Huntsman Corp (HUN) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the third-quarter 2008 Huntsman Corporation earnings conference call. My name is Madge and I will be your coordinator for today. At this time, all participants are in a listen-only mode. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Kurt Ogden from Huntsman Corporation Investor Relations. Please proceed, sir.

Thank you, operator and good morning, everyone. My name is Kurt Ogden from Huntsman Corporation's Investor Relations. Welcome to Huntsman's investor conference call for the third quarter of 2008. Joining us on the call today are John Huntsman, the Founder and Chairman of our Company; 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 November 13, 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 83791974. A recording of this call may also be accessed through our website.

Before we begin our 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 to be considered 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 consumption 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 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 governmental regulations, geopolitical events and other risk factors. Please refer to our most recent 10-K, 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 outline the format for today's call. I will summarize the earnings and then turn the call over to Kimo Esplin who will address the impact of Hurricanes Gustav and Ike, provide an update on capital spending and liquidity and discuss the current status of the merger with Hexion. Finally, Peter Huntsman will review the performance of our business and each of the divisions in the quarter. Unfortunately, given the pending merger with Hexion and litigation relating 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 gains and losses and extraordinary gains and losses related to the purchase of a business.

In the third quarter of 2008, we recorded a net cost of $28.9 million related to such costs and expenses, of which $25.8 million were related to the merger in the third quarter of 2007. We recorded aggregate net costs of $232.3 million related to such costs and expenses of which $205 million were related to the merger.

We focus 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 third-quarter earnings release, which has been posted to our website.

Today, Huntsman Corporation announced third-quarter earnings as follows. Huntsman recorded adjusted EBITDA from continuing operations of $193.9 million as compared to adjusted EBITDA from continuing operations of $209.8 million in the second quarter of 2008 and $240.2 million in the third quarter of 2007.

As indicated in our earnings release this morning, we estimate that we incurred $49 million of costs and lost profit margin that impacted our adjusted EBITDA in the third quarter of 2008 due to Hurricanes Gustav and Ike. Excluding the impact of the merger, the third-quarter 2008 adjusted EBITDA would have exceeded the third-quarter 2007 and second-quarter 2008 results.

Net loss available to common stockholders for the third quarter of 2008 was $20.2 million, or $0.09 per diluted share. This compares to net income available to common stockholders for the second quarter of 2008 of $23.7 million, or $0.10 per diluted share and net loss of $150 million, or a loss of $0.68 per share in the third quarter of 2007. Excluding the after-tax impact relating 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 gains and losses, adjusted net loss from continuing operations was $1.9 million, or $0.01 per diluted share, including an approximate $0.14 per share related to the hurricanes. This compares to $19.9 million of adjusted net income from continuing operations or $0.09 per diluted share for the second quarter 2008 and $80 million, or $0.34 per share in the third quarter of 2007.

On an adjusted basis, including the hurricane impact of $49 million, third-quarter results decreased as compared to the previous year as stronger results in our Performance Products and Pigments divisions were more than offset by lower results in our Polyurethanes and Materials and Effects division. Corporate and unallocated expenses were also higher in the 2008 period compared to 2007, primarily due to higher minority interests in certain of our subsidiaries' income.

On a sequential basis, including the hurricane impact of $49 million, adjusted EBITDA decreased by $15.9 million as stronger results in Performance Products and Pigments were more than offset by lower results in Polyurethanes, Materials and Effects and higher corporate and other charges. With that, I will turn the call over to Kimo Esplin, our CFO.

Thanks, Kurt. I will begin my remarks with some comments on the financial impact caused by Hurricanes Gustav and Ike. These hurricanes hit the US Gulf Coast in September this year. In preparation for those hurricanes, certain facilities were shut down in an orderly process to minimize the storm effects. Fortunately, all of our associates were safe and the damage was minimized. Although the circumstances surrounding each facility were different and unique, the facilities remained inoperable for a number of days and in certain cases weeks.

During the third quarter, the impact of unabsorbed fixed costs, as well as repairs, was approximately $21 million. Additionally, we incurred lost profit margin of an additional $28 million for a total third-quarter hurricane adjusted EBITDA impact of $49 million. The effects of the hurricane in the fourth quarter are estimated to be $18 million. All of the impacted plants are now back up and running. While all our operations are ensured against physical damage and business interruption, in neither case did we exceed our deductibles.

Our capital expenditures in the third quarter were $101 million. Consistent with our prior guidance, we expect to spend between $440 million and $450 million this year. Our annual required maintenance capital expenditures, including environmental health and safety, is approximately $100 million to $150 million for the entire Company. All discretionary spending is allocated through a very disciplined process based on a risk-adjusted return threshold. We expect capital spending in 2009 to be considerably below depreciation, which runs approximately $400 million annually.

From a liquidity perspective, we had approximately $536 million of cash and unused borrowing capacity at the end of the third quarter. At September 30, our total debt, our total net debt, including our off-balance-sheet AR securitization program, stood at approximately $4.3 billion, which was slightly lower than at June 30, 2008.

During the third quarter, net change in accounts receivable, inventory and payables, including receivable sold into our off-balance-sheet AR securitization program, was flat. Receivables in general were lower as a result of the impact from the hurricanes, while inventories were modestly higher. As raw material prices decline from the previous high commodity price environment, we expect that net working capital levels will reduce.

We are in the process of amending and extending our AR securitization facility that currently matures in April of 2009 and expect to complete this in the next several weeks. The AR securitization facility will be extended 364 days from the date of the amendment.

I would like to take a moment on our ongoing litigation with Hexion, Apollo and the banks related to the merger. At the end of September, we won a decisive legal victory in the Delaware Court of Chancery. Vice Chancellor Lamb denied all of the declarations sought by Apollo and Hexion in their suit in which they asked that the Chancery Court excuse Hexion from its obligation to consummate the merger.

The Court soundly rejected Hexion's allegations that Huntsman had suffered a material adverse effect and that a solvency certificate or opinion could not be provided for the combined Hexion/Huntsman entity at the closing and ordered Hexion to specifically perform its covenants under the merger agreement, including using its reasonable best efforts to take all actions necessary and proper to consummate the merger. The Delaware Court also held that Hexion knowingly and intentionally breached numerous covenants under the merger agreement and as a result of this, we may seek uncapped damages from Hexion if the merger is not consummated. Apollo and Hexion have appealed the Court's decision. Following the Delaware decision, Huntsman and Hexion agreed to schedule the closing of the merger for October 28.

On September 30, the day after the Delaware decision, we filed a suit in Texas against Credit Suisse and Deutsche Bank, the lenders who had signed the commitment letter to finance the merger, alleging fraud, tortious interference and conspiracy with Apollo to interfere with the merger agreement we had entered into with [Basel] in June 2007.

The Texas Court set a jury trial date for February 9, 2009 and imposed a temporary injunction enjoining the banks from filing any lawsuit seeking to declare the combined Hexion/Huntsman entity would be insolvent. The temporary injunction was unanimously affirmed by the Texas Court of Appeals and later expired on November 1.

On October 23, American Appraisal, a leading valuation firm, provided us with a written solvency opinion concluding that the combined Hexion and Huntsman entity would be solvent under all the solvency tests commonly used in this type of transaction.

At the time of closing, I issued a signed solvency certificate in my capacity as CFO of Huntsman Corporation in a form similar to those used by other Apollo portfolio companies in past transactions. Despite this, late in the evening of October 27, Hexion informed us that they had received a letter from the bank stating that the banks did not believe the solvency certificate and opinion provided by American Appraisal met the condition of their commitment letter. Effectively saying that, as a result, the banks would not fund the proposed closing of the merger on October 28.

On October 29, Hexion filed suit against the banks in New York asking for the Court to order the banks to perform their commitment under the commitment letter and fund the merger closing and for the Court to issue a temporary injunction preventing the banks from terminating the commitment letter.

On October 31, the Court denied Hexion's request for a temporary injunction. Hexion did not appeal. A trial in New York has been set for January 8, 2009 to determine whether the banks will be required to specifically perform under the commitment letter that expired on November 1, 2008. We intend to continue to zealously pursue our multibillion-dollar actions against Hexion and Apollo in Delaware and against Apollo, Leon Black, Josh Harris, Credit Suisse and Deutsche Bank in Texas.

In the meantime, our priorities will 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 growth and efficiency initiatives. With that, I will turn the call over to Peter.

Kimo, thank you very much. And thank you all for taking the time to join us this morning. Excluding the approximate $49 million impact of Hurricane Gustav and Ike, our third-quarter results were very solid. Third-quarter adjusted EBITDA from continuing operations, excluding the hurricane impact, was approximately $243 million, in line with the prior year's results of $240 million and significantly greater than the second quarter of $210 million. These solid results were achieved despite the continued significant headwinds in the form of higher raw material and energy costs measured on a sequential and year-over-year basis.

By way of example, the two key benchmarks -- crude oil and natural gas -- were up 56% and 70% respectively compared to the third quarter of 2007, which had the effect of pushing our direct costs up $360 million. The good news is that the prices for these benchmarks have come off their peaks. While we saw raw material costs fall during the latter part of the third quarter, we experienced a $170 million increase in our direct costs as we worked through our inventories.

During the fourth quarter, we are seeing the cost of our inventory decrease. On a historical basis, generally about -- generally, for every $10 change in crude oil, our three largest raw materials -- butane, benzene and ethane -- will change annually by approximately $140 million. For every $1 movement in natural gas, our costs will change approximately $24 million annually. Our ability to capture this extra margin depends on how well we are able to maintain prices with our finished products.

In response to the rising raw material costs, we initiated swift and sustained price increases with our customers earlier this year across every division. These, obviously, differ in amount by product and region, but selling prices are higher around the world. Depending on market conditions and contractual price protection, the effects of the announced price movements generally take two to three months to work their way into our P&L. During the third quarter, we realized an uplift in price of approximately $300 million compared to previous year and $40 million compared to the second quarter of this year.

Our Polyurethanes business was impacted by the previously mentioned hurricane by approximately $39 million, more than any of our other divisions. We have done everything possible to work with and fulfill our customers' needs. In fact, we have gone as far as to airship product to certain of our customers in order to keep them going during the hurricane outage. It is a credit to our Polyurethanes team that we did not lose a single customer during this time period.

Third-quarter earnings were impacted further by raw material cost increases and softer demand. We continue to experience higher manufacturing costs, more specifically due to higher benzene, natural gas, propylene, ammonia and caustic soda. In fact, this year, our cost to produce MDI is up well over 20% versus the end of last year. More specifically, during the third quarter, benzine costs rose 10% compared to the second quarter. Global MDI demand has slowed down a bit. Although as an industry, we estimate, at this time, that global MDI growth this year will still be up about 6% over 2007. As expected, our MDI volumes decreased compared to the second quarter as we felt the impact of the Chinese Olympics and a slow August as Europe takes vacation during this time period.

Looking at demand on a regional basis, Asia demand was softer due to the Chinese government-imposed manufacturing restrictions leading up to the Olympics and then a slower-than-expected post-Olympic recovery. During the latter part of the third quarter moving into the fourth quarter, we are seeing a slowdown in Chinese demand and throughout the rest of Asia. This is particularly true for chemicals that service export-oriented markets. Approximately 60% of our MDI sold in China is for domestic consumption. While we are experiencing a slowing in demand, I think we're well-positioned in this particular market that we will recover sooner than export-oriented applications.

In Europe, which is currently our largest market, we saw solid growth during the quarter, fueled somewhat by Eastern European emerging markets and demand in the Middle East. In the Americas, the hurricane outage negatively impacted volumes and in addition, construction-related demand was softer as credit heightened and housing starts decreased further.

On the pricing side, the average for MDI was up about 1% as compared to the second quarter despite the strengthening of the dollar versus the euro. The good news here is that we put in place a series of price increase initiatives across a range of products, which took effect in the third quarter in both Europe and the Americas. With record high raw material costs, we expect to hold on to these increases even after raw material prices recede as we work through our higher-valued inventories.

As a point of reference, benzine costs in the third quarter 2007 were $3.55 per gallon. In the second quarter of 2008, it was $4.36 per gallon. Currently, it is approximately $1.62 per gallon. Keep in mind, a significant number of our customers have mechanisms built into their contracts that allow for a passthrough, both up and down, of certain key raw material costs.

Our propylene oxide and [coke] product MTBE business enjoyed healthy margins during the quarter. Unfortunately, the outages caused by the hurricanes limited our volumes and subsequent profitability of this business.

During the fourth quarter, we will complete installation of an MDI process technology upgrade at our Geismar, Louisiana facility, which will provide an increased, differentiated product slate, as well as significant costs and environmental benefits. We believe this project will deliver an internal rate of return in excess of 40% and a payback on our investment of just over one year based on current raw material costs.

Our Advanced Materials and Textile Effects results in the third quarter decreased slightly from the second quarter. Adjusted EBITDA decreased in our Advanced Materials business, but improved in the Textile Effects. In Advanced Materials, we benefited from a 5% increase in average selling prices. As expected, demand dropped from our second quarter as we experienced the Chinese Olympics and seasonal slowdown in August in our European markets. Moving into the second quarter, we are seeing a slowdown in certain end-use applications while demand in aerospace and power infrastructure continues to remain consistent.

In Textile Effects, adjusted EBITDA improved compared to the second quarter, but down compared to a year ago. While prices were up, we continued to experience a weak demand environment for our textile, chemical and dyes business as volumes decreased. The softer demand was felt particularly in our Western European and Asian market. Whereas, the Americas held up a little bit better in the quarter.

China's exports of textiles and garments fell 11% in the first half of 2008 compared to the prior year. European textiles and garment production is down 10% in the same time period as consumer demand has fallen. To counter these conditions, we increased prices, particularly in the Americas and Asia, as we worked to offset the higher cost of raw materials. We have been successful in raising our average selling price 18% compared to the prior year.

In our Performance Products division, our adjusted EBITDA improved compared to last year and the second quarter. Results for the third quarter of this year represented an all-time record of $81 million despite the hurricane impact of approximately $9 million. Key to the success this quarter was the efficiency of our manufacturing facilities, which are operating very well until mid-September when Hurricane Ike hit and forced the closure of five out of six of our US facilities in this division. Clearly, the maintenance work that we undertook in this business early in the year is paying off with much better operating reliability.

Compared to the second-quarter, average selling prices were up about 7% as we implemented continued price increase initiatives to recover higher raw material costs that more than offset the 5% decrease in volumes. Over the last 12 months, average selling prices have increased by 34% in the Performance Products business.

Our core performance specialty business performed very well. We continue to enjoy strong demand for these products, especially our amines. Market demand held steady during the third quarter for most of our intermediates business. Our intermediates business is structured so that approximately 50% of our volume are cost-plus contracts and therefore, should enjoy relative stability in margins in softer economic periods. Further, we expect margins in our surfactants business to benefit from lower ethylene prices as it generally runs countercyclical to the ethylene cycle.

To keep up with customer demands around the world and to improve our cost structure, we have a number of projects that will continue to expand this division. We are near completion of our new 100 million pound maleic anhydride facility at our Geismar, Louisiana site, which we expect to start up early in the second quarter of 2009. Our total investment will be approximately $170 million, of which half will be spent this year. This facility will be among the lowest cost and most efficient maleic facilities in the world.

We are moving forward with the expansion of our existing maleic facility in Moers, Germany where we have a 50/50 joint venture with Sasol. We intend to expand capacity 100 million pounds to approximately 230 million pounds, which we believe will make this facility the lowest cost and one of the largest maleic facilities in all of Europe. We expect to complete this expansion in the first part of 2011.

Maleic anhydride is one of our most profitable businesses with EBITDA margins greater than 20%. So we expect additional capacity to have a meaningful improvement on our business and our Performance Product's profitability beginning in 2009.

The construction of our ethylene amines manufacturing joint venture in Dammam, Saudi Arabia with the Al-Zamil group as a 50% partner continues and is on track. Our equity contribution of $43.5 million was completed in the second quarter of 2008 and the plant is expected to come on line in early 2010 with an annual capacity of 60 million pounds.

In our TiO2 Pigments division, I am pleased to see that our pricing effects are improving our results. Our earnings increased compared to the second quarter and a year ago. We realized positive price movements in all regions of the world despite the strengthening of the US dollar versus the euro in the third quarter as compared to the second quarter. Although we continued to see strong demand in Asia, elsewhere demand was softer during the quarter and sales decreased in our core European market in North America and other regions of the world.

Additionally, higher raw material costs in ores, acid, energy and freight has continued to put pressure on margins and result in challenging market conditions. In fact, we have seen roughly a $100 per ton increase to our direct cost in each of the three quarters thus far this year, which has offset price increases for the same period. We're starting to see relief during the fourth quarter as some of the raw material costs have started to drop. We will continue to explore ways to cut costs and improve efficiencies in our Pigments division.

Our 50,000 ton expansion at our Greatham, United Kingdom chloride titanium dioxide plant was completed in September of this year and is operating today at near full capacity of 150,000 metric tons. This is an investment of approximately $110 million, of which $30 million will be in 2008. We believe this will make Greatham the lowest cost TiO2 facility in all of Europe.

In conclusion, similar to all of our competitors, we're seeing slowing demand in many parts of the world. I believe that some of this is due to customers wanting to empty inventories as commodity prices fall and most of this is due to a global economic slowdown. Despite of this headwind, we are experiencing drops in raw material costs in most of our divisions. We are seeing capital that was tied up in inventories start to be released. We take satisfaction in having sold our commodity assets this past year and focused on our differentiated products when we did.

We believe that our global reach, strong market presence and diversified portfolio will allow us to take advantage of the best economic opportunities, be they in Asia, Europe or the Americas. We are controlling our expenses and continuously working towards improving our operating cost position. With the talents of over 13,000 professionals around the world, I feel confident about our direction and opportunity.

As Kimo mentioned in his remarks, we have won court cases in Delaware and Texas against Hexion, Credit Suisse and Deutsche Bank. Should we not complete a transaction, we are in an ideal position to vigorously pursue multiple billions of dollars in damages against Hexion, Apollo, Leon Black, Josh Harris, Credit Suisse and Deutsche Bank. Notwithstanding the condition of global markets, I believe our Company is in a unique position to create shareholder value and capitalize on these fast-changing times. With that, I'll turn the remainder of the call back over to Kurt Ogden.

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

Thank you for part your participation in today's conference. Presentation you may now disconnect. Good day.