Good day, ladies and gentlemen, and welcome to the Huntsman Corporation Spin-off Update Conference Call. My name is Emma, I will be your operator for today. At this time, all participants are in listen only mode. We will conduct a question and answer session toward the end of this conference. If at any time during the call you require assistance, please press star 0 an operator will be happy to assist you. As a reminder, this call is being recorded for replay purposes. Now I'd like to turn the call over to Mr. Kurt Ogden. Please go ahead.
Thank you, Emma, good morning everyone. I'm Kurt Ogden, Huntsman Corporation's Vice President of Investor Relations and Finance. Welcome to our conference call this morning, the purpose for which is to provide an update on our previously announced spin-off. Joining us on the call today are Peter Huntsman, President and CEO. Kimo Esplin, Executive Vice President, Strategy and Investment. Sean Douglas, Executive Vice President and CFO, Simon Turner, Division President, Pigments. This morning before the market opened, we posted a set of slides on our website, which we will use on the call this morning. On this call, we intend to speak only to the materials provided will reserve commentary regarding our fourth quarter for our earnings call, which is scheduled for February 15th. During this call, we may make statements about our projections or expectations for the future.
All such statements are forward-looking statements, while they reflect our current expectations, they involve risks and uncertainties are not guarantees of future performance. You should review our filings with the Securities and Exchange Commission 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 the quarter. In addition, we will also refer to non-GAAP financial measures such as adjusted EBITDA, and/or adjusted net income or loss free cash flow. You can find reconciliations to the most directly comparable GAAP financial measure in materials that have been posted on our website at huntsman.com. I will now turn the call over to Peter Huntsman President and CEO.
Thank you, Curt. Good morning, everyone. Thank you for joining us. Let's turn to slide number two. Earlier this year, at our Investor Day, we laid out three primary strategic financial objectives for Huntsman Corporation. Our first goal was to deliver more than $350 million of free cash flow in 2016 reduce our debt by more than $500 million over the next three years. Through the third quarter 2016 year-to-date, we generated $569 million. During 2016, we repaid approximately $550 million of debt. We've been intensely focused on these objectives in 2016, this will continue to be a priority in 2017. Our second primary objective is to separate our titanium dioxide business. Our announced spin-off of the pigments and additives business is proceeding well. We filed an amended Form 10 this morning.
Due to strong pricing recovery for titanium dioxide and the identification of business improvement opportunities representing more than $75 million of annual EBITDA within our Pigments and Additives business, we have decided to retain the Textile Effects business. The Pigments and Additives business we plan to spin today is stronger and being launched at a better time than we had planned six months ago. The $75 million in business improvements are incremental to current earnings. Simon Turner, our future CEO of Venator, will provide more information regarding these improvements a little later in this call. Our third objective is to grow our downstream differentiated businesses. We are investing 70% of our capital expenditure on businesses such as MDI polyurethanes, amines, and epoxy resins. On the 15th of February, we will be announcing our Huntsman Corporation earnings.
For obvious reasons, we will not be making any comments on this call regarding Huntsman Corporation fourth quarter performance. Let's turn to slide number 3. This morning, we announced the name of our planned spin-off is Venator Materials Corporation. Venator is a Latin word for hunter or, and is intended in part to acknowledge our Huntsman legacy. We provided a profile of what Venator and pro forma Huntsman will look like after the spin. Venator will report earnings through two segments: titanium dioxide and Performance Additives. We think the additional transparency within this business will be helpful for the investment community. Huntsman Corporation and Venator will be industry leaders in their respective areas of operation with a diversified geographic footprint. We will have two great companies shareholders can invest in. Simon will cover the next few slides.
Thanks, Peter. Let's turn to slide four. Titanium dioxide prices have steadily improved during 2016. Since the trough in 1Q16, we have implemented three consecutive quarterly price increases and captured approximately $300 per ton during 2016. We are encouraged by the improvement in TiO2 pricing and expect the momentum to continue into 2017. We have identified $75 million in annual EBITDA business improvements. This is a combination of volume growth, manufacturing optimization, and fixed cost reduction.
These business-wide benefits are incremental to our 2016 earnings. We expect to achieve in excess of $20 million run rates by the end of 2017 and the full run rate by the end of 2018. Let's turn to slide five. Venator will be a robust business with a broad geographic presence. We'll operate 27 facilities, employ approximately 4,500 associates, and sell our products in more than 110 countries. On a third quarter last 12-month basis, our revenues are weighted more heavily towards Europe at 41%. North America comprised 26% and Asia Pacific 19%. Venator will be the world's largest purchaser of low-cost sulfate ores. We will also be the world's most differentiated pigments producer. Kimo will cover our final slide.
Thanks, Simon. Let's finish on slide six. The Form 10 amendment filed earlier today contains financial information updated through the third quarter of 2016. Additional information such as capitalization, additional pro forma information, and other matters will be provided in subsequent amendments to Form 10. We are targeting a spin towards the end of the second quarter, subject to market conditions. Venator is incorporated in the U.S., with its principal executive offices expected to be in the U.K. We plan to have Venator shares listed on the New York Stock Exchange using the ticker VNTR. We have previously indicated our intent to retain as much as 40% of an economic interest in SpinCo, in large part to capture the appreciation and value associated with an improving titanium dioxide cycle. We intend to use the monetization of our economic interest to repay debt.
In order for the spin-off to be tax-free, we will not retain more than 19.9% of the voting power. We will determine our retained ownership following receipt of a private letter ruling sanctioning the tax-free nature of the spin-off. Certain board members and executive management are also identified in the Form 10. With that, Kurt?
Thanks, Kimo. Emma, we're prepared to answer any questions, why don't we go ahead and open the line now.
Ladies and gentlemen, if you wish to ask a question, please press star followed by one on your touch tone telephone. If your question has been answered or if you wish to withdraw your question, press star followed by two. Press star one to begin. Please stand by for your first question. Your first question comes from the line of John Roberts of UBS. Please proceed.
You noted using the name The Hunter for the SpinCo in part reflects Huntsman's legacy. Are you specifically referring to your desire for further consolidation in the TiO2 industry there?
Who knows? I don't think it's any secret that in the past, we've endeavored to be part of further consolidation, one of the objectives that we'll have of this business, obviously, will be to create shareholder value any way we can. I certainly wouldn't preclude that.
Secondly, can we assume the textile business is still non-core even though it's being retained back in the new Huntsman?
Well, I'm not sure that I would say that it is non-core or ever has been non-core. The textile business, I believe that over the course of the next few years here, is going to be a mid-teens sort of a margin business for us. I would remind you that our objective a year or two ago was to bring this up to a double-digit margin business. I think that we've done that now. I think that we see a way forward to bring it up to 15, sort of a 15%, 16% EBITDA business. I would say, though, however, as we look at the business segments that we are in today, of the business segments, as I kind of look within amines and maleic anhydride and epoxy resins and so forth, the dyes and textile chemicals industry probably has the greatest opportunity for consolidation and M&A transactions.
I certainly, again, I would not say this is a non-core piece, but I think that we will continue to be exploring value-enhancing opportunities with our Textile Effects, including keeping the business and seeing further improvements in the business.
Thank you.
Okay, your next question comes from the line of Jim Sheehan, SunTrust Robinson Humphrey. Please proceed.
Thank you. Part of your outlook for the TiO2 spin is you've got strong pricing momentum, and you're talking about pricing being higher in the fourth quarter. How do you see the pricing environment beyond 2017?
Sorry, Jim, could you clarify? Did you say beyond 2016 or beyond 2017?
It was 2017.
Okay. We would see the pattern of increases that we saw in 2016 continue into 2017.
Beyond that, I think it's difficult to assume that we will be onward at those particular rates. I would see that in 2017, I would see it probably flatline.
From a profitability standpoint, Jim, you saw from 2015 to 2016, EBITDA double in this business. I think you should expect to see roughly doubling again, 2016 to 2017, on a divisional basis.
Great. Then in terms of the rationale for having Textile Effects as part of the spin, you previously talked about having flexibility in terms of pursuing strategic alternatives for that business. How do you see that flexibility changing now that you're going to retain Textile Effects?
I think that we'll have even greater optionality keeping that as part of Huntsman Corporation and not involving that with the spin. The biggest reason that we saw putting Textile Effects in with the Pigments business was to kind of bridge it until we saw the earnings get to a point where the business would really be on a standalone, self-sustaining platform. I think that as we look at a combination of the business improvement plan that has been developed to date and the market momentum that we see, I just don't see a need for the Textile Effects business to be in Venator. I think that we're going to have greater optionality and value keeping it out.
Thank you.
Okay, the next question comes from the line of Kevin McCarthy of Vertical Research. Please proceed.
Hi, this is Matthew Dio on for Kevin.
Yes.
Morning, gentlemen.
Morning.
Morning.
Kind of wanted to ask you briefly if you could bucket the investment opportunities into the various components. How much of this $75 million is coming from volume improvements versus optimized manufacturing footprints versus reduced fixed costs?
Yeah. Hi, Matthew, it's Simon here. The way to think about the 75, if you think about it's a third, a third, a third. That's a good way to characterize that.
If I was to look at these three drivers, what could drive volatility to the upside and downside of each individual component? Where do you see the most risk? Where do you see the most opportunity?
Well, I think it's fair to say that, as you know, we came through the Rockwood integration and synergy capture these past 18 months or so. In terms of the fixed cost type of risk association, you're looking at a low single-digit % of our spend here. I would categorize the risk in that area as fairly low. Improvements in our optimization, as it relates to our manufacturing footprint, relates to some actions that are already in train that aren't in our 2016 numbers, such as the closure of the Umbogintwini facility. Again, lower risk in that area. Certainly in the volume improvements market area, we contemplate a fairly nominal growth environment this next period. We certainly got some product developments and introductions that will take us beyond market growth in some areas.
I'd say if you had to pin a risk in any of the three buckets, it's probably there you'd look at, given the demand environment that we've seen at times in this industry.
Yeah, fair to say two-thirds of this improvement is really within our control. I think we've been proven at being capable of controlling the cost and reducing cost and improving the business operations. I'd say it's a fair assessment.
All right. Thank you.
Your next question comes from the line of Frank Mitsch of Wells Fargo. Please proceed.
Good morning, gentlemen, congrats on this step. I just wanted to follow up on the last question regarding the $75 million business improvement program. Simon, I know that when the Rockwood deal was announced, there was a bogey of $130 million of synergies to be captured. Can you talk about that program, where you feel you hit or missed on that program, and any subsequent productivity programs in improving Venator's profitability?
Okay. Thanks, Frank. Just to comment on the first part of your question with Rockwood. You recall correctly, $130 was indeed the number we originally stated. By the time we got through that in 15 months, that number was around $205 million. I think if you looked at our most recent 3Q earnings of 2016, you'll see a year-on-year basis that those numbers showed up pretty clearly in those charts. I'd like to represent to you that pretty much we're through that program, and the way to think about this $75 we've announced today is a combination of fresh new measures, and it does include some already allocated measures. The point being that these are all incremental to anything we'll report in 2016.
I think I'll leave it for you to judge whether the execution record stands up, but I think that we feel good about this, and we believe we will deliver this in the timeframe that we've identified in our materials today.
Terrific. Thank you.
The next question comes from the line of Hassan Ahmed of Alembic Global Advisors. Please proceed.
Good morning, gents. To answer one of the earlier questions, you talked about good pricing appreciation through the course of 2017 on a year-over-year basis. An element of pricing plateauing out thereafter. Let me ask the question a bit differently. In terms of supply-demand fundamentals, how do you see supply-demand fundamentals in 2017 and beyond over the next couple of years? As a follow-up to that, could you do a compare and contrast of where you see current TiO2 cash margins and how they compare to where you see current replacement value?
Yeah. I think on the current replacement and the current margins, I think we'd probably like to hold off on that until our earnings call. As far as the longer-term trends we see in pricing, Simon?
Yeah. The question relating to the operating rates, we see recent operating rate around the mid-80s, 85%, 86% type of zone.
Simon, I think TZMI has been clear that the 2016 they estimated growth of 6% and supply grew about 3%. A tightening of that utilization rate in the year.
Got you. Thanks, Kurt.
In terms of just, obviously we'll be a cyclical company. I would imagine a dividend at some stage and the like, what's the thought process, just being a cyclical company and the like, I mean, is there some sort of thought given to maybe maintaining some sort of fixed payout ratio? I mean, just some sort of guidance. I know early days and the like, just how you're thinking about in the next one, three, five-year time horizon to utilize the cash that you guys will be generating. I'd imagine cash flow would rev up quite nicely as pricing picks up and supply-demand fundamentals tighten.
Well, I think on the dividend, that's going to be for the new board of directors of Venator to determine. I would imagine that the number 1 priority with cash generation on this business will be debt reduction and making sure that during the times of feast, that we're able to manage that balance sheet and keep that balance sheet as strong as we can. That's not to say that we will not have a dividend. It's to say that our priority is going to be maintaining a strong balance sheet.
Very good. Thanks so much, guys.
The next question comes from the line of Jeff Sikorski of J.P. Morgan. Please proceed.
Thanks very much. How much of your titanium dioxide production is in the U.K.? Are the currency movements assisting you and leading you to a stronger outlook?
Yes. I'll pick up on that, Jeff. Our Greatham facility is our only TiO2 facility in the United Kingdom, and that's about 16%-17% of our total output. As you point out, of course the weakening pound, and of course that has a bit of a moving situation. That's certainly giving a bit of a wind assist on that facility.
In terms of the $75 million in incremental profit that you see, what are the incremental costs of that? That is exclusive of raw materials. That is, you have some kind of cost reduction effort. What might that cost you?
I think the way to think about it, Jeff, is typically we've looked at a one-on-one kind of cost to capture ratio. As you know, as I stated earlier, the 75 isn't part of that volume. A way to think about it is two-thirds of the 75/50, so you're thinking about a 50 cost to capture.
Lastly, I think earlier you said something like 25 would come in year one and 50 in year two. Why are the benefits so back-end loaded? Why shouldn't it be larger in 2017?
I think that what we said is that we'd be running in excess of $20 million at the end of 2017.
Right. 20. Yep.
The reason it's back-end loaded, clearly the volumetric piece, you think about that probably spread fairly evenly. We don't see 2017 as being, let's just say, a vintage demand year. We see growth being relatively nominal. That's a good reason you'd see a little bit more back-end loading in 2018 and 2017 there. Certainly, in some of the line items, there's a fairly long fuse time to set up costs to run through these programs. Particularly when you're talking about planning of fixed costs and installation of projects and so forth, that's not a quick run rate. As you can imagine, the areas which were quicker, those are areas we attacked fulsomely during the Rockwood integration. I hope that helps you think about the more back-end loaded nature of it.
One of the things too that we obviously saw during the Rockwood was shutting down a facility isn't something you just pull the plug on and it takes place overnight. It's something that between working with the local government and magistrates and so forth and doing things environmentally sound and clean up and so forth. Also, if there's any reduction in workforce, proper notification, garden leave and so forth, those things can all take several months as well. I would just say that we will be attacking this aggressively as we can, and I would hope that we would be able to meet or exceed the timetable numbers.
Jeff, if I can just add to that. As we think about some of the EBITDA benefits coming toward the end of that time frame that Simon discussed. The cash expenditures are going to come earlier towards the front end of that. As you think about modeling, it's that $50 million of cash outflow. The bulk of that will be coming in 2017. That's not dissimilar to any other restructuring program that you'd expect to see.
Okay, great. Thank you so much.
The next question is from the line of Ufi Fisher of Barclays. Please proceed.
Yes. Good morning. First question is just, what's the cash call on this business going to be, let's say, over the next three years? Capital expenditures relative to the last couple, three years, higher, lower, the same? Will there be any major environmental remediation cash calls?
We've spent a lot of capital in the last few years simply because we were replacing SAP systems in Rockwood, and there was the Augusta facility that while there was a purchase price adjustment with Rockwood, it still flowed through post-close. That was a $175 million facility. I think you're asking what is the normalized capital per year? I think you should think about it as roughly $90 million of annual capital, and there's relatively little environmental here, and it's not large enough, I don't even think, to model.
Okay. The $75 million cost per improvement program, is that incremental to the $400 million of normalized, or that's now part of the $400 million of normalized?
I would say the way to think about that is part of the road to normalize and maybe expediting that process.
Okay. Just the last one. The thoughts around chairman of the board, will that be Peter, or how will that be handled?
At this point, it is expected to be Peter.
Okay.
That was Peter who was answering.
Yeah.
I guess if the chairman speaks, we'll believe him. Thanks, guys.
Yeah. I think it's fair to say then that the next filing or two in the Form 10 will be announcing board members and a more fulsome board than just Simon and me. That would kind of be a fun board.
Meeting you both, same as the old boss.
Terrific. Thank you.
The next question is from the line of Brian Lalli of Barclays. Please proceed.
Hey, gentlemen. I appreciate the two questions for Barclays in a row here. Maybe just real quick on the fixed income side, if I may. Appreciating the Form 10 doesn't have any real specifics yet, but maybe some high-level thoughts on how you plan to capitalize the SpinCo loans versus bonds, and maybe more so, how would you think about leverage as it relates to LTM and the normalized kind of ranges. What would you guys be communicating to investors in terms of leverage multiples on what EBITDA?
Yeah, sure. Great question. We are planning to capitalize Venator on a similar multiple in terms of leverage as Huntsman Corporation is. We've been saying to Huntsman Corporation shareholders, it should be sort of a leverage-neutral transaction on an LTM basis for us. Obviously, on a next 12-month basis or a normalized basis, that's a much lower leverage multiple and should look pretty good going forward. Huntsman Corporation is roughly 3.5x leverage right now.
Just to follow up on that, it sounded like you would lever it based on more like the LTM at that ratio with then the improvement in normalized, hoping to drive that number down below.
Yeah, not only the trajectory of sort of the price increases and the next 12 months is gonna be better than the last 12 months, undoubtedly, at that point in time, plus the benefits of the 75 that Simon was talking about.
Sure. Then just one last one for me. Your slides point to upcoming meeting with the agencies. I guess what would you be thinking on the ratings front? Maybe as a follow-up to John's question at the beginning, does the potential for further industry consolidation, I guess, change how you think about the starting balance? Would you want to give yourselves more flexibility as it relates to strategic options? Thanks for the time, guys.
Yeah. Listen, it's unclear as to where we'll come out in the ratings. My guess is it's gonna be a single B to a weak double B kind of range. In terms of flexibility, I think, as noted earlier in the call, my guess is that the business is gonna pay off debt very quickly. It's gonna have some flexibility going forward, but the initial focus will be to bring that debt down, to be able to really, in any kind of trough environment, be cash flow positive.
That's great. Thanks, guys.
The next question is from Richard O'Reilly of Revere Associates. Please proceed.
Hi. Quick question. I just want to understand that the spin would be tax-free even if the economic interest is greater than 20%. Is that correct?
That's correct.
Okay. That's different from the voting power. The voting power has to be less than 20% to be tax-free, not the Okay. All right.
That's right. We are in dialogue with the IRS to ensure that's the case.
Okay, fine. Second thing, I don't know who there is a "Star Wars" fan there, the name also has something to do with "Star Wars," a type of battleship.
Correct.
Okay, thanks.
It's true.
This is Peter. I am not a "Star Wars" fan. I'm a Trekkie, I'd be very leery of that. That's not where the name came from. I think it had something to do more with Vulcans and Klingons.
Thank you. Good day.
Thank you.
Emma, this is Kurt. Do we have any more questions in the queue?
Yes, we just have another one here. It's from Jim Sheehan of SunTrust Robinson Humphrey. Please proceed.
Hi, this is Matthew Stevenson on for Jim. Quick question. Had you stated what the standalone company costs are likely to be for Venator?
We have not yet. We would expect to include that in subsequent amendments to the Form 10. You should expect to see some more information in the coming months regarding those standalone company costs for Venator.
Thank you.
Yeah. We want to thank everybody for joining us on the call today. Of course, feel free to reach out to the investor relations team to the extent that there are additional questions, but thank you, everyone, for your time.
Thank you for your participation in today's conference call. This concludes the presentation. You may now disconnect. Good day.