Huntsman Corp (HUN) 2008 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the second quarter 2008 Huntsman Corporation earnings conference call. My name is Nikita, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. (OPERATOR INSTRUCTIONS) I would now like to introduce your host for today's call, John Heskett. Please proceed, sir.

Thank you, operator, and good morning to everyone. My name is John Heskett. I am the Vice President of Corporate Development and Investor Relations for Huntsman Corporation. Welcome to Huntsman's investor call for the second quarter of 2008. 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 CFO.

As a reminder, a recorded playback of this call will be available until midnight August 6, 2008. The recorded playback may be accessed from the US by dialing 1-888-286-8010, and from outside the US by dialing 1-617-801-6888. The access code for both dial-in numbers is 90758926. A recording of this call may also be accessed through our website.

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; the impact of the ongoing litigation related to the merger; future global economic conditions; changes in the of prices of our raw materials and the energy we consume in our production processes; access to capital markets; industry production capacity and operating rights; the supply/demand balance for our products and that of competing products; pricing pressures; technological developments; changes in geopolitical events and government regulations; and other risk factors. Please refer to our most recent Form 10-K 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 provide an update on our working capital management, debt levels, capital spending and outlook. Finally, Peter Huntsman will share his thoughts on the performance of certain our businesses in the quarter and will also briefly address the ongoing litigation with Hexion.

Unfortunately, given the pending merger with Hexion and the litigation related to this merger, we will not be able to take any of your questions following the conclusion of Peter's remarks. I know that many of you have questions in this regard and 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, unallocated foreign exchange losses, and extraordinary gains and losses related to the purchase of a business.

In the second quarter of 2008, we recorded a net gain of $400,000 related to such costs and expenses. And in the second quarter of 2007, we recorded aggregate net costs of $223.8 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 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 EBITDA, adjusted EBITDA and adjusted net income from continuing operations to net income can be found in our second quarter earnings release, which has been posted to our website.

Today, Huntsman Corporation announced second quarter earnings as follows. Huntsman recorded adjusted EBITDA from continuing operations of $209.8 million as compared to adjusted EBITDA from continuing operations of $188.3 million in the first quarter of 2008, and $246.4 million in the second quarter of 2007. Net income available to common stockholders for the second quarter of 2008 was $23.7 million or $0.10 per diluted share. This compares to net income available to common stockholders for the first quarter of 2008 of $7.3 million or $0.03 per diluted share and a net loss of $70.9 million or loss of $0.30 per diluted share in the second quarter of 2007.

Excluding the after-tax impact related to merger associated expenses, losses due to restructuring costs, the impact of discontinued operations, extraordinary gains on the acquisition of a business, and unallocated foreign exchange losses, adjusted net income from continuing operations was $19.9 million or $0.09 per diluted share. This compares to $16.9 million of adjusted net income from continuing operations or $0.07 per diluted share for the first quarter of 2008, and $83.8 million or $0.36 per diluted share in the second quarter of 2007.

On an adjusted EBITDA basis, as compared to the previous year, stronger results in our Performance Products segment were more than offset by lower results in polyurethanes, materials and effects and Pigments divisions. Corporate and unallocated expenses were also higher in the 2008 period as compared to 2007, due to weaker results at our Australia Styrenics operation, higher IT costs and higher minority interests in our subsidiaries' income.

On a sequential basis, adjusted EBITDA increased by $21.5 million or 11.4% as stronger results in polyurethanes and materials and effects and lower corporate and other charges were partially offset by softer results in Pigments and Performance Products.

I would now like to briefly outline the performance of each of our four segments. Polyurethanes recorded adjusted EBITDA of $147.7 million for the second quarter of 2008, which was $15.9 million higher than in the first quarter, but $11.5 million lower than in the second quarter of 2007. MBI volumes were up approximately 13% as compared to the first quarter, while MBI pricing was essentially flat in local currency terms.

The higher average prices in US dollar terms were primarily due to the stronger value of the euro. In addition, raw materials were higher across the board and dollar reported fixed costs were also higher, again, due to the strength of the euro relative to the dollar.

Results in our PL co-product MTB business were also higher in the quarter, both relative to the first quarter and the last year, due to stronger MTBC factors and stronger propylene oxide pricing.

Materials and effects recorded adjusted EBITDA of $50.5 million for the second quarter of 2008. This was up from $40 million in the first quarter, but down from the results of a year-ago. Relative to the first quarter, volumes were up 7%, while selling prices increased by 4%.

Advanced Materials contributed approximately $46.6 million of adjusted EBITDA, while the Textile Effects contribution was $3.9 million in the quarter. In Advanced Materials, we saw a strong environment, with volumes up 10% relative to the first quarter and relative to last year. Pricing improved by 8% as compared to last year, primarily due to the stronger euro.

In Textile Effects, pricing was up 18% as compared to last year, with increases in both dyes and chemicals in all regions. However, we have experienced a very challenging volume environment, particularly in Europe, due to a soft retail outlook and competitive pressures. Total volumes were down 14% compared to last year. This, together with higher raw material costs, fixed costs and SG&A, due to currency resulted in lower adjusted EBITDA.

Performance Products recorded adjusted EBITDA of $50.5 million in the second quarter of 2008, as compared to adjusted EBITDA of $39.8 million a year ago, but down from $53.1 million in the first quarter, primarily due to higher LIFO charges.

In our core performance specialties business, higher prices more than offset higher raw material costs, which together with strong volumes resulted in higher profitability. Earnings in our intermediates group, despite being negatively impacted by an extended outage at our Port Natchez, Texas olefins facility, were also higher as compared to last year. We estimate the impact of this outage at approximately $12 million in the second quarter. Adjusted EBITDA in maleic anhydride was lower, primarily due to higher cost for butane, our primary raw material in this product line.

Pigments recorded adjust EBITDA of $6.9 million in the second quarter, which was down compared to $20.9 million in the second quarter of 2007, and down as compared to $11.7 million in the first quarter. Sales volumes increased by 9% as compared to the first quarter and were essentially flat as compared to a year ago. Average selling prices were up 9% a compared to last year in US dollar terms, but flat in local currency terms. On a sequential basis, US dollar prices were up 4% versus the first quarter and also flat in local currency terms.

Higher prices in Asia Pacific and other regions have been largely offset by lower pricing in Europe. Adjusted EBITDA continues to be negatively impacted by inflation in raw materials and energy and the decline in the value of the dollar. With that, I will turn it over to Kimo Esplin, our CFO.

Thanks John. Our CapEx in the quarter was $115 million. Consistent with our prior guidance in this area, we expect total spending for this year to be approximately $440 million. As we've discussed before, we're in the process of completing several strategic expansion projects. Let me briefly remind you of a few of these.

We are near completion on a new 100 million pound maleic anhydride facility at our Geismar, Louisiana site. We expect this to be among the lowest and most efficient facilities in the world and we'll solidify our market leadership in this product. Our investment will be approximately $165 million, over half of which will be spent this year, and startup is scheduled for the first quarter of 2009. This is a very profitable product line for us. In fact, EBITDA margins for our existing business and facility in Pensacola are about 25%, which is among the highest in our portfolio. So, we expect this expansion to make a meaningful addition to Performance Products profitability beginning in 2009.

In addition, we are moving forward with our expansion of our maleic anhydride joint venture with Sasol in Moers, Germany, intending to add 100 million pounds of additional capacity to our existing 135 million capacity presently. It's presently expected to be completed in 2011.

We also just completed a 70 million pound or 20% expansion of our ethanolamine capacity at our Port Natchez, Texas plant at a cost of $32 million. This is another very profitable product for us and we've already seen the results of this on the bottom line, as volumes in the first six months were 24% higher than the last year with the corresponding increase in EBITDA.

Our 50,000 ton expansion of our Greatham, UK chloride titanium dioxide plant will physically be completed in September of this year, and operating at its full 150,000 ton capacity by the first quarter of 2009. This is a $110 million investment and we believe we'll make Greatham the lowest cost TI O2 facility in Europe.

In the second quarter, we completed our equity contribution of $44 million to our ethyleneamines manufacturing joint venture in Jubail, Saudi Arabia with Al-Zamil Group as our 50% partner. The plan is expected to come on line in early 2010 with an annual capacity of 60 million pounds. The costs of this project are anticipated to be approximately $290 million and will be financed by our equity contributions already made and local project finance.

At June 30th, our total net debt, including our off balance sheet AR securitization program stood at $4.3 billion. This compares to approximately $4.1 billion at March 31st, or an increase of approximately $200 million. As we highlighted in our earnings release this morning, approximately $86 million of this increase was due to higher working capital.

With raw material prices spiking to the extent we saw, this has put quite a bit of pressure on our inventory valuation. Inventory volumes, however, have been much more manageable and in fact, our finished goods, which comprises 85% of our total inventory values, decreased during the quarter by almost 182 million pounds or 14%, offsetting some of the increase we would have otherwise experienced, given rising prices and costs.

Certainly given the operating environment out there, working capital management is very much a focus of the management team. However, given the current trends in energy and basic raw material prices, along with some initiations we have in place, we wouldn't expect to see these kinds of increases in the coming quarter and wouldn't expect our debt levels to change materially in the third quarter.

Before I turn the call over to Peter, let me give you a bit more color on the directional guidance for the second half of the year, that was contained in our release this morning. As we indicated, we would expect adjusted EBITDA in the second half of the year to be stronger than the first half of 2008, and stronger than in the second half of 2007, when total adjusted EBITDA was $434 million.

In polyurethanes, MDI volumes continue to grow nicely, and although higher raw material prices, including benzene, created a bit of headwind, we would expect margins to improve in the second half, as recently announced price increases are implemented.

In Performance Products, our results in the first half of 2008 were negatively impacted by approximately $26 million related to the operational issues we experienced at our Port Natchez, Texas intermediate site. These problems are behind us and the plan is now running very well, which will certainly help our bottom line.

In materials and effects, I would characterize the second half outlook as stable, with results improving in Textile Effects as we continue to make progress with our restructuring program. This is likely to be offset by lower margins in Advanced Materials due to the lag effect of higher raw materials.

And finally, in Pigments, we are seeing traction in recent price increase initiatives. In fact, our prices in all regions in July were the highest we have seen all year, so our expectation is that margins will improve. With that, I'll turn the call over to Peter.

Kimo, thank you very much. And thank you, all of you that have joined us this morning. With adjusted EBITDA from the continuing operations of approximately $210 million, second quarter results improved compared to the first quarter of 2008, by over $21 million or over 10%. This improvement was despite headwinds from rising and volatile raw materials, energy costs and a further weakening of the US dollar. These factors added nearly $100 million of cost to our second quarter results versus our first quarter.

We are pleased with the performance of our industry-leading businesses relative to our peers. Just to give you some perspective, the prices for most of our key raw materials were up not only year-over-year, but also sequentially. By way of example, the two key benchmarks, crude oil and natural gas, were up 27 and 52% respectively as compared to the first quarter alone.

The good news is that the prices of these benchmarks have recently come off sharply from their recent peaks, but the average thus far in July, remain above the second quarter average prices, so we are keeping a close eye on direct costs and are in no way backing away from our aggressive stance on pricing initiatives that we have around the world.

As I mentioned, the continued decline in the value of the US dollar relative to the primary European currencies, have also impacted our results as the US dollar depreciated by 6 and 8% respectively against the euro and the Swiss frank during the quarter. This has been particularly apparent in certain of our businesses such as Advanced Materials, Textile Effects and Pigments, where the majority of our manufacture ring and overhead costs are in European currency.

There were, however, some very positive trends in our businesses. As I mentioned in our release this morning, volumes were very strong, up between 7 to 14%, depending on the division. We also announced aggressive action to take our selling prices up across the board in every division. This obviously differed in amounts from product to product and region to region, but prices are moving up. Also keep in mind that this action occurred in late May and June, so with lags and contractual price protection, we would expect these to meaningfully impact the bottom line beginning in the third quarter.

Our polyurethanes business had a very good quarter with MDI volumes up 13% as compared to the first quarter, and adjusted EBITDA up by 12%. Demand continues to grow on a global basis, and in particular in the developing economies of Asia, Eastern Europe and Latin America. The fact is, in industry, we estimate that global MDI growth will be about 6% this year.

On a regional basis, Asia continues to grow very nicely, with our MDI volumes up 15% as compared to the first quarter. Although we believe the market in China is beginning to take a bit of a breather, ahead of the upcoming Olympics, due to some of the regulatory issues enacted by the government.

In Europe, volumes expanded in the quarter, in line with the market, primarily due to seasonal factors. We are watching the European market very closely, as it is our largest, but haven't seen any major signs of softening. In fact, our core insulation business is seeing strong demand pull in Eastern Europe and the Middle East. In the Americas, volumes growth over the first quarter was the strongest in all regions, which is amazing, given that this is probably our weakest economic market.

We believe that our Oriented Strand Board, or OSB volumes bottomed out earlier in the year. Some of this is seasonal, of course, but we think that this part of the business is poised to recover, which would be a positive sign, given the stagnant market conditions of the past few quarters.

On the pricing side, MDI was up about 2% as compared to the first quarter, which was mostly due to exchange impact. The good news is that we put forth a series of price initiatives and increases across a range of products of up to 15% for third quarter in both Europe and the Americas, late in the second quarter, so we are expecting improvement as we head into the back half of the year.

These price increases should offset the higher manufacturing costs we are experiencing due to high benzene, chlorine and natural gas and other raw materials. In fact, year-to-date our cost to produce MDI is up by 25% versus last year.

Finally, profitability in our propylene oxide and MTBE business posted improvements in the quarter as well as last year. Volumes have improved, particularly in MTBE. MTBE margins were at very attractive levels in the quarter, in fact, more than double over the first quarter.

Our Advanced Materials and Textile Effects results in the second quarter increased from first quarter results. Adjusted EBITDA improved by 26% with higher earnings in each of our Advanced Materials and Textile Effects divisions. In Advanced Materials, we benefited from a 10% sequential increase in volumes, together with a 2.3% improvement in average selling price. Volumes and selling prices were also well ahead of last year's levels. Direct costs were a bit higher during the quarter, but we more than offset this with top-line growth and improvement.

In Textile Effects, adjusted EBITDA did improve from the breakeven results we saw in the first quarter with adjusted EBITDA of $3.9 million. While prices were up over 6% versus the prior quarter and over 17% as compared to last year, we continue to experience a very weak demand environment in our textile, chemicals and dyes businesses, particularly in our Europe and Americas markets.

Asia has held up much better. Our sense is that the traditional garment and home furnishing sectors have softened in the last couple of quarters and this has resulted in a very competitive market environment. In our Materials and Effects division, we were also impacted by the continued weakness of the US dollar compared to European currencies.

I'm sure you are aware, both of these businesses are headquartered in Europe and have a very significant manufacturing presence in Europe. As the euro and the Swiss frank continue to appreciate, our European SG&A manufacturing cost has increased on a reported US dollar basis. We estimate that reported fixed costs in these divisions alone increased by over $26 million as compared to last year and almost $6 million higher as compared to the first quarter, based solely on the translation of non-US dollar costs.

In our Performance Products division, our adjusted EBITDA improved relative to last year, but was down slightly from first quarter results. As compared to our first quarter, selling prices were up about 10% on the back of price initiatives to recover higher raw material costs and currency FX, while volumes improved by 7%.

We also benefited from higher tolling revenues in the second quarter, reflecting some of the structural changes we have made in this division related to our glycol and surfactant operations. Our core performance specialty business performed very well, with adjusted EBITDA up by 33% as compared to last year.

We did struggle again in the olefins product category of our Intermediates group, which we shared with you in the last update. We went through an extended planned maintenance and inspection project at our Port Natchez, Texas olefins and derivatives facility in the first quarter. We brought most of the unit back on line late in the first quarter, but we continued to encounter problems with operating reliability with the olefins unit through much of April and May, which required additional downtime.

As a result, this unit operated at 40% of capacity during the second quarter. We have estimated the financial impact of this downtime to be approximately $12 million in the quarter, consistent with higher maintenance expense and the cost of purchased ethylene, versus internally sourced products.

In our Pigments division our earnings declined as compared to the first quarter and a year ago. Although demand has been good, particularly in Asia, with volumes up 9% as compared to the first quarter and flat with last year, we have struggled in the first half of the year to get pricing traction in our core European markets and in North America.

Additionally, with higher raw material prices in ores, acid, energy and freight, as well as the negative impact of the continued decline in the value of the US dollar versus the primary European currencies, we saw challenging market conditions in the second quarter. However, producers have implemented a combination of price increases and surcharges in all regions of the world.

We did see market improvement in the second quarter in Asia and other regions of the world. Europe and the US have lagged a bit, but prices in July in both of these regions are higher than at any time in the second quarter, which gives us quite a bit of confidence that profitability will improve in the third and fourth quarters. Similar to Materials and Effects, our manufacturing and SG&A centers are based in Europe, so as European currencies have appreciated against the US dollar, our reported fixed costs have increased dramatically.

Before we conclude today's call, let me comment briefly on the ongoing litigation with Hexion as it relates to our agreement to the merger. I assume most of you have followed the company's public statements over the past six weeks, so I don't feel it is necessary to rehash all of this. But, I will say that we are shocked and disappointed by the actions of Hexion and Apollo.

While repeatedly assuring us and our shareholders that they were working diligently to satisfy the remaining closing conditions and consummate the merger, it appears that Apollo was working with Duff & Phelps and others to scuttle the merger. Without our knowledge or input, they retained Duff & Phelps for the sole purpose of rendering an insolvency opinion to support their goal of not closing the merger. This opinion and the underlying analysis was based on a series of dubious assumptions. Duff & Phelps was specifically not permitted to discuss any aspect of the report with Huntsman, including the assumptions they made about the Huntsman business.

Finally, again, without discussing or notifying Huntsman, Apollo permitted Duff & Phelps to finalize the report and then release the findings to public and to the banks. Apollo then filed a lawsuit in Delaware seeking to avoid their obligations under the merger agreement.

Apollo's and Hexion's actions over the past weeks represented a knowing and intentional breach of their obligation under the merger agreement, which clearly obligates them to "use its reasonable best efforts to take all actions and to do or cause to be done all things necessary, proper or advisable to arrange and consummate the merger and any financing." In addition, the merger agreement also prohibits them from "taking any action that could reasonably be expected to materially impair, delay or prevent consummation of the financing contemplated by the commitment letter."

Clearly, these are obligations that they have chosen to ignore and in fact, have taken a series of actions in direct opposition to them. Furthermore, Apollo and Hexion have also suggested that a material adverse effect under the merger agreement has occurred. We strongly disagree and our results for the second quarter announced today are confirmation of our view.

Finally, Apollo has alleged that there exists a substantial funding gap, in other words, the amount of funds available is not sufficient to close the transaction. We do not believe that any funding gap exists. In any event, Hexion assumes all the financing risks in connection with our merger, as the merger agreement has no financing conditions.

An expedited trial is scheduled to begin in Delaware on September 8th. We are confident that a trial based on the merits will reveal that an MAE has not occurred and that the combined company is indeed solvent.

Huntsman has retained a number of experts in these areas and has begun a period of intensive discovery with regard to Apollo, Hexion and their advisers, in preparation for the upcoming trial. We would expect the trial to take about a week and the judge has indicated that he is willing to render his decision shortly thereafter. We are hopeful that by the middle of September the litigation will be resolved, which will then put us in a position to go about closing the merger as soon as possible thereafter.

In conclusion, we have had the opportunity to hear from many of you directly over the course of the past several weeks. We appreciate your support in this matter. With that, I'll turn the call back to John Heskett, our Vice President of Corporate Development and Investor Relations.

Thank you, Peter. And operator, this concludes the call. Thank you everyone for joining us this morning.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.