Huntsman CORP Q4 FY2024 Earnings Call

Greetings, and welcome to the Huntsman Corporation Fourth Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Ivan Marcuse, VP of IR and Corporate Development. Thank you. You may begin.

Thank you, Darrell, and good morning, everyone. Welcome to Huntsman's fourth quarter 2024 earnings call. Joining us on the call today are Peter Huntsman, Chairman, CEO and President; and Phil Lister, Executive Vice President and CFO. Yesterday, February 17, 2025, we released our earnings for the fourth quarter 2024 via press release and posted to our website, huntsman.com. We also posted a set of slides and detailed commentary discussing the fourth quarter 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 our projections or expectations for the future. All such statements are forward-looking statements and while they reflect our current expectations, they involve risks and uncertainties and are not guarantees of future performance. You should review our filings with the SEC for more information regarding the factors that could cause actual results to differ materially from these projections or expectations. We do not plan on publicly updating or revising any forward-looking statements during the quarter. We will also refer to non-GAAP financial measures such as adjusted EBITDA, adjusted net income 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 for that exciting preamble, and thank you all for taking the time to join us this morning. The purpose of my taking a few minutes to begin these calls is not simply to add more to our script. It is to ensure that we're sharing with you the most recent data and for me to share our views as to the direction of our company and key markets in real-time. We've given you an outlook on the first quarter on a divisional basis. We're often asked why we don't provide yearly guidance. As I look at markets and the geopolitical scene over the past two weeks, I think this provides ample reason why we are reluctant to try to plan much beyond three to six months as it relates to market conditions. I'll come back to those most recent conditions in a moment. I would also like to give some further clarity on the often-used phrase we will focus on the things which we can control. On our earnings call in October of 2022, reporting on the first quarter to see the full impact of Putin's invasion of Ukraine and Europe's failed energy policies, we stated that a new normal in Europe would include higher gas prices and recessionary conditions. To offset these actions, we announced initiatives to cut costs in excess of $40 million. We delivered those savings in less than 12 months. As it became clear that Europe's focus on deindustrialization was accelerating faster than anyone expected, many global markets were slowing. We took further steps and have continued to do so through 2023 and 2024. These include the closure and relocation of our Everberg, Belgium R&D and European headquarters, offices in the UK, Brazil, Argentina, and Chile. We closed or sold polyurethane system houses in Malaysia, Thailand, Indonesia, and Italy, and today announced the closures of our Deggendorf, Germany and King's Lynn, UK locations. We've opened global business services hubs in San José, Costa Rica and Kraków, Poland. We expanded our Kuala Lumpur, Malaysia site and now have approximately 600 positions at these locations as we have reduced headcounts and costs in Basel, Brussels, and the Woodlands. In our Advanced Materials divisions, we've closed our BLR capacity in Alabama and sold our Harrison City, Pennsylvania facility. We also announced today that we'll be taking actions regarding our Moers, Germany, maleic anhydride facility. Also, in early 2023, we completed the sale of our Textile Effects division. We're not sitting around wondering what to do about Europe and other troubled areas. Decisions executed have more than offset over $150 million of global inflationary costs since 2022 and seen our SG&A drop by more than 6%. We continue to assess our global assets in all of our divisions, as I believe this industry will continue to see consolidation, divestitures, and acquisitions. We will not only look at our cost structure but also our asset footprint. I believe that we're well-positioned to benefit as demand and pricing recover. Lastly, I'd like to comment on our 2025 outlook. Rather than trying to predict our earnings outcome a year from now, we need to focus on capitalizing on today's market forces. Just in the past two weeks, two such forces have emerged that have potentially longer-term ramifications. The first of these are the recent announcements on tariffs. By and large, the vast majority of what we produce in Europe, the U.S., and China stay within those regions. In fact, actions to date that have focused on imports into the U.S. will likely help our earnings. Needless to say, these tariffs are changing almost daily. But I feel we are quite well situated as we ship very little across the Atlantic or the Pacific Oceans. The second shift we are seeing is around recent price announcements in many of our products. I believe that MDI was among the first of the major chemical chains to drop in demand and margins. This was due to the simultaneous rise in interest rates that slowed North American construction and the collapse of the Chinese housing market. Europe's industrial decline and overcapacity as projects announced pre-COVID came on stream; I think Huntsman has remained incredibly disciplined with respect to pricing. We previously announced lost volume due to this. We've stated on past calls that demand needs to return before pricing picks up. As we've reported in the past few quarters, we've seen volumes improve as de-inventorying has ceased and demand has cautiously returned. I believe that we're seeing some early signs of recovery in pricing and margins. As of today, we are seeing publicly reported polymeric MDI prices in China at a three-year high. Huntsman has also announced a series of price increases in North America as well. Again, as publicly reported, we have seen others pushing for similar actions. It is challenging to say if these actions will be successful and how soon, and to what segments they will stick. However, as we sit here today, it is fair to say that there are more positive than negative movements in the MDI industry. My personal feeling is that MDI was one of the first major chemical chains to drop and may well be among those that show signs of recovery earlier than other chains. 2025 will be a year in which we will continue to minimize our cost structure, optimize our asset footprint, and aggressively push for margin expansion across the board. In short, we will not be sitting still this year. With that operator, let's open the lineup for any questions.

Thank you. We will now be conducting a question-and-answer session. Our first questions come from the line of Patrick Cunningham with Citibank. Please proceed with your questions.

Hi, good morning. Thanks for taking my questions. So, in the midst of the restructuring actions, it seems like the downstream piece is a big part of this. But in the past, you kind of talked about this being part of the business you like. You've already gone through a lot of fixed cost takeout. First, can you help us understand the size and scope of these actions? Why is this an area of focus if not, and if there's any concern in being able to fulfill that demand improvement when it does come?

Yes. I think that as you look at this across the board, we are going to calibrate our business around what customers need and what they're willing to pay for. As we see some of our customers relocating out of Europe and moving manufacturing footprints and assets to Asia and the U.S., we obviously are going to be following them and manufacturing further downstream capacities in those areas. We've also announced in previous calls that we've been able to consolidate some of our system houses by multi-using assets in these various system houses. It used to be that you would build a system house that was built around the automotive industry, or one that was built around the insulation industry, or one that was built around a particular region or customer cluster in Europe, for example, where we have perhaps the most developed downstream business. I think over the years we have done a much better job in being able to utilize one location for what used to be two or three locations and expanding the capacity of that location both from a technical and volume point of view. We've seen the market change. We've seen fewer customers that are demanding the formulations and the products coming out of system houses. And frankly, if customers are not going to pay for the services rendered from those, we'll make decisions and we'll be cutting back. So I think it's a combination of all those areas, and you're going to see a preponderance of that taking place in Europe. But we've also announced where we've withdrawn from some of the Southeast Asian markets. We find that it's our margins of supplying raw materials out of China. For us at least, that was a better value proposition than moving downstream in some of these countries that we had to have quite a bit of local expertise and cost to handle those. So it really will vary region by region.

Understood. Very helpful commentary. And I know you don't guide for the full year, but in Performance Products, you seem to talk about margins improving earlier this year. I know you have some investments there that are adding to the EBITDA online. But what are the markets driving this volume improvement, or is it a significant mix improvement, just anything underpinning that level of confidence in material margin improvement?

I do think that Performance Products will gradually improve throughout the year, and we're going to see that mostly come about through the recovery in the construction area as it pertains to the maleic business and in our means business. It's going to be everything from polyurethane spray foam catalysts to the raw materials going into the agricultural industry to our most recent expansion in Conroe, Texas, where we'll be servicing the chip industry with solvents and cleaning solutions and so forth. That expansion is complete, and we're in the process right now of getting qualifications from customers. So we've actually booked sales coming from that. But I wouldn't expect to see us running at that run rate that we've given earlier forecasts on until later in the year when we're fully qualified in a broader customer base.

Thank you. Our next questions come from the line of David Begleiter with Deutsche Bank. Please proceed with your questions.

Thank you. Good morning. Peter, on your maleic announcement today, can you provide some more color as to why now, given maybe a potential rebound in European construction? How much is that business? I assume a negative EBITDA. How negative is it, and what's the potential cash cost for shutting that business down? Thank you.

David, always good to hear from you. Yes, we've received a couple of different inbound inquiries on that business. As you can well imagine, in a world that's rapidly changing with tariffs and trade patterns and so forth, we're going to pursue those calls and we're going to see where values are and what we want to do with that site longer-term. Long-term, as we've looked at maleic and we've looked at the downstream UPR industry, we've seen Europe become a far more competitive area with imports coming in, particularly from China, Turkey, and places in Eastern Europe where I think you're pricing a lot of Russian materials and downstream products in Russia that find their way into the European market despite sanctions and so forth. I think where we look at where we've got a cost advantage, we have a strong market position is in North America. So we're going to weigh those issues and see if we're the best owner for that facility longer-term. We're going to see how we feel about Europe from an industrial basis. Maleic, as you know, is very sensitive to raw material costs, on butane energy byproduct values and so forth. All these things have to be taken into consideration. So that's what we're doing. We're not going to be sitting here a year from now wondering what to do with that site. I think that we'll make a decision here in pretty short order.

Very good. And just on polyurethane, you mentioned some share gains as well as additional growth from the splitter in 2025. Can you provide some more color as to what's driving those share gains and potential uplift from those actions in 2025?

I think in 2025, particularly in North America, we certainly want to be able to grow with the market. As we look at the nice gains we've had over the last year or two in capacity utilization, we are still below pre-COVID numbers in MDI demand. We still have room for expansion. I think that that will include perhaps a minority of what I believe that we need to be expanded 2025 needs to come about through market growth, but there's also some applications and customers that we lost over the last year overstands that we took on pricing, on trying to maintain pricing and so forth. We are very hopeful that we'll be getting some of that back. That's not something that happens overnight, and it's not something just because you drop the price, you get the business back. So it's going to be because of service, technical support, full value proposition. That's not something that happens in a single quarter. So I believe that we'll continue to make further progress through 2025.

And David, you can assume if the market develops as we think about a $15 million benefit year-on-year from the splitter at Geismar.

Thank you. Our next questions come from the line of Frank Mitsch with Fermium Research. Please proceed with your questions.

Hey, good morning. At the risk of playing an armchair psychologist, Peter, it sounds like you're more optimistic than we've heard you in quite some time. So I'm curious as to what might be more specific in terms of what's driving that optimism, if I'm reading that correctly. Is it what you're seeing out of China post-New Year's? I mean, any sort of color there would be helpful.

Yes, Frank, it's always nice to hear from you, and I appreciate your offer of free psychiatric counseling. Looking at the markets currently, I want to clarify that pricing changes made in the first quarter of 2025 will only have an impact at the earliest in the second quarter. If we were to announce price increases today, those changes would primarily reflect Huntsman's perspective and our customers, rather than our competitors' actions. China remains a significant consumer of polymeric MDI, with publicly available pricing that largely reflects the market conditions. Over the last two quarters, those prices have been quite stable and are at a three-year high. Despite expectations of increased demand due to new capacity, we have not seen any substantial stimulus in China pushing for greater demand. There have been rumors suggesting this could occur around the end of the Chinese New Year, but I haven't observed any signs of it yet. As we had mentioned about a year ago, we expect China's recovery to be gradual and to continue into 2025. In the U.S., we've announced several price increases, specifically highlighting the U.S. market where there are various price points due to the commoditized nature of polymeric materials and downstream products like adhesives. When discussing price adjustments of $0.10 or $0.15 per pound, we should note that these may not be implemented immediately or uniformly across the market. Additionally, in the U.S., many contracts have provisions for pricing adjustments tied to raw material costs, typically reviewed every six to twelve months. My main point is that while pricing varies in contracts and timelines differ, what I'm seeing now in the U.S. is unique; multiple players are announcing price increases across several segments for the first time in about two years. Although the specifics vary by price and timing, this indicates a shift. With the end of de-inventorying and a gradual recovery towards more consistent home construction levels, there seems to be a stronger adherence to pricing discussions than we've experienced recently. It's been somewhat isolating pushing for price increases, but I know we are not the only ones making that push. In Europe, I believe they will continue to face challenges due to significant imports and uncertainty about protecting local industry, managing energy costs, or addressing tariffs. Everyone in Europe seems to be waiting to see how the situation will unfold.

That's very comprehensive. Thank you. If I could follow-up on the U.S. and MDI and China, the U.S. is looking at a preliminary anti-dumping probe on Chinese MDI coming in. I'm curious if you have any thoughts as to how that may play out and what might be the impact and when might be the impact for you guys?

We are involved in this process because we received a request from the USITC, which will make a recommendation to the Department of Commerce. This will likely cycle back to the ITC and then return to the Department of Commerce, leading to a decision made by someone who is apparently receiving a Social Security check and is 134 years old. My point is, Frank, by the time there is a final decision, it could take at least a year. However, given the current state of the U.S. and the potential outcomes, I don't think it would be detrimental if the Commerce Department determined that dumping is occurring. I believe we would be better positioned in that scenario.

Thank you. Our next questions come from the line of Jeff Zekauskas with J.P. Morgan. Please proceed with your question.

Thanks very much. I think your EBITDA projection in Performance Products is about is 25% to 35% for the first quarter, so call it 30%. And last year you did 42%. So why are we down 30% in Performance Products, and are we going to continue at that level in 2025? Can you analyze the EBITDA decrease for the first quarter?

I will provide a comment. Most of the decrease in profitability is related to our maleic facility in Europe. We do not plan to maintain this level of performance. We are implementing cost initiatives throughout 2025, which will be announced during the year. We have capacity coming online in Conroe and additional capacity to enhance our catalyst chemistry in Pétfürdő, Hungary, expected to start in mid-year. I prefer not to rely on forecasts that suggest sudden improvements in the second half of the year, but we do have capacity that will enter the market at the end of the first half, translating into increased volume in the second half. Regarding de-inventories, it has been clear in previous calls that Performance Products, especially amine chemistry, experienced a de-inventorying in its supply chain later than polyurethanes and Advanced Material. I anticipate a gradual recovery throughout the year.

And in polyurethanes, what's the year-over-year volume growth either that you expect in the first quarter of 2025 or that you've experienced year-to-date?

I would think that that's going to be around about 5% as we look at the first quarter versus first quarter, first quarter 2025 to first quarter 2024, so somewhere in that low-single digit and mid-single-digit.

And relatively consistent, Jeff, with what we saw in 2024, continued growth, which is obviously important for the color that Peter gave around pricing.

Thank you. Our next questions come from the line of Vincent Andrews with Morgan Stanley. Please proceed with your questions.

Thank you, and good morning, everyone. Wondering if you could speak a bit more to volume expectations in the European market. You had some recovery there last year and just obviously with all the uncertainty there, just wondering what you're expecting in Europe.

I would like to be more optimistic about Europe. However, I think it will be relatively flat. The volume increase we experienced this year compared to last year is somewhat misleading due to a poor comparison from last year, which was affected by an electrical outage at our Rotterdam facility that reduced our volume. Looking ahead, the comparison may be skewed. It's also important to note that at the end of this quarter and the beginning of the next, we will have a 40-day turnaround involving many of our raw material suppliers and some of our downstream customers. This is a significant maintenance event that occurs once every four years along the entire ship channel in Rotterdam. The key to recovery is that the process can only proceed as quickly as the least efficient operator can get their facility back online. We hope this turnaround will last 40 days or less, with slightly over half of that time occurring in the first quarter and the remainder in the second quarter.

Okay. And then, if I could just ask on a follow-up on all of your pricing commentary, which was very helpful. If I heard what you said correctly, it sounds like you're suggesting it's possible that there could be some good price achievement this year that would not come at the expense of volume, meaning that the volume needs to go up with sort of just the overall recovery in the market, but that you might still also be able to get price, so that there wouldn't be any trade-off between the two. Is that a correct interpretation of what you said?

Yes. That would be a correct interpretation. If we are sitting here reporting in the first quarter that we've lost market share and we're giving up volume in order to get pricing, I will not be happy.

Thank you. Our next questions come from the line of John Roberts with Mizuho Securities. Please proceed with your questions.

Thank you. Do you think the reciprocal tariffs will change the trade flows for your customers that could impact you, or do you think it's just going to change price and there'll be minimal change in trade flows at your customers?

I think it's too early to determine the exact impact. I'm often surprised that tariffs tend to be less damaging than anticipated. However, changes typically arise from unexpected areas. I realize that might seem vague, but decisions are often made months in advance of tariffs as companies prepare by building up stockpiles, leading to shifts in buying patterns. In this instance, I'm not observing significant inventory buildup from our customers. I can't speak for others, but there doesn't appear to be a substantial tariff-related inventory increase among them. This could be due to the frequent changes regarding what is valid and the varying impacts on different entities. It would be a risky decision to build inventory and tie up working capital now for potential tariffs that may come later this year.

Okay. And then, the 2025 supply chain financing program, is that a standard factoring program? So the free cash flow increase is temporary until you decide to end that program?

John, it's Phil. I'd characterize it as a standard supply chain financing program. And I think we'd indicated that we're targeting about a $30 million benefit from that program. You're correct. If we chose to end that program, then theoretically, that would go away. That's not how we're viewing it with being it as a structured program for the future for the company.

Thank you. Our next questions come from the line of Salvator Tiano with Bank of America. Please proceed with your questions.

Yes. Thank you very much. I wanted to follow-up a little bit on tariffs and get a better understanding, specifically because the China tariffs should already be in effect. So is there anything you're seeing with regard to, for example, imported MDI or that you would expect in the weeks ahead because this is not theoretical scenario; it's something that already is in place? And secondly, as we talk about potential anti-dumping duties for MDI and also for boxes in the U.S., how do you think this will play out together with the standard tariffs, meaning would this be implemented on top of the tariffs? Would it be one or the other? So the 10% China tariff goes away if the U.S. goes with anti-dumping duties. How does this work out?

Yes. I'll address the first part of the question and then let Phil handle the second part. Regarding tariffs, I don't think we see an immediate cause and effect. If you are a large company in Europe or Asia exporting to the U.S., particularly a Chinese company, you've been paying 30% tariffs on products like maleic anhydride and MDI, and that has now increased to 40%, depending on trade negotiations and potential decisions from the Commerce Department. This increase could go even higher. As a result, some companies might decide not to produce and export from China and may instead source from Europe or other locations, potentially allowing them to avoid some tariffs. However, generally, there will be added costs somewhere in the supply chain. Over time, this situation tends to exert pressure on profit margins and compels companies to raise prices. Therefore, I believe that while what we're observing currently may not be directly related to tariffs, we could see some pressure emerging in the second and third quarters of 2025 due to these factors.

And Sal, MDI already had a 30% tariff, so add another 10% to that from China. So that's where we are. As the investigation when the ITC goes on, I mean, typically, those are then additive to those tariffs. But let's just see how the actual investigation evolves over the coming months.

Okay. Perfect. And I want to follow-up a little bit on potential strategic reviews. I mean, in the past few years, including now, the focus has been on underperforming assets. I'm trying to see whether something can be divested or needs to be shut down. But what about considering options for assets that are actually performing well like your Advanced Materials division that, as you've highlighted, the margins have been stable despite the turmoil. And even where your surprises, the valuation for Huntsman, perhaps it would make more sense instead of focusing on underperforming assets, to focus on realizing the value that the market does not see enhancement in your best assets is something that you would consider?

Well, I would remind you that our Advanced Materials in Europe are some of our most valuable and highest margin assets we have in the company today. Again, that's in one of the most high-cost countries in the world, Switzerland, supplying European customers. So I don't want to completely write off Europe, though I guess, the Swiss is always argue if they're part of Europe or not. I would just say that I don't want to paint all of Europe as if we're looking at all assets there in the same way. I will just repeat what we've said on previous calls, that if we have an opportunity to expand, if we have an opportunity to exercise merger or M&A in this company, we're going to be leaning very heavily towards looking more like Advanced Materials than any of the other divisions. That's not to say we don't love the other divisions, but it is to say we do want longer-term that margin, the lack of volatility, and a global footprint that I think is going to be more conducive to investors. So yes, we're not going to look at everything the same.

Thank you. Our next questions come from the line of Kevin McCarthy with Vertical Research Partners. Please proceed with your questions.

Yes. Thank you, and good morning. Peter, would you comment on MDI industry operating rates by region and where you see the tightest and loosest market conditions today?

Yes, I think we are currently experiencing the most relaxed market conditions in Europe, while the U.S. is likely facing some of the tightest conditions. However, it's important to consider factors such as imports and the impact of imported materials. Certain regions may be exporting more MDI than they are importing, making it difficult to generalize the situation. Overall, Europe likely has the most excess capacity, which is also the oldest and most expensive. On a global scale, I would estimate that operating rates are likely between 85% and 90%, typically in the mid to high-80s range. These numbers can fluctuate based on how many companies are shut down for maintenance and other trade flow factors. When a vessel is on the water, it may remain out of service for an extended period, leading to substantial stockpiles of materials. I've previously focused more on MDI capacity utilization; while it's a figure worth monitoring, I wouldn't place too much emphasis on it due to the numerous variables influencing it.

Understood. And then as a follow-up, in the prepared remarks that you released yesterday evening, Peter, I think you talked about escalation of energy in Europe and specifically natural gas in the region around $15 per MMBtu. How are you and just competitors broadly handling that? In other words, do you foresee a return to some sort of surcharge regime? Are you dealing with it through normal course pricing? Maybe you could talk about the next quarter or two and how that might evolve?

Yes. A week ago, the natural gas price in Europe was about $16, while in Louisiana and Texas today, we're seeing prices around $2 to $3 per MMBtu. This creates a significant difference of five times between the U.S. and Europe, depending on facility locations. When considering China, their prices are comparable to or even lower than U.S. prices unless they are burning coal, which is a major part of their energy mix and gives them a competitive edge over the U.S. for electricity and raw materials. Currently, natural gas pricing is around $14.50 in Europe, reflecting a $1.5 drop that has gone largely unnoticed. In contrast, a similar drop in the U.S. would cause significant financial distress for natural gas producers. We need to recognize these longer-term trends. Europe lacks an energy policy that supports hydrocarbon production, which has been detrimental to their industry over the past couple of years, and this is something we've anticipated for a while. Historically, about 15 to 20 years ago, our production of petrochemicals in Europe was ten times what it is now, which is remarkable. Many of those operations have been divested or shut down, resulting in a staggering 90% decrease in chemical production in Europe, highlighting the shortcomings of European energy policy. Fortunately, our current portfolio, particularly in Advanced Materials and Performance Products, is not heavily reliant on natural gas as it was in the past. We are concentrating on maximizing profitability with less energy-intensive operations. As mentioned in previous earnings calls, we are evaluating our energy-intensive facilities in Europe to explore options for production in regions like the Middle East or the U.S. where costs may be lower, although this is not a straightforward task. We will continue to seek alternatives, as the long-term outlook for energy-intensive industries in Europe without a solid plan appears quite bleak.

Thank you. Our next questions come from the line of Hassan Ahmed with Alembic Global. Please proceed with your questions.

Good morning, Peter and Phil. A question around volumes. You certainly sound a little more positive with regards to the destocking being behind us. You mentioned within polyurethanes. It seems pricing may have dropped out, maybe beginning to pick up a little bit. In your prepared remarks, you talked about how in 2024, volumes were up 6% across your portfolio, but yet well below normal levels, right? So I'm just trying to get a sense of as and when the recovery happens, factoring in restocking, factoring in market growth, what that volumetric uptake may look like, just to get us back to normal and then obviously, there'd be market growth.

Well, I think that if you go back just looking at history, you go back to 2021, that was obviously a time when we were sold out. Most all of our production, particularly around polyurethanes, since 2021, we've started a splitter in Geismar, Louisiana. So the next go-round when we're quote in a sold-out position. I would hope that we'd have even more value-added downstream components at MDI than more of the bulk commodity grades that we had. We were more reliant on a couple of years ago. I think that when we look at it as a more sold-out position from 2018 to 2021, I mean these are kind of the times when you see that. I think, but for COVID, you probably would have seen in 2018 through 2021 sort of a quasi-super cycle that would have taken place over a multi-year period. We've obviously seen the falloff now. Our biggest issue, I believe, in every division we have is volume, and polyurethane is going to be volume and margins.

Very helpful, Peter. And as a follow-up, in a world with tariffs, certain product areas, anti-dumping duties, and the like. As you look at your portfolio, I mean, it's obviously more global than your competitors. From a sort of positioning perspective in this sort of tariff anti-dumping duty environment, would you consider the geographic positioning of your portfolio as a major advantage relative to your competitors?

Yes, I'm hesitant to discuss our competitors, especially with legal counsel present. However, I appreciate the approach we've taken over the years, following the model established by ICI more than two decades ago: producing where we sell and not relying solely on global trading, which may seem unusual coming from ICI. Nonetheless, this strategy has allowed us to establish a significant global presence. Currently, more than 90% of what we produce is sold within the regions we operate in, which I believe is a strong advantage for us.

Thank you. Our next question comes from the line of Josh Spector with UBS. Please proceed with your questions.

Hey, good morning. First, I just wanted to ask on the corporate costs for 2025. I mean, the costs haven't come down in the last few years despite the cost savings. Can you just go through why?

Sorry, Josh, can you repeat that?

Yes. So just why haven't your corporate costs come down from $165 million over the last two years to three years despite the cost savings?

Yes. I mean, I think our corporate costs ultimately have come down from a high of about $199 million a couple of years ago to $175 million. They were $160-odd million today. You've got inflation running through that, Josh. Just as we said, we run at $40 million to $50 million of inflation overall. In addition to that, we've had some more LIFO losses. And in addition to that, some FX impacts as well. But in general, the underlying costs have been coming down.

Okay. Fair enough. If I could follow-up from an earlier question, just specifically around Europe and the downstream system houses that you're making some changes to. I just want to clarify, what's your plan for Europe then with that business? Do you sell more polymeric and monomeric MDI and less formulations, and your service costs are lower, and therefore that's how you get back to profitability? Or is there a different strategy at play to how you approach that region?

No, I think demand is decreasing. We have excess capacity in some of our facilities, and we need to optimize the most efficient and flexible ones while eliminating the excess. Unfortunately, in a region that has been shrinking industrially, the market has become smaller over the last few years. We need to reassess our assets to match where our customers are investing. For instance, many European automotive companies are investing more in new products in the U.S. and China, which means some capacity and work previously done in Europe will shift elsewhere. We need to follow our customers and where the applications are developing, and we must also eliminate any excess capacity we have.

Thank you. Our next questions come from the line of Aleksey Yefremov with KeyBanc Capital Markets. Please proceed with your questions.

Good morning, everyone. Peter, thanks for your commentary on MDI pricing in the U.S. And I realize that there isn't just one price out there. You described that. Nevertheless, one player announced a $0.15 per pound increase here. So could you maybe approximately size the order of magnitude of what you are trying to achieve or what do you see your competitors trying to achieve relative to maybe that $0.15 per pound? Are we talking about $0.05 per pound, $0.10 or $0.15 that you're hoping to achieve by, let's say, middle of the year?

Our price increase that went out before one was at least $0.10 per pound. Again, that's some people are going to try to ramp that through as quickly as possible. Others you're going to have pricing protection and others certain other applications, they may see more, they may see less than that. But ours is less or at least $0.10 per pound.

Thanks a lot. Very helpful. As a follow-up, I wanted to ask you about MIRALON. So you're describing qualification initiatives. So can you maybe tell us what's been achieved with MIRALON in 2024 and whether your outlook and timeline for commercial scale-up of this product has changed?

Yes, over the past year, we have upgraded to a 30-ton reactor. This advancement will allow us to produce a product at a commercial scale and with commercial viability. Additionally, it enables us to begin qualifications for various applications. We anticipate that by 2025, we will start production from this 30-ton reactor for market release, and we plan to scale up to a larger 5,000-ton reactor, likely starting next year. To clarify, the reactor size is 5,000 tons, not kilotons. While achieving a five-kiloton reactor would be ideal, it may not be feasible due to physical limitations. The new reactor will provide the same materials but with improved economics. Although we have some developmental work ahead on the reactor, we are already advancing products into the market and exploring several applications. One of our initial targets is in EV battery applications, where we expect to provide updates later this year.

Thank you. Our next questions come from the line of Michael Sison with Wells Fargo. Please proceed with your questions.

Hey, good morning. I understand difficulty in looking beyond the first quarter. But Peter, is there a potential that 2Q EBITDA sequentially should be better than 1Q or maybe the way to ask it is, what do you think needs to happen to see a sequential improvement? Are you seeing any hints from customers that demand seasonally should uplift in 2Q? So just kind of your general thoughts on how EBITDA could get better as the year unfolds.

Yes, I understand this might seem like a straightforward answer, but seasonally, we are expecting an improvement in earnings as we are entering the April, May, and June construction period, which typically sees more activity compared to the first quarter. I also believe we will see some positive movement in MDI pricing in the second quarter, and I am optimistic about that. However, it's important to note that we won't have confirmation until customers actually pay their invoices. Regardless of our announcements, we won't be successful until there's an increase in revenue from our customers. I anticipate that seasonality and better pricing in PU, along with advancements in Advanced Materials—which is not heavily affected by cycles or seasons—will contribute to improvements in Performance Products as they gain traction in new market applications. Additionally, UPR maleic derivatives are likely to perform better during the construction season. So yes, I certainly hope that Q2 will outperform Q1.

Got it. And then just a quick follow-up. I think you mentioned that China MDI prices are a three-year high. I don't suspect that China MDI margins are a three-year high. So if they're not, maybe you can give us a thought on where they are and what needs to happen for the margins to improve.

I don't want to go into the details regarding EBITDA on a regional basis, but I would be very pleased if all regions had the same margin as China. What we really need in China is demand. It would be beneficial to see some stimulus, as I believe we've witnessed the end of a housing bubble that likely began in the 1980s, which was one of the longest and most prolonged bubbles as hundreds of millions transitioned from rural to urban living, benefiting China greatly during that time. Obviously, that growth has slowed, and if it can recover and gain some momentum, it would be a significant advantage.

Thank you. Our next questions come from the line of Matthew Blair with TPH. Please proceed with your questions.

Great. Thank you, and good morning, everyone. On Slide 13, the dividend from equity affiliate guidance for 2025 shows a $75 million headwind year-over-year. It seems like a pretty large number in the context of your contribution from the China PO/MTBE plant, I think, was about $39 million of equity income in 2024. So could you help us understand the moving parts on the $75 million? Thanks.

Yes, Matthew, good question. So two items, which I see that headwind; one you talked about, which is all around the MTBE margins and how those have deteriorated fairly significantly from the second half of 2024 and have remained very low here in the first part of 2025. So that's one part. The other part, you may recall that we had an approximately $40 million dividend as a result of the restructuring of our Chinese MDI joint venture, the so-called SLIC joint venture, and that was a one-off, which I think we highlighted at the time. That goes away, and therefore, it's a headwind in 2025.

Great. Thank you. And then, could you also clarify on the European notes that will be repaid in the first quarter? Is that going to be a straight payoff with cash? Or do you expect to refinance those notes?

No, we don't expect to refinance those. We took out a 2034 note at the end of the third or fourth quarter of last year for $350 million, which we swapped to about a 4.25% rate. So no, that will be a straight payoff, which we'll do in the first quarter.

Thank you. Our next questions come from the line of Laurence Alexander with Jefferies. Please proceed with your questions.

Good morning. I have two questions. First, if the U.S. construction market recovers and U.S. MDI becomes relatively tight, assuming there isn't broader inflation to suppress demand or an alternative demand shock, what would you consider the natural breakpoint for the regional spread in margins? Are there any safety mechanisms or notable product substitutions that we should consider regarding how U.S. margins compare to the rest of the world? Secondly, if conditions do tighten again, based on your indicators of improvement, and perhaps I’m being overly optimistic, leading to a return to a healthy free cash flow rate, what will your priorities be in terms of capital returns, reducing debt, and shifting the portfolio to lessen cyclicality in the future?

Yes, Laurence, it's great to hear from you. I would like to explore your hypothesis and see how high we could raise prices before we start noticing changes. There are three key points to consider. First, we need to think about the intended application. Some applications use very little MDI, meaning prices could potentially double without significantly affecting the end product. However, in the construction sector, particularly with products like spray foam for home insulation, there are competing options like fiberglass and mineral wool. If we increase the price of spray foam, we may see more competition from these alternatives. Regarding OSB, it’s likely that where it’s still applicable, products with lower prices, such as those containing aldehyde, will come into play. At some point, product substitutions will occur, with these alternatives often being cheaper, which depends on the overall MDI content. The third factor to consider is that if margins become skewed compared to other regions, we may attract imports. There are still companies in Europe that produce MDI and ship it to the U.S. under current economic conditions. I’m not entirely sure how that’s sustainable, but trade data shows it happening. So, as margins increase disproportionately compared to other regions, we can expect an influx of imports, some of which will be influenced by tariffs, while others will be less affected. Considering these three elements: the MDI content per end-use application, the competitive materials available, and the point at which imports start to flood the market is essential.

Laurence discussed capital allocation, emphasizing the importance of a portfolio transitioning back to mid-cycle over time. He mentioned being comfortable with long-term debt levels around $1.5 billion, which he believes is suitable for the portfolio. Current capital expenditures are estimated at $180 million to $190 million, but these may be slightly low if moving toward mid-cycle earnings, which would suggest an increase to about $230 million to $240 million. He highlighted the need to maintain competitive dividends, currently at a 6% yield, reflective of current economic conditions. Once there is excess free cash flow significantly exceeding the dividend, the company will then consider share repurchase versus mergers and acquisitions in their Advanced Materials business, which they plan to continue to grow over time. This framework outlines their approach to capital allocations as they progress toward mid-cycle earnings.

And operator, we've typically like to end at the top of the hour. Why don't we take one more question, and then we'll wrap up the call afterwards.

You got it. Our final questions are coming from the line of Arun Viswanathan with RBC Capital Markets. Please proceed with your questions.

Thank you for taking my questions. I wanted to ask about capital allocation, particularly regarding your review in Europe. Are there other clean-ups you are considering? Also, could you discuss your approach to leverage and the dividend? Are you still committed to those? Thank you.

Yes. I would just say on the dividend, yes, we are very much committed. And as we look out to 2025, we believe that our objective as a management team is to make sure that we cover that dividend and then some. So yes, I would say just speaking on behalf of the Board who met just a couple of days ago on our quarterly meeting, that that dividend is something that is near sacred to us. Capital allocation to other areas.

I think as we said on the call, we're focused on a number of restructuring some of our asset footprint. We've talked about the downstream areas in Europe. We're going through a strategic review on maleic anhydride. Arun, Peter listed a lot of actions that we've taken over the last three years, and we'll continue to look at our portfolio on a regular basis. In terms of overall leverage, we closed at 3.6x. I do expect a bit of a kick-up in the first quarter just because of a natural free cash outflow in the first quarter. But as you look out with this portfolio over a number of years, you see that coming down as you return to more mid-cycle levels of earnings over time.

Operator, we'd like to thank everybody for joining us this morning, and we'll look forward to meeting hopefully all of you during the next quarter here.

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.