cost savings. Thank you.

Our next question comes from Aleksey Yefremov with KeyBanc Capital Markets. Please proceed with your question.

Thanks, and good morning, everyone. Peter, could you talk about your cost in MDI in Europe, how do they compare currently to your U.S. assets, China assets? And are you exporting any MDI from the U.S. to Europe?

Yes. I think that when we look at the gives and takes on all of these things, in the U.S., we have a bit higher chlorine and caustic costs than in -- but we've got lower energy costs in the U.S. and Europe. We're advantaged when we look at such things as tariffs and so forth, where you've got a -- if you're selling -- moving product to China, for example, in the U.S. you've got a 25%, 30% tariff, whereas in Europe, your looking at a single digit. So, there's internal and there are external forces as you look at the -- as you look at these. But by and large, the gap between Rotterdam, without getting into too much specificity on a cost per tonne basis, it's fair to say the gap between the three regions has now shrunk to a point where they're all within freight distance. Or say, if you think about the cost of that between the three regions, they're all lower than that. So, there is not a lot of advantage -- unless you're desperately short of particular tonnage, there's not a lot of advantage of moving from one region to the other.

Our next question comes from Arun Viswanathan with RBC Capital Markets. Please proceed with your question.

Great. Thanks for taking my question. So first off, on the outlook. If you kind of look at the first half versus the 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 maybe a little bit better performance in the second half? And when you think about that, the destocking, is it really -- you noted that it was maybe a little bit more pronounced in North America. So, is that kind of in construction areas? Or where specifically are you seeing that?

Yes, I'd say that the destocking is probably -- as you look at it on a global basis, three quarters of that destocking is taking place in North America. And I think that's where you see the greatest concentration of that taking place in the building materials in U.S. housing. That's not to say that we couldn't see other destocking take place. But Europe, by and large after COVID, stayed in a pretty lethargic state. Whereas the U.S., the housing boom after COVID in the last 12 to 24 months has really gone up considerably. And it's come down. There's a lot of stock that was built up. Think of a year, 1.5 years ago when MDI was short, not just MDI, but a lot of building materials were very short. So, a lot of people were buying excessive amounts of materials and stockpiling it. So again, it's not just an MDI issue in the U.S. housing market. A number of raw materials from lumber all the way on through that's going. So, when we talk about a deinventoring process that takes place. It's not just around MDI or around a particular chemical, 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, if we could get through that destocking, I think that starts to give us price leverage and it gives us improved volume. But again, you're going to be selling into a housing market, a housing start market, that is 25% again smaller than it was a year ago. And as that now improves the number of homes being built, and that's going to be a whole number of issues from demand to mortgage rates to consumer confidence…

Our next question comes from Kieran De Brun with Mizuho. Please proceed with your question.

Hi, good morning. You clearly have a very strong capital position now after closing the Textile business. You have cash flow that's being generated in the back half of the year. How should we think about your capital deployment priorities? And how does M&A, if at all, now fit into your story going forward? Thank you.

Yes. Thanks, Kieran, for the question. As we said, a balanced approach to capital in terms of policy, making sure that we maintain our investment grade, which in general, over time, is a net debt leverage ratio of 2 times. We have said that we would deploy approximately $400 million of cash into share repurchases this year. We feel that, that is competitive from an overall return to shareholders' perspective. But we do have the flexibility and the lever, particularly with the portfolio we have going forward, to deploy cash into M&A. And in order of priority, very clearly for us, Advanced Materials is an area that we would like to seek out bolt-on acquisitions, as we did during the COVID time frame where we added CVC, Gabriel to our portfolio, Horizontal Plays in Advanced Materials. And we would look to build up that business as bolt-on acquisitions become available and as they become available from a value perspective. In general, you look over the past couple of years, they've been pretty high, and we've therefore stayed on the sidelines. We think going forward, there should be some value to businesses. But balanced approach overall, and we've got a strong enough balance sheet to be able to do both.

Our next question comes from Laurence Alexander with Jefferies. Please proceed with your question.

This is Dan Rizzo on for Laurence. Thanks for taking my question. You mentioned that the push for increased energy efficiency is a tailwind in the U.S. and U.S. construction. I was wondering if it's kind of a similar potential tailwind in China where they're looking to do that as well? Or is it really not material in that region?

I would say that it's not as material, but yes, it is going to continue to have an impact on the business, particularly around EVs. A lot of the infrastructures that we're selling into, you think about pipe and pipe, where you're reinsulating hot water lines, utility lines and so forth, that's a big application for us in China. I mentioned the EV market, lightweighting, and so forth. There's also very large investments being made in China on building out the power grid system that is going to continue to help with us and -- as we think about our Advanced Materials. And as we think about our polyurethane amins going into wind, and the amount of wind blades and so forth that are needed not just in China, but more and more 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 is going to need as far as these various components around a green new deal, if you will, so long as the United States has an anti-mining policy and an anti-production policy around many of the components going into these end applications, we're going to see real growth in China for a lot of these components, be it wind blades, be it EV batteries, solar panels, and various other products.

Thanks, very much.

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 have been a better fairy tale than Goldilocks.

That's a good point. Especially at insulated house, because the wind wouldn't have been able to get throug?

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 is down?

I wouldn't say anything that is appreciable or material to our bottom line. I would -- as we move further and further downstream, I think about HBS where you're making up 40% of that 2/3 of our MDI, we really don't compete against another MDI producer. We don't compete there in -- with -- and it gets another polyurethane, really, we're competing against competing applications, competing material, mineral fiber, and other smaller entity. So, we'll 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 HBS in particular, that market has changed over the last 5 years to 10 years. I think it's become a little more consolidated with some of the larger strategic players coming into the market. And you actually see less of the smaller players in that market today. And we think that's good. We think that's good for us, a discipline into the end market in terms of making sure that the appropriate products are sold and are applied correctly.

That's -- yes, it's an excellent point. Companies like Owens Corning sulfur that you used to be exclusively mineral fiber, now moving into the spray foam business, and that's -- frankly, that's good for us.

Our next question comes from Hassan Ahmed with Alembic Global. Please proceed with your question.

A lot of commentary about MDI volumes and the like, and you also touched on 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 in terms of global MDI cost curves. You guys, obviously, and you touched on that, are relatively cost-advantaged. You had like around 48% EBITDA margins in Q4, around 7% EBITDA margins in the Polyurethanes segment in Q1. So, I would like to imagine that a chunk of your competitors are maybe at breakeven or negative EBITDA margin levels. So, any thoughts around cost curve positioning and how that may actually give the market some buoyancy would be appreciated.

Yes. I think it's an excellent question. Again, I won't be saying anything of 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 kind of the four components that I look at manufacturing a ton of MDI. You've got benzene, I've got natural gas. When I talk about natural gas, that's everything from electricity to hydrogen to steam -- I mean, it's a whole range of products, right, it's not just the price of natural gas or natural gas does all those. And then you kind of got your caustic and chlorine, which is, I would say, would be the fourth component. And then your -- third component. Your fourth component is going to be labor, which you would think would be a big flywheel, but in actuality, these plants do not employ a lot of people. They employ a lot of people downstream and ancillary businesses to keep these operations running, but the number of people that are actually working on a shift to keep an MDI plant working. So, kind of reversing of those four steps, I would say 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. And the difference between benzene costs in North America to Europe to China is not going to drastically differ. I will say that where we see the biggest variability of differences come in the…

Our next question comes from Jeff Zekauskas with JPMorgan. Please proceed with your question.

Thanks, very much. The cash flows were negative $122 million in the quarter. And part of that was a decrease in your accounts payable by about $50 million sequentially. And usually accounts payable goes up, I don't know, by $100 million. What are the sources of the changes in payables? Does that have to do with reverse factoring, that is, our financing terms for buyers changing in a higher interest rate environment? And does that affect your cash flow expectations for the year?

Yes. Jeff, it's Phil. Working capital came in as we expected and cash flow, overall, as we guided. The big element that you're talking about there on accounts payable is really related to our insurance premium that we pay in the first quarter every year. So that wasn't a surprise to us. I think we guided that on the previous call overall. As you look forward, we're focused on maintaining our working capital for the appropriate degree given the underlying economic conditions that we have. Obviously, cash flow will be under more pressure with lower EBITDA year-on-year, which is what we've said, but a large focus for us on making sure that we're managing our working capital appropriately. If we look at the cash conversion cycle, number of days, we're in no real different to where we were last year at all. And I think we're managing that 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 maleic, and these are kind of hard markets for us to get a handle on. So, as we look at price in your comments, I mean, how much are they actually falling? And kind of what level are they now versus perhaps pre-COVID, if pre-COVID is even the right benchmark? If not, maybe what's a better benchmark on price?

Yes. I think the prices from a pre-COVID 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, it's just become more competitive, mostly among domestic and mostly with derivative demand of those products. Neither one of those have a great deal of competition, a number of competitors, and so forth. So, it's a combination of just what we're seeing on the domestic market and what we're seeing on downstream demand and volume pull-through. But fair to say that the prices of those products are a little bit lower than they were on a pre-COVID basis.

And I think, Matt, we were guiding really to moderate pressure quarter-on-quarter, Q1 to Q2, for those products, which is really demand-driven and underlying market conditions driven overall. But our focus is on what our unit variable margins look like. And obviously, you've got some of the raw materials there, such as butane, such as EDC, caustic dropping as well. So, our focus remains on unit variable margins in what a fairly difficult end market growth conditions.

As we look back to the performance as to where we were a year ago in that business, around that 150-ish sort of EBITDA on a quarterly basis, it's largely going to be driven by demand. And that's -- we see to see demand pick up at the end of the day. The margins are there, the pricing discipline, I think, is there. For the most part, it's demand.

Our next question comes from Kevin McCarthy with Vertical Research Partners. Please proceed with your question.

Good morning. Thank you. Peter, within Performance Products, how would you compare and contrast your volume experience for maleic versus amines? And are you seeing any green shoots there, whereby you would expect to be able to take up operating rates sequentially?

I'd say -- good question, Kevin. On the Maleic side, I think that the demand we're seeing is going to be pretty flat. And the biggest offtake that that's going into is unsaturated polyester resin. So, think about 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 has taken place. And those markets will continue to gradually recover. But I don't see that bouncing back all that quickly. Operator, we're at the 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?

Our next question is from Angel Castillo with Morgan Stanley. Please proceed with your question.

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 moved away from, I guess, anything incremental that you might be looking at that might provide greater opportunity for cost savings from an asset restructuring perspective.

Thanks for the question, Angel. I think we've guided in terms of cash that we were looking to spend on restructuring this year of around $100 million, excluding capital. I think we're still on target for around those sorts of numbers, and you can expect a lot less cash out in 2024 as we basically get those savings into our run rate. Honestly, our focus this year is completing our European restructuring and delivering on some of the savings, which actually came through right at the end of the first quarter. I did say in the earlier remarks, we're focusing on 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, and you may disconnect your lines at this time.