Status Update

Jan 17, 2017

Good day, ladies and gentlemen, and welcome to the Huntsman Corp. Spin off Update Conference Call. My name is Emma, and 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. As a reminder, this call is being recorded for replay purposes. And now, I'd like to turn the call over to Mr. Curt Ogden. Please go ahead. Thank you, Emma, and good morning, everyone. I'm Curt 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 Esselin, Executive Vice President Strategy and Investment Sean Douglas, Executive Vice President and CFO and 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 and will reserve commentary regarding our fourth quarter for our earnings call which is scheduled for February 15. 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 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 and 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, Huntsman's President and CEO. Thank you, Kurt. 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 $350,000,000 of free cash flow in 2016 and reduce our debt by more than $500,000,000 over the next three years. Through the 2016 year to date, we generated $569,000,000 During 2016, we repaid approximately $550,000,000 of debt. We've been intensely focused on these objectives in 2016 and 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 $75,000,000 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 $75,000,000 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 February 15, 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 three. This morning, we announced the name of our planned spin off as 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 form a 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 1Q 'sixteen, we have implemented three consecutive quarterly price increases and captured approximately $300 per ton during 2016. We are encouraged by the improvement in CO2 pricing and expect momentum to continue into 2017. We have identified 75,000,000 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 $20,000,000 run rates by the 2017 and the full run rate by the end of twenty eighteen. Let's turn to slide five. Zenitor will be a robust business with a broad geographic presence. We will operate 27 facilities, employ approximately 4,500 associates, and sell our products in more than 110 countries. On a third quarter last twelve months 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 twenty sixteen. Additional information such as capitalization, additional pro form a 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 US with its principal executive offices expected to be in The UK. We plan to have 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. So why don't we go ahead and open the line now? Your first question comes from the line of John Roberts of UBS. Please proceed. You noted using the name the Hunter for the spin co and partly 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. And one of the objectives that we'll have of this business obviously will be to create shareholder value any way we can. So I certainly wouldn't preclude that. And then 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%, 16% EBITDA business. I would say though, however, if we look at the business segments that we are in today, of the business segments, as I kind of look within amines and molybdenum hydride and epoxies and so forth, the dyes and textile chemicals industry probably has the greatest opportunity for consolidation and M and transactions. So 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. So your next question comes from the line of Jim Sheehan of 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 'sixteen or beyond 'seventeen? It was '17. Okay. So, you know, we would see the pattern of increases that we saw in '16 continue into 2017. Beyond that, I think it's difficult to assume that we will be reaching, you know, we onward at those particular rates. I would see that 2017, you know, I would see it probably flat. From a profitability standpoint, Jim, you saw from 15 to 16 EBITDA double in this business. I think you should expect to see roughly doubling again 16 to 17 on a divisional Great. Basis. And 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. Our biggest 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. And 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. And I think that we're going to have greater optionality and value keeping it out. Thank you. Okay. So the next question comes from the line of Kevin McCarthy of Vertical Research. Please proceed. Hi, this is Matthew Dio on for Kevin. Good gentlemen. Good morning. Morning. Kind of wanted to ask you briefly if you could bucket the investment opportunities into the various components. How much of this $75,000,000 is coming from volume improvements versus optimized manufacturing footprints versus reduced fixed costs? Yes. Hi, Matthew. It's Simon here. The way to think about the 75,000,000 if you think about it, it's about a third, a third, a third. That's a good way to characterize that. Okay. And then so if I was to look at the, you know, these three drivers, you know, 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 eighteen months or so. So in terms of the fixed cost type of risk association, you're at a low single digit percentage of our spend here. So I would categorize the risk in that area is fairly low. Improvements in our optimizations relates to our manufacturing footprint relates to some actions that are already in train that aren't in our 16 numbers such as the closure of the Embargo and Sweeny facility. So again, lower risk in that area, certainly in the volume improvements market area. We contemplate a fairly nominal growth environment this next period, but we certainly got some product developments and introductions that will take us beyond market growth in some areas. So I'd say if you had to pin the risk in any of the three buckets that probably there you'd look at given the demand environment that we've seen at times in this industry. Yes, fair to say two thirds of this improvement is really within our control. And I think we've been proven at being capable of controlling the cost and reducing cost and improving the business operations. I think it's a fair assessment. Alright, thank you. Your next question comes from the line of Frank Mitsch of Wells Fargo. Please proceed. Good morning, gentlemen, and congrats on this step. I just want to follow-up on the last question regarding the $75,000,000 business improvement program. Simon, I know that when the Rockwood deal was announced, there was a bogey of $130,000,000 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 fifteen months, that number was around $2.00 5,000,000. I think if you looked at our recent 3Q earnings of '16, you'll see a year on year basis that those numbers showed up pretty clearly in those charts. So I'd like to represent you that pretty much you know, 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, you know, we will report in 2016. So I think, you know, 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 time frame that we've identified in our materials today. Terrific. Thank you. The next question comes from the line of Hassan Ahmed of Alembic Global. Please proceed. Good morning, gents. In your earlier sort of to answer one of the earlier questions, you talked about good pricing appreciation through the course of 2017 on a year over year basis and then 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? And as a follow-up to that, if you compare where current could you sort of do a compare and contrast of where you see current TiO2 cash margins and how they compare to where you see current replacement value? Yes. I think on the current replacement and the current margins, I think we'd probably like to hold off on until our earnings call. But as far as the longer term trends we see in pricing, Simon? Yes. And the question relating to the operating rates, we see recent operating rate around the mid-80s, 85, 86% hydro zone. And Simon, I think TZMI has been clear that 2016 they estimated growth of 6% and supply grew about 3%. So a tightening of that utilization rate in the year. Thanks, Kim. Fair enough. Now in terms of just obviously we'll be a cyclical company. I would imagine a dividend at some stage and the like. But 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, but just how you're thinking about in the next sort of one, three, five year time horizon to utilize the cash that you guys will be generating? Because 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 the for the new Board of Directors of Benator to determine. But I would imagine that the number one priority of cash generation on this business will be debt reduction and making sure that during the times of fees 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 Geoff Zekauskas of JPMorgan. Please proceed. Thanks very much. How much of your titanium dioxide production is in The UK? And are the currency movements, you know, assisting you and, you know, leading you to a stronger outlook? Yes. I'll pick up on that, Jeff. Our Grieffen facility is our only tier two facility, you know, in The United Kingdom. And that's about 17% 17% of our total output. And as you point out, of course, the, you know, weakening pound and, of course, that has a bit of a a moving situation, you know, certainly giving a bit of a window system that facility. In terms of the $75,000,000 in incremental profit that you see, what are the incremental costs of that that is exclusive of raw materials? Is you have some kind of cost reduction effort. What might that cost you? Yes, I think the way to think about it Jeff is typically we've looked at a one on one kind of like 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, you know, two thirds of the 70 five-fifty. So even thinking about a 50 cost to capture. And then lastly, think earlier you said something like 25 would come in year one and fifty in year two. Why are the benefits so back end loaded? Why shouldn't it be larger in '17? Well, you know, think that what we said is that we'd be running in excess of 20,000,000 at the end of 2017. That's right, 20 Yep. But, you know, the reason it's back end loaded, clearly the volumetric piece, you know, you think about that probably spread fairly evenly. We don't see 'seventeen as being, let's just say, a vintage demand year. We see growth being relatively nominal. So that's a good reason you see a little bit more back end loading in 'eighteen and 'seventeen there. And certainly, some of the line items, there's a fairly long fuse time set up cost to run through these programs, particularly when you're talking about planning of fixed cost and installation of projects and so forth. Then that's not a quick run rate. And as you can imagine, the areas which work with those areas we attacked fulsomely during the Rockwood integration. I hope that helps you think about the more backend loaded of it. Yes. 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 governments 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. So 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 this timetable numbers. Jeff, if I can just add to that, as we think about some of the EBITDA benefits coming towards the end of that timeframe as time discussed, The cash expenditures are going to come earlier towards the front end of that. So as you think about modeling, is that $50,000,000 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 Uffy Fischer of Barclays. Please proceed. Yes. Good morning. First question is just what's the cash call in this business going to be, let's say, over the next three years? So capital expenditures relative to the last couple of three years, higher, lower, the same? And then 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 $175,000,000 facility. I think you're asking what is the normalized capital per year? I think you should think about it as roughly $90,000,000 of annual capital. And there's relatively little environmental here and it's not large enough I don't even think to model. Okay. And then the $75,000,000 cost improvement program, is that incremental to the $400,000,000 of normalized or that's now part of the $400,000,000 of normalized? I would say the way to think about that is part of the road to normalize and maybe expediting that part. And then 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. So I yeah. Well, I guess if the Chairman speaks, we'll believe him. Thanks, guys. We'll yes, I think it's fair to say that in the next filing or two in the Form 10, we'll be announcing Board members and a more fulsome Board than just Simon and me. So that would be kind of be a fun We're meeting you about the same as the old person. 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 that, you know, the Form 10 doesn't have any real specifics yet, but maybe some high level thoughts on how you plan to capitalize the spin co loans And maybe more so, you know, how would you think about leverage as it relates to LTM and the normalized kind of ranges? You know, what would you guys be communicating to investors in terms of leverage multiples on what EBITDA? Yes, 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 twelve month basis or a normalized basis, that's a much lower leverage multiple and should, you know, look pretty good going forward. So Huntsman Corporation is, you know, roughly 3.5 times leveraged right now. Just to follow-up on that, it sounded like you would lever it based on more like the LTM at that ratio within the improvement in normalized hoping to drive that number down below? Yes, not only the trajectory of sort of the price increases and, you know, the next twelve months is going to be better than the last twelve months undoubtedly at that point in time, plus the benefits of the 75 that Simon was talking about. Sure. And then just one last one for me. You know, your slides point to upcoming meeting with the agencies, guess, what would you be thinking on the ratings front? And maybe as a follow-up to John's question at the beginning, is the potential for further industry consolidation, I guess, change how you think about the starting balance sheet? 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, you know, single B to a weak double B kind of race. And in terms of flexibility, I think as noted earlier in the call, my guess is that the business is going to pay off debt very quickly. It's going 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. And the next question is from Richard O'Reilly of Revere Associates. Please proceed. Hi. I just a 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. So the vote so that's different from the voting power. The voting power would be has to be less than 20% to be tax free, not the okay. Alright. That's right. And we are we 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, but the name also has something to do with Star Wars, a type of battleship in the movies. Okay. Thank you. Well, it's true. I I I this is Peter. I I I'm not a Star Wars fan. I'm a truckie. And so it's it's I'd be very leery of that. So I that's not where the name came from. I think it had something to do more with Vulcans and KLEONs. Thank you. Good day. Thank you. 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, have you stated what the company costs are likely to be for Aventador? We have not yet. We would expect to include that in subsequent amendments to the Form 10. So you should expect to see some more information in the coming months regarding those stand alone company costs for Venator. Thank you. 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.