Huntsman Corp (HUN) 2007 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the fourth-quarter 2007 Huntsman Corporation earnings conference call. My name is Melanie and I will be your coordinator today. All participants are and listen only mode. (OPERATOR INSTRUCTIONS). As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Mr. John Heskett. Pleased proceed, sir.

Thank you, Melanie, and good morning to everyone. My name is John Heskett and I'm the Vice President, Corporate Development and Investor Relations for Huntsman Corporation. Welcome to Huntsman's investor conference call for the fourth 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 CFO. A recorded playback of this call will be available until midnight, February 29, 2008. 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 57468327. A recording of this call may also be accessed through our web site.

Before we begin the 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 stocks 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-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 refer to our most recent 10-K and our other public filings for a more complete discussion of the risk factors applicable to our Company and our announced plans to merge with Hexion.

Before I walk through a summary of 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, will provide an update on our merger agreement with Hexion, review the details of the completion of the sale of certain of our commodity businesses to a subsidiary of Koch Industries and our recent preferred stock conversion and provide a brief update on our pending insurance claim. 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 inclusion of Peter's remarks. I know that many of you have questions related to certain aspects of the Hexion merger, including the timing of 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're not in a position to provide any information beyond that which has been provided in our recent public filings.

Turning to our 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 arising from the early extinguishment of debt and gains related to the sale and acquisition of assets. In the fourth quarter of 2007, we recorded a net cost of $90 million related to such costs and expenses, and in the fourth quarter of 2006, we recorded aggregate net gains of $66.3 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, and we have received feedback from many of you in the investment community that this how you prefer to look at our business. A reconciliation of both EBITDA and adjusted EBITDA to net income can be found in our fourth quarter earnings release, which has been posted to our web site.

Today, Huntsman Corporation announced fourth quarter earnings as follows. Huntsman recorded adjusted EBITDA from continuing operations of $192.3 million as compared to adjusted EBITDA from continuing operations of $170.8 million in the fourth quarter of 2006. Net income available to common stockholders for the fourth quarter of 2007 was $2.2 million, or $0.01 per diluted share. This compares to net income available to common stockholders for the fourth quarter of 2006 of $80.2 million, or $0.34 per diluted share. Excluding the after-tax impact related to merger-associated expenses, losses due to restructuring costs, the impact of discontinued operations and gains from the sale of assets and other items, adjusted net income from continuing operations was $47.7 million, or $0.20 per diluted share. This compares to $47.8 million of adjusted net income from continuing operations, or $0.20 per diluted share for the comparable period in 2006. Improved results on an adjusted EBITDA basis as compared to the previous year were primarily attributable to stronger results in our Polyurethanes, Performance Products and Materials and Effects divisions, partially offset by weaker results in Pigments. Corporate and unallocated expenses were also higher in the 2007 as compared to gains -- as compared to 2006 due to weaker results in our Australian styrenics operation and higher IT costs.

I would now like to briefly outline the performance of each of our four continuing segments. Polyurethanes recorded adjusted EBITDA of $142 million for the fourth quarter of 2007 which was $34.4 million higher than in the fourth quarter of a year ago. MDI volumes were up approximately 5% as compared to the fourth quarter of last year. MDI pricing was also higher, up about 8% compared to a year ago, primarily due to the stronger euro. Results in our PO and co-product MTBE business were modestly higher in the quarter, but down relative to the third quarter due to seasonally lower MTBE prices.

Our core MDI business benefited from strong market conditions in Asia during the fourth quarter, both in terms of demand and pricing and our ability to capitalize on the strength of this region was very much enhanced by the fact that our MDI joint venture facility in Caojing, China operated in excess of 90% of design capacity during the quarter.

Materials and Effects recorded adjusted EBITDA of $46.9 million for the fourth quarter of 2007. This was up from $39.6 million in the fourth quarter of a year ago. Advanced Materials contributed approximately $35.5 million of adjusted EBITDA while textile effects contribution was $11.4 million. In Advanced Materials, we continue to see a strong pricing environment and an improved product mix with average selling prices up about 13% over last year. In textile effects, a similar story with pricing up almost 11% with increases in both dyes and chemicals in all regions. Textile effects volumes were down about 6% as higher volumes in Asia were more than offset by lower volumes in Europe.

Performance Products recorded adjusted EBITDA of $48.6 million in the fourth quarter of 2007 as compared to adjusted EBITDA of $41.9 million a year ago. In our core Performance specialties business, pricing and volume improvements were offset by higher raw material and other costs, while in our Performance intermediates, improved surfactants profitability and EG pricing resulted in stronger results. 2006 results also included approximately $7.3 million in insurance income related to a previous period.

Pigments recorded adjustment EBITDA of $6.6 million in the fourth quarter, which was down compared to $22.8 million in the fourth quarter of 2006 but up as compared to $3.7 million in the third quarter of 2007. Volumes were up about 11% as compared to the fourth quarter of last year as we continue to experience healthy levels of global demand and the year-ago period sales volumes were unusually low. Average selling prices were flat with last year in U.S. dollar terms but down about 5% in local currency terms. On a sequential basis, U.S. dollar prices were up 3% versus the third quarter and also up slightly in local currency terms. Adjusted EBITDA also continues to be negatively impacted by the continued decline in the value of the U.S. dollar. Kimo?

Thanks, John. Let me start off by updating you on the completion of the disposition of our U.S. Polymers and Base Chemicals businesses to Flint Hills. As you know, during the fourth quarter we successfully completed the restart and commissioning of our Port Arthur olefins facility. As a result, we were able to complete the sale of our U.S.-based chemicals businesses to Flint Hills on November 5 and transferred the plant and related business across to them in exchange for $415 million in cash. Beginning this quarter, the entire Base Chemical business is reflected as a discontinued operation and we recorded a pretax impairment charge of $143.4 million in discontinued operations related to this sale.

We also received the final $70 million in proceeds related to the sale of our U.S. butadiene and MTBE business to Texas Petrochemicals in the fourth quarter and we recorded a pretax gain of approximately $69 million. This gain is included in continuing operations but has been excluded from our calculation of adjusted EBITDA and adjusted income from continuing operations.

On February 16, 2008, in accordance with the terms of our 5% mandatory convertible preferred stock, we converted all of the outstanding shares into 12,082,475 shares of common stock. On February 19, 2008, we paid our final preferred dividend to stockholders of -- and trading of our preferred stock has been effectively suspended. This brings our total issued and outstanding common share count to approximately $234.1 million.

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, the stockholders of the Company voted to approve the merger.

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 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 January 25, 2008, we announced that Hexion had notified us that it will exercise its right as provided under the terms of the merger agreement to extend the termination date by 90 days from April 5 to July 4, 2008. The extension is necessary to provide the FTC with additional time to review the transaction, such that the merger is unlikely to close prior to May 3. This extension was clearly contemplated by the terms of the merger agreement and the termination date remains subject to another 90-day extension under certain circumstances. The cash price per share to be paid by Hexion will increase at the rate of 8% per annum inclusive of any dividends paid after April 5, 2008.

Together with Hexion, we're working diligently to satisfy all closing conditions. On February 7, Huntsman certified to the FTC that it was in substantial compliance with the terms of the second request for information which was originally received from the FTC on October 4, 2007. While we are currently unable to estimate when the FTC and other regulatory approvals will be received, 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.

Finally, a brief update on the status of our insurance claim with regard to the fire and outage we experienced at our Port Arthur olefins facility in 2006 and 2007. Through the end of 2007, we had submitted total proofs of loss of $541 million and would expect to submit additional proofs of loss in the near future. To date we have received $325 million in cash reimbursements from our insurance carriers, including $20 million that was received following year end. We are working diligently to resolve this claim and we would expect to receive additional amounts in 2008.

With that, I'll turn the call over to Peter.

Thank you very much, Kimo, good morning everybody. With adjusted EBITDA from continuing operations of $193 million, the fourth quarter represented another period of improvement for us as results increased about 13% as compared to the fourth quarter of last year.

Excluding Pigments, where margins continue to be constrained due to a soft North American residential construction market and the continued slide in the value of the U.S. dollar relative to the primary European currencies, results of each of our Polyurethanes, Performance Products and Materials and Effects divisions recorded very solid increases in adjusted EBITDA as compared to the fourth quarter of last year. The adjusted EBITDA of our Polyurethanes division increased 32%. Materials and Effects increased 18% and Performance Products improved 16%. In fact, the total adjusted EBITDA for these three divisions was up $48 million, or 26% as compared to the fourth quarter of last year. This is also the first quarter that reported results from continuing operations that did not include any impact from the divested commodity businesses. As you know, this series of sales transactions as well as the impact of the outage of the Port Arthur facility has resulted in quite a lot of noise in our reported results. With the completion of the sale of our North American Base Chemicals business to Flint Hills Resources in November, these onetime changes should now be behind us. Also, we need to keep in mind that these results were achieved in spite of sharply higher raw material and feedstock costs as compared to the fourth quarter of last year and the third quarter of this year.

Our Polyurethanes business performed very well during the fourth quarter with volumes up 5% as compared to the fourth quarter of last year. As expected, our volumes sold into the composite wood products sector were down sharply due to the slowing pace of residential construction activity, but we more than made up with this with strong volume increases in other sectors, including installation where volumes increased 18% and in our adhesives, coatings and elastomer divisions where volumes were up 19%.

Our oriented strand board wood binders business continues to face a very challenging market environment in North America. In fact, if you exclude the OSB impact, our volumes were up 12% fourth quarter of 2007 as compared to fourth quarter of 2006. And 10% full year 2007 as compared to full year 2006. So we are still seeing very strong demand for MDI across a broad set of geographic regions as well.

On the pricing side, MDI was up about 8% as compared to the fourth quarter of last year on the back of some of the initiatives we put forth over the last year and strength of the euro. On a sequential basis, pricing was essentially flat while the raw material side, our benzene price although still very high, did come off a bit in the fourth quarter which helped to restore margins. However, costs for benzene and other raw materials in the first quarter of 2008 have increased, which is something we're keeping a very close eye on.

Finally, let me briefly update you on our joint venture planned in Caojing, China. I am pleased to announce that the unit operated at approximately 92% of design capacity in the fourth quarter, which is by far the strongest quarterly period of operations we've experienced since startup. We're obviously pleased with this. Our ability to produce MDI in China has clearly allowed us to support the growing needs of our customers in Asia. This is a strong contributor to our earnings in the fourth quarter as our sales volumes in Asia in the fourth quarter were up over 25% as compared to the fourth quarter of last year.

We ended the year in our Materials and Effects division very strongly. In fact, in our advanced materials division in 2007, it was the strongest year we have had since acquiring the businesses in 2003, while in textile effects we continue to make good progress with our restructuring program. The pricing environment for both businesses continues to be very strong with average selling prices up 11% in textile effects and up 13% in Advanced Materials. Some of this is certainly attributed to the strength of the euro, but we have been very successful in increasing our prices and improving our mix throughout the year and we expect this to continue throughout 2008.

In our Performance Products division, we recorded strong increases in adjusted EBITDA relative to the fourth quarter of last year, up 16% despite the fact that our fourth quarter 2006 results included incremental $7.3 million of insurance proceeds related to the 2005 U.S. Gulf Coast storms. In our Performance Intermediates Products group, we saw very strong growth in volume and pricing as compared to the third quarter of 2007 and fourth quarter of 2006. At Ethylene glycol margins were strong in the quarter and the profitability of our surfactants business also improved. In addition to the fourth quarter, we were not impacted by the unplanned production outages that we experienced at our Port Neches, Texas facility in the third quarter.

Also during the fourth quarter of 2007, on October 30 we formally opened our new world scale (inaudible) Polyether-Amines manufacturing facility at Jurong Island in Singapore. This facility will produce 16,000 tons of polyether amines and will enable us to serve the rapid growth in the Asia Pacific region.

In our TIO2 division, our earnings continue to be negatively impacted by the continued softness in the North American residential construction sector. In fact, with the majority of our production assets and cost base in Europe and with the continued appreciation of the value of the euro and the pound sterling relative to the U.S. dollar, we have seen our margins shrink. In addition, a weak dollar has led to a surge of imports into our core European market. Volumes were strong in the quarter, up 11% on last year, as we have moved past some of the production issues that we had experienced in the third quarter of last year. The pricing environment continues to be challenging as producers have nominated a series of increases but have struggled to implement these. As a result, pricing has been flat in U.S. terms but down on a local currency basis.

We are continuing to push hard on the pricing front and expect to see some moderate improvement in the first quarter of 2008 as compared to the fourth quarter. We're also continuing to absorb higher costs in certain of our raw materials as well as transportation and freight costs. This includes items such as sulfuric acid where prices are expected to increase dramatically in 2008 as compared to 2007 levels.

Finally, let me comment briefly on our pending merger with Hexion. I think Kimo provided a good summary of the status of the regulatory approval here. The recent notice of extension of the termination date by Hexion was not unexpected and was expressly provided for in terms of our merger agreement we entered into in July of last year. We're working closely with Hexion and their advisers to complete the approval process with the regulators in a timely manner. The completion of the required regulatory approval remains a top priority for our management team. Huntsman has certified substantial compliance with the FTC's second request and continues to work closely with the regulators in the U.S., Europe and other jurisdictions. That being said, the merger is not expected close before May 3.

Finally, consistent with our obligations to operate independently, we and Hexion are continuing to develop 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 short, we're working hard to satisfy our responsibilities under the merger agreement and complete this transaction. 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 to over to John Heskett, our Vice President, Corporate Development and Investor Relations.

Thank you, Peter. Operator, that concludes our call for today. Thank you everyone for joining.

Ladies and gentlemen, thank you for your participation in today's conference. That does conclude the presentation. You may disconnect, have a wonderful day.