Huntsman Corp. Q2 2008 Earnings Call

| About: Huntsman Corporation (HUN)

Huntsman Corp. (NYSE:HUN)

Q2 FY08 Earnings Call

July 30, 2008, 11:00 AM ET


John R. Heskett - VP of 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 Second Quarter 2008 Huntsman Corporation Earnings Conference Call. My name is Nikita and I'll be your coordinator for today. And at this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of the today's conference [Operator Instructions]. As a reminder, this conference is being recorded for replay purposes.

I will now like to introduce your host for today's call, John Heskett. Please proceed.

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

Thank you, Operator and good morning to everyone. My name is John Heskett. I am the Vice President of Corporate Development and Investor Relations for Huntsman Corporation. Welcome to Huntsman's Investor Call for the second quarter of 2008.

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

As a reminder, a recorded playback of this call will be available until midnight August 6, 2008. The recorded playback maybe accessed from the US by dialing 1-888-286-8010 and from outside the US by dialing 1-617-801-6888. The access code for both dial-in numbers is 90758926. 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, the impact of the ongoing litigation related to the merger 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, the supply demand balance for our products and that of computing products, pricing pressures, technological developments, changes in geopolitical events and government regulations 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 our earnings, I would like 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 working capital management, debt levels, capital spending and outlook. Finally, Peter Huntsman will share his thoughts on the performance of certain of our businesses in the quarter and will also briefly address the ongoing litigation with Hexion. Unfortunately, given the pending merger with Hexion and the litigation related to this merger, 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 in this regard and 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 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, unallocated foreign exchange losses and extraordinary gains and losses related to the purchase of the business.

In the second quarter of 2008, we recorded a net gain of $400,000 related to such costs and expenses. And in the second quarter 2007, we recorded aggregate net cost of $223.8 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 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 EBITDA, adjusted EBITDA and adjusted net income from continuing operations to net income can be found in our second quarter earnings release, which has been posted to our website.

Today, Huntsman Corporation announced second quarter earnings as follows. Huntsman recorded adjusted EBITDA from continuing operations of $209.8 million, as compared to adjusted EBITDA from continuing operations of $188.3 million in the first quarter of 2008, and $246.4 million in the second quarter of 2007.

Net income available to common stockholders for the second quarter of 2008 was $23.7 million, or $0.10 per diluted share. This compares to net income available to common stockholders for the first quarter of 2008 of $7.3 million, or $0.03 per diluted share and a net loss of $70.9 million, or loss of $0.30 per diluted share in the second quarter of 2007.

Excluding the after tax impact related to the merger associated expenses, loses due to restructuring costs, the impact of discontinued operations, extraordinary gains on the acquisition of a business and unallocated foreign exchange loses, adjusted net income from continuing operations was $19.9 million, or $0.09 per diluted share. This compares to $16.9 million of adjusted net income from continuing operations, or $0.07 per diluted share for the first quarter of 2008 and $83.8 million, or $0.36 per share in the second quarter of 2007.

On an adjusted EBITDA basis, as compared to the previous year, stronger results in our performance product segment were more than offset by lower results in Polyurethanes, Materials and Effects, and Pigments divisions.

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

On a sequential basis, adjusted EBITDA increased by $21.5 million, or 11.4% as stronger results in Polyurethanes and Materials and Effects, and lower corporate and other charges were partially offset by softer results in Pigments and Performance Products.

I would now like to briefly outline the performance of each of our segments. Polyurethanes recorded adjusted EBITDA of $147.7 million for the second quarter of 2008, which was $15.9 million higher than in the first quarter, but $11.5 million lower than in the second quarter of 2007.

MDI volumes were up approximately 13% as compared to first quarter while MDI pricing was essentially flat in local currency terms as higher average prices in US dollars terms were primarily due to the stronger value of the Euro.

In addition, raw materials were higher across the board and dollar reported fixed costs were also higher, again due to the strength of the euro relative to the dollar.

Results in our PO co-product MTBE business were also higher in the quarter, both relative to the first quarter and the last year due to stronger MTBEC factors and stronger propylene oxide pricing.

Materials and Effects recorded adjusted EBITDA of $50.5 million for the second quarter 2008. This was up from $40million in the first quarter, but down from the results of the year ago. Relative to the first quarter, volumes were up 7%, while selling prices increased by 4%.

Advance Materials contributed approximately $46.6 million of adjusted EBITDA, while the textile effects contribution was $3.9 million in the quarter. In Advance Materials, we saw strong environmental with volumes of 10% relative to first quarter and the relative to last year. Pricing improved by 8% as compared to last year primarily due to the stronger Euro.

In textile effects, pricing was up 18% as compared to last year with increases is both dyes and chemicals in all regions. However, we experienced a very challenging volume environment particularly in Europe, due to a soft retail outlook and competitive pressures. Total volumes were down 14% compared to last year. This together with higher raw material costs, fixed costs and SG&A due to the currency resulted in lower adjusted EBITDA.

Performance Products recorded adjusted EBITDA of $50.5 million in the second quarter of 2008, as compared to adjusted EBITDA of $39.8 million a year ago, but down from $53.1 million in the first quarter primarily due to the higher LIFO charges.

In our core Performance Specialties business, higher price more than offset higher raw material costs, which together with strong volumes resulted in higher profitability.

Earnings in our intermediate's group, despite being negatively impacted by an extended outage of our Port Neches, Texas olefins facility were also higher compared to last year. We estimate the impact of this outage at approximately $12 million in the second quarter.

Adjusted EBITDA in the maleic anhydride was lower, primarily due to higher cost permuting our primary raw material in this product line.

Pigments recorded adjusted EBITDA of $6.9 million in the second quarter, which was down compared to $20.9 million in the second quarter of 2007, and down as compared to $11.7 million in the first quarter. Sales volumes increased by 9% as compared to the first quarter and were essentially flat as compared to a year ago.

Average selling prices were up 9% as compared to last year in US dollar terms, but flat in local currency terms. On a sequential basis US dollar prices were up 4% versus the first quarter and also flat in local currency terms. Higher prices in Asia Pacific and other regions, has been largely offset by lower pricing in Europe.

Adjusted EBITDA continues to be negatively impacted by inflation in raw materials and energy, and the decline in the value of the dollar.

With that I'll turn the call over to Kimo Esplin, our CFO.

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

Thanks John. Our CapEx in the quarter was $115 million. Consistent with our prior guidance in this area, we expect total spending for this year to be approximately $440 million. As we've discussed before when the process are completing several strategic expansion projects, let me briefly remind you the few of these.

We are near completion on a new 100 million pound maleic anhydride facility at our Geismar, Louisiana site. We expect this to be among the lowest and most efficient facilities in the world and will solidify our market leadership in this product. Our investment will be approximately $165 million, over half of which will be spent this year and startup as scheduled for the first quarter 2009.

This is a very profitable product line for us. In fact, EBIDTA margins for our existing business and facility in Pensacola are about 25%, which is among the highest in our portfolio. So, we expect this expansion to make a meaningful addition to performance products, profitability beginning in 2009.

In addition, we're moving forward with our expansion of our maleic anhydride joint venture with Sasol in Moers, Germany intending to add 100 million pounds of additional capacity to our existing $135 million capacity presently. It's presently expected to be completed in 2011.

We also just completed the 70 million pound or 20% expansion of our ethyleneamines capacity at our Port Neches, Texas plant at a cost of $32 million. This is another very profitable product for us and we've already seen the results of this on the bottomline, as volumes in the first six months were 24% higher than the last year with a corresponding increase in EBIDTA.

Our 50,000 ton expansion of our Greatham UK Chloride... Titanium Dioxide plant will physically be completed in September of this year and operating at its full 150,000 ton capacity by the first quarter of 2009. This is a $110 million investment and we believe will make Greatham the lowest TiO2 facility in Europe.

In the second quarter, we completed our equity contribution of $44 million to our ethyleneamines manufacturing joint venture in Jubail, Saudi Arabia, with Al-Zamil Group as our 50% partner. The plant is expected to come on line in early 2010 with an annual capacity of 60 million pounds. The costs of this project are anticipated to be approximately $290 million and will be financed by our equity contributions already made and local project finance.

At June 30th, our total net debt including our off balance sheet AR securitization programs stood $4.3 billion. This compares to approximately $4.1 billion at March 31st, or an increase of approximately $200 million. As we highlighted in our earnings release this morning, approximately $86 million of this increase was due to higher working capital.

With raw material prices spiking to the extent we saw, this has put quite a bit of pressure on our inventory evaluation. Inventory volumes, however, have been much more manageable and in fact, our finished goods, which comprises 85% of our total inventory values decreased during the quarter by almost a $182 million pounds, or 14% offset setting some the increase we would have otherwise experienced given rising prices and costs.

Certainly given the operating environment out there, working capital management is very much a focus of the management team. However, given the current trends in energy and basis raw material prices along with some initiations we have in place, we wouldn't expect to see these kinds of increases in the coming quarter and wouldn't expect our debt levels to change materially in the third quarter.

Before I turn the call over to Peter, let me give you a bit more color on a directional guidance for the second half of the year, that was contained our release this morning. As we indicated, we would expect adjusted EBITDA in the second half of the year to be stronger than the first half of 2008 and stronger than in the second half of 2007 when total adjusted EBITDA was $434 million.

In Polyurethanes, MDI volumes continue to grow nicely. And although, higher raw material prices including benzene have created a bit of headwinds, we would expect margins to improve in the second half as recently announced price increases are implemented.

In Performance Products, our results in the first half of 2008 were negatively impacted by approximately $26 million related to the operational issues we have experienced at our Port Neches, Texas intermediate site. These problems are behinds us and the plan is now running very well, which will certainly help our bottomline.

In Materials and Effects, I would characterize the second half outlook is stable with results improving in textile effects as we continue to make progress with our restructuring program. This is likely to be offset by lower margins in Advance Materials due to lag effect of the raw materials... of higher materials.

And finally in Pigments, we are seen traction in recent price increase initiatives. In fact, our prices in all regions in July were the highest we've seen all years, so our expectation is that the margins will improve.

With that, I'll turn the call over to Peter.

Peter R Huntsman - President and Chief Executive Officer

Kimo, thank you very much. And thank you all of you that have joined us this morning. With adjusted EBITDA from continuing operations of approximately $210 million, second quarter results improved compared to the first quarter of 2008 by over $21 million over 10%. This improvement was despite headwinds from rising raw materials and energy cost, and the further weakening of the US dollar. These factors added nearly $100 million of cost to our second quarter results versus our first quarter. We are pleased with the performance of our industry leading businesses relative to our peers.

Just give you some prospective, the price for most of our key raw material were up not only year-over-year, but also sequentially. By way of example, the two key benchmarks; crude oil and natural gas, were up 27% and 52% respectively as compared to first quarter alone.

The good news is that the prices of these benchmarks have recently come out sharply from their recent peaks. But the average, thus far, in July remain above the second quarter average prices. So we are keeping a close eye on direct costs and are no way backing away from our aggressive stats on pricing initiatives that we have around the world.

As I mentioned, the continued decline in the value of the US dollar relative to the primary European currencies have also impacted our results as US dollar depreciated by 6% and 8% respectively against the Euro and the Swiss Franc during the quarter. This has been particularly apparent in certain of businesses such as Advance Materials, Textile Effects and Pigment with majority of our manufacturing and overhead costs are in European currencies.

There were, however, some very positive trends in our businesses. As I mentioned in our release this morning volumes were very strong, up between 7% to 14%, depending on the division. We also announced aggressive action to take our selling prices up across the Board in every division.

This obviously differs in amount from products-to-product and region-to-region, but prices are moving up. Also keep in mind that this action occurred in late May and June. So with lags and contractual price protection, we would expect these to meaningfully impact the bottomline beginning in the third quarter.

Our Polyurethane business had a very good quarter with MDI volumes up 13% as compared to the first quarter and adjusted EBITDA up by 12%. Demand continues to grow on a global basis, and in particular in the developing economies of Asia, Eastern Europe and Latin America.

In fact, as an industry, we estimate that global MDI growth will be about 6% this year. On a regional basis, Asia continues to grow very nicely with our MDI volumes up 15% as compared to the first quarter. Although, we believe that the market in China has begin to take a bit of breather ahead of the upcoming Olympic due to some of the regulatory issues enacted by the government.

In Europe, volumes expanded in the quarter in line with the market primarily due to seasonal factors. We are watching the European market very closely as it is our largest, but haven't seen any major signs of softening. In fact, our core insulation business is seeing strong demand pull in Eastern Europe and the Middle East.

In the Americas, volumes growth over the first quarter was the strongest in all regions, which is amazing given that this is probably our weakest economic market. We believe that our Oriented Strand Board or OSB volumes bottomed out earlier in the year. Some of this is seasonal of course, but we think that this part of the business is poised to recover, which would be a positive sign, given the stagnant market conditions of the past few quarters.

On the pricing side, MDI was up about 2% as compared to the first quarter, which is mostly due to exchange impact. The good news is that we put forth a series of price initiatives and increases across a range of products of up to 15% for third quarter in both Europe and the Americas late in the second quarter.

So, we are expecting improvement as we head into the back half of the year. These price increases should offset the higher manufacturing cost we are experiencing, due to high benzene, chlorine and natural gas and other raw materials. In fact, year-to-date our cost to produce MDI is up by 25% versus last year.

Finally, profitability in our propylene oxide in MTBE business posted improvement in the quarter as well as last year. Volumes have improved particularly in MTBE. MTBE margins were at very attractive levels in the quarter, in fact, more than double over the first quarter.

Our Advanced Materials and Textile Effects results in the second quarter increase from first quarter results. Adjusted EBITDA improved by 26% with higher earnings in each our Advance Materials and Textile Effects divisions. In Advance Materials, we benefited from a 10% sequential increase in volumes together with a 2.3% improvement in average selling price. Volumes in selling prices were also well ahead of last year's level. Direct costs were bit higher during the quarter, but we more than offset this with topline growth and improvement.

In Textile Effects, adjusted EBITDA did improve from the breakeven results we saw in the first quarter with adjusted EBITDA of $3.9 million. While prices were up over 6% versus the prior period quarter and over 17% as compared to last year, we continue to experience a very weak demand environment in our textile chemicals and dyes businesses, particularly in our European and America's market.

Asia is held about a much better. Our censuses at the traditional garments and home furnishing sectors have softened in the last couple of quarters and this has resulted in a very competitive market environment.

In our Materials and Effects division, we were also impacted by the continued weakness of the US dollar compared to European currencies. I am sure you were aware of both of these businesses are headquartered in Europe and have a very significant manufacturing presence in Europe.

As a Euro and the Swiss Franc continue to appreciate, our European SG&A manufacturing costs has increased on a reported US dollar basis. We estimate that reported fixed costs in these divisions alone increased by over $26 million as compared to last year, and almost $6 million higher as compared to the first quarter based solely on the translation of non-US dollar cost.

In our Performance Products division, our adjusted EBITDA improved relative to last year, but was down slightly from first quarter results. As compared to our first quarter, selling prices were up about 10% on a back of price initiative to recover higher raw material costs and currency effects, while volumes improved by 7%.

We also benefited from higher tolling revenues in the second quarter reflecting some of the structural change we have made in this division related to our glycol and surfactant operations.

Our core Performance Specialties business performed very well with adjusted EBITDA up by 33% as compared to last year. We did struggle again in the over olefins product category of our intermediate's group. As we surd [ph] with you in the last update, we went through an extended plan maintenance and inspection project that are Port Neches, Texas, olefins and derivatives facility in the first quarter.

We brought most of the unit back online late in the first quarter, but we continued to encounter problems with operating reliability with the olefins unit through... much of April and May, which required additional downtime. As a result, this unit operated at 40% of capacity during the second quarter. We've estimated the financial impact of this downtime to be approximately $12 million in the quarter, consistent with higher maintenance expenses and the cost of purchased ethylene versus internally sourced products.

In our Pigments division, our earnings declined as compared to the first quarter and a year ago. Although, demand has been good, particularly in Asia with volumes up 9% as compared to the first quarter and flat with last year, we have struggled in the first half of the year to get pricing traction in our core European markets in the North America.

Additionally, with higher raw material prices in ores, acid, energy and freight as well as a negative impact of the continued decline in the value of the US dollar versus the primary European currencies, we saw a challenging market conditions in the second quarter. However, producers have implemented a combination of price increases in surcharges in all regions of the world.

We did see market improvements in the second quarter in Asia and other regions of the world. Europe and the US have lagged a bit, but prices in July in both of these regions are higher than at anytime in the second quarter, which gives us quite a bit of confidence about profitability for... profitability will improve in the third and fourth quarters.

Similar to Materials and Effects, our manufacturing and SG&A centers are based in Europe. There was European currencies have appreciated against the US dollar, our reported fixed costs have increased dramatically.

Before we conclude today's call, let me comment briefly on the ongoing litigation with Hexion as it relates to our agreement to the merger. I assume most of you have followed the company's public statements over the past six weeks. So I don't feel it is necessary to rehash all of this. But I will say that we are short and disappointed by the actions of Hexion and Apollo. While repeatedly assuring us and our shareholders that they were working diligently to satisfy the remaining closing conditions and consummate the merger.

It appears that Apollo was working with Duff & Phelps and others to scuttle the merger. Without our knowledge or input they retained Duff & Phelps for the sole purpose of rendering an insolvency opinion to support their goal of not closing the merger. This opinion and the underlying analysis was based on a series dubious assumptions. Duff & Phelps was specifically not permitted to discuss any aspect of the report with Huntstman, including the assumptions they made about the Huntsman business.

Finally, again without discussing or notifying Huntsman, Apollo permitted Duff & Phelps to finalize the report and then release the findings to public and to the banks. Apollo then filed a lawsuit in Delaware seeking to avoid their obligations under the merger agreement.

Apollo's and Hexion's actions over the past weeks represented a knowing and intentional breach of their obligation under the merger agreement, which clearly obligates them to "use its reasonable best efforts to take all actions and to do, or cause to be done, all things necessary, proper or advisable to arrange and consummate the merger and any financing"

In addition, the merger also prohibit them from "from taking any action that could reasonably be expected to materially impair, delay or prevent consummation of the financing contemplated by the commitment letter." Clearly, these are obligations that they have chosen to ignore and in fact, have taken a series of actions in direct opposition to them.

Furthermore, Apollo and Hexion have also suggested that a material adverse effect under the merger agreement has occurred. We strongly disagree. And our results for the second quarter announced today are confirmation of our view.

Finally, Apollo has alleged that there exists a substantial funding gap. In other words, the amount of funds available is not sufficient to close a transaction. We do not believe that any funding gap exists. And any of that Hexion assumed all financing risks in connection with our merger as the merger agreement has no financing conditions.

An expedited trial is scheduled to begin in Delaware on September 8. We are confident that a trial based on the merits will reveal that an MAE [ph] has not occurred and that the combined Company is in deep solvent. Huntsman has retained a number of experts in these areas and has begun a period of intensive discovery with regard to Apollo, Hexion and their advisors in preparation for the up coming trial. We would expect the trial to take about a week. And the Judge has indicated that he is willing to render his decision shortly thereafter.

We are hopeful that by the middle of September the litigation will be resolved, which will then put us in a position to go about closing the merger as soon as possible thereafter.

In conclusion, we have had the opportunity to hear from many of you directly over the course of the past several weeks. We appreciate your support in this matter.

With that, I'll turn the call back to John Heskett, our Vice President of Corporate Development and Investor Relations.

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

Thank you, Peter. And operator, this concludes the call. Thank you everyone for joining this quarter.


Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.

Question-and-Answer Session

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