Huntsman Corp. Q4 2007 Earnings Call Transcript

| About: Huntsman Corporation (HUN)

Huntsman Corp. (NYSE:HUN)

Q4 FY07 Earnings Call

February 22, 2008, 11:00 AM ET


John R. Heskett - VP, Corporate Development and IR

J. Kimo Esplin - EVP and CFO

Peter R. Huntsman - President, CEO and Director



Good day ladies and gentlemen and welcome to the Fourth Quarter 2007 Huntsman Corporation Earnings Conference Call. My name is Melanie and I'll be your coordinator today. All participants are in listen-only-mode. [Operator Instructions]. As a reminder this call is being recorded for replay purposes.

I would now like to turn the call over to Mr. John Heskett. Please proceed sir.

John R. Heskett - Vice President, Corporate Development and Investor Relations

Thank you, Melanie and good morning to every one. My name is John Heskett and I am Vice President, Corporate Development and Investor Relations for Huntsman Corporation. Welcome to Huntsman investor conference call for the fourth quarter of 2007. Joining us on the call today are John Huntsman, our Chairman and Founder, Peter Huntsman, our President and CEO and Kimo Esplin, our Executive Vice President and CFO.

The recorded playback of this call will be available until midnight February 29, 2008. The recorded playback maybe accessed from the U.S. by dialing 1-888-286-8010 and from outside the U.S. by dialing 1-617-801-6888. The access code for both dial in numbers is, 57468327. The recording of this call may also be accessed through our website.

Before, we begin the discussion of our earnings, I would like to say a few words about forward-looking statements. Statements made during this conference call that are not historical facts are forward-looking statements. Such statements are considered to be predictions or expectations and are subject to a number of risks and uncertainties. Our actual results could differ materially based on a number of factors including, but not limited to the consummation and timing of our proposed merger with Hexion, future global economic conditions, changes in the prices of our raw materials and the energy we consume in our production processes, access to capital markets, industry production capacity and operating rates, the supply demand balance for our products and that of competing products, pricing pressures, technological developments, changes in government regulations, geo-political events and other risk factors.

Please refer to our most recent 10-Q... 10-K and our other public filings for a more complete discussion of the risk factors applicable to our company and our announced plans to merge with Hexion.

Before, I walk through a summary of our earnings, I'd like to briefly outline the format for today's call. I will briefly summarize the earnings and then turn the call over to Kimo Esplin, our CFO, who will provide an update on our merger agreement with Hexion, review the details of the completion of sales of certain of our commodity businesses to a subsidiary of Koch Industries and our most... and our recent preferred stock conversion and provide a brief update on our pending insurance claim.

Finally, Peter Huntsman will share his thoughts on the performance of certain of our businesses during the quarter. Unfortunately, given the pending merger with Hexion we will not be able to take any of your questions following the conclusion of Peter's remarks. I know that many of you have questions related to certain aspects of the Hexion merger including the timing of regulatory approvals and financing arrangements. We expect that additional details related to these issue and others will be made public by either Huntsman or Hexion in the coming weeks and months.

However, at this time we are not in a position to provide any information beyond that which has been provided in our recent public filings.

Turning, to our earnings, I'd like to point that as I summarize earnings I will be referring to adjusted EBITDA from continuing operations, which is EBITDA adjusted to exclude the impact of discontinued operations, restructuring impairment and plant closing cost, merger associated expenses, the sale of accounts receivable, losses arising from the early extinguishment of debt and gains related to the sale and acquisition of assets.

In the fourth quarter of 2007, we recorded a net cost of $90 million related to such costs and expenses, and in the fourth quarter of 2006 we recorded aggregate net gains of $66.3 million related to such cost and expenses. We focus on adjusted EBITDA from a management standpoint as we believe it is the best measure of the underlining performance of our operations and we have received feedback from many of you in the investment community that this is how you prefer to look at our business.

A reconsolidation of both EBITDA and adjusted EBITDA to net income can be found in our fourth quarter earnings release, which has been posted to our website.

Today, Huntsman Corporation announced fourth quarter earnings as follows. Huntsman recorded adjusted EBITDA from continuing operations of $192.3 million as compared to adjusted EBITDA from continuing operations of $170.8 million in the fourth quarter of 2006.

Net income available to common stockholders for the fourth quarter of 2007 was $2.2 million or $0.01 per diluted share, this compares to net income available to common stockholders for the fourth quarter of 2006 of $80.2 million or $0.34 per diluted share.

Excluding, the after tax impact related to merger associated expenses, losses due to restructuring cost, the impact of discontinued operations and gains from the sale of assets and other items, adjusted net income from continuing operations was $47.7 million or $0.20 per diluted share. This compares to $47.8 million of adjusted net income from continuing operations or $0.20 per diluted share for the comparable period in 2006.

Improved results on an adjusted EBITDA basis as compared to the previous year were primarily attributable to stronger results in our Polyurethanes performance products and Materials and Effects divisions partially offset by weaker results in Pigments. Corporate and unallocated expenses were also higher in the 2007 as compared to gains in... as compared to 2006 due to weaker results in our Australian styrenics operation and higher IT costs.

I'd now like to briefly outline the forms each of our four continuing segments. Polyurethanes recorded adjusted EBITDA of $142 million for the fourth quarter of 2007 which was $34.4 million higher than in the fourth quarter of a year ago. MDI volumes were up approximately 5% as compared to the fourth quarter of last year. MDI pricing was also higher up about 8% compared to a year ago, primarily due to the stronger euro.

Results, in our PO co-product MTBE business were modestly higher in the quarter, but down relative to the third quarter due to seasonally lower MTBE pricing. Our core MDI business benefited from strong market conditions in Asia during the fourth quarter, both in terms of demand and pricing and our ability to capitalize on the strength of this reason was very much enhanced by the fact that our MDI joint venture facility Caojing, China operated in excess of 90% of design capacity during the quarter.

Material and Effects reported adjusted EBITDA of $46.9 million for the fourth quarter of 2007. This was up from $39.6 million in the fourth quarter of a year ago. Advanced materials contributed approximately $35.5 million of adjusted EBITDA, while textile effects contribution was $11.4 million.

In advance materials we continue to see a strong pricing environment and an improved product mix, with average selling prices up about 30% over last year. In textile effects, a similar story was pricing up almost 11% with increases in both dyes and chemicals in all regions. Textile effects volumes were down about 6% as higher volumes in Asia were more than offset by lower volumes in Europe.

Performance Products recorded adjusted EBITDA of $48.6 million in the fourth quarter of 2007, as compared to adjusted EBITDA of $41.9 million a year ago. In our core Performance specialties business, pricing and volume improvements were offset by higher raw material and other cost, while in our Performance intermediates improved surfactants profitability and EG pricing resulted in stronger results.

2006 results also included approximately $7.3 million in insurance income related to our previous period.

Pigments recorded adjusted EBITDA of $6.6 million in the fourth quarter which was down compared to $22.8 million in the fourth quarter of 2006, but up as compared to $3.7 million in the third quarter of 2007. Volumes were up about 11% as compared to the fourth quarter of last year as we continue to experience healthy levels of global demand and the year ago sales volumes were unusually low.

Average selling prices were flat with last year in U.S. dollar terms, but down about 5% in local currency terms. On a sequential basis, U.S. dollar prices we are up 3% versus the third quarter and also up slightly in local currency terms. Adjusted EBITDA also continues to be negatively impacted by the continued decline in the value of the U.S. dollar. Kimo?

J. Kimo Esplin - Executive Vice President and Chief Financial Officer

Thanks John. Let me start off by updating you on the completion of the disposition of our U.S. Polymers and base chemicals businesses to Flint Hills. As you know, during the fourth quarter, we successfully completed the restart and commissioning of our Port Arthur olefins facility. As a result, we were able to complete the sale of our U.S. base chemicals business to Flint Hills on November 5th, and transfer the plant and related business across to them in exchange for $415 million in cash.

Beginning, this quarter the entire base chemical business is reflected as a discontinued operation and we recorded a pre-tax impairment charge of $143.4 million in discontinued operations related to the sale.

We also received the final $70 million in proceeds related to the sale of our U.S. butadiene and MTBE business to Texas petrochemicals in the fourth quarter and we recorded a pre-tax gain of approximately $69 million. This gain is included in continuing operations, but it has been excluded from our calculations of adjusted EBITDA and adjusted income from continuing operations.

On February 16, 2008, in accordance with the terms of our 5% mandatory convertible preferred stock, we converted all of the outstanding shares into 12,82,475 shares of common stock. On February 19, 2008, we paid our final preferred dividend to stockholders of... and trading of our preferred stock is being effectively suspended. This brings our total issued in outstanding common share count to approximately 234.1 million.

Now let me update you on the status of our merger with Hexion. As a reminder on July 12, 2007 we entered into an agreement with Hexion specialty chemicals where in they will acquire all of the issued and outstanding shares of common stock of Huntsman for $28 per share. Including the assumption of debt this values the transaction for Huntsman at approximately $10.6 billion. The Board of Directors of Huntsman unanimously approved the merger agreement on the recommendation of a transaction committee comprised entirely of independent directors, subsequently on October 16th at a special meeting stockholders of the company boarded to approve the merger.

The closing of the transaction is not subject to a financing condition and Hexion has secured financing commitments from Deutsche Bank and Credit Suisse to provide for all necessary funding. But the transaction is subject to various other conditions including U.S. and foreign competition law approvals and other customary closing conditions.

On January 25, 2008 we announced that Hexion had notified us, that it will exercise its right as provided into the terms of the merger agreement to extend the termination date by 90 days from April 5th to July 4th 2008. The extension is necessary to provide the FTC with additional time to review the transaction, such that the mergers is unlikely to close prior to May 3rd.

This extension was clearly contemplated by the terms of the merger agreement and the termination date remains subject to another 90 day extension under certain circumstances. The cash price per share to be paid by Hexion will increase at the rate of 8% per annum, inclusive of any dividends paid after April 5, 2008.

Together with Hexion, we are working diligently to satisfy all closing conditions on February 7th, Huntsman certified to the FTC that it was in substantial compliance with the terms of the second request for information, which was originally received from the FTC on October 4, 2007.

While, we are currently unable to estimate when the FTC and other regulatory approvals will be received, both Huntsman and Hexion have made receipt of these approvals a priority and we expect closure of the merger to follow soon after they are received.

As previously indicated we and Hexion expect to make additional information about the merger publicly available in the future. But until we do so, we are limited in our ability to comment further.

Finally, a brief update on the status of our insurance claim with regard to the fire and outage we experienced at our Port Arthur, Texas olefins facility in 2006 and 2007. Through the end of 2007, we had submitted total proofs of loss of $541 million and would expect to submit additional proofs of loss in the near future.

To-date we have received $325 million in cash reimbursements from our insurance carriers including $20 million that was received following year end. We are working diligently to resolve this claim and we would expect to receive additional amounts in 2008.

With that I will turn the call over to Peter.

Peter R. Huntsman - President, Chief Executive Officer and Director

Thank you very much Kimo. Good morning everybody. With adjusted EBITDA from continuing operations of $193 million, fourth quarter represented another period of improvement for us as a result increased about 13% as compared to the fourth quarter of last year. Excluding Pigments, where margins continue to be constrained due to a soft North American residential construction market and they continued slide in the value of the U.S. dollar relative to the primary European currencies, results of each of our Polyurethanes, Performance Products and Material and Effects division recorded very solid increases in adjusted EBITDA as compared to the fourth quarter of last year.

The adjusted EBITDA of our Polyurethanes division increased 32%, Materials and Effects increased 18% and Performance Products improved 16%. In fact, the total adjusted EBITDA for these three divisions was up $48 million or 26% as compared to the fourth quarter of last year. This is also the first quarter that reported results from continuing operations that did not include any impact from the divested commodity businesses.

As you know, this series of sales transactions as well as the impact of the outage of the Port Arthur facility has resulted in quiet a lot of noise in our reported results. With the completion of the sale of our North American base chemicals business to Flint Hills Resources in November, these one time changes should now be behind us. Also, we need to keep in mind that these results were achieved in spite of sharply higher raw material and feedstock cost as compared to the fourth quarter of last year and the third quarter of this year.

Our Polyurethanes business performed very well during the fourth quarter with volumes up 5%, as compared to the fourth quarter of last year. As expected, our volumes sold into the composite wood product sector were down sharply due to the slowing pace of residential construction activity. But we more than made up with this, with strong volume increases in other sectors, including insulation where volumes increased 18%, and in our adhesives, coatings and elastomer division where volumes were up 19%.

Our oriented strand board wood binders business continues to face a very challenging market environment in North America. In fact, if you exclude the OSB impact, our volumes were up 12% fourth quarter of 2007, as compared to fourth quarter of 2006, and 10% full year 2007, as compared to full year 2006.

So, we are still seeing very strong demand for MDI across a broad set of geographic regions as well. On the pricing side, MDI was up about 8% as compared to the fourth quarter of last year, on the back of some of the initiatives we put forth over the last year and strength of the euro. On a sequential basis, pricing was essentially flat, while the raw material side, our benzene price although still very high did come off a bit in the fourth quarter which helped to restore margins. However, cost for benzene and other raw materials in first quarter of 2008, have increased which is something we are keeping a very close eye on.

Finally, let me briefly update you on our joint venture plan in Caojing, China. I am pleased to announce that the unit operated at approximately 92% of design capacity in the fourth quarter which is by far the strongest quarterly period of operations we have experienced since start up. We are obviously, pleased with this. Our ability to produce MDI in China has clearly allowed us to support the growing needs of our customers in Asia. This is a strong contributor to our earnings in the fourth quarter, as our sales, volumes in Asia, in the fourth quarter were up over 25% as compared to the fourth quarter of last year.

We ended the year in our Materials and Effects division very strongly. In fact, in our advanced materials division in 2007 was the strongest year that we have had since acquiring the business in 2003. While in textile effects, we continue to make good progress with our restructuring program. The pricing environment for both businesses continues to be very strong with average selling prices up 11% and textile effects and up 13% in advanced materials. Now some of this is certainly attributed to the strength of the euro. But we have been very successful in increasing our prices and improving our mix throughout the year and we expect this to continue throughout 2008.

In our Performance Products division we recorded strong increases in adjusted EBITDA relative to the fourth quarter of last year, up 16% despite the fact that our fourth quarter 2006 results included incremental $7.3 million insurance proceeds related to the 2005 U.S. Gulf Coast storms.

In our Performance intermediates products group, we saw very strong growth in volume and pricing as compared to the third quarter of 2007 and fourth quarter of 2006. Ethylene glycol margins were strong in the quarter and the profitability of our surfactants businesses also improved. In addition, to the fourth quarter we were not impacted by the unplanned production outages that we experienced at our Port Neches, Texas facility in the third quarter.

Also, during the fourth quarter of 2007 on October 30th, we formally opened our new world-scale JEFFAMINE Polyetheramines manufacturing facility at Jurong Island in Singapore. This facility will produce 16,000 tons of Polyetheramines and will enable us to serve the rapid growth in the Asia-Pacific region. In our TiO2 division, our earnings continue to be negatively impacted by the continued softness in the North American residential construction sector. In fact, with the majority of our production assets and cost base in Europe and with a continued depreciation of the value of the euro and the pound, sterling relative to the U.S. dollar we have seen our margin shrink, in addition to a weak dollar lead to a surge of imports into our core European market.

Volumes were strong in the quarter up 11% on last year, as we have moved past some of the production issues that we had experienced in the third quarter of last year. The pricing environment continues to be challenging as producers have nominated a series of increases but have struggled to implement these. As a result, pricing has been flat in U.S. terms but down on local currency basis. We are continuing to push hard on the pricing front and expect to see some moderate improvement in the first quarter of 2008, as compared to the fourth quarter. We are also continuing to absorb higher cost in certain of our raw materials as well as transportation and fright cost. This includes items such as sulfuric acid where prices are expected to increase dramatically in 2008 as compared to 2007 level.

Finally, let me comment briefly on our pending merger with Hexion. I think Kemo provided a good summary of the status of the regulatory approval here. The recent notice of extension of the termination date by Hexion was not unexpected and was expressly provided for in terms of our merger agreement we entered into... in July of last year. We are working closely with Hexion and their advisors to complete the approval process with the regulators in a timely manner. The completion of the required regulatory approval remains a top priority for our management team.

Huntsman has certified substantial compliance with the FTC's second request and continues to work closely with the regulators in the U.S., Europe and other jurisdiction. That being said, the merger is not expected to close before May 3rd. Finally, consistent with our obligations to operate independently, we and Hexion are continuing to develop an integration plan to bring these two organizations together and expect to be in a position to release additional information related to this plan in the future.

In short we are working hard to satisfy our responsibilities under the merger agreement and complete this transaction. In the mean time our priorities is that the company remain unchanged to operate our facilities in a safe manner to continue to serve the needs of our customers and to continue to execute on a, on our various ongoing growth and efficiency initiatives. With that I will turn this call back over to John Heskett, our Vice President, Corporate Development and Investor Relations.

John R. Heskett - Vice President, Corporate Development and Investor Relations

Thank you Peter. Operator that concludes our call for today. Thank you, everyone for joining.


Ladies and gentlemen thank you for participation in today's conference. That does conclude the presentation. You may disconnect. Have a wonderful day.

Question-and-Answer Session

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