Greetings. Welcome to the Huntsman Corporation Third Quarter 2023 Earnings Call. As a reminder, this conference is being recorded. I would now like to turn the call over to Ivan Marcuse, Vice President of Investor Relations and Corporate Development. Thank you. You may begin.

Thank you, Daryl. Good morning, everyone. Welcome to Huntsman's third quarter 2023 earnings call. Joining us on the call today are Peter Huntsman, Chairman, CEO and President; and Phil Lister, Executive Vice President and CFO. Yesterday, October 31, 2023, after the U.S. equity markets closed, we released our earnings for the third quarter 2023 via press release and posted to our website, huntsman.com. We also posted a set of slides and detailed commentary discussing the third quarter on our website. Peter Huntsman will provide some opening comments shortly. We will then move into the question-and-answer session for the remainder of the call. During the call, let me remind you that 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 don't plan on publicly updating or revising any forward-looking statements during the quarter. We will also refer to non-GAAP financial measures such as EBITDA, adjusted net income or loss 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.

Ivan, thank you very much, and thank you all for taking the time to join us this morning. This past week, I had the opportunity to visit one of our largest aerospace customers with our Board of Directors. We watched firsthand as Huntsman's composite raw materials were applied to some of the most fuel-efficient and modern aircraft built anywhere in the world today. We also visited one of our plants that is making Germany's premier sports cars lighter and consume less electricity. We spoke to our associates at the same plant who are responsible for making components for a smarter, more reliable power distribution and grid system. I'd go on about the numerous applications that Huntsman is now pushing to serve a less energy-intensive, but more energy-reliant economy. All this gives me cause for optimism, and it's a great reminder about our company's position in the global marketplace. Over the past 24 months, we've seen some of the strongest economic performance as we recovered from a global pandemic and subsequently among the most chaotic economic conditions as European energy policy seemingly collapsed, China's bounce back stumbled along and North America's construction markets took a beating over high interest rates and consumer uncertainty. As we now have some visibility into the beginning of the fourth quarter, as I said during our last earnings call, we expect this to be a tough quarter depending on the amount of customer de-inventoring we see and lack of consumer confidence. Our projections for the fourth quarter remain murky, as the real year-end seasonality does not yet start for a couple more weeks. However, our customer and plant business demonstrates how vital our products are in an evolving global economy. We continue to see the recovery of the aerospace industry. In all of our other divisions, we will be a vital supplier to both the EV and ICE automotive industry. We continue to see growing demand in power and electronics, building insulation materials, cleaner solvents for the chip industry and expanding markets for lightweight and stronger materials. We will pace our share buyback program to make sure we are both returning value to our shareholders and preserving a strong balance sheet that will assure our flexibility and allow us to capitalize on M&A opportunities. During 2024, we will complete a $280 million cost realignment, a European restructuring program we announced over the past two years. This will help offset inflation, flatten our organization and allow us to compete more aggressively and respond quicker to market conditions. As mentioned in our prepared remarks, we will be very conservative on our capital spend this next year. We will spend what is needed to assure our reliability and safety as well as investing in high-priority growth projects. Depending on the speed of an expected recovery in 2024, we will be ready to proceed with other projects as market conditions may warrant. In short, as we conclude what has been a year with more challenges and opportunities, we believe that we're in a unique position to rebound quickly as markets shift direction. We will also be calibrating our operations around a conservative approach to capital allocation towards long-term shareholder return and reliability. Thank you very much. And with that, we will open the line up for questions.

Our first questions come from Aleksey Yefremov with KeyBanc Capital Markets.

Peter, it seems like China could be one of the main reasons things are so tough in MDI, in particular. Do you see anything in China to suggest a path for better 2024?

It's great to hear from you. Regarding China, we've been noting a slow and steady recovery over the past year. While early in the year, many anticipated a quick recovery, we see that the housing market shows signs of improvement as interest rates decline, which usually indicates a forthcoming recovery. However, we are not overly dependent on this. Our investments are focused on domestic energy conservation in China, particularly in insulation, building materials, and the electric vehicle market. We continue to gain market share in both internal combustion engine vehicles and EVs, as well as in consumer goods and appliances. Our primary focus is on the domestic consumption and building sectors of the Chinese economy. I believe we will keep seeing gradual growth and recovery in that area. Furthermore, looking at Chinese prices since the start of the year, they have remained slightly elevated, and I anticipate continued improvement throughout 2024 in China.

And as a follow-up, it seems like raw materials spiked some time in Q3, affecting margins in Q4. Do you see this as sort of a temporary issue for Q4 such that margins should improve in subsequent quarters? Or is it sort of a reset that could last longer?

I don't think that it's going to be a permanent reset, but it is something when we look at raw material volatility. Remember, for most chemical companies, I don't think we were any different. By the time you buy the product today, and I guess, I suppose some of this still is how you end up doing your accounting. But if you buy the material today, you're shipping it from various places around the world. You're bringing in your inventory, you're working it. It works through your inventory, goes to your customer, you're billing your customer and you're getting your money for that inventory. That value of the inventory, it can be anywhere from 2 months to 4 months. If you get into slower demand periods and rising raw material costs, that's kind of the worst of all worlds in my opinion. And I think that's the reason why we were saying a quarter ago is we were seeing the global uncertainty and the rising cost as we go into the fourth quarter, which is usually a time when people are de-inventorying anyways. I think that we were kind of expecting to see higher costs, slower demand, and that would typically mean a drag on earnings. I think that's what we tried to reflect in the forecast that we've given.

Yes. Aleksey, I think it's clear we've got a headwind going into the fourth quarter, particularly when you look at benzene, which averaged about $3.10 in quarter 3. It settled in October over $4. It settled for November at $3.65. Spot price is lower, but that is our largest raw material. Natural gas in Europe has also risen from approximately $10 a Btu to about $14 to $15 today. So some headwinds there; there are some benefits in the chlorine chain, with chlorine coming down, epichlorohydrin is falling. But those are outweighed by benzene and natural gas.

Our next question comes from the line of Michael Sison with Wells Fargo.

Peter, when you think about, I guess, Polyurethanes in total, you've done a lot of things over the last several years going downstream and trying to improve the quality of the business. This year's, for a lot of businesses, looks really tough to see those changes. But when you think about, again, just thinking where the business see when things recur, maybe talk about whether EBITDA margins can get back to all this destock in difficult times end?

Yes. I believe that MDI is currently experiencing an unprecedented decline in demand. In my 25 years of working with this product, as well as the experiences of those with over 30 years in the field, we have never witnessed two consecutive years of decreasing demand. This situation is not primarily driven by macroeconomic factors, as we are not facing competition from alternative materials. There's a noticeable halt in the use of MDI in furniture, bedding, and home construction. Despite this, I see MDI continuing to grow its range of applications and improving its chemical properties. From a fundamental perspective, there is no reason why MDI shouldn't perform much better under normal economic conditions. I expect margins to return to the mid-teens. I don't believe that significant changes are necessary because the core fundamentals of MDI remain intact. The recovery of U.S. housing will be a significant factor in MDI demand, as buying a new home leads to increased use of MDI in construction, furniture, bedding, paints, coatings, electronics, and more. Even though the automotive sector was indirectly affected by strikes last quarter, which resulted in more MDI being available than anticipated, this hasn’t drastically impacted our customers. Additionally, in the context of global energy conservation and insulation trends, particularly in spray foam and insulation materials, I see no reason why MDI shouldn’t bounce back. When that recovery happens, I believe it will happen faster than expected.

As a quick follow-up, you mentioned Chinese MDIs in your prepared remarks. What is the current situation in the U.S. and Europe? How much lower do you anticipate prices will drop in the fourth quarter? What are your thoughts on 2024, and what needs to happen to strengthen all regions?

Well, fundamentally, in '24, people need to stop tolerating losing money. And I think that, that fundamentally has to be a broad issue. It's the age-old issue of any product that's being bought and sold at very low margins, is that what's the discipline of an industry to be able to sell a product and set a price to return money to shareholders. And right now, MDI is not doing that. And so fundamentally, I think that there needs to be a change in the entire MDI market. Now that doesn't just come about without economic recovery. It doesn't come about through without customer demand returning. And those things will happen. But as I look at how close much of this is getting to fixed cost sort of return, it seems like we're there. As I look at pricing in Europe, we've been able to get some modest increases in the fourth quarter. I'd like to say that's because demand is improving, but I think it's more just discipline. And there are signs that I'm seeing or at least feeling that we're to the bottom. But unfortunately, I think I've probably said that in the past. And so I'm not ready to call the bottom out, but I think that we're very close to it.

Our next questions come from the line of David Begleiter with Deutsche Bank.

Peter, do you expect this destocking the inventory to continue into Q1? And I know it's early, but should Q1 be better than Q4 or maybe closer to Q3? Or how do you think about Q1 right now?

I believe that Q1 will conclude much stronger than it starts. In past years, particularly as we have expanded in China and considering the Chinese New Year, I can't overlook the impact of these factors on the early part of the year. Certain parts of our business perform exceptionally well during this time, especially in our downstream operations. The aerospace sector typically sees a stronger influx of orders in Q1 compared to other periods, while some other sectors tend to do better later in the year. However, I find it challenging to believe that inventories can continue to decrease significantly into 2024. Normally, at year-end, there's an expectation for a boost in free cash flow, as companies aim to minimize their inventory. Generally, Q1 is not a time when companies are looking to cut down on inventories unless there's a significant macroeconomic reason to do so.

Very good. I know you mentioned aerospace earlier. How much has aerospace improved this year? And how would that compare to prepandemic levels of profitability?

I think we can confidently say that we're about 55% to 60% recovered in that business. There is a strong backlog among the large jet manufacturers, specifically Airbus and Boeing. The demand for both of these companies’ aircraft is robust. Based on recent visits to both companies, the main challenge appears to be supply chain issues. The production rate of an airplane is limited by the slowest component in the assembly process. We are in discussions with them and can provide more materials, but delays can stem from components that may be less recognized, or from regions where metal supplies might be delayed. There is certainly demand within the aerospace sector, and customers are eager to resolve these bottlenecks and increase production capacity as soon as possible. I am quite optimistic that in the next 12 to 18 months, we will return to or come very close to our pre-pandemic levels. It's worth noting that approximately one-third of our aerospace business—around 30%—relates to military and private aviation. We are witnessing the introduction of new, lighter, more fuel-efficient models in private aviation, and of course, as more target drones are produced and used, that’s a trend we welcome, provided it doesn’t result in harm to anyone.

And David, we did see a 13% revenue increase year-on-year. So we are seeing some progress in aerospace despite the supply chain issues that Peter outlined.

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

Peter, maleic anhydride prices seem like they're continuing to slide here in the fourth quarter as they have really all year long. So I appreciate your updated views there. What do you think we'll need to see to stabilize that market? And maybe you can comment on things like operating rates and butane costs in terms of profiling that business over the next couple of quarters here?

We are significantly larger in the U.S. compared to anywhere else globally. While we do have a facility in Europe, I'm not overly concerned about margins at this time because butane prices have remained very competitive. As prices decrease, raw material costs have also fallen. The bigger concern regarding maleic anhydride, in my view, is the demand for maleic in construction markets such as polyester resin, especially with imports coming from regions still receiving Russian Fed raw materials. We are observing trade movements in that customer segment that we haven't seen before. I believe that as the construction market normalizes, the real opportunity will lie more in demand rather than in raw material costs or manufacturing balance. It's all about getting back to a more stable environment.

Remind you, Kevin, that we have quite a majority of our contracts in North America, which are on formula-based pricing. So margins, themselves, as Peter says, have been relatively stable unit margins in North America. Europe, a different story where it's been under depreciation you by noting the pricing pressure there.

That's helpful. And then switching gears. It sounds like you're contemplating a new MIRALON plan. I think your prepared remarks that were released last night said you're evaluating a 5,000-ton plant. Can you just talk a little bit about the opportunity there and put that in possible investment into context, not sure how much that might cost, for example, to build that out?

We are currently in the process of starting a 30-ton facility early next year. As a reminder, at our R&D facilities, we developed this technology beginning with machines producing one pound of capacity per year, followed by a scale-up to 100 pounds annually. We then began selling to NASA at a high price point per kilo. After that, we successfully scaled to one ton per year. We are now constructing a 30-ton facility in Texas, and once it is operational, we plan to replicate it at one of our locations, allowing us to utilize the hydrogen byproduct and produce MIRALON material. This will be our first fully commercial unit, where all output will be utilized. The total cost for the 30-ton facility is expected to be in the low tens of millions of dollars. Previously, such facilities have only operated in controlled environments, so integrating one within our facilities will provide real-world insights. We aim to begin this project, which will take about 9 to 12 months to complete, by late 2024. Following that, we anticipate starting a 5,000-ton facility in early 2025. If successful, this facility will produce a competitively priced product for various applications, including carbon fiber, concrete strengthening, and EV batteries. We are actively qualifying and entering several of these applications, marking a critical period over the next 18 to 24 months as we transition from bench-scale testing to commercial-scale operations. I may have shared more information than you were seeking, but we are committed to progressing aggressively while maintaining technological integrity.

Kevin, less than $50 million of capital is allocated for all the investments that Peter has mentioned and has been spent over several years, which is included in the total capital expenditure we've outlined for 2024.

Our next questions come from the line of Vincent Andrews with Morgan Stanley.

Peter, just wanted to square your comments on decelerating the pace of the buyback from I think you were doing 100 a quarter to now maybe it's going to be 50 in the fourth quarter. In the prepared remarks, you referenced just sort of obviously what's happening to the EBITDA in the fourth quarter in the operating environment. But I think I heard you on the call talk about you also wanted to have some spare capacity for M&A. So I just wanted to get your latest thoughts on M&A and how you think about what might be out there versus your own stock trading in low 20s?

Right now, we believe our stock is still a very competitive buy, although its value is unfortunately being impacted. When we look at the overall M&A market, we are noticing a slight improvement as multiples decrease. However, it’s not just multiples that are affecting asset valuations; EBITDA for most of the assets we are examining is also declining. As we move away from the period of easy money, the competitive environment has shifted a bit. More importantly for our Board of Directors, our discussions about share buybacks focus on consistency and reliability. We are not just thinking about whether we can afford it this quarter or this year, but how to establish a reliable program that stakeholders can depend on over the next couple of years. Our balance sheet is strong enough to handle challenges and provides us with opportunities and flexibility, ensuring that we remain competitive with our peers in the chemical industry in returning value and cash to shareholders. It's a matter of balancing all these factors. So, I urge you to not view the changes in the fourth quarter as a mere reaction to one quarter but as part of a broader strategy for flexibility. Reflecting on our stock buybacks over the past year, our dividend, and so forth, we have been among the leaders in our industry in returning value to shareholders.

Yes. I think if you close out the year, we'll save in excess of $0.5 billion to shareholders through a combination of dividends and share repurchase throughout this year.

That’s very clear. As a follow-up, I think I also saw that you anticipate completing your planned cost savings program this year as intended. Are you contemplating anything for next year?

Well, I think that we’re always looking as to how we can be doing things better and more efficiently and more effectively. I think as we look at our overall portfolio, depending on business conditions and again, I think that we probably have seen some other unprecedented conditions. I said, we’ve never seen a year where MDI consumption has fallen 2 years consecutively. We’ve got to make sure that we see the realities in the marketplace and that we calibrate the business, the cost structure and so forth accordingly. So we’ll see $60 million in benefits in 2024 that we didn’t see in 2023. That’s largely because we’ll have an annualized savings of 2024 over 2023 of the cost savings will be completed by this year. But again, the day we sit back and look at our portfolio and say it doesn’t need to be changed or our cost structure is perfect, probably a time when a new management team needs to come in because I think that’s what – largely what we get paid to do.

I think we see some additional opportunities in our manufacturing cost efficiency as well as completion of the European transformation. We do need to balance next year in terms of making sure that we’re limiting the amount of restructuring cash net needs to be a real focus on free cash flow and free cash flow generation overall, as Peter said, $60 million of year-on-year benefits to come from what we’ve done this year.

Our next questions come from the line of Frank Mitsch with Fermium Research.

As I looked at the guide for the fourth quarter, I understand the macros are not great. But the number was pretty low in terms of what you're guiding. And Peter, as you started the call, you said, look, things are murky. We haven't even started the end of year sort of changes by the customers, maybe they're destocking or what have you, into year-end. So can you give us some more color as to how you came up with the $65 million to $90 million guide for the fourth quarter? What's kind of embedded in that? And if I could be so bold as to ask a more granular question, what the heck did you guys report in October in terms of profitability? How much of that $65 million to $90 million is kind of already in the bank?

As we review the October figures, we won't be discussing the specifics of our monthly performance. However, I can confirm that October was not a good month. Generally, at the end of the quarter, we observe that larger customers, particularly in the automotive sector, usually approach us in mid-December to indicate they are finished for the year. Prior to that, they often begin cancelling orders, leading to a sudden end to the fourth quarter, which typically occurs in December rather than on the last day of the year. The business doesn't fluctuate dramatically from month to month, but within the fourth quarter, it does. Based on what we've heard from customers, there seems to be an indication that they will be shutting down earlier this year, planning to take the last two to three weeks off and reducing inventory. This is anecdotal information, and for a company of our size, it's challenging to make abrupt changes like inventory reductions, especially since goods are currently in transit or already shipped. We expect some inventory reductions in the fourth quarter, and if these begin at the start of December instead of mid-December, it will significantly impact our financial results. I just wanted to clarify in my remarks that despite entering the fourth quarter and seeing some order trends, it’s still too early to predict our final outcomes with certainty.

Frank, if you're looking to bridge between the 136 we just did and the midpoint of that range, you can think about half of it being price costs. We've talked about what's gone on with the benzene market and the natural gas market. Overall, we did indicate that our China joint venture PO/MTBE, that EBITDA is going to come down between Q3 to Q4 by about $10 million. And then the balance of it will be the seasonality and the inventory of the customer and that Peter has talked about.

That's very helpful. However, there is a prevailing perspective that destocking has been ongoing since the third quarter of 2022. Some believe that this process is nearing its conclusion, suggesting that the typical seasonality in the fourth quarter regarding companies adjusting their inventories may not be as pronounced this year. It seems to me that you disagree with this view and maintain that further destocking is still necessary. Is that correct?

I don’t want to be seen as the ultimate pessimist, but I think year-end destocking is correct. While I don't anticipate it being catastrophic, I do believe it will happen. I'm a bit confused about your earlier point regarding destocking over six consecutive quarters. I don't believe there's that much inventory in the system; rather, it seems to stem from a decline in demand and inventory. When we saw a drop in demand, particularly in housing and other sectors, it appeared as if we were witnessing inventory destocking, but now it seems we've experienced a significant amount of inventory reduction alongside a real decrease in those areas. Remember that at the start of 2022, many sectors faced significant inventory increases due to supply chain issues. Numerous customers held excessive inventories, not just ours, but also their own. For example, some of our OSB customers and OEMs typically manage 20 to 30 days of inventory, but some had up to 90 days. We may not see the complete picture because while they might not stock 90 days of MDI, they're still working through other inventories before they can start purchasing ours again. Overall, it seems to be a mix of factors, but I do agree with you, Frank, that whether it's related to demand or inventory, we are likely approaching the end of this situation.

Our next questions come from the line of Mike Harrison with Seaport Research Partners.

So the next logical question is maybe on your expectations for destocking as we get into next year. Do you think we're in a situation where we see a gradual recovery in order patterns? Or could we see a situation where customers are going to need to rapidly bring production back up, rapidly accelerate orders to meet seasonal demand pick up in the spring? Is that something that we could be seeing about to unfold here?

I'm not going to speculate since it's challenging to have the necessary data to support it. However, I believe that if businesses are running low on inventory, which I think the market currently is, it’s not particularly difficult to see a rapid response. When someone begins to act quickly to restock inventory, we start hearing requests for more inventory. We're operating at about 55% to 60% capacity in our facility, and it will take us a few weeks to adjust production to meet the inventory needs. Suddenly, there are shortages, and as people announce their shortages, prices rise, leading to a rush for supplies. This often stems from something small, like a single operator globally facing a plant issue or a spike in raw material costs. Even though there isn’t anything particularly wrong happening in the Middle East right now, a problem could arise at any moment. Furthermore, when crude prices rise for any reason, that indicates my raw material prices will increase next month, making it difficult to obtain the product I expected. Many chemical companies appear to be adjusting their operations based on current demand rather than anticipating a recovery. Considering all these factors, I believe we could experience a quicker, more abrupt recovery instead of a gradual process.

All right. That's very helpful. And then my other questions on the spray foam opportunity in international markets. Maybe give us an update on the kind of progress that you're making with spray foam insulation in Europe and in China?

Well, I think just in a nutshell, we're continuing to see strong growth in both of those areas, mostly when we talk about international. We're looking at the Middle East and we're looking at the U.K. Those are the two markets where we've got ready-made system houses that are making the raw materials. We've got the sales and marketing forces that are out and aggressive in these markets. I would say that Japan also should be, for us, a growing market in that area. But we're starting from a very low base, but we have very high expectations on that. So I wouldn't see material movement on our P&L because of the sales in those regions, but those are going to be growth markets that over the coming years. We're going to see, I think, a real opportunity to change the business.

Our next questions come from the line of Hassan Ahmed with Alembic Global.

On the polyurethane side of things, obviously, a bunch of questions around trying to sort of forecast demand, obviously, in our industry is always challenging to do. But it seems that the supply side of things easier to forecast, right? So as you sort of sit there and look at polyurethane, sort of cost curves. I mean, in the response to one of your earlier questions, you talked about how margins are the same for some of the marginal producers. You guys, yourselves, reported 8% EBITDA margins this quarter. So I'm just trying to understand the marginal guys presumably are losing money right now. So with the supply looking the way it's looking, I mean, do you forecast potentially shutdowns, more delays in capacity additions and the like and how will that play out as it pertains to a potential recovery going forward?

I'm not sure that the recovery going forward is going to be dependent on any shutdowns. I am a bit surprised that, that hasn't happened yet. As I look at the various regions, I look at the U.S. I don't see a lot of shutdowns of total facilities in the U.S. because the major producers in the U.S. only have one facility. And I don't see somebody exiting the North American market. And I think the same can be said for China. Now there are people that have multiple facilities in China but I personally just don't see them shutting one of down. They're very competitive. They start with foam and they work their way through on a competitive set of economics. Europe, in my opinion, longer-term, when I look at the size of the facilities that are in Europe and the number of people that have multiple facilities in Europe, I do question the longer-term viability of some of those assets. But again, I'm not privy to decisions that are made, obviously. In those companies, I don't know what their economics are. To the degree that they've got longer-term contracts with government-assisted money or with unions and so forth, I have no idea what limitations there might be on that. But fundamentally, I think that the industry is shutting down lines more than they're shutting down facilities. And I think you're probably going to continue to see that.

The only supply coming to the market, Hassan, will really be 1 month over the next sort of 4 to 5 years, but there's nothing else major that's been announced and if the industry returns to its 4.5%, 5% growth level, then that will strip supply as a rebound occurs.

It makes sense. As a follow-up, let's shift our focus to the M&A side of things. The balance sheet looks very strong, and you've mentioned some inorganic opportunities. In your prepared remarks, you spent a good amount of time discussing the housing construction and automotive markets. Given that these markets are significant for you, are you also considering the possibility of diversifying away from housing, automotive, and construction, especially since these markets can be somewhat unstable?

I believe that by following the money, we can identify where we've been allocating our internal capital. This includes producing cleaning materials for the chip industry, catalysts for polyurethanes, home insulation, and diversifying further downstream in MIRALON. Our M&A activity in recent years has centered on Advanced Materials, which allows us to expand into a broader field of chemistry. We have indicated our focus on trends such as greener solutions, lightweight materials, and adhesion. Our materials, especially in Advanced Materials, will replace ceramics and traditional applications like composite materials. These areas will be our primary focus moving forward. As soon as Phil presents me with a business that has a 35% margin available for 5x FDA, we will act quickly.

Our next questions come from the line of a representative from Bank of America.

So as we're talking about hopefully getting a volume recovery at some point, I think your variable decremental margins this quarter were in around 40% or somewhere in that range. Can you discuss how the decremental margins differ from within each segment and how essentially we would expect a volume recovery in each of the three businesses to flow down to EBITDA?

Yes, I believe we experienced a year-on-year decline of about 30% to 35% in overall decrementals. It's great to speak with you. Regarding volume recovery, both Polyurethanes and PP have significant potential for improvement as construction activity recovers, which should positively impact our decremental margins. Advanced Materials is closely tied to our progress in aerospace, and we anticipate that if automotive production remains steady globally, it will support this growth.

Perfect. And just a follow-up on the raw materials for MDI, besides a well-known increase in benzene prices, can you provide us a little bit what you are assuming for Q4 in each of the key regions, Europe, China and the U.S. for other key raw materials, chlorine, et cetera?

Yes. We discussed benzene and noted that natural gas prices in Europe are expected to reach 15. Chlorine and caustic soda are facing some downward pressure, which we have accounted for. These two are the main raw materials, although they still make up a smaller portion of Advanced Materials. Additionally, ammonia, which is a significant raw material for Performance Products, has been trending upwards after experiencing a decline throughout the year. This also affects our Polyurethanes and nitric acid. Overall, you should consider that the largest raw material we buy globally still remains the same.

And certainly, many of the products that Phil just mentioned are subject to significant volatility due to longer-term contracts or pass-through contracts related to natural gas and similar factors.

Our next questions come from the line of Matthew Blair with Tudor, Pickering, Holt & Company.

Peter, so it's obviously a tough market, but your prepared comments did mention that building solutions volumes were up both quarter-over-quarter as well as year-over-year. So I don't know, that seems encouraging in the tough construction market. Should that be the read-through for investors? And do you have any more color here? And also, is this because you're gaining share in the spray foam market or are there other dynamics at play?

Last year’s third quarter was quite challenging, marking a low point for our overall business. However, in this third quarter, we’ve seen a 2% increase compared to the previous quarter and a 10% increase from a year ago. Looking at some of our other products, like composite wood materials, we are observing a positive year-on-year comparison for the first time in over a year on a quarterly basis. I don’t want to get too optimistic, but these indications suggest that we may have hit the bottom and are starting to see a recovery. In the total insulation sector, there’s been a 3% increase from the previous quarter. While we’re down 4% compared to last year, we have seen a sequential increase. I think we’re starting to see signs of stabilization in some areas and improvement in others. While we traditionally refer to these as “green shoots,” it feels like a worn metaphor at this point, but I believe we are observing more of these signs now than we did a quarter ago.

Okay. That's helpful. And then you mentioned some challenges from rising European natural gas prices. Do you have any hedges in place? Or is there anything you're doing today to mitigate potential price spikes in the winter?

We do have some measures in place, but I wouldn’t categorize them as substantial. They will help us manage the extreme fluctuations, but I believe that the short-term spikes will still affect us as a company. In the long run, the negative effects of the poor energy policies in Europe are likely to impact consumers, confidence in the broader economy, and our customer base, which relies heavily on energy. So while we do have some protection from gas price increases, it is limited. My main concern lies with the overall impact on the macro economy.

Our next questions come from the line of Josh Spector with UBS.

I wanted to focus on Advanced Materials. If you examine your volumes there, they've declined about 40% compared to 2019. You've mentioned the impact of aerospace on recovery. But regarding the rest, could this gap indicate some lost volumes due to competitiveness issues or destocking? Where do you see the market heading? Additionally, your EBITDA isn't too far from 2019 levels, suggesting your unit margins are improving. Is this a positive indicator for future profitability when volumes rise, or is that not the correct perspective?

As you consider the business, keep in mind two key points. Firstly, we are transitioning away from the BLR sector, and in many areas of Advanced Materials, particularly in downstream differentiated specialties, we have observed significant growth. I previously mentioned components being used in EV sports cars. Conversely, we are exiting the bulk liquid resins business, which constituted the majority of Advanced Materials five to ten years ago. We are moving away from large volume, low-margin accounts. Overall, while the business may appear to show negative growth, the quality of what we are developing and the core of the business is growing strongly. Additionally, since 2019, we have made two substantial acquisitions in this sector that have been successful and well-integrated from a cost perspective. With cost synergies now completed, our focus shifts to long-term market opportunities and the customer applications these acquisitions enable us to pursue. As we assess the long-term outlook for Advanced Materials, pursuing valuable M&A opportunities remains a high priority for us.

Our next questions come from the line of Laurence Alexander with Jefferies.

Could you provide more insight into what you believe is causing the slowdown in the EV market? How are your customers reassessing their fundamental assumptions? Additionally, could you discuss your views on working capital days for next year and where you believe the mid-cycle performance should be as your portfolio evolves?

That's a great question, Laurence. I’ll let Phil address the working capital inventory issues. Regarding the EV sector, I'm not exactly worried, but when I look at the entire supply chain and consider some of the car manufacturers, it seems that Tesla is the exception, having been largely supported by federal green credits that other companies purchased from them. It's only been in the last couple of years that Tesla has started to generate profits from their EVs, despite producing an excellent vehicle. However, the broader EV market raises concerns. Some companies are reporting losses of tens of thousands of dollars on each vehicle, and while they claim it’s a matter of increasing volume, that growth doesn't appear to be happening. Looking at the supply chain, it's evident that substantial profits are made from components going into the batteries. The Chinese have considerably developed their supply chain over the past 15 years, excelling in refining, mining, processing, and expertise, and they deserve recognition for their achievements. All these factors are quite complex and perhaps beyond my expertise regarding the future of the EV market. However, any EV will require certain fundamental components, including lightweight strong materials and effective batteries that need ultra-pure ethylene carbonates. Our upcoming MIRALON and other materials will help reduce weight, enhance strength, improve mileage, and hopefully decrease production costs while also providing better comfort in the vehicles. From our perspective, each EV presents more opportunities across all our divisions compared to internal combustion engine vehicles. I remain optimistic about the business potential in this area, even as I can’t address every economic challenge. Nonetheless, I believe Huntsman has significant opportunities now and in the next two to three years.

Laurence, on working capital. We target approximately 30 days cash conversion cycle. At the year-end, you want to think about that. But for 2024, we have been bringing down our inventories in quarter 3 about 5% in the third quarter, looking at another 10% in the fourth quarter to make sure we're calibrated overall demand. I do think there's an opportunity as we meet through 2024 to further improve working capital, and we highlighted that in the prepared remarks.

Our next questions come from the line of Patrick Cunningham with Citi.

So you decided to pause the UPEC project given the weaker pricing there. But on the flip side, you're moving forward with the other two projects. So can you talk about what gives you confidence to move forward in those markets there? And what's the expected contribution to both 2024 and run rate earnings from those projects?

Yes. We have two projects, one in Conroe and one in Hungary. The Conroe project is connected to the semiconductor market, and we are confident about its delivery despite a decline in the semiconductor market this year. In the long term, our clean amines are expected to perform well in that market, especially with the ongoing investments in North America. We plan to have it operational in the first half of next year, contributing to our profits in the second half of 2024. The project in Hungary is closely tied to installation, energy efficiency, and automotive products that are in demand from automotive OEMs. We are not worried about selling these projects at good margins. The issue has been with UPEC, where we faced a surplus of Chinese materials. Therefore, we prudently paused construction at the right time. We can resume within 12 months, but currently, the returns are not favorable, so we are reallocating that capital to other projects like Advanced Materials. Overall, we anticipate about $10 million in benefits from the two projects in the second half of next year, increasing over time to more than $30 million as we progress through 2025 and 2026.

Operator, we're at the top of the hour. Why don't we take one more question?

Our next question comes from the line of Arun Viswanathan with RBC.

If we look at over the last couple of years, I think you did a 13 50 or so EBITDA in '21. You removed the textiles business and maybe you're down to call 50 or so at a peak. You're run rating around $400 million right now. So is that the right way to think about kind of trough to peak EBITDA of Huntsman as it stands now and maybe like a $800 million mid-cycle number? And if so, any kind of larger items that would take you from, say, that $400 million to that $800 million annualized number? How should we think about that?

Yes, Arun, your calculation is correct. $1.2 billion, excluding textile effects, reflects the recent highs of 2021 and 2022 overall. We need to consider three key factors for current rates to improve. First, there should be a continued recovery in China, where we have observed steady and moderate improvement and expect further progress next year. Second, the U.S. construction markets must rebound, as about 40% of our business is in North America, with a significant portion tied to U.S. construction, both residential and commercial. Lastly, it’s crucial for companies in Europe to find ways to enhance profitability amid rising gas prices. These three macro elements will be essential for increasing profitability. Additionally, we have projects launching in Performance Products and Advanced Materials over the coming years, and we also anticipate a recovery in aerospace, which will contribute to these numbers.

Operator, I think that we're done with our time. We'd like to thank everybody for taking the time for joining us this morning.

Thank you. That does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.