Huntsman CORP Q3 FY2021 Earnings Call

Greetings and welcome to the Huntsman Corporation Third Quarter 2021 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 of Investor Relations. Thank you. You may begin.

Thank you, Jesse and good morning everyone. Welcome to Huntsman's third quarter 2021 earnings conference call. Joining us on the call today are Peter Huntsman, Chairman, CEO, and President; Phil Lister, 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 of 2021 via press release and posted it to our website huntsman.com. 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 diluted 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 to our website, huntsman.com. I will now turn the call over to Peter Huntsman, our Chairman, CEO, and President.

Thank you very much, Ivan. Good morning everyone. Thank you for taking the time to join us. Let's turn to slide number three. Adjusted EBITDA for our Polyurethanes division in the third quarter was $246 million versus $156 million of the year ago. Our Polyurethanes business EBITDA growth was primarily a result of a 2% year-on-year total volume increase and improved margins. Total volumes would have increased 5% had it not been for Hurricane Ida disrupting our Geismar, Louisiana operations in the third quarter. Our differentiated volumes increased by 4% in the quarter, led by our insulation, including spray foam and elastomers, and adhesive businesses. Our core construction markets, including insulation, adhesives, and coatings continue to be the strongest markets for polyurethanes. The North American insulation businesses include spray foam and our composite wood products business. These remain strong as we see solid residential and commercial construction spending. Our Huntsman Building Solutions business continues to benefit from strong demand and market share gains. HBS revenues were well above the prior year and on track to exceed $575 million for 2021, combined with margins approaching 20%. The backlog of our order book for spray foam remains strong. The price increases that we implemented during the quarter are helping to offset higher raw material prices and logistical costs and challenges. Further, our efforts to expand internationally continue to gain momentum and are contributing ahead of our expectations. We remain very positive about this platform, and we'll look to add to it with bolt-on acquisitions and organic investments when feasible. Our elastomers, which includes our global footwear business, is another core growth platform for Polyurethanes and it continues to see strong recovery trends globally. This platform is implementing price increases globally to offset the headwinds in raw materials and supply chain costs that are pressuring margins. Our global automotive business is being hindered by the chip-related shortages that are reducing automotive production. We believe that these challenges will eventually be worked out, and that low inventories and strong underlying demand globally could drive higher production rates for several quarters once the supply chain issues are resolved. Fortunately, global demand in our other markets is strong, and we were able to redirect volumes originally intended for our automotive market into markets utilizing similar formulations and margins. Polyurethanes' strategy is to upgrade the quality of our portfolio. We will continue to redirect more of our plants' output to our differentiated businesses and cut lower-margin component business. We will invest in our downstream businesses organically and where it makes sense through bolt-on acquisitions. Where we can generate higher and more stable margins through long-term contracts in our component business, we are doing so. Our splitter investment in Geismar, Louisiana is consistent with this strategy, helping to drive our downstream growth and increasing overall margins. This project will start up in the second quarter of 2022 and once fully operational and selling at capacity, it will contribute $45 million in incremental adjusted EBITDA on an annualized basis in 2024. Our PO/MTBE joint venture with Sinopec in China, where we own a 49% interest, continues to benefit from above-normalized margins and is driving above-average equity earnings. As we said last quarter, the equity earnings contribution will be lower in the second half versus the first half of this year. We expect the fourth quarter to be lower than the third quarter by between $10 million to $15 million. While many countries and economies remain hobbled by COVID and Europe and Asia grapple with unprecedented high energy costs, the underlying fundamentals of our MDI global markets remain strong. Globally, industry MDI demand continues to grow at rates higher than GDP. Limited capacity will be added, particularly in North America and Europe. Our downstream pull-through of MDI will allow us to generate less capital-intensive, less volatile, and higher-earning MDI formulations. As I've said in the past, this is not necessarily about more MDI but higher value-added MDI. Looking into the fourth quarter, except for automotive, we see general demand fundamentals in most of our core markets remaining solid. The typical seasonality in our construction markets and lower joint venture equity earnings lead us to expect our Polyurethanes fourth quarter adjusted EBITDA to be between $200 million and $220 million. Let's turn to slide number four. The Performance Products segment reported adjusted EBITDA of $103 million for the third quarter. Volumes are back to our pre-pandemic levels in most of our core markets and increased 24% versus the prior year's period. Improvements in commercial excellence, including pricing initiatives, good cost controls have helped to offset the higher raw material costs and supply chain headwinds. Positive demand fundamentals in amines used in coatings and adhesives, polyurethane catalysts, and fuel and lubricants are also helping to drive higher profitability. Construction demand is having a favorable impact on maleic anhydride volumes sold into UPR as well. While this division is benefiting from favorable market conditions and tightening in certain products, the significant improvements are coming from an increased focus on the existing businesses since the sale of the upstream commodities and surfactant businesses in early 2020. Prior to the sale, the business prioritized moving volumes to keep large plants running at high utilization rates. Today, the business is focused on the two remaining businesses, amines and maleic anhydride, including the targeted growth in our specialty amines, carbonates, and catalysts while driving commercial excellence across the entire segment. This focus on value over volume is generating higher quality of margins. As we stated in the past, we will look for bolt-on acquisitions to spur downstream growth, but those opportunities tend to be infrequent in Performance Products. Inorganic growth opportunities inside, we are investing in high-return projects that will increase in attractive markets such as electric vehicles, electronics, and polyurethane catalysts. During the third quarter, we announced an expansion of semiconductor-grade specialty amines at our Conroe, Texas facility for the electronics market. We also announced an expansion of JEFFCAT's polyurethane catalysts at our Petfurdo, Hungary site. We look forward to highlighting these new investments and this changed business at our upcoming Investor Day. While we do expect some typical seasonality in the fourth quarter, we see solid momentum in this business. We currently expect Performance Products to report a fourth quarter adjusted EBITDA of $95 million to $100 million. Let's turn to slide number five. Advanced Materials reported EBITDA of $48 million in the quarter, significantly above last year's third quarter, driven primarily by improving demand in our core aerospace and industrial businesses and contributions from our recent acquisitions. While improved year-over-year adjusted EBITDA for the division did fall slightly short of our expectations, this shortfall can be explained by higher-than-expected raw materials and supply chain costs that were not fully offset by price increases, and logistics challenges that resulted in some sales being delayed into the fourth quarter. Further price increases are currently being implemented, which we expect will result in improved margins in the fourth quarter. Aerospace sales and earnings remain below pre-pandemic levels, steadily improving as they recover. As a reminder, our business has the largest exposures to wide-body aircraft production, which will likely lag the overall industry production rates until there are significant improvements in intercontinental and long-haul travel. The integration of last year's acquisitions remains on track. We remain confident that the $23 million of synergies will be completed in 2023. The underlying demand for the Advanced Materials division is tracking well. As aerospace recovers, we expect this division to consistently generate adjusted EBITDA margins of 20% or better, like it had in the last five years prior to 2020. We will continue to grow this division organically through targeted bolt-on acquisitions. We expect typical fourth quarter seasonal slowdown in earnings to be relatively muted this year due to a combination of sales order backlog caused by challenged global supply chains and forthcoming increases in prices. As a result, we expect fourth quarter adjusted EBITDA to be between $47 million and $54 million. Moving to slide number six. Our Textile Effects division reported an adjusted EBITDA of $21 million for the third quarter. Total volumes in this division are now back to above pre-pandemic levels, driven by specialty volumes, which are up 8% compared to the third quarter of 2019. Our specialty products are winning market share with our customers as well as global brands and retailers looking for ways to reduce waste and increase transparency in the supply chain. As these groups make more meaningful commitments to improve their environmental and social footprints, we would expect to see our leading specialty and sustainability products continue to grow. Looking towards the fourth quarter, we continue to watch for increased restrictions in our core Asian markets and disruptions in the global textile supply chain. In addition, we are raising prices to help offset rising raw materials and supply chain costs. Nevertheless, we expect adjusted EBITDA to increase year-over-year and to be in the $20 million to $22 million range. Before some concluding remarks, I'd like to turn a few minutes over to Phil Lister, our Chief Financial Officer.

Thank you, Peter. Turning to slide seven. We are pleased to see a continuation of a strong recovery in earnings. Adjusted EBITDA for the quarter was $371 million. Adjusted EBITDA increased by $183 million year-over-year and by $37 million or 11% quarter-over-quarter. We were particularly pleased with the continuation of the strong adjusted EBITDA margins in our Performance Products division. We're investing organic growth capital into this division with a determination to maintain adjusted EBITDA margins above 20%. Overall, our volumes grew by 8% with recovery across the majority of our businesses since 2020. Gross profit margin improved substantially over the prior year period despite severe increases in raw materials year-on-year, increases which continue into the fourth quarter as energy costs, driven by natural gas, rise around the world. Since 2017, we have divested approximately 40% of our prior portfolio, with one of our primary objectives being to deliver more stable earnings than we have in the past. Our adjusted EBITDA margin was 16% for the third quarter, and we have now delivered three consecutive quarters of margins of 16% to 17%. We remain focused on improving our adjusted EBITDA margin beyond these levels. Let's turn to slide eight. A reminder that we have an ongoing acquisition synergy and cost optimization program which we began in 2020. We expect to have delivered approximately $90 million by the end of 2021, of which half is SG&A. We initially targeted $120 million of total improvements by 2023 and now expect to deliver approximately $135 million, of which $60 million is SG&A and the remainder is improvement to gross profit. We remain focused on controlling SG&A. Since 2019, we have offset increased SG&A from bolt-on acquisitions with our cost-saving initiatives. Those acquisitions, combined with overall improved business performance, have increased our top-line revenue and driven SG&A as a percentage of sales to just below 9% in the third quarter. Turning to slide nine. Cash flow from operating activities was $186 million for the quarter, with free cash flow at $110 million as we continued with our Geismar MDI splitter investment. We expect to spend approximately $350 million in 2021 on capital expenditures, with reduced spending in 2022 as the splitter project rolls off and the new Performance Products projects ramp up. Primary working capital has risen substantially during the course of the year from the low point of 2020 as the business has recovered. We continue to control our working capital in this inflationary environment, with our working capital to sales levels at the end of quarter three below the same time periods in 2018 and 2019. The amount of inventory we hold on our balance sheet declined versus the second quarter, while our accounts receivable balance trended significantly higher as we increased average selling prices further. We now expect free cash flow for the full year to be between $250 million and $275 million or approximately 20% free cash flow to EBITDA conversion, due to working capital headwinds. With lower working capital inflation in 2022, combined with lower capital expenditures and lower turnaround cash costs, we remain confident in our target of 40% free cash flow for EBITDA conversion next year. Our adjusted effective tax rate for the quarter was 15%. During this quarter, we were able to increase certain U.S. tax benefits associated with providing export goods and services as a one-time opportunity. Our expected long-term tax rate under current tax law remains between 22% to 24%. Regarding capital allocation. In the two years prior to the global pandemic, Huntsman returned approximately 7% per annum of our market capitalization to shareholders, comparable to peers in the industry through a balanced approach to dividends and share repurchases. We then placed our share repurchase program on hold during the depths of the pandemic. Earlier this year, we increased our dividend by 15%, and we indicated on our second quarter earnings call that we would restart our share repurchase program in the second half of this year. During the third quarter, we repurchased approximately $102 million of shares at an average share price of $25.64, with those purchases occurring during August and the first three weeks of September. We have approximately $318 million remaining on our current Board-authorized share repurchase program of $1 billion. We remain intensely focused on a disciplined and balanced approach to allocating capital to maintain our investment-grade balance sheet, invest in attractive organic and inorganic growth opportunities, and return capital to our shareholders, including through share repurchases. Peter, back to you.

Thank you, Phil. Given that our Investor Day is a little over a week away, I shall limit my comments this morning until the time when my team and I intend to share a more comprehensive vision of the business. However, this past quarter marks a significant achievement in that our strongest quarter on record still has room for improvement as we further cut costs, complete our MDI splitter, see the Aerospace recovery continue, anticipate new capacities of specialty products, and push through price increases. Over 40% of our EBITDA came from non-Polyurethanes earnings, marking a significant balance. We also purchased just over $100 million this past quarter of our stock. Our Board, upon reviewing our projected earnings and cash generation, has decided to resume a share buyback program that will include a quarterly buyback that, at a minimum, should approximate our quarterly dividend. As we look into the fourth quarter, we should expect some seasonality, raw materials headwinds, and logistics challenges. This should be largely offset by aggressive price increases, operating excellence, and a continued focus on cost reductions. We expect our fourth quarter EBITDA to be between $320 million and $355 million. On another front, we began reporting, in 2017, on the significant lawsuit we filed against Rockwood and Albemarle after discovering that Rockwood had committed fraud and breached contractual obligations at Otas under an agreement to purchase Rockwood's TiO2 colored pigments business in 2013. After we closed on the transaction in the following year, Albemarle merged with Rockwood when it purchased the stock of the remaining Rockwood businesses. We sued Rockwood and Albemarle as Rockwood's successor after discovering that when we were negotiating the deal, Rockwood misled us about the viability of the key color pigments manufacturing technology it was selling. We arbitrated the case for two weeks in May of this year, had closing arguments in July, and yesterday afternoon, I'm pleased to report the panel of three former federal court judges unanimously ruled in our favor, wrote a detailed opinion, and awarded us in excess of $600 million in damages, of which we will net approximately $400 million after fees and before taxes. We are now beginning the process of having the panel's award confirmed in the New York State Supreme Court. This process, which will also include any appeal by Albemarle, will take at least several months. We are confident that the panel's ruling and damages awarded will be upheld. We think the court will be hesitant to disturb an arbitration award rendered in these circumstances, especially after the American Arbitration Association held numerous hearings, supervised months of far-reaching discovery, conducted extensive motion practices, and held a two-week trial with live witnesses before three distinguished former federal trial judges; Kirkland and Elson tried the case for us and David Stryker, our General Counsel, led a fully engaged team of in-house lawyers. Our long-time Board member, Wayne Reaud, himself a distinguished trial lawyer, was actively involved in the case, consistent with our approach on major legal matters going back to the Apollo litigation. Lastly, without the support, unity, and integrity of our associates and engaged Board of Directors, we would not have won this award. Thank you very much. And with that, operator, we'll open the line for any questions.

Thank you. Ladies and gentlemen, we will now be conducting our question-and-answer session. Our first question is coming from the line of Frank Mitsch with Fermium Research. Please proceed with your question.

Good morning all and congrats on the quarter, and Peter, certainly congrats on the Albemarle lawsuit. I remember reading the complaint 4.5 years ago and I was thinking, wow, Albemarle is in deep trouble. And then when Kirkland and Ellis took on the case on a contingency fee basis, I thought it was just a matter of time. So really happy that it finally played out. You mentioned that they are going to make an appeal, which on an arbitration process seems a little bit confusing. But regardless, that will take several months. You said that in the release, I think it said there's a 9% interest fee. Does that continue on these results? And actually, there were other individuals that were named in the lawsuit. What transpired there? And I guess given this windfall, how should investors think about the cash that you're going to get in?

Thank you for the question, Frank. I appreciate your early coverage of the lawsuit back in 2016. Regarding the appeal, I cannot predict Albemarle's actions; that decision rests with them. If they choose to appeal, it could extend the timeline by a few months. My understanding, and I must clarify that I'm not a lawyer, is that the threshold for appealing arbitration is higher than in typical court cases, so it's up to them how they proceed. The motions and filings, as well as the judges’ decisions, should be made public on Monday when we submit our case, and I expect that most of this information will be available at that time. As for the 9% interest, that will continue to accrue after the judgment has been rendered. This interest is based on a fixed New York state rate, which does not change and does not involve any arguments or appeals. Regarding the individuals involved, I will defer to the panel's conclusions. On the matter of fund usage, we plan to be more proactive in deploying capital to enhance our stock value, particularly through acquisitions, which includes buying back our own shares. Our intention is to repurchase around $40 million in stock each quarter, and in some cases, as we did last quarter, we may exceed that amount. We aim for our stock buybacks to align with the dividends paid to shareholders.

Thank you. Our next question is coming from the line of Bob Koort with Goldman Sachs. Please proceed with your question.

Thank you. Good morning, Peter. I wanted to ask you about your comments on the Polyurethanes division and the journey you've been on to high-grade it, which will, I guess, culminate shortly with the splitter project. Do you anticipate, is the vision there that your margins will actually increase? Or relative to the sort of mid- to upper-teens channel you've been in, as you displace some of the commodity sales, which obviously can have very good margins at times, is it more of an outcome that you'll have a more stable margin structure in Polyurethanes?

Yes, we believe that on an ongoing basis, we are currently achieving about an 18% margin across our Polyurethanes. With further cost and operating consolidation as well as material upgrades, we anticipate an average EBITDA of around 20% going forward. We aim to secure at least a 200 basis point improvement, much of which relies on factors within our control. Recently, we have shut down one or two of our system houses, allowing us to consolidate operations while continuing to serve our customers and product lines. These consolidations have shifted focus from two or three product applications to five or six. As we expand our spray foam business in Europe, we expect to do so without additional investments in new locations, utilizing our existing system houses instead. This will enable continued downstream growth without significant capital outlay. I see an opportunity to further lower costs and enhance our business operations. One point to emphasize is that transformational changes require initial investments in infrastructure, capacity, R&D, market routes, and specialty products. The process of marketing and selling these innovations can take between six to 18 months for approvals in various applications like fire-retardant materials, automotive or aerospace uses, adhesives, and coatings. Transitioning from traditional polymeric products to differentiated offerings typically spans 12 to 18 months as capacities and capabilities develop, products gain qualifications, and volume transfers occur. However, we are making good progress on this journey, and we expect to see benefits throughout 2022. We will provide more details at our Investor Day next week.

Thank you. Our next question is coming from the line of Mike Sison with Wells Fargo. Please proceed with your question.

Hey good morning. Nice quarter guys. Peter, I think you mentioned in the opening remarks that the goal is to get to 20% EBITDA margins, and I suspect we'll get a lot of that next week. But just curious where you think the opportunity is to continue to improve margin over the next couple of years and maybe some timing on that potential.

I believe I may not have stated 20% specifically, but I would like to reach that target as soon as possible. Currently, we've mentioned high teens, which I would classify as 18% or 19% for the company. At Investor Day, I'll present the projects designed to help us achieve that. This gives you a preview of what we're working on. There are several opportunities in areas that we can influence. The aerospace sector's ongoing recovery is expected to contribute about $50 million in profitability over the next 18 to 24 months, bringing us back to our pre-pandemic levels. This depends on the aerospace industry's growth and the recovery of wide-body aircraft contracts we've already secured. We currently hold over 85% market share in many of those applications, and we aim to maintain that. We're also focusing on capital projects in our Performance Products, such as electrolytes, car batteries, and ultrapure amines, along with the upcoming splitting project, which we'll discuss further next week. Additionally, we are considering acquisitions and implementing a broad range of cost optimization strategies that involve more than just reducing SG&A; we're also looking at direct and indirect cost reductions and supply chain efficiencies. We have publicly set a target of $140 million, which we expect to increase as we discuss it in more detail. Each of these initiatives could add about 40 to 50 basis points to our margin. With our traditional run rate margin around 16%, I am confident that within the next 12 to 18 months, we can achieve an improvement of 300 to 350 basis points.

Thank you. Our next question is coming from the line of Hassan Ahmed with Alembic Global. Please proceed with your question.

Good morning, Peter. Q3 was a challenging quarter due to Hurricane Ida and supply chain issues. However, the volume growth, especially in Polyurethanes, increased sequentially by 10%, which is quite impressive. I would like to hear your thoughts on volume growth as we consider 2022. Typically, this industry experiences volume growth of around 5% or 6%. Will there be a significant restocking exercise? How do you see year-on-year volume growth shaping up in 2022?

Yes, I think that's an excellent question, one that we grapple with. When I look at Polyurethanes, in the third quarter, we're essentially sold out. We're producing as much as we can and we're selling as much as we can. We saw an increase in that volume in the third quarter over the second quarter largely because of the Rotterdam turnaround that had that facility down for a little bit longer than we had expected. But as I mentioned, I'm not a believer that we ought to be investing capital to expand revenue and expand tonnage for the sake of expanding tonnage. I'd much rather see us deploy that capital and take the least profitable lens of our businesses and figure out how we can upgrade and make a higher-margin product across the board. The industry is going to be growing, with the MDI industry growing at 5% or 6% globally. I don't have a problem with us being sold out. We're obviously going to have some incremental debottleneck projects that will come along with low single-digit sort of growth rates, sort of reliability projects and so forth. But we are focused on how we increase the margin on the volume. We have plenty of MDI, I think, in the world. We need to have better Huntsman. I'm not talking about the industry. Huntsman needs to have better MDI, better margins, lower costs, and be able to take what is already a great business and make it even better.

Thank you. Our next question is coming from the line of David Begleiter with Deutsche Bank. Please proceed with your question.

Thank you. Peter, Performance Products has had a very good 2021 and a good back half of the year. How do you think about the sustainability of these numbers or a more normalized earnings power of this business heading into next year?

Yes, I think these products and the applications we've gone into, and I hope we've been clear about the transformation we've seen in that industry. When you're operating facilities such as those that we sold to Indorama, we had capacity in Fort Neches of about 1.5 billion pounds. More importantly, rather than just focusing on the value per pound, you have to keep those plants running, you have to keep them running at capacity. Your end markets are obviously going to be more commoditized and be larger volume customers. As we look at where we are today, we've sought after and been able to win a lot of niche businesses such as our polyurethanes catalysts. Not just our polyurethane catalysts but also that of others. As we look at the wind industry, coatings industry, fuel and lubricant additives business, the desulfurization of natural gas production, and so forth going into the maleic anhydride going into UPR and the integration into those areas. We've been able to take this business and focus it less on the commodity side, more on the specialty side. I think it's really paying us very handsomely. We think as raw materials probably reach a plateau in the next two quarters, our opportunity in this business is to hang on to the gains that we've made. We've got to continue to focus on our commercial excellence programs and pricing. As those raw material prices come down over the next year or in the next 12 to 18 months, we have an opportunity not just to maintain these margins, but in some cases, hopefully strengthen the margins. Hopefully, the raw materials aren't going to crash because of a recession. But if they moderate back to a more normalized basis of crude oil around $40 or $50 instead of $70 or $80 a barrel, I think that this business will not only maintain this level of performance, but we might have an opportunity, over the next year or two, to continue to strengthen it. So we're very bullish on our Performance Products. We like where it's going and the investments we're making in this area will continue to be key for us.

Our next question comes from the line of Kevin McCarthy with Vertical Research Partners. Please proceed with your question.

Yes good morning. Peter, I was intrigued by the comments you made in your prepared remarks about a greater focus on value versus volume in the Performance Products segment. If we zoom out the lens and look at the margin profile there, it's improved quite dramatically. Given the changes that you just talked about with divesting the Indorama assets and managing the business differently, do you think that there's an opportunity for EBITDA margins to remain above 20% sustainably, or do you think there’s too much cyclicality to endorse that? Just to follow up on David's question, how would you suggest we think about the medium-term margin profile and trajectory in Performance Products?

Yes, I would think that this business ought to remain a 20% plus sort of a business. There is going to be some cyclicality, as there is in any business. But I think as you look across the board, we have an opportunity here, the week after next, to be able to convince you of this and the new products, new applications that we're getting into. I'm hugely bullish on our Performance Products and there's a reason why we kept the assets that we did. We think there's a great future in this business. We think that the earnings we see today, by and large, are sustainable.

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

Thanks. So, if we rewind back to Q1, the discussion around the Polyurethanes business was that there was some degree of overearning. Since then, prices continued to move higher. Obviously, there's been a lot of outages, but one of your larger competitors tried to dispel kind of any notion that MDI and Polyurethanes from a commodity basis is really overearning at the moment. So like what's your opinion on this? Has it changed at all? What do you think the most likely direction for MDI profitability is over the next 12 months?

I don't believe that the MDI markets are currently overearning. The industry demand appears to be fairly balanced at the moment. In Europe, utilization seems to be around mid-80s, while in the Americas it is likely at 110% to 120%, considering some imports. Asia is probably utilizing slightly less than Europe. Overall, I think we are performing as expected in MDI right now.

Thank you. Our next question is coming from the line of Mike Harrison with Seaport Research Partners. Please proceed with your question.

Hi, good morning. Was wondering, Peter, if you can comment on where polyurethane inventory levels are right now in terms of volumes compared to normal for this time of year as we think about the coming recovery in the supply chain in construction and the seasonal build there. Will you have some additional inventory that you would typically build into that spring season? And then maybe also talk about what that means for plant utilization. Does that mean that you're going to be running your plants harder than you typically would in Q4 and Q1 and we could potentially see some better utilization, better margins from those facilities in the next couple of quarters? Thanks.

That's a great question. I'm reluctant to discuss the position of our competitors since I'm not sure where they stand, especially in light of recent developments. Tony, could you share your insights on current inventory levels and the potential for an increase?

Yes, thanks, Peter. Mike, I think levels are now as low as they've ever been in MDI. We see demand continuing to be very strong, particularly in North America. The disruptive supply chains and the regional balances have really evened out. Our customers are running low inventories as well. They're struggling to get key components needed to make these formulations. I think we're going to see very strong utilization rates on the plants. We're flat out; we can't run those harder than we're running at the moment anyway. So I don't see any balance between Q4 and Q1 in that respect. We're running as hard as we can, particularly to manufacture the downstream products. We still have an eight-week backlog in orders so we can sell every molecule we can make. This bodes well for industry utilization rates and I see that continuing well into 2022. Yes, inventory is low, and we need everything we can make.

Thank you. Our next question is coming from the line of John Roberts with UBS. Please proceed with your question.

Thank you. Regarding Huntsman Building Solutions, when you mention EBITDA margins nearing 20%, is that based on market-priced MDI and propylene oxide? Could you remind me if you have a cost advantage for propylene oxide in that business? I assume you are utilizing market-priced MDI?

John, it's Phil. We use integrated margins. Strategically, our focus is on upgrading the quality of our margins overall. We make decisions as an overall supply chain team looking at where we direct those molecules. We look at integrated margins, including how we move our polymeric downstream into our HBS business for the supply chain.

John, just to add to that, we do have an advantage here on polyols because as we grow that business, particularly with close sales using polyester polyol, rather than polyether which comes from PL, the polyester comes from recycled bottle-grade terrell. There, we do have a cost advantage, and we see that end of the market growing very rapidly.

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

Thank you. Good morning everyone. Peter, about a month ago, the company announced energy surcharges for MDI in Europe. Have you been able to fully implement any of those? What's been the market reaction?

Well, this will shock you that our customers are less than excited about this. But it's something that we're pushing through as we speak and as we are in a number of very sensitive negotiations with others, I really don't want to speculate. One of the reasons why we gave a wide range in the fourth quarter on our EBITDA is because there is some uncertainty as to the outcome of all of these. I think we'll get some of them, and right now, I don't want to speculate on all of them but we're pushing very hard. As we're telling our customers, the incredibly shortsighted and bad energy policy in Europe is not of our making, and the volatility of these prices and costs are not of our making. They really need to recognize this. Huntsman is not going to be the shock absorber between energy policy and the consumer. So yes, I feel very passionate about this, and it's something that we're going to push. Even if we lose some volume, we are going to continue to push. As far as our competition, I can't speculate what they're doing, if they're doing it through price increases or surcharges or whatever. One of the great criticisms in this industry is that at times, I think we can be lazy and lethargic when it comes to these issues and just figure they're going to go away in a quarter or two, and we'll just absorb it. I don't think that's fair to shareholders.

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

Hi, good morning and thanks for taking the question. Just curious about the Asian market competitive environment. If you could give us a little more color as to what you're seeing both from a demand perspective, given all of the uncertainty and changes taking place, but also from the perspective of the competitor that added capacity or expanded its capacity earlier this year, how have you seen the market absorb that? And are we at a good balanced level in that region and how we're seeing it progress?

I'll let Tony comment on the polyurethane side of that. I would remind all of you that as we look at the Asian market, very similar to Europe and very similar to North America, we're probably about 95% self-supplied within that region. Yes, we do have some logistics backlogs, and I would say that we're probably in the low tens of millions of dollars in particular in some of our specialty products in Advanced Materials and in Performance Products. Tony mentioned some of our blowing agents and so forth in our spray foam business, where we are getting hit with some of the backlogs and so forth at the ports. But by and large, as we look at our Asian market, we produce a product between China and Singapore and Thailand and other locations and we supply within that region. From a macro basis, it looks quite solid and a slow and steady recovery.

Peter, I think you're absolutely right. Particularly in China now, we're seeing a balanced situation with the dual control policy clearly affecting certain provinces. The way to look at that is, geographically, Jiangsu, Fujian, and Guandong have slowed down because of the imposition by the government of the dual control energy policies. This has affected demand in those regions, particularly in things like appliances and footwear, which tend to be concentrated in those provinces. But that's been offset by outages in Q4. One of our major competitors has got a significant turnaround. So, I see a balanced situation going into Q4. I think prices remain steady around RMB2,000 a ton. So to answer the question, balanced conditions in China right now.

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

Thank you for fitting me in. This is Dan Rizzo on for Laurence. You mentioned before changing portfolio and doing some bottom slicing. I was just wondering where you still are looking at kind of divesting or just bottom slicing within your own portfolio?

I'm not sure now is the appropriate time for us to identify particular assets that we would be looking to sell off. But we are very serious about improving the margin of this business. In the last few years, we've sold 40% of our company. We've repurchased, in other assets, equivalent to about 15% to 20% of our business. We're transforming the entire portfolio. As you do that, that means shifting your costs around, cutting your costs, and repositioning them. You're looking at opportunities to put higher-value margins in materials where you can capitalize on customer relations and so forth. As we look at the business and the transformation going on, I see that continuing going forward. We're going to continue to look at our assets and the value they have to us and the shareholders we represent. Likewise, we'll continue to look outside our company for assets that are valued. I think we're starting to see a diminishment in the value of some of the assets that we've been looking at, but by and large, I think asset prices are a bit inflated right now.

Thank you. Our next question is coming from the line of Matthew Blair with Tudor, Pickering, and Holt. Please proceed with your question.

Hey good morning and congrats on the results. I guess this might be a question for Phil. But looking at the working capital headwinds this year, I think about $650 million year-to-date, and I know it's going to be hard to predict when that might reverse. But I just wanted to clarify, do you expect to fully recover those working capital headwinds in the future? Or is there a reason why you might not recapture all that $650 million?

Yes. So Matt, if you think back, at this time last year, we were sitting in an oil environment in the $30s. Today, we're in the $80s overall. As you indicated, that's moved up our working capital balances substantially. The answer is, as you move into 2022, you'll see significantly less working capital inflation overall for us. We remain confident, obviously, in delivering our 40% free cash flow conversion in 2022. If you look at our working capital and the control of our working capital as a percentage of sales, it's lower today than at the same time point in 2018 and 2019. We believe we'll continue to recover those working capital amounts. As those receivables roll through and we collect on them, we'll be improving our cash flow as we head into 2022.

Operator, I know a number of people are looking to move on to other calls here at the top of the hour. Why don't we take one more question and we'll let people get back to work?

Thank you. Our final question comes from the line of Arun Viswanathan with RBC Capital Markets. Please proceed with your question.

Thanks for taking my question. Given the strong free cash flow conversion here that you're expecting in 2022, we were encouraged to see the resumption of the buyback plan this quarter of $100 million-plus. Would you expect that to continue, and again, given the cash flow that you expect next year, might it accelerate maybe?

I believe we will see a minimum of around $40 million on a quarterly basis. This amount aligns with our annual cash or dividend payment, which we aim to keep balanced. As we identify opportunities and gain confidence in our earnings and ongoing cash flow generation, we might become more aggressive with buybacks. Given the current stock valuation compared to purchasing assets in the open market, we may well increase our buyback activity. However, I hesitate to predict our position regarding share buybacks six to nine months from now. The minimum threshold we've established is approximately $40 million. Based on today's prices and what we observed last quarter, we still consider our stock a good buy.

Thank you. Ladies and gentlemen, we have reached the end of our question-and-answer session, and this concludes today's teleconference and webcast. We thank you for your participation, and you may disconnect your lines at this time.