Earnings Call Transcript - HUN Q1 2022

Operator, Operator

Greetings, and welcome to the Huntsman Corporation First Quarter 2022 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. Thank you. You may begin.

Ivan Marcuse, Vice President of Investor Relations

Thank you, Darryl, and good morning, everyone. Welcome to Huntsman's First Quarter '22 Earnings Call. Joining us on the call today are Peter Huntsman, Chairman, CEO and President; and Phil Lister, Executive Vice President and CFO. This morning, before the market opened, we released our earnings for the first quarter '22 via press release and posted to our website, huntsman.com. We also posted a set of slides on the site which we will use on the call this morning while presenting our results. During the call, we may make statements about our projections or expectations for the future. All such statements are forward-looking statements. While they reflect our current expectations, they involve risks and uncertainties that 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 and free cash flow. You can find reconciliations to the most directly comparable GAAP financial measures in our earnings release, which is posted on our website, huntsman.com. I'll now turn the call over to Peter Huntsman, our Chairman, CEO and President.

Peter Huntsman, Chairman, CEO and President

Ivan, thank you very much. Good morning, everyone, and thank you for joining us. Let's turn to Slide #5. Adjusted EBITDA for our Polyurethanes division in the first quarter was $224 million, an increase from $207 million a year ago, representing an 8% growth. Revenues rose by 30%, largely due to price hikes we implemented to counteract significant inflationary pressures on feedstocks and logistics costs. Our volumes improved by 4% year-on-year. When comparing to the first quarter of 2021, volume growth in the Americas was 7%, followed by 4% in Asia and 2% in Europe. We anticipate the Americas will continue to be our strongest region, driven by construction-related markets and overall economic robustness. In Europe, we are closely watching the effects of the war in Ukraine on the broader economy. While it's difficult to predict, we currently see stable demand driven by construction and adhesives in coatings markets. In Asia, especially China, we expect to face short-term challenges from government-imposed lockdowns as they seek to manage COVID-19. Despite ongoing logistics and supply chain issues, our Huntsman Building Solutions platform achieved first-quarter revenues of about $160 million, nearly 50% growth from the prior year, primarily thanks to effective pricing strategies. Sustainability trends among consumers and high global energy prices remain strong advantages for HBS. We plan to continue enhancing the value of our polymeric MDI in spray foam insulation systems. Our polyurethanes division serving the automotive sector is still affected by the global chip shortage and supply chain disruptions. However, we've finally delivered year-over-year growth after several quarters, attributed to improving trends, favorable comparisons, and ongoing product substitutions. Revenues for this segment increased by 18%, with volume growth of 4% compared to last year. We are committed to investing in our automotive platform and providing innovative solutions for our customers. Our elastomers business, which includes both industrial and consumer segments, also saw positive results. We are implementing pricing increases to counteract inflation, and overall revenue rose by 28% compared to the first quarter of 2021. Industrial markets continue to be the strongest drivers of value and demand, especially in the Americas. We've chosen to step back from certain footwear-related revenues in Asia where we don't see sufficient value amidst high inflation. Our strategy of prioritizing value over volume remains fundamental for our polyurethanes division and will guide our investment and supply decisions. The new MDI splitter in Geismar, Louisiana, a key investment to enhance our Americas portfolio, is expected to be completed in June and will begin influencing results in the second half of this year. As previously mentioned, we expect this project will add approximately $45 million in annual EBITDA to our division results by 2024. As we shared during last year’s Investor Day, equity earnings from our PO/MTBE joint venture with Sinopec in China declined in the first quarter due to lower propylene oxide margins. The joint venture contributed around $12 million in equity earnings for the quarter, down from $35 million last year. We anticipate equity earnings will be about $50 million lower in 2022 compared to 2021. Raw material inflation is a continuing issue, but our pricing efforts have allowed us to offset more than $250 million in direct costs relative to the first quarter of 2021. About half of this inflation occurred in Europe, where we implemented surcharges and price hikes to mitigate these challenges. We expect costs to rise in the second quarter compared to the first quarter but believe we can offset these increases through our pricing strategies. Alongside our focus on improving margins by shifting towards higher value-added products, we are also optimizing our cost structure within this division. We achieved over $40 million in cost optimization and synergies in polyurethanes, and we are concluding plans for the next phase. We will share details in our second quarter earnings call and aim for a $60 million run rate by the end of 2023, as targeted during our Investor Day. As we look into the second quarter, we are closely monitoring the global economy's numerous challenges, such as military conflict, COVID lockdowns in China, cost inflation, and persistent supply chain disruptions. Despite these challenges and limited visibility, particularly in China and Europe, near-term trends for the second quarter appear stable relative to the first quarter. Consequently, we expect second quarter adjusted EBITDA for polyurethanes to fall between $210 million and $230 million. Let's move to Slide #6. Performance Products reported adjusted EBITDA of $146 million for the first quarter, with revenues increasing by 57% and adjusted EBITDA margins rising to 30%. This margin exceeds our target range of 20% to 25%, with strong performance from both amines and maleic. We anticipate some moderation in certain amine products in Asia, primarily related to the renewable energy wind market. However, we are confident in the favorable supply and demand dynamics for performance products in the medium to long term. Furthermore, with our commercial excellence program and emphasis on cost controls, this division should consistently deliver adjusted EBITDA margins well above 20% for the foreseeable future. Volumes grew by 2% compared to the same period last year. Demand fundamentals in sectors such as coatings and adhesives, construction, composites, fuel additives, and other industrial markets positively impact both our maleic and amines businesses. We saw profitability improve year-on-year across all three regions as well as sequentially compared to the fourth quarter. Across all divisions, we remain focused on value over volume, and performance products are no exception. This approach will continue as we pursue targeted organic investments. We have absorbed over $80 million in year-on-year cost increases while expanding margins where feasible and maintaining strict commercial discipline. As we've noted before, this division is now significantly different from the one we managed before the $2 billion divestment to Indorama in early 2020. Last year, we announced targeted capital investments in polyurethane catalysts and differentiated chemicals aimed at electric vehicles, semiconductors, and insulation markets. These initiatives are progressing on schedule and are expected to contribute to results in 2023, delivering more than $35 million in EBITDA benefits in 2024. We have expressed a strong interest in pursuing bolt-on acquisitions in performance products, but such opportunities are relatively scarce. Therefore, in the near term, we will maintain discipline and concentrate on organic investments to grow this business. The second quarter performance for Performance Products typically mirrors the first quarter. However, we anticipate some impact on volumes in China due to COVID lockdowns. Currently, we expect Performance Products to achieve a second quarter adjusted EBITDA of $130 million to $140 million. Moving to Slide #7, Advanced Materials reported adjusted EBITDA of $67 million in the quarter, significantly exceeding last year’s first quarter, marking the strongest quarter in the division's history. We achieved 20% adjusted EBITDA margins through a disciplined focus on value over volume, despite aerospace results still being below pre-pandemic levels. On a per unit variable contribution margin basis, Advanced Materials showed a 50% improvement compared to the first quarter of last year, with a further 15% rise since the fourth quarter, even amid additional raw material costs. We are stepping back from lower-margin businesses while shifting towards higher value sales where possible. Additionally, our recent acquisitions of Gabriel and CVC are performing strongly, contributing a combined annualized run rate of $80 million in adjusted EBITDA in the first quarter, exceeding our average adjusted EBITDA margins through effective pricing and synergies. Revenues rose by 21% compared to the first quarter of 2021 and 6% from the fourth quarter. Prices soared by 34% compared to the first quarter of 2021, while volumes declined by 17% year-over-year and 5% sequentially. This volume reduction was a strategic decision to exit the commodity BLR manufacturing segment in the U.S., in line with our stated strategy. Raw material shortages, subdued demand in Latin America, and our commitment to a value over volume strategy have somewhat limited volumes across our business, particularly in automotive, which fell by 15% compared to the prior year, though remained relatively steady compared to the fourth quarter. Growth was observed in general industrial markets. Our aerospace sector experienced a significant recovery compared to last year’s low first quarter, with a notable increase in profitability. Aerospace is currently trending towards a nearly 40% uplift compared to 2021, positioning us approximately $30 million below pre-pandemic adjusted EBITDA levels. Industry fundamentals remain strong, and we expect continued improvements over the next couple of years as we work back to pre-pandemic levels. Presently, we see stable underlying demand for many of our core specialty businesses in the Americas and Europe, continuing to observe rising prices to tackle inflation. However, we do anticipate that COVID-related restrictions in China will have a minor impact on advanced material results in the second quarter. We expect adjusted EBITDA for this segment in the second quarter to land between $62 million and $68 million. Moving on to Slide #8, our Textile Effects division reported an adjusted EBITDA of $28 million for the first quarter, 12% above the comparable prior year period. This, combined with a record 14% margin, marks the strongest first quarter in this business's history. Overall revenues increased due to strong pricing discipline and a focus on specialty and differentiated sectors. We continue to withdraw from lower-margin businesses, causing total volumes to decline by 14% in the quarter, partially due to disruptions from COVID lockdowns in China. The first quarter volumes were also affected by a slowdown in the home textile market, with U.S. imports dipping year-over-year. Additionally, volume reductions stemmed from rising fiber prices, prompting many competitors to postpone open orders for renegotiations. Our forward open order patterns remain strong, well above 2021 levels. Our focused portfolio and alignment on pricing in response to higher raw material costs supported margin improvement during the quarter. We remain optimistic about the underlying fundamentals of this business and believe our specialty-oriented portfolio will continue to thrive and constitute a larger share of our overall portfolio. As mentioned, the order book is solid as customers and global brands seek solutions to minimize waste and enhance supply chain transparency. We are carefully monitoring the lockdown situation in China. We currently forecast adjusted EBITDA in the second quarter to be between $29 million and $31 million. I will now hand over to our Chief Financial Officer, Phil Lister.

Phil Lister, CFO

Thank you, Peter. Turning to Slide 9. Adjusted EBITDA increased $116 million to $415 million, a 44% improvement compared to the first quarter of 2021. Sequentially, adjusted EBITDA improved by $66 million or 19%. We were particularly pleased to see a 170 basis point improvement in adjusted EBITDA margins versus the prior year to just over 17%. We delivered this improvement in adjusted EBITDA margins despite cost of sales increasing at an annualized level of approximately $1.5 billion since quarter one of last year. In our MDI business alone, we incurred approximately $450 million of annualized year-on-year cost increases primarily in Europe. All divisions improved adjusted EBITDA with our Performance Products division driving the largest portion of the increase, following a 30% margin quarter. On the right side of Slide 9, you can see the output of our value over volume strategy with combined volumes relatively flat for the quarter, but with pricing and positive mix leading to $179 million of profitable improvement. SG&A and R&D remain under control despite a high inflationary environment with SG&A to sales at 9% in the first quarter. The negative variance in FX and other is driven by lower equity earnings from our China propylene oxide joint venture and the strengthening of the U.S. dollar against the euro by 8% year-over-year. Let's turn to Slide 10. As a reminder, we have targeted an incremental $100 million of cost optimization and synergy savings, bringing a total of $240 million of run rate savings expected by the end of 2023. We have delivered approximately half of this run rate at the end of 2021, and we closed this quarter at an annualized rate of approximately $125 million. We are in the process of concluding our plans for the next phase of savings, which covers polyurethanes' margin enhancement, global business services expansion as well as supply chain optimization. We expect to announce the details in the coming months and discuss in more depth at our next quarterly earnings call. We remain confident that we will meet or exceed the full run rate level of $240 million of savings by the end of 2023. Turning to Slide 11. Net cash provided by operating activities was a positive $85 million in the first quarter compared to an outflow in 2021. Free cash flow was also positive despite over $200 million of working capital inflation as raw materials and energy prices rose significantly in the quarter. Capital expenditures amounted to $69 million for the quarter and we continue to expect approximately $300 million of spend in 2022 as we complete our Geismar MDI splitter investment. Our operating working capital closed at 16% of sales in quarter one compared to 18% in the same prior year period. In the second quarter, we do expect additional working capital inflation on the back of further selling price and raw material increases. We remain on track to meet or exceed our 40% free cash flow conversion target in 2022. As a reminder, this target excludes the funds we will receive from Albemarle in the second quarter. We expect to receive a net amount of $78 million from Albemarle in May, bringing the total post-tax benefit to Huntsman from the legal settlement to $410 million. Our balance sheet remained strong with total liquidity of $2.3 billion and net debt leverage of 0.5x. We received credit rating agency upgrades from S&P to BBB- and from Fitch to BBB during the first quarter, a reflection of our disciplined approach to our balance sheet and capital allocation as well as the strength in our underlying portfolio. We increased our dividend by $0.10 a share or 13% during the first quarter and recorded adjusted earnings per share of $1.19 compared to $0.65 per share in quarter one of 2021. We also repurchased approximately 6 million shares for $210 million at an average purchase price of $37.85 during the quarter. As previously announced, our Board of Directors authorized an increase to our total share repurchase plan to $2 billion. We had approximately $1.7 billion remaining on the plan on March 31, 2022, and expect to repurchase a total of approximately $1 billion of shares in 2022. Based upon our current market capitalization, we expect our total return of capital to shareholders to be approximately 15% in 2022. Peter, back to you.

Peter Huntsman, Chairman, CEO and President

Thank you, Phil. As we announced the results of our first quarter, it's worth taking a few minutes to remind our shareholders what we presented at our Investor Day in November of this past year. At that time, we outlined a projection that we plan to hit a margin of 17% EBITDA margins in 2022. Our first quarter results hit this objective. Had the raw material prices been equal to the time when these projections were shown, our first quarter EBITDA margins on a lower cost basis would have exceeded 17%. In short, we're achieving our plan while contending with record high raw material prices and volatility. As we look into the second quarter, we remain optimistic about hitting our EBITDA range of $380 million to $420 million. We still continue to hold a firm view on pricing and passing raw material increases to our customer base across all of our products. We remain focused on two principal areas. Number one, we will continue to focus on value over volume. By the end of quarter two, we'll be operating our MDI splitter at Geismar, Louisiana. This will enable us to take existing commodity-grade MDI and upgrade it to a higher-margin product. It will also allow us to renegotiate more competitive contracts on our existing commodity MDI sales. In our Performance Products, we are on track to complete upgrades to produce higher value amines and carbonates allowing us to be the sole North American producer of ethylene carbonates for EV batteries, catalysts and semiconductor chips. We continue to see a recovery in our aerospace market as well. This recovery, together with continued synergies and pricing excellence, will assure our Advanced Materials division meets our margin objectives in excess of 20% adjusted EBITDA. Our second major focus is on our cost realignment across all of our divisions and our SG&A. We presented at our Investor Day a goal of $240 million. To date, we've achieved $125 million of value creation. We remain on track both with respect to timing and the $240 million objective. We share the concerns expressed by just about every company with regards to the threat of energy volatility, inflation, consumer spending and the uncertainties between Russia and Ukraine. For this reason, we will maintain a strong balance sheet while focusing on greater than 40% free cash flow. We will execute with even greater determination on our efforts around our cost structure and continue to diversify and upvalue our customer base. We may not be able to anticipate exactly what will impact us in the coming months, but we will remain focused on creating value and on delivering results. With that, operator, we'll open the line now for any questions.

Operator, Operator

Our first question comes from P.J. Juvekar with Citi.

Prashant Juvekar, Analyst

Peter, can you talk about the aerospace recovery that you mentioned? I know you have exposure to more wide-body planes. And as international travel picks up, what should be the cadence of recovery as these planes are brought back into service?

Peter Huntsman, Chairman, CEO and President

It's great to hear from you, P.J. Regarding the recovery in our aerospace business, we were operating at approximately a $90 million run rate before COVID. During the height of the pandemic, we experienced an annualized EBITDA level of around $40 million, which represents a drop of about $50 million. Currently, I believe we are about halfway through the recovery process, with a run rate of around $60 million, which is an increase of $20 million from the lowest point, leaving us with 60% to go to return to pre-COVID levels. We are also qualifying for additional applications with newer models. To achieve the remaining $30 million needed to reach pre-COVID levels will largely depend on orders for wide-body aircraft. This will be influenced by demand and fuel efficiency. In high energy cost environments, we often see enhancements in energy conservation and insulation. Additionally, airlines are ordering more fuel-efficient aircraft. We're witnessing the retirement of older models like the Airbus A380 and Boeing 747, which will be replaced by newer models such as the Airbus A350 and Boeing 787. So far, our recovery timeline remains consistent with our guidance of 2 to 3 years, and I believe we are about halfway through this process. We anticipate a more complete recovery by the end of next year.

Operator, Operator

Our next question comes from the line of Aleksey Yefremov with KeyBanc.

Aleksey Yefremov, Analyst

Peter, for Performance Products, EBITDA margins were very strong at over 30%. As far as I remember, you were setting long-term goals for the segment at 20% to 25%. Do you feel more optimistic about these long-term targets? Or is there maybe an element of cyclical upside in the current margins that may not be sustaining to the future?

Peter Huntsman, Chairman, CEO and President

I believe that as we enhance our pricing strategy and optimize our cost structure, I would lean more towards the 25% margin rather than the 20% margin, though I still feel comfortable within that range. It's important to note that with the investments we are making in upgrading our carbonate, amines, and customer base over the next 12 to 18 months, I expect that a 25% margin may become more typical. Currently, the business is benefitting from strong demand, which is likely above the usual levels. Additionally, there have been significant changes in the structure of several industries, such as the number of competitors, their focus, and broader applications, along with pricing discipline across the board. From my perspective today, when the margin range of 20% to 25% was established, I would have thought the normalized margin would lean towards the lower end, but now I would lean more towards the higher end. Over the next year or two, I anticipate that we will see a gradual improvement as we continue to upgrade our products.

Operator, Operator

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

Michael Sison, Analyst

Nice start to the year. Peter, you're having a really good first half, $400 million plus in EBITDA roughly each quarter. How should we think about the second half? And I know it's a little bit early to give specific guidance, but can you keep that level going? Or what are the puts and takes for us to think about in sort of modeling the second half? And if any specifics you can give would be great.

Peter Huntsman, Chairman, CEO and President

Thank you very much. I think we're currently where we expected to be in the first quarter. I believe the second half has the potential to be as strong, if not stronger, than the first half, but I say that with a significant caveat. My main concern in the short term is overall demand. We've successfully implemented price increases over the past quarters, achieving $250 million in the first quarter alone while also expanding our margins. Our EBITDA margins increased on a per pound basis, despite absorbing around $375 million in raw material inflation, with $250 million related solely to polyurethanes. Heading into the second half, the biggest headwinds, influenced by the actions of Russia and other economic factors, could change rapidly. However, my main worry remains overall demand. While we might maintain margins and potentially increase them, a drop in the tonnage we can sell is concerning. In the short term, the situation in China with the lockdowns could impact our business by approximately $20 million a month. I believe we'll recover that when China reopens and lifts those lockdowns, leading to a quick rebound in margins, pricing, and demand. The duration of these impacts and whether they could spread to other areas is uncertain, but this is my primary near-term concern. Looking longer-term into the second half, a general slowdown in demand, possibly due to higher interest rates and mortgages, could also affect us. Nevertheless, when I consider margins, new applications, customer upgrades, and cost efficiencies, I remain quite optimistic for the second half of the year.

Operator, Operator

Our next question comes from the line of David Begleiter with Deutsche Bank.

David Begleiter, Analyst

Peter, just on MDI manufacturing in Europe, can you talk to the competitiveness of that right now by the industry? And do you think your advantage at all having a plant in the Netherlands as opposed to capacity in Germany?

Peter Huntsman, Chairman, CEO and President

Yes, it's great to hear from you, David. I believe we are in a strong position. In the Netherlands, we have an excellent setup where we source part of our electricity from wind power through our contracts in the area. While I don’t want to suggest that we are completely insulated from natural gas supply issues and price fluctuations, I feel good about our situation. We are part of a chemical cluster that operates independently. So far, I don’t see any immediate threats based on what we have observed. We have heard about potential actions related to natural gas shortages affecting Germany and the implications for larger sites along the Rhine River. While there may be some effects on us, they would be quite distant. I appreciate our demand and customer base. Currently, we are reviewing our entire European presence, which also encompasses the Middle East, Africa, and India. It’s essential for us to evaluate the entire region to ensure we obtain the best value for our available tonnage. I know I repeat this often, but our focus is not on acquiring new tonnage but on enhancing margins, improving tonnage, and better serving customer applications. This means we will continuously reassess our customer profiles and the geographical areas where we operate. I mentioned earlier that we have exited some footwear applications under our TPU business in Southeast Asia. This segment was once a critical part of our business strategy, but if we can't achieve pricing that allows us to pass on raw material costs and enhance margins, we will redirect that tonnage elsewhere while continually seeking to strengthen our relationships and applications.

Operator, Operator

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

Kevin McCarthy, Analyst

Peter, it seems that demand is quite strong across many of your major product lines. So in that context, do you foresee the need to debottleneck or otherwise add capacity moving forward? And related to that, how do you think the capital budget of $300 million this year might trend as your splitter project rolls off?

Peter Huntsman, Chairman, CEO and President

I will let Phil discuss the capital projects and projections. However, I would like to emphasize that we should always be exploring internal projects for additional efficiency gains of 1%, 2%, or 3%. We are expanding our capabilities in certain areas, particularly amines, to produce more catalysts and similar products. Currently, about 75% to 80% of our capital expenditures from last year and projected for the next 6 to 18 months will focus on upgrading our capacity. This includes transitioning our carbonate production towards electric vehicles and applying our amines in high-demand areas such as semiconductor chips. Moreover, we are shifting our commodity MDI in North America away from traditional uses and into automotive and downstream applications, focusing on enhancing value. As we assess our company's valuation in relation to the market's perception of our EBITDA and cash generation, it is crucial for us to improve profit margins, reliability, and consistency in earnings. This has been our strategy for the past two years, and we intend to pursue it further. Many investments initiated a couple of years ago, like the MDI splitter in Geismar, Louisiana, are now yielding results, and we will start seeing the full impact soon. I want to remind you that as we transition between markets and enhance our offerings, we often benefit in two ways: increased tonnage in higher-value markets and renegotiated contracts that allow for greater margins as we exit other markets. The benefits we expect from project Patriot amount to $45 million, which stems from moving into differentiated markets. This does not yet include the advantages we are already observing from improved contract negotiations. Phil, would you like to add anything about the working capital?

Phil Lister, CFO

Yes, Kevin, so we spent $342 million last year on CapEx. We'll be down this year at approximately $300 million. That's a good number to model on outwards, about 3% to 4% of our overall sales. And we said we'll be very disciplined, devoting approximately 60% of that capital to growth capital. The three performance product projects, which we've talked about, are incredibly important. Those amount to about $150 million of spend over the '22 and '23 time period. There are a number of targeted investments that we can continue to make in order to grow the business effectively. But I'd use for modeling purposes, approximately $300 million per annum going out.

Operator, Operator

Our next question comes from the line of Angel Castillo with Morgan Stanley.

Angel Castillo, Analyst

Peter, could you provide more details on the Performance Products segment? You mentioned that UPR might see some demand benefits, but the volumes don’t seem to be significant. It sounds like you're emphasizing value over volume, which is part of it. Could you clarify what other factors are contributing to strength and maybe quantify them? Additionally, regarding the maleic process, which I understand generates energy and steam, could you quantify its contribution to the overall benefits as well?

Peter Huntsman, Chairman, CEO and President

Yes. Angel, that's a great question. When we consider the steam and its advantages, I wouldn’t characterize it as material to the business. It definitely helps in a high-energy price environment because we can obtain credits similar to natural gas prices. In the current situation in Europe with high natural gas prices, we will see some benefits, but I wouldn't refer to it as a material advantage. Regarding downstream applications, we’ve traditionally focused on moving molecules, using our amines business to transfer ethylene oxide and propylene oxide, as well as other major raw materials. Now that we are somewhat independent from that aspect, we are concentrating on value, exploring fuel additives, and finding ways to enhance the cleanliness and environmental efficiency of gasoline. We are also prioritizing the purity of our amines products and upgrading them for use in semiconductor and chip manufacturing, where higher cleanliness leads to increased efficiency and greater throughput per chip. The exploration of applications for electric vehicles remains a key growth area for us. By next year, we will be the only North American producer of high-purity carbonates, which are essential for the electrolytes that connect the anodes and cathodes in batteries. There are also broader applications in the amines sector, such as replacing traditional solvents and acting as curing agents in the wind industry, where demand, particularly in China, remains very strong. As greener trends persist, we anticipate continued strong demand in the wind and power sectors. Additionally, we are seeing robust demand for amines used as a catalyst, especially within the polyurethane catalyst and spray foam markets. We supply certain catalysts that are used in the spray foam industry, which connects to Huntsman Building Solutions from our Huntsman Performance Products division. These are aligned with market prices because we can source similar products from competitors, providing us insight into market dynamics. We view this as a strong and growing market. This is also a key reason for the investment activities in Petfurdo, Hungary, where we supply both international and domestic applications for the polyurethane catalyst business. I could elaborate further, but I might lose some of you with lengthy details. We have a wide range of diverse end-use applications that we will persistently enhance to create better, purer, and more valuable products for the company.

Operator, Operator

Our next question comes from the line of Frank Mitsch with Fermium Research.

Frank Mitsch, Analyst

Yes, and certainly would never doze off, Peter. I understand that you guys may have been pretty busy during the first quarter, but the strategic review of the Textile Effects business was supposed to begin in earnest early in the first quarter. So I was just wondering where that stands? And if you have any updated thoughts on that?

Peter Huntsman, Chairman, CEO and President

Frank, I wouldn't expect you to fall asleep this early in the morning. Maybe after 6:00 p.m., but that's likely due to some drinks or similar. Anyway, thinking about that process now, we are at a stage where we can confirm that we are making progress. I don't want to go into too much detail that could lead to misunderstandings or change expectations on either side. It’s fair to note that we have several interested parties, and we are moving at the pace we established and communicated to the market a few months ago, and we are still on that path. I don’t see any slowdown; everything is proceeding as we anticipated.

Operator, Operator

Our next question comes from the line of Matthew DeYoe with Bank of America.

Matthew DeYoe, Analyst

Can you talk a little bit about the revenue deselection in Advanced Materials and how you're able to grow earnings in a backdrop where volumes were down like 17% year-over-year?

Peter Huntsman, Chairman, CEO and President

Well, it's by focusing on that value over volume and where we have products where we don't add significant margin products that are in the basic liquid resins where we're basically taking someone else's epichlorohydrin or someone else's chlorine or raw materials, and then we're merely blending products together and not adding a great deal of chemistry or know-how or customer intimacy or service to that. That's just frankly not an end of the business that we choose to be in. So I would remind some people that are trying to model the Advanced Material business, we've said this in the past that when you focus on the core of the business and as you focus on the growth end of the business, this business, you see one end of the business where we're literally shrinking the business and exiting the business, and we have another end of the business that is growing much better than what we're seeing right now on a GDP basis. So within Advanced Materials, you're going to see better than GDP growth in the core end of the business. And in the other end of the business, where you see some of the lower-margin coatings and some of the lower margin applications where we're kind of in there slugging it out with a dozen other companies, same products and applications and so forth. We'll continue to deselect from those. And where we have opportunities to move those molecules somewhere else, we will. If we can't move the molecule somewhere else, then we'll exit them.

Operator, Operator

Our next question comes from the line of Josh Spector with UBS.

Joshua Spector, Analyst

I think, Peter, if I heard you right, you talked about polyurethane, Auto's market demand was up maybe a low to mid-single-digit percent year-over-year. That seems to outperform unit sales or unit production in Autos pretty nicely. Just wondering if you could differentiate between how much of that linked with unit demand, maybe if there are some inventory effects, which helped the quarter, or really how much of that is a substitution effect that you referred to?

Peter Huntsman, Chairman, CEO and President

A lot of this really relates to the substitution of other products. We're seeing significant growth in our higher-end applications, particularly with Tesla. As mentioned previously, we've secured the seating applications for Tesla in China. Currently, we're working on qualifications and applications for additional vehicles. While we frequently mention electric vehicles in these discussions, our focus remains on aspects like the battery, insulation, sound quality, seating, and lightweighting of the vehicle. We believe we are well-positioned in these areas to add significant value, and we will continue to pursue that. The higher-end automobile segment is performing well for us, and I hope our results will exceed the broader car industry's stagnation, aiming for slightly better than 0 growth.

Operator, Operator

Our next question comes from the line of Laurence Alexander with Jefferies.

Daniel Rizzo, Analyst

It's Dan Rizzo on for Laurence. Given how tight the market is, would you co-invest in the greenfield and MDI plant to look back in market share and downstream chemistries longer term?

Peter Huntsman, Chairman, CEO and President

I would never say it's impossible, but it would take a very compelling case for us to consider a greenfield investment. When thinking about expanding by adding a production line or increasing capacity with a current customer or partner, that might be an option. However, investing $1.5 billion to $2 billion in a greenfield is significant. A greenfield refers to a completely new facility, starting from scratch to build a brand-new site, progressing from nitrobenzene to aniline, to MDI, and so on. This endeavor would require a facility with a capacity of over 400 tons, an investment of $1.5 billion to $2 billion, and approximately 7 to 8 years for construction. Alternatively, if I used $2 billion to buy shares at our current market capitalization, it could potentially lead to a 25% increase in our stock price within the next year or two compared to the extended timeline for constructing a facility. By the time the new facility becomes operational, the market conditions could be very different. Based on my discussions with shareholders and analyzing the numbers, it seems unlikely that we would actively and aggressively pursue a greenfield investment in an MDI plant. However, this doesn't mean we are not committed to the business or looking for investment opportunities in MDI. I would prefer to allocate $100 million to $200 million over the next couple of years towards downstream spray foam, upgrading our MDI processes, and exploring downstream applications to enhance MDI production.

Operator, Operator

Our next question comes from the line of Mike Harrison with Seaport Research Partners.

Michael Harrison, Analyst

I would like to get more details on the Geismar splitter. What does the start-up process look like between now and June? Can you also explain the impact on your EBITDA this year? Should we expect some initial costs and then gradually see a ramp towards that $45 million annual EBITDA contribution? Additionally, are customers already lined up for the upgraded product from the splitter, or will it take time to sell the new material?

Peter Huntsman, Chairman, CEO and President

When considering our operations, we currently run similar facilities in China and Europe. We expect a quick startup, not taking six months as we aim to leverage our existing knowledge. The main challenge will be qualifying new products from the new facility to our customers. We've already introduced some products from Asia and Europe into the market. For the latter half of this year, I anticipate a benefit of around $10 million to $15 million. Looking ahead to next year, we could see benefits in the range of $35 million to $40 million. By 2024, we expect to reach a full operational capacity, although the process will be gradual due to the qualification and supply phases. We have already identified the customers and market segments, and we've been transferring products from Europe and China. We plan to start strong, and while I expect us to outperform the timeline I've mentioned, I am also aware of the realistic qualification period for our customers.

Operator, Operator

Our next question comes from the line of Matthew Blair with Tudor, Pickering, Holt.

Matthew Blair, Analyst

I was hoping you could talk about this rising mortgage rate environment in the U.S. and how it might impact housing? And then specifically, do you think there would be like a 1-for-1 hit if housing slowed down to your polyurethane segment? Or are there ways that you would be insulated from any sort of housing downturn?

Peter Huntsman, Chairman, CEO and President

When considering the North American residential market, it's important to note that it constitutes about 10% of our overall polyurethanes business. Specifically, around 10% of our total business comes from U.S. residential, with roughly two-thirds being new builds and one-third related to retrofitting. If we see a slowdown in new builds, we can expect an increase in retrofitting as people may choose not to purchase new homes. However, I want to clarify that this won’t be a direct one-to-one correlation. While I would prefer to see new homes being built for the benefit of our business and products, a hypothetical 10% drop in new builds will not necessarily translate to a 10% decrease in our business. This decline should be counterbalanced by growth in the retrofit segment. Additionally, a significant portion of our North American residential business is linked to the spray foam sector, which continues to perform well amidst higher energy prices. We are currently at full capacity, though our production is somewhat constrained due to the availability of essential blowing agents and catalysts. We have a backlog of about five weeks, meaning we can sustain operations for the next month fulfilling existing orders without new incoming ones. In terms of residential demand, we are observing strong interest in our building materials and applications. While we haven’t experienced a slowdown yet, we remain cautiously aware of trends in new home sales, mortgage applications, and building permits, indicating some volatility may be ahead. Nonetheless, we expect continued demand for environmental retrofits and upgrades, and we plan to capture market share from competing products. This segment is vital for us, and we will keep investing in it. Operator, we have time for one more question before we conclude.

Operator, Operator

Our next question comes from the line of Hassan Ahmed with Alembic Global.

Hassan Ahmed, Analyst

Just wanted to revisit the European MDI side of things. Obviously, Europe is a pretty large part of the MDI industry. Have you guys seen some reductions in operating rates already over there? And if not, if sort of the current geopolitical situation continues, do you expect to see certain curtailments, operating rate reductions and the like? And again, the only reason I ask this is in light of some of the commentary coming out of BASF a couple of weeks ago.

Peter Huntsman, Chairman, CEO and President

Yes, I have not seen or heard what BASF mentioned. Our business in Europe is obviously smaller than theirs. However, we are currently sold out and experiencing strong demand across Europe. While I have concerns about raw material availability, consumer confidence, and inflation pressures, it's important to note that although gas prices are high at $30, they have significantly decreased from over $60 a month ago. We are working diligently on our cost structure in Rotterdam to maintain pricing and focus on new applications. Despite operating in the lower margin segment of our MDI business due to raw material costs, we believe we are performing well in Europe. Unfortunately, this is likely to remain the case for the foreseeable future.

Operator, Operator

Thank you. That is all the time we have for questions today. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.