Q4 2022 Earnings Conference Call
February 21, 2023 10:00 a.m. ET
Ivan Marcuse - Vice President of Investor Relations
Peter Huntsman - Chairman, President and Chief Executive Officer
Phil Lister - Executive Vice President and Chief Financial Officer
Conference Call Participants
David Begleiter - Deutsche Bank
Aleksey Yefremov - KeyBanc Capital Markets
Kevin McCarthy - Vertical Research Partners
Jeff Zekauskas - J.P. Morgan
Mike Harrison - Seaport Research Partners
Frank Mitsch - Fermium Research
Arun Viswanathan - RBC Capital Markets
Matthew DeYoe - Bank of America
Mike Sison - Wells Fargo
John Roberts - Credit Suisse
Josh Spector - UBS
Hassan Ahmed - Alembic Global
Greetings and welcome to the Huntsman Corporation Fourth Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the call over to, Ivan Marcuse, Vice President of Investor Relations. Thank you. You may begin.
Thank you, Darrel, and good morning, everyone. Welcome to Huntsman's fourth quarter 2022 earnings call. Joining us on the call today are Peter Huntsman, Chairman, CEO and President; and Phil Lister, Executive Vice President and CFO.
This morning, before the market opened, we released our earnings for the fourth quarter '22 via press release and posted to our Web site, huntsman.com. We also posted a set of slides on our Web site which we will use on the call this morning while presenting our results. As a reminder, following the announcement of the sale of our Textile Effects business, we are now treating Textile Effects as discontinued operations in our income and cash flow statements and held for sale on the balance sheet.
During this call, we may make statements about our projections or expectations for the future. All such statements are forward-looking statements. And while they reflect our current expectations, they involve risks and uncertainties and 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 to publicly update or revise any forward-looking statements during the 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 Web site, huntsman.com.
I'll now turn the call over to Peter Huntsman, Chairman and CEO.
Thank you, Ivan. Good morning, everyone. Thank you for taking the time to join us.
Let's start out here on slide number five. Adjusted EBITDA for our Polyurethanes division in the fourth quarter was $37 million. Significant destocking across our markets, specifically in Europe and North America, combined with competitive pricing and historically high energy costs placed unprecedented pressure on the Polyurethanes business throughout the fourth quarter. Overall sales volume in the quarter declined 22% year-on-year, and 9% sequentially. The Americas and European regions accounted for all the declines as lower demand and significant destocking significantly impacted sales volumes.
Our Asian markets, primarily China, did experience modest volume growth in the quarter due to slightly improved demand in insulation and automotive when compared to the fourth quarter a year ago. Europe demand remained subdued. And from our vantage point, we're still clearly in a recessionary economic environment. While energy costs remained historically higher, those headwinds have improved. This improvement will help to relieve some of the pressure on our European business as we move through the first-half of 2023. That said, falling costs and lower demand has triggered increasing pricing pressure on MDI, and that offset some of the benefit from lower natural gas prices.
As we indicated on our previous earnings call, we are restructuring our business in Europe to better reflect the high energy cost environment. In the short-run, we are also idling our smaller MDI line in Rotterdam for an extended period until end market demand improves. We have no intention of remaining an industry shock absorber as has been the case these past quarters. To be clear, Europe remains a core region for our Polyurethanes business. We will benefit for many years to come from the region's needed drive for improved energy conservation and efficiency. We remain well-positioned to bring energy saving solutions to both residential and commercial construction markets as well as innovative improvement to the lightweighting of automobiles.
There is some optimism that economic conditions and demand in China will improve as 2023 unfolds due to the removal of the Chinese government's Zero-COVID policies. How this optimism translate into increased consumer spending and industrial activity remains to be fully seen. Post Chinese New Year's, we are seeing early signs of improved conditions in pricing trends and moderate demand improvement in areas such as cold chain, infrastructure, and certain consumer-related markets including furniture. China is the world's largest MDI market accounting for approximately 40% of global capacity and demand. A steadily improving demand situation and potential economic stimulus would be a catalyst for our Polyurethanes business.
Lower propylene oxide margins in China drove our equity earnings lower year-over-year. Our joint venture contributed approximately $10 million in equity earnings for the quarter, below the $22 million reported a year ago. One of the greatest headwinds impacting our Q4 was, and continuing to challenge our Polyurethanes business is the high levels of destocking we've seen in our Americas region, and especially in our construction markets. Remember that two-thirds of our Polyurethanes Americas business goes into construction-related end markets, approximately half into commercial construction, and half into residential, of which 70% is related to new residential builds.
Our construction markets for composite wood products used in residential and non-residential insulation markets were under significant downward pressure throughout the fourth quarter. These trends have continued into the first-half of Q1 as we continue to see the impact of higher interest rates and their effect on downstream customer decision-making. We are hopeful that destocking in the Americas will ease as we move into the typically seasonally stronger months of March and April. Giving us some confidence in this regard is that our spray foam business, which was the first to see destocking last year, reported flat volumes year-over-year in the fourth quarter.
Our Huntsman Building Solutions spray foam business ended the year with $600 million of annual sales. While the housing market may endure a more difficult year than 2022 due to higher interest rates, we remain on the right side of energy efficiency drive, and we will benefit from both improved building codes and the government's Inflation Reduction Act. Another positive trend continuing to emerge for our Polyurethanes business is the modest but steady recovery we are seeing in our global automotives platform which saw 7% improvement globally in the fourth quarter, with every region seeing positive volumes during the fourth quarter. Approximately 15% of our Polyurethanes portfolio ended up in automotive in Q4.
As we announced last quarter, we are not waiting for markets to improve, but are taking decisive and proactive steps to make our company more efficient, stronger, better positioned for when the current challenging conditions abate. We discussed last quarter in the short-term in Polyurethanes, we have adjusted MDI production to match demand, we will continue to monitor and to adjust accordingly during 2023, both in Rotterdam and at Geismar to ensure that we aggressively manage our working capital with cash generation as our top priority. Furthermore, we are moving forward aggressively on the cost reduction plans we discussed last quarter. We are on track of delivering as planned.
This includes existing geographies that are not generating acceptable returns and consolidating additional back office functions. Most of these actions will be completed by the end of 2023, and it will lower the overall cost basis for Polyurethanes by at least $60 million. Looking forward into the first quarter, we expect to see improvement over the fourth quarter despite the typically seasonality and lighter quarter due in part to the Chinese New Year. We should expect continued destocking in the United States, but that destocking should moderate as we move through the quarter. Putting it all together as we sit here today, we expect Polyurethanes adjusted EBITDA to the first quarter to be in the range of $55 million to $65 million.
Let's turn to slide number six, Performance Products reported adjusted EBITDA of $61 million for the fourth quarter, which was a healthy 20% margin despite destocking headwinds that exasperated the typically seasonality that we see in the fourth quarter. The decline in adjusted EBITDA versus the prior year was driven primarily by a 32% decline in volumes year-over-year, but that was partially offset by a 23% improvement in unit variable margins owing to our commercial excellence initiatives and market dynamics. The volume decline in turn was driven primarily by lower demand and aggressive destocking in construction, coatings and adhesives, and industrial-related markets mostly in the Americas and European regions.
We have seen signs that destocking appears to be moderating, but global demand remains muted, and customers are keeping inventories low as they wait for improved visibility. As we mentioned, even with these macro challenges, we were able to deliver EBITDA margins within our long-term expected range. These returns are due in large part to our ongoing commercial excellence program and attractive industry dynamics we pointed to over last year, as well as good cost control. Maleic anhydride and our high molecular weight ethyleneamines continue to offer strong returns despite a slowdown in end market volumes. As indicated on prior calls, we have seen significant pressure on returns in amines into our China and European wind businesses.
And it remains to be seen whether the Chinese and the E.U. governments' public stance for more renewable energy will come to fruition and drive improvements. Our remaining amines portfolio in Performance Products is fragmented and highly diverse, and will benefit us both in the short and long-term. Capital investments in our differentiated performance amines serving insulation, EV battery, and semiconductor markets continues to move forward on schedule. As we've stated in the past, assuming stable macro conditions, we expect these projects to start up in 2023, and deliver more than $35 million of EBITDA once they are fully ramped up, and the respective markets return to a more normalized level of demand.
Performance Products remains a highly attractive division in our view. And we continue to prioritize strategic growth via organic investment and inorganic opportunities over the long-run. The first quarter is typically similar to the fourth quarter. The first quarter will face tough comparisons versus prior year due to lower overall volumes driven by destocking and the more challenging global demand environment. However, we do expect to stay within our long-term EBITDA range of 20% to 25%. And we expect Performance Products' first quarter adjusted EBITDA to be in the range of $60 million to $70 million.
Let's turn to slide number seven. Advanced Materials reported adjusted EBITDA of $41 million in the quarter, which is below the fourth quarter a year ago due primarily to lower sales volumes, improved pricing and mix helped keep EBITDA margins only modestly below the prior year. Despite the fourth quarter decline, for the full-year of 2022, Advanced Materials registered its best ever year, and adjusted EBITDA margins were 18%, a 120 basis point improvement over 2021. The sales volume decline of 28% was due in part to our existing of lower margin commodity-type product lines.
Excluding our deselection of certain product lines, our core specialty volumes declined less than the segment average, with much of the drop attributed to destocking in several of our industrial-related markets, primarily in the Americas and Europe. Total sales fell less than volumes due to favorable pricing and mix, which helped improve our unit margin by over 20%. Our Aerospace business continues to demonstrate improving trends and increased almost 20% compared to prior year. We expect these trends to continue through 2023, and beyond as wide-body production rates improve and airlines continue to increase orders, our expectations remain that this important and profitable sector will return to pre-pandemic levels in 2024.
Automotive revenues in the divisions increased 7% compared to the prior year as sales benefited from improvement in global supply chains combined with continued favorable trends in lightweighting and growth of electric vehicles. Like in other divisions, continued destocking and cautious customer ordering patterns are weighing moderately on sales in the early part of the first quarter. In addition, we see continue headwinds in our European infrastructure coatings business and further destocking in our industrial markets specifically in the Americas. But remember that Advanced Materials has less than 10% exposure to worldwide commercial and residential construction market. We expect improved results in the first quarter in 2023 driven by our aerospace and automotive businesses as well as continued effective cost controls.
Combining all of this, we expect the first quarter adjusted EBITDA for this division to be in the range of $45 million to $50 million with higher EBITDA margins than we saw in the fourth quarter.
I'll now turn the time over to our Chief Financial Officer, Phil Lister. Phil?
Thank you, Peter. Good morning.
Let's turn to slide eight. Adjusted EBITDA for the quarter four was $87 million compared to $327 million in quarter four of 2021, and $271 million in quarter three of 2022. A decline over the prior year was driven by reduced volumes across our portfolio as well as lower unit margins in our Polyurethanes division. Sequentially, volumes declined by 14% driven by the significant destocking in Europe and in North America.
Seasonally, we would normally expect to see a sequential volume decline of approximately 5% across our portfolio. As a reminder, about 40% to 45% of our overall portfolio is linked to worldwide construction by commercial, residential, and infrastructure spend. Unit margins in Performance Products and Advanced Materials improved both year-on-year and sequentially with pricing remaining firm.
Polyurethanes unit margins declined as weakening demand led to price erosion in the fourth quarter while cost of sales increased year-on-year by over $500 million annualized driven by a significant increase in energy costs and raw materials. For the full-year Huntsman's raw material cost increased by approximately $1 billion. Of which, approximately half was as a result of increased energy cost.
SG&A cost will lower by $19 million year-on-year as a result of our cost optimization program. We closed the year at 9% SG&A to sales and improvements on 2021 and ahead of our Investor Day commitments. Year-on-year foreign exchange movement impacted the business by approximately $20 million with a stronger U.S. dollar compared to quarter four of 2021. We also saw a decline in our equity earnings from our China propylene oxide joint venture with lower demand in China facing pressure on margins. Adjusted EBITDA margins declined to 5% in the quarter driven by Polyurethanes at 3% while Performance Products and Advanced Materials continued to deliver higher returns at 20% and 15% respectively.
Let's turn to slide nine. With our European restructuring, we have increased our cost optimization target to $280 million annualized run rate by the end of 2023. As a reminder, approximately half the savings are coming from SG&A reduction and half from cost of sales. We closed the year with an annualized run rate of approximately $190 million compared to $160 million at the end of quarter three. More specifically, for our European restructuring, we have completed the majority of works council discussions. We have some benefit from European restructuring late in the fourth quarter with some early headcount reductions.
The majority of reductions and reshaping of our footprint in Europe will occur during 2023 with a targeted annualized run rate of $40 million of savings by the end of the year. In addition, our move to a new global business service hubs in Poland and Costa Rica continues at pace with approximately one hundred positions already filled. As part of our continued focus on functional spend, we have also completed the handover of certain IT activity to a managed services third-party provider, saving approximately $15 million on an annualized basis
Within Polyurethanes, we continue to reduce headcount we work to align ongoing costs with current profit margins. In quarter one 2023, we will complete the previously announced exits from our Southeast Asia business, which will add to the already completed exit of our South American business in 2022....