Huntsman CORP Q1 FY2024 Earnings Call

Thanks, Daryl, and good morning, everyone. Welcome to Huntsman's First Quarter 2024 Earnings Call. Joining us on the call today are Peter Huntsman, Chairman and CEO and President, and Phil Lister, Executive Vice President and CFO. Yesterday, May 2, 2024, after the U.S. markets closed, we released our earnings first quarter '24 via press release and posted to our website, huntsman.com. We also posted a set of slides and detailed commentary discussing the first quarter of 2024 on our website. Peter Huntsman will provide some opening comments shortly, and we will then move to a question-and-answer session for the remainder of the call. During this call, let me remind you that we may make statements about projections or expectations for the future. All such statements are forward-looking statements, and while they reflect our current expectations, they involve risks and uncertainties and are not guarantees of future performance. You should review our filings with the SEC for more information regarding the factors that could cause actual results to differ materially from these projections or expectations. We do not plan on publicly updating or revising any forward-looking statements during the quarter. We will also refer to non-GAAP financial measures such as adjusted EBITDA, adjusted net income 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, our Chairman and CEO.

Ivan, thank you very much, and thank you all for taking the time to join this morning. Reviewing the results of the first quarter, a few things of note are emerging. I said in our fourth quarter conference call on the 22nd of February that our #1 priority this year was to recover lost volumes. During first quarter, we were able to make some modest gains and we'll be doing more throughout 2024. The gains that we saw in volume were attributed to a combination of new business, demand growth and pockets of inventory restocking. We question how much of this was the end of inventory destocking and the beginning of inventory rebuilding versus demand growth. While it will vary customer by customer, I believe it to be about 50-50. I should also say to that eventually, the two conditions merge into one gray area. Demand improvement begets inventory restocking. However, the bigger issue is when do markets recover sufficient to achieve pricing recovery. Today's levels of profitability, particularly in Europe, are below reinvestment levels, and in some cases, are below positive cash generation. I'm happy to see a 25% growth in our North American MDI demand in Q1, we should remember that this is compared to Q1 of 2023, where demand had dropped 35% from 2022. All this noise means that we are moving back to where we were merely a year ago. To have a real return to normalized market conditions, we're going to need consistent demand improvement and equally important, higher prices to expand margins. During the last call, we also outlined the need to improve our cash flow. While we're seeing improvements in this area as well, we may face headwinds in working capital later in the year as sales volumes and prices move up. Our third priority in 2024 is our continued focus on our costs in the face of global inflationary and regulatory pressures. We continue on track to meet all the objectives we announced to offset projected 3% to 4% global inflation. Our fourth priority is to continuously assess our portfolio to make sure we're maximizing the value of the assets we own and how we deploy capital for growth. Finally, we continue to focus on our environmental and safety performance. This is our license to operate and regardless of business conditions, we will not compromise on the safety of our operations. This focus on risk also applies to our balance sheet. We will not jeopardize our investment-grade rating for short-term gains. All in all, I'm not surprised by the results and conditions that we are seeing. Our quick action on cost, capacity rationalization and discipline with pricing will serve us well as the industry continues to recover. Our objective is to take quick and decisive actions, advantage of these improving conditions and get us back to normalized earnings as quickly as possible. With that, operator, let's turn the time over to questions and comments.

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

Some of your comments in the prepared remarks reflect a slightly more positive view on China. And I think the sentiment there is pretty mixed at this point. Can you highlight where you're seeing some strength with end markets and what you expect to be growth drivers throughout the year?

We are observing significant demand growth in the automotive sector, largely due to the rapidly expanding domestic markets in China, particularly in the electric vehicle (EV) space. Our offerings for EVs match those for internal combustion engine vehicles, and our Polyurethanes division, which is our largest in automotive applications, plays a key role. We are also working on various applications that are transitioning into EVs from other divisions, focusing on aspects like structure, strength, lightweighting, adhesion, and insulation. The Chinese automotive market remains a strong growth area, and I believe this trend will persist for some time. However, there are broader questions regarding the longevity and success of Chinese exports, especially relating to the challenges of exporting EVs to the U.S. and the potential limitations in Europe on vehicles built in China. Nonetheless, we see many Chinese auto firms forming joint ventures with European counterparts, which may enhance this sector. Furthermore, projects related to energy conservation in China, such as insulation and building materials, continue to perform well. While residential construction remains sluggish, we anticipate a slow but steady recovery in China, both in terms of volume and pricing, which aligns with our expectations from a few quarters ago.

Great. Appreciate the detail. And then Advanced Materials volumes were down year-on-year, even facing the easier comp. Is there any element of whether it’s value over volume or lower-margin product exits there? Or is this reflective of underlying demand? And just on full year volume, do you expect volumes to be down this year?

I expect volumes in Advanced Materials to grow this year at the same rate as overall macro-GDP. Areas such as electrical infrastructure applications, the aerospace industry, automobiles, lightweighting, and EV applications are likely to see growth that outpaces GDP. Many industrial coatings will align with GDP growth, maybe slightly below it. We will also keep moving away from more commoditized grades, like BLR resins, which don't provide significant value from a technical or manufacturing competitive perspective. Overall, it will be a mixed scenario, but if we exclude the commodity aspect, we have consistently seen steady growth in downstream applications over the last couple of years.

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

Obviously, very impressive volume growth in North America and polyurethanes as you mentioned, but you said you were only getting back really where you were for '23. How do you think about the pace of business in polyurethanes, not just in North America, but as we play out through the year?

I'm feeling increasingly optimistic about the situation, Frank. I don't expect to see a consistent 25% growth throughout the year. Much of what we experienced in the first quarter was due to the end of inventory reductions. Currently, we anticipate a slow and steady recovery as we return to in-house operations. While I can't definitively say this applies to all areas, inventory levels generally seem quite low across most applications in MDI. Looking ahead to the next few quarters, we expect to see ongoing recovery and modest growth, particularly in construction.

Okay. The volume forecast is expected to be slow and steady. On the margin side, you mentioned some modest price increases in MDI in a few regions, but we are currently facing persistent benzene costs. How should we view the margin profile for polyurethanes?

I believe that our improvements over the next quarter or two are promising. Although it's early in the quarter, I can project market conditions for the short term. I expect the improvements to be driven about two-thirds by volume and one-third by price. While there are some challenges with benzene prices, crude prices are currently pushing $80 to $90 depending on WTI versus Brent, which will impact gasoline prices. This time of year typically marks the beginning of the blending season, and benzene prices may experience upward pressure. Therefore, we need to recover from high raw material costs and exceed those prices. In my view, the main challenge we face as a company is to raise these prices.

Our next question is come in of David Begleiter with Deutsche Bank.

Peter, what will it take and how long will it take to get back to that $1 billion EBITDA threshold that you've exceeded in the past?

I believe it's going to require several factors. It's a great question that we consider frequently. Simply waiting for market conditions to improve isn't the solution we should be aiming for. We need to see demand in U.S. housing return to around the $1 million mark for housing starts. Considering our past performance over the last couple of years, we are more concerned about the volatility than the disruptions in North America. We need Europe to halt their ineffective policies regarding industrialization and foster a growing economy. As for China, I see it experiencing a gradual and steady recovery. While there are expectations for significant stimulus, I don't foresee anything drastic happening; rather, I anticipate a consistent recovery in China. A lot of our outlook is tied to our own initiatives, such as the MDI splitter in Geismar, Louisiana, which we launched just as COVID hit. That should generate an additional $40 million to $45 million in EBITDA. We have several expansions planned in the coming months for amines, urethane catalysts, and ultra-pure amines for chip cleaning and solvents, expected to bring in $10 million to $25 million in benefits once operational. Additionally, we have over $30 million in EBITDA anticipated from the Aerospace segment as it recovers, though demand for widebody planes is still below pre-COVID levels. Regarding our MIRALON technologies, we are currently starting a 30-ton reactor set to enter the commercial market, and we're also beginning construction on a 5,000-ton unit that will launch in late 2025 or early 2026. Our R&D pipeline shows cost reductions of $280 million. While I know this sounds challenging, when you consider all these factors, we have an opportunity for an additional $150 million to $200 million in EBITDA that we can control and should aggressively pursue. Therefore, while market recovery is essential, we must also effectively execute the projects we have underway and forthcoming this year.

Very, very helpful. And just much nearer term back half of the year, polyurethanes EBITDA, should that improve versus Q2 levels based on current expectations.

I certainly hope so. I’ve challenged the team based on our earnings from the fourth quarter to the first quarter of this year, where we saw a 300% increase. If Tony can achieve that level of improvement every quarter for the rest of the year, I would be quite pleased.

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

Peter, just curious, as you talk to your customers in building and construction in the United States, we're ultimately going to get some rate cuts. It obviously seems like more a question of when. How fast do they seem to indicate they think markets will start to move once we move into a less restrictive monetary policy?

I think there’s quite a bit of bullishness right now in the building market. I think there’s kind of two paths that are being pursued right now. That of what happens if rates kind of stay where they are, obviously, that means that you’re going to be getting less house for the same amount of money. So maybe houses are a little bit smaller, maybe they’re a little bit cheaper to build. And the cost of that house is going to be down. And as we look across the board, though, we continue to see very low housing inventory of new homes, new home availability. And so I think builders are doing really two things. They’re preparing and looking at a scenario where interest rates stay where they are and let’s adapt and equip to that. And also, should rates be coming down, I think that’s really going to open up the demand to be quite a bit higher than it’s been the last couple of years. And then the point is there’s a big gap there that needs to be filled.

Okay. Yes. And then just we have seen housing starts to improve over the last 6, 9 months, been a little lumpier recently. But are you starting to see the benefit of that flowing through in your businesses? Or is it just beginning. And maybe we'll see it more over the next quarter or two?

I believe we are witnessing the early signs of improvement. The most significant advantage we experienced in the first quarter was the absence of de-inventorying. It seems that this phase has largely come to an end for various products, especially in the construction and housing sectors. As we anticipate an increase in demand and housing starts in the coming quarters, I am optimistic that this will contribute positively to our achievements to date.

Our next questions come from the line of Aleksey Yefremov with KeyBanc Capital Markets.

Pretty impressive volumes in polyurethanes in North America and Europe. Can you just tell us where are your volumes today in these two regions versus what you would consider a normal volume level?

I’m pleased to see the volumes increasing, but they are where we were about a year ago. We really need to see ongoing growth and movement in pricing. I don’t anticipate volume improvements to reach a 25% increase, but we're sensing that the housing and construction markets are starting to show signs of loosening. Additionally, we are noticing some improvements. If mortgage rates decrease, I believe that will have an immediate effect on the business, and it will be the most significant factor in our North American markets.

Aleksey, you can see that we are 35% down year-on-year from this time last year, and then 25% up. So we are still about 10% to 15% below where we were, and we need to see that trend continue to return to our previous levels.

Okay. And then I wanted to ask you about your spray foam business. How is it doing in Q1 and heading into Q2?

Well, spray foam continues to be a competitive market. The single biggest application for spray foam is our new housing builds. And as we look at that, that for us continues to be an area that is a competitive market. If you look at the mineral fiber with a low cost of energy and so forth, we're going head-to-head. But we still grew our volume there versus the prior year at just under 10%, 8% growth in that business. And so we continue to see growth. But again, growth is great to see, but we've got to see pricing. We've got to see margin expansion take place there as well.

Our next questions come from the line of Jeff Zekauskas with JPMorgan.

Can you talk about the relative prices for MDI in both crude and I guess, more specialized in Europe, China, and the U.S. And can you say something about your relative margins in each of those areas?

Yes. When we evaluate the market for polymeric MDI, prices are generally in a narrow range of about $2,000 per ton, with variations of only $100 to $200 among sellers. The market is currently stable, with no significant incentives for large volume shifts between regions. Demand has been somewhat weak over the past year, suggesting that pricing will remain steady. However, there is a positive note as capacity utilization in the industry is around the mid-80s. We are also witnessing quarter-on-quarter growth for the first time in two years, indicating some recovery. Although recent media reports have highlighted operational outages, I want to clarify that we are not anticipating significant price increases just yet. As demand increases and capacity utilization trends upward, we may begin to see regional price differences and potential increases in some areas.

And I guess for my follow-up, can you mention on the liquidation of the SLIC joint venture and how that may affect debt or cash flows in 2024 and '25?

Yes, Jeff, a couple of comments on SLIC, as you rightly point out. So we closed on that deal during the first quarter, minimal impact net income, cash flow perspective, EBITDA perspective. I think we said on the last call, you then go through a process with the Chinese authorities, which will probably last into 2025, where we need to liquidate that joint venture. What that means is that we put approximately $200 million of cash from our consolidated joint venture into SLIC into the unconsolidated joint venture. That cash then gets liquidated out in 2025 back directly to the partners. So you think of Huntsman getting about $100 million of that back and our joint venture partner, SCAC getting the remainder directly. So what you’ll see is the cash goes down because it’s off our balance sheet for a period, it effectively gets trapped in SLIC and then it comes back up in 2025. It has a nominal impact on leverage, probably about 0.2x on leverage as we progress through that process.

Our next questions come from the line of Michael Sison with Wells Fargo.

Peter, where are industry operating rates now for polyurethanes MDI. And just curious where you think those need to get to establish a little bit better pricing and margin going forward?

Typically, in this industry, maintenance of facilities usually requires about 90% capacity utilization. I consider around 90% to be a fully sold-out position. As we've mentioned before, you generally see pricing leverage kick in around 85%, typically in the mid- to upper 80s. Pressure starts building at about 85%. Right now, when assessing your current capacity utilization, which I'm referring to for the second quarter, not the first quarter, I believe Europe is operating in the high 80s, around 87% to 88%. In the U.S., capacity is exceeding 100%, meaning the U.S. needs imports to meet demand. In China, utilization is likely in the mid- to upper 70s. When you aggregate these figures, you're looking at an overall capacity utilization of about 85%, which is on the low end for triggering pricing improvements. To see demand improvements, we need to start experiencing outages or better performance than outages. Historically, we've discussed global operating rates of about 80% to 82%, but being at 85% or 86% is significantly better. A couple of plants being down or slight industry growth could elevate that to around 88% or 89%. I may be getting technical with the percentages, but the key point is that we're in a much stronger position compared to the last two years.

Got it. And then I know it's a little bit early to look to the second half, but what do you think needs to happen to get better EBITDA sequentially in the third and the fourth? And do you think the third and the fourth quarter run rate for EBITDA would be sort of a good base to think about how earnings can grow into 2025?

As we approach the end of the second half, it will certainly influence our pathway for 2025. I'm feeling more optimistic. Looking back to this time last year, we anticipated a challenging start, followed by a strong recovery in the latter half that would offset our previous issues. That didn’t occur; instead, things became more difficult, and it felt like we were in a really tough situation. Nevertheless, as we analyze the start of this year, I believe we’ve witnessed good, consistent growth and recovery. In the second half, we need to sustain that growth. I've mentioned before the importance of pricing movements, and as we consider our trajectory, I'm pleased with the direction we are heading.

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

Peter, I just wanted to revisit some of the commentary that you made on polyurethane volumes. Obviously, North America on a percentage basis, ridiculously strong, up 25%. But you alluded to the fact that we're still not really at normal volume levels. Europe, up 9%. Again, it seems from deflated levels and Asia relatively flat. So could you just help me understand the trajectory from here. I mean we're obviously below normal in North America. Europe, it seems well below normal and same thing with Asia. So I mean, how should we be thinking about near term as well as medium-term volume growth trajectories by region?

I believe we will likely see growth in Europe and the Americas that is stronger than average. Looking ahead to the second quarter, it's still early in our order predictions. However, I expect to see ongoing modest growth. We're facing easier comparisons to last year, so I will focus on comparing quarter-on-quarter performance rather than year-over-year. Over the past year, we've faced significant challenges, and our priority has been to recover from that situation. It seems we are nearing a recovery, and our next step is to begin growing from this point. That is our current status and direction.

And Hassan, as we indicated, sequentially, when you go Q1 to Q2, typically, you'll get about a 5% improvement in volumes, and we highlighted in the prepared remarks but we would expect to get more than that this year. So the trajectory is in the right direction.

And as a follow-up, continuing with polyurethanes just on the cost curves, obviously, there was margin improvement, call it 1%, 1.5% EBITDA margins going up to like 4%. But I mean you guys being on the lower cost of production side of things, I'd like to think that a chunk of the industry is still in the red. And further to that thought, I would imagine that unto itself as the recovery is happening. Would be a big positive in terms of you guys or the industry getting pricing power again.

I agree with you, Hassan. In the U.S., the cost curve appears quite flat. The major players in this market are relatively similar in size, and we are all purchasing effectively. None of us are integrated back into benzene production, so it feels like we are all facing the same challenges regarding natural gas and electricity prices. The chlorohydrin rack pricing is also standardized across the board. When I consider Europe, it seems that's where the significant cost differences are between low-cost and high-cost producers. There are still some relatively small facilities operating in Europe, and I’m honestly surprised that some of them remain in business, though I don’t have insight into their economic situations. Regarding their sizes, yes, Europe is where we will see disparities. In Asia, there are many newer, large-volume facilities functioning. Wanhua likely has an advantage due to their scale and facility setup. However, it's important not to overlook production costs because once you delve into downstream operations, as we see with our splitter in Geismar, Louisiana, and our activities in elastomers and system houses, well-managed downstream businesses that focus on maximizing value from the molecule can yield higher returns than just looking at manufacturing costs. While both aspects are crucial, Europe tends to reward innovation, energy conservation, and lightweighting, resulting in several high-margin applications that we can capitalize on there.

Our next questions come from the line of John Roberts with Credit Suisse.

Peter, your opening comments mentioned that certain areas in Europe are not generating positive cash flow. Is this related to maleic anhydride, or are there other factors?

I’d say that maleic and again, I just got the talking about some of the better end of our urethane businesses. There are also going to be some commodity ends of the urethane business, where we’re really struggling to get pricing up and we need to get pricing up or we need to ask ourselves if we ought to be moving that product somewhere else, to be honest with you. But as we look, by and large, it’s some of the European markets. When I made the comment, I had in mind our maleic business where we are having to battle with a lot of import materials coming in and sluggish demand. And some of the downstream urethane applications are still not, in my opinion, those are not volumes and margins that are sustainable.

And then I had thought you had already exited epoxy BLR resin that's there. So what else are you exiting that I thought you exited before and how much is left to go?

When we evaluate our epoxy operations, we are still producing certain commodity grades of epoxies, and this will continue as we stabilize some of our facilities. Our focus will remain on channeling that volume into higher value-added components. There are indeed lower-end reactions occurring in production that I categorize as commodity, and we will consistently aim to move away from that lower end while increasing volume in the higher margin areas. It's important to note that our discussions about exiting certain businesses aren't solely about basic low-end production. As we assess our capacity and where to concentrate our efforts, it may extend beyond basic low-end production as well.

Yes. And John, for context, I mean, BLR used to be about 50%. If you go back 10 years. Today, we still have some business, as Peter says, it’s about 10% of our volumes, and we continue to move that down when appropriate.

Our next questions come from the line of Salvator Tiano with Bank of America.

Yes. So firstly, I wanted to continue that commodity epoxies discussion. And can you quantify, for example, when you said you selected some businesses in Q1. How much was that impacted on what your volume growth would have been like-for-like without the commodity side? And also looking at the past couple of years, where I think your volumes have declined by around 30%. And also, can you put into context how much of that was just you walking away from low-margin business versus the high-end products?

Yes. So Salvator, if you look at the Advanced Materials business, it grew in aerospace, and I think we said sales grew 6% overall year-on-year. We grew actually in automotive. We grew in the power grid area as well. So you’re talking there, just those three areas, about 50% of our overall Advanced Materials business, where there was growth. The commodity part was well down. And that was well down throughout the year as we did deselect some more BLR business. And year-on-year, we also moved away from some of the low-end commoditizing part of infrastructure coatings. So if you took out some of that commodity, you would have seen growth given power given our volumes into aerospace and into automotive. And I would say that quarter-on-quarter, the sequentially usually see a little bit of an uptick. We saw 5% growth quarter-on-quarter between 4Q and 1Q in terms of our volumes and advanced materials as well.

And then sales question is that the volume that gets to be selected does not generate a lot of EBITDA that’s associated with that.

Okay. Perfect. Since you've already recognized the benefits of producing more downstream products and considering that the epoxy market has faced challenges for a couple of years, we're observing other companies also attempting to move more downstream into epoxy systems. Are you noticing this in terms of competitive pressure, or is this a concern for you moving forward?

Well, many of our applications would go into, for instance, the power grid and electronics, aviation and so forth. These are sold typically on the qualifying basis where you’re selling out for 5 to 10 years on a contract. If you’re selling to the aerospace market, you’re going to be qualifying into a fighter jet project or into an Airbus or Boeing application, that will be around for years to come, and they typically don’t change suppliers. You don’t change specs and formulations and so forth. The other end of the business and I kind of look beyond kind of the power and aviation. Remember that this is an incredibly fragmented business, more so than any of the other businesses that we have. And you’re going to see competition coming from other competing materials, not just epoxy, but I would think that most of our application and competition is coming from non-epoxy applications, where we’re either replacing other materials or we’re seeing other materials that will be competing against us. That are not necessarily epoxy. But typically, just as a rule of thumb, the companies that I see people comparing us to in the Epoxy segments are typically not the companies that we really are aggressively competing with.

Our next questions come from the line of Kevin McCarthy with Vertical Research Partners.

I had a question regarding MDI unit margins. So benzene costs have been elevated a little bit north of $4 a gallon in the U.S. lately. And your prices are rising as well. And so if I net those two things out, when you craft your guidance of $70 million to $80 million for polyurethanes. Are you baking sequential improvement in the unit margins for MDI in terms of cents per pound? It sounds like maybe the answer is yes, but I just want to make sure I’m understanding that correctly.

Yes, Kevin, I believe that’s an accurate assessment. We are trying to manage rising raw material prices while also positioning ourselves ahead of those costs. That’s why I anticipate only slight price improvements, and most of the gains I expect as we progress into the second quarter and possibly into the third quarter will depend more on volume than on price at this stage.

And Kevin, we did see a small unit margin improvement as we move from Q4 to Q1. And as Peter said, we do expect a small improvement as we move from Q1 to Q2. And I would also say there’s a good focus on benzene because that’s the largest raw material. Gas remains relatively low, chlorine in general, has been slightly down and then ammonia onto nitric has been slightly down as well. So you need to consider all of the raw materials that are flowing through into polyurethanes.

Very good. And then, Peter, as a second question, I think 1 of your 5 objectives for the year is to look at potential to optimize the portfolio. And in my mind, I’ve been thinking about Europe is maybe the center of that effort. I’m just tempted to ask things like seems like things are improving cyclically, as you discussed in your prepared remarks. On the other hand, Europe has some problem to arguably more structural in nature as you’ve also addressed in the past. So how do you put those two things on the scale? In other words, if the European assets are more fully loaded and profit is starting to come back, how do you weigh that against what may be a less exciting outlook over the medium to longer term for capital deployment in the region, for example?

That's a great question, Kevin. It’s quite complicated, but I'll keep it brief. Given the current margins and economic uncertainty, we want to protect our balance sheet. This isn't the right time to increase leverage or add uncertainty to the market. It could be an opportunity for industry consolidation or potential mergers when earnings for everyone are down. Typically, during strong economic times, companies might take more risks with their balance sheets and be more aggressive in M&A. However, when earnings decline, it's important to adopt a more cautious approach. I want to clarify that this doesn't mean we're planning a significant merger; it's about being vigilant during industry cycles. While we prioritize our balance sheet protection, we also need to assess if we are the best owners of our assets and whether we are maximizing their value in the market. Just because the markets are down doesn't mean we stop evaluating these important questions.

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

I wanted to follow up on Polyurethanes. I think in the prepared comments, you talked about getting back to normal in that segment. I guess, what do you consider normal at this point? I guess if you get an improvement into the second half, maybe you’re run rating around $400 million, you have obviously some changes in the cost structure you alluded to, you’re doing some cost savings. I guess what’s the bridge back to normal at this point?

I believe the path to achieving that involves increasing volumes and pricing. Once the MDI market stabilizes, I anticipate margins in the mid-teens. When the business operates at full capacity, with sold-out splitters and strong demand, we could see market conditions similar to those in 2022, reaching margins in the high teens, potentially nearing 20%. However, on a normalized basis, our urethanes business should be around 15% to 16% in EBITDA margins. To reach those levels, we will require both increased demand and pricing.

That's helpful. If I could just ask quickly, just on buybacks. You didn’t do any in the quarter. I assume that’s just because of the working capital flows through the quarter versus the year. But how would you expect your plans around buybacks for the rest of the year to play out?

We will evaluate that on a quarterly basis. Currently, I don't anticipate us engaging in share buybacks in the second quarter, and it's unlikely in the third quarter as well. However, this will be a topic for the Board to discuss and review each quarter.

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

Peter, you mentioned that you're looking for bolt-on acquisitions in ad mat. Are there specific end markets where you're looking to get more exposure for example, are you looking to increase your aerospace exposure? Or are you looking for perhaps more diversification?

We are focused on finding high-margin opportunities where we can offer something unique through our chemistry. When considering acquisitions, we ask what we can do that private equity cannot. Our recent deals, like the acquisitions of Gabriel and CVC, were excellent moves. While the previous owners were strong companies, we now have the chance to globalize their applications and integrate them into our operations. They tended to pursue horizontal growth rather than focusing on specific downstream applications. Therefore, we aim to enhance technology, promote globalization, and provide unique solutions for our customers, but we aren't specifically prioritizing any one sector, such as aerospace. Yes. After the expansion from Wanhua occurs, I don't anticipate significant additional capacity following that. Wanhua will proceed according to their plans. The Chinese market remains strong for us, with demand steadily increasing and prices holding firm. I don't foresee new capacity being introduced in North America or Europe. In fact, I have doubts about whether the current operations in those two regions should be maintained. Outside of China, there is no new capacity expected.

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

Another question for you on the spray foam opportunity. I was wondering if you could talk about the progress that you’re making on some commercial inroads in Europe and in Asia. You mentioned that maybe there are some opportunities in building installation in China. And just curious how you’re positioned there?

Yes, we are going to continue to focus on this area. If you look beyond Asia, particularly in Japan and some regions in the Middle East, we are experiencing stronger growth compared to other areas in those regions. I see this as a significant opportunity. Considering the high energy costs in Japan and the extensive new construction happening in the Middle East, these locations present prime opportunities for us. It is important to note that the majority of our business is centered in North America, specifically Canada and the U.S. While we expect to see growth in Europe and Asia, the strength and vitality of our business will largely depend on North America.

All right. And then a question for Phil, and I apologize if this is a stupid question, but just curious if you can give us some color on the special items. The gain on acquisition of assets and the prepaid asset write-off. What were those two items? And were they related to each other?

They were related to each other, Mike, you’re quite right. That was all related to the closing of the SLIC transaction, the SLIC restructuring that we did, and you’ll see a number of 71. You’ll see a number of 52. There’s also a number of 18 on tax. And when you net all those together, get virtually no movement whatsoever on net income. So it all relates to the SLIC transaction with minimal impact to net income.

Our next questions come from the line of Arun Viswanathan with RBC Capital Markets.

I wanted to revisit the discussion about the normalization of some markets. If you consider the first half, we’re looking at EBITDA around $200 million, and in the second half, possibly tracking above $450 million to $500 million. Historically, the peak EBITDA was approximately $1.4 billion; if we exclude certain textiles, it might lower to around $1.3 billion. Is that the range you have in mind? If we move from $450 million to $500 million, potentially reaching $800 million or $900 million in the mid-cycle, do you think that reflects roughly two-thirds in volume and one-third in price? How would you describe that trajectory?

I’m not sure, Arun, that you're significantly off in any particular area. I do think that perhaps you will see a bit more pricing. You mentioned being about one-third on price and two-thirds on volume. I believe that pricing needs to improve to help us handle the increased raw material costs and recover margins. Volume can only support us to a certain extent. We need volume to drive pricing, and that should come first. However, being the optimist I am, I hope we will perform better in '24 and have a stronger second half. That said, when you consider your mid-cycle peak and our current situation, I don’t think you're too far off.

Great. And then just going back to the question of portfolio. Arguably, despite some maybe improving markets here, the cost position in Europe is probably not necessarily going to get materially better. So would you be in a position to maybe reconsider some exits in Europe at some point in the future? Obviously, we have seen some announcements in certain areas by some of your competitors already. So I just wanted to get your thoughts on that.

I have concerns about various issues in Europe, particularly high energy prices and the regulatory environment. While energy costs are a concern, most of our businesses in Europe are not heavily reliant on energy. Overall, our individual assets remain competitive. Advanced Materials continues to perform well for us, with stronger margins than in other regions. We have a larger business in Europe compared to APAC, and if you're in the right sectors like aerospace, adhesion, and lightweighting, you can do well in Europe. However, for energy-intensive industries like fertilizer or cement, there are more significant portfolio challenges. Currently, the cost competitiveness of Europe compared to North America and Asia for polyurethane does not support large-scale global shipments. A year ago, conditions were different, but today energy prices in Europe remain high and are not being effectively addressed by governments, which lack realistic policies. Nonetheless, this situation does not compel us to exit the market.

Thank you. We have reached the end of our question-and-answer session. And with that, that does conclude today's teleconference. You may disconnect at this time. Thank you for your participation and have a great weekend.