Greetings. Welcome to the Huntsman Corporation Third Quarter 2023 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. At this time, I would like to hand the call over to Ivan Marcuse, Vice President of Investor Relations and Corporate Development. Thank you. You may begin.

Thank you, Daryl. Good morning, everyone. Welcome to Huntsman's third 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, October 31, 2023, after the U.S. equity markets closed, we released our earnings for the third quarter 2023 via press release and posted to our website, huntsman.com. We also posted a set of slides and detailed commentary discussing the third quarter on our website. Peter Huntsman will provide some opening comments shortly. We will then move into the question-and-answer session for the remainder of the call. During the 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, 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 don't have plan on publicly updating or revising any forward-looking statements during the quarter. We will also refer to non-GAAP financial measures such as 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.

Ivan, thank you very much, and thank you all for taking the time to join us this morning. This past week, I had the opportunity to visit one of our largest aerospace customers with our Board of Directors. We watched firsthand as Huntsman's composite raw materials were applied to some of the most fuel efficient and modern aircraft built anywhere in the world today. We also visited one of our plants that is making Germany's premier sports cars lighter and consume less electricity. We spoke to our associates at the same plant who are responsible for making components for a smarter, more reliable power distribution and grid system. I'd go on about the numerous applications that Huntsman is now pushing to serve a less energy intensive, but more energy-reliant economy. All this give me cause for optimism, and it's a great reminder about our company's position in the global marketplace. Over the past 24 months, we've seen some of the strongest economic performance as we recovered from a global pandemic and subsequently among the most chaotic economic conditions as European energy policy seemingly collapsed, China's bounced back stumbled along and North America's construction markets took a beating over high interest rates and consumer uncertainty. As we now have some visibility into the beginning of the fourth quarter, as I said during our last earnings call, we expect this to be a tough quarter depending on the amount of customer deinventoring we see and lack of consumer confidence. Our projections for the fourth quarter remain murky, as the real year-end seasonality does not yet start for a couple more weeks. However, our customer and plant business demonstrates how vital our products are in an evolving global economy. We continue to see the recovery of the aerospace industry. In all of our…

[Operator Instructions] Our first questions come from the line of Aleksey Yefremov with KeyBanc Capital Markets.

Peter, it seems like China could be one of the main reasons, things global or so tough in MDI, in particular. Do you see anything in China to suggest a path for better 2024?

Well, I think that it'll -- actually, first of all, it's good to hear from you. And as I look at China, look, we've been saying for the past year that we're seeing a slow and steady recovery taking place in China. I think we're a little bit of an outlier earlier in the year when we were saying that people we're expecting that there was going to be a very sudden bounce back. But I -- we're seeing in the housing market that interest rates are dropping. And typically, that will mean that there'll be a recovery following, but we're not overly reliant on that. I think where we are invested on the domestic energy conservation in China around insulation, around building materials, around the EV market. We continue to get market share in the auto, both in ICE and in EV and in consumer goods and appliances. So our focus is not on the export segment of the Chinese economy rather the domestic consumption and building side of the Chinese economy. And in that, I think that we're going to just continue to see slow but steady growth and recovery in that area. And to that end, as I look at Chinese prices from the beginning of the year, they're actually slightly up from where they started the year. And I think that we're going to continue to see continued improvement throughout 2024 in China.

And as a follow-up, it seems like raw materials spiked some time in Q3, affecting margins in Q4. Do you see this as sort of a temporary issue for Q4 such that margins should improve in subsequent quarters? Or is it sort of a reset that could last longer?

I don't think that it's going to be a permanent reset, but it is something when we look at raw material volatility. Remember, for most chemical companies, I don't think there were any different by the time you buy the product today, and I guess, I suppose some of this still is how you end up doing your accounting. But if you buy the material today, you're shipping it from various places around the world. You're bringing in your inventory, you're working it. It works through your inventory goes to your customer, you're billing your customer and you're getting your money for that inventory. That value of the inventory, it can be anywhere from 2 months to 4 months. If you get into slower demand periods and rising raw material costs, that's kind of the worst of all worlds in my opinion. And I think that's the reason why we were saying a quarter ago is we were seeing the global uncertainty and the rising cost as we go into the fourth quarter, which is usually a time when people are deinventorying anyways. I think that we were kind of expecting to see higher costs, slower demand, and that would typically mean a drag on earnings. I think that's what we tried to reflect in the forecast that we've given.

Yes. Aleksey, I think it's clear we've got a headwind going to the fourth quarter, particularly when you look at benzene, which averaged about $3.10 in quarter 3. It settled in October over $4. It settled for November at $3.65. Spot price is lower, but that is our largest raw material. Natural gas in Europe has also risen from approximately $10 a Btu to about $14 to $15 today. So some headwinds there, there are some benefits in the chlorine chain, with chlorine coming down, epichlorohydrin is falling. But those are outweighed by benzene and natural gas.

Our next question comes from the line of Michael Sison with Wells Fargo.

Peter, when you think about, I guess, Polyurethanes in total, you've done a lot of things over the last several years going downstream and trying to improve the quality of the business. This year's, for a lot of businesses, look really tough to see those changes. But when you think about, again, just thinking where the business see when things recur, maybe talk about whether EBITDA margins can get back to all this destock in difficult times end?

Yes. I think that as we look at MDI, fundamentally, I do think that we're in unprecedented downdraft right now with MDI, putting it mildly. The reason I say that is this is a product since I've been in it for the last 25 years, and some of the veterans that been in the last 30-plus years, we've not seen 2 consecutive years of falling demand. And that's largely not about because of macroeconomic conditions. We're not seeing competing materials. We're not seeing a lots of people that are -- or stopped building homes with OSP. They've stopped using MDI and furniture and bedding. And so it wasn't anything. We see MDI continuing to expand its application base, its chemistry base and getting better. So -- I mean, if I look at the bare fundamentals, there's absolutely no reason why this material during normal economic conditions, or even normal economic minus a bit, shouldn't be doing immensely better than it's doing today. And so I think that getting back to what I would see as mid-teens -- plus mid-teens sort of margins. I personally don't think that it's going to take a great deal of change just from the sense that I don't see any fundamentals in the business that have changed the broader outlook of MDI. When U.S. housing comes back, that's obviously a very large component of MDI demand. When people buy a new home, not only did the product that goes and build the home, but also to furnish a home and -- means of furniture, bedding and paints and coatings, electronics and so forth. When you look at the automotive industry, particularly this last quarter, while we weren't directly hit with strikes that we saw in North America, our customers weren't hit by that. That did put more MDI on the market than you otherwise would have seen, probably having a detrimental effect. And as we look at the global energy conservation and insulation areas around spray foam and insulation materials again, I look at those big macro issues. I see no reason why MDI shouldn't recover. And when it recovers, I gladly predict -- when it recovers, I think it's going to surprise me how quickly it does.

And as a quick follow-up. You referenced a Chinese MDIs in the prepared remarks. Where are we in the U.S. and Europe? And how much lower do you think will go into the fourth quarter on those prices? And do you think -- what's your thought about '24? And what needs to happen to shore up all the regions?

Well, fundamentally, in '24, people need to stop tolerating losing money. And I think that, that fundamentally has to be a broad issue. It's the age-old issue of any product that's being bought and sold at very low margins, is that what's the discipline of an industry to be able to sell a product and set a price to return money to shareholders. And right now, MDI is not doing that. And so fundamentally, I think that there needs to be a change in the entire MDI market. Now that doesn't just come about without economic recovery. It doesn't come about through without customer demand returning. And those things will happen. But as I look at how close much of this is getting to fixed cost sort of return, it seems like we're there. As I look at pricing in Europe, we've been able to get some modest increases in the fourth quarter. I'd like to say that's because demand is improving, but I think it's more just discipline. And there are signs that I'm saying or at least feeling that we're to the bottom. But unfortunately, I think I've probably said that in the past. And so I'm not ready to call the bottom out, but I think that we're very close to it.

Our next questions come from the line of David Begleiter with Deutsche Bank.

Peter, do you expect this destocking the inventory to continue into Q1? And I know it's early, but should Q1 be better than Q4 or maybe closer to Q3? Or how do you think about Q1 right now?

I could think that Q1 is going to end much stronger than how it begins. I don't think that there's this -- first quarter for us, over the last couple of years, as we become larger in China and so forth and as we look at the Chinese New Year and the impact that has in the early part of the year, I can't -- I simply can't ignore that. There's some of our businesses that do extremely well in a lot of our downstream. The aerospace business and so forth, typically, their orders will come a little bit stronger in Q1 than throughout the years and others of our businesses, they do better near the latter part of the year. But I really struggled, Dave, to see that inventories can continue to destock much into '24. Typically, people are looking for a year-end pop in free cash flow. They want to end the year having covered up their inventory. They've gotten rid of as much of it as possible. And typically, Q1, just by and large, is typically not a quarter where people are getting rid of inventories, unless there's an economic -- a larger macroeconomic reason to do so.

Very good. I know you mentioned aerospace early. Where -- how much do aerospace is you up this year? And how -- why would that take us versus prepandemic levels of profitability?

I think it's safe to say that we're probably about 55%, 60% recovered in that business. There's a very healthy backlog on the large jet builders, I would say, Airbus and Boeing. There's a very healthy backlog on demand for both of those platforms. Right now, my understanding having had the opportunity to visit both of those accounts in the last couple of weeks is really around supply chain issues. You can only build a plane as fast as the slowest component that goes into that plane. I mean, when you think about it, we're talking to them, we're ready to go. We can supply more materials and everything. And it's a part that most people would never have even heard of on a single plane or a delay that's coming from a part of the world where metals and so forth might be held up. And so it's -- the demand is there. I know the aerospace customer base is looking to debottleneck and to increase that capacity as quickly as possible. I'm very confident that over the course of the next 12 to 18 months that we'll be back to prepandemic levels or very close to prepandemic levels. And I would say that as we look at the aerospace industry, I remind you that about 1/3 of our business there in, 30% of that business is going to be military and commercial -- excuse me, military and private aviation. And we continue to see new lighter, more fuel-efficient models come out on the private aviation side. And of course, the more target drones are built and blown up, that's obviously something that we'd like to see as well, so long as nobody is getting hurt.

And David, we did see a 13% revenue increase year-on-year. So we are seeing some progress in aerospace despite the supply chain issues that Peter outlined.

Our next question comes from the line of Kevin McCarthy with Vertical Research Partners.

Peter, maleic anhydride prices seem like they're continuing to slide here in the fourth quarter as they have really all year long. So I appreciate your updated views there. What do you think we'll need to see to stabilize that market? And maybe you can comment on things like operating rates and butane costs in terms of profiling that business over the next couple of quarters here?

Well, we're much larger than that in the U.S. than we are anywhere else in the world. We do have a facility in Europe. And -- but I think that -- I'm not overly concerned about margins right now because butane prices are -- have continued to be very competitive. And so as the prices have come down, raw material prices have come down as well. The larger issue around maleic anhydride my opinion is going to be none of maleic that goes into the construction markets -- polyester resin and so forth, and what is demand happening there with imports coming in from areas of the world that continue to get Russian Fed raw materials and so forth. We're seeing trade movements in that customer base that we haven't seen heretofore. And so look, when you get to a more normalized construction market, I think that, that will be the opportunity more so than raw material costing and so forth or manufacturing balance. It's going to be around demand, getting back to where, I would say, there's a more normalized sort of an environment.

Remind you, Kevin, that we have quite a majority of our contracts in North America, which are on formula-based pricing. So margins, themselves, as Peter says, have been relatively stable unit margins in North America. Europe, a different story where it's been under derepression you by noting the pricing pressure there.

That's helpful. And then switching gears. It sounds like you're contemplating a new MIRALON plan. I think your prepared remarks that were released last night said you're evaluating a 5,000 ton plant. Can you just talk a little bit about the opportunity there and put that in possible investment into context, not sure how much that might cost, for example, to build that out?

Well, we're in the process right now. We should be starting up the early part of this next year, a 30-ton facility. And just as a reminder, if you were to go to our [indiscernible], if you will, our R&D facilities, we developed this technology, we started with a number of machines that we're building -- that we're producing literally 1 pound a year of capacity. We then went to 100 pounds per year of capacity. At that point, we started selling to NASA in the very high end where you're looking at thousands of dollars of cost per kilo. We then went to a one ton per year, and that proved to be a success. We're building a 30-ton facility right now in Texas. And when that is complete, we'll be looking at replicating that facility and actually putting it in one of our facilities, where we'll be able to take one of -- we'll be able to take the byproduct, hydrogen, in one of our own facilities and take the MIRALON material on the other side. And that will be the first "commercial unit". I say commercial that all of the output will be fully utilized. And when you're looking at that 30-ton facility, you're looking in the low tens of millions of dollars as far as the overall cost on that facility. Again, to date, those facilities have only been built in a controlled environment and putting it in the middle of one of our facilities is going to be a real world of experience. And we'll be starting on that project, which will take somewhere between 9 and 12 months to complete sometime the latter part of '24. Then going to a 5,000-ton facility, we see that starting in early '25. The 5,000 tons of capacity, if that proves to be successful, we will have a product that we think will be very competitive on a commercial scale for applications anywhere from traditional carbon fiber applications to going into strengthening concrete to going into EV batteries. And we're in the process right now of qualifying and getting into a number of those applications. So very crucial time over the course of the next 18 to 24 months as is in any chemical process going from a bench to a pilot plant to a commercial operation to world-scale operation and I see all that being completed. So Kevin, I'm probably way more information than you're looking for. But it's something that we're pushing as aggressively as possible without cutting any corners on the technological side.

Kevin, less than $50 million of capital for all the investments that Peter has just -- and spent over a number of years and contained within all of the total capital expenditure that we've outlined for 2024.

Our next questions come from the line of Vincent Andrews with Morgan Stanley.

Peter, just wanted to square your comments on decelerating the pace of the buyback from I think you were doing 100 a quarter to now maybe it's going to be 50 in the fourth quarter. In the prepared remarks, you referenced just sort of obviously what's happening to the EBITDA in the fourth quarter in the operating environment. But I think I heard you on the call talk about you also wanted to have some spare capacity for M&A. So I just wanted to get your latest thoughts on M&A and how you think about what might be out there versus your own stock trading in low 20s?

Well, I think right now, from everything we see, our stock remains a very competitive buy and [indiscernible] value, unfortunately. But I think that as we look at the broader M&A market, we are seeing a, I would say, a slight improvement on multiples coming down. And as multiples come down, it's not -- that doesn't -- that's not the only part that's changing asset valuations. EBITDA, for most assets we look at, are also coming down. And so as we've kind of seen the end of free money, if you will and I'm seeing a little more competitive environment today. But more importantly than the M&A market, I think, for our Board of Directors in our discussions around share buyback is we want to have consistency and we want to have reliability. And the discussions around our Board table and over, can we afford it this next quarter or even this next year, but rather how do we have a reliable program that people can count on for the next couple of years? We've got a balance sheet that can weather the storm. They can give us opportunity, flexibility, but also make sure that we're competitive with the best of our peers in the chemical industry on returning value, returning cash to shareholders. So I think it's really a balance of all of those things. So I don't want you to look at the fourth quarter change as just a knee-jerk reaction to a single quarter. But rather, let's assume that we want to have that flexibility across the board. And I think -- I still think as I look back on what we bought back this last year at the price of our stock, our dividend and so forth, we've been one of the best in our industry as far as returning value to shareholders.

Yes. I think if you close out the year, we'll save in excess of $0.5 billion to shareholders through a combination of dividends and share repurchase throughout this year.

That’s very clear. As a follow-up, I think I also saw that you anticipate completing your planned cost saves program this year as intended. Are you contemplating anything for next year? A –Peter Huntsman: Well, I think that we’re always looking as to how we can be doing things better and more efficiently and more effectively. I think as we look at our overall portfolio, depending on business conditions and again, I think that we probably have seen some other unprecedented conditions. I said, we’ve never seen a year where MDI consumption has fallen 2 years consecutively. We’ve got to make sure that we see the realities in the marketplace and that we calibrate the business, the cost structure and so forth accordingly. So we’ll see $60 million in benefits in 2024 that we didn’t see in 2023. That’s largely because we’ll have an annualized savings of 2024 over 2023 of the cost savings will be completed by this year. But again, the day we sit back and look at our portfolio and say it doesn’t need to be changed or our cost structure is perfect, probably a time when a new management team needs to come in because I think that’s what – largely what we get paid to do. A –Phil Lister: I think we see some additional opportunities in our manufacturing cost efficiency as well as completion of the European transformation. We do need to balance next year in terms of making sure that we’re limiting the amount of restructuring cash net needs to be a real focus on free cash flow and free cash flow generation overall, as Peter said, $60 million of year-on-year benefits to come from what we’ve done this year.

Our next questions come from the line of Frank Mitsch with Fermium Research.

As I looked at the guide for the fourth quarter, I understand the macros are not great. But the number was pretty low in terms of what you're guiding. And Peter, as you started the call, you said, look, things are murky. We haven't even started the end of year sort of changes by the customers, maybe they're destocking or what have you, into year-end. So can you give us some more color as to how you came up with the $65 million to $90 million guide for the fourth quarter? What's kind of embedded in that? And if I could be so bold as to ask a more granular question, what the heck did you guys report in October in terms of profitability? How much of that $65 million to $90 million is kind of already in the bank?

Well, as we look at the October numbers, we're not going to get into splicing. It's a good question, but we're not going to get into splicing our monthly performance. But as we look at the demand across the board here, I certainly can say that October was a bad month. What we typically see at the end of the quarter, Frank, is customers will come to us, and these are larger customers, not the mom-and-pops, but the large OEMs are going to the automotive industry and so forth. And they'll typically come in a normal year, midway through December, and say, we're done for the year. And usually, a week or 2 before that, they'll start canceling orders and so forth. And we'll see that the fourth quarter ends rather suddenly, not on December 31, but usually sometime in the month of December. It's usually not that dramatic, but it's pretty close to that. So you really don't see the results of December and October. Typically, the business doesn't move all that much in a month or 2. Fourth quarter, it does. And what we've heard from customers, we've not seen it yet in the order patterns. What we've heard is that there's going to be an earlier shutdown this year that we're going to -- you hear from customers just anecdotally, they're going to be shutting down earlier this year. They're going to be taking the last 2 or 3 weeks off, then they're going to be reducing inventory. Now you hear that anecdotally and it's just -- I don't know, that's why I started about 3 or 4 months ago. It's really tough for us, a company this size to just put on the brakes, say, we're going to reduce inventory starting this next week because everything is on the road, everything's on the water, everything's in the railcar. So we anticipate fourth quarter, there's going to be inventory reduction. And if that starts at the beginning of December versus the middle of December, frankly, that's going to have quite a bearing on our bottom line. So I wanted to just spell out in my comments, even though we're into the fourth quarter, even though we're starting to see the order patterns as they develop through the quarter, it still is a bit too early to say definitively where we're going to be.

Frank, if you're looking to bridge between the 136 we just did and the midpoint of that range, you can think about half of it being price costs. We've talked about what's gone on with the benzene market and the natural gas market. Overall, we did indicate that our China joint venture PO/MTBE, that EBITDA is going to come down between Q3 to Q4 by about $10 million. And then the balance of it will be the seasonality and the inventory of the customer and that Peter has talked about.

That's very helpful. But you know there's a school of thought out there, and I'm curious as to where you fall in this is that we have been hearing incessantly about destocking since the third quarter of '22. And so there's a school of thought out there that the destock is -- has got to be near an end. And therefore, the sort of seasonality in the fourth quarter in terms of companies rightsizing their inventories, et cetera, may not be as dramatic this year. It seems to me that you're not buying into that thesis that you still believe there's more destocking that needs to occur. Is that correct?

I personally -- and Frank, I don't want the headlines to start Peter Huntsman's the ultimate pessimist. But no, I do think that that's -- I do think that's correct. I do think that there's going to be year-end destocking. And as I talk to customers and so forth, I don't think it's going to be cataclysmic but I do think it's going to happen. I would also just note that I've been somewhat befuddled by what you said earlier about how do you get destocking that takes place for 6 quarters in a row. Is there that much inventory in the system? And no, there isn't that much inventory in the system, I don't believe. I think that it's really a combination of falling demand and of inventory. And I think some of the -- when we perhaps saw falling demand and how quickly that demand was falling in housing in some of these other areas, I think that we took that as inventory destocking because demand was down and the statistics look like it ought to be okay. But as you look back on it, I think what we've seen over the last 1.5 years is really a combination of massive destocking of inventory and a real fall off when you look at areas like housing, building materials and so forth. Let's remember going into 2022 and going into even the beginning of this year in a lot of areas, we saw very large inventory builds because of the supply chain constraints that we saw at the beginning of 2022. There were a lot of customers that were sitting on not just our inventory, but a lot of customers' inventories, and they were sitting on their own inventory. I look at some of our OSB customers and OEMs and so forth. They typically will deal with 20 to 30 days of inventory. Some of these companies had 60, 90 days' worth of inventory, and we may not see that because they're not holding 90 days of MDI inventory, but they're holding 90 days of some other inventory that they've got to work through before they can start buying ours again. So I think it was just really a combination of issues. But Frank, I do share your view that whether it's demand or inventory, I think that we're really very, very close to the end of that road.

Our next questions come from the line of Mike Harrison with Seaport Research Partners.

So the next logical question is maybe on your expectations for destocking as we get into next year. Do you think we're in a situation where we see a gradual recovery in order patterns? Or could we see a situation where customers are going to need to rapidly bring production back up, rapidly accelerate orders to meet seasonal demand pick up in the spring? Is that something that we could be seeing about to unfold here?

I'm not going to anticipate that just because it's tough to have the underlying data to justify it. But I do think that if people are getting low on inventory, which I think the market is, I don't think that it's a whole lot to stood the herd, if you will, whether it's a single shot of lightning or in this case, maybe just a rattlesnake somewhere on ground. And once -- when somebody starts moving very quickly to replenish inventory, you start to see people coming to us, and I need some more inventory. And what we're running at 55%, 60% capacity of the single facility, and it's going to take us a couple of weeks to recalibrate the plant and to keep -- to have the production to be able to fill the inventory. All of a sudden, you've got shortages and also people are publishing their shortages, prices are going up and everybody kind of crowded through the door at the same time. And that's usually -- and it's usually over something that is miniscule as a single operator somewhere around the world having a plant problem, a raw material going up, not that there's anything going unusually wrong in the Middle East right now. But what would happen if something were to take or get sick or whatever. Also, when people see crude prices going up for whatever reason, that means my raw material prices next month going to go up. And all of a sudden, I'm going back and I can't get the product that I thought I could get. I do think that a number of chemical companies are also operating their facilities, calibrating their facilities around today's demand, not the demand of a recovery, but around today's demand. So I think you take all of those things together, and I think that it does put us in a position where you could see a more sudden knee-jerk recovery than a kind of a longer sustained recovery.

All right. That's very helpful. And then my other questions on the spray foam opportunity in international markets. Maybe give us an update on the kind of progress that you're making with spray foam insulation in Europe and in China?

Well, I think just in a nutshell, we're continuing to see strong growth in both of those areas, mostly when we talk about international. We're looking at the Middle East, and we're looking at the U.K. Those are the two markets where we've got ready-made system houses that are making the raw materials. We've got the sales and marketing forces that are out and aggressive in these markets. I would say that Japan also should be, for us, a growing market in that area. But we're starting from a very low base, but we have very high expectations on that. So I wouldn't see material movement on our P&L because of the sales in those regions, but those are going to be growth markets that over the coming years. We're going to see, I think, a real opportunity to change the business.

Our next questions come from the line of Hassan Ahmed with Alembic Global.

On the polyurethane side of things, obviously, a bunch of questions around trying to sort of forecast demand, obviously, in our industry is always challenging to do. But it seems that the supply side of thing's easier to forecast, right? So as you sort of sit there and look at polyurethane, sort of cost curves. I mean, in the response to one of your earlier questions, you talked about how margins are same for some of the marginal producers. You guys, yourselves, reported 8% EBITDA margins this quarter. So I'm just trying to understand the marginal guys presumably are losing money right now. So with the supply looking the way it's looking, I mean, do you forecast potentially shutdowns, more delays in capacity additions and the like and how will that play out as it pertains to a potential recovery going forward?

I'm not sure that the recovery going forward is going to be dependent on any shutdowns. I am a bit surprised that, that hasn't happened yet. As I look at the various regions, I look at the U.S. I don't see a lot of shutdowns of total facilities in the U.S. because the major producers in the U.S. only have one facility. And I don't see somebody exiting the North American market. And I think the same can be said for China. Now there are people that are like -- that have multiple facilities in China but I personally just don't see them shutting one of down. They're very competitive. They start with foam and they work their way through on a competitive set of economics. Europe, in my opinion, longer term, when I look at the size of the facilities that are in Europe and the number of people that have multiple facilities in Europe, I do question the longer-term viability of some of those assets. But again, I'm not privy to decisions that are made, obviously. In those companies, I don't know what their economics are. To the degree that they've got longer-term contracts with government-assisted money or with unions and so forth, I have no idea what limitations there might be on that. But fundamentally, I think that the industry is shutting down lines more than they're shutting down facilities. And I think you're probably going to continue to see that.

The only supply coming to the market, Hassan, will really be 1 month over the next sort of 4 to 5 years, but there's nothing else major that's been announced and if the industry returns to its 4.5%, 5% growth level, then that will have strip supply as a rebound occurs.

Makes sense. And as a follow-up, I mean, if we could sort of switch gears to the M&A side of things. Obviously, the balance sheet continues to look very good. And you guys have talked about inorganic opportunities and the like. I mean, look, in your prepared remarks, a fair date of sort of time was spent talking about the housing construction end market, the auto end market and the like. And as you guys look at the portfolio today, obviously, those end markets are sizable end markets for you guys, right? So rather than sort of -- in the past, you've talked about potential M&A opportunities in Advanced Materials and the like. I mean, as you think about these inorganic opportunities, are you also thinking about potentially diversifying away from housing autos and construction, which are sizable end markets for you right now and in this market, at least tend to be a little shaky, maybe potentially diversifying away from those end markets?

Well, I think that if you, pardon the cliche, that follows the money. Look where we've been investing our capital that we have internally is around producing cleaning materials for the chip industry, catalysts for polyurethanes and home insulation and so forth, looking at how we diversify further downstream in the MIRALON and so forth. When you look at our M&A over the last couple of years, it's around Advanced Materials and how we not only get more but a more diverse field, a broader field of chemistry. And I think we've been publicly -- if we haven't said it publicly, I'll say it now, as we prioritize where we see the world going, it's going into a greener, it's going into lightweighting, it's going into adhesion. It's going into where our materials, particularly in Advanced Materials, but also PP and Performance Products and Polyurethanes, but we're seeing particularly in Advanced Materials where that is going to be replacing ceramics, it's going to be replacing traditional applications, composite materials and so forth. And those are going to be the areas of focus for us. So as soon as Phil can give me a 35% margin business that we can buy for 5x FDA, we'll be moving pretty aggressively.

Our next questions come from the line of [indiscernible] with Bank of America. Q – Unidentified Analyst: So as we're talking about hopefully getting a volume recovery at some point, I think your variable decremental margins this quarter were in around 40% or somewhere in that range. Can you discuss how the decremental margins differ from within each segment and how essentially we would expect a volume recovery in each of the three businesses to flow down to EBITDA?

Yes. I think we were more like year-on-year, about 30% to 35% overall on decrementals. So it's good to talk to you, by the way. And then in terms of volume recovery, both Polyurethanes and PP have a real leverage here to a volume recovery as construction comes back overall and obviously, that will -- and then most decremental margins. Advanced Materials, really linked into the country we made around aerospace and assuming that automotive continues on a decent global production to build that. Q – Unidentified Analyst: Perfect. And just a follow-up on the raw materials for MDI, besides a well-known increase in benzene prices, can you provide us a little bit with what you are assuming for Q4 in each of the key regions, Europe, China and the U.S. for other key raw materials, chlorine, et cetera?

Yes. I think we said -- so we outlined benzene, we outlined natural gas was headed in Europe intended to 15. Chlorine caustic under a little bit of downward pressure overall, so we built that in. This will remain I think -- which are the two main raw materials, although they still represent a minority of Advanced Materials is coming off as well. And then you've got ammonia, which is obviously a big raw material into Performance Products, which has been moving upwards. It moved down throughout the year, but it's been moving upwards. That also impacts Polyurethanes in nitric -- into nitric acid. So that's the way to think about our raw material base pending still remains the biggest raw material that we purchase globally.

And certainly, the most volatile -- a lot of those products that Phil just mentioned on longer-term contracts or pass-through contracts with natural gas and so forth.

Our next questions come from the line of Matthew Blair with Tudor, Pickering, Holt & Company.

Peter, so it's obviously a tough market, but your prepared comments did mention that building solutions volumes were up both quarter-over-quarter as well as year-over-year. So I don't know that seems encouraging in the tough construction market. Should that be the read-through for investors? And do you have any more color here? And also, is this because you're gaining share in the spray foam market or are there other dynamics at play?

Well, a couple of things. First of all, last year, third quarter was a pretty tough year. I mean, it was a low point, I think, as we look at the overall business. But as you look at the third quarter, we're up 2% from -- versus the prior quarter. We're up 10% a year ago. If you look at some of our other products like the composite wood products and so forth, as we look at the order patterns thus far into fourth quarter, and I don't want to get ahead of myself, but we're seeing a positive year-on-year comparison there. And that's the first time we've seen a positive comparison there for probably over a year on a quarterly basis. So again, I'm not -- I don't want to get overly encouraged by this, but these are signs you first have to hit the bottom, and then you're going to see a bounce back. So as I look at things from where we are in the third quarter, I think there's some positive signs I'm seeing in HBS and the building solutions, all around in -- areas around our total insulation business. From the prior quarter, it was up 3%. From a year ago and again, this isn't just spray foam. This is our installation that goes into rigid panels, construction panels and so forth, we're down 4% over a year ago but up 3% sequentially. So starting to see, I think, signs that we're hitting the bottom in some of these areas, and I'd like to think that we're recovering in others of them. So I would take those as -- we call them green shoots, but I think it's a tired metaphor because we've used it now the course in -- and we haven't seen much more than green shoots. But no, I think there's probably more of those we see today than we did certainly a quarter ago.

Okay. That's helpful. And then you mentioned some challenges from rising European natural gas prices. Do you have any hedges in place? Or is there anything you're doing today to mitigate potential price spikes in the winter?

We do a little bit. I wouldn't say that they're material. It will protect us from the absolute highs and lows and so forth. But look, I think that those -- spikes like that are going to impact us as a company on the short term. But I think longer term, what the reverberations of the very poor energy policy that you see in Europe is the longer term of what that does for consumers, what it does for confidence in the macro economy, what it does for our customer base that is more energy-intensive customer base. And so I -- the gas pipes, yes, I think that we've got some protection in there, but not a great deal. My bigger concern is what happens to the macro economy there.

Our next questions come from the line of Josh Spector with UBS.

I wanted to zero in Advanced Materials, I guess. If you look at your volumes there, you're down something like 40% versus 2019. Obviously, you've talked about aero and that has an impact about how that recovers. But when you look at the rest, how -- that gap is maybe some lost volumes because it's no longer competitive to play there destocking? And where would you see the market is? And my follow-up with that is your EBITDA is actually not terribly far off 2019. So your unit margins are doing much better. Is that a silver lining about where profitability would be when volumes improve? Or is that not the right way to look at it?

I think that as you look at that business, two things to keep in mind. One, we've been getting out of the BLR business. So in a lot of the downstream differentiated specialty ends of Advanced Materials, we've actually seen very good growth in those areas. I mentioned earlier about some of the components that are going into the EV sports cars and so forth. On the other hand, we've been getting out of the bulk liquid resins and that is a business, if you go back 5, 10 years ago, that's what made up the vast majority of Advanced Materials. So we've been getting out of large volume, low-margin accounts we've been getting. So when you look at the business overall, it doesn't look like there's, if anything, as you said earlier, you've seen negative growth. But the quality of what we're building, the quality of the core of the business, it continues to grow very aggressively in that division, continues to be very firm and to be very strong. I'd also note that since 2019, we've had two large acquisitions in that business that have -- I think, have both been very successful and both integrating those acquisitions in -- from a cost point of view. But now that we're done with the cost synergies, more importantly now is the longer-term market opportunity and what are the customers and applications that this allows us to compete in. And that's -- I think that's as we look at Advanced Materials on the longer term. But if we find good value M&A opportunities there, that certainly is going to continue to be a high priority for us.

Our next questions come from the line of Laurence Alexander with Jefferies.

Could you give a little bit more color on what you think the -- is going on behind the stutter in the EV market? To what degree your customers are rethinking their structural or their fundamental assumptions? And then secondly, can you just talk a little bit about how you think about working capital days, both next year and kind of where -- and also where you think kind of mid-cycle should be as your portfolio has been evolving?

Laurence, very good question. I'm going to let Phil comment on the working capital inventory issues. On the EV side, I'm not going to say that I'm concerned, but if I look at that entire chain, and you see some of these car manufacturers, I think with the exception of Tesla that was built largely on the back of billions of dollars of federal green credits that other companies bought from them. I mean, it's only been relatively recently that Tesla is making money on their EV cars in the last couple of years. They've obviously built an excellent vehicle. But as you look at the overall EV markets, I'm not sure that on a stand-alone basis, and when you look at some of the more recent earnings on some of these EVs, some of these companies are losing tens of thousands of dollars per vehicle. And they say, well, then it's a question of volume, but the volume doesn't seem to be coming. And then you look at the supply chain, where's the money being made in the supply chain and seemingly are the components going into the batteries themselves. And that seems to be where the money is being made. And who controls the EV components. Well, the Chinese, I think, have done an excellent job in the last 15 years of developing that supply chain, the refining, the mining, the processing, the expertise in that area and give them credit for what they've done. So Laurence, all of those things I just outlined, that's well above our pay grade, at least, mine as far as where the EV markets are going. But as I look at the applications going into an EV, any EV vehicle is going to need a couple of basic issues. When the lightweight strong materials, they're going to need effective and efficient batteries, which are going to require ultrapure ethylene carbonates. It's going to require materials like our forthcoming MIRALON and some of the other materials that we're producing today that's going to reduce the weight, strengthen the car and give manufacturers better mileage overall and hopefully lower costs in building the car. So -- and better comfort. So as we look at this, on all of our divisions, we continue to make -- we continue to have more opportunity per vehicle on an EV than we do in ICE. So I continue to be a proponent from a business point of view for that. I can't answer all the economic conundrums of it. The -- but yes, I won't comment further on that. But I do think that as we look at the opportunities for Huntsman, we continue to see a lot of opportunities, not just today, but over the course of the next 2 or 3 years.

Laurence, on working capital. We target approximately 30 days cash conversion cycle. At the year-end, you want to think about that. But for 2024, we have been bringing down our inventories in quarter 3 about 5% in the third quarter, looking at another 10% in the fourth quarter to make sure we're calibrated overall demand. I do think there's an opportunity as we meet through 2024 to further improve working capital, and we highlighted that in the prepared remarks.

Our next questions come from the line of Patrick Cunningham with Citi.

So you decided to pause the UPEC project given the weaker pricing there. But on the flip side, you're moving forward with the other two projects. So can you talk about what gives you confidence to move forward in those markets there? And what's the expected contribution to both 2024 and run rate earnings from those projects?

Yes. So the two projects, as you indicate, one in Conroe and one in -- and one in Hungary. The one in Conroe linked into the semiconductor market, we're confident about that. We're confident about the delivery of that project despite a lowering of the semiconductor market this year in the long run. Our clean amines will play out well in that market and particularly with all of the investment that's going on the ground in North America. We'll have that up and running in the first half of next year and contributing to the P&L in the second half of 2024. The one in -- it's firmly linked into installation, energy efficiency and also into automotive for -- products, which the automotive OEMs demand. So again, we're not concerned about the ability to sell out those projects at decent margins. UPEC has been the one that's been the issue, and that's just been a flood of Chinese material that's come in. And therefore, we've done the appropriate thing, paused that construction where we started at the appropriate time. We can get it going within 12 months. But right now, the returns aren't there, and we can divert that capital to other projects such as -- and Advanced Materials. In terms of benefits, overall, you think of about $10 million maybe in the second half of next year from the two projects, and that ramps up over time to over $30 million as we move through 2025 and 2026.

Operator, we're at the top of the hour. Why don't we take one more question?

Our next question comes from the line of Arun Viswanathan with RBC.

If we look at over the last couple of years, I think you did a 13 50 or so EBITDA in '21. You removed the textiles business and maybe you're down to call 50 or so at a peak. You're run rating around $400 million right now. So is that the right way to think about kind of trough to peak EBITDA of Huntsman as it stands now and maybe like a $800 million mid-cycle number? And if so, any kind of larger items that would take you from, say, that $400 million to that $800 million annualized number? How should we think about that?

Yes. Arun, so -- I mean, your calculation is right. $1.2 billion, excluding textile effects at the recent sort of 2021 and 2022 high overall. We have to look for three things, right, ultimately for the current rates to come up. One is a continued recovery in China. We've seen a steady and moderate improvement. We do expect improvement next year. U.S. construction markets absolutely have to turn. About 40% of our business is in North America and a decent portion of that is into U.S. construction, whether that's residential or commercial. So that needs to return upwards. And then ultimately, everyone needs to find a way to make more money effectively in Europe with higher gas prices. And those three things are the key elements macro-wise, which will move or move profitability up. In addition to that, we obviously do have some projects coming online in Performance Products. We have projects coming online in Advanced Materials over the next few years. And you can expect an aerospace recovery as well moving those numbers up.

Operator, I think that we're done with our time. We'd like to thank everybody for taking the time for joining us this morning.

Thank you. That does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.