Huntsman Corp (HUN) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2007 Huntsman Corporation earnings conference call. My name is Dan and I will be your operator for today. At this time, all participants are in listen-only mode. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Mr. John Heskett. Please proceed, sir.

Thank you, operator. Good morning to everyone. My name is John Heskett. I am the Vice President of Corporate Development and Investor Relations for Huntsman. Welcome to Huntsman's investor conference call for the second quarter of 2007. Joining us on the call today are John Huntsman, our Founder and Chairman; Peter Huntsman, our President and CEO; and Kimo Esplin, our Executive Vice President and Chief Financial Officer.

A recorded playback of this call will be available until midnight, August 6, 2007. The recorded playback may be accessed from the U.S. by dialing 1-888-286-8010 and from outside the U.S. by dialing 1-617-801-6888. The access code for both dial-in numbers is 475-08950. A recording of this call may also be accessed through our website.

Before we begin discussing our earnings, I would like to say a few words about forward-looking statements. Statements made during this conference call that are not historical facts are forward-looking statements. Such statements are considered to be predictions or expectations and are subject to a number of risks and uncertainties.

Our actual results could differ materially based on a number of factors including but not limited to the consummation and timing of our proposed merger with Hexion and the pending sale of our North American Base Chemicals and Polymers business to Flint Hills; future global economic conditions; changes in the prices of our raw material and the energy we consume in our production processes; access to capital markets; industry production capacity and operating rates; the supply/demand balance for our products and that of competing products; pricing pressures; technological developments; changes in government regulations; geopolitical events; and other risk factors. Please see our most recently filed 10-Q and other public filings for a more complete discussion of the risk factors applicable to our Company.

Before I walk through the summary of earnings, let me outline the format of today's call. I will briefly summarize the earnings and then turn the call over to Kimo Esplin, our CFO, who will outline certain of the terms of our merger agreement with Hexion and provide an update on our process to sell our U.S. Base Chemicals and Polymers business to a subsidiary of Koch Industries. Finally, Peter will share his thoughts on the performance of certain of our businesses in the quarter.

Unfortunately given the pending merger with Hexion, we will not be in a position to take any of your questions following the conclusion of Peter's remarks. I know that many of you have questions related to certain aspects of the Hexion merger including the timing, regulatory approvals, and financing arrangements. We expect that additional details related to these issues and others will be made public by either Huntsman or Hexion in the coming weeks and months. However at this time, we are not in a position to provide any information beyond that which has been provided in our public filings over the past several weeks.

Turning to earnings, I would like to point out that as I summarize earnings, I will be referring to adjusted EBITDA from continuing operations which is EBITDA adjusted to exclude the impact of discontinued operations, restructuring impairment, and plant closing costs, legal and contract settlements, loss on the sale of accounts receivable, losses arising from the early extinguishment of debt, and losses related to sale and acquisition of assets.

In the second quarter of 2007, we recorded aggregate net costs of $231.8 million related to such costs and expenses and in the second quarter of 2006, we recorded aggregate net gains of $214.3 million related to such costs and expenses. We focus on adjusted EBITDA from a management standpoint as we believe it is the best measure of the underlying performance of our operations. We have received feedback from many of you in the investment community that this is how you prefer to look at our business.

A reconciliation of both EBITDA and adjusted EBITDA to net income can be found in our second-quarter earnings release, which is has been posted to our website.

Today Huntsman Corporation announced second-quarter earnings as follows. Huntsman recorded adjusted EBITDA from continuing operations of $241.4 million as compared to adjusted EBITDA from continuing operations of $285 million in the second quarter of 2006. It should be noted that given the pending sale of the Flint Hills Resources, we are now classifying our U.S. Polymers business as a discontinued operation and have conformed our presentation in prior periods to reflect this. So going forward you will see results from only five divisions reported as compared to the six that we have historically presented to you.

Net loss available to common stockholders for the second quarter of 2007 was $83.9 million or $0.36 per diluted share. This compares to net income available to common stockholders for the second quarter of 2006 of $262.9 million or $1.13 per share. Excluding the after-tax impact related to legal and contract settlements, losses due to restructuring costs, the impact of discontinued operations, and other items, adjusted net income from continuing operations was $76.1 million or $0.33 per diluted share. This compares to $80.2 million of adjusted net income from continuing operations or $0.34 per diluted share for the comparable period in 2006.

Lower results on an adjusted EBITDA basis as compared to the previous year were primarily attributable to softer results in Polyurethanes, Pigments, and Performance Products divisions. Results were lower in our Base Chemicals segment as the 2006 period benefited from approximately one month of operations at our Port Arthur, Texas facility prior to the fire and outage. This was partially offset by stronger results in our Materials and Effects division and lower corporate and unallocated expenses.

Now I would like to briefly outline the performance of each of our five continuing segments. Polyurethanes recorded an adjusted EBITDA of $159.2 million for the second quarter of 2007, which was $12.8 million lower than in the second quarter of last year but $40.5 million higher than in the first quarter. On a sequential basis, results were stronger in both our core Urethanes business due to improve selling prices and volumes and in our PO coproduct MTBE business or C factors recovered from the extremely low levels we experienced in the first quarter.

Results in the second quarter were negatively impacted by a couple of items. First, our MDI polyurethanes joint venture facility in China was off-line for the entire quarter as the JV was in the process of continuing to replace a damaged heat exchanger. We estimate that the financial impact of this outage, which includes unabsorbed fixed costs and additional freight and duty associated with products shipped from our MDI plants in Europe and North America totaled approximately $11 million in the second quarter, which is similar to the impact we saw in the first quarter.

Second, we did experience an unplanned outage at our Port Neches MTBE unit that resulted in about two weeks of lost production with an estimated $6 million impact on EBITDA. So if you were to normalize polyurethanes results for these two events, adjusted EBITDA in the second quarter would've exceeded $175 million, which was a bit above the levels we experienced last year's second quarter.

Our core MDI Polyurethanes business continues to perform very well as MDI volumes were up 15% relative to the first quarter as demand was stronger in all regions and the continued growth in insulation applications globally more than offset softness in composite wood products related construction end markets in North America.

Materials and Effects recorded adjusted EBITDA of $61.1 million for the second quarter of 2007. This was up from $33.9 million in the second quarter of a year ago. Advanced materials contributed approximately $40.1 million of the adjusted EBITDA, while the Textile Effects contribution was $21 million. In advanced materials, we continue to see a fairly healthy pricing environment with average prices up about 13% over last year.

In Textile Effects, sales were up by about 8% relative to the first quarter as demand for our dies products were stronger in all regions but particularly in China. Results also benefited from the implementation of price increases which have been announced over the past several quarters.

Performance Products reported adjusted EBITDA of $39.8 million in the second quarter of 2007 as compared to adjusted EBITDA of $76.5 million a year ago. We experienced a three-week unplanned outage at our Port Neches, Texas site which resulted in lower profitability in our base olefins and intermediates businesses. We estimate the impact of this outage at approximately $10 million in the quarter. Results in this division were also negatively impacted by higher raw material costs.

Pigments recorded adjusted EBITDA of $20.9 million in the second quarter which was down compared to the $31.9 million in the second quarter of 2006 and essentially flat with first-quarter results. Volumes were up about 9% as compared to the first quarter and as compared to the second quarter of last year. Selling prices, however, continued to decline in local currency terms, down 2% from the first quarter and down 5% as compared to last year as we have seen a very soft pricing environment in the North American coatings and construction segment. And the strengthening of the euro relative to the U.S. dollar has resulted in competitive pressures in our core European market.

Base Chemicals recorded an adjusted EBITDA loss of $1.6 million in the second quarter of 2007, which was down compared to last year when the olefins unit had a partial quarter of operations. As you know, the bulk of our U.S. business is related to our Port Arthur olefins facility, which was off-line for the entire quarter as a result of the ongoing outage. We estimate the second-quarter lost profits due to business interruption related to this outage at approximately $31 million, which we believe will be reimbursed by our insurance carriers.

With that, I would like to turn things over to Kimo Esplin, our CFO, for his comments on our merger agreement with Hexion and an update on the sale of our U.S. commodity and petrochemicals chemicals business to Flint Hills.

Thanks, John. Let me start by briefly reviewing the terms of the merger agreement that we had entered into on July 12 with Hexion Specialty Chemicals. Hexion has agreed to acquire all of the issued and outstanding shares of common stock of Huntsman for $28 per share. Including the assumption of debt, this values the transaction for Huntsman at approximately $10.6 billion. The Board of Directors of Huntsman unanimously approved the merger agreement on the recommendation of a transaction committee comprised entirely of independent directors.

Hexion will have up to 12 months subject to a possible 90-day extension under certain circumstances to close the transaction and the cash price per share to be paid by Hexion will increase at the rate of 8% per annum inclusive of any dividends paid if the transaction is not consummated by April 5, 2008.

The closing of the transaction is not subject to a financing condition and Hexion has secured financing commitments from Deutsche Bank and Credit Suisse to provide all necessary funding. However the transaction is subject to various other conditions including the approval of the merger by Huntsman stockholders, expiration or termination of applicable waiting periods under the Hart-Scott-Rodino, foreign competition approvals, and other customary closing conditions.

Entities controlled by MatlinPatterson, the Huntsman family, and Fidelity Charitable Gift Fund who collectively own 57% of Huntsman's common stock have agreed to vote the shares of the common stock that they own as of the record date for the special shareholder meeting in favor of the merger.

Also in connection with the merger, the Company amended the terms of its existing registrations rights agreement to allow for the immediate registration for sale of all of the shares held by MatlinPatterson. In accordance with the amended terms of this registration rights agreement, the Company is obligated to file and maintain an S3 shelf registration statement with the SEC to provide for the sale by MatlinPatterson as and when they elect to pursue such sales.

We have filed the merger agreement, the voting agreements and the amended registration rights agreement with the SEC and would encourage anyone who has additional questions or requires further information to review the detailed terms of these various agreements.

We are currently in the process of preparing for a shareholder vote later this year and would expect to file a proxy statement with the SEC in the course of the next several weeks. Together with Hexion, we have begun the regulatory approval process in the United States, Europe, and other jurisdictions and expect this process to move forward through the end of the year and likely into 2008.

As John had indicated, we and Hexion would expect to make additional information about the merger publicly available in the future, but until we do so, hopefully everyone can understand that at this time we are very limited in our ability to comment further.

Now let me update you on the sale of our U.S. Polymers and Base Chemicals business to Flint Hills. As you know, we entered into a definitive agreement with Flint Hills back in February. Under the terms of this agreement, Flint Hills had the option to close on the polymers portion of the business in advance of the restart of the Port Arthur olefins facility. Flint Hills has elected to exercise this option and we expect to close on the polymers business tomorrow, August 1.

In connection with this closing, we will transfer our plants in Odessa and Longview, Texas, Marysville, Michigan, and [Peru], Illinois along with approximately 665 associates and we will receive approximately $350 million in cash for the business including all of the inventory. Huntsman will retain the other elements of working capital including accounts receivable and accounts payable and will liquidate these for cash over the next several months. Substantially all of the proceeds will be used to repay a portion of the outstanding borrowings under our credit -- our revolving credit facility and reduce outstandings under our accounts receivable securitization facility.

In the second quarter we booked a $240 million impairment related to these assets and the sale. The remaining portion of the business will transfer across when the Port Arthur olefins facility has been restarted. We continue to make good progress with the Port Arthur facility. The rebuild activities are nearing completion and we are now heavy into the commissioning phase, which is expected to take several months. Following this commissioning, we will restart the facility before transferring it across to Flint Hills. We expect this to occur in the fourth quarter.

At the time of the restart and sale of this unit to Flint Hills, we will receive an additional $306 million in cash plus the value of the inventory. Also we will be in a position to collect the remaining $70 million that is due from TPC relating to the sale of our C4s business approximately one year ago.

With that, I'll turn it over to Peter.

Thank you very much, Kimo. Thank you all that are joining us this morning. With adjusted EBITDA from our continuing operations of $241 million, the earnings profile of the second quarter is very consistent with that of last quarter and normalized for a couple of non-reoccurring issues very similar to the second quarter of last year. I think this very much reflects the more stable earnings that our differentiated business has produced.

Also you need to keep in mind that these results were in spite of high raw material costs across the board as compared to the first quarter. Average prices for crude oil were up 12%. Natural gas was up 11%. Benzene was up about 10%. Not huge increases, but these certainly provide a bit of headwind as we progress through the quarter, most of which we have been able to offset. We believe that our strategy to expand globally has helped offset the slowdown we've seen in the U.S. housing and automotive sectors.

Our MDI polyurethanes business performed very well in the quarter with volumes up 15% as compared to the first quarter. We saw very healthy increases in all regions but particularly in Asia, where MDI sales volumes were up 49% as compared to the first quarter and 21% over the second quarter of last year.

This was achieved despite continuing production issues at our Caojing Chinese joint venture facility and extremely soft U.S. housing and construction markets. We, as expected, our volumes in the composite wood products were down as compared to the first quarter, but we more than made up for this with strong MDI volumes into the insulation sector, which was up 25%. Our adhesives, coating, and elastimers businesses were up 16% and our appliance business, which is up 36%, particularly or primarily in Asia. We continue to see strong demand for MDI across a very broad set of geographic regions and end-use applications.

On the pricing side, MDI was up 3% as compared to the first quarter following pricing initiatives we put into effect last quarter and higher raw material costs. Given the solid global demand we continue to see particularly in Asia, we think selling prices are poised to increase further as the year progresses. We believe that the overall industry supply conditions remain tight. We are operating our manufacturing facilities in Geismar, Louisiana and Rosenberg, Netherlands at very high rates. All of these factors give us increased confidence about our businesses' outlook as we move through 2007.

Now let me briefly update you on the status of our joint venture facility in Caojing China. As we indicated on our last call, this facility has been off-line since mid-December to repair a damaged heat exchanger. The joint venture has installed a new exchanger and all of the repair work on the damaged equipment has been completed. We are in the final stages of recommissioning this facility and startup will proceed throughout the next week or two.

As a result, we would expect to have sellable quantities of product in August. As John mentioned, we expect the impact of this outage at $11 million during the second quarter. We will also see some impact in the third quarter as the plant was off-line for the month of July.

We are very pleased with the performance with our Materials and Effects division in the quarter. A big improvement from the results that were recorded in the second quarter of last year as adjusted EBITDA was $61 million as compared to $34 million a year ago. Textile Effects contribution was $21 million, while Advanced Materials portion was $40 million. So strong results from both sides of this business.

Our Textile Effects business continues to make good progress in the reconstructing program that we started this past fall. Just to remind you as to the highlights of this program, we plan to spend approximately $150 million over the next 18 months as we will follow our customers from North America and Europe to Asia. Our goal is to capture $75 million in cost savings and drive EBITDA margins in the midteens.

I am pleased to report that we are on track with this restructuring, most of which will take place in the latter part of 2007 and throughout 2008.

You also may have noticed that we have announced two strategic acquisitions in our Textile Effects group this past quarter. We have agreed to acquire a division of Metrochem Industries for approximately $47 million in cash. This division is located in Baroda, India and manufactures textile dyes and intermediates. This will expand our footprint in Asia and in particular the fast-growing Indian market. It will also provide us with a low cost manufacturing base in this fast-growing region of the world.

Second, just last week we acquired DuPont's nonwovens fluorochemical finishing business. Although a relatively small transaction, it is something that we are quite excited about. As you know, one of our core strategies in Textile Effects is to continue to diversify our business away from traditional textile applications and into areas that we have referred to as technical textiles. Nonwovens are one of these areas and DuPont is one of the market leaders so this acquisition will help us expand significantly in this area.

Finally I am pleased to announce we successfully commissioned and started our new polyether amines facility on Jurong Island in Singapore, which is a very important accomplishment for our Performance Products division. The total investment in this new plant was approximately $40 million and the site will have a capacity of approximately 15,000 tons. Huntsman is already a leading polyether amines producer in the world. Completion of the Singapore plant will further increase Huntsman's capacity and complement our existing polyether amines facilities in Conroe, Texas and Llanelli, Wales and will serve as a key platform as we continue supporting our customers' global expansions.

We have seen double-digit demand growth in this product line over the past several years. We believe this expansion will allow us to continue to grow with this market demand.

In our TiO2 division, we continue to be disappointed with industry conditions that have led to ongoing earnings erosions driven largely by softness in pricing. However I am pleased with the continued progress that we continue to make in our own business relative to our competition. We continue to make strong progress to improve our business across the board with our Project Titan initiatives. The most significant element of this is the expansion of our Greatham, UK site, which is progressing on plan.

Our Greatham facility produced -- our Greatham production rates are gradually ramping up and we are on track to achieve a full 150,000 metric tonnes rate by mid 2008. Several other integrated actions including operating costs and efficiency improvements and introduction of several innovative higher value products are also progressing very well. When completed in 2008, the profitability of this division is expected to be more than $75 million higher than it is today.

Finally let me share a few thoughts on our pending Hexion merger. At $28 a share, I think this represents excellent value for our shareholders and I believe reflects the substantial progress we have made as a company over the past several years in a number of areas. We've streamlined our portfolio through selective acquisitions and divestitures. We have reduced our cost base through our successful Coronado program.

We have substantially reduced debt, which was over $6 billion at the end of 2004 and is now less than $4 billion. We have continue to invest in our facilities and in our people in order to grow with our customers around the world. This is something that all of our 15,000 associates should be extremely proud of.

Our focus in the future shall continue to be to create as much value as possible for our shareholders in the safest and most responsible manner possible. We are currently in the early stages of developing an integration plan to bring these two organizations together and expect to be in a position to release additional information related to this plan in near future.

In the meantime, our priority as a Company remains unchanged; to operate our facilities in a safe manner, to continue to serve the needs of our customers, and continue to execute on a various ongoing growth and efficiency initiatives we have throughout the company.

With this, I will turn back the call to John Heskett, our Vice President of Corporate Element and Investor Relations.

Thank you, Peter. Operator, that concludes this call. Thank you, everybody, for joining.

Thank you very much for participating in today's conference. This concludes the conference. You may now disconnect. Good day.