Huntsman Corp. Q1 2008 Earnings Call Transcript

| About: Huntsman Corporation (HUN)

Huntsman Corp. (NYSE:HUN)

Q1 FY08 Earnings Call

May 9, 2007, 11:00 AM ET


John R. Heskett - VP, Corporate Development and IR

J. Kimo Esplin - EVP and CFO

Peter R. Huntsman - President and CEO



Good day, ladies and gentlemen and welcome to the First Quarter 2008 Huntsman Corporation Earnings Conference Call. My name is Eric. I'll be your coordinator for today. And at this time, all participants are in a listen-only mode. [Operator Instructions].

I will now like to turn your presentation over to your host for today's call, Mr. John Heskett. Please proceed.

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

Thank you, operator and good morning to everyone. My name is John Heskett. I am the Vice President, Corporate Development and Investor Relations for Huntsman Corporation. Welcome to Huntsman's investor conference call for the first quarter 2008.

Joining us on the call today are Peter Huntsman, our President and CEO; Kimo Esplin, our Executive Vice President and CFO.

A recorded playback of this call will be available until midnight May 16th, 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 65230565. A 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 price of our raw materials and the energy we consume in our production processes, access to capital markets, industry production capacity and operating rates, supply demand balance for our products and that of computing products, pricing pressures, technological developments, changes in government regulations, geopolitical events and other risk factors. Please refer to our most recent 10-K and our other public filings for more complete discussion of the factors applicable to our company and our announced plans to merge with Hexion.

Before I walk through a summary of earnings, I would like briefly outline the format for today's call. I'll briefly summarize the earnings and then turn the call over to Kimo Esplin, our CFO who will provide an update on the merger with Hexion. Finally, Peter Huntsman will share his thoughts on the performance of certain of our businesses in the quarter. Unfortunately, given the pending merger with Hexion, we will not be able 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 merger including the timing of regulatory approvals and financing arrangements. We expect that additional details related to these issues 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 earnings, I would like to point out as I summarize earnings, I will be referring to adjusted EBITDA from continuing operations, which is EBITDA adjusted to exclude the impacted 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 the gains related to the sale of acquisition of assets and unallocated foreign exchange gains and losses.

In the first quarter of 2008, we recorded a net cost of $18.8 million related to such costs and expenses. And in the first quarter 2007, we recorded aggregate net cost of $2.5 million related to such costs and expenses. We focused on adjusted EBITDA from a management standpoint, as we believe it is the best major of the underlying 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 reconciliation of both EBITDA and adjusted EBITDA to net income can be found in our first quarter earnings release, which has been posted to our website.

Today, Huntsman Corporation announced first quarter earnings as follows. Huntsman recorded adjusted EBITDA from continuing operations of $188.3 million, as compared to adjusted EBITDA from continuing operations of $194.2 million in the fourth quarter of 2007, and $242 million in the first quarter 2007.

Net income available to common stockholders for the first quarter of 2008 was $7.3 million or $0.03 per diluted share. This compares to net income available to common stockholders for the fourth quarter of 2007 of $2.2 million or $0.01 per diluted share and net income of $46.6 million or $0.20 per diluted share in the first quarter of 2007. Excluding the after tax impact related to merger associate expenses, losses due to restructuring costs, the impact of discontinued operations, gains from the sale of assets and other items and unallocated foreign exchange gains and losses, adjusted net income from continuing operations was $16.9 million or $0.07 per diluted share. This compares to $48.6 million of adjusted net income from continue operations or $0.21 per diluted share for the fourth quarter of 2007, and $57.4 million or $0.25 per diluted share in the first quarter of 2007.

On an adjusted EBITDA basis, as compared to the previous years, stronger results in our Polyurethane segment was more than offset by lower results in Performance Products, Materials and Effects and Pigments divisions.

Corporate and unallocated expenses were also higher in the 2008 period as compared to 2007, due to weaker results at our Australia styrenics operations, higher IT cost and higher minority interest in our subsidiaries income.

I would now like to briefly outline the performance of each of our four segments. Polyurethanes recorded adjusted EBITDA of $131.8 million for the first quarter of 2008, which was $13.1 million higher than in the first quarter of a year ago. MDI volumes were up approximately 3% as compared to the first quarter of last year. MDI pricing was also higher, up about 8% as compared to a year ago, primarily due to the stronger euro. Results in our PO co-product MTBE business were also higher in the quarter, due to higher MTBE factors and stronger propylene oxide volumes and pricing.

Volumes in our core MDI business continue benefits from strong market conditions particularly in Asia and other developing regions of the world. Materials and Effects recorded adjusted EBITDA of $40 million for the first quarter of 2008. This was down from $62.9 million in the first quarter of a year ago, and also down as compared to the fourth quarter, as volumes were down by about 5%, offset by 11% increase in average selling prices.

Advance Materials contributed $39.5 million of adjusted EBITDA, while textile effects contribution was $0.5 million. In Advanced Materials, we continue to see a strong pricing environment and favorable currency environment with average selling prices up about 12% over last year's first quarter. Volumes were down by 2%. In textile effects, a similar story, with pricing up by almost 12% with increases in both dyes and chemicals in all regions. However, we have experienced a very challenging volume environment particularly in Europe, due to a softening retail outlook and competitive pressures. This together with higher raw material and fixed cost due to currency translation resulted in lower adjusted EBITDA.

Performance Products recorded adjusted EBITDA of $53.1 million in the first quarter of 2008, as compared to adjusted EBITDA of $72.2 million a year ago, but up from $48 million in the fourth quarter. In our core Performance Specialties business, higher prices and stronger volumes resulted in higher profitability, while earnings in our intermediate's group was negatively impacted by an extended and planned turnaround and inspection of our Port Neches, Texas facility during the quarter. We estimate the impact of this outage at approximately $14 million.

Finally, Pigments recorded adjusted EBITDA of $11.7 million in the first quarter, which was down compared to $23 million in the first quarter of 2007, but up as compared to $6.6 million in the fourth quarter of last year. Average selling prices increased by 4% in U.S. dollar terms and 2% in local currency terms as compared to the fourth quarter as announced price increases have been implemented.

Adjusted EBITDA continues to be negatively impacted by higher raw material and energy prices and the continued decline in the value of the U.S. dollar.

With that, I'll turn it over to Kimo.

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

Thanks, John. Let me update you on the status of our merger with Hexion. As a reminder, on July 12th, 2007 we entered into an agreement with Hexion Specialty Chemicals, wherein they will acquire all the issued and outstanding shares of common stock of Huntsman for $28 per share. Including the assumption of debt, this value is 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, the stockholders of the company voted to approve the merger.

On January 25, 2008 we announced that Hexion had notified us that it intended to exercise its right as provided under the terms of the merger agreement to extend the termination date by 90 days from April 5th to July 4th, 2008. On April 5th, this extension took place and the termination date is now July 4th, 2008.

Beginning on April 6th, the cash price per share to be paid by Hexion will increase at the rate of 8% per annum, that's inclusive of any dividends paid from April 6th, 2008. The closing of the transaction is not subject to financing condition and Hexion has secured financing commitments from Deutsche Bank and Credit Suisse to provide for all necessary funding. The terms of these financing commitments have not been made public, but in connection with the April extension, Hexion indicated that the financing commitments were still in place.

The transaction is subject to various other conditions including U.S. and European Union and other foreign competition law approvals and other customary closing conditions. Together with Hexion, we are working to satisfy all closing conditions including the required regulatory approvals. The process to secure these approvals began in July of last year and is ongoing. As the buyer, Hexion is leading the effort to obtain the required regulatory approvals and under the terms of the merger agreement, Hexion is obligated to take any and all actions necessary to secure the required regulatory approvals by the termination date, including but not limited to selling Hexion or Huntsman assets. Huntsman is obligated to cooperate with Hexion in this regard.

While we are currently unable to estimate when the FTC and European Commission and other regulatory approvals will be received, Huntsman has made receipt of these approvals a priority and we expect closure of the merger to follow soon after the regulatory approvals are received. As previously indicated, we and Hexion expect to make additional information about the merger publicly available in the future.

I also want to briefly comment on the inventory build that we experienced in the first quarter. This totaled approximately $196 million. Although our total inventory volumes did increase in the quarter due to seasonal patterns, the increase in the value of this inventory was more a result of higher raw material dollar prices and the fact that inventories denominated in foreign currencies have increased due to appreciation in the value of most foreign currencies relative to the U.S. dollar. As I mentioned, the first quarter tends to be a period of seasonal inventory build, particularly in our Pigments and Polyurethane businesses, where we are entering the peak construction period in the Northern Hemisphere. We would expect these levels to fall in the second and third quarters.

Finally, capital spending was $109 million in the quarter, which is roughly in line with the first quarter of last year. You probably noticed that we have dropped our total year forecast by 10% to $440 million.

With that I will hand it off to Peter.

Peter R. Huntsman - President and Chief Executive Officer

Thank you very much, Kimo. Thank you everybody for taking the time to join us this morning. With the adjusted EBITDA from the continuing operations of $188 million, first quarter represents another good quarter for us and was achieved despite rising raw materials and energy cost and the continued weakness of the U.S. dollar.

Just to give you some perspective, prices of most of our raw materials were up not only year-over-year, but also sequentially. By the way... by way of example, the two key benchmarks; crude oil and natural gas, were up 69% and 18% respectively as compared to the first quarter of 2007. As you know, prices have continued to escalate into the second quarter and currently are well above where they were in the first quarter. As I mentioned, the continued decline in the value of the U.S. dollar relative to the primary European currencies has also impacted our results. This has been partially... particularly apparent in certain of our businesses like Advanced Materials, textile effects and Pigments where the majority of our manufacturing and overhead base sits in Europe.

As I mentioned in our earnings release this morning, as would be expected in a transaction of this nature, we've also seen an impact on our customers, suppliers and employees from the uncertainty and duration related to this pending merger with Hexion.

There were however some very positive trends in our business. Selling prices were up across the board in every division. These obviously differ by product and region, but we have been successful in increasing our prices in the face of inflation, in raw materials and cost. We continue to see forward momentum in selling prices as we move into the second quarter. Also volumes generally continue to be stable and growing, which is certainly a result of the scope and diversity of our products portfolio, which covers many different end markets and geographies.

Our Polyurethanes business continues to perform very well in the quarter; with volumes up 3% as compared to the first quarter of last year, and adjusted EBITDA up by 11%. Demand has been particularly strong in Asia and the other developing regions of the world, including Eastern Europe and Latin America. But we continue to face very challenging market environment in North America.

As expected, volumes into the composite wood products sector were down due to some of the slow pace of residential construction activities and a very competitive market environment, due in part to our pending merger. Volumes in our oriented strand board wood binders business have declined from the levels we saw in 2007. So we've been able to more then make up for this in other sectors of our portfolio. In fact, if you exclude the OSB impact, our global volumes were up 9% in the first quarter of 2008 as compared to the first quarter of 2007. While we are not sure when the demand growth will resume for the USB business, our volumes and pricing into this market have stabilized in the last couple of quarters. So, we think this part of our business is poised for a recovery.

On the pricing side, MDI was up 8% as compared to the first quarter of 2007, following some of the pricing initiatives we put forward over the last 12 months and the exchange rates. However, we've also seen our raw material cost in almost all of the areas increase dramatically both sequentially and as compared to the first quarter of last year. This limited our ability to meaningfully improve margins for the first quarter.

Finally, profitability in our PO, co-products MTBE posted improvement in the quarter as compared to both the fourth quarter and prior year. Propylene oxide volumes were up 22% as compared to last years, our plant ran very well and demand improved. MTBEC factors have also been at very attractive levels and this has continued into the first few weeks of the second quarter. Materials and Effects results in the first quarter were down from the fourth quarter of last year and year-over-year. There were a couple of things going on here.

Firstly, we experienced a very weak demand environment for our textile chemicals and dyes business, particularly in Western European markets. Our traditional garments and home furnishing sectors has softened and this has resulted in a very competitive market environment. We have however, raised prices across the board in this business during the quarter. In fact average selling prices were up 4% on average as compared to the fourth quarter. In Materials and Effects, we were also impacted by the continued weakness of the U.S. dollars compared to European currencies. As I am sure you are aware, both of these businesses are headquartered and have very significant manufacturing presence in Europe. As the euro continues to appreciate, our European SG&A and manufacturing cost have increased on a U.S. dollar basis.

In our Performance Products division, although our adjusted EBITDA decreased on a year-over-year comparison, it increased for the third consecutive quarter. Prices were up 29% on a year-over-year basis, part of which is due to a stronger euro and Australian dollar and increased raw materials. We have also been very successful in price increase initiatives in this business.

Our Specialty business realized very healthy increases in prices and volumes while in our maleic anhydride business, margins were squeezed by higher raw material prices and a slowdown in the North American housing construction markets.

Most of the decline in earnings as compared to last year was in our Intermediates Group, where we had an extended turnaround in inspection at our large Port Neches, Texas olefins and derivatives facility. We have estimated the financial impact of this extended turnaround and inspection to be approximately $14 million. For those who have participated in our calls in the past several quarters, you know that the operating reliability of this unit has been poor and downtime and unexpected outages took place numerous times in 2007. We estimate that the total 2007 impact of these outages was approximately $27 million.

We believe that with the significant and amount of work that was done during the recent T&I, we have addressed the reliability issue. As a reminder, the next turnaround for this unit isn't likely to be for another five years.

Further, we have recently announced in April plans to expand our 50-50 joint venture facility in Moers, Germany with our partners Sasol Limited. We intend to add an additional 45,000 metric tons, which is similar to the 45,000 metric tons plant currently under construction in Geismar, Louisiana which is expected to be operational in late 2008. In late April we broke ground on our world scale ethylene amines project in Jubail, Saudi Arabia, which is expected to be completed by the end of 2009. These capacity expansions will enable us to maintain our leading position in these highly profitable products.

In our Pigments division, our earnings improved as compared to the trough conditions that we experienced in the second half of 2007. In fact adjusted EBITDA has increased sequentially in both the fourth quarter of last year and the first quarter despite seeing significant headwinds as it relates to our raw material cost with natural gas, sulfuric acid, electricity and coke, showing double-digit percentage increases versus prior year.

Despite this, we were able to marginally increase our average selling price in Europe, measured in local currency terms as compared to the previous quarter. We've also experienced positive traction as it relates to pricing increase initiatives in Asia as well as other parts of the world, as average selling prices increased compared to the fourth quarter of 2007.

Although volumes were essentially unchanged year-over-year, we experienced increased demand in Asia and Europe whereas in North America, we continue to feel the effects of the turn down in housing and construction markets. Similar to Materials and Effect, our manufacturing and business support base is focused in Europe. So the euro and the pound sterling have appreciated against the U.S. dollar, our reported costs have increased dramatically.

Finally, let me comment on our pending merger with Hexion. I believe Kimo provided a good summary of the status of the regulatory approval process. The extension of the termination date by Hexion last month was not unexpected and was entirely consistent with the terms of the merger agreement we entered into in July of last year. We are working closely with Hexion and their advisors to complete the approval process and facilitate in the completion of the required regulatory approvals remains a top priority for our management team.

We are continuing to develop an integration plan to bring these two organizations together. The pace of this activity has increased in the last couple of months, following the announcement of the future leadership team for the combined new company. Further integration activities and announcements will take place in this regard as we get closer to completion of this merger. Progress is being made in the discussions with the regulators, organizational integration and other important pre-closing steps. In the mean time, our priorities as a company remain unchanged, to operate our facilities in a safe manner, to continue to serve the needs of our customer and to continue to execute on our various ongoing growth and efficiency initiatives.

With that, I will return the call back to John Heskett, our Vice President, Corporate Development and Investor Relations.

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

Thank you, Peter. And operator, that concludes our call for today and thank you everyone for joining.

Operator: Thank you for your participation in today's conference. This concludes our presentation. You may now disconnect and have a good day.

Question-and-Answer Session

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