Huntsman Corp (HUN) 2007 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the Huntsman Corporation third quarter 2007 earnings conference call. (OPERATOR INSTRUCTIONS)

At this time I would now like the turn the call over to Mr. John Heskett, Vice President of Corporation Development and Investor Relations. Please proceed, sir.

Thank you, operator and good morning to everyone. My name is John Heskett. Welcome to Huntsman's investor conference call for the third quarter of 2007. Joining us on the call today are John Huntsman, our Chairman and founder, Peter Huntsman, our President and CEO and Kimo Esplin our Executive Vice President and Chief Financial Officer. As a reminder a recorded play back of this call will be available until midnight November 16, 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 73485711. A recording of this call may also be available through our web site.

Before we begin a discussion of 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, future global economic conditions, changes in the prices of our raw materials and the energy we consume in our production processes, access to capital markets, industry production capacity and operating rates, the supply/demands balance for our products and that of competing products, pricing pressures, technological developments, changes in government regulations, geo-political events and other risk factors. Please refer to our most recent Form 10(Q) and our other public filings for a more complete discussion of the risk factors applicable to our company and our announced plan to merge with Hexion.

Before I walk through a summary of our earnings I would like to briefly outline the format for today's call. I will briefly summarize the earnings and then turn the call over to Kimo Esplin, our CFO, who will update you on our merger agreement with Hexion and review details related to the sale of the U.S. Base chemicals and Polymers business to a subsidiary of Coke Industries. Finally Peter Huntsman 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 able to take any of your questions following the conclusion of Peter's remarks. that I know many of you have questions relating to certain aspect of the merger including 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 recent public filings.

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, merger associated expenses, the sale of accounts receivable, losses arriving from the early extinguishment of debt and gains related to the sale and acquisition of assets. In the third quarter of 2007 we recorded a net cost of 215.2 million related to such costs and expenses, 200 million of which represents the break seed paid to Basell, 100 million of which was reimbursed by Hexion, and in the third quarter of 2006 we recorded aggregate net costs of 216.8 million related to such costs and expenses.

We focused on adjusted EBITDA from a management standpoint as we believe it is the best measure of the underlying performance of our operations and 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 third quarter earnings release which has been posted to our web site.

Today Huntsman Corporation announced third quarter earnings as follows: Huntsman recorded adjusted EBITDA from continuing operations of 223.1 million, as compared to adjusted EBITDA from continuing operations of 230.4 million in the third quarter of 2006. Included in the results for the third quarter of 2007 and 2006 were adjusted EBITDA losses related to our U.S. Base Chemical business of 13.3 million and 3.2 million respectively. On November 5 we completed the sale of this business to Flint Hills Resources. Beginning in the fourth quarter we will record the result of this business as a discontinued operation and we'll conform all prior periods to this presentation.

As indicated on our earnings release this morning we would also expect to record a $150 million pretax impairment charge related to the completion of this sale in the fourth quarter. Net loss available to common stockholders for the third quarter of 2007 was 150 million, or a loss of $0.68 per diluted share. This compares to a net loss available to common stockholders for the third quarter of 2006 of 182.3 million, or a loss of $0.78 per share. Excluding the after tax impact related to merger associated expenses, losses due restructuring costs, the impact of discontinued operations and other items adjusted net income from continuing operations was 61.1 million, or $0.26 per diluted share. This compares to 70.1 million of adjusted net income from continuing operations or $0.30 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 our Pigments division. Results were also lower in our Base Chemical segment which as I just mentioned has just been now sold to Flint Hills Resources. This was partially offset by stronger results in each of our three differentiated businesses, Materials and Effects, Polyurethanes and Performance Products. Corporate and unallocated expenses were also higher due to foreign exchange losses in the 2007 period as compared to gains in 2006.

I would now like to briefly outline the performance of each of our four continuing segments. Polyurethanes reported adjusted EBITDA of 172.8 million for third quarter of 2007 which was 37 million higher than in the third quarter of a year ago, and 13.6 million higher than in the second quarter. On a sequential basis results were stronger in our P.O. and Co. product M TB business, as seed factors were higher and propylene oxide pricing and volumes improved.

Results in the third quarter were negatively impacted by the outage at our M. DI joint venture facility in China which was restarted during the quarter. We estimate the financial impact of this outage which includes additional fixed costs and freight and duties associated with products shipped from our M DI polyurethane plants in Europe and North America totaled approximately $4 million in the third quarter. Our core M D I business continues to perform very well, as M D I volumes were up 4% relative to the third quarter of last year as demands was stronger in Asia and Europe due to the continued growth in installation and other applications. This more than offset softness in composite wood products related end markets in North America. In fact excluding sales in the composite wood products our volumes were up 10% as compared to last year.

Materials and Effects recorded adjusted EBITDA of 52.8 million for the third quarter of 2007. This was up from 47.2 million in the third quarter of a year ago. Advanced materials contribution was 39.1 million of adjusted EBITDA while the textile effects business contributed 13.7 million. In Advanced materials we continue to see a strong pricing environment and an improved product mix with average selling prices up about 12% over last year. In textile effect sales were up by 4% relative to the third quarter of last year's demand and mix particularly for our dyes and chemical products were stronger in all regions but in particular Central and Latin America. Results also benefited from lower SG&A costs as we have begun to see the restructuring benefits of our restructuring program in the third quarter.

Performance products recorded adjusted EBITDA of 47.9 million in the third quarter of 2007 as compared to adjusted EBITDA of 38.1 million a year ago. In our core performance specialties business results improved on higher volumes and pricing. However, we experienced a number of unplanned outages at our Port Neches, Texas site which resulted in lower profitability in our base olefins and intermediate businesses. We estimate impact of these outages at approximately $10 million in the quarter.

Pigments recorded adjusted EBITDA of 3.7 million in the third quarter which was down compared to 26.1 million in the third quarter of 2006, and down compared to 20.9 million in the second quarter. Volumes were down about 2% as compared to the third quarter of last year and 4% as compared to the second quarter due to planned and unplanned production outages at certain of our facilities including our Greatham facility where we are in the process of completing our ICON 2 expansion. Average selling prices continue to decline in local currency terms, down 2% from the second 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 strength of the Euro relative to the U.S. dollar has resulted in competitive pressures in our core European market. With that I would like to turn things over to Kimo Esplin, our CFO, for a review of our sales of the U.S. commodity petrochemicals business to Flint Hills and our plans to merge with Hexion.

Thanks John. Let me start off by updating you on the disposition of our U.S. polymers and base chemicals businesses to Flint Hills. As you know we completed the sales of our North American polymers business to Flint Hills Resources on August 1 and have received 354 million for property, plant and equipment and inventory. During the fourth quarter we successfully completed the restarting commissioning of our Port Arthur olefins facility. As a result we were able to complete the sale of our U.S. Base Chemicals business to Flint Hills on Nov. 5th and have transferred the plant and related business across to them in exchange for 415 million, again for property, plant, equipment and inventory, which remains subject to post closing inventory adjustment.

The base chemicals business will be reflected as a discontinuing operation beginning in the fourth quarter and we would expect to record a pretax impairment charge of approximately $150 million related to this sale. As a result of the successful restart of the Port Arthur olefins facility we also expect to soon receive the final 70 million in proceeds from the sale of our U.S. butylene and M TB business to Texas Petrochemical over a year ago and in the fourth quarter we would expect to record a pre-tax gain related to this business of approximately $69 million. Proceeds from these dispositions will be used to repay debt, reducing outstanding amounts under our off balance sheet accounts receivable securitization facility and improve our liquidity.

So if you take the reported adjusted net income from continuing operations of $0.26 and adjust this to exclude the losses related to the U.S. Base Chemicals business in the quarter of $0.05 per share and adjust the interest expense in the quarter to reflect the application of the proceeds from FHR and T PC which comes to $0.03 per share, the third quarter results would have been $0.34 per share for our continuing business and current debt structure.

Now let me update you on the status of our merger with Hexion. As a reminder, on July 12, 2007, we entered into an agreement with Hexion Specialty Chemicals wherein they will 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. Subsequently on October 16 at a special meeting shareholders of the Company voted to approve the merger.

Hexion has until July next year subject to a possible ninety-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 received financing commitments from Deutsche Bank and Credit Suisse to provide for all necessary funding but the transaction is subject to various other conditions including U.S. and foreign competition law approvals and other customary closing conditions. On October 4, 2007, Hexion and Huntsman received an expected second request for additional information from the FTC in connection with the merger.

Together with Hexion we are working diligently to satisfy all closing conditions. We are currently unable to estimate when these approvals will be received. However, both Huntsman and Hexion have made receipt of these approvals a priority and we expect closure of the merger to follow soon after they are received. As previously indicated we and Hexion expect to make additional information about the merger publicly available in the future but until we do so we are limited in our ability to comment further. With that let me turn it over to Peter.

Thank you very much, Kimo. Good morning everybody. Thank you for taking the time to join us this morning. The total adjusted EBITDA from our continuing operation of $229 million, the earnings profile of the third quarter was very consistent with that of the previous quarter and the third quarter of last year. Excluding pigments where margins were soft due to the weak North American residential construction market, results of our polyurethanes, performance products, advanced materials, and textile effects divisions recorded increases in adjusted EBITDA as compared to the third quarter of last year.

In fact, the total adjusted EBITDA from the three divisions were up 19% as compared to last year. I think this very much reflects the more stable and growing earnings profile and the geographic diversity of our differentiated business portfolio. Also you need to keep in mind that these results were in spite of generally higher raw material costs as compared to the third quarter of last year with crude oil up 18% being the pricing driver. As many of your aware these negative trends in raw material costs have continued into the fourth quarter which I expect will provide a bit of head wind on margins.

Our M D I based polyurethane business performed very well in the quarter with volumes up 4% as compared to the third quarter of last year. As expected, our volumes in the composite wood products sector were down but we more than made up with this with very strong volume increases in all of our other sectors including insulation, our adhesives, coatings and elastomers, and appliance businesses. Volumes into the composite wood products like OS B. are somewhat tied to residential housing starts in the U.S. but as John mentioned if you exclude this impact our volumes were up 10% year over year.

We saw very healthy increases in Asia and European M D I demand with volumes up 25% and 9% respectively on last year. In essence, we are still seeing very strong demand for M D I across the board in a broad set of geographic regions and end use applications with a clear exception of the composite wood products in North America. When the North American housing demand returns we expect this demand segment to do likewise.

On the pricing side M D I was up about 2% as compared to the second quarter following some of the pricing initiatives we announced last quarter, and the strength of the Euro. This provided a bit of a margin improvement in the quarter. We believe that overall industry supply conditions remain very tight. We are running our production assets in Kaixing, China, Geismar, Louisiana, and Rosenburg in the Netherlands at very high rates. All of these factors give us a lot of confidence about the business outlook as we complete 2007 and start 2008.

Now let me briefly update you on the status of our joint venture plant in Kaixing, China. As we indicated on our last conference call, the facility had been offline since mid-December to repair a damaged heat exchange unit. This unit was restarted in the third quarter and it operated at almost 55% capacity during the quarter. I am pleased to announce that the unit has operated very well since the start up. In fact, production rates exceeded 80% of design rates during the month of October and we've been operating the plan at design rates producing on spec product for the past few weeks now. It's been a challenging start-up period for this facility but I'm confident that these issues are behind us for good. As John mentioned we estimate the impact of this outage at $4 million during the third quarter.

This quarter I was pleased with the performance of our advanced materials and textile effects division. Results in the third quarter improved notably from the prior year as adjusted EBITDA was $53 million as compared to $47 million of last year. Textile effects contribution was $14 million while advanced materials portion was $39 million. In advanced materials the pricing environment was strong with average selling prices up almost 12% as compared to the third quarter of past year while our textile effects business continues to make good progress on the restructuring program that we kicked off this last year. Our goal is to capture $75 million in cost savings and drive EBITDA margins to the mid-teens. In fact SG&A and R&D costs in the textile effects declined by almost $9 million or 17% as compared to second quarter levels.

In performance products we recorded nice increases in adjusted EBITDA relative to the second quarter results and relative to the third quarter of last year, up 20% and 26% respectively. Our performance specialties products grouping which forms the core of this division continues to exhibit very strong demand growth with volumes up about 10%, this compared to last year, and positive pricing momentum, with average selling prices up 8%.

In our TiO2 division our earnings were negatively impacted in the third quarter by the recent slow down in the North American residential construction sector as well as some planned facility outages during the quarter and the weakness of the U.S. dollar relative to the Euro. We continue to make progress in a broad based improvement program called Titan. The most significant element is the expansion of our Greatham, U.K. site which is progressing on plan. Greatham production rates gradually ramping up weren't we are on track to achieve a full 150,000-ton rate by mid 2008.

Several other integrated actions including operating cost and efficiency improvements and introduction of several innovative higher value products are also progressing very well. As you know it continues to be a very challenging environment in the marketplace but we expect that the third quarter will represent the trough and profitability as the production issues we experienced in the third quarter are behind us and the industry appears to be aggressively pushing through recently announced price increases.

As I look across the Company I'm very pleased with the success in selling off our commodity businesses. We have reduced our debt from over $6 billion just over two years ago to about $3.5 billion today. With the collection of expected insurance proceeds and operating cash flows this number should fall to about $3 billion in the future. As stated earlier our adjusted EBITDA of our nonpigments business divisions were up 19% as compared to last year. Today our debt is down, our differentiated businesses are growing and our volatility has been greatly reduced.

Finally I'm pleased that over 99% of those shares that were voted at our special shareholders meeting last month we cast in favor of our plan to be merge with Hexion. I think this is a very strong endorsement by our shareholders, as the value of this merger transaction, I believe, reflects substantial progress that we made as a company. 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 the future.

In the meantime our priorities as a Company remain unchanged, to operate our facilities in a safe manner, to continue to serve the needs of our customers and to continue to execute on our various ongoing growth and efficiency initiatives. With that I will turn the call back over to John Heskett, our Vice President of Corporation Development and Investor Relations.

Thank you Peter, and thank you everyone for joining the call today. Operator, I think that concludes the conference call.

Ladies and gentlemen, this concludes the presentation. You may now disconnect. Thank you and have a good day.