Earnings Call Transcript - HUN Q4 2022

Operator, Operator

Greetings and welcome to the Huntsman Corporation Fourth Quarter 2022 Earnings Call. All participants are currently in listen-only mode, and a question-and-answer session will take place after the formal presentation. This conference is being recorded. I will now hand the call over to Ivan Marcuse, Vice President of Investor Relations. Thank you, and you may begin.

Ivan Marcuse, Vice President of Investor Relations

Thank you, Darrel, and good morning, everyone. Welcome to Huntsman's fourth quarter 2022 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 fourth quarter '22 via press release and posted to our website, huntsman.com. We also posted a set of slides on our website that we will use during the call this morning while presenting our results. As a reminder, following the announcement of the sale of our Textile Effects business, we are now treating Textile Effects as discontinued operations in our income and cash flow statements and held for sale on the balance sheet. During this call, we may make statements about our projections or expectations for the future. All such statements are forward-looking statements. And while they reflect our current expectations, they involve risks and uncertainties and are not guarantees of future performance. You should review our filings with the SEC for more information regarding the factors that could cause actual results to differ materially from these projections or expectations. We do not plan to publicly update or revise 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, Chairman and CEO.

Peter Huntsman, Chairman and CEO

Thank you, Ivan. Good morning, everyone. Thank you for taking the time to join us. Let's start out here on slide number five. Adjusted EBITDA for our Polyurethanes division in the fourth quarter was $37 million. Significant destocking across our markets, specifically in Europe and North America, combined with competitive pricing and historically high energy costs placed unprecedented pressure on the Polyurethanes business throughout the fourth quarter. Overall sales volume in the quarter declined 22% year-on-year, and 9% sequentially. The Americas and European regions accounted for all the declines as lower demand and significant destocking heavily impacted sales volumes. Our Asian markets, primarily China, did experience modest volume growth in the quarter due to slightly improved demand in insulation and automotive when compared to the fourth quarter a year ago. Europe demand remained subdued. And from our vantage point, we're still clearly in a recessionary economic environment. While energy costs remained historically high, those headwinds have improved. This improvement will help to relieve some of the pressure on our European business as we move through the first half of 2023. That said, falling costs and lower demand have triggered increasing pricing pressure on MDI, which offset some of the benefit from lower natural gas prices. As we indicated on our previous earnings call, we are restructuring our business in Europe to better reflect the high energy cost environment. In the short run, we are also idling our smaller MDI line in Rotterdam for an extended period until end market demand improves. We have no intention of remaining an industry shock absorber as has been the case these past quarters. To be clear, Europe remains a core region for our Polyurethanes business. We will benefit for many years to come from the region's needed drive for improved energy conservation and efficiency. We remain well-positioned to bring energy-saving solutions to both residential and commercial construction markets, as well as innovative improvements to the lightweighting of automobiles. There is some optimism that economic conditions and demand in China will improve as 2023 unfolds due to the removal of the Chinese government's Zero-COVID policies. How this optimism translates into increased consumer spending and industrial activity remains to be fully seen. Post-Chinese New Year's, we are seeing early signs of improved conditions in pricing trends and moderate demand improvement in areas such as cold chain, infrastructure, and certain consumer-related markets including furniture. China is the world's largest MDI market accounting for approximately 40% of global capacity and demand. A steadily improving demand situation and potential economic stimulus would be a catalyst for our Polyurethanes business. Lower propylene oxide margins in China drove our equity earnings lower year-over-year. Our joint venture contributed approximately $10 million in equity earnings for the quarter, below the $22 million reported a year ago. One of the greatest headwinds impacting our Q4 was, and continuing to challenge our Polyurethanes business is the high levels of destocking we've seen in our Americas region, and especially in our construction markets. Remember that two-thirds of our Polyurethanes Americas business goes into construction-related end markets, approximately half into commercial construction, and half into residential, of which 70% is related to new residential builds. Our construction markets for composite wood products used in residential and non-residential insulation markets were under significant downward pressure throughout the fourth quarter. These trends have continued into the first half of Q1 as we continue to see the impact of higher interest rates and their effect on downstream customer decision-making. We are hopeful that destocking in the Americas will ease as we move into the typically seasonally stronger months of March and April. Giving us some confidence in this regard is that our spray foam business, which was the first to see destocking last year, reported flat volumes year-on-year in the fourth quarter. Our Huntsman Building Solutions spray foam business ended the year with $600 million of annual sales. While the housing market may endure a more difficult year than 2022 due to higher interest rates, we remain on the right side of the energy efficiency drive, and we will benefit from both improved building codes and the government's Inflation Reduction Act. Another positive trend continuing to emerge for our Polyurethanes business is the modest but steady recovery we are seeing in our global automotive platform which saw 7% improvement globally in the fourth quarter, with every region seeing positive volumes during the fourth quarter. Approximately 15% of our Polyurethanes portfolio ended up in automotive in Q4. As we announced last quarter, we are not waiting for markets to improve but are taking decisive and proactive steps to make our company more efficient, stronger, and better positioned for when the current challenging conditions abate. We discussed last quarter in the short-term in Polyurethanes, we have adjusted MDI production to match demand. We will continue to monitor and adjust accordingly during 2023, both in Rotterdam and at Geismar to ensure that we aggressively manage our working capital with cash generation as our top priority. Furthermore, we are moving forward aggressively on the cost reduction plans we discussed last quarter. We are on track to delivering as planned. This includes existing geographies that are not generating acceptable returns and consolidating additional back-office functions. Most of these actions will be completed by the end of 2023, and it will lower the overall cost basis for Polyurethanes by at least $60 million. Looking forward into the first quarter, we expect to see improvement over the fourth quarter despite the typically seasonality and lighter quarter due in part to the Chinese New Year. We should expect continued destocking in the United States, but that destocking should moderate as we move through the quarter. Putting it all together as we sit here today, we expect Polyurethanes adjusted EBITDA for the first quarter to be in the range of $55 million to $65 million. Let's turn to slide number six, Performance Products reported adjusted EBITDA of $61 million for the fourth quarter, which was a healthy 20% margin despite destocking headwinds that exacerbated the typical seasonality that we see in the fourth quarter. The decline in adjusted EBITDA versus the prior year was driven primarily by a 32% decline in volumes year-over-year, but that was partially offset by a 23% improvement in unit variable margins owing to our commercial excellence initiatives and market dynamics. The volume decline, in turn, was driven primarily by lower demand and aggressive destocking in construction, coatings and adhesives, and industrial-related markets mostly in the Americas and European regions. We have seen signs that destocking appears to be moderating, but global demand remains muted, and customers are keeping inventories low as they wait for improved visibility. As we mentioned, even with these macro challenges, we were able to deliver EBITDA margins within our long-term expected range. These returns are due in large part to our ongoing commercial excellence program and attractive industry dynamics we pointed to over last year, as well as good cost control. Maleic anhydride and our high molecular weight ethyleneamines continue to offer strong returns despite a slowdown in end market volumes. As indicated on prior calls, we have seen significant pressure on returns in amines into our China and European wind businesses. And it remains to be seen whether the Chinese and the E.U. governments' public stance for more renewable energy will come to fruition and drive improvements. Our remaining amines portfolio in Performance Products is fragmented and highly diverse and will benefit us both in the short and long term. Capital investments in our differentiated performance amines serving insulation, EV battery, and semiconductor markets continues to move forward on schedule. As we've stated in the past, assuming stable macro conditions, we expect these projects to start up in 2023 and deliver more than $35 million of EBITDA once they are fully ramped up, and the respective markets return to a more normalized level of demand. Performance Products remains a highly attractive division in our view. And we continue to prioritize strategic growth via organic investment and inorganic opportunities over the long run. The first quarter is typically similar to the fourth quarter. The first quarter will face tough comparisons versus prior year due to lower overall volumes driven by destocking and the more challenging global demand environment. However, we do expect to stay within our long-term EBITDA range of 20% to 25%. And we expect Performance Products' first-quarter adjusted EBITDA to be in the range of $60 million to $70 million. Let's turn to slide number seven. Advanced Materials reported adjusted EBITDA of $41 million in the quarter, which is below the fourth quarter a year ago due primarily to lower sales volumes, improved pricing and mix helped keep EBITDA margins only modestly below the prior year. Despite the fourth quarter decline, for the full year of 2022, Advanced Materials registered its best ever year, and adjusted EBITDA margins were 18%, a 120 basis point improvement over 2021. The sales volume decline of 28% was due in part to our exiting of lower margin commodity-type product lines. Excluding our deselection of certain product lines, our core specialty volumes declined less than the segment average, with much of the drop attributed to destocking in several of our industrial-related markets, primarily in the Americas and Europe. Total sales fell less than volumes due to favorable pricing and mix, which helped improve our unit margin by over 20%. Our Aerospace business continues to demonstrate improving trends and increased almost 20% compared to the prior year. We expect these trends to continue through 2023 and beyond as wide-body production rates improve and airlines continue to increase orders, our expectations remain that this important and profitable sector will return to pre-pandemic levels in 2024. Automotive revenues in the divisions increased 7% compared to the prior year as sales benefited from improvement in global supply chains combined with continued favorable trends in lightweighting and growth of electric vehicles. Like in other divisions, continued destocking and cautious customer ordering patterns are weighing moderately on sales in the early part of the first quarter. In addition, we see continued headwinds in our European infrastructure coatings business and further destocking in our industrial markets specifically in the Americas. But remember that Advanced Materials has less than 10% exposure to the worldwide commercial and residential construction market. We expect improved results in the first quarter in 2023 driven by our aerospace and automotive businesses as well as continued effective cost controls. Combining all of this, we expect the first-quarter adjusted EBITDA for this division to be in the range of $45 million to $50 million with higher EBITDA margins than we saw in the fourth quarter. I'll now turn the time over to our Chief Financial Officer, Phil Lister. Phil?

Phil Lister, Chief Financial Officer

Thank you, Peter. Good morning. Let's turn to slide eight. Adjusted EBITDA for the fourth quarter was $87 million compared to $327 million in the fourth quarter of 2021, and $271 million in the third quarter of 2022. A decline over the prior year was driven by reduced volumes across our portfolio as well as lower unit margins in our Polyurethanes division. Sequentially, volumes declined by 14% driven by the significant destocking in Europe and in North America. Seasonally, we would normally expect to see a sequential volume decline of approximately 5% across our portfolio. As a reminder, about 40% to 45% of our overall portfolio is linked to worldwide construction by commercial, residential, and infrastructure spend. Unit margins in Performance Products and Advanced Materials improved both year-on-year and sequentially with pricing remaining firm. Polyurethanes unit margins declined as weakening demand led to price erosion in the fourth quarter while the cost of sales increased year-on-year by over $500 million annualized driven by a significant increase in energy costs and raw materials. For the full year, Huntsman's raw material cost increased by approximately $1 billion, of which approximately half was as a result of increased energy cost. SG&A costs were lower by $19 million year-on-year as a result of our cost optimization program. We closed the year at 9% SG&A to sales, an improvement on 2021 and ahead of our Investor Day commitments. Year-on-year foreign exchange movement impacted the business by approximately $20 million with a stronger U.S. dollar compared to the fourth quarter of 2021. We also saw a decline in our equity earnings from our China propylene oxide joint venture with lower demand in China facing pressure on margins. Adjusted EBITDA margins declined to 5% in the quarter driven by Polyurethanes at 3% while Performance Products and Advanced Materials continued to deliver higher returns at 20% and 15% respectively. Let's turn to slide nine. With our European restructuring, we have increased our cost optimization target to $280 million annualized run rate by the end of 2023. As a reminder, approximately half the savings are coming from SG&A reduction and half from cost of sales. We closed the year with an annualized run rate of approximately $190 million compared to $160 million at the end of the third quarter. More specifically, for our European restructuring, we have completed the majority of works council discussions. We have some benefit from European restructuring late in the fourth quarter with some early headcount reductions. The majority of reductions and reshaping of our footprint in Europe will occur during 2023 with a targeted annualized run rate of $40 million of savings by the end of the year. In addition, our move to a new global business service hub in Poland and Costa Rica continues at pace with approximately one hundred positions already filled. As part of our continued focus on functional spend, we have also completed the handover of certain IT activity to a managed services third-party provider, saving approximately $15 million on an annualized basis. Within Polyurethanes, we continue to reduce headcount as we work to align ongoing costs with current profit margins. In first-quarter 2023, we will complete the previously announced exits from our Southeast Asia business, which will add to the already completed exit of our South American business in 2022. Overall, we remain confident of achieving our $280 million annualized run rate target by the end of 2023. Outside of our formal cost optimization program, we remain focused on continuously improving our cost base to meet current economic conditions, which include persistently high inflation. We'll be extremely vigilant of any discretionary spend, particularly in our European polyurethanes business given current levels of profitability. As Peter mentioned earlier, we will be idling the smaller of our two Rotterdam MDI units for an extended period due to current end market demand. We have also idled one of our three lines in Geismar, Louisiana until we see sustained improvements in the North American construction market. Both units can be brought back online as demand dictates. Combined, we expect to save approximately $10 million in costs in 2023. Turning to slide 10, fourth quarter operating cash flow from continuing operations was strong at $297 million. And we closed the year at $892 million or a 77% adjusted EBITDA conversion rate. Free cash flow for the fourth quarter was $211 million, with $620 million for the full year, $542 million excluding net proceeds from the Albemarle litigation settlement. These figures equate to a free cash flow conversion rate of 54% including the Albemarle settlement, and 47% excluding Albemarle, both in excess of our 40% target for 2022 set out at our 2021 Investor Day. Capital expenditure from continuing operations was $272 million for 2022, $290 million including textile effects, within the guidance level we gave this time last year. We are focusing intently now on our spend on projects and performance products, targeting energy-saving installations, semiconductors, and electric vehicles. Given the current economic environment, we expect to reduce capital expenditure in 2023 compared to 2022 with a target range of $240 million to $250 million. Beyond CapEx, some guidance on other elements of cash flow in 2023. Interest payments should be similar to 2022. Our cash tax rate in 2023 will be a slight headwind compared to 2022 with full-year bonus, depreciation from our Geismar splitter project rolling off. As we stated on our Q3 earnings call, restructuring cash spend in 2023 will be higher than in 2022 as we continue to work through our European restructuring program. Pension contributions are expected to provide a slight tailwind in 2023 down $10 million to approximately $40 million this year. Note with regards to pensions, there will be an adverse non-cash impact on adjusted EBITDA of approximately $40 million in 2023 compared to 2022. Operating working capital at the end of 2022 was lower at 11% of sales. And this remains a key variable for 2023 cash flow, depending upon the level of economic activity and raw material costs that develop during the course of the year. In the short-term, we expect to see a seasonal cash outflow in first-quarter 2023, which will also reflect the current and lower level of profitability, as well as our annual insurance premiums. Our balance sheet remains strong, and we remain firmly committed to an investment-grade rating. We closed 2022 with $1.8 billion of liquidity and net debt leverage of 0.9 times. As a reminder, the expected closure of our Textile Effects sale later this month will add net after-tax cash proceeds of approximately $0.5 billion, and we currently expect to make at least $400 million of share repurchases in 2023. Adjusted earnings per share for the fourth quarter were $0.04 per share, $3.13 for the full year. In the fourth quarter, we repurchased approximately $250 million of shares at an average price of $27.39. Our adjusted effective tax rate was 20% for the full year. For modeling purposes in 2023, we expect an increase in our adjusted effective tax rate to approximately 24% to 26%, due in part to the accounting impact from a valuation allowance in our European polyurethanes business recorded in Q4 2022. Our long-term expectation remains an adjusted effective tax rate of 22% to 24%. We've also increased our dividend by 12% to $0.95 per share, which will add approximately $10 million of net cash outlay in 2023. With this dividend increase combined with share repurchases, we would expect approximately a 10% return of capital yield to shareholders in 2023 at current levels of market capitalization. Peter, back to you.

Peter Huntsman, Chairman and CEO

Thank you, Phil. In conclusion, as we close this chapter on one of our company's most challenging quarters, I'd like to take a few minutes to express what we are presently seeing in the industry, and what we are doing in response. In the fourth quarter, we saw three major headwinds that impacted our performance. The first of these was the near record-high cost of energy. To move into the first quarter, we are seeing some moderation in energy prices. However, up to the present time, Europe continues to see gas and corresponding utility costs seven to ten times higher than in North America. The relief that we are seeing has more to do with a mild winter in Europe and industrial demand destruction rather than structural change. I do not see a return in the coming years where prices will compete with North American gas and utilities. To mitigate this, we announced four months ago, a $40 million cost savings plan as we recalibrate our European cost structure. We continue to remain on track to have this completed by the end of this year. It does not mark a retreat from our European market, but rather a longer-term commitment to compete and create shareholder value in the face of new market realities. We continue to assess the energy, regulatory, and economic future of Europe. We will continue to possibly see further restructuring of our European footprint. The uncompetitive energy situation has caused the second headwind for our business, and inflationary drag on overall demand for our products. In the EU, this has been caused by rising energy costs and poor energy policies. In the U.S., we're seeing similar conditions due to rising interest rates. We believe that our Rotterdam MDI plant is one of the more competitive MDI plants in Europe. However, we will only produce that which we can competitively sell; we will idle one of our two lines in Rotterdam that represents about a third of our Rotterdam capacity. At our Geismar, Louisiana MDI plant, we have closed one of our three lines that represents about 30% of our output. While both of these lines can be restarted, we will only do so when conditions justify such a move. We've also taken similar steps in our Performance Products and, to a lesser degree, our Advanced Materials divisions, so that we calibrate production to actual demand. This will allow us to generate better working capital and pass through raw material costs more effectively. The last negative impact in the fourth quarter was an unusually strong inventory reduction that was felt across all of our products, but particularly in Europe and North American construction. I believe that for more, we see things in the first quarter that inventory levels are very low on the chemicals portion of our customer's inventory. However, we have much less visibility into our customers' finished product inventory. Would a building material supplier keep in warehouses, or in unsold houses are all part of an inventory change that impacts our products? These are parts of it. There are parts of the construction material segments, where we continue to see destocking taking place. Other segments are operating their plants and mills around just-in-time delivery. In the aerospace, automotive, and spray foam insulation, we see much tighter change than we do in other areas. We will continue to manage our working capital accordingly. We push for higher prices to recover more of our lost margins. As we look at the remainder of the first quarter, we continue to see gradual improvements across the board. China continues to show signs of improved demand and gradual improvements in pricing as the economy loosens its previously enforced COVID restrictions. Early visibility into market conditions for Q2 are murky at best. Regarding the second half of this year, I could see a number of scenarios; it could mean hundreds of millions of dollars positively or negatively. To give a meaningful full-year outlook at this time would be speculation at best. What we will continue to do is to react to each variability in the macro marketplace and make decisions that create shareholder value. We will do this by remaining open-minded as to our overall portfolio and where we create lasting value. We will continue to assess our global footprint as it pertains to our cost, from where we source our raw materials to our internally produced products. We will preserve our strong balance sheet and deploy capital, as was mentioned earlier in this call, to enhance shareholder value as we buy in at least $400 million of share repurchases this year and increase our dividend by 12%. We continue to aggressively look at M&A opportunities, particularly in our Performance Products and Advanced Materials divisions. But we will remain disciplined and not overpay for assets. I personally believe that the steps we have initiated and continue to take going forward will allow us to take maximum advantage of whatever comes our way. We have a strong balance sheet, great customer segments, a strong focus on cash and working capital, and will relentlessly match our cost structure to the realities of the marketplace. In short, we are well-positioned to take advantage as markets improve. With that, Operator, why don't we take any questions?

Operator, Operator

Thank you. We will now conduct a question-and-answer session. Our first question comes from David Begleiter with Deutsche Bank. Please proceed with your question.

David Begleiter, Analyst

Thank you. Good morning. Peter, you mentioned some strength in MDI pricing in China recently. Could you give a little more color on what you're seeing in the country on the ground right now? Thank you.

Peter Huntsman, Chairman and CEO

Yes, following the Chinese New Year, we've observed prices increasing to an average of around 15,800 per ton. This is an average figure, with specialty products likely seeing higher prices, while more commoditized items may trend lower. This marks an increase from approximately RMB 14,000 per ton in the fourth quarter. We are noticing some positive developments in both pricing and demand, and we hope this trend continues. In considering the Chinese market, we should look at three main areas: consumer-related growth, infrastructure stimulus spending, and exports. The export sector, in which we have minimal involvement, still appears sluggish. Consumer spending, particularly in automotive and related sectors, seems to be the strongest of the three areas at this early stage. We're also beginning to see a rise in infrastructure spending, which relates to insulation and various energy infrastructure projects that require our products. It's important to remember that many sectors in China have faced challenges for nearly two years. This won't result in an immediate return to full capacity after the New Year; rather, we can expect a gradual improvement leading into the second quarter, especially regarding consumer spending and infrastructure developments. We anticipate continued enhancements in demand and pricing.

Operator, Operator

Thank you. Our next question comes from line of Aleksey Yefremov with KeyBanc Capital Markets. Please proceed with your question.

Aleksey Yefremov, Analyst

Thank you. Good morning, everyone. Peter, considering all the uncertainties, do you think the second quarter is likely showing better trends than the first?

Peter Huntsman, Chairman and CEO

Yes, I would say that it certainly is. I hope that each quarter this year will show improvement. However, there is some ambiguity in the overall market. As we move further into 2023, factors like GDP growth and the possibility of a recession, alongside China’s continued improvement and construction in North America, will significantly impact whether we approach $1 billion a year. Additionally, we need to see the completion of the inventory reductions we’ve experienced, particularly on the chemical side, where much of the deinventorying is already finished. Building materials will not see restocking by customers until their finished goods are in order. This also applies to the consumer areas; our progress will depend on clearing out inventory at the end of the supply chain. We discussed our reliance on both commercial and residential construction in North America, which currently includes retrofits, spray foam, and products like OSB, all of which are performing better. Some areas are recovering well, while others still require further inventory clearance. We also need to see stability in interest rates to encourage consumers to make significant purchases in construction. In terms of reaching our potential, the key factors to monitor are our inventory levels, improvements in construction activity beyond the current state, and competitive energy prices, especially in Europe. Although I welcome the lower prices in Europe, they have resulted from a substantial drop in industrial demand, indicating considerable deindustrialization. In the Americas, we are likely to see an increase in production and energy output, which should help moderate energy prices throughout 2023. Lastly, it is crucial for China to keep progressing, and we’ll need to witness a steady recovery in demand across all these areas.

Phil Lister, Chief Financial Officer

Aleksey, just to add, typically, of course, you would see a seasonal uptick from quarter 1 to quarter 2, respectively, as we move through the winter months, and construction tends to pick up between Q1 and Q2 as well, which you should factor into your thought process.

Operator, Operator

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

Kevin McCarthy, Analyst

Yes, good morning. Peter, I have a two-part question on your Polyurethanes business. First, for the portion that's exposed to construction, can you remind us how much goes into new structures versus retrofits of existing structures? And then secondly, what would you need to see to consider restarting the idle lines at Rotterdam and Geismar?

Peter Huntsman, Chairman and CEO

As we evaluate our North American business, we find that approximately two-thirds is related to residential markets while one-third pertains to commercial markets. In Europe, the distribution is closer to even, but it leans more towards commercial than residential. Regarding the residential segment, about 30% involves retrofitting, and around 70% is focused on new home construction. These percentages may vary slightly, presenting opportunities in both areas. While we are experiencing some decline in new builds, we are seeing an increase in home remodeling projects, which offsets some of the losses in new home construction.

Operator, Operator

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

Jeff Zekauskas, Analyst

Thank you very much. I have a two-part question. Are Textile Effects inventories still recorded on your balance sheet, or are they classified under a different category? Secondly, regarding your relationships with contractors in the United States, some believe that contractors are nearing the completion of their backlog, which may lead to a subsequent period of weaker demand. Is this a trend you observe, or does it seem more difficult for you to assess?

Peter Huntsman, Chairman and CEO

I'll take a stab at the latter part of that, and let Phil take the Textile Effects part of the question. I think that a lot of the slowdown that we saw in contractors finishing up their jobs takes into account a lot of the slowdown that we saw in the fourth quarter going into the first quarter. I think that the inventories, as I mentioned in my prepared remarks, our inventories also would include downstream inventories that would be included in unsold homes. Now we believe, again, just anecdotally, I don't want to talk as though we know what's going on in every situation. But we believe that that supply chain is spinning, the inventory is spinning. And hopefully, as we get into March and April, we're hoping that we start to see that we're going to see greater demand. But everything that we're seeing and everything that we're hearing is that contractors, at this point, are working on very thin inventories, working through that supply chain.

Phil Lister, Chief Financial Officer

To answer the question on Textile Effects, we have recorded it as a discontinued operation or held-for-sale on the balance sheet, so it's excluded from our numbers and everything we’ve provided regarding our underlying cash flow performance EBITDA. The 11% operating working capital percentage of sales I mentioned is also excluding Textile Effects. Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Mike Harrison with Seaport Research Partners. Please proceed with your question.

Mike Harrison, Analyst

Hi, good morning. Was hoping that you could give us a little bit more of an update on the Performance Products, some of the capital investments you're making in polyurethane catalysts, the semiconductor cleans, and ethylene carbonate for batteries. You talked about the EBITDA contribution being a 2024 number and kind of contingent on demand being more normalized. But maybe give us a little better sense of the timing of some of those commercial sales, and I guess what your expectations are, I guess, in '23 and going into '24? Thank you.

Peter Huntsman, Chairman and CEO

Good morning, Mike. As we consider the situation, if we had completed the carbonate project today, I believe the demand for that volume would be fully present. However, this does not imply that prices and margins will be as strong as they might be in a more favorable period. The demand is definitely there, and we anticipate finishing this project in the early part of the fourth quarter. Once we complete the qualifications, the same timeframe applies to the ULTRAPURE carbonates material. The ULTRAPURE amines product for the semiconductor sector will also be ready in the fourth quarter, but qualifying that product will take longer. Thus, we expect the project to finish in the fourth quarter and require the first half of next year to be fully qualified, likely leading to a sold-out condition by mid-2024. We cannot pre-qualify the materials until we actually produce them. Regarding our third project focused on polyurethane catalysts and other materials from our site in Petfurdo, Hungary, its success will depend on the growth of our spray foam business in Europe, which is currently expanding but at a slow pace. Senior management has been actively promoting a more aggressive approach to the Green New Deal regarding building insulation and energy efficiency in both the U.K. and the E.U., and I believe we will see good progress there. This project will likely not reach full capacity upon completion by the end of this year, as it wasn't designed to. We need additional capacity to support our business growth over the next few years. With everything considered, I expect us to achieve a normalized run rate by the middle of next year's third quarter once we get the plants and products qualified and begin seeing returns in the spray foam sector. This should result in a run rate of around $35 million once we are up and running. However, I want to emphasize that when the plants start in early fourth quarter of this year, we shouldn't expect to see that run rate immediately; it will take time to qualify a number of these products.

Operator, Operator

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

Unidentified Analyst, Analyst

Hi, good morning. This is Kevin for Laurence. Thank you for taking my questions. My first question is about how flexible you are willing to be with your balance sheet before you see improvements in order trends. Also, when you mention green shoots in the automotive and aerospace sectors in China, could you provide more details on the extent of the improvement you are observing?

Peter Huntsman, Chairman and CEO

Yes, I would say that what we're seeing in aerospace in China is a relatively immaterial portion of our aerospace business. The vast majority of our demand in aerospace is going to be between Boeing and Airbus, and specifically around the Airbus 350, the Boeing 787, and the new wing designs on the 777X. So, as those models increase in order patterns, as the 777X is able to come online, which I believe is a 2024 event, we'll see the benefit from that. The Chinese automotive continues to be a great business for us, and we're making more and more headways across all of our divisions, and particularly in the EV models for that segment of the business.

Phil Lister, Chief Financial Officer

And for aerospace overall, globally, we highlighted about a $90 million EBITDA on pre-pandemic levels. That dipped to about $30 million during the pandemic. We're now back up to about $50 million-$60 million. And we're confident that, by 2024, which is what we'd indicated, we'd be back at pre-pandemic levels of profitability.

Peter Huntsman, Chairman and CEO

And I want to make sure I understand your question on flexing the balance sheet. Was that more about producing product to meet demand before it comes, or, I'm sorry, I'm not sure I got the point on that one?

Unidentified Analyst, Analyst

Yes, exactly. Before trends improve, I was just wondering about that.

Peter Huntsman, Chairman and CEO

No, I wouldn't be in favor of that. It's not that we're afraid of the balance sheet; I don't want to put any more product in the market than needs to be put in the market. And we need to see genuine demand improvements, and we need to see pricing and margins expansion. At that point, we'll make decisions to add capacity. But in these sort of market conditions, and I'm just speaking for Huntsman, not speaking as an industry, in these sort of market conditions, we don't need more tonnage going into the market at this time. Let's meet the customer demands that we have, and those customers where we have contractual obligations, and so forth, to do so. And we're going to scale back production in areas where we're not able to get an acceptable return.

Operator, Operator

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

Frank Mitsch, Analyst

Thank you, and good morning. I wanted to come back to the idling of the MDI facilities in Rotterdam and in Geismar. When did you bring those units down? What were your operating rates in MDI in Q4? Where do you think Q1 is going to come out? And where do you think you are relative to the industry?

Peter Huntsman, Chairman and CEO

Good to hear from you, Frank. I believe we are fairly aligned with the industry. Currently, there is limited transparency, and I estimate global operating rates to be around 70%. This estimation is based on our own data. There are companies prioritizing volume over value, particularly those receiving government assistance in different regions. While this approach may be beneficial in the short term, it can lead to long-term challenges as it restricts the ability to reduce costs significantly. Essentially, it puts companies in a difficult position. We decided to shut down our Geismar capacity in the fourth quarter of this year. Our Rotterdam facility is currently undergoing a turnaround, and when it restarts, it will only operate with a portion of its lines. Prior to the turnaround, we were also adjusting production levels at that facility.

Phil Lister, Chief Financial Officer

And as we said on our call, Frank, if demand dictates we can restart those units relatively quickly. But as Peter says, we are going to make sure that we are matching effectively production to end market demand.

Operator, Operator

Thank you. Our next question comes from the line of Arun Viswanathan with RBC Capital Markets. Please proceed with your questions.

Arun Viswanathan, Analyst

Great. Thanks for taking my question. I just wanted to ask if you look at year-over-year, there is a decline of maybe over $200 million even ex-textile. So, if you were to think about that, is there any way you could help us understand how much of that is maybe broken down into different buckets? Say price, volume, and then maybe decremental margin? And similarly, if you look ahead looks like you are going to be up in the range of $40 million sequentially on EBITDA. And is there any way you could kind of break that out into maybe some those buckets? Thanks.

Peter Huntsman, Chairman and CEO

I haven't focused much on the different categories in the past, but looking ahead, it seems likely that we will see benefits in the next quarter and the first quarter. We expect to gain from reduced raw material costs across all regions. However, we still anticipate some pricing instability and volume demands affecting certain parts of the company in the first quarter. Overall, we should see higher earnings in the first quarter and into the second quarter as raw material costs decline. The improvements in demand and pricing are likely to be more evident in the second quarter. Looking back, it appears that in some areas, particularly in Performance Products and Advanced Materials, our variable margins haven't changed significantly. The emphasis here is on volume. In Polyurethanes, we have also not seen much decline in margins. However, in more commoditized segments of the business, both margins and volume have decreased. Overall, I think the primary reason for the drop in earnings compared to last year is primarily due to volume issues.

Operator, Operator

Thank you. Our next question comes from the line of Matthew DeYoe with Bank of America. Please proceed with your question.

Matthew DeYoe, Analyst

Good morning, everyone. I have two questions. First, are you liable for anything if Venator terminates the contract or goes bankrupt? Second, considering the lower energy costs along with reduced prices and volumes in Europe, do you anticipate an improvement in polyurethane profits in Europe on a quarter-over-quarter basis? I'll stop there.

Peter Huntsman, Chairman and CEO

Well, I can answer succinctly no, and yes, but no, we're not on the hook for anything with Venator; we have some shares that you can obviously read in our filings, but now we divested of that asset, what, four or five years ago, at this point. And so, the simple answer to your first is no. And yes, I believe that as we look at our polyurethanes business, we certainly would hope to be expanding volumes on the back of falling energy prices and cost discipline and moving prices where we can.

Phil Lister, Chief Financial Officer

Matt, on Venator, we mark-to-market and we've got $6 million on the balance sheet at the end of the fourth quarter. So, it's de minimis from some balance sheet perspective.

Operator, Operator

Thank you. Our next question comes from the line of Mike Sison with Wells Fargo. Please proceed with your question.

Mike Sison, Analyst

Hey, good morning. Happy Mardi Gras. In slide eight, where you have adjusted EBITDA bridge Polyurethanes is down $180 million or so. And I think you guys said it was mostly volume. So, if the restocking ends, or I'm sorry, destocking ends, how much of that 180 comes back? And if there is a restocking event, as maybe things get better, do you get all that back, and then some?

Phil Lister, Chief Financial Officer

Yes, Mike. I think if you look at the year-over-year for Polyurethanes, I think it is a combination of volume down year-over-year both in the Americas and in Europe, as we've said, and it is also a unit margin decline. Even though year-on-year, there's actually a slight price increase year-on-year Q4 to Q4, obviously, there's been a much more significant impact on variable costs. I think we indicated a half billion dollar increase on cost of sales year-on-year. As we move forward and we said from Q4 to Q1, we would expect some unit margin improvements from Q4 to Q1 on polyurethanes, particularly with those still high natural gas prices. And of course, benzene has started to rise as well. But we would expect some unit margin improvements. It really then becomes a discussion around volume, the things that Pete has talked about in terms of China, and also when construction comes back overall. But we are expecting improvement in Q4 to Q1 in polyurethanes.

Operator, Operator

Thank you. Our next question comes from the line of John Roberts with Credit Suisse. Please proceed with your question.

John Roberts, Analyst

Thank you. Why is the minimum of $400 million the right number for 2023 buybacks? And should we look at the difference between the Textile proceeds and the $400 million is what you might hope to do for acquisitions?

Phil Lister, Chief Financial Officer

No, I think that we've looked at our overall plan on cash deployment. We look at our dividend. We look at share buybacks, we look at our organic internal capital needs and investments, and then we would like to think that we keep some powder dry for M&A. And quite frankly, if there is no M&A, that's why we say at least $400 million; if we can't find a good value on the M&A front, we'll keep buying our own company. So, I think that is we balance that and we take our best look throughout the entirety of the year and cash needs and so forth in our expected cash generation. Yes, we want to make sure that we're focused on all four of those areas between share buyback, dividends, internal and external. So, right now, beginning of the year, let's keep some dry powder for the M&A opportunities that we see. And that's something that we're very aggressively pursuing. But as I said in my comments, we're not going to, we're not going to overpay, so we'll keep looking.

Operator, Operator

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

Josh Spector, Analyst

Yes, hi. Thanks for squeezing me in here. Just a quick one on Europe, just you are pretty clear you're going to see some benefit of lower costs. But wondering, given your use of surcharges earlier in the year last year, is that something we need to consider in terms of being a dampening effect of some of that benefit as it rolls through or is that something that shouldn't be a big issue?

Peter Huntsman, Chairman and CEO

No, I don't see it as rebate surcharges, surcharges we put in the time for higher energy costs; we transferred those surcharges that were put into permanent price increases. And I think that the surcharge for us was the best way that we can respond quickly to the high surge that we saw in energy prices and raw materials that were taking place. And so, if we get in that situation again this next summer, I hope we don't, but if we do, that's something that we'll likely be implementing again. As I said in my earlier comments, we're not going to be continued to be the shock absorber between energy prices, energy producers, and the ultimate consumers. So, we'll continue to deploy whatever we have to offset energy volatility.

Operator, Operator

Thank you. Our next question comes from the line of P.J. Juvekar with Citi. Please proceed with your question.

Unidentified Analyst, Analyst

Hi, good morning, Peter. It's indiscernible on for P.J. What was the EBITDA earnings on your HBS sales of $600 million? And what do you expect sales to go next year with lower new build activity? And how much of it is non-U.S.? And can you talk about your aspirations for growing internationally?

Peter Huntsman, Chairman and CEO

Yes, so we don't disclose our EBITDA for HBS. Overall, you can obviously track the sales we give; we look at our integrated margins across that business and drive the business appropriately. As we said, between Q3 and Q4, we could see fairly flat volumes overall. And certainly Q4 over Q4 gives us some part that maybe some of the destocking has finished. In terms of our international business overall, spray foam is needed more than anywhere over in Europe. And you think about the U.K., you think about some Western Europe, which is needed, it is a relatively smaller part of our business overall, sub 10% right now. However, we would expect that to grow over the next three to five years, particularly in the European landscape that really needs energy efficiency.

Phil Lister, Chief Financial Officer

I would just note, as we look at expanding that business in Europe, we're able to do it with our present configuration of assets there, meaning that we will not have to make an investment in system houses or facilities to be able to continue to grow the European market. But we're also focused on the Asian markets as well. And again, it's not just us that there's just not a lot of polyurethane spray foam. Those are very, very ideal markets for us to be expanding in over the coming years, but right now that the Lion's share of our focus and majority and improvement in earnings. And that business continued recovery will be in North America. And with that operator, why don't we take one more question, and then we'll wrap it up. I think we've got a little bit over time here.

Operator, Operator

Thank you. Yes, our final question comes from the line of Hassan Ahmed with Alembic Global. Please proceed with your question.

Hassan Ahmed, Analyst

Good morning, Peter and Phil, thanks for taking the question. Look, a question around the near and medium-term MDI supply. I mean, you guys talked about your sales sort of matching your supply to the lower demand, right, within MDI. I mean from what I'm seeing the rest of the industry is doing the same. Would you sort of think that that discipline will continue? I mean, obviously, you guys will, but for the rest of the industry as demand comes back? So that's on the near-term side of it. And on the medium-term side of it, what are you guys seeing in terms of the industry participants maybe rationalizing capacity, maybe reconsidering expansions and the like?

Peter Huntsman, Chairman and CEO

I cannot comment on the actions of the competition or the extent to which they've reduced their capacity, as that likely varies by company. However, in the long-term view of MDI, I want to emphasize that although it may seem like I'm discussing something from a decade ago, if we look back just a year or even to the pre-COVID era, this industry has proven to be quite resilient. MDI continues to replace other products and is growing at a rate that outpaces GDP. Prior to the energy crisis in Europe, we were essentially sold out. I'm not just referring to Huntsman; the entire industry was sold out and we were engaged in discussions with several large customers about multi-year contracts and purchasing capacity, topics that we hadn't encountered before. The overall market structure hasn't changed significantly; it still requires at least one new world-scale facility every nine to twelve months, primarily in China where most new construction will occur. However, when I consider the future and the number of facilities expected to be built, very few have been announced so far. Over the next five to seven years, as these facilities are constructed, there will be a valid concern regarding Europe's status. I see the high energy costs and regulatory expenses associated with crude MDI production in Europe compared to the Americas, the Middle East, and Asia. If there's going to be a substantial cost difference of hundreds of dollars per ton, Europe will inevitably be affected. I question the long-term competitiveness of low-cost polymeric MDI, especially with today's pricing, as certain producers in Europe are already incurring losses at current energy prices. I'm uncertain how this situation will evolve in Europe. We're continuously assessing our portfolio and evaluating where we source our raw materials, as well as our internal supply of crude MDI and its components. I don't believe we've fully resolved the question of our global footprint yet. For context, back in 2020, European prices for MDI were actually the lowest, with Huntsman's price per ton around $875, compared to Geismar at about $950 and around $925 elsewhere. The competitive ability to transport products between regions was limited, as all three regions had similar manufacturing costs, which meant that moving products across regions was not feasible given the freight costs. In contrast, last year, the cost difference per ton of MDI has reached as high as $1,000 among our operations, leading to significant variances that incorporate freight costs. This considerable spread raises questions about our required footprint in Europe to maintain competitiveness and create shareholder value. We will continue to explore ways to address these challenges. I realize this is a lengthy response, but it highlights our observations in Europe regarding deindustrialization and the chemical segments we are involved in, pointing towards our need for responsive strategies in both the short and long term. As we look toward the next few years, I do not feel all questions have been fully addressed as of yet.

Operator, Operator

Thank you. Yes, that does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time, and enjoy the rest of your day.