Huntsman Corporation Q3 FY2025 earnings call

• Market conditions: Facing challenges in the U.S. economy, China consumer confidence, and Europe deindustrialization.
• Dividend: Board deliberates on dividend distribution considering market conditions, prioritizing balance sheet preservation.
• Cost reduction: On track to complete the $100 million cost reduction program, with efforts continuing through 2026.
• Cash management: Delivered $200 million operating cash in Q3 and has over $100 million in year-to-date free cash flow.
• Supply chain: Adjusting in Europe, closing the Moers maleic facility and sourcing from the U.S. for better margins.
• Business focus: Performance Products division managing inventories, Advanced Materials in aerospace, automotive, and electronics showing potential.

Huntsman is focused on calibrating its cost structure to market realities. It is on track to complete a $100 million cost reduction program, including closing 7 sites and relocating over 600 positions, mostly in Europe. The company generated $200 million in operating cash in the third quarter and has over $100 million in year-to-date free cash flow. The Performance Products division is managing inventories, with the maleic anhydride business in North America being a strong point but facing challenges in Europe due to excess Chinese capacity.

• Dividend: Board will consider increasing dividends when market conditions warrant.
• Cash flow: Expect continued focus on cash generation, with inventory reduction expected in Q4.
• EBITDA: Midpoint guidance for second half 2025 around $130 million, with cost reductions and inventory impact factored in.

• Europe manufacturing collapse risk, potentially affecting supply chains.
• Inventory management risks if demand doesn't pick up as expected.
• Market volatility in MDI and other product segments due to global trade and economic conditions.

Q: Just wanted to ask about the cash flow and the inventory reduction actions that you took during Q3. It sounds like your expectation is there's still some further inventory reduction that will happen in Q4 as you continue to focus on cash generation. My question is, though, what do these inventory reduction actions mean for your utilization rates, particularly in Q3, where you're running a little bit slower? And will that continue into Q4? I guess my question is, are you running slower now so that you can run harder potentially in the first and second quarter of next year?

A: We look at that on a -- literally on a product-by-product and division-by-division basis. So if you think where we'll be in the first quarter, we're typically starting to build inventories as you go into the second quarter, which is typically the beginning of your construction, housing seasons. Obviously, that's weather related and it's also demand related as people are looking to relocate into the summer months. And so you see a lot of buying activity pick up at the time. So typically, across the entire company, you will see inventories rise during that first quarter going into the second quarter in preparation of demand. Now if the demand doesn't necessarily build and I think 2025 was a good example of that, we really saw a very muted construction market, particularly in North America versus expectations. And you then see that partway through the second quarter, you've got too much inventory. Some of our products such as your MDI materials, not -- this doesn't apply to every single grade of product we produce but to the more commoditized materials in MDI polymeric and so forth, you can typically reduce that inventory by selling it into other markets, into other applications, even into export markets and so forth. I'm not going to say that's easy and I'm not going to say you can do that fairly quickly but you typically can take care of your inventories through proper management usually within 1 quarter or 2. Other products like your Performance Products, where you're producing amines that are going into catalysts, you're producing maleic anhydride that goes into unsaturated polyester resin, you've built up your inventory early in the year. And sometimes it will take you longer to reduce those inventories, fewer customers, fewer outlets and so forth to get rid of that inventory. And so you typically -- that will happen through the third and in our case with Performance Products through the fourth quarter. Now you've got a decision to make, you asked a very good question that do you reduce your production rates, thereby lowering your inventory so that you can meet production demand as you get into early 2026. I believe that we have an opportunity to see a modest recovery starting in 2026 but I'm not willing to bet our inventories on it. So let's go into 2026 with our inventories, I would say, lower than average, where we can calibrate our production to the actual demand as we see the demand. I think probably by and large, I can't speak for our competitors but probably as an industry after 2025 and the muted market -- the muted recovery that we saw in early 2025, the beginning of the construction season, I think that people will probably be cautious going into 2026. And therefore, I think that's why you're seeing a lot of companies right now focus on the working capital, focus on inventory reduction and perhaps putting their free cash flow and cash generation ahead of EBITDA. In the case of our MDI business, I believe our inventory levels, while not perfect, I believe that they are in the area where we want them. Performance Products, I believe they'll be there by the end of the year. And barring any huge change in demand one way or the other -- and so yes, in the fourth quarter, I think that as we look at Performance Products, in particular, I'm not very encouraged when I look at the EBITDA outlook for the fourth quarter but I do look at it as somewhat of a one-off because we are going to sacrifice some EBITDA to get rid of what I think is the last of that inventory. Sorry, that was a very long-winded answer but a very good question.

Q: Peter, in your opening remarks and over the past couple of years, you talked about the continued collapse of European manufacturing and you've already been quite proactive here with positioning your own footprint. I guess my question is, is there a risk that enough capacity leaves that it no longer becomes attractive for suppliers to support some of these industrial clusters, if there's enough links in the chain broken and perhaps maybe down the road, you need to evaluate your Rotterdam asset as well. So maybe just directionally comment on how you're thinking about the asset footprint for Huntsman specifically and that sort of tail risk to the industry or what's left of it?

A: Yes. And Patrick, what I don't want to do right now is try to predict too much of the future but it is something that we keep a very close eye on. We feel very confident that our first-tier suppliers that are giving us chlorine, giving us CO2, giving us our raw materials and so forth in Rotterdam, in particular, our ability to import in benzene and so forth, we feel that, that is a very good position by what we see today. Now do I have inside information on what's going on? I don't. But we communicate with those first-line customers. You do bring up a very good point, though. What happens if a supplier of a supplier of a supplier, you can take that back 2 or 3 steps and you start looking at the refining infrastructure or you start looking at the pipeline infrastructure, is enough product going in to run the pipeline system. That may be something that is not only out of our control but out of the control of our suppliers and so forth. I don't foresee that happening in the near term. Is it something that could happen 2 or 3 years down the road? I'd be surprised to see it get that bad where you start seeing a collapse of these clusters. I genuinely think that it'd be such an economic calamity that the government would probably step in on some of these things. But I'm just surmising. I try to get into the head of European bureaucrats, not only very nebulous but dangerous. So won't try to do that but I feel that at least for the foreseeable future for us for the coming years and so forth, Rotterdam is going to continue to be a low-cost European site. It's our -- feeds into our second largest MDI market. And I think that we have some work there to get that site more competitive on a global basis. We continue to work with our suppliers, with our partners, with our customers and looking at anything and everything that we can do on that site. But yes, I -- that's -- you bring up a very good point. It's something that we are in continuous discussions with our suppliers.