Huntsman CORP Q3 FY2022 Earnings Call

Hello and welcome to the Huntsman Corporation Third Quarter 2022 Earnings Call. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Ivan Marcuse, Vice President, Investor Relations. Please go ahead, Ivan.

Thank you, Kevin. Welcome to Huntsman's third quarter '22 earnings call. Joining us on the call today are Peter Huntsman, Chairman, CEO and President; Phil Lister, Executive Vice President and CFO. This morning, before the market opened, we released our earnings for the third quarter '22 via press release and posted 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. As a reminder, following the announcement of the sale of our Textile Effects business, we are now treating Textile Effects as discontinued operations on our income and cash flow statements and held for sale on the balance sheet. You will be able to find all the relevant details within our 10-Q that will be filed with the SEC. During the 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. We will also refer to non-GAAP financial measures such as adjusted EBITDA, adjusted net income and free cash flow. You can find reconciliations to the most directly comparable GAAP financial measures in our earnings release which has been posted to our website, huntsman.com. I'll now turn the call over to Peter Huntsman.

Thank you, Ivan. Welcome, everyone. Thank you for joining us this morning. Let's turn to Slide number 5. Adjusted EBITDA for our Polyurethanes division in the third quarter was $138 million. Overall, sales volumes in the quarter declined 16% with Europe accounting for over half of this decline, the Americas for about 35%, and then China for about 10%. These declines were caused by a combination of inventory destocking throughout the supply chain and falling demand. Europe is clearly in a recessionary economic environment which could potentially get worse over the coming months due in large part to high and volatile natural gas and energy prices. In Europe, natural gas prices have been moderating since peaking at the end of August but remain at historical high levels. And moving forward, prices remain dramatically higher than in the United States. We expect and are planning for high and volatile natural gas prices in Europe for the foreseeable future. As we mentioned on our last earnings call, we do have the benefit of 60% of our natural gas-related production costs via our nitrobenzene and aniline facilities, or in the U.K. where natural gas prices have been lower this year versus Mainland Europe. Despite this cost advantage, our profitability has been significantly impacted in Europe and we will have to lower our cost structure in the region to generate acceptable returns. Over the long term in Europe, outside of the current recessionary environment, we do expect to be a large beneficiary of energy conservation initiatives. The world and Europe, in particular, need increased levels of insulation to reduce energy consumption. We remain well positioned to bring solutions to both the residential and non-residential markets. Demand in China continues to be impacted by lower overall economic growth as the government mandates a zero COVID policy and the impact it is having on its economy, as well as lower construction activity. Improvements around the COVID situation and possible economic stimulus to get the economy going in the right direction would be a catalyst for our business to improve in the region. Lower propylene oxide margins in China drove our equity earnings lower year-over-year. Our joint venture contributed approximately $18 million in equity earnings for the quarter, below the $32 million reported a year ago. Given current levels of PO margin, we expect the equity earnings could be approximately $70 million lower in 2022 versus the record earnings of 2021. The impact of rapidly increasing interest rates in the United States as the Federal Reserve fights higher inflation is having a real impact on the residential construction markets. We're seeing this clearly in our OSB, spray foam and furniture businesses. HBS, our spray foam insulation business, saw revenues decline 22% compared to last year as we saw deinventory through the quarter. In the early part of the fourth quarter, we've seen a slight improvement in order patterns but we anticipate the greater than 7% mortgage rates will be a clear headwind going forward. As a result of slowing demand and our expectation for this environment to continue for at least the next several months, we are taking swift near-term and long-term actions to address these challenges. I'll make further comments in my closing remarks but suffice it to say, we will be taking out more costs in our polyurethane businesses going forward. In the short term, in polyurethanes, we've adjusted our MDI production to match demand. This will do two things. On the positive side, it will help to manage our inventories and costs as our focus on cash generation is a top priority. However, the lower production will have some negative impact on our fixed cost absorption and delay the positive impact of lower benzene prices moving through our income statement. Moreover, we are aggressively moving forward on the cost reduction plans we discussed last quarter and have been in the process of implementing which include exiting certain regions that are not generating an acceptable return such as Brazil. We also continue to consolidate certain back-office functions. Our Polyurethanes automotive platform, again saw improved volumes year-over-year of 18%. Looking through a recessionary environment, we have an automotive business that is well positioned and poised to recover over the coming years. Looking into the fourth quarter, we expect Europe will generate a loss. We expect continued destocking in the United States. The economy in China looks like it will remain muted. As a result, seasonality will be much more pronounced this year due to all the headwinds impacting demand as well as costs. As we sit here today, we expect polyurethanes adjusted EBITDA for the fourth quarter to be in the range of $55 million to $85 million and below 10% margins due to European market conditions. Let's turn to Slide number 6. Performance Products reported adjusted EBITDA of $110 million for the second quarter which is 7% higher than the third quarter last year. The adjusted EBITDA margin in the quarter remained strong at 25%. The industry dynamics in Performance Products became more difficult through the quarter as challenges in Europe and China increased. Demand in Europe came down significantly by 23% with maleic volumes being under pressure. However, even with these macro challenges, we were able to deliver margins on the high end of our long-term expected range. The high returns are due in large part to the strength of our Americas market, our commercial excellence program and attractive industry dynamics that we have been pointing to over the last year, as well as effective cost control. Our North American maleic anhydride business which goes into areas such as non-residential construction and our global ethylene amines business which goes into fuel and lubes markets, remains our best-performing business in this division. Our capital investments in polyurethane catalyst and differentiated chemicals serving the electric vehicles, semiconductors, insulation markets continue to move forward on schedule. As we've stated in the past, assuming stable macro conditions, we expect these projects to start up in 2023 and deliver more than $35 million of EBITDA benefits in 2024. Performance Products remains a highly attractive business and we continue to evaluate strategic organic investments to grow this business over the long term. The fourth quarter is typically this division's seasonally weakest quarter. We expect this year will include lower demand in Europe and above-average customer deinventorying in the U.S. As a result, we would expect Performance Products' fourth quarter adjusted EBITDA to be in the range of $60 million to $80 million with around a 20% margin. Let's turn to Slide number 7. Advanced Materials reported adjusted EBITDA of $58 million in the quarter, a 21% increase over last year's third quarter. We generated solid returns during the quarter despite a slowing global economy. Volumes declined 16%, half of which was because of our decision at the beginning of the year to deselect lower-margin commodity business and half was due to lower demand in some of the industrial coatings related markets. Improved volumes in higher-margin products, synergies from recent acquisitions and strong cost controls drove the improvement of adjusted EBITDA. We believe the business continues to outperform in several of our industrial adhesive markets as we deliver solutions to our customers. Despite some of the near-term demand headwinds, our industrial adhesives portfolio is positioned well to grow over the coming years. Additionally, we saw modest growth in our aerospace and automotive markets versus the third quarter of last year. Our volumes and margins in aerospace are about halfway back to prepandemic levels despite the raw material headwinds. We believe the fundamentals in the aerospace industry continue to improve and we expect the business to fully recover as production rates of widebody planes over the coming years moves higher. In the medium term, we expect aerospace to continue to recover, automotive to benefit from higher rates of its materials in EV versus traditional combustion engine vehicles and expected increases in infrastructure spending. Like our other businesses, we do expect seasonality in addition to softer overall demand and currency headwinds to impact the fourth quarter. We project the fourth quarter adjusted EBITDA to be in the range of $40 million to $45 million. With that, I'll turn a few minutes over to our CFO, Phil Lister.

Thank you, Peter. Turning to Slide 8. Adjusted EBITDA for the third quarter was $271 million, a decline of $78 million or 22% compared to the third quarter of 2021. Sequentially, adjusted EBITDA declined $139 million or 34%. The year-on-year reduction in adjusted EBITDA was driven by our European polyurethanes business which declined to breakeven levels during the third quarter as a result of high energy costs and declining demand. Adjusted EBITDA margins for Advanced Materials and Performance Products remained strong at 18% and 25%, respectively. Polyurethanes adjusted EBITDA margins declined to 11% in Q3, leading to an overall EBITDA margin level of 13% for the company. Our European polyurethanes business depressed total company margins by 3%. Sales volumes declined by 15% during the quarter, 23% in Europe, 14% in the Americas, and 7% in Asia, as macroeconomic conditions deteriorated, particularly in Europe and in construction end markets overall. Gross margin improved by $48 million with $339 million of price gains, representing a 15% increase year-over-year offsetting higher cost of sales of $291 million. During the third quarter, natural gas-related raw materials and utility costs more than doubled compared to the prior year. Within our most energy-intensive production process, MDI, we have indicated every $1 per MMBtu movement in Europe is equivalent to approximately $10 million at normalized production levels. We are running production rates in Rotterdam at approximately 50%. And at those levels, the impact per every $1 per MMBtu is approximately $5 million to $6 million on adjusted EBITDA. Some other raw materials, most notably benzene, have declined from record high prices seen in the early part of Q3 though prices still remain elevated, while other raw materials continue to increase such as ammonia, chlorine, and caustic. As a reminder, when considering cost impacts, we account for over 90% of our inventory using the weighted average cost method. On a weighted average basis, it normally takes approximately 3 months to work through the majority of costs. With slower sales and high costs of natural gas in Europe in August and September, we will continue to see higher costs working their way out of inventory throughout Q4. Regarding inventory, we reduced our global inventory volumes by approximately 10% in Q3 and expect a further 10% decline in Q4 to align with lower economic activity. SG&A remains under control due to our cost optimization program despite a high and persistent inflationary environment. Foreign exchange was a negative impact of approximately $15 million with approximately $20 million of translation impact, partially offset by approximately $5 million of transactional gains as a result of the weakening of the Chinese renminbi. Let's turn to Slide 9. Our cost optimization and synergy program remains on track. At the end of Q3, we achieved an annualized run rate of $160 million of savings. Excluding our new European restructuring initiative, we expect to meet or exceed our target of $170 million of savings by the end of 2022 and $240 million by the end of 2023. During the quarter, we made progress recruiting at our new global business services hubs in Costa Rica and in Poland. We expect to be fully operational at those sites during 2023. In addition, as part of our support service model, we announced that we would transition parts of our internal IT services to a third-party managed service provider. We are progressing geographical exits previously announced in polyurethanes. And in Advanced Materials, we announced the closure of our Maple Shade, New Jersey facility which was part of our 2020 acquisition of CVC. In terms of our $240 million program, we expect approximately $65 million of cash costs in 2022 and we're expecting approximately $70 million of cash costs next year as we work through severance and restructuring. Regarding the proposed European restructuring we have announced today, we have advised the relevant works councils that we intend to consult with them to reduce our costs by exiting certain legacy commercial and R&D facilities, as well as accelerating our move of support services to Krakow, Poland. We intend to achieve approximately $40 million of additional savings over and above our $240 million program by the end of 2023 through certain site closures and headcount reductions in Europe. We expect to spend approximately $50 million of cash restructuring relating to those savings, the majority of which we expect to incur next year. We also expect to spend approximately $15 million of capital expenditure related to the restructuring which we will manage within our normal capital expenditure allocation. Turning to Slide 10. Cash flow from continuing operations during the quarter was $285 million compared to $179 million in the prior year period. Free cash flow from continuing operations came in at $228 million for Q3 compared to $106 million a year ago. Year-to-date, our free cash flow from continuing operations stands at $409 million. Over the last 12 months, total free cash flow was approximately $1.1 billion and we have returned approximately $1 billion to shareholders in the form of share repurchases and dividends. Share repurchases for the quarter amounted to $250 million, bringing the total year-to-date to $752 million. Earnings per share for the quarter came in at $0.71 per share compared to a prior year of $1.02. Capital expenditures are tracking towards our plan of approximately $300 million of spend in 2022, $280 million from continuing operations. We are now focused on our Performance Products investments targeted at electric vehicles, semiconductors and insulation catalysts. Our adjusted tax rate for the quarter was 21% and our long-term range of 22% to 24% remains unchanged. At the end of September, we had just under $2 billion of liquidity. Our net senior notes debt maturity is due in 2025 for approximately $300 million. And beyond that time frame, we have maturities in 2029 and 2031. Our balance sheet is strong at 0.7x leveraged on an adjusted EBITDA less 12 months basis and we remain fully committed to our investment-grade rating. Upon the close of the deal to sell our Textile Effects business, we expect to receive approximately $540 million after-tax cash proceeds before any adjustments to the closing statement for net working capital. I would also note that our preferred equity of approximately $80 million which we announced at the time of signing has been syndicated out and the Textile Effects transaction is now an all-cash deal for Huntsman. Peter, back to you.

Phil, thank you very much. In the past 12 months, the global economy has gone through a number of shocks and unforeseen events. These include 40-year high inflation and the related consumer reaction. The most devastating destabilizing European land war since the Second World War, trillions of dollars of value wiped from the global markets and unprecedented energy volatility with its related supply chain challenges. In light of these events, it is worth reviewing those things within our control and how we are responding to events outside of our control. First, we announced today in Europe a European-based restructuring that will take a minimum of $40 million out of our European businesses. I think it will be some time before Europe fully picks up the pieces of its failed energy policies. However, I believe that any new normal will be based on a gas plus transportation to supply their needs, where Russian gas supplies to Europe usually sold at a slight premium over U.S. prices, I think that Europe will now find itself competing with Korea, China and Japan to name a few for gas imports. If I look over the past decade, gas has been sold in these export markets at a premium of about $5 per MMBtu over historic gas prices in Europe and North America. If Europe is to endure a $5 per MMBtu gas charge for freight, this will cost Huntsman approximately $40 million to $50 million per year. This is our initial target for cost reduction. We are announcing today the closure of two of our divisional HQ and a series of initiatives that will permanently remove an excess of $40 million from our European businesses. Let me be clear. This is not an abandonment of any of our $2 billion European commitment but rather a recalibration of a business based on the realities of cost, customers, investor expectations and having a business built around those customer requests that will provide future growth and opportunity. We will complete this by the end of 2023. This will be in addition to the $240 million that we outlined at last year's Investor Day presentation. We also announced today that our commitment to invest $80 million of preferred equity towards the divestiture of our Textile Effects business has been replaced. This will essentially keep $80 million on our balance sheet that we had announced earlier would be needed to complete the sale of our Textile Effects business to SK Capital. At a time when so many deals are being pulled or unable to get completed, this says something about the quality of this deal and SK's and Huntsman's ability to complete what we started. We expect this transaction to be closed within the next few months. We committed to a cost savings business restructuring plan of $240 million a year ago at our Investor Day presentation. And to date, we've accomplished a run rate of $160 million of that and are on track to be completed by the end of 2023. We announced this quarter the purchase of $250 million of shares and remain on track to accomplish $1 billion of share buybacks in 2022. Through the end of the third quarter on an LTM basis, we've generated $1.4 billion of adjusted EBITDA and at a 16.5% margin. There are many variables between now and the end of the year but we expect free cash flow to be about 40%. We will finish the year with a strong balance sheet that will be further strengthened with the divestment of our Textile Effects business. We intend to use our balance sheet to continue to return cash to shareholders through a competitive dividend, share buybacks, M&A opportunities and reinvestment in our business. While looking for opportunities to deploy capital, we will be very judicious. Now looking into the murky waters of Q4 and into 2023 while we are seeing slowing markets in the U.S. around residential construction as well as continued sluggishness in China around continued COVID prevention policies. Our biggest challenges are around Europe. We will see two variables that will either be severe headwinds or may well provide us with better-than-expected earnings. The first of these is energy. As we have said in the past, every dollar of movement per MMBtu of gas costs our European business is a cost of around $10 million per year depending on utilization rates. We're forecasting a higher gas price in our Q4 range we shared with you earlier in this call than what we are seeing today. Should prices stay where they've been so far this month, we will see some benefit. Should prices spike to levels that we saw in late summer, there will be headwinds. Either way, we'll continue to push prices and margins wherever we can. The second variable is how customers are managing inventories. How much of our drop in demand are inventory controls by our customers? And how much is consumer sentiment and falling consumer demand varies customer by customer? Broadly speaking, we would estimate that about half is inventory control and should work itself out by year-end or early 2023. Either way, we're operating our facilities to match our own working capital objectives and the needs of our customers. We are also supplementing some of our production needs with imports from outside Europe. Our immediate priority continues to be to complete our operational and restructuring objectives. Continue to work with our customer base to understand their longer-term needs and make sure our pricing and margins are what the market will bear. Through 2023, the worst mistake we can make is to wait for conditions to fix themselves. We will be aggressive. We'll do whatever we can as quickly as we can to recover the profitability and returns our investors deserve and our company needs to restore our European business to where it should be. Throughout 2023, the U.S. will start to get control of inflation and I believe we will see China rebound as it refocuses more on economic growth. Europe will start to stabilize and there will be winning industries and those that will move out or move on. We've taken the right steps to ensure that we are in a position to take advantage of any of these improvements as markets dictate. Operator, with that, we've concluded our prepared remarks and we'll open the line up for any Q&A.

Our first question is coming from Josh Spector from UBS.

I know it's tough to answer but I guess if you look at the sequential move, 3Q to 4Q, you talked about some of this already but if you were to bridge or kind of put into bigger buckets energy cost, destocking, base volume declines, fixed cost leverage, what would those buckets be so we could start to think about what maybe a normal rate would be when you get past some of the worst of this?

That's a very good question. I think that that's going to vary industry sector by industry sector. For instance, I think where you're continuing to see strong pull-through such as automotive and in aerospace, there's not much inventory control that's taking place right now. And so you're seeing most of any of the headwinds that we're facing in those industries is just trying to absorb raw material costs and pushing them through. In other areas, certainly like what we are seeing in construction material products and so forth. And some of those areas that are related to construction, furniture, insulation and so forth. We're seeing quite a bit of inventory correction that would certainly make those industries and businesses look worse than they normally would be on a normalized run rate. We think that as we move from Q3 into Q4, that probably about 50% to 60% of the decline that we've seen in demand is related to inventory adjustments. Again, I want to just emphasize that's a fluid number because it is going to vary sector by sector or customer by customer. But as I said in my comments, I believe that by the end of this year, early part of next year, most of that inventory will be depleted from the supply chain. I also would just emphasize that as market conditions slow, this almost becomes a self-fulfilling prophecy to extend that cycle as market conditions slow and as demand slows, that inventory reduction just takes longer to accomplish. So benefits that we would have hoped to have gotten by falling raw material prices that took place a month or two ago, they'll hit us later than expected and inventory that we hope would have been depleted by quarter's end will go into next year because of the falling demand. So again, apologies for being a bit murky but it's a pretty squishy situation that we're seeing right now.

Josh, just a couple of additional data points for you. So FX year-on-year, we'd anticipate with right now the rates that we're seeing about a $15 million negative impact year-on-year. And then you commented on under-absorption rates given the efforts that we're making to align inventory with end markets, you can assume about a $15 million to $20 million negative impact between Q3 and Q4 from what we're trying to achieve by matching production with the end market situation.

Our next question is coming from Kevin McCarthy from Vertical Research Partners.

Peter, can you talk about your asset footprint in polyurethanes? I think last quarter, you sort of advertised some work you're doing in Brazil. Do you see potential to continue that rationalization in markets like Asia?

Yes, we're looking at various areas in Southeast Asia. Without getting into too much detail, some of those facilities we've looked at shutting down and others we’re looking at selling off or perhaps giving the option of giving a facility over to a partnership or something. So again, some of those are in motion right now. But having said that, I think, again, longer-term, where we want to see our volume concentrated or in those markets where we are going to see a value-over-volume strategy. That means that we are going to be looking for those markets where we can move the production that's coming out of our splitters. We can move the higher-end, less volatile, higher-margin materials. And that's not something that's going to happen overnight but it's a 2-year or 3-year transition and commitment. I believe that we're probably one-third of the way halfway through that. And so it's a combination of how quickly can we shut down those assets and move them in an orderly manner and how quickly can we reabsorb that tonnage into new applications and into qualifying applications. So it's not just a question of moving the product instantaneously. In many cases, we've got to go through a qualifying process. It would take several months.

Our next question is coming from Aleksey Yefremov from KeyBanc.

In Performance Products, it sounds like we expect weaker volumes but margins are largely holding up. You don't see a meaningful spread compression at this stage. I just wanted to make sure that that's correct.

Well, again, these are tenuous times right now but I think that our margin discipline in our pricing discipline has been strong to date. In a lot of these products, we are one of two, perhaps three, global players on a global basis. So we don't typically see spot materials and spot pricing that's putting a great deal of pressure on pricing. So I hope that that pricing discipline is going to continue. But I think that the biggest factor for the performance products going into the fourth quarter and early into next year is going to be volume more so than margin.

Your next question is coming from John Roberts from Credit Suisse.

How is the loading on the new splitter going? And do you think the slowing economy is going to delay your ability to load that?

Well, again, I think that the single biggest product that we're moving out of that split is in the automotive sector. And that continues to be a very good sector for us right now. We also see a lot of flexible foam that is going to be coming out of that splitter and that's again, got both residential and automotive applications to it. But again, as we look at the automotive market, I think it's going to be very interesting over the course of the next year. How many of the OEMs in the automotive sector are going to be relocating from Europe to North America and shifting a lot of their products back. And when I said in my comments, we're speaking with a lot of our customers, I think that over the course of the next year or two, you're going to see quite a few customers moving production, European production, particularly in areas of aerospace, automotive and so forth to either China or more likely to North America and then reexporting, if you will, that product back into North America.

Our next question is coming from Frank Mitsch from Research.

When you guys are pulling out of Maple Shade, you're going to raise my taxes. So I'm not sure how I feel about that.

If you negotiate a discount for us on your publications, we already pay a fortune for them, so maybe...

That is a nonnegotiable task. A couple of quick points on cash. Phil, in terms of the fourth quarter free cash flow, is it reasonable to expect that you'll be able to generate another $100 million there? And you are on track to get $540 million of cash early next year. You have a pretty pristine balance sheet right now. What are your thoughts on the possibilities of M&A with that cash?

Yes, Frank, so in terms of free cash flow, as we said, $409 million through the end of the first three quarters of this year. We would expect to see a fairly sizable net working capital inflow in the fourth quarter, particularly with everything that we're doing around production rates and given that end market conditions are deteriorating, both through some demand destruction and through some seasonality. So that net working capital should come through. We are going to be focused on making sure we continue to put capital expenditures into the three performance products projects that we've talked about. But in terms of being able to deliver $100 million plus of free cash flow in the fourth quarter, we would certainly hope that we're on target for that. And as Peter indicated in our prepared remarks, we would expect to be approximately 40% for the full year on free cash flow from continuing operations. In terms of deployment of cash, yes, $540 million net cash proceeds after tax. There will be some adjustment for the closing statement but that's what you can assume coming back onto our balance sheet. As we indicated in our prepared remarks, that gives us optionality around bolt-on acquisitions. It also allows us to continue to deploy effectively share repurchase back to shareholders as well as a competitive dividend. But we'll still have headroom given our leverage and given our leverage well below our 2x net debt target to be able to do bolt-on acquisitions. I would remind you that during the coronavirus time period, we actually went out. We bought our second spray foam insulation business. We bought two additional businesses in Advanced Materials and that was because our balance sheet was flexible enough to be able to purchase those businesses at a decent price. Again, we would look to that flexibility as we go through a slightly slower economic environment.

Your next question today is coming from David Begleiter from Deutsche Bank.

Peter, on your Slide 12, looking at 2023, you listed a number of positive and negative or challenges. Any early thoughts on '23 EBITDA relative to the roughly $1.2 billion you'll do this year?

Boy, David, I appreciate the question. You give me the variables and I'll give you the number. Without trying to sound too evasive here, I think that the year will probably look a lot like 2022 but backwards, if you will. I would hope that we will see improvements throughout the year as we see the impact coming in of our cost reduction initiatives and further opportunities we have to move product through our Geismar splitter as we see the capital that we're investing come to fruition, as we see the full integration of recent acquisitions and so forth. I think that even if it stays to be a pretty flat year, we're going to see those improvements sitting throughout the year. And so I'm not overly optimistic but I'm rather optimistic as we go through the year we'll do better than the market on a relative basis. And like I said in my prepared comments, I think that throughout the year, we'll start to get a handle on inflation. A lot of the inflation in the U.S. is due to our own failed energy policies here. And I think that a lot of that is going to be addressed here after the first of the year. And I do have confidence that China, when it does fully open economically, I think is going to open with quite a sharp uptick in demand given how long these restrictions have been on economic growth.

Next question today is coming from Andrew Castillo from Morgan Stanley.

I just wanted to talk a little bit more about MDI and the competitive environment you're maybe seeing there. You noted that you're running your assets at about 50%. So curious what are you seeing kind of the broader industry. And particularly, as you think about pricing dynamics and your efforts in passing through costs and surcharges, can you just talk about maybe how that's progressing, how it's kind of evolving? And within that, maybe give a little bit more color on the energy assumptions for your fourth quarter versus what you maybe need to recoup and potential benefit?

Yes. Our energy forecast for the fourth quarter aligns closely with current market projections. If you examine the forward trading numbers for December and the rest of November, there's a gradual increase indicated for those months. If temperatures stay warmer than usual, as they have been this season in Europe, we could benefit from lower-than-expected gas prices. Regarding pricing, we will continue to implement price increases and surcharges where possible, but we will not do so at the expense of our customer base. We have been a leader in pricing within our size category in Europe while emphasizing the value of our product over volume. In the third quarter, we successfully offset all raw material cost increases through pricing and disciplined pricing strategies, which demonstrates our commitment to prioritizing price over volume. That said, as we approach year-end and consider our customer segments, we have a significant concentration in the automotive industry alongside some exposure to insulation, footwear, and other markets. Other polyurethane manufacturers may be more heavily focused on appliances, synthetic leather, and different applications. Therefore, I wouldn't assume our experiences are reflective of the industry's overall condition. We will remain focused on this strategy; we believe it is not prudent to run plants to build inventory at this time, given the uncertainty as the year concludes. We're aligning our production closely with customer demand.

Your next question is coming from Mike Sison from Wells Fargo.

Peter, I wanted to revisit the 23%. Looking at the midpoint for the fourth quarter and multiplying that by four gives us a fairly low figure. However, as you mentioned, it reflects significant destocking, which may not represent the appropriate baseline for Huntsman’s earnings. If we could adjust for the destocking in the fourth quarter, what do you think that adjusted figure would look like? Would that provide a clearer perspective on what Huntsman's trough earnings might be in '23?

I don't believe it's an appropriate perspective because the fourth quarter is influenced by seasonality that isn't present in the other three quarters. There will certainly be de-inventorying and capital management that most companies implement even during typical business conditions in the fourth quarter. I expect there will be significant volatility. My personal expectation is that we have observed a low natural gas price in Europe this quarter of around $7 to $8 per MMBtu, but prices may surge towards the end of the day, potentially exceeding $50. Thus, we can anticipate some of the most erratic natural gas prices during the fourth quarter. I think it's erroneous to extrapolate those variables and conclude that these represent the new normal or that they reflect an entire year's performance. There are simply too many factors at play. When I assess our business and reflect on the last part of 2022, thinking about that inversely for 2023, I believe we'll face some considerable challenges at the start of 2023 stemming from the fourth quarter. However, I see more reasons for optimism than pessimism as we progress through 2023. I want to emphasize that I'm trying to foresee the conclusion of November and December for Q4. The outlook for 2023 appears quite unclear. For instance, consider the implications of Russian gas and any decisions made by Putin regarding sanctions on natural gas and crude oil, which could have variable effects worth tens to hundreds of millions of dollars on our business.

Next question today is coming from Matthew Blair from TPH.

Peter. You mentioned you're running your Rotterdam MDI plant at about 50%. You're relying on some imports and overall EBITDA negative in Europe for MDI. Is it possible to shut this plant down and fully rely on lower-cost imports? Can you talk about the considerations there?

Yes, it is indeed possible, but it may not be very practical. There are fixed costs involved that will remain regardless of whether the facility operates or not. These include minimum take-or-pay agreements and costs for constructing hydrogen and carbon dioxide units. Additionally, there are ongoing expenses for labor and other facilities supplying utilities. We won't be laying off all our employees and then re-hiring them in six months. These fixed costs will persist even if the facility is idled. Furthermore, MDI plants generally do not perform well below 50% capacity utilization. The process involves moving a substance similar to glue, and operating at reduced capacity increases the risk of complications with the equipment. Typically, these plants do not function efficiently below that threshold. In our European facility, we have two lines, allowing for a potential adjustment where we might shut down the smaller unit and operate the larger one more intensively, as we did in Geismar, Louisiana during the recession in 2008 and 2009. It's important to consider the logistics of moving MDI. Last August, we seriously contemplated shifting MDI from the U.S. to Europe due to significant gas price differences. However, costs associated with logistics and working capital complicate matters. If we had decided to relocate product then, we would have faced delaying arrivals until November, during a time when gas prices were significantly lower. Moving products involves a degree of risk, assuming that what we transport today will be competitively priced in the coming months. This is a complex decision-making process. So, to answer your question, I don't foresee circumstances that would lead us to shut down our Rosenberg facility or our MDI capacity in Europe. Market conditions, as they stand today, do not appear to warrant such an action.

And in reality, our cost competitiveness on the cost curve of Rotterdam which is the second largest facility, MDI facility across all of Europe remains extremely attractive relative to others, particularly with the position that we have in U.K. energy-intensive and aniline production at a much lower natural gas price to mainland Europe.

Our next question is coming from Matthew DeYoe from Bank of America.

As you reduce the volume in the HBS business, will the PU production be going offline? Are you shifting those polymeric molecules to other markets? If so, is there a margin challenge from this change in mix, and what would that entail?

The outcome will rely on market demand, pricing, and our margins at that time. Ideally, most of the product we are transitioning into HBS also has applications in spray foam and rigid insulation. This provides us an opportunity to shift that volume. If it’s not being allocated to HBS, we can redirect it elsewhere. However, this product is also used in CWP, composite wood production, OSB, and plywood applications. It’s important to note that this typically represents our lowest margin MDI, specifically our polymeric, commodity-grade MDI. One of HBS's advantages is that it allows us to take some of our lower-margin materials and move them to higher-value applications. Generally, I believe we can find a use for it, but the specifics depend on market conditions and the availability of alternate placements for that volume.

And typically, if we're moving that product through HBS, it's not only a polymeric MDI. We're also matching that with an aromatic polyester which is our own technology which we purchased back in 2013 and that's what makes it a much more attractive proposition as we're selling a formulation downstream into the market rather than just a component polymeric MDI.

Yes. And operator, why don't we take one more question given the time constraints and so forth.

Certainly. Our final question today is coming from Laurence Alexander from Jefferies.

Just on the European restructuring, is it fair to characterize it as currently mostly a cost realignment because your customers haven't yet made their repositioning decisions? And so was there probably another round of European restructuring needed once they've made their decisions but also if capacity is going to be moving to the U.S. and China, do you have sufficient capacity in place to handle the next up cycle if there's also going to be a structural shift in capacity into those regions? So I'm thinking particularly on the MDI side.

Yes, that’s a great question. Regarding the program we announced today, we are looking at approximately 300 positions. We are working to align our business with what we perceive to be the new market reality. In Europe, I see opportunities in sectors like insulation, aerospace, lightweighting, and spray foam, as well as significant infrastructure spending, particularly in automotive. These markets are expected to thrive, and we will need the necessary technical support and business infrastructure to sustain them. We also anticipate that some energy-intensive customers and applications will shift out of Europe. Certain OEMs producing materials like glass or those used in automotive and coatings may relocate due to their high energy consumption. While not all will move, some are expected to exit. We have tried to assess these changes as accurately as possible. Today, we’re not just eliminating positions; we are also relocating about 125 to 150 positions to Krakow, Poland, where labor costs are approximately 35% lower, depending on the role and origin country. I don’t foresee us needing to implement further cuts or repositioning in the next six to twelve months. We've thought this through over the past six months, and we have a clear understanding of which customers will remain and their financial viability. Along with assessing margins, we also consider our customers’ creditworthiness. As we enhance our offerings from lower-margin sectors in South America to North America, we ensure we can supply our customer base adequately. We recently launched our splitter in Geismar, Louisiana, which allows us to transition from some polymeric applications we've supported for years into downstream businesses. If we face shortages, we can leverage this as an opportunity to upgrade lower-margin polymeric products and reallocate them towards more profitable applications. We have the capability to manage this transition in China, Europe, and North America. Additionally, we can supplement volumes with sourced polymeric MDI or crude MDI globally. I’m confident in our ability not just to supply MDI but to focus on delivering profitable MDI. Our aim is to cater to specific niches where we can improve pricing, margins, and reliability. Ultimately, that’s the direction we want to push our urethanes business. Thank you all for joining us this morning, and I wish everyone the best.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.