Star Equity Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 3, 2024

There are 15 speakers on the call.

Operator

Greetings and welcome to the Huntsman Corporation First Quarter 20 24 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Ivan Marcuse, VP of IR and Corporate Development.

Operator

Thank you. You may begin.

Speaker 1

Thanks, Daryl. Good morning, everyone. Welcome to Huntsman's Q1 2024 earnings call. Joining us on the call today are Peter Huntsman, Chairman, CEO and President and Phil Lister, Executive Vice President and CFO. Yesterday, May 2, 2024, after the U.

Speaker 1

S. Markets closed, we released our earnings for the Q1 'twenty four via press release and posted to our website huntsman.com. We also posted a set of slides and detailed commentary discussing the Q1 2024 on our website. Peter Huntsman will provide some opening comments shortly, and we will then move to a question and answer session for the remainder of the call. During this call, let me remind you that we may make statements about projections or expectations for the future.

Speaker 1

All such statements are forward looking statements and while they reflect our current expectations, they involve risks and uncertainties and are not guarantees of future performance. You should review our filings with the SEC for more information regarding the factors that could cause actual results to differ materially from these projections or expectations. We do not plan on publicly updating or revising any forward looking statements during this quarter. We will also refer to non GAAP financial measures such as adjusted EBITDA, adjusted net income or loss and free cash flow. You can find reconciliations to the most directly comparable GAAP financial measures in our earnings release, which has been posted to our website huntsman.com.

Speaker 1

I'll now turn the call over to Peter Huntsman, our Chairman and CEO.

Speaker 2

Ivan, thank you very much and thank you all for taking the time to join us this morning. Reviewing the results of the Q1, a few things of note are emerging. I said in our Q4 conference call on the 22nd February that our number one priority this year was to recover lost volumes. During the Q1, we were able to make some modest gains and we will be doing more throughout 2024. The gains that we saw in volume were attributed to a combination of new business, demand growth and pockets of inventory restocking.

Speaker 2

We question how much of this was the end of inventory destocking and the beginning of inventory rebuilding versus demand growth. While it will vary customer by customer, I believe it to be about fifty-fifty. I should also say that eventually the two conditions merge into one gray area. Demand improvement begets inventory restocking. However, the bigger issue is when do markets recover sufficient to achieve pricing recovery.

Speaker 2

Today's levels of profitability, particularly in Europe, are below reinvestment levels and in some cases are still below positive cash generation. I'm happy to see 25% growth in our North American MDI demand in Q1. We should remember that this is compared to Q1 of 2023, where demand had dropped 35% from 2022. All this noise means that we are moving back to where we were merely a year ago. To have a real return to normalized market conditions, we're going to need consistent demand improvement and equally important, higher prices to expand margins.

Speaker 2

During the last call, we also outlined the need to improve our cash flow. While we're seeing improvements in this area as well, we may face headwinds in working capital later in the year as sales volumes and prices move up. Our 3rd priority in 2024 is our continued focus on our costs in the face of global inflationary and regulatory pressures. We continue on track to meet all the objectives we announced to offset projected 3% to 4% global inflation. Our 4th priority is to continuously assess our portfolio, make sure we're maximizing the value of the assets we own and how we deploy capital for growth.

Speaker 2

Finally, we continue to focus on our environmental and safety performance. This is our license to operate and regardless of business conditions, we will not compromise on the safety of our operations. This focus on risk also applies to our balance sheet. We will not jeopardize our investment grade rating for short term gains. All in all, I'm not surprised by the results and conditions that we are seeing.

Speaker 2

Our quick action rationalization and discipline with pricing will serve us well as the industry continues to recover. Our objective is to take quick and decisive actions, advantage of these improving conditions and get us back to normalized earnings as quickly as possible. With that, operator, let's turn the time remaining time over to questions and comments.

Operator

Thank you. We will now be conducting a question and answer Our first questions come from the line of Patrick Cunningham with Citi. Please proceed with your questions.

Speaker 3

Hi, good morning. Thanks for taking my questions. Some of your comments in the prepared remarks reflect a slightly more positive view on China and I think sentiment there is pretty mixed at this point. Can you highlight where you're seeing some strength and what you expect to be growth drivers throughout the year?

Speaker 2

Yes. We continue to see a lot of demand growth in auto. I think that much of that has to do with the fast growing domestic markets in China, particularly around EVs. As we think about EVs, we essentially supply everything that goes into an ICE vehicle, goes into an EV vehicle. And our polyurethanes division, which is our largest division with automobile applications.

Speaker 2

But we also have a number of applications that we're developing right now that are in the pipeline, some of them that are merging into EVs that are coming from the other divisions as well around structure strength, light weighting, adhesion, insulation and so forth. So Chinese automotive continues to be what I think is one of the stronger areas of growth in China. How long that continues? I think it's probably going to continue for some time in China. I think that there's a broader question as to how long and how well that goes with the Chinese export markets, how successful China be exporting those EVs into the U.

Speaker 2

S, which has been extremely limited, obviously. And obviously, going into Europe, which is there's a lot of talk about putting limitations on Chinese vehicles being built in China. Yet you see a number of Chinese auto companies that have joint ventured with European auto companies. So, there's going to be that's going to be a much greater area. But certainly that and of course, anything that has to deal with energy conservation in China, insulation, building materials where there's energy conservation, central heating, piping insulation and so forth, infrastructure projects continue to do quite well.

Speaker 2

Obviously, if it's related to residential construction, it's pretty sluggish in China. But by and large, as we said, probably 3 quarters ago, we expect China to have a slow but steady recovery both in volume and in pricing. And I think that's what we're seeing.

Speaker 3

Great. Appreciate the detail. And then Advanced Materials volumes were down year on year, even facing that easier comp. Is there any element of whether it's value over volume or lower margin product exits there? Or is this reflective of underlying demand?

Speaker 3

And then just on full year expect

Speaker 2

volumes to be down this year? I would imagine volumes in Advanced Materials ought to be growing for the year on an at the rate of the overall macro GDP. I think you're going to see areas like applications that are going to electrical infrastructure, aerospace industry, automobile light weighting, EV applications, that will be growing better than GDP. A lot of your industrial coatings and so forth will be at GDP, maybe a little bit less than GDP. And then we're going to continue to deselect the more commoditized grades, the BLR resins and so forth that we don't really add a great deal of value from a technical or manufacturing competitive basis.

Speaker 2

So it'll be a mixed bag. But if you strip away the commodity side of that business, by and large over the last couple of years, you continue to see steady growth in the more downstream applications.

Operator

Our next question comes from the line of Frank Mitsch with Fermium Research.

Speaker 4

Obviously, very impressive volume growth in North America and polyurethanes as you mentioned, but you said you were only getting back really where you were for 'twenty three. How do you think about the pace of business in polyurethanes, not just in North America, but as we play out through the year?

Speaker 2

I'm feeling better and better about it, Frank. Again, I don't think that we're going to see a compounded 25% growth, obviously, throughout the year. I think a lot of what we saw in the Q1 was the cessation of inventory drawdowns and so forth. And what we're seeing right now is going to just be a slow and steady recovery as we kind of get back in housing. I think inventory levels, I can't say this unequivocally with all applications, but by and large, inventory levels still like to pretty thin in most applications in MDI.

Speaker 2

And I think as we look throughout the next couple of quarters, we're expecting to see continue to see a recovering and modest growth in that area, particularly around construction.

Speaker 4

Okay. So slow and steady is kind of the volume forecast. So then on the margin side, you did highlight some modest price increases on MDI in a couple of regions, but we have stubborn benzene right now. How do we think about the margin profile for polyurethanes?

Speaker 2

I think that our improvements, Frank, over the next quarter or 2, again, early in the quarter. So I'm very good at projecting market conditions for anywhere from 20 to 24 hours. Because I think over the improvements that I would be expecting in the next quarter or so, you're probably going to be looking at 2 thirds to 3 quarters, that's going to be around volume and the rest of that around price. And I don't have to be pessimistic about price. Right now, you're right.

Speaker 2

We do have some headwinds in benzene prices. We're looking at crude prices today, pushing $80 to $90 depending on WTI versus Brent. And that's going to filter down into the gas lean pool. Typically, this time of year in the springtime, you're starting your blending season and so forth. You're going to see benzene prices will have a little bit of pressure on the upward side.

Speaker 2

So we're going to have to recover those higher raw material prices and we need to get above and beyond those. So that's in my opinion, that's going to be the number one challenge that we've got as a company as we get these prices up.

Operator

Thank you. Our next question has come from the line of David Begleiter with Deutsche Bank. Please proceed with your questions. Thank you. Good morning.

Operator

Peter, looking at longer term EBITDA, what will it take and how long will it take to get back to that $1,000,000,000 threshold you've exceeded in the past?

Speaker 2

Well, I think that it's going to take 2 or 3 things. It's a very good question, something that we ask ourselves all the time. If we're merely waiting for market conditions to recover, that's not the answer that we ought to be it's not the objective we ought to be looking for. So we do need to see demand in U. S.

Speaker 2

Housing come back to where it was around that $1,000,000 sort of a threshold in housing starts and so forth. And as we look around that, where we've been over the last couple of years And really looking more for stability there is the volatility, I think, that probably concerns us more nicely out to North America. We need to see Europe stop this nonsense, the policy that they've got around the industrialization and get an economy that's kind of growing once again. China, I think China has a nice recovery, a slow and steady recovery. I think people are kind of expecting some major stimulus or something to come through that's also going to put it through the roof.

Speaker 2

I mean, I'd love to see it, but I just don't expect it. I think you're just going to see a gradual recovery taking place in China. But a lot of it also has to be due with what we are doing ourselves. As I look at our MDI splitter in Geismar, Louisiana that we started up just as COVID was coming on full force, there's another $40,000,000 $45,000,000 of additional EBITDA that we ought to be getting out of that splitter. Once we're able to sell that out, we've got a number of expansions that are coming on in the coming months quarters around amines expansion, urethane catalyst expansions, e Greater, which is our ultra pure and amines are going to be going to chip cleaning, chip solvents.

Speaker 2

These are projects that are going to be $10,000,000 to $20,000,000 $25,000,000 of benefit to the company once these lines are up and moving and we're able to sell them out. We still have another 30 $1,000,000 plus of EBITDA in the Aerospace segment as we come back, as we see a full recovery. I mean, we're still not at the same wide body demand as we were pre COVID. I look at our Miralon technology. We're in the process right now starting up a 30 ton reactor that will be selling product in the commercial arena for the first time at these sort of values and volumes that we've ever had.

Speaker 2

And we're starting the construction of a 5,000 ton unit that will be coming on in the early part, latter part of 'twenty five, early part of 'twenty six. I look at the R and D pipeline, I look at the cost reductions of $280,000,000 I know it sounds like this is a lot of issues, but when you add all these up, David, you kind of get the idea that there is another $150,000,000 to $200,000,000 of additional EBITDA that we really control, that we ought to be aggressively moving forward with. And so I feel that we do need markets to recover, but we've also got to be able to successfully execute on all the projects that we've started and will be coming up this year.

Operator

Very, very helpful. And just much newer term back half of the year, polyurethanes EBITDA, should that improve versus Q2 levels based on current expectations?

Speaker 2

Yes. I would certainly hope so. I've challenged the team as we saw from our earnings from where we were in the Q4 to the first quarter of this year, we're up 300%. If Tony can do that every quarter, 300% improvement for the rest of the year. We'll be I'll be quite pleased with them.

Operator

Thank you. Our next questions come from the line of Vincent Andrews with Morgan Stanley. Please proceed with your question.

Speaker 5

Thank you. Peter, just curious as you talk to your customers in building construction in United States, we're ultimately going to get some rate cuts. It's obviously seems like more a question of when. How fast do they seem to indicate they think markets will start to move once we move into a less restrictive monetary policy?

Speaker 2

I think there's quite a bit of bullishness right now in the building in trades. I think there's kind of 2 paths that are being pursued right now, That of what happens if rates kind of stay where they are. Obviously, that means that you're going to be getting less house for the same amount of money. So maybe houses are a little bit smaller, maybe they're a little bit cheaper to build and the cost of that house is going to be down. And as we look across the board though, we continue to see very low housing inventory of new homes, new home availability.

Speaker 2

And so I think builders are doing really 2 things. They're preparing and looking at a scenario where interest rates stay where they are and let's adapt and equip to that. And also should rates be coming down, I think that's really going to open up the demand to be quite a bit higher than it's been the last couple of years. So there's a point is there's a big gap there that needs to be filled.

Speaker 5

Okay. Yes. And then just we have seen housing starts improve over the last 6, 9 months. It's been a little lumpier recently. But are you starting to see the benefit of that flowing through in your businesses?

Speaker 5

Or is it just beginning, and maybe we'll see it more over the next quarter or 2?

Speaker 2

I think we're seeing the beginning well, I don't think we are seeing the beginnings of that. I think right now the biggest benefit that we saw in the Q1 was the lack of de inventorying. And I get a sense that that is really ended across the board in many of the products, but particularly in the construction and housing market. And as we look at the hopeful expansion of demand and housing starts over the next couple of quarters, I'm hopeful that will certainly be additive to what we've been able to accomplish thus far.

Operator

Thank you. Our next questions come from the line of Aleksey Yefremov with KeyBanc Capital Markets. Please proceed with your questions.

Speaker 6

Thanks. Good morning, everyone. Pretty impressive volumes in polyurethanes in North America and Europe. Can you just tell us where are your volumes today in these two regions versus what you would consider a normal volume level?

Speaker 2

Well, I think, again, I'm very happy to see the volumes growing where they are, but they are where we were basically a year ago. And so we really need to we needed to see continued growth and continued movement on pricing. Again, I don't expect volume improvements to be at 25% sort of improvement, but certainly, the housing and the construction markets are one that we're starting to feel is loosening up. And we also see some improvements there. Now if mortgage rates go down, I think that's going to have a near instantaneous impact on the business.

Speaker 2

And I think that would be the single biggest variable in our North American markets.

Speaker 7

And Alexia, I mean, you can do the math, 35% down year on year, this time last year, as we said, and then 25% up. So we're still about 10%, 15% below where we were and so we still need to see that trend continue to get back to where we started.

Speaker 6

Okay. Thanks for that. And then I wanted to ask you about your spray foam business. How is it doing in Q1 and heading into Q2?

Speaker 2

Well, spray foam continues to be a competitive market. The single biggest application for spray foam is our new housing builds. And as we look at that, that for us continues to be an area that's a competitive market. If you look at the mineral fiber with a low cost of energy and so forth, yes, we're going head to head. But we still grew our volumes there versus the prior year at just under 10%, 8% growth in that business.

Speaker 2

And so we continue to see growth, but again, growth is great to see, but we've got to see pricing, we've got to see margin expansion take place there as well.

Operator

Thank you. Our next questions come from the line of Jeff Zekauskas with JPMorgan. Please proceed with your questions.

Speaker 8

Thanks very much. Can you talk about the relative prices for MDI in both crude and I guess more specialized in Europe, China and the U. S? And can you say something about your relative margins in each of those areas?

Speaker 2

Yes. As we look at our Polymerics MDI, they're all basically selling it at, I'd say, within $100, $200 of each other per ton and it's around $2,000 per ton. So it's a pretty flat market right now. There's not a kind of an

Speaker 5

when you see demand, which has

Speaker 2

been kind of sluggish this past year, when you see demand, which has been kind of sluggish this past year, that would tell you that you're going to see pretty flat pricing. I will say though that as I look for some optimism in those areas, I looked at capacity utilization, I believe the industry today is running at about somewhere in the mid-80s on capacity utilization. And where we're seeing growth in demand and so forth, we're seeing quarter on quarter growth for the first time and excuse me, year on year growth on a quarterly basis for the first time in 2 years. There have been a number of operating outages that have recently been reported in the media and so forth. So I don't want to paint a picture that we're expecting to see prices go up to the roof.

Speaker 2

We're kind of getting into those dynamics where demand and capacity utilization moving into the mid-80s. You're starting to get into some areas where I think you're probably going to start seeing some regional divergences and higher prices in some of these areas, again, hopefully.

Speaker 8

And I guess for my follow-up, can you comment on the liquidation of the slick joint venture and how that may affect debt or cash flows in 2024 2025?

Speaker 7

Yes. Jeff, a couple of comments on FLIC. And as you rightly point out, so we closed on that deal during the Q1, minimal impact, net income, cash flow perspective, EBITDA perspective. I think we said on the last call, you then go through a process with the Chinese authorities, which will probably last into 2025, where we need to liquidate that joint venture. What that means is that we put approximately $200,000,000 of cash from our consolidated joint venture into SLIC, into the unconsolidated joint venture.

Speaker 7

That cash then gets liquidated out in 2025 back directly to the partners. So you think of Huntsman getting about $100,000,000 of that back and our joint venture partner, SCAC, getting the remainder directly. So what you'll see is cash goes down because it's off our balance sheet for a period. It effectively gets trapped in Slick and then it comes back up in 2025. It has a nominal impact on leverage, probably about 0.2 times on leverage as we progress through that process.

Operator

Our next question comes from the line of Michael Sison with Wells Fargo. Please proceed with your question.

Speaker 9

Hey, good morning. Nice start to the year. Peter, where are industry operating rates now for polyurethanes, MDI? And just curious where you think those need to get to establish a little bit better pricing and margin going forward?

Speaker 2

Well, typically, given the fact that this industry, the number of outages that you have to have for your maintenance of your facilities, typically it's about 90%, I like to think somewhere around 90% is kind of a sold out position. As we said in the past, leverage, pricing leverage typically comes at about 85%, somewhere in the mid to upper 80s. You start to see that pressure at 85% as you move through that. So as I would think about your capacity utilization right now, and I'm talking about today in Q2, not necessarily in the Q1. I believe in Europe, you're probably in the high 80s, 87%, 88%.

Speaker 2

The U. S, you're running over 100%. U. S. Needs imports to be able to satisfy demand.

Speaker 2

In China, you're probably somewhere in the mid to upper 70 percentile, which you add all that up and you're probably about 85% capacity utilization today, which is it's a very low end of what I would say is where you start getting into your pricing improvements. Now again, as you start having outages or better than outages, you start seeing demand improvements come along, that's really what we need. So given what we've been in the past where we've been talking about global operating rates around 80% to 81%, 82%, being at 85%, 86%, the idea that a plant or 2 going down or 2% or 3% sort of growth in the industry, all of a sudden puts you up there in that 88%, 89%. Sorry, I'm getting overly technical here, it's a few percentage points one side or the other. But point is, I think that we're in a much better position than we've been anytime the last 2 years.

Speaker 9

Got it. And then I know it's a little bit early to look to the second half, but what do you think needs to happen to get better EBITDA sequentially in the 3rd and the 4th? And do you think the 3rd and the 4th quarter run rate for EBITDA would be sort of a good base to think about how earnings can grow into 2025?

Speaker 2

Well, certainly where we end the second half certainly be a trajectory as to where we go in 'twenty five. I'm getting more bullish. I mean, again, I just go back to the nightmares of where we were a year ago this time when we were saying, we're going to have a rocky beginning of the year and the second half of the year is going to recover very strongly and erase all of our sins. That didn't happen and the sins just multiplied and got worse and worse and finally we found ourselves in hell. So that's probably not a very good metaphor to use.

Speaker 2

But anyway, as we look at the beginning of this year, we've I think we've seen good reliable and consistent growth and recovery. And I think the second half, what we need to see is that continued growth. And again, I know I've said this before, but movement in pricing. And so as we look at where we're moving, the direction we're moving, I like the direction of which we're going.

Operator

Thank you. Our next questions come from the line of Hassan Ahmed with Alembic Global. Please proceed with your questions.

Speaker 10

Good morning, Peter. Peter, I just wanted to revisit some of the commentary that you made on polyurethane volumes. Obviously, North America on a percentage basis, ridiculously strong, up 25%, but you alluded to the fact that we're still not really at normal volume levels. Europe up 9%, again it seems from deflated levels and Asia relatively flat. So could you just help me understand the trajectory from here?

Speaker 10

I mean, we're obviously below normal in North America. Europe, it seems well below normal and same thing with Asia. So, I mean, how should we be thinking about near term as well as medium term volume growth trajectories by region?

Speaker 2

Well, I think that we're going to continue to see probably stronger than average growth in Europe and in the Americas. I look into the Q2, it's early right now to order books. But we're going to see continue to see modest underlying growth. We're dealing with easy comps from a year ago. So I'd be focused more on quarter on quarter versus where we were a year ago.

Speaker 2

And we've obviously, this last year, we've gotten a deep hole and I think we first need to get out of the hole. And I think that we're just about out of that hole and we need to start growing from that point on. And I think that's where we are and that's where we're heading.

Speaker 7

And Hassan, as we indicated, sequentially, when you go Q1 to Q2, typically, you'll get about 5% improvement in volumes, and we highlighted in the prepared remarks that we would expect to get more than that this year. So the trajectory is in the right direction.

Speaker 10

Fair enough. And as a follow-up, continuing with polyurethanes, just on the cost curves, obviously, there was margin improvement, call it 1%, 1.5% EBITDA margins going up to like 4%. But I mean you guys being on the lower cost of production side of things, I'd like to think that a chunk of the industry is still in the red. And further to that thought, I would imagine that unto itself as a recovery is happening would be a big positive in terms of you guys or the industry getting pricing power again?

Speaker 2

I would certainly agree with that, Hassane. As I look in the U. S, though, I think the cost curve in the U. S. Is pretty flat.

Speaker 2

And you look at the major players in the U. S, they all have relatively the same size. We're all buying growth. None of us are integrated back up into benzene. We're producing our benzene.

Speaker 2

It feels like we're kind of all in the same boat as far as competitiveness. Natural gas is electricity is kind of the same price for everybody. The chlorine racket is the same for everybody. So as I think about Europe, I think that's where you probably see some of the biggest cost disparities between the low cost and high cost producers. York still operates some relatively small facilities.

Speaker 2

And to be honest with you, I'm surprised some of those facilities are still operating. But again, I'm not privy to their economics. But as I just look at their size, anyway, yes, so Europe, I think, you're going to see that. In Asia, you've got a lot of newer facilities, single line, large volume single lines that are operating. Wanhua, I believe, probably has a I don't think it's order of magnitude.

Speaker 2

They certainly have just by virtue of their size of their lines and so forth. I think they probably have a bit of an advantage over the other players. But I think that we shouldn't get lost so necessarily on the cost of production, because as you start going downstream and as you start looking at things like our splitter in Geismar, Louisiana, you start looking at our downstream applications going to elastomers and system houses and so forth. If those downstream businesses are being operated well and you're focused on adding value to the molecule, I believe you're going to make more money on your downstream business than you will on your manufacturing economics. Both very important, agreed, but Europe also, you do have that disparity between producers.

Speaker 2

But Europe also, in spite of some of the industrial problems and so forth, Europe also rewards innovation and rewards energy conservation, light weighting, adhesion, footwear and there's a number of applications in Europe that where we have some of our higher margin businesses.

Operator

Thank you. Our next questions come from the line of John Roberts with Credit Suisse. Please proceed with your questions.

Speaker 5

Thank you. Peter, your opening comments mentioned some areas of Europe are below positive cash generation. Is that maleic anhydride and is there anything else?

Speaker 2

I'd say that maleic and again, I just got to talking about some of the better ends of our urethane businesses. There are also going to be some commodity ends of the urethane business, where are really struggling to get pricing up and we need to get pricing up or we need to ask ourselves if we ought to be moving that product somewhere else, to be honest with you. But as we look by and large, it's some of the European markets. When I made the comment, I had in mind our Malay business, where we are having to battle with a lot of import materials coming in and sluggish demand. And some of the downstream urethane applications are still not, in my opinion, those are not volumes and margins that are sustainable.

Speaker 5

And then I had thought you had already exited epoxy BLR resin that's there. So what else are you exiting that I thought you exited before? And how much is left to go?

Speaker 2

Well, again, when we look at our epoxy businesses, we do continue to produce some commodity grades of epoxies and we will do that as we base load some of our facilities. Our emphasis is going to continue to be able to take that volume and moving it into higher value added components and so forth. But yes, you do have some of the low end of your reactions, reactors that take place and your production that takes place that I consider to be commodity and that you're always going to be exiting the bottom end of that and pushing more volume on the upper end of that margin scale. So not sure that it's all necessary when we talked about exiting businesses, isn't necessarily all BLR. I would just say that as we look at our capacity availability and where we want to put our emphasis, that may be beyond just basic BLR as well.

Speaker 7

Yes. And John, for context, I mean, BLR used to be about 50% if you go back 10 years. Today, we still have some business, as Peter says. It's about 10% of our volumes and we continue to move that down when appropriate.

Operator

Thank you. Our next questions come from the line of Salvator Tiano with Bank of America. Please proceed with your questions.

Speaker 11

Yes. Thank you very much. So firstly, I want to continue on that commodity epoxy discussion. And can you quantify, for example, when you said you selected some businesses in Q1, how much was that impact and what your volume growth would have been like for like without the commodity side? And as we look in the past couple of years where I think your volumes have declined by around 30%.

Speaker 11

Also can you put into context how much of that was just you walking away from low margin business versus the high end products?

Speaker 7

Yes. So, if you look at the Advanced Materials business, it grew in aerospace,

Speaker 11

and I think

Speaker 7

we said sales grew 6% overall year on year. We grew actually in automotive. We grew in the power grid area as well. So you're talking there just those three areas about 50% of our overall Advanced Materials business where there was growth. The commodity part was well down and that was well down throughout the year as we did de select some more BLR business.

Speaker 7

And year on year, we also moved away from some of the low end commoditizing part of infrastructure coatings. So if you took out some of that commodity, you would have seen growth given power, given our volumes into aerospace and into automotive. And I would say that quarter on quarter, both sequentially, usually you see a little bit of an uptick. We actually saw 5% growth quarter on quarter between 4Q and 1Q in terms of our volumes in Advanced Materials as well.

Speaker 1

And then, Sal, just to follow-up on that question is that the volume that gets deselected, there's not a

Speaker 12

lot of EBITDA that's associated with Okay, perfect.

Speaker 11

And since I guess you've already seen the value of making more downstream products here And the commodity ready epoxy market have been suffering for a couple of years. We're seeing some other companies trying to shift, I guess, a little bit more downstream into epoxy systems as well. Is this something that you're seeing in terms of competitive pressure or is the concern for you going forward?

Speaker 2

Well, many of our applications that we're going to, for instance, the power grid and electronics, aviation, so forth, these are sold typically on a qualifying basis where you're selling out for 5 to 10 years on a contract. If you're selling to the aerospace market, you're going to be qualifying into a fighter jet project or into an Airbus or Boeing application that will be around for years to come and they typically don't change suppliers, you don't change specs and formulations and so forth. The other end of the business and I kind of look beyond kind of the Power and Aviation, remember that this is an incredibly fragmented business, more so than any of the other businesses that we have. And you're going to see competition coming from other competing materials, not just epoxy, but I would think that most of our application and competition is coming from non epoxy applications, where we're either replacing other materials, or we're seeing other materials that will be competing against us that are not necessarily epoxy. But typically, just as a rule of thumb, the companies that I see people comparing us to in the epoxy segments are typically not the companies that we really are aggressively competing with.

Operator

Thank you. Our next questions come from the line of Kevin McCarthy with Vertical Research Partners. Please proceed with your questions.

Speaker 13

Yes. Thank you and good morning everyone. I had a question regarding MDI unit margins. So benzene costs have been elevated a little bit north of $4 a gallon in the U. S.

Speaker 13

Lately and your prices are rising as well. And so if I net those two things out, when you craft your guidance of $70,000,000 to $80,000,000 for polyurethanes, are you baking in sequential improvement in the unit margins for MDI in terms of cents per pound? It sounds like maybe the answer is yes, but I just want to make sure I'm understanding that correctly.

Speaker 2

Yes, I think Kevin, I think that's a correct assessment. We're simultaneously trying to offset rising raw material prices and at the same time, trying to get ahead of those prices. And I think that's why I say we're we expect to see marginal price improvements and most of the improvement that we see as I look again into the Q2 and perhaps developing the 3rd quarter, it's going to be the improvement is going to be more around volume than price at this point.

Speaker 7

And Kevin, we did see a small unit margin improvement as we move from Q4 to Q1. And as Peter says, we do expect a small improvement as we move from Q1 to Q2. And I would also say there's a good focus on benzene, rightly, because that's the largest raw material. Gas remains relatively low. Chlorine in general has been slightly down and then ammonia onto nitric has been slightly down as well.

Speaker 7

So you need to consider all of the raw materials that are flowing through into polyurethanes.

Speaker 13

Very good. And then Peter, as a second question, I think one of your five objectives for the year is to look at potential to optimize the portfolio. And in my mind, I've been thinking about Europe as maybe the center of that effort. I'm just tempted to ask, it seems like things are improving cyclically as you discussed in your prepared remarks. On the other hand, Europe has some problems that are arguably more structural in nature as you've also addressed in the past.

Speaker 13

So how do you put those two things on the scale? In other words, if the European assets are more fully loaded and profit is starting to come back, how do you weigh that against what may be less exciting outlook over the medium to longer term for capital deployment in the region, for example?

Speaker 2

Well, it's a very good question, Kevin. It's rather complex one as well. So but I mean, I'll just briefly touch When margins are where they are today and uncertainty around the economy are where they are today, and I don't want to sound I don't want to give false signals here. But where they are today, we certainly want to protect the balance sheet. And so this is not the time to go out and lever up the balance sheet and put uncertainty into the market.

Speaker 2

It may and I want to emphasize the word may it may be a time when you're looking at industry consolidations, looking at potential mergers, bringing assets together. Typically, if you're looking at where a lower tide is lowering the earnings of everybody, this might be an opportunity to look at those sort of structures that you typically wouldn't look at when you're near peak economics. When you're near peak economics, people have a tendency to stretch the balance sheet more and to be more aggressive on your M and A side. When your earnings are down, your balance sheet is to be protected, you're going to do something that's more capital conservative and that's looking at potential mergers and so forth. And now again, in saying that, I don't want to somehow single that we're looking to do some big merger.

Speaker 2

I'm just saying that as you go through the industry cycles that we're going through and we're obviously coming off of a very steep floor, we want to protect our balance sheet. We're not going to do anything that is reckless with that balance sheet. But at the same time, we still have to be able to look at our assets. We've got to look at, are we the best owners of these assets? And relative to the overall value that the stock market puts on our assets, are we getting maximum value?

Speaker 2

And just because markets are down doesn't mean we stop asking those questions.

Operator

Thank you. Our next questions come from the line of Josh Spector with UBS. Please proceed with your questions.

Speaker 12

Hi, good morning. I wanted to follow-up on polyurethanes. I think in the prepared comments you talked about getting back to normal in that segment. I guess what do you consider normal at this point? I guess if you get improvement to the second half, maybe your run rating around 400,000,000 dollars You have obviously some changes in the cost structure you alluded to.

Speaker 12

You're doing some cost savings. I guess what's the bridge back to normal at this point?

Speaker 2

Well, I think that the bridge to get there is going to be higher volumes and it's going to be higher pricing. But when I think of a normalized MDI market, I'm thinking of margins that are in the mid teens. This is a business that when it's running on all cylinders, and that is your splitters are sold out and you've got strong demand. You're probably looking at market conditions that you saw in 2022, time period of when you're looking at the very high teens and you're pushing 20%. But on a normalized basis, our urethanes business ought to be somewhere in the mid something just slightly north of 15%, 16% sort of EBITDA margins.

Speaker 2

But again, we're going to need both, again, demand and pricing to get there. That's

Speaker 12

helpful. If I could just ask quickly just on buybacks, you didn't do any in the quarter. I assume that's just because of working capital flows through the quarter versus

Speaker 5

the year, but how would you expect your plans around

Speaker 12

buybacks for the rest of

Speaker 2

think that we'll be assessing that on a quarter to quarter basis. And right now, we've I don't see us certainly in the Q2 and most likely in Q3 of doing share buybacks. But again, that's something the Board will be discussing and assessing on a quarterly basis.

Operator

Thank you. Our next questions come from the line of Matthew Blair with Tudor, Pickering and Holt. Please proceed with your questions.

Speaker 5

Hi. Thank you and good morning. Peter, you mentioned that you're looking for bolt on acquisitions in ADMAT. Are there specific end markets where you're looking to get more exposure? So for example, are you looking to increase your aerospace exposure or are you looking for perhaps more diversification?

Speaker 5

I think that we'd be

Speaker 2

that that we have the chemistry to be able to do something that is unique. I like to think, I mean, when we look at opportunities for acquisitions, I like to ask the question around what can we do that private equity can't do. Our recent acquisitions, as we look at the Gabriel acquisition, the CBC acquisition, these were great acquisitions. The previous owners were great companies, but we had an opportunity to globalize the applications to integrate into our existing footprint. And they didn't really go into any one specific downstream application as much as they I'd say there was more of a horizontal growth.

Speaker 2

We went out rather than up and down on that integration. So I think where we can continue to bring technology, to bring globalization and to bring downstream applications and uniqueness to our customers, solutions to our customers, we're going to be focused on those. But no, we don't have a specific where we're saying we're going to put a greater emphasis on aerospace, for example.

Speaker 7

Sounds good. And then could

Speaker 5

you talk about your MDI supply expectations for the next few years? There's been some reports that Wangwha is starting up a new 400 kt expansion quarter. Is that in line with your expectations? And are there any other big projects on the docket for the rest of this year or into 2025?

Speaker 2

Yes. I think after that expansion from Wahgnwa comes on, I'm not sure that there's a whole lot of capacity coming behind that. But look, I mean, Wano is going to do what they're going to do. But I mean, as I look at it, the Chinese market continues to be a good market for us. Demand is continuing to modestly grow and pricing continues to be pretty sticky.

Speaker 2

And so I don't see any new capacity coming on in North America or Europe. If anything, I question if everything ought to be operating in those 2 market segments. But as you look outside of China, there's nothing coming on.

Operator

Thank you. Our next questions come from the line of Mike Harrison with Seaport Research Partners. Please proceed with your questions.

Speaker 5

Hi, good morning. Another question for you on the spray foam opportunity. I was wondering if you could talk about progress that you're making on some commercial inroads in Europe and in Asia. You mentioned that maybe there are some opportunities in building insulation in China and just curious how you're positioned there?

Speaker 2

Yes. This is going to be an area that we're going to continue to put a lot of emphasis on. And you look just beyond Asia, you look specifically in Japan and some of these other areas, the Middle East, we're seeing stronger growth there than in other areas of those regions. I see this as a real opportunity. And as you think around the either the high cost of energy as in the case of Japan or in the Middle East where there's just a lot of new construction that's going on.

Speaker 2

These are both prime areas of opportunity for us. I should emphasize that as you look at the vast, vast majority of that business is North America, Canada and the U. S. Related. We are going to see growth in Europe and Asia, but the health and the vitality of that business is going to be dependent on North America.

Speaker 5

All right. And then a question for Phil, and I apologize if this is a stupid question, but was curious if you can give us some color on the special items, the gain on acquisition of assets and the prepaid asset write off. What were those two items and were they related to each other?

Speaker 7

They were related to each other, Mike. You're quite right. That was all related to the closing of the slick transaction, the slick restructuring that we did. And you'll see a number of 71, you'll see a number of 52. There's also a number of 18 on tax.

Speaker 7

And when you net all those together, you get virtually a no movement whatsoever on net income. So it all relates to the transaction with minimal impact to net income.

Operator

Thank you. Our next questions come from the line of Arun Viswanathan with RBC Capital Markets. Please proceed with your questions.

Speaker 14

Great. Thanks for taking my question. So I just wanted to come back to the discussion around normalization of some of these markets. So if you think of maybe the first half around $200,000,000 plus of EBITDA and maybe the second half above that, you're kind of tracking around $450,000,000 $500,000,000 And I think in the past, your peak EBITDA was around $1,400,000,000 If you remove some textiles, maybe you're down to $1,300,000,000 So is that the right range you're kind of thinking of? And so if you think about that going from $450,000,000 to $500,000,000 to maybe $800,000,000 or $900,000,000 in the mid cycle.

Speaker 14

Is that maybe 2 thirds volume and maybe 1 third price? How would you kind of frame that trajectory?

Speaker 2

I'm not sure, Arun, that you're off that much in any one area. I do think that maybe you're going to see a little more pricing. You said you're kind of a third, 2 thirds, 1 third on price and volume. I think it's got to be probably pricing just has to occur here. We need to be able to get traction to offset higher raw material prices and margin recovery.

Speaker 2

Volume is only going to take so much of that. So we need the volume to get the price. That's got to come first. But I would be the optimist that I am. I hope that we would do better in 'twenty four.

Speaker 2

I hope that we have a stronger second half in 'twenty four. But having said that, since you look at kind of your mid cycles peak and where we are today, no, I don't think you're too far off.

Speaker 9

Great. Thanks for that.

Speaker 14

And then just going back to the question of portfolio. Arguably, despite some maybe improving markets here, the cost position in Europe is probably not necessarily going to get materially better. So would you be in a position to maybe reconsider some exits in Europe at some point in the future? Obviously, we have seen some announcements in certain areas by some of your competitors already. So just wanted to get your thoughts on that.

Speaker 2

No, I think that as we look at Europe, look, I'm concerned about a lot of things in Europe, but I'm mostly concerned about high energy prices in the high regulatory environment. As I look at the high energy cost, most of our businesses in Europe are not terribly energy intensive assets. So again, I maybe have some concerns around the macro picture, but of our individual assets. I think that by and large, they're competitive. I look at Advanced Materials and that continues to be a very strong business for us with we see stronger margins in Advanced Materials than we do in the other areas of the world.

Speaker 2

And between Europe and APAC, we have a much larger business in Europe than we do APAC. So again, if you're in the right segments, aerospace, adhesion, light weighting, you're going to do okay in Europe. If you're in energy intensive and you're producing fertilizers, which we're not, glass and things cement, things are going to be energy intensified. I think you've got some real portfolio concerns there. So the cost competitiveness of Europe versus North America and Asia right now in polyurethanes does not warrant the movement of large scale shipments to be moving around the globe at this time.

Speaker 2

So this is obviously, that's where we were a year ago. We're not there today. I think energy prices are still too high in Europe. I don't think they're adequately being addressed by the governments there. I don't think they have a realistic policy to address those things.

Speaker 2

But I don't see that as being bad enough to force an exit.

Operator

Thank you. We have reached the end of our question and answer session. And with that, that does conclude today's teleconference. You may disconnect at this time. Thank you for your participation and have a great weekend.

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Earnings Conference Call
Star Equity Q1 2024
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