Huntsman CORP Q3 FY2020 Earnings Call

Greetings and welcome to the Huntsman Corporation Third Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. It is now my pleasure to introduce your host, Ivan Marcuse. Thank you, Mr. Marcuse, you may begin.

Thank you, Victor, and good morning, everyone. Welcome to Huntsman's Third Quarter 2020 Earnings call. Joining us on the call today are Peter Huntsman, Chairman, President and CEO; Sean Douglas, Executive Vice President and CFO; and Tony Hankins, President of Polyurethanes. This morning before the market opened, we released our earnings for the third quarter 2020 via press release and posted to our website huntsman.com. We also posted a set of slides to our website, which we will use on the call this morning while presenting our results. During this call, we may make statements about our projections or expectations for the future. All such statements are forward-looking statements, and while they reflect our current expectations, they involve risks and uncertainties and are not guarantees of future performance. You should review our filings with the SEC for more information regarding the factors that could cause actual results to differ materially from these projections or expectations. We do not plan on publicly updating or revising any forward-looking statements during the quarter. We will also refer to non-GAAP financial measures such as adjusted EBITDA, adjusted net income, and free cash flow. You can find reconciliations to the most directly comparable GAAP financial measures in our earnings release, which has been posted on the website huntsman.com. I'll now turn the call over to Peter Huntsman, our Chairman, President, and CEO.

Thank you very much, Ivan. Good morning, everyone. Thank you for taking the time to join us. Let's turn to Slide #3. Adjusted EBITDA for our Polyurethanes division in the third quarter was $156 million versus $146 million a year ago. This is better than we had anticipated when we gave an update in early September as demand trends in nearly all of our polyurethane lines, including construction, automotive, and elastomers, came in better than expected. Margins also improved better than we expected given tightening MDI supply-demand conditions throughout the quarter. These positive market trends and conditions have continued into October. The third quarter improvement in adjusted EBITDA versus the prior year was driven primarily by the ongoing integration of our Icynene-Lapolla acquisition at lower fixed costs, which more than offset lower margins year-over-year. We also benefited from lower benzene costs. Our differentiated volumes grew 2%, and our component volumes declined 4% in the quarter compared to the prior year. Throughout the third quarter, variable margins in our differentiated business remained relatively stable. At the same time, variable margins in our component and polymeric systems improved from the multi-year lows we experienced in the second quarter. The notable increase in component MDI prices over the past couple of months has been primarily driven by real global demand improvements as economies continue to recover from the second quarter's COVID-related lockdowns, as well as from various fits and starts and temporary outages within the industry. Our China business, where we have limited downstream differentiation and in other regions of the world, has benefited the most from the higher prices. Europe has also benefited, but to a lesser degree. Our higher downstream differentiated margins continue to show stability. Importantly, we saw meaningful improvement in demand in our higher-margin Elastomers business and within automotive. As is typical, there have been several planned turnarounds within the industry. As the industry responded to improving demand trends, there have been various production disruptions. As we reported a few weeks ago, we have our own production issues in Geismar, Louisiana, due to a third-party supplier of industrial gas having a mechanical failure, which we estimate will impact us by approximately $15 million in the fourth quarter. As the various temporary production issues across the industry are resolved, we would expect that industry utilization rates will move back to a more balanced environment versus the seemingly temporary above-average tightness that we are presently experiencing. However, we do see demand improving, and fundamentals well intact. Construction, including insulation, is strong; auto is rebounding well; and nearly all our other end markets are seeing positive trends subject to uncontrollable and unforeseen events. We would expect component margins to normalize at reasonable levels. We've shared before that we estimate roughly half of our Polyurethanes business is impacted by trends related to construction, with our largest direct exposure being within our insulation business, which makes up close to 40% of our global Polyurethanes segment. Our portfolio is well-positioned to benefit from the expected growth within the global insulation market, which is our single largest market, and we expect it will be one of our highest growth markets over the coming years. A fast-growing part of our global insulation business is our industry-leading spray foam business, Huntsman Building Solutions, which continues to exceed our expectations, with the delivery of meaningful synergies from the recent Icynene-Lapolla acquisition, as well as from strong market conditions. We expect the $20 million in identified synergies to be achieved ahead of schedule and be largely completed by early 2021. Continued growth in North America will be supplanted by an aggressive effort to accelerate growth by scaling up this business internationally. Just to give you some additional interesting facts about spray foam: An average home requires about 1,500 pounds of spray foam materials for insulation, which currently sells for roughly $1.38 to $2.00 per pound depending on the type of application utilized. Additionally, our polyurethane spray foam utilizes our eco-friendly Huntsman produced polyol, which uses the equivalent of roughly 10,000 PET bottles per average home that would otherwise end up in landfills. Our polyurethane spray foam is an economically compelling, structurally sustainable, and environmentally friendly alternative to traditional insulation products. We believe that our polyurethane spray foam will see strong growth for the foreseeable future, providing an optimal solution in a world that is increasingly sensitive to green and sustainable solutions, with building standards becoming more environmentally stringent. Today, we estimate our polyurethane spray foam only represents about 18% of the North American insulation market and substantially less than that globally. The opportunities for above-market growth in North America and globally seem promising. As we sit here today, looking to the fourth quarter, we believe the favorable trends of our global construction and automotive markets will continue. We also expect to see continued improved component and polymeric systems margins. Roughly offsetting these dynamics will be the $15 million impact from our partial Geismar outage and some typical seasonality. Putting all this together, we would expect our fourth quarter polyurethane results to be in line with the third quarter. Turning to Slide #4, our Advanced Materials business reported adjusted EBITDA of $25 million, down from $51 million in last year's third quarter. The decline in adjusted EBITDA was primarily a result of revenues being down in aerospace by 68% year-over-year. The aerospace market remains depressed. While we believe it has bottomed in the third quarter, we do not expect it to begin to recover until the supply chain fully destocks and adjusts to expected much lower production build rates over the next couple of years. Our Advanced Materials segment should be viewed in two segments. Looking beyond the depressed aerospace segment, there is a much better recovery story within our other formulated Advanced Materials business. Our Specialties businesses, excluding aerospace, improved throughout the third quarter, with revenues down only 15% and EBITDA down 21%. This includes our India DIY business, which was heavily locked down during the first half of the quarter. Our sales into the power, electronics, transportation, and industrial markets strengthened throughout the quarter, as our EBITDA improved by 50% from the beginning to the end of the quarter, and this momentum has carried into October. The integration of our recent acquisition of CVC Thermoset is on track and delivered a modest contribution to EBITDA during the third quarter of about $2 million. As we stated in our last earnings call, the results of this acquisition are being negatively impacted by a needed inventory adjustment of about $5 million in the second half of this year. With cost synergies expected from integration efforts underway, we expect 2021 EBITDA related to this acquisition to be close to 2019 levels despite approximately 15% of the business being exposed to the aerospace market. We remain confident that we will achieve a $15 million run-rate in synergies by the end of 2021 and expect to exceed this target as we move through 2022 and beyond, anticipating identifying additional cost savings and commercial opportunities. Looking towards the fourth quarter, we would expect our non-aerospace specialty business EBITDA to be close to the same levels as the prior year and for CVC to make a modest contribution. On the back of continued weakness in our aerospace business and the sale of our Indian DIY adhesives business, we expect the Advanced Materials segment EBITDA to be slightly lower than the third quarter. Just to be clear, on a pro forma basis—meaning if we were to include the DIY business in our estimates for the fourth quarter, our adjusted EBITDA for the Advanced Materials group would likely be modestly higher in the fourth quarter. Let's turn to Slide #5: The Performance Products segment reported adjusted EBITDA of $36 million compared to $38 million in last year's third quarter. The decline in EBITDA was largely due to approximately 19% lower volumes, partially offset by lower fixed costs. Our Performance Amines volumes, which make up about half of the Performance Products segment volumes, declined by approximately 6% in the quarter versus the prior year, primarily due to lower volumes in gas treating. Yet the related EBITDA increased approximately 11% from lower costs and a favorable product mix. The strength in Performance Amines comes as a result of specialty products used in composites going into the Chinese wind market, coatings and adhesives for construction markets, and our low emission catalysts providing VOC-free solutions for markets such as insulation, bedding, and automotive. Volumes and margins in our ethylene amines business continue to be weak due to the overall economic environment and competitive pressures. Overall margins in Maleic remain relatively stable, and volumes that go into construction-related markets are now trending positively. Despite the fourth quarter being historically the weakest quarter of the year, we expect Performance Products adjusted EBITDA to be similar to the third quarter as its core markets continue to recover. Let's turn to Slide #6. Our Textile Effects division reported an adjusted EBITDA of $8 million for the third quarter. While volumes in the quarter fell approximately 13% versus last year's third quarter, we did see a significant improvement in volumes and EBITDA versus the second quarter. The volume recovery we are seeing is being led by our home textile products and our athleisure sportswear and protective apparel. We also see a gradual pickup in demand within our automotive textile products. We are optimistic that the industry will continue to recover over the coming quarters, generally in line with the reopening of retail stores and pent-up consumer demand. We believe that inventories in the supply chain are on the tight end. As our customers gain more confidence around the eventual recovery, we expect to see more benefits from restocking as well. Our offering of sustainable products in textiles continues to gain momentum. Just one specific example would be our range of patented Avitera dyes, which allows our customers to reduce water and energy consumption by up to 50%. We are focused on developing profitable, sustainable solutions for our customers across textiles and throughout our entire portfolio. While fourth-quarter EBITDA in our Textile division will be down versus the prior year, we expect that this business will continue to show further recovery and improvement compared to the third quarter. Before sharing some concluding thoughts, I'd like to turn a few minutes over to Sean Douglas, our Chief Financial Officer. Sean?

Thank you, Peter. Turning now to Slide 7, we were pleased to see a better-than-anticipated recovery during the quarter. Just to give you a flavor of that recovery, we saw monthly adjusted EBITDA more than triple from June to September. At a high level, our adjusted EBITDA is down $27 million year-over-year. As explained by Peter, this is largely attributed to the significantly depressed sales within our commercial aerospace business and to still recovering demand for retail apparel within our textiles business. But for Polyurethanes, volumes were down year-over-year in all segments amidst the global recovery that has been underway. Though now improving, overall margins were a bit weaker year-over-year, more than offset by lower fixed costs, largely as a result of our response suppression to global COVID-related impacts. Turning to Slide 8, we ended the quarter with approximately $2.5 billion of liquidity, including approximately $1.2 billion of cash. In relation to the sale of our India-based DIY business, we expect to receive $257 million of cash within the next week. We expect tax leakage to be just under 10%. We also expect to complete the sale of approximately 42.5 million shares of Venator near year-end for approximately $100 million. This includes cash paid for a 30-month option for the potential sale of the remaining approximate 9.5 million shares at an agreed price of $2.15 per share. The transaction is subject to regulatory approvals, which are progressing and on schedule. The capital loss on this transaction unlocks cash tax savings of approximately $150 million relating to the taxable capital gain on the sale of the chemicals Intermediates and Surfactants business that was completed earlier this year. Remaining cash taxes owed on this sale are approximately $185 million to be paid in the fourth quarter of this year. Depending on the timing of completion on the sale of the Venator shares, the net amount to be paid in the fourth quarter may be reduced this year by approximately $150 million. If the transaction closes after year-end, the $150 million of cash tax savings will be received near the end of 2021 or the beginning of 2022. We are doing our best to close this transaction before year-end and are on schedule. We generated $189 million of adjusted free cash flow during this quarter. This is more than we had anticipated for the quarter versus when we addressed you during our prior quarter's earnings call. In addition to our adjusted EBITDA being stronger than initially expected, with a sharp intra-quarter recovery, more surprising was the increased cash provided by the change in working capital. Not only did we see a resulting larger drawdown of inventory, but also a bigger increase in payables than was expected. Our days inventory dropped by an additional approximate 5 days more than was expected with a similar increase in days payable than was anticipated. Furthermore, we were effective in managing our receivables through this COVID canyon, and DSO also reduced by a few days. As we shared with you last quarter, we effectively managed our inventories lower at the onset of COVID. Now, with this improved recovery, our inventory levels are particularly tight. As we sit here today and look into the fourth quarter, we do not expect the typical seasonal release in primary working capital as we typically experience. In fact, depending on the nature of the ongoing recovery, we expect to see a modest build of inventories. For your awareness, we have a large-scale turnaround scheduled at our Rotterdam MDI site for March-April of next year. This occurs every four years. The estimated duration of which is between 40 and 45 days. The estimated cash impact will be around $40 million, and the projected EBITDA impact should be under $10 million. We typically build inventory ahead of turnarounds. During the quarter, we spent $54 million in capital expenditures. For 2020, we estimate that our total spend on capital expenditures will now be between approximately $250 million and $255 million. This is approximately $25 million more than we had previously guided. The increase is largely a result of moving forward some deferred payments on our Geismar Louisiana splitter for a total spend in 2021 of approximately $55 million. With respect to the polyurethane splitter, we still estimate a total spend of approximately $175 million, or just over $180 million, including capitalized interest and a startup in mid-2022. That leaves approximately $80 million of spend on a splitter in 2021 and the remaining approximate $30 million of spend in 2022. In other words, in total, we are still on budget and still on schedule. We are just days away from renewing our primary insurance programs. Worth flagging is that the global insurance markets are experiencing a typical shortage of capacity. This is not only specific to Huntsman, but it will impact our annual insurance premiums by as much as approximately $15 million, all of which are paid in the fourth quarter. Putting this all together, we still anticipate modest positive adjusted free cash flow for the year 2021. During the quarter, we did not repurchase any shares, but we did pay off the term loan of approximately $100 million. We have a U.S. equivalent of approximately $520 million of euro-denominated notes maturing in April of next year and callable in January, which we currently expect to redeem next year with cash on hand. This will reduce our interest in 2021 by about $25 million. We remain focused on maintaining a strong investment-grade balance sheet, being disciplined, sensible, and balanced in our capital allocation strategy, generating consistent, strong free cash flow with the recovery underway.

Thank you, Sean. As we move into the final months of the year, I think it's worth looking back on some of our objectives and where we are in our effort to create more shareholder value. Beginning in January, we sold our chemicals intermediate business for $2 billion. This further transformed our balance sheet and allowed us greater flexibility to aggressively pursue our ability to grow the more strategic ends of our business. This transaction also allowed us to take advantage of tax losses that we were able to realize with the sale of the remainder of our stake in Venator, which we announced this past August. We are still on track to see a closing of this transaction, hopefully before the end of the year. We do not see any major obstacles to getting this completed by then. In May, we closed on the CVC Thermoset Specialties business as we sought to further expand and diversify our Advanced Materials division. While we're disappointed to see the slowdown of our commercial aerospace business due to the COVID-19 pandemic, the CVC acquisition will help fill the void created from this temporary loss in sales and EBITDA. As this valuable aerospace business begins to recover over the next year or two, it will be additive to what we are building with the CVC acquisition and in other areas of our Advanced Materials division. We are also well on track to deliver the previously announced $15 million of synergies. In July, we announced our initiative to realign our cost structure and streamline our operations. At the time, we outlined $100 million of savings from these efforts, which includes acquisition synergies. We are now targeting approximately $112 million, and I would expect this number may well grow. We expect some $20 million to be realized by the end of this year, and we should be running in excess of $100 million by the end of next year. Last night, we announced the sale of our India-based DIY business to Pidilite in an all-cash transaction valued at potentially $285 million. The full transaction value represents a multiple of 15x our 2019 EBITDA. Huntsman will receive $157 million in cash at closing, which is expected to take place within the next week. Then we will have the potential to receive up to an additional $28 million in cash within 18 months depending upon achieving certain revenue milestones that approximate 2019 levels. We built this business from nothing over these past 15 years and have taken this business as far as we can without material expansion or investment. Pidilite is a respected adhesives business based in India and is well-positioned to take this business to the next level now. This is a win-win transaction to unlock significant value for Huntsman that we will redeploy in the near term to further reshape our Advanced Materials business. With our two divestitures at the beginning of the year and now this India-based DIY business, these two transactions should demonstrate the quality of our businesses and divisions. We will continue to assess other assets in our portfolio, but given our balance sheet and global footprint, one should expect more acquisitions than divestitures. Lastly, I'd like to point out the performance of our newly formed Huntsman Building Solutions. This is an entity that we formed through the acquisition of Icynene-Lapolla and Demilec, two polyurethane spray foam businesses that we further combined with our polyols and polymeric MDI production. In the past year, we have created the world's largest polyurethane spray foam business, the world's best insulation, and the fifth largest installation company. We committed to you that we would realize $100 million of EBITDA by the end of next year. I'm pleased to say that during the third quarter, we hit that run rate well ahead of our forecast. At the beginning of this COVID crisis, we told you that we would emerge from this mess a stronger company than when we entered it. At the present time, while I like the demand in margins going into the fourth quarter, we are also aware and keeping an eye on the rapidly changing market conditions, particularly in Europe, where the number of COVID cases and the national lockdowns have all increased in the past two weeks. The coming days will see the effects of Hurricane Zeta and the results of an election where a much-loved Donald Trump will either prevail or lose against the much-hated Donald Trump as America either approves or disapproves of his performance. Either way, this quarter is shaping up to be very interesting. One thing is certain, we will continue to focus on what we can control. We will continue to support our strong customer base, keep an investment-grade balance sheet, control our costs, and add value to our shareholders with smart capital allocation, asset divestitures, and bolt-on acquisitions. With that, Operator, why don't we open the lineup for Q&A?

Ladies and gentlemen, we will now have our question-and-answer session. Our first question comes from Bob Koort with Goldman Sachs. Please proceed with your question.

Thanks, good morning.

Good morning, Bob.

Good morning.

Peter, maybe to ask Tony a question, I think you mentioned he was on the line. There’s certainly been some volatility and production curtailments, as you mentioned, in MDI, but I also sense talking to investors a lot of varying consultants’ opinions on how much MDI is coming into the world over the next couple of years. I was wondering if you could talk maybe specifically, Tony, what your business intelligence is telling you about supply capacity coming into the MDI market in 2021 and to the extent we have a normal world, what do you think the demand growth would be in 2021? Thanks.

Bob, good morning. Good to be with you. I see the market to be very balanced right now and over the next two years. There are no major new capacities coming into the market, just some debottlenecking. Overall, I think the demand growth and supply growth will be matched and very balanced. As we exit quarter three, we're seeing about a 3% to 4% MDI growth over last year. The recovery across all sectors has been really impressive through quarter three, particularly in our insulation business, and I see that continuing. There are unforeseen circumstances with COVID and what that may do in quarter four, but right now we’re not seeing it. We have strong order patterns, and I think as people are aware, there's a lot of maintenance going on right now. I would estimate it across the global business that we’re at about 20% of MDI capacities currently idle with maintenance. But coming back to your question, Bob, I see the situation to be very balanced. I don't expect the supply to exceed demand over the next 18 months to two years.

Great, thanks. And, Peter, if I could ask sort of broadly through the portfolio, you mentioned MDI and its insulating properties, but as we start to think about green energy and new deals and stimulus for those sorts of things, it would seem you’ve got wind, insulation, construction insulation, residential insulation—how can you guys tap into that theme that's continuing to grow in significance in terms of energy conservation or new energy? Thanks.

Well, Bob, I think that as we look at the entire Green New Deal, there's a lot of it that I have some consternation about, to be honest with you, but there's also a lot that when we look at it, particularly around construction and what we see in insulation and OSB, as we continue to make progress in various grades, you're going to see in the coming year or so, fire retardancy and other such properties. We're environmentally coming up with a number of opportunities here, particularly around energy conservation. If you look at our amines business, what we're doing to take sulfur and a lot of the bad actors out of gas treating, if you look at our polyurethanes catalysts and other products that take volatile organic compounds out of a lot of the chemicals today, we look at water conservation and color conservation. The chemical industry needs to be, in my opinion, and Huntsman in particular—I think we need to be bolder in what we're able to do as providing solutions in transitioning to a more green and cleaner economy that is also profitable. So, believe me, I think regardless of who wins, we have internal ideas and strategies and have already met with lobbyists on both sides of the aisle, where we’d like to be part of the solution going forward—not waiting for Inauguration Day, but we hope that our influence will be felt right after the election. Because I think we bring a number of solutions to the table.

Great, thanks very much.

Thank you.

Thank you. Our next question comes from Frank Mitsch with Fermium Research. Please proceed with your question.

Yes, good morning. And for what it's worth, my vote would be for a much-loved Ivan Marcuse versus the candidate there. A couple of years ago, you guys did a really good job of detailing the windfall from some of the outages on the MDI front and how that impacted Polyurethanes. Is there a way that you could kind of quantify what impact, if at all, that showed up in the third quarter?

Specifically around the under-utilization of production of MDI?

I mean, obviously, we saw some—you had some demand constraints, but a lot of competitors had downtime. We saw a bunch of force majeures announced. As you indicated in early September, you thought you would do $40 million higher EBITDA in Polyurethanes and it came in a little bit higher than that. I would assume that some of that was related to the force majeures; was it not?

Yes, I think that as we look at it, I mean, as I tried to articulate in some of my comments, I think we're going to see this most profoundly in China, where we have more commoditized production versus North America, where we have more formulated production. We then look at taking a lot of our commoditized production of the polymeric and moving it downstream into the insulation business. Ideally, we’d like to be moving as much of the product that is most impacted by these shortages as possible further downstream into spray foam and others. But as we try to put a handle around—an economic handle, if you will—I don’t like using the word spike because that would denote that we're going to be up X dollars one quarter and down X dollars the next. But I think that the overall impact of these shortages and pricing is probably somewhere around $20 million on a quarterly basis. As we look at that going into the fourth quarter, we'll probably see the full realization. I think it ramped up in the third quarter, at the beginning of the quarter; I'm not sure you would have seen a whole lot of that. By the fourth quarter, certain aspects should probably be at full effect of around $20 million. Again, that's a really tough thing to calculate, because as you get shortages on a global basis, bear in mind that you're looking at anywhere from 30 to 60 days to take MDI from point A in Asia, point B in Europe, or the US and move it to other areas of the world. So people somehow think that you can instantaneously move product globally. That's just really tough to do. So how much of this is a spike in margins and pricing, so forth, how much of it is going to be due to recovery of demand, and how much of it is going to be due to outages and so forth? At the end of the day, it’s tough to tell.

Yes, fair enough. Fair enough. And then if I could, kind of interesting, at the first-quarter conference call, I think some of the discussion was around how the pandemic might impact M&A and move it to the side. Obviously, you guys have done a heck of a job remaking the portfolio or making some changes via M&A since that timeframe. With the announcement of the sale in India, I think you indicated when talking about Advanced Materials that you're looking to redeploy that money into M&A in that front. What sort of timeframe, what sort of size are you looking at? Any sort of color you could provide there would be great.

Well, right. We're in the process right now of actively reviewing a number of opportunities. As we look at this, we want something that's going to have synergies—hopefully, some product pull-through, some synergies around that. Something that will be additive to our technology and something that we can globalize. As we look at that matrix, we're actively looking at multiple options. I would say it's a bit too early for us to name potential candidates, but we also mentioned that this acquisition would likely be in the Advanced Materials segment as well.

So that's something we can look forward to kind of the early part—earlier part of 2021, you think?

I would hope so; the sooner the better. But you know the way transactions go, they kind of have a life of their own.

Terrific, thanks so much.

Thank you. Our next question comes from Mike Sison with Wells Fargo. Please proceed with your question.

Hey, guys, nice quarter. Peter, when you think about the insulation business and there are folks who think housing will remain pretty strong for the next couple of years, given there is a trend to maybe moving. Is there—do you think this is a business that grows double digits, high single digits? What's the cadence of growth as we head into 2021?

I think that you're going to see high single digits. But as you look at this, I keep a couple of things in mind. First of all, we look at spray foam in general; that's about 18% of the North American insulation market, and that's for the entire spray foam industry—not just Huntsman. I may have misspoke in my comments here, leaving a word out. As we look at the spray foam opportunity here, if you were to look at probably one of the easiest ways—we talk about the greening economy, here is one of the easiest ways to conserve CO2. Just under 50% of all energy consumed globally is consumed to adjust the environment of our homes and offices, and insulation is one of the easiest ways to do that. The studies that we've done internally with our customer base of people in spray foam suggest heating bills can be cut in half with people that take that cheap pink insulation out of their attics and replace it with our high-quality spray foam. So that's not a sales pitch, by the way. As we look at it, there is a significant impact on the environment. If building standards were to change even marginally or to match much of what you see in Europe or many states in the US and you were to see a build rate of 1 million homes—which is down significantly from where we are today—I'm kind of taking a worst-case scenario of 1 million homes annually, and we would have a 20% penetration in something like that, you would see this business in very short order over the next couple of years, doubling. On a realistic basis, I think—we kind of look at present market changes, without any changes in legislation or anything else, this business we think will continue to grow, in very high single-digit sort of numbers globally.

Got it, thanks. And then I guess a quick one for Tony. I think you said 20% of global capacity is out. How long do you think it will take to get some of that capacity back online? And when you look at where pricing is now relative to last year, sequentially, it's up quite a bit. Could you maybe talk about how the timing flows? I know you mentioned, Peter, $20 million maybe this quarter, but will you see more of that effect in the first quarter versus this quarter?

Mike, going back to your question of 20%, so it's hard to tell, as these plants are around the world and our competitors clearly have a better view than I do on this. But I think some of that will come back in quarter four. The Geismar plant is scheduled to come back online on November 15. When the plants come back, it takes some time to get them back to full operating rates. I think we're assuming that most of that outage is going to continue through quarter four, and then we'll slowly start to work its way back into the market in quarter one of next year. Our history has shown that these plans take longer to come back than people forecast. It is a complicated process to get an MDI plant back on stream, and it always seems to take longer than we expect. So I think you should assume for the next three to six months that capacity is slowly going to work its way back into the market.

I would just like to clarify that when we talk about that $20 million, that is a fourth-quarter number, and that’s assuming that the pricing we’re seeing today holds out through the quarter. When you look at how much of that was in the third quarter, it would have been felt very little in the final part of the third quarter.

Got it, thank you.

Thank you. Our next question comes from John Roberts with UBS. Please proceed with your question.

Thank you. Peter, do you have any thoughts on how quickly Performance Products in the non-aerospace part of epoxies can get back to pre-COVID levels?

Yes, I think that as we look at it, I think by the early part of next year, if present trends continue—and again, I want to emphasize that if you are asking me that question 10 days ago versus today, kind of pre-European lockdown versus post-European lockdown, there's just a lot of noise and static in the fourth quarter. I’m generally a pretty optimistic person so take that for what it’s worth. But as we look at the non-aerospace segment of Advanced Materials, we’re somewhere around 90% of where we were a year ago. I would expect that to be back on year-over-year non-COVID sort of volumes by the early part of next year. Again, assuming that we continue the recovery, not that we fall back down. The aerospace segment of that—I’m looking at kind of a two-phased approach. One is how long does it take us to get back to a normal—post-COVID normalized build rate? Time will tell. But the non-aero business of Advanced Materials continues to do well and grow well, and I think we'll have a lot of applications as we look to that excess capacity going elsewhere.

And then could you just remind us what percent of the Polyurethanes segment sales are component and polymeric MDI that's not protected by spread margin contracts?

In the US, those spread contracts are virtually all in North America. About 60% of that is the polymeric and is under contracts.

Thank you. Our next question comes from Aleksey Yefremov with KeyBanc. Please proceed with your question.

Hi. Yes, good morning, everyone. Peter, your current domestic spray foam business, I think you're saying about $100 million normalized EBITDA run-rate, how should we think about the international opportunity? Can you give us some idea on how soon you can get there? Maybe some targets for next year and the next two to three years?

So I think that over the next couple of years—I think we're really focused on over the next 12 months. We look at the EBITDA of that business. I would say that there's a real opportunity today. About 10% to 12% of that EBITDA is coming from international markets, and it would be great to see that go up to a quarter. It's an enormous opportunity for us. As we look at the penetration of polyurethane spray foam in Europe and in Asia, we already have the infrastructure, the blending capabilities, people, and distribution networks throughout Russia, China, Europe, and Southeast Asia. So I would hope that over time, we'll continue to see that strong single-digit, pushing 10% growth on an annualized basis in North America, and hopefully, we ought to see better than that internationally once we’re operational.

Thank you. And a question for you, Peter or for Tony. Some of the trade analysts are reporting strong demand for rigid insulation panels in Europe. Is this a normal cyclical recovery after lockdown or is this also a result of maybe the secular impact from the EU policies?

I think there is going to be a great incentivization—the Green Deal that we're seeing in Europe is a great incentive for builders, architects, and construction firms to implement the best practices and the best installations and energy conservation. It’s only natural that they’re moving to Polyurethanes. So when we look at that rigid foam section, I don’t think it’s just Huntsman, but other companies are seeing healthy demand, particularly given where the macro economies are in these countries.

Aleksey, I think, just to add to what Peter said, we're also seeing continued strong demand for DIY, particularly in Europe and North America. So a lot of that insulation, especially in the composite wood products business, continues to see strong growth in both Europe and America. I believe that is a result of the continued pandemic and people's continued discretionary spend on improving their homes, which is benefiting our business significantly.

Thank you. Our next question comes from Hassan Ahmed with Alembic Global. Please proceed with your question.

Peter, a question around the polyurethane business—some of the trade publications have been talking about fairly tight conditions on the polyols side of things, and how with rising prices and polyols, and scarce availability, there has been reduced demand for TDI. Now the question really is that—I’ve heard your comments, obviously MDI demand seems to be quite strong.

I don't really think so. A lot of the applications of TDI don’t necessarily compete with us head-to-head. There is that fringe area around soft foams going into furniture, but I think it's a pretty small segment. We don’t have a marketing effort that says we're going to target TDI or TDI applications. Again, there is overlap, you're absolutely right. It's not something that is a major effort for us. As we look at polyols, we're finding ways to relocate and replace our polyols. We particularly like polyester polyols to the extent that we can build out the end of our MDI and our Polyurethanes business into the polyester polyol or TEROL business. We're using that technology of recycled bottles and moving that ahead. For us, that is a high priority.

Very helpful, Peter. As a follow-up, going back to the sale of the Indian DIY business, obviously, you got a great multiple. If I run the numbers, you're looking to replace the $19 million, $20 million of EBITDA that you generated from that business in 2019. According to the press release, you said quickly you want to replace that. Is it fair to assume that $19 million, $20 million of lost EBITDA in any business that you acquire would be at a multiple significantly lower than your sale multiple? So it's a two-part question: Is that fair to assume? And second, how quickly will you be able to replace that?

I think it’s obvious from what I said earlier, we're actively reviewing opportunities. We’re in negotiations with options that we think will be an opportunity to expand particularly Advanced Materials. I don't want to get into where that multiple might be and so forth. It's just right now. I think it's a bit of a sensitive time to be talking about potential acquisitions.

I would just say, whatever the acquisition, as we've always said, post-synergies, those multiples would be very close to where we trade or better. On a post-synergy basis, certainly, it could be a lot better.

Excellent, thank you so much, Peter.

Thank you. Our next question comes from Jeff Zekauskas with JPMorgan. Please proceed with your question.

Thanks very much. Your EBITDA in Polyurethanes was above where it was last year and volumes were flat, and what you said is, the markets are a little bit tighter than they might be ordinarily. But your volumes should grow, so order of magnitude should the Polyurethanes segment earn in 2021 what it did in 2019, just roughly?

Yes, I would hope that it would be close to that. As we look at that, probably, let's say, in 20 years—you’re asking a 2019 number versus a 2020 number?

2021. In other words, 2021 should look like 2019, given that the third quarter is a little bit better, a little bit tighter; it’s going to loosen up, your volume’s going to grow?

I think that as we look at the volumes and so forth, especially if you factor in the HPF in Huntsman Building Solutions, we ought to be doing better in 2021 than we did in 2019.

Okay. And what will it take to get the Textile Effects business back to normal?

People going to stores and buying clothes. I think, again, there you will see—as I look at the recovery of demand in Textile Effects, we were down 60%, 70% at the lowest point year-on-year demand. Now, I look in the fourth quarter; we’re down single digits from where we were a year ago. Granted, a year ago, when I compare this year's fourth quarter to last year's fourth quarter, Textile Effects was feeling more of the impact of COVID than the other divisions, as it's so Asian-centric. Of course, being the virus started in China, that area of the world was impacted before any other. So as we look at year-on-year comparisons, we'll probably see that exceeding last year first in Textile Effects. As we look at Textile Effects to see a rather rapid recovery to a point, and that last point will come about gradually and slowly, I think through the early part of 2021, as stores and retailers start opening. We clearly have seen that there are certain clothes and apparel and textiles that people will buy online. People typically buy their athletic wear online; people typically don’t buy formal clothes and things that need to be fitted, things that need to be tailored. I think that people want to try on and so forth, typically don’t buy that online. Certain segments are doing well; other segments are not doing very well, and that will—I think the recovery is as you mentioned, as the retail outlets start opening. Auto is gradually recovering; home textiles is recovering, and these are recovering much faster than the retail end.

Okay, thank you very much.

Thank you. Our next question comes from David Begleiter with Deutsche Bank. Please proceed with your question.

Thank you. Peter, you mentioned talking about the India Adhesives sale that you won't be looking into other assets. I assume they’re pretty small, but any more color on what those could be in terms of the size of those other assets that could be reviewed?

No, where we were talking about divestitures or acquisitions. I never wanted to use the word never or say that there are parameters about what we may or may not do. I'm quite pleased with the portfolio and the shape of the overall portfolio, but at the same time, a part of our job is that we have to look at our assets and assess our assets. And as I look specifically at the DIY business in India, I think that we took an asset from nothing, we built it, and for us to have continued to build it at that rate, we would have had to start consolidating market share, putting in quite a bit of investment and capital, retail advertising and so forth. The company that we sold it to, Pidilite, is already in that segment and doing all those things. They put a higher value on it than we did internally. To the extent that we have other products and lines in the business that would fall into that same sort of parameter, I think we owe it to our shareholders to look at where we can create the most value. Overall, I don’t see a lot of pieces for sale within the company, and I look at the size of the acquisitions, look at what we’ve done over the last couple of years between the consolidation of our Maleic Anhydride, CVC, Demilec. I think these are pretty good-sized acquisitions that are meaningful, so we’re not risking our balance sheet or stressing the balance sheet, but we see meaningful synergies and meaningful opportunities to globalize and build these businesses.

And just for cost savings, I think you increased the target from $100 million to $112 million—a modest increase. Where did that $112 million come from?

I think you're looking at hundreds of thousands of dollars here and there, and you're looking at opportunities. I think it's not all coming from one specific segment, and I think each segment, as they start looking within their areas of opportunities for consolidation, rationalization, and streamlining businesses are finding opportunities as they start digging through these projects.

Thank you.

Thank you. Our next question comes from PJ Juvekar with Citi. Please proceed with your question.

Thank you. Peter, can you talk about the Performance Products business? You had 19% volume declines or sales declines, I should say, in this quarter and a 20% decline in the second quarter. So you're not seeing much sequential pickup, but despite that, your EBITDA margins have been very resilient; EBITDA really is not down that much. Can you just address the top line versus the bottom line in Performance Products?

Yes, our biggest volume in Performance Products is our Maleic Anhydride, and I would simply note that our biggest single facility, which almost exceeds the rest of the capacities within Huntsman, is our Pensacola, Florida site. That's why it was down for hurricanes that passed through the area, and some of the residual impact of those hurricanes. We had some one-offs on volume and on availability of product in the third quarter. Certainly, the demand for the product grew throughout the quarter. Maleic Anhydride is used in many applications: if you were to go into the bathroom fixtures and apartment fixtures that you would see in an apartment or hotel, we're seeing that anything associated with residential construction and installation or OSB or textile is doing quite well. Anything that has to do with closed-in small unit apartment construction and hotel construction has been recovering at a much slower rate than residential. I think the Maleic construction applications—don't get me wrong, they're all tilted towards that apartment and hotel construction, but they are tilted a bit in that; you'll see a slower recovery but you'll see it nonetheless.

And the EBITDA, can you address that? It’s been quite resilient; what accounts for that?

I think those are our strong products. We have unique businesses and applications. Margins are stable and these are great businesses.

And then just quickly, you mentioned earlier about your green PU spray foam that will include PET bottles. How do you charge for a product like that? Do you get some kind of green premium or is it going to be priced in line with the existing product? Thank you.

I think over time you start seeing the quality of the product that we have and how it's made and the greening effect. I don't think that we're getting a green premium today. I do think that all things being equal, if you have an opportunity to use something made that will be in your house for decades to come, that’s made from recycled PET, you look at the environmental advantages that come from this. I think there is a premium and I think over the course of the next year or so, as we start with more aggressive advertising and promotion in this area, again, I want to remind you that this is a business that we weren’t even in two years ago. We view this business as, still to some degree as exciting as we are about it; we're still in the infancy of the business. I think consumer habits and sentiment will be very high, and people are going to care about this stuff. So, yes, I hope that over time we would be able to have a green premium.

Thank you, great idea. Thank you.

Thank you. Ladies and gentlemen, this concludes today's web conference. You may now disconnect your lines at this time. Thank you for your participation and have a great day.