Huntsman CORP Q4 FY2020 Earnings Call

Greetings, and welcome to the Huntsman Corporation Year End 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ivan Marcuse, Vice President, Investor Relations. Thank you. Sir, you may begin.

Thank you, Jessie, and good morning, everyone. Welcome to Huntsman's fourth 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 fourth quarter 2020 via press release and posted to our website. We also posted a set of slides on 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 adjusted free cash flow. You can find reconciliations to the most directly comparable GAAP financial measures in our earnings release, which has been posted to our website. I will now turn the call over to Peter Huntsman, our Chairman, President, and CEO.

Thank you very much, Ivan. Good morning, everyone. I appreciate you joining us. Let's discuss Slide 3. In the fourth quarter, our Polyurethanes division achieved an adjusted EBITDA of $201 million compared to $122 million the previous year. This growth was mainly due to better margins from higher prices in our component business and favorable costs. We saw stronger demand than anticipated across all regions, as several core markets, like automotive, continued to rebound, and our spray foam insulation business grew compared to the same quarter last year. However, our total MDI volumes were down about 8% because of earlier production issues at Geismar related to a third-party supplier. It's important to note that our total differentiated volumes, including our automotive, elastomers, and spray foam businesses, increased by 6% this quarter. We're noticing improved demand trends in our core markets, such as construction and automotive, despite a rise in COVID cases during the fourth quarter and new restrictions imposed by governments in some states and European countries. When we provided our initial fourth-quarter outlook during the previous call, we were concerned those restrictions might hinder recovery. Fortunately, the strong demand trends persisted beyond our expectations when we revised our outlook in early December. As COVID cases in many areas have stabilized or begun to decline, along with the increase in vaccinations, we're cautiously optimistic that demand trends will stay positive, and we expect our Polyurethanes performance in 2021 to be significantly better than last year. The global push for efficiency in energy use, lightweighting, plastic recycling, and the production of VOC-free consumer products positions our Polyurethanes segment to benefit from these sustainable trends in coming years. Our largest global market, making up about half of our Polyurethanes segment, includes urethane building and construction products, focusing on insulation, composite wood products, and adhesives. The insulation business, our largest market, features MDI-based insulation, known for its efficiency and versatility. Our Huntsman Building Solutions, a leading provider of spray polyurethane foam, is experiencing double-digit growth, exceeding market averages, thanks to rising consumer and contractor demand for sustainable solutions. Additionally, Huntsman Building Solutions is seeing growth due to positive housing trends in North America, international expansion, and market share gains from traditional insulation products. The integration of the Icynene-Lapolla acquisition will be mostly complete by the second half of this year, resulting in over $20 million of annualized synergies. Our TEROL polyols, which use recycled PET waste as a feedstock, will also grow in tandem with our spray foam and global insulation businesses. In 2020, we expanded our TEROL polyols operations by opening a facility in Taiwan to support SPF growth in Asia and serve additional insulation products and customers. The outlook for Huntsman Building Solutions is very positive, and we remain enthusiastic about the long-term potential of our insulation portfolio. Next, in construction, our second-largest segment in Polyurethanes is automotive, where we also anticipate solid growth in the coming quarters. We're continuing to innovate with our customers and reaping benefits from MDI substituting existing products. Moreover, our high-margin elastomers business is beginning to show improved trends as footwear sales rise, alongside recovery in several other niche industrial markets we serve. While we acknowledge existing volatility in the component segment of our business, which has received considerable attention, the bulk of our Polyurethanes segment lies in our downstream businesses, benefiting from stable margins and demonstrating considerable growth. The upstream part of our business, primarily component and polymeric systems, did see advantages in the fourth quarter due to a tight market caused by multiple MDI facilities being temporarily down. We expect margins in this part of the business, especially in China, to return to normal as facilities resume standard production rates, but we don't foresee margins dropping anywhere near the levels observed in the first half of 2020. Over the next few years, we don't anticipate new capacity entering the market that will significantly disrupt demand and supply balances. As we have repeatedly stated, we expect overall industry demand to remain relatively balanced in the coming years. In our third-quarter call, we disclosed our planned outage in Geismar due to third-party supply issues, which affected fourth-quarter adjusted EBITDA by around $15 million. The stronger-than-expected recovery also impacted our fourth-quarter results and limited our ability to build inventory for a scheduled turnaround in the fourth quarter at one of our Geismar lines, prompting us to defer this turnaround to the first quarter of 2021. This has shifted about $10 million of expenses from the fourth to the first quarter. With robust global market conditions in the fourth quarter and production issues at Geismar, we faced product shortages. This situation will temporarily affect us in the first quarter of 2021 as we work to build inventories ahead of our planned second-quarter Rotterdam turnaround and inspection. Quarter-over-quarter, this situation will impact us by about $30 million in the first quarter as we balance inventories prior to our turnaround. We still estimate the Rotterdam turnaround will impact second-quarter adjusted EBITDA by approximately $15 million. Keeping this in mind, despite expecting polymeric MDI margins to slightly decrease from current highs and the challenges associated with building inventories before planned turnarounds, we still anticipate that our first-quarter adjusted EBITDA will be slightly more than double that of the previous year. Now let's move to Slide 4. The Performance Products segment reported an adjusted EBITDA of $41 million, down from $43 million in last year's fourth quarter. The EBITDA decrease was mainly due to a slight decline in maleic EBITDA from lower margins. Although overall segment volumes fell by about 4%, we benefitted from reduced fixed costs. Our performance amines volumes were affected mainly by persistent weakness in the gas treating and oilfield markets. However, we saw favorable demand trends in other performance amines sectors such as coatings, adhesives, construction, and fuels and lubricants, which remained resilient throughout the past year. Growth was somewhat restricted by temporary raw material and supply chain challenges in certain regions that prevented year-over-year growth for this business in the fourth quarter. Volumes and margins in our ethylene amine business have remained soft due to the overall economic climate and competitive pressures, but we believe this business has hit bottom after several quarters of decline, and we are starting to observe signs of recovery. Global volumes for maleic were relatively flat year-over-year. Volumes for UPR markets are showing positive trends, and we anticipate favorable demand for maleic in 2021. In the first quarter of 2021, we expect strong demand for both amines and maleic and predict an increase in Performance Products adjusted EBITDA by about 10% to 15% compared to the prior year, which is particularly good considering the difficult comparison to last year's strong pre-buying by some customers in anticipation of government-mandated pandemic shutdowns. Now, let's review Slide 5. Our Advanced Materials division reported adjusted EBITDA of $27 million, a 36% decrease compared to the previous year, entirely driven by a 65% drop in aerospace-related sales, somewhat offset by modest growth in the rest of our specialty portfolio. The contribution from the CVC acquisition was mainly offset by lost adjusted EBITDA from our recent divestiture of the DIY consumer adhesive business in India. We believe that our aerospace business has reached its lowest point. Although a full recovery in aerospace will take years, we're beginning to see orders come back, indicating that supplier inventory channels have cleared and destocking has hit bottom. We expect to see modest sequential improvement in the first quarter relative to the fourth quarter. Excluding aerospace, 2020 was a pivotal year for our Advanced Materials segment, as we successfully repositioned and strengthened our core specialty portfolio through three strategic transactions at favorable prices. The business acquired from CVC, like the rest of our Advanced Materials division, has been impacted by the global pandemic, particularly in the aerospace area. However, we believe it fits well within our portfolio. We're on track to achieve the $15 million synergy run rate by the end of 2021. We've only had Gabriel Performance Products for about a month, but we are optimistic about its potential. We are confident we will reach a target of $8 million in synergy run rate within two years. The investments made in our Advanced Materials division position us for earnings growth in the coming years and serve as a strong platform for additional organic growth. While adjusted EBITDA is expected to decline about 20% year-over-year in the first quarter due entirely to aerospace, we project significant sequential improvements of roughly 40% and anticipate this division will show growth for the full year. Moving on to Slide 6. Our Textile Effects division reported an adjusted EBITDA of $18 million for the fourth quarter, remaining flat compared to the previous year. Volumes in this quarter increased by 3%. The volume recovery we are witnessing is primarily driven by our apparel and home textile businesses. We are optimistic about the industry's recovery in the coming quarters, aligning with the reopening of retail stores and improved consumer spending. Our order book is returning to levels seen in 2019, and inventory in the supply chain is tight, which may lead to some restocking as order patterns normalize and customer visibility improves. The biggest improvement in orders comes from our specialty and sustainable products that assist our customers in achieving goals like water reduction. We are committed to developing sensible, sustainable solutions across our textiles and all our portfolios. We expect to report volume and revenue growth again in the first quarter, which will help offset rising raw material and supply chain costs, resulting in our adjusted EBITDA being slightly above last year's figures.

Thank you, Peter. Turning now to Slide 7. We were pleased to see a strong recovery in the fourth quarter with overall volumes not far from where they were a year ago. The volume decline is largely due to aerospace within our Advanced Materials segment. Margins were stronger, mostly resulting from higher prices in Polyurethanes. Fixed costs were lower largely resulting from cost suppression and ongoing cost reduction initiatives. Turning to Slide 8. We ended the year with approximately $3 billion of liquidity, including approximately $1.6 billion of cash. We received approximately $257 million of cash from the sale of our India-based DIY business. We may receive up to an additional $28 million in earn-out dependent upon achieving certain revenue targets in line with 2019 levels. We also completed the sale of 42.4 million shares of Venator, including a 30-month option for approximately $100 million. The option is exercisable with respect to 9.7 million shares for up to 30 months. The sale of our Venator shares unlocked immediate cash tax savings of approximately $150 million by offsetting the capital loss on the sale of Venator with a capital gain from the sale of our chemicals and intermediates business completed early in 2020. We also completed a sale and leaseback arrangement for a property in Basel, Switzerland that generated approximately $73 million in cash. This site is primarily for administrative and technical R&D. I would like to point out that we have been efficient in our tax planning that has allowed us to minimize leakage on our recent divestitures. With respect to our sale of our chemicals and intermediates business, tax leakage was approximately 12%. For the sale of our India DIY business, leakage was approximately 10%. With respect to our sale and leaseback on our Basel site, tax leakage was negligible. In January of this year, we completed the acquisition of Gabriel Performance Products for $250 million that further strengthens our coatings and adhesives footprint within our Advanced Materials business. Our balance sheet is as strong as it has ever been with a net leverage ratio of 0.8x adjusted EBITDA or 1.2x pro forma for the Gabriel acquisition. Pro forma net debt stands at about three quarters of $1 billion, leaving us well under 1x levered normalized EBITDA. In January of this year, we redeemed in full €445 million or the U.S. dollar equivalent of $541 million at par. This will have the effect of reducing annualized cash interest by approximately $26 million. For 2021, because of the timing of associated interest payments, the savings is approximately $19 million. For 2021, we estimate our full cash interest spend to be approximately $84 million. With respect to capital expenditures, we spent $249 million during 2020, near our guidance level. Included in this was approximately $54 million for our urethane splitter at Geismar, Louisiana. The splitter is still on target for completion in mid-2022. We expect to spend approximately $80 million this year and approximately $30 million next year. In light of the $73 million of cash generated in the fourth quarter of 2020 for the sale and leaseback of the Basel, Switzerland site, we expect to reinvest this capital in strategic high-return projects within our downstream footprint. These projects represent high growth opportunities that will further enhance our growth platforms within our downstream businesses. The incremental spend in 2021 associated with these projects will be approximately $30 million. Combining all this together, we expect to spend between $320 million and $330 million in capital during 2021. As our splitter spend rolls off in 2022, we would anticipate spend for 2022 to be approximately between $275 million and $300 million. Now onto free cash flow. On our last earnings call, we indicated that we did not expect a typical release of working capital within the fourth quarter in light of already low inventory levels and our anticipation to build inventories ahead of the Rotterdam, Holland turnaround that happens every four years and that is scheduled for March-April this year. We believe that the fourth quarter would be a use of cash, and we therefore guided to a 2020 full-year modest positive free cash flow. As it turned out, we actually ended the year with a much stronger adjusted free cash flow of $285 million and an adjusted free cash flow conversion of 44%. In contrast to the vantage point we had at the time of our last call, the actual overall recovery within most of our businesses has been much stronger, particularly within Polyurethanes. As already shared by Peter in light of the fourth-quarter Geismar outage, coupled with the increasing polyurethanes demand, we were unable to build inventories in 2020 as previously targeted. All of our businesses ended the year with lower inventory levels than we had anticipated. With respect to receivables, although sales recovered stronger than anticipated, we achieved some of the best metrics we have ever achieved or experienced on managing accounts receivable. Now with respect to payables, we saw continuous improvement in the days payable outstanding. Combining all this together, along with higher than expected EBITDA, we were pleasantly surprised by the better than expected free cash flow results. Looking ahead into the first quarter of 2021, as Peter previously mentioned, we are trying to build inventories, particularly within Polyurethanes. We, therefore, anticipate a larger than normal first-quarter seasonal build, with a significant build in net working capital in quarter one. Our expected free cash flow is expected to be more negative than seasonally normal. However, net working capital should release as the year progresses, and we expect to end the year with a reasonably modest overall build in net working capital as we reach more normalized levels of inventory. Within the first and second quarters of 2021, we estimated an incremental cash spend of around $40 million associated with the Polyurethanes Rotterdam turnaround. With respect to our cost realignment optimization and synergy plans, we spent approximately $27 million in 2020, and we expect to spend approximately $70 million in 2021. Each of these plans are on track and will deliver a combined annualized benefit in excess of $120 million by mid-2023. Given the temporary elevated spending CapEx, cost realignment, and optimization plans, and dependent on many variables including but not limited to the overall macroeconomic environment, we target a 2021 free cash flow near 20%. Keep in mind that for five years in a row now, Huntsman has generated an excess of 35% free cash flow. The challenges of 2020 only made us better. We have a stronger balance sheet and a better platform of businesses for growth. We are committed to maintaining a strong balance sheet and delivering strong free cash flow. Peter, back to you.

Thank you, Sean. As we say a robust and heartfelt good riddance to 2020, it is worth pausing and reviewing a bit of our past before looking forward. Above all else, I'd like to recognize our Huntsman associates around the world. They've been outstanding. They’ve stayed focused on our safety and operating reliability. I am both humbled and proud to be associated with each and every one of them. We exit 2020 a much stronger company than when we started. Through six transactions, we have made meaningful progress in improving our business portfolio. We are on track to deliver in excess of $120 million of annualized synergies, cost realignment, and business optimization savings by mid-2023. We delivered strong free cash flow and have a balance sheet that will serve our objectives well as we move into the coming years. Looking into 2021, the year has started off strong, continuing on from the robust momentum of the fourth quarter. It is difficult to parcel out just how much of the growth in demand may be due to supply chain and inventory restocking purchases ahead of expected price increases or just a flat-out insecurity of availability of supply due to imbalances in shipping and logistics. However, I'm convinced that we are seeing true and underlying fundamental improvements in demand for our products. We are seeing a two-speed economy. A huge section of our GDP related to travel and aerospace, hotels, restaurants, entertainment, bricks and mortar retail, and tourism are still hurting. On the other hand, we're seeing a growing demand for automotive, construction, infrastructure, and greener and renewable products. I compared the upheaval of our society last year as being akin to the Whiskey Rebellion of 1791. Now, it just seems that not only do you need a good shot of whiskey to make sure you haven't lost your taste and smell but also to try to make sense of the seemingly ever-changing economic, political, and regulatory environment. While we have a pretty good view of the first quarter of 2021, as we go further into the year, our vision gets a bit more hazy. Given the fourth quarter of 2020 and seemingly strong first quarter of 2021, we have plenty of reasons to be optimistic for the remainder of the year. However, there are a few areas that I would like to call out as giving me more encouragement than I otherwise would feel. In our automotive business, we are seeing strength as many people are abandoning public transportation. There's also dozens of new EV and more fuel-efficient internal combustion engine vehicles coming into the market. Since nobody has a large position in ICE vehicles, we see even greater opportunities in electric vehicles, whether it is battery technology using our carbonates, semiconductors using our amines, electric motor casings using our Advanced Materials, or our low VOC polyurethane applications in seating insulation and light weighting. Another macro trend we think continues is construction and remodeling. With record low interest rates and perhaps the largest migration of people moving out of large congested and poorly run cities in the past 50 to 60 years, we think this will be stronger relative to the rest of the economy. Whether it is the electronics needed for smart houses, structural OSB, energy conserving insulation, or our maleic moving downstream to the growing UPR markets, we are well-positioned to not only supply the needs of today but welcome and encourage higher building standards around green applications. As poorly as the aerospace industry performed this past year, we are seeing some forward movement in inventory. We continue to believe that this will be a long and rocky recovery, but we will see improvements throughout this year. We will also play a vital role in infrastructure and a greener and less of a carbon footprint economy. Our pipeline of innovation will see us taking advantage of more powerful batteries, carbon capture, building out and expanding power grid, light-weighting vehicles in transportation, strengthening, and cutting emissions from everything from concrete to asphalt to textiles. Similar to 2020, we're going to be focused on upgrading our portfolio. This will likely include further divestitures and acquisitions. Our focus will not be about slowly adding more tonnage, but as much as increasing our margin and improving our cash flow. In short, 2020 was something of a transformative year for us. 2021 has the potential of taking the company to far greater levels of transformation and value creation. With that, Jessie, we've concluded our prepared remarks and we'll turn it over to questions and answers.

Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. Our first question is coming from the line of Bob Koort with Goldman Sachs. Please proceed with your question.

Thank you very much. Peter, I think in the past when we've had some very strong MDI markets, you talked about some level of fly up and you talked about maybe a little bit of softening from where we were in the back half of '20. Can you help us quantify what you thought might have been some excess profitability there, or is it the sort of glide path through '21 would be for the MDI business?

Bob, it's an excellent question. I think that as we look at the run up of the component businesses, I'm kind of struggling to think just how much of that was a tightness due to one-time events and how much of that was due to planned outages. I would think that the majority of the excess, if we want to call it fly up that took place in the fourth quarter, certainly took place in Asia and then secondarily, a bit of it in Europe, probably around $40 million to $50 million in the fourth quarter would be our best estimate. But I would say that as we look at the margins in the fourth quarter of 2020, particularly the Asian margins and we compare that to where it is today, it has stayed flat going into the first quarter. And we've actually seen margins improving on the component side of the business in Europe. So, our biggest challenge in the first quarter as I see it is not going to be around necessarily demand and pricing. I feel pretty optimistic as far as I can see in the first quarter on those things. It's going to be around the timing of the turnaround that we have in Geismar. We have a single line that was pushed into Q1 and mostly into Rosenberg. The issue that we have in Rosenberg, of course, is that this is a cluster turnaround which means it could result in a – well, okay, it's a cluster turnaround and we are only going to be able to restart as fast as everybody else in that cluster is able to restart their facilities. And the last time we had this a couple of years ago, as you'll remember, we gave it an estimate we were ready to go, we were ready to start up our facilities and we kept having utility issues and steam issues and chlorine issues with some of the other associated production facilities that, again, were not Huntsman size. So we can only operate in these sort of turnaround situations as fast as the slowest person can come up to speed. So again, we're optimistic. We think we've done all the planning we can do to make sure these are successful and timely T&Is and we've also got to make sure that we have adequate inventory built up to be able to supply customers during that timeframe. So sorry, long-winded answer there but I think that we're seeing the momentum from pricing and margins continuing in the first quarter.

Thank you. Our next question is coming from the line of Kevin McCarthy with Vertical Research Partners. Please proceed with your question.

Good morning. Peter, you were kind enough to give us a forward outlook for EBITDA by segment. As I roll all of that up and make some assumptions, it seems as though you're steering the Street to about $250 million or so for the first quarter. Is that fair or would you endorse the over or the under on that level?

I would say that’s a very fair assessment, Kevin. The single biggest variable I see right now is the amount of T&I work we have. Some of that is within our control, particularly at Geismar, while other aspects are outside of our control. I think that's likely to be the biggest variable. I would expect that during investor conferences and similar events throughout the quarter, we would definitely want to update the market on that.

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

Hi. Good morning. I wanted to ask about the Polyurethanes question from a different angle regarding the fourth quarter compared to the first quarter. As I noted the various factors affecting both quarters, it seemed to me that operationally they would be quite similar when you look past the different influences. Historically, the second quarter tends to be better than the first quarter. However, last year was an exception. Given that predicting the future is uncertain, is there anything we should consider? I apologize; it seems we've lost you. It appears you may have disconnected from the call. We'll now move to our next question from David Begleiter with Deutsche Bank. Please go ahead with your question.

Thank you. Just on capital allocation, how is the M&A pipeline and how are you thinking about share buybacks with this newfound financial strength here? Thank you.

I'm sorry, David. Regarding your first question about the M&A pipeline, I would like to reiterate that we aim to continue exploring both divestitures and acquisitions as we move into 2021. I do have some concerns about asset prices. My experience in this industry has taught me that these trends can vary significantly over time. I try to align potential divestitures with acquisitions, but that doesn't always happen. We are monitoring a few opportunities, but I want to ensure that we don't overpay or act too aggressively. Looking at share buybacks, everything is under consideration. We'll evaluate our capital against our internal projects, M&A possibilities, and potential share buybacks. Personally, I am inclined to prioritize M&A as I believe the company needs to expand and grow. However, that must be done thoughtfully and not at any expense. We will carefully weigh all these options.

Thank you. Our next question is coming from the line of Laurence Alexander with Jefferies. Please proceed with your question.

Hi, guys. This is Dan on for Laurence. How are you?

I’m well.

The semiconductor shortage has been noted by others as having an effect on the auto industry. I was wondering if you guys are seeing any effect on your demand trends as well.

I’m sorry. Can you repeat that question?

Sure. The semiconductor shortage has been noted by other people who serve the auto industry as a headwind. I was wondering if you're seeing that at all.

Yes, I’m going to turn that over to Tony Hankins, because most of what we sell in auto comes out of Polyurethanes. I've not heard anything on a material, just anecdotally. But Tony, anything more specific?

No, Peter. The impact has been really de minimis. We will see no effect in China. We’ve seen a little bit in Europe, but nothing of a material nature. Our automotive sales continue to be very strong in all three regions.

It’s fair to say that the majority of our automotive sales are in Europe. And I think that a lot of this is seemingly, at least at this point, is hitting U.S. manufacturers.

Thank you. Our next question is coming from Frank Mitsch with Fermium Research. Frank, please go ahead and repeat your question.

Hi. I really apologize. It was just the exact timing that I had to do my taste and smell test for coronavirus, so apologies for that.

Good one. That’s onto the hour again.

Exactly, but I did pass. So that's the good news. I was trying to get to the point that historically, your fourth quarter and first quarter appear to be aligned when you consider all the ups and downs, and typically, your second quarter in Polyurethanes performs better than the first. Of course, that was not the case in 2020 because of the pandemic. Is there anything you can highlight at this moment that might influence whether the second quarter will be better than the first quarter in Polyurethanes, knowing that you have some uncertainty in that prediction?

I think as we look at the second quarter, it's really the impact of the T&I that has this – and it feels like the markets are really strong right now. And I would have said a quarter ago that fourth quarter probably will diminish a bit than first quarter and first quarter. It looks like we're heading into second quarter with some really strong momentum. We did point out I think in the call that we think that there will probably be a little bit lower margins and component prices in China. But again, that's yet to be seen. Look, just because we're – as we feel that, that doesn’t mean that we're going to go out and force that to happen. If the volume is there, the demand is there and the pricing is there, we will be taking advantage of it. We'll be leading it and then we'll be supporting it.

Thank you. Our next question is coming from the line of Aleksey Yefremov with KeyBanc Capital Markets. Please proceed with your question.

Thank you. Good morning, everyone. Peter, you mentioned that various outages in the MDI industry benefited margins in the fourth quarter. If you look at the state of supply and demand today, do you see any large unplanned outages that are sort of abnormal and affecting the level of prices in mid-February?

I think that there are a number of facilities that have been publicly spoken about. There's some capacity in Japan where there have been some operating problems, and I think they recently have come back into the market. And then there's a facility in Ningbo and I think that there was some talk from BASF publicly about 400,000 tons being offline. I think those projects are supposed to be coming up sometime this month. The market as of right now, today, it still feels very tight. There's also been some further postponement of another 400,000 kilotons in China that have been postponed into later in the year. And, of course, our nearly 500,000 metric tons will be down for 42 days as we look into the March-April timeframe. So I think that as we look at these T&I, I think that we probably need to differentiate between what happens. It's unexpected and how much of it is planned? I think the majority of what we've been saying is planned. I think as we look around global capacity utilization rates right now, certainly in the U.S., we're importing materials. I think as an industry, we're importing materials right now. We're structurally short. Europe seems to be very tight, probably operating in somewhere in the low 90s. And Asia is probably somewhere in the mid to upper 70s. And I think when you take that on a global basis, you're operating somewhere around a 90% capacity utilization. When you take that and you take the stated nameplate capacity of the MDI market, I think that 90% capacity utilization is probably about as well as the industry can do when you factor in all of the scheduled T&Is and so forth that have to take place on an annualized – semi-annualized basis.

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

Good morning, Peter.

Good morning. How are you?

I’m very well, Peter. Thank you. Peter, again, revisiting Polyurethanes, but more on the demand side of things and just beyond sort of, call it, Q4, Q1, you alluded to some sort of regulatory sort of trends as well as demographic trends being sort of decent tailwinds to overall demand. As I took a look at Q3, obviously, year-on-year, volumes were down quarter-on-quarter and year-on-year around 3%. And typically, this is an industry that grows at, call it, 6% to 8% demand-wise. So my question is, with the rollout of the vaccine and the like, hopefully, the world does normalize a bit. And in this sort of reversal to normalcy, where do you see trend demand growth for Polyurethanes now, keeping some of those demographic, regulatory, and secular changes in mind?

I believe the two key areas I mentioned earlier, concerning building solutions and the automotive sector, are significant. We've recently secured the Tesla EV contract in China, which, although it may not be as large in volume as other contracts, is substantial given the potential impact it may have on the market in one to two years. As the new administration aims to effectively reduce CO2 emissions, focusing on building insulation and relevant regulations presents a promising opportunity. We are collaborating with stakeholders in this administration and believe there is a chance to promote a greener footprint in society, aided by our product solutions. Overall, I'm very optimistic about the next few quarters and years. However, I recognize the challenges posed by certain political decisions and macroeconomic trends that have affected society. Therefore, I prefer not to make precise short-term forecasts but see a more favorable outlook over the next year or two.

Thank you. Our next question comes from Mike Harrison with Seaport Global Securities. Please proceed with your question.

Hi. Good morning. I was wondering if you can talk a little bit about the ethylene amines business. It sounds like margins are stabilizing there and maybe there's some improvement coming. But maybe a little more color on what you're seeing in terms of demand trends and some of the competitive dynamics there.

Yes, I believe we are observing an improvement in that market. When we consider the end-use markets, they primarily include fuel and lubricants. If a company introduces a new fuel detergent or an enhanced lubricants package, it will feature the additives typically found at gas stations or in lubricant products. These are the main markets for our business. As driving and traveling increase, and as more people return to their normal routines and workplaces, we expect to see rising demand and better opportunities to enhance margins in this area.

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

Yes. Hi. Good morning. Peter, your new SPF insulation with recycled PET materials, what is the customer uptake on that product? How do you price it? And is it cheaper to produce? And then just one more quickly on ethyleneamines. You mentioned weakness there. What's causing that? Is there more supply from Satara that has impacted that market? Thank you.

I believe we are seeing continued improvement in the market as some capacity has been shut down and absorbed, while new capacity has been introduced over the past couple of years. Overall, the market appears to be more balanced now than in recent years, with most players operating at near capacity, leading to increasing margins and prices. This should serve as a tailwind for us. However, it’s important to note that this isn’t the primary driver of Performance Products or our corporate EBITDA. While I appreciate the improvement, our focus remains on our core products like specialty amines and maleic anhydride. Regarding the pricing and cost structure of our polyurethane foam, it's a question I frequently pose to Mr. Hankins, particularly about why we cannot achieve higher prices for our excellent recycled foam insulation products. Tony, would you like to add something to that?

PJ, good morning. Thank you, Peter. Yes, we’re selling the spray foam formulation made from our MDI and TEROL technology polyols. We can now recycle up to 60% of post-consumer scrap from PET bottles into that formulation, making it very competitive. We manufacture at two facilities, one in Houston and one in Taipei. In North America, we're experiencing strong growth of around 25% in our spray foam application. We’re also making significant progress in Asia with the growth of spray foam TEROL in Taiwan. It competes well with the recycled content, and we position it as a high-quality premium product. This segment of our business is performing well, and we have strong optimism for the future of TEROL and the HPS applications.

Yes. I want to point out that in 2019, we had no international EBITDA in that business. In 2020, despite the impact of COVID, we achieved $8 million in EBITDA. This year, we expect to potentially double that figure in the international insulation markets. We are particularly excited about the globalization of that aspect, especially in the North American market, but we also see significant opportunity for growth in international markets.

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

Thank you. Do you think your new portfolio can carry higher leverage than the old portfolio so that we might see deployment of even more than the divestment proceeds?

I think that could be a possibility, but I’m not entirely sure that's the route we should take just because we can. More importantly, we want to stick to that 2x EBITDA normalized debt level. We've made that commitment to the market. If we were to go beyond that 2x EBITDA, at least from my perspective right now, we would need a very clear and swift plan to either sell an asset or take some action to return to that 2x EBITDA. However, we need to find a balance between growth and investment opportunities. Given the cash we are generating, I believe we can manage both. We continue to acquire assets, reshape our portfolio, and maintain a strong balance sheet.

Thank you. Our next question comes from Matthew Blair with Tudor, Pickering, Holt & Co. Please proceed with your question.

Hi. Good morning. Peter, with understanding it’s the Board's decision, how do you feel about the prospect for a dividend increase in 2021?

Well, I think it's something that the Board certainly needs to be talking about. Matthew, to be honest with you, I probably better not comment one way or the other on that one, because I just see myself getting in trouble. But it is something that we want to continuously evaluate. And on a quarterly basis, at our Board meetings, we do look at the chemical industry in general and we want to make sure that we are competitive with our peers. We certainly don't want to be the highest, but we certainly don't want to be anywhere close to the lowest. So that's something that we're going to continue to be evaluating on an ongoing basis.

Thank you. Our next question comes from the line of Matthew DeYoe with Bank of America. Please proceed with your question.

Hi. Thanks for taking my question. So there's been some positive talk about free cash flow progress, but your 2021 guidance of 20% conversion isn't particularly robust I guess when we look at peers and where we are on the polyurethane cycle with some of the fly up. So I guess what's holding cash flow back in 2021 I guess ex the CapEx uptick which makes sense and what you've talked about?

Yes, I'll take that one. This is Sean. Look, if you think about some of the projects we've explained in our script today, you'd see that if you add those back, we actually are looking at above 35% free cash flow year in 2021. So I actually feel that we're on track with what we've said. What we've done is we're in the biggest spend year of our project in Geismar, Louisiana, the splitter, and that's an $80 million spend. We also have announced some usage of $70 million of proceeds. We just got to sort of accelerate some of the growth in our downstream business that you can't buy, that you have to build yourself. And so we added $30 million this year to CapEx. And when you tie in the optimization spend that we're spending this year to get that $120 million of savings on an annualized basis, you put all that together, you're taking that kind of near 20% up to about 35%. So I feel we're right on track.

Thank you. Our next question comes from the line of Angel Castillo with Morgan Stanley. Please proceed with your question.

Hi. Good morning. Thanks for taking my question. Peter, I was just hoping you could unpack a little bit more on the Advanced Materials segment in your outlook and what you're seeing. From an end market perspective, you talked about aerospace. But if you could touch on some of the other end markets that you have, then what you're seeing. And on top of that, I guess I was also wondering, you talked about that segment as a core platform for growth in M&A and there's a lot going on right now with some of the acquisitions that you've recently done. So curious from a capacity perspective, operationally, is there any constraints as to limitations as to how much more M&A you can do kind of in the near term for that segment? Do you kind of take a pause until you've done Gabriel fully integrated or is there an opportunity to do something kind of near term still?

I think, Angel, that that's an excellent question. I think that as we look at Advanced Materials, in the script, we talked about it being a platform for internal investment and organic expansion. And so I think that we see a lot of opportunities, particularly around power and around electronics. So when you think of the power grid system that has to be built, if you're going to be connecting all of these windmills and solar plants and all of these new sources of electricity, the build-out of a smart grid or just the addition of a dumb grid, I guess, either one of those, a smart grid or a dumb grid, we're going to be involved in the build-out of the electronic infrastructure; the power lines, the transformers, and so forth. That's a very profitable end of our business. And then we also look at the electronics side of what we're doing. This is an area as well when you think about the shortages that are taking place around the automotive industry and from the excellent questions earlier asked, and you look at the average electric vehicle, it's going to take 4x the amount of semiconductor capacity as an ICE vehicle. So as you look at those end-use applications, I think that those are all areas of growth and a lot of what we're going to be doing in Advanced Materials. These are new fields. As we look in our Performance Products and we look at expanding some of our products that we'll be going into battery technology, these aren't areas where you go out and you buy competition because nobody's doing it right now, and we think that we've got an expertise, a lot of the amines that potentially will be used for carbon capture and sequestration. We've talked in the past about our ability to produce nanotechnologies around carbon and as part of carbon capture and so forth. A lot of these areas are areas that we have technology, we have knowhow and we want to develop these end-use markets. And we think that with this transition going into this greener economy, not only will there be some sort of a subsidy and help in doing some of those sorts of things through taxes and so forth, but we think that the markets will be there as well. So when we talk about internal opportunities for Advanced Materials and Performance Products and the other divisions as well, we see real opportunities there. But again, I'd also just say that with the recent acquisitions we've done, areas around curing agents and coatings, again, we have an opportunity to take those acquisitions and to give our existing customer base and our expanding customer base a wider portfolio of services, products, formulations, components. And I think that as I look at Advanced Materials, yes, I see it as a potential platform for more M&A. But I'm especially excited to see about what it could do by improving the bottom line, by integrating what we've purchased, by becoming more streamlined in the cost, and by capitalizing on small but manageable expansions that we’ll be going into new and bolder opportunities going forward.

Thank you. Our next question comes from Arun Viswanathan with RBC Capital Markets. Please proceed with your question.

And operator, given that we’ve come to the top of the hour, this is the last question. Thank you everybody for having joined us this morning.

Thank you, Peter, and I appreciate you taking my question. I'm trying to understand your overall perspective. Based on the guidance provided, it seems like Q1 EBITDA is around $250 million. You've mentioned that typical annualized earnings might be around $925 million in terms of EBITDA, and it appears you've already recuperated most of that. Could you elaborate on how much of your portfolio is still underperforming, or do you believe you've fully recovered? Does the current run rate for the quarter suggest a projection of $1 billion for the year? Is that an accurate assessment of your situation?

I want to be clear that I’m not fond of making macro predictions. However, if 2021 continues to mirror the performance seen in the fourth quarter of last year and the first quarter of this year, we can expect demand and margins to remain strong. This gives me confidence that we are returning to the normalized range we’ve discussed. However, I should note that we have some turnarounds and expenditures already identified. Additionally, there are still significant funds to deploy and opportunities for synergies and consolidations within our operations, which will unfold over time. When we evaluate our position from 2018, the $1.1 billion to $1.2 billion level plays a role in our recovery back to a normalized rate. This recovery involved synergies and cost optimizations, though it’s uncertain if all will be accomplished this year. While I hope to see this completed within the year, it may take up to two years to fully realize. If demand persists and margins remain at current levels as we transition into the second quarter, I would feel even more optimistic about our prospects for 2021. I want to address certain analysts' reports suggesting that we may not be as optimistic as our competitors. It’s important to focus on our ability to capitalize on market conditions. Being less bullish than others does not imply that we will lower our prices or negatively impact the market. We are in a position to leverage pricing and expand margins throughout the year. If the economic outlook maintains the positive trajectory we experienced in the first quarter, it is poised to be an excellent year for us. We are prepared to fully capitalize on that opportunity through our recent acquisitions, ongoing cost-cutting measures, and further advancements downstream. Thank you for joining us this morning, and please reach out to Ivan and our IR group if you have any questions or comments. Thank you.

Thank you.

Ladies and gentlemen, this concludes today's teleconference. Once again, we thank you for your participation and you may disconnect your lines at this time.