Huntsman Corporation (NYSE:HUN) Goldman Sachs Basic Materials Conference May 22, 2013 11:45 AM ET
Peter R. Huntsman - Chief Executive Officer, President, Director and Member of Litigation Committee
J. Kimo Esplin - Chief Financial Officer and Executive Vice President
Robert A. Koort - Goldman Sachs Group Inc., Research Division
Robert A. Koort - Goldman Sachs Group Inc., Research Division
If I could get everyone to take their seats, I know there's stomachs that are growling out there. We're getting close to lunchtime, but we'll do just one more presentation before we get there. I'm very happy to have CEO of Huntsman Chemical here to speak. We're happy to welcome Peter Huntsman.
Peter R. Huntsman
Good afternoon, and it's -- well, good morning. It's nice to see everybody here. And with me here is Kurt Ogden, who's our Vice President in charge of Investor Relations; and our Chief Financial Officer, Kimo Esplin is here in the back of the room. And well, I'll walk through some slides here, and we'll open up for any questions or comments any of you might have.
Just as a kind of a reminder, we operate the business with 5 different business groups: our Polyurethanes, our Performance Products, our Advanced Materials, our Textile Effects and our TiO2 Pigments group. To give you an idea of the revenue, on the left-hand side and upper-right-hand side, our adjusted EBITDA. If you look at our EBITDA this past year, in 2012, certainly, a record year. 2011 was a record year previous to that. The guidance that we've given on 2013 is that we believe that the non-TiO2, 4 of our 5 divisions, should be doing equal to, if not better than, the performance of last year. So this year, we're expecting that the quality of our earnings, we believe, will be an improvement over 2013.
If you look what's on the bottom-right-hand corner here, the light blue color, that's our Pigments earnings. And I would just note that, obviously, from what we have said earlier on any Pigment questions and so forth that might deal with M&A, Huntsman has publicly said that we are looking at a number of options, that we would very much like to have optionality. We'd like to do something that creates greater value with our TiO2 business that may involve any number of different options, which we are in the process right now of being in discussions with a number of different options, and I pertain to our TiO2 discussions. So on the Q&A side, I hope that I'm not having to say I can't answer that. But that's essentially where we are.
If you look at our operations on a global basis, you see from an employment number of associates that we have, 42% of them are in Europe, 32% in Asia, 18% in North America. We have, I believe, a very large global footprint, large number of associates in Europe largely because that's where most of our titanium dioxide, very labor-intensive process compared to most of our other manufacturing facilities. Also, we have the legacy of ICI and some of our other European [indiscernible] businesses and so forth that are in Europe. But you see a nice percentage as well, nice global footprint on 31% of our sales in North America, 28% of our sales in Europe and roughly about 40% of our sales throughout the Asian and Latin America region.
If you look at our overall supply chain, I think that the fundamental question is where do Huntsman want to be in a couple of years, where are you putting your money, where are you looking to take advantage? I think in a very broad sense, when we talk about growth and talk about opportunity, we're looking at 2 very broad areas, and these will seem like they're, perhaps, on both sides of this supply chain. We certainly want to be in a position in North America to take advantage of our natural gas position, ethane position and a lot of our NGLs. I think that we're uniquely positioned. I think going back to that slide, there were only about 1/3 of our sales that are in North America. 80% of our raw material purchases globally that deal with natural gas, natural gas-related products, ethane, propane, butanes and so forth, just slightly over 80% of those purchases are in North America. So we're very much preponderantly located in North America. We have an opportunity to take advantage of that low-cost raw material position. And we will continue to look at expanding and investing in areas where we can expand those products that are consuming North American gas. I believe that gas advantage is going to be here for many, many years to come, and I'm even more bullish today on the idea that it will be some time until any regions of the world really have any frac-ing capacity that will even come close to rivaling what's been done in North America.
On the further downstream end of the business, we continue to make strategic acquisitions, smaller acquisitions, bolt-on acquisitions in Polyurethanes and expanding our capacity, where we're moving more into -- excuse me, moving more into systems, formulations and so forth in the Polyurethanes. We're taking -- not necessarily adding a great deal of MDI to the market but taking MDI that we have and being able to derivatize that into more formulated products, more systems, more areas where we can have multiple price points, multiple customers and so forth and a wider variety of grades.
And I think that the same thing can be said for our Performance Products. We're investing further downstream into amine chemistry and so forth. And our Advanced Materials going further downstream in the aerospace, in the automotive sectors and so forth. So really, both sides of the supply chain taking advantage of North American raw materials on the front end and then looking at more formulation route to markets on a global basis on the other end here.
If you look at some of these long-term growth drivers, we've got multiple, what I believe, the growth drivers within the business. But 2, in particular, that I think are particularly exciting are the MDI and Polyurethanes. One of the largest producers in the world, MDI is really the growth in our EBITDA in MDI, going from first quarter to this year, first quarter -- excuse me, first quarter last year, first quarter this year. Again, there's some seasonality. Typically, second and third quarter is stronger than first quarter. But you can see year-on-year growth in this business taking place. Again, very similar to what you would see with the amines and our maleic anhydride. Polyurethanes is very centered in the construction. I think we're very well positioned in the North American housing market. Same with the maleic anhydride business in -- North American housing-centric sort of an opportunity.
In our amines area, we're the largest producer of amines in the world. As we look at the downstream, everything from chemical curing to the oilfield chemicals and agri chemicals and so forth. We continue to see much better than GDP growth in that end of the business as well.
Specifically talking about Polyurethanes, we continue to believe and are seeing the trends in the market of seeing what has been over the last 20 years of about a 7% growth rate growing to about an 8% to an 8.5% annualized growth rate. The reason is -- and it's nothing that's all about magic behind the numbers. As much as where Asia going back just a decade ago, Asia was almost insignificant in the amount of product that it was consuming. If you look at Asia today, it's now the largest single market for consuming MDI. Now what's happening is that Asia is overtaking Europe and North America. And Asia continues to grow its traditional growth rates, whereas Europe and the Americas are kind of growing their traditional growth rates. But it's Asia having a faster growth rate, overtakes the other 2 markets. We believe that's going to have an impact on the industry. As you look at our exposure in the housing, an often-asked question is "When do you get back to sort of peak demand in the housing market?"
If you look at the Slide #6 on the lower-right-hand corner, if you look at the amount of MDI that was used on a per-house basis, you can see the levels right up here, when about 2 million homes were being produced. Well, with the MDI that has been replacing formaldehyde and making further inroads and you take that with the housing market kind of bottoming out and gradually building up to that 900,000, 950,000 units forecast in 2013, our usage on a per-home basis, you can see, is actually right where it was during the peak. So we believe that we're back to sort of peak demand by the end of 2013 that we saw back in 2006.
Again, as we look at the overall capacity utilization rates that are taking place within the global MDI market, again, this would be the single largest volumetric product and product by margin that will be lifting our bottom line. You see the first quarter of 2013, we believe the industry is operating in the high 80s on a global basis. We're really -- Huntsman is really in a sold-out position. By the end of this year, we'll be actually buying products from our competitors in order to meet our own customer demands. We're working very aggressively for an expansion to take place in China. We've been working on this expansion out for about the last 2.5 to 3 years. To bring up an interesting point, a lot of capacity that's slated to come on in China over the course of the next 5 years or so, I would just mention a word of caution, a lot of people have kind of lumped all this capacity coming on in about a year or 2 sort of a time frame. And I think when you realistically look at some of the slides -- I've seen some industry charts that have shown Huntsman's capacity right here coming on this next year. We're still waiting for environmental permits. I think the earliest we probably can come on is probably the early part of 2017, latter part of 2016. Will all this capacity come on? Yes, I believe it will come on. I believe it will probably be coming on to over probably a 6- to 7-year period. And if all that comes on even over a 5-year period, you're still going to see operating rates operating really in the high 80s, low 90% capacity utilization over the next several years, barring a major economic global slowdown, particularly in China. All this capacity is coming on in China. This is a globally traded product when it's in its most commoditized crude form. But when you get into the downstream derivatives, where Huntsman competes and produces most of the product, we believe that, if anything, the products, over the course of the next not just a year or 2 but for the next 3 to 5 years, are going to be fairly tight in the European market and particularly in North America as the housing recovery continues to take speed.
If you look at our financial overview, net debt today is about 2.8x. We've been, I think, very aggressive and quite successful in taking on maturities, moving out our maturities and also paying down debt out of our cash flows that we have in the company. I would just say that as you think about Huntsman, you think about those downstream formulated products. What am I really talking about? Am I talking about having more products going into more differentiated applications? Take the airline industry and take the Boeing 787. Every product, every plane that's produced has nearly 12 tons of Huntsman epoxy material in the carbon fiber for the 787 model, very similar to the 380 Airbus. That's 11.5 tons. We have a 20-year contract for the Airbus 350, the first of which is being rolled out this year, that will be going out for the next 20 years, which you have about 11.5 to 12 tons of epoxy material on a per-plane basis, not just on the exterior skin of the composite materials. It doesn't include all of the other materials that will be used coming from all of our other divisions. And so as you look at the amount of aluminum that's used in the construction of an airplane, basically, it's dropped by anywhere from 20% to 60%, depending on the model being built. This is a real growth engine for Huntsman and the one that we've been able to lock in, but I think a very healthy margins for literally many, many years to come.
If you look at the automotive industry, again, the same thing. People moving to lighter cars, people moving to more fuel-efficient cars, more electronics within the car. These are all things that will be working towards Huntsman's strengths. If you look at the new BMWi series that's coming out, the smaller compact car, it's going to be built with a lot of carbon fiber resins products that -- or the technology that's being used in the aerospace industry that we're able to transfer right over to BMW.
Looking at the housing market, again, this is just within the construction of the house itself, each one of the divisions, again, moving further downstream, being able to take advantage not only of the construction of the home, but the carpeting and the appliances and everything else that are going to be going into that home. You think, again, about the homes of the future. They're going to be more energy-conscious, more -- better insulated than they have been in the past, more electronics. Homes are going to be built around the needs of the individual homebuyer, more so than what we've seen in the past. If we look at the building trends, as we talk to our customers and so forth, these are all areas that I believe are going to be playing into our strengths.
If you look at our company, I think in this industry, you just have to relentlessly, continuously go after your cost structure. You've got to be able to expand your business. You've got to be able to diversify your downstream businesses and expand your technologies while, at the same time, controlling your cost and in many cases, lowering your cost.
You can see that over the course of the next 2 years, the remainder of this year going into 2014 to beginning of 2015, we have about $220 million. I believe that we'll come in well north of that number, but about $220 million of costs that will be coming out of our Textile Effects, our Advanced Materials, our Polyurethanes businesses. And also, the directional guidance that we've given with our businesses on the bottom of the slide here, I think the directional guidance we've given for 2013 certainly is more precise and more detailed than any we've given and any year going forward. I would just note 1 or 2 things on this directional guidance. We're saying Polyurethanes are going to be similar 2013 to 2015. We were expecting last year that we are $90 million from MTBE due to outages from our competition. We don't believe that those outages are going to be repeating themselves this year. So we believe that we are in a unique position to benefit from the upside of MDI that will be offsetting the lower margins that we're going to be seeing in MTBE. So if we look at a similar earnings this year compared to last year, again, I believe that the quality of those earnings, more MDI earnings, less MTBE earnings, should actually be a positive thing given the fact that MDI is far less cyclical than MTBE. MTBE, I'd say, is cyclical in a sense that MTBE profitability and variability and pricing can move multiple percentage points in a single day of trading.
Also, as we look at our Performance Products, we're talking about a similar performance of 2012 and 2013. We'll just note that in 2013, in the first quarter, we had a once-every-4-year event. Our largest Performance Products facility was down for maintenance for most of the first quarter. It cost us $55 million. So what we're saying is that even with that $55 million charge against us in the first quarter, we believe that we're similar to last year. We had an improvement of roughly about 13% to 14% in our earnings from 12% to 13% if you take out the $55 million.
We believe that we're going to be better in Textile Effects and in Advanced Materials than we were this past year. We believe in TiO2, we believe, today, that the industry -- well, we believe that Huntsman is running at an annualized run rate, as I speak here today, close to about $100 million per year of EBITDA. Obviously, our earnings in the first quarter were less than that sort of run rate because we're rationalizing capacity, dropping inventories as the industry continues to destock. Last year, it was our customers that are destocking. This year, early part of this year, I believe it is the producers, the TiO2 producers that need to destock. And I think as we get into the second quarter, we're going to see slightly lower prices, slightly lower margins on a per-pound basis, but we should see better volumes in the second quarter. This should more than offset the lower prices that we're going to see in the second quarter. So our earnings in the second quarter should be much closer to that $100 million sort of run rate. I believe in the second half of the year, I continue to believe that we are going to have opportunity to raise prices and to expand margins. And I think that we'll end this year in a much stronger position from a margin perspective than when we started the year. And I think that as we move into 2014, you're looking at an industry that is operating in probably the mid- to high 80%, pushing 90% capacity utilization, and I don't see any reason why margins should not continue to expand through 2014.
I'd like to thank all of you for your time and attention here. And as we look into the future, 2014, 2015, I think across all of our businesses, we're certainly seeing an opportunity to continue to expand margins, continue to expand volumes, take advantage of the U.S. gas situation and be able to expand our earnings and expand the quality of those earnings, thus, raising our multiple.
So at this time, we'll open the floor to any comments or questions any of you might have.
Peter R. Huntsman
In the past, you talked about peak and trough and normalized performance for a lot of the business segments. For Polyurethanes, in particular, have those expectations changed now that you've seen some of those restructuring benefits and a good size of U.S. housing recovery?
Peter R. Huntsman
I would say that when we talk about a peak and a trough in Polyurethanes, if we look at the last peak in the Polyurethanes business, it was about $700 million of EBITDA back in 2005, 2006. If we were to take that same margin, if we were to repeat those same market conditions, those peak conditions, Polyurethanes division would be earning an excess of $1 billion. That's how much new capacity that we've been able to add into the market. I believe that the quality of the customer base as well has also improved since that last peak. But it's tough when you've got a business that's growing at 8% or 9%. We've added an entirely new facility in China since that time. We've added acquisitions in our downstream in Turkey, in Russia, in Germany. We've expanded internally since that. So it's kind of tough to think on a static sense that we're going to repeat those sort of economics. As we look at it on a flat EBITDA basis, we're back to sort of peak economics. If we look at it on a margin-per-ton basis, we still got a long way to go to get back to what traditionally has been more of a peak type of earnings in this business. Yes?
Kind of a general background question on TiO2. Business has been around for a long time. I mean, TiO2, there's nothing new about titanium dioxide. What's changed in the market that would make for a market that wants to consolidate now rather than x number of years ago? I mean, I just can't see what the difference is that would cause all this change in TiO2 amongst the various players in the business.
Peter R. Huntsman
I think that the -- that's a very good question. I'm just -- I'm guessing here. I would think that the recent volatility has probably jarred a lot of people both on the upside and on the downside. I think that there's probably been a perception as well that there's been a fundamental shift. I don't see that a fundamental shift necessarily damages the business. But a fundamental shift in the ore producers, you've got Rio, you've got Iluka, that essentially are in control of certain segments of your raw material ores, traditionally, the path from TiO2 pricing and margins went down -- or prices rapidly went down with it. And it appears that the ore producers are trying to take a far more disciplined approach that we're going to cut capacity rather than lower price to keep the capacity. But to be honest with you, I've only been in the TiO2 segment for about 13 or 14 years, and there are more people today that are looking to get out or to do something today than probably all of those 13 previous years combined. So I really can't -- I don't know what's going on in the board rooms of others. I think we've been very consistent long before the run-up occurred in TiO2. We would like to have optionality. We'd like to have -- be in a position where we can benefit from synergies. And I believe that there's going to be a run-up in margins on a longer-term basis. I don't think it's going to happen in a quarter or 2. But I think starting over the course of next quarter or 2, we'll see a gradual improvement in this business, and we'd like to be part of that. Now I think that we've got some opportunities, obviously, that are before us that we're reviewing. And if those opportunities should create greater value to our shareholders, then just riding the cycle where we believe it will be going over the next couple of years, and we'll aggressively pursue those. Any other questions or comments? Yes, sir.
Peter, sort of a hypothetical question, but maybe this applies to Kimo also. But if today, you were to -- you can only get so many of the $1 billion, $1.2 billion for China one of your businesses, where do you think -- what parts of that business would you redeploy that cash towards? Would you look for additional M&A opportunities? Are you wanting to delever further, or would a share buyback be something that you'd open to them?
Peter R. Huntsman
Well, I will take a stab at it. Now I'll turn some time over to Kimo to do likewise. I think that this board is very much committed to having a strong balance sheet, making sure that we keep that strong balance sheet. I'm not necessarily sold -- and I will say that this is just my view. I'm not necessarily sold that if we burn down another $300 million, $400 million of debt, that we also can get this big pop in multiple or something. I think that our balance sheet and our debt multiples are such that I think that we're kind of in the middle of the herd of most of our peers that we look at in the industry. I think that we probably have a perception that's worse than reality. I do think that we are entering times where we've, perhaps, got to look a little more aggressive at opportunities to grow the top line and the bottom line. I mean, I'm kind of amazed. Just an industry in general, we're seeing this kind of in all industries, right, the top line staying the same, bottom line is improving because of cost cutting, new technology implementations and so forth, lower energy prices. That's not going to continue, right? I mean, that can only go for a year or 2. And eventually, you've got an economy where 60% of the world's GDP between the EU and the U.S. is growing at either flat or 1.5%. I think you're going to have to get creative, and it's more than just putting more debt on the balance sheet and going out and buying. I think you've got to look aggressively at mergers and off balance sheet and joint ventures and things that are going to preserve your balance sheet and at the same time, expand your business and expand your business opportunities. I think some of these ventures we're doing in China, for instance, the joint venture with Sinopec, where we're not having to put a great deal. We're leveraging our technology, and we're near the 50% of what will be close to $1 billion project, the MDI expansion that we have ongoing in China right now, very much the same sort of structure as the previous one. I think those are going -- I think that there will also be some acquisitions and so forth. So I think it's really -- to answer your question, I think it's a combination. I think we want to make sure we preserve our balance sheet. These are still very uncertain times. A lot of the same economics, statistics around debt and so forth in our economy are the same today as they were a couple of years ago. So I think we're going to want to preserve and keep that balance sheet, but at the same time, I think that we -- I wouldn't be surprised if we take a little more aggressive posture than in the past of just looking for those sort of opportunities. Nothing to add?
J. Kimo Esplin
Peter R. Huntsman
Okay. Anything else?
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