Huntsman - Q2 2024
August 6, 2024
Transcript
Operator (participant)
Hello, and welcome to the Huntsman Corporation Second Quarter 2024 Earnings Call and Conference. At this time, all participants are in listen-only mode. If anyone should require operator assistance, please press star zero. A question-and-answer session will follow the formal presentation. You may be placed into question queue at any time by pressing star one on your telephone keypad. We ask you please limit yourselves to one question and one follow-up, then return to the queue. It's now my pleasure to turn the call over to Ivan Marcuse, Vice President of Investor Relations and Corporate Development. Please go ahead, Ivan.
Ivan Marcuse (VP of Investor Relations and Corporate Development)
Thank you, Kevin, and good morning, everyone. Welcome to Huntsman's second quarter 2024 earnings call. Joining us on the call today are Peter Huntsman, Chairman, CEO, and President, and Phil Lister, Executive Vice President and CFO. Last night, on August 5, 2024, after the U.S. equity markets closed, we released our earnings for the second quarter of 2024 via press release and posted it to our website, huntsman.com. We also posted a set of slides and detailed commentary discussing the second quarter on our website. Peter Huntsman will provide some opening comments shortly, and we will then move to the question-and-answer session for the remainder of the call. During the call, let me remind you that we may make statements that, 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 that 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 and expectations. We do not plan on publicly updating or revising any forward-looking statements during the quarter. We will also refer to non-GAAP financial measures such as Adjusted EBITDA, Adjusted net income, and free cash flow. You can find the reconciliations to the most directly comparable GAAP financial measures in our earnings release, which has been posted to our website at huntsman.com. I'll now turn the call over to Peter Huntsman, our Chairman, CEO, and President.
Peter Huntsman (Chairman, CEO and President)
Ivan, thank you very much, and thank you all for joining us this morning. I find myself in a rather precarious place this morning, as I usually prepare some opening comments the afternoon before these calls. Within the last 24 hours, swords have been rattling in the Middle East, triggering massive potential for raw material volatility. Over the past few hours of trading, $ trillions, JPY trillions, EUR trillions, and RMB trillions have been wiped out, and consumer confidence has been reforecasted more times in the polling data for the upcoming presidential election. All of that being said, after 5 quarters in the chemical industry of massive inventory adjustments, plummeting margins, and a tidal wave of Asian-based oversupply, these most recent events seem quite calm. Our cost initiatives that have been ongoing for the past 3 years are paying off as we've stayed ahead of inflation.
Our focus on cash generation delivered over $50 million of cash flow from our operations in the second quarter. As we outlined plans in the previous earnings call, our volumes year-over-year and quarter-over-quarter were up across the entire business by 9% and 8%, respectively. This volume improvement took place as we were able to increase margins and earn what we projected from our previous call. While I continue to be concerned with Europe's highly successful policy of de-industrialization and excess chemical capacity flowing out of Asia, the single largest catalyst for margin improvement for Huntsman would be a resurgence of commercial and residential construction demand. This will not fully happen until its interest rates drop below their current levels. I believe that events in the past few weeks have increased the likelihood and timing of a rate decrease.
Presently, third quarter order patterns seem flattish to the second quarter. We remain cautious regarding the second half of the year. At the present time, it is simply too early to have a clear picture of the fourth quarter. That being said, inventory in the supply chain remains low. Our construction, aerospace, infrastructure, power, and elastomers businesses continue to improve. We will stay focused on costs, and cash management is our priority. With that, let's open the line up for any questions.
Operator (participant)
Thank you. We'll now be conducting a question-and-answer session. As a reminder, we ask you, please ask one question, one follow-up, then return to the queue. If you'd like to be placed in the queue, please press star one at this time. If you'd like to remove yourself from the queue, please press star two. One moment, please, while we poll for questions. Our first question is coming from Michael Sison from Wells Fargo. Your line is now live.
Michael Sison (Managing Director and Senior Equity Research Analyst)
Hey, good morning. Nice quarter there, Peter. In terms of MDI industry operating rates, I think last quarter you noted that, you know, we were at the cusp, potentially, of getting, you know, better pricing. I think you said operating rates are in the mid-eighties. Any thoughts of where we're at now in July and how that, how you think that's gonna shape up as we head into the rest of the second half?
Peter Huntsman (Chairman, CEO and President)
Yeah, it's somewhat of a squishy number because there's not a lot of reliable data that's transmitted in real time. I would say that we probably have seen a few percentage points drop in Europe, probably a few percentage points tightening in Asia, and the Americas basically I'd say stayed flat since the second quarter. I'd say that in the second quarter, first going into the second quarter, we were probably in the mid-80s, on the weak mid-80s, and I think now we're probably still in that mid-80s, but perhaps a few points stronger. Overall, I think trending in the right direction, but moving along ever so slowly.
Michael Sison (Managing Director and Senior Equity Research Analyst)
Got it. And you know, you did mention if there is an improvement in construction demand longer term, it's the big- the most important earnings driver for Huntsman. Any thoughts where you think you've had a lot of cost savings, where you think polyurethanes EBITDA can get back to in the event that hopefully demand resurges over time?
Peter Huntsman (Chairman, CEO and President)
Well, I certainly see, you know, given that if we get back into kind of that normalized construction, that we're looking at the mid- to upper mid-teens sort of margins with polyurethanes across the board. You know, that will require, I think, three basic things to take place. I believe that China will have to see a little bit stronger growth than we've seen in the last year or two. We'll have to see Europe at least start to get some traction, and you know, in a low sort of percentage growth rate in an industrial basis. Kind of remember that they need to be moving from a tourist economy back to some element of an industrial economy.
And then the US, which I feel is in a recovery phase right now, we need to see that housing come back. Those three basic things take place, I think you see urethanes back into that mid-teens plus sort of margin basis.
Operator (participant)
Thank you. Next question today is coming from Jeff Zekauskas from J.P. Morgan. Your line is now live.
Jeffery Zekauskas (Managing Director and Senior Equity Research Analyst)
Thanks very much. Your volumes were up, you know, 8, 8 or 9%. Your inventories were down about 10%. Why is that?
Peter Huntsman (Chairman, CEO and President)
I think that we've tried to manage cash as carefully as we can. We did have a plan, as we announced, 3 and 6 months ago, to try to recover some of our volumes that we had lost. I don't think through error, but we certainly lost some volumes a year ago trying to hold on to pricing and demonstrate pricing discipline. We did give up some of the larger, particularly around insulation, composite wood, some of the more polymeric commodity sides. We also saw a lot of de-inventorying that took place in elastomers, industrial applications, and so forth. So we've gotten some of that volume back. We've seen some regrowth taking place in some of those applications, and we have seen a lot of the de-inventorying taking place.
So I think it's just a capital discipline around supply and demand in production.
Phil Lister (EVP and CFO)
Jeff, just on the numbers, our volume in inventory is down 4% overall. You're correct, if you calculate that on a DIO basis, we're down about 10%, and as Peter says, that's just a real focus on our inventory levels that we have right now.
Jeffery Zekauskas (Managing Director and Senior Equity Research Analyst)
Do you think your working capital will be a use of cash this year or a benefit to cash on balance?
Phil Lister (EVP and CFO)
Yeah, I think, Jeff, that's gonna come down to revenues in the final quarter. I think we'll control our inventories pretty well. I think in general, those will offset with payables as we get to the end of quarter four. And I think it's gonna come down to receivables and just the level of activity that we see in quarter four this year versus last year. And as we said in the prepared remarks, we've probably got about $100 million of year-on-year free cash flow benefits outside of any movement that we see in working capital, and that's our focus.
Peter Huntsman (Chairman, CEO and President)
Well, I will just note, in addition to that, the lack of de-inventorying that we're seeing this year versus last year is giving us a little bit better predictability in supply and demand of orders and so forth.
Operator (participant)
Thank you. Our next question today is coming from Patrick Cunningham from Citi. Your line is now live.
Patrick Cunningham (Vice President and Senior Equity Research Analyst)
Hi, good morning. So the polyurethanes guide is, you know, calling for flattish EBITDA quarter on quarter, despite maybe $50 million-$20 million in discrete headwinds and relatively stable volumes. How should we think about, you know, variable margin improvement throughout the quarter, and if there are any particular regions you wanna call out that, you know, might be stronger than others?
Peter Huntsman (Chairman, CEO and President)
Yeah, I think it's largely going to be flat. I mean, there'll be some give and takes. You know, we experienced an outage in our Rotterdam facility, in which we're just now starting to restart the facility and coming back online. We've got to rebuild some inventory there. We'll see a little bit of headwinds on the Chinese joint venture that we have around propylene oxide. And you know, we hope to see some volume growth and pricing momentum that continues into the third quarter, and I think some of that's gonna be offsetting each other, a little bit of seasonality. That'll mostly be taking place in Performance Products in the third quarter.
So yeah, I think a lot of give and take, as I said in my prepared remarks. It's probably gonna be pretty flattish.
Phil Lister (EVP and CFO)
Well, one item to consider, Patrick, on the bridge for polyurethanes from Q2 to Q3, we will aim to have an inventory build towards the back end of quarter three. We've got a turnaround in the fourth quarter, that will necessitate some inventory build, which will give us a one-time benefit on EBITDA, which will reverse out. Well, that's probably between $5 million and $10 million, which will reverse out in the fourth quarter.
Patrick Cunningham (Vice President and Senior Equity Research Analyst)
Understood. Very helpful. Then, you know, with price mix down 10% year-on-year for Advanced Materials, were there any areas of structural pricing pressure, or was this mostly mix impacts? And if you have any detail on how we should think about it for the balance of the year, that would be helpful.
Peter Huntsman (Chairman, CEO and President)
I think that virtually all of that is mix. Demand trends continue to be very strong in Advanced Materials, very solid, and we're seeing the gradual recovery of aerospace. I do mean gradual, because there continue to be plagued with some supply issues in aerospace, but by and large, it's been a very consistent and very reliable end of the business.
Operator (participant)
Thank you. Next question is coming from Vincent Andrews from Morgan Stanley. Your line is now live.
Vincent Andrews (Managing Director and Senior Equity Research Analyst)
Thank you, and good morning. Peter, in your, your prepared remarks, you made a comment that lower interest rates, you're not so sure would actually improve your operating environment in Europe. I was wondering if you could just color that in a little bit.
Peter Huntsman (Chairman, CEO and President)
No. Okay, well, maybe I meant that, that came out a little bit backwards. I think the lower interest rates are going to particularly impact North American construction, housing, commercial construction, so forth. I do think that lower interest rates will impact Europe. I just don't believe that it will be nearly as material to the bottom line. We certainly welcome that in Europe, but I don't think it's gonna be nearly as material as it will be in the United States.
Vincent Andrews (Managing Director and Senior Equity Research Analyst)
Is that just a function for you of your exposure being larger to building and construction in the U.S. versus Europe, or is there something else that that's causing that too?
Peter Huntsman (Chairman, CEO and President)
Yes. Yes, and I think as we look at and we track multifamily, single family, construction, so forth, and we look at the we look at the housing inventory of how many homes are in the market, how many homes are available, just go through the typical housing data. The U.S., when it rebounds, I believe it's not gonna be a very gradual rebound. It could be a very sudden and strong rebound, again, depending on two things: on rate cuts and overall consumer optimism.
Phil Lister (EVP and CFO)
For North America, construction's about a 60% exposure. Europe's about 50, but it's very different, as Peter says. In Europe, in general, it's aligned with commercial construction, whereas in North America, it's relatively balanced, but with a greater proportion of sales into residential.
Vincent Andrews (Managing Director and Senior Equity Research Analyst)
Okay. Thanks very much. Appreciate it.
Peter Huntsman (Chairman, CEO and President)
Thank you.
Operator (participant)
Thank you. Next question today is coming from Frank Mitsch from Fermium Research. Your line is now live.
Frank Mitsch (President and Senior Analyst)
Hey, good morning. Peter, one of the priorities in 2024 was to get the volumes up, and clearly that's been a success. But, you know, price mix in the second quarter faced a very easy comp and obviously came in on the negative side of the ledger. Q3 faces another easy year-over-year comp. How should we think about the progression of price mix in Q3 and, and beyond, and what, what will it take to get it back to neutral, if not positive?
Peter Huntsman (Chairman, CEO and President)
Well, it's gonna take a combination of capacity utilization, overall demand, and mix of the products we're selling. A combination of those three. And as you know, short of a cataclysmic economic event, you know, I remain bullish that we're going to continue to see a gradual improvement that that's taking place in the business over the course of the next couple of quarters.
Phil Lister (EVP and CFO)
I think price mix is mostly built in, Frank. If you look at the sequential quarter one to quarter two, in general, that was relatively, relatively neutral.
Frank Mitsch (President and Senior Analyst)
That's right. Yeah, I did pick that up. And then, you know, North America, polyurethane volume's up nicely in Q1, up nicely again here in Q2, you know, over 20% in both of those quarters. Does that continue in Q3, that level of improvement in polyurethane in North America?
Peter Huntsman (Chairman, CEO and President)
Well, most likely, yes. Again, the kind of basing what you said earlier, we're starting at, on a very low basis as to where we were a year ago. But no, I, I think that we will continue to defend our market share, and we'll continue to win back business.
Operator (participant)
Thank you. Next question today is coming from David Begleiter from Deutsche Bank. Your line is now live.
David Begleiter (Managing Director and Senior Equity Research Analyst)
Thank you. Good morning. Peter, if the recent drop in oil prices holds, could there be a benefit tailwind to your earnings in the back half of the year?
Peter Huntsman (Chairman, CEO and President)
I'd like to think that would be the case, but, you know, we are seeing areas around refining, where we've seen crude prices coming down and benzene prices going up in some cases. Now, today's benzene's down to $3.50-ish, as I look at it today. In the second quarter, it was up around $4. So yeah, I mean, as I look at some of these prices, I look at some of the published prices around chlorine and caustic, not that I give those published prices much credence, but, you know, you are seeing stability in certain areas that seemingly are somewhat detached from crude oil. But I think by and large, falling crude prices should give us some tailwind.
Phil Lister (EVP and CFO)
For benzene, David, it settled at $380, the contract for August, so it was still relatively high relative to the spot price. We tend to pay the contract price. So it really, for us, is all about how benzene then moves during the month of August and how it settles for September and beyond.
David Begleiter (Managing Director and Senior Equity Research Analyst)
Very good. Just in Advanced Materials, Peter, when you think about the bridge to 25, could this be a sizable uplift in earnings in the segment as some of the mix issues and raw material issues get grandfathered in and volumes pick back up?
Peter Huntsman (Chairman, CEO and President)
I, well, I should certainly hope so. I think that again, we're, we're going to need, you know, some, some tailwind in all of the three areas. But as we look at, the cost initiatives, pricing, some of the R&D, initiatives that will be coming into the market, yes, I, I believe that as we get into 2025, again, barring some major change, it, it, ought to be a year of, of improvement for us.
Operator (participant)
Thank you. Next question is coming from Mike Harrison from Seaport Research Partners. Your line is now live.
Michael Harrison (Managing Director and Senior Chemicals Analyst)
Hi, good morning. Was hoping that you could talk a little bit about the competitive dynamics that you called out in Performance Products. You said that those negatively impacted margins. What exactly is going on there, and do you expect that negative impact to persist into the second half?
Peter Huntsman (Chairman, CEO and President)
Yeah, well, our Performance Products, mind you, is really in two major product groupings, and then you get into sub-product groupings and geographies from there. That would be our maleic business and our amines business. Our amines business, it continues to hold up quite well. Maleic in North America, again, this would be the raw material going into unsaturated polyester resin and so forth, is holding up quite well. Where we're getting hit the hardest in Performance Products is maleic, specifically in Europe, where we're seeing a tidal wave of Asian-based maleic that's going into Europe. Europe also has very low duties comparison to the U.S. in maleic.
Maleic coming into the U.S. has about 28-29% duty protection, whereas in Europe, I believe it's around mid-single digit, sort of numbers. So, again, getting back to that industrial policy, you know, that we look for in Europe and so forth, but that's really the area of greatest competition that we're seeing for Performance Products.
Michael Harrison (Managing Director and Senior Chemicals Analyst)
All right. Thank you for that. And then on Advanced Materials, it really sounds like this is becoming a significant focus area for M&A. Curious what the acquisition pipeline in Advanced Materials looks like at this point, and could we expect some acquisition activity yet to come this year?
Peter Huntsman (Chairman, CEO and President)
Well, we're looking at that pipeline probably picking up a bit. I mean, I think there's across the board, there's a lot of assets right now that are owned by private equity, that are kind of getting to the end of a multi-year sort of a hold, where a lot of these companies, I think, are gonna be bringing assets to the market. Having said that, Advanced Materials is unique, in that if we were to go out and try to buy MDI capacity, for example, in Polyurethanes, we wouldn't be able to do that for antitrust purposes. Performance Products, we're already the largest in North America, in maleic anhydride, and so forth.
When we look at advanced materials, we see an opportunity both for vertical and horizontal integration, that really makes it a target-rich environment. This is a business that I think is extremely core to our business. If we wanna look at a business where we want the rest of the business to have the sort of earnings profile of a 20-ish, high teens, sort of margin, EBITDA margin business, and I'd remind you that that business remains very strong in Europe, in spite of all the headwinds and everything that we're seeing in Europe. So there, I think of where we want to be as we continue to evolve as a company, I look at where there's a target-rich environment, and all of those would point to advanced materials.
Now, having said all that, I do wanna emphasize that just 'cause there are a lot of targets out there, does not mean that we're going to be loosening up, you know, the barriers that we're setting up as far as the discipline around pricing, value, integration, and what it means to go out and actually buy one of these, and what the impact that has on the balance sheet. So we're gonna remain very disciplined in that pricing as well.
Operator (participant)
Thank you. Next question today is coming from Salvator Tiano from Bank of America. Your line is now live.
Salvatore Tiano (Equity Research Analyst)
Yes, thank you very much. First, I wanted to review a little bit the Polyurethanes guidance, because actually, I think when you're taking into account the force majeure or the PO/MTBE turnaround, it looks like actually like for like, it would have... You're pointing to much higher earnings in Q3 than Q2. And I'm wondering what is driving that? Is it essentially the U.S. margin expansion because of the Freeport outage and the, I guess, the big price increase we saw in May and June? And also, how sustainable is this margin expansion as Freeport comes back online?
Phil Lister (EVP and CFO)
Yeah, Sal, so you're correct in that we've got the Rotterdam force majeure, we've got a PO/MTBE turnaround. I think we said earlier as well, we've got a one-time benefit from what is an intended inventory build towards the end of September, ahead of a turnaround in October. Any benefits that we're getting tend to be in PU Americas when you compare quarter two to quarter three, driven by a little bit of volume. But as you indicate, we've also got some pricing traction in the United States with our price increase, which should improve unit variable margins as we go through the quarter. So it's really North America, plus those other pluses and minuses that we gave earlier to bridge the quarter two to quarter three.
Salvatore Tiano (Equity Research Analyst)
... Okay, and can I ask also a little bit about the adhesives business in Advanced Materials that you highlighted? Can you provide a little bit more color there about applications? Is that the wood space, adhesives, and also what's the difference, I guess, in the outlook versus your composite business? Because I would assume that also that is driven by aerospace. So, yeah, but it, you know, the outlook, as you said, there, is much better for this year.
Phil Lister (EVP and CFO)
Yeah, so I think what we highlighted was our infrastructure coatings business in Advanced Materials. I mean, there's five elements overall to Advanced Materials, our power business, aerospace, our automotive business, industrial, and our infrastructure coatings business. The infrastructure coatings business tends to be a little lower margin business that drove us down from a price mix combination. In terms of adhesives, in terms of adhesives, in particular, that's where we're putting interior applications into aerospace, and that has grown for us pretty much double digits during the course of this year. It's offset some of the slower growth that we've seen more on the composite sides, going into the wide body aircraft.
It's given us a lot of heart that I think we've said we should expect aerospace to return to pre-pandemic levels during the course of 2025.
Operator (participant)
Thank you. Our next question today is coming from Josh Spector from UBS. Your line is now live.
Joshua Spector (Executive Director and Senior Equity Research Analyst)
Yeah, hi, good morning. I wanted to ask around your early thoughts here around 4Q, and not necessarily pinning to a specific number, but just thinking about seasonality. When we talked about some of the moving parts in polyurethanes, and you're seeing some pricing, you know, would you expect seasonality to be normal in fourth quarter? Should that be our base case, or are there things that you would call out to say why it would be abnormal, maybe closer to stable versus what you typically expect? Thanks.
Peter Huntsman (Chairman, CEO and President)
Well, yeah, great, great question. My guess is probably as good as any, Josh. I would suspect this year that seasonality ought to be pretty, pretty normal, compared to the last couple of years, with the exception of last year. And I base that solely on demand has been fairly steady. It hasn't been growing a great deal. It's been fairly steady. There's not a lot of inventory, just anecdotally, that I'm seeing in the supply chains.
That's not to say that they're not pockets here and there and so forth, but typically, at the end of the year, if you're sitting on a lot of inventory, customers and, in certain geographic areas of the company, will take that opportunity, to deplete inventories and, improve their working capital at the end of the fourth quarter. And seasonally, yeah, that couples with seasonality. So, from a seasonal point of view, probably 100% chance of certainty that Christmas and New Year's will come about. There will be a slowdown. As far as will there be a massive drawdown of inventory and so forth, there doesn't feel like there's a lot of inventory in the system right now.
I think my biggest concern right now would be between now and the end of the year, where you've got kind of a couple of these big macro issues, be they geopolitical issues in the Middle East, U.S. elections, and so forth. Consumer confidence and volatility in the stock market. Consumer confidence somehow tanks in the fourth quarter, that could have a reverberating impact on overall demand, and I think that, in my mind, is probably the biggest uncertainty that's out there right now. But aside from that, I don't see at this point, I don't see a lot of areas of uncertainty and supply, that's sloshing around.
Joshua Spector (Executive Director and Senior Equity Research Analyst)
Thanks, that's helpful. And I just wanted to follow up on the point around cash deployment. So, you know, while your leverage is higher now with depressed earnings, does that really delay any deployment into buybacks or M&A? I mean, I guess if you have normal seasonality, you're probably still in the fours through the rest of this year, so how do you think about that?
Peter Huntsman (Chairman, CEO and President)
I think what the cash discipline you've seen in the first half of this year will most likely continue over to the second half of this year. I don't think that there'll be, you know, a lot of change therein. Yes, we're gonna be very disciplined on capital spend. We're going to be spending freely on areas around safety and reliability. That's our license to operate. You know, but discretionary spending and so forth, we're gonna continue to be very focused on limiting that. If we do M&A, it's gonna have to be something that fits very well, that makes a lot of sense of integration and shareholder value creation.
You know, we wanna make sure that we're able to guard the dividend, the balance sheet.
Phil Lister (EVP and CFO)
Yeah, and as, as Peter says, I mean, our dividend right now is at 4.5%, so it's pretty competitive, overall from that perspective. And you're right, Josh, I mean, our leverage, our net debt leverage is, it's, it's 4x, really of, of, trough, trough EBITDA. I think we'd see ourselves at that $1.5 billion, about that, of, of, of net debt. And if you do sort of average cycles, EBITDA, that'll, that'll bring us down to below our, our, our 2 level, which is, is what we would try and ensure over a, over a cycle.
Operator (participant)
Thank you. Next question is coming from Aleksey Yefremov from KeyBanc Capital Markets. Your line is now live.
Aleksey Yefremov (Managing Director and Equity Research Analyst)
Thanks. Good morning, everyone. Peter, I was hoping you could update us on your spray foam story. How is your business doing this year, and if that business overall is gaining share from other forms of insulation?
Peter Huntsman (Chairman, CEO and President)
Well, I think, you know, when I look at the comparison to spray foam versus other products. I look at it first from a very macro basis, and I look at some of the earnings of our peers and so forth. It feels like it's a pretty sluggish area of demand right now, and, you know, we're optimistic about some of the government initiatives and standards and so forth that have been set that'll be coming in through 2025. They'll be, you know, as those standards, tax issues, building codes, and so forth, really hit the bottom line, I am quite optimistic about what I see in the pipeline.
Presently, you know, the higher crude prices, which is kind of where your polyurethane foam is based versus your natural mineral fibers, which are largely based on energy and natural gas prices, it's a competitive market out there right now.
Aleksey Yefremov (Managing Director and Equity Research Analyst)
Thanks, Peter, and you reminded us of your commercial versus residential real estate exposure in the U.S. in prepared remarks. I was hoping to ask you if you see any signs of slowdown in commercial real estate, and also tell us what is the breakdown between maintenance and new within commercial?
Peter Huntsman (Chairman, CEO and President)
Yeah, as we look at commercial in North America, just looking at the revenues, it's really about, you know, on the commercial side, which makes up about 40% of our overall business, 45% of our overall North American Polyurethanes business. Of that, it'll be split about 1/3 retrofit, 2/3 new. Again, that's commercial. When I look at residential, that's making up of our Polyurethanes business in North America on a revenues basis. That's making up about 55%, and of that, that's gonna be about of that number, it'll be about 3/4 that will be new and 1/4 that will be retrofit.
Operator (participant)
Thank you. Next question is coming from John Roberts from Mizuho Securities. Your line is now live.
John Roberts (Managing Director and Senior Equity Research Analyst)
Thank you, Peter. In Advanced Materials, what kind of vertical integration are you interested in? I assume it's primarily downstream and not going back into the upstream.
Peter Huntsman (Chairman, CEO and President)
No, we spent years getting out of the upstream. It'll definitely not... Well, I should never say never, but it'd be a cold day in hell for us to go upstream. But I don't know the temperature gauge in hell, so I can't rule it out. But no, it certainly is downstream. It certainly is lateral. I think, look at our last couple of acquisitions, and I think we've been able to go lateral. We've been able to buy some chemistries and so forth that have enhanced our core business in Advanced Materials, and I'd like to see us go further downstream.
John Roberts (Managing Director and Senior Equity Research Analyst)
And then what has to happen for the long-term effective tax rate to come down to 22%-24%? Is that just geographic normalization?
Phil Lister (EVP and CFO)
Yes, it is exactly right, John. I mean, we've said 22%-24%. I think as we move back towards mid-cycle EBITDA, you'll see that coming down. We're actually 23% in the second quarter, 27% year to date. But it's exactly that, and what we need to see is an improvement in profitability in Europe, so ultimately you can use some of those NOLs.
Operator (participant)
Thank you. Next question today is coming from Kevin McCarthy from Vertical Research Partners. Your line is now live.
Kevin McCarthy (Senior Equity Research Analyst)
Yes, thank you, and good morning. I wanted to ask you, Peter, regarding Performance Products, your volume grew 8% in the quarter, and I, I think in the prepared remarks released last night, you referenced some seasonality, but also modest restocking, and I was curious about that. We haven't heard a lot of chemical companies pointing to restocking. You called out coatings and adhesives and fuels and lubricants. So I was wondering if you could expand on that and maybe comment on your confidence or visibility that it's restocking related versus, you know, underlying demand pull or green shoots.
Peter Huntsman (Chairman, CEO and President)
Yeah, Kevin, a great question. I think in the last earnings call a quarter ago, I said that, you know, we've got restocking, you've got demand. Higher demand's gonna precipitate higher restocking. And eventually, if you look at kind of the bell curve with each of those on each end, you're gonna get in this gray area in the middle, and that's, I think, an area where we always struggle. But typically, as demand improves, you are going to see people's confidence improve and restocking will improve. So when I talked about modest restocking, we're seeing modest demand improvement coming back.
A lot of that particularly around some of the ag business and and construction business around Performance Products is going to be around you know your spring planting and there's gonna be some seasonality in that. That's why we pointed out in the third quarter we'll probably see some seasonality headwinds in Performance Products. But we're also seeing a nice return in demand in the fuel and lubes additives. Remind you that as we look back on 2023 that was an end of the business that unexpectedly got hit very hard.
I should say unexpectedly, because a lot of that was inventory driven, and I think that we've seen inventories normalize, return to demand come back, and that was a nice area of recovery we saw in this past quarter.
Kevin McCarthy (Senior Equity Research Analyst)
That's helpful. And then sticking with performance products, I wanted to come back to maleic anhydride. I think you referenced you know, some of the challenges there in Europe related to import pressure into Europe from Asia. I guess my question is, do you think that dynamic will improve in the back half of the year, given industry dynamics as well as, you know, the freight rates from Asia to Europe? One of the consultants, at least I think, pointed to a higher contract price for maleic in Europe in 3Q versus 2Q. So not sure if you saw that as well or what your expectations are there, but it'd be helpful to understand a bit better.
Peter Huntsman (Chairman, CEO and President)
I have not seen any indications in the third quarter so far, and even going into the fourth quarter, that give me a whole lot of optimism around pricing for maleic in Europe. That's not to say that we're opposed to that price improving, it just- I'm just not seeing those sort of indications. I think it might be more of a 2025 event. Look, you're gonna see, when you see some of these trade routes change and shift between, you know, going up through the Suez Canal versus going around Africa and so forth, that's gonna cause a month or two of pricing volatility, supply and demand, but eventually the product's gonna get there, right? So, and when you start...
You know, you take a bunch of shipments and you put them around Africa versus up through the canal, and you reopen the canal, you're gonna actually get you could see a scenario where you get too much coming in at the same time. So I wouldn't put a whole lot of long-term cure, if you will, around shipping costs and logistics and routing and so forth. Fundamentally, as the Chinese economy improves and Chinese domestic demand improves, more of that maleic will stay in China and will not need a home in Europe, and that will probably be what will help European prices more than anything else.
Operator (participant)
Thank you. Next question is coming from Hassan Ahmed, from Alembic Global. Your line is now live.
Hassan Ahmed (Hassan Ahmed, from Alembic Globa)
Morning, Phil and Peter. Peter, question, just wanted to revisit volumes in the polyurethane segment. You know, obviously, on a percentage basis, you know, strong growth over there, particularly in North America. I'm just trying to get a better sense of, you know, despite, you mentioned that obviously we're coming off of a low base. You know, how far away are we, you know, be it by region, be it globally, from reaching more normalized levels of volumes?
Peter Huntsman (Chairman, CEO and President)
I think that it's a good question. I think that you've got to see that normalization. Again, we need to see recovery in the construction, residential construction markets, and I believe that as we see that gradual improvement take place, it's certainly something that we would hope would have returned in 2025, as we kind of get through the rest of this year.
Hassan Ahmed (Hassan Ahmed, from Alembic Globa)
Understood. Just sort of, you know, carrying on with the construction side of things, you know, obviously we saw the rate cut on the ECB side, and it seems, you know, the rate cut's imminent, here in the U.S. I mean, you know, internally, as you take a look at, you know, historic trends and your own sort of numbers and the like, I mean, what sort of lag is there between a rate cut and you guys seeing the benefit from that in your, you know, demand numbers, profitability numbers, and the like?
Peter Huntsman (Chairman, CEO and President)
I think it's probably... It's depending on the time of year, the size of the rate cut and so forth, but you're probably talking about, you know, 2, 2 quarters or so. It's not gonna be the next week or the next month, but as the rate cuts come down, you will see optimism among builders. You will see gradual pickup as of inventory and so forth, as people feel more confident about investing in the future. And again, depending on the time of season and the size of the cut, you're probably looking at at least 2 quarters to really see an impact on something like that.
Operator (participant)
Thank you. Next question is coming from Laurence Alexander from Jefferies. Your line is now live.
Daniel Rizzo (Senior Vice President and Equity Research Analyst)
Hi, this is Dan Rizzo for Laurence. Thanks for taking my question. You mentioned being disciplined with CapEx. I was just wondering if you have ample capacity to meet any resurgent needs, resurgent demand that could occur after rate cuts or if things go back to a kind of a stronger restock cycle in all three segments?
Peter Huntsman (Chairman, CEO and President)
Yeah, good, good question, Dan. Simple answer is absolutely. We're poised, set, and ready to go.
Daniel Rizzo (Senior Vice President and Equity Research Analyst)
Okay.
Peter Huntsman (Chairman, CEO and President)
Meet any demand scenario.
Daniel Rizzo (Senior Vice President and Equity Research Analyst)
Okay. And then, and you also mentioned, Europe being more dependent upon commercial construction, and a rate cut doesn't have as big effect. What do you think needs to happen from a macro standpoint to kind of, again, re-energize that, that region?
Peter Huntsman (Chairman, CEO and President)
To re-energize the commercial construction?
Operator (participant)
Europe.
Peter Huntsman (Chairman, CEO and President)
Or Europe? I believe that Europe, if the question's around Europe, is going to be a question as much around consumer confidence and rate cuts as it is around anything else. And consumer confidence in Europe is largely going to be predicated on everything from geopolitical, but particularly around energy pricing, energy competitiveness. And you know, when you see your utility bills that are going up 40%, 50%, 100% year-over-year, that's a lot of disposable income that's going to pay for a failed energy policy.
Operator (participant)
Thank you. Next question is coming from Matthew Blair from TPH. Your line is now live.
Matthew Blair (Managing Director)
Thank you and good morning. Peter, could you talk about the dynamics on the ground in China for Huntsman System? Is it fair to say that areas like housing and manufacturing are slowing, and how would you characterize autos in the region?
Peter Huntsman (Chairman, CEO and President)
You know, the auto side continues to be in strong demand for us, and, you know, we've got a lot of very good applications and relationships there with a number of the OEMs in auto. I don't really see an area of decline. Obviously, we've seen areas of decline over the last year or so, particularly around residential and construction. I don't think those are particularly getting worse. We're just not seeing any recovery taking place in those areas. But by and large, we're seeing, you know, we're seeing things stay pretty steady. Infrastructure continues to be, you know, decent for us. Automotive continues to be strong, and consumer confidence and exports, I think are staying steady.
Matthew Blair (Managing Director)
Sounds good. And then on Admat, I think the slides mentioned that aerospace sales are rising due to interior adhesive applications. Do you have any examples of this? And is this something that only applies to the wide-body planes, or are you making inroads into other planes as well?
Peter Huntsman (Chairman, CEO and President)
No, safe to say that it's in both wide body and in narrow body, and we're seeing a lot of this in overhead bins and in the galley areas and so forth. When you think of an airline and those large commodious bathrooms they have there, all of the components and sidings and everything that are glued in there, it's kind of a new and growing area of application for us. When we think about aerospace, for us, it's been a lot of...
Traditionally, it's been a lot around the composite materials going on, the outer shell and wing and so forth, and the interior, adhesive applications. These typically take quite a while to qualify for these, and we're seeing, you know, we've been working on that for some time and, we're seeing, you know, the patience is paying off.
Operator (participant)
Thank you. Next question is coming from Arun Viswanathan from RBC. Your line is now live.
Peter Huntsman (Chairman, CEO and President)
Operator, why don't we have this, it's a busy morning for a lot of people. Why don't I have this be the last question, and anybody else that has any other questions or anything, feel more than welcome to call Ivan or Christine.
Operator (participant)
Certainly. Our final question today will come from Arun from RBC. Your line is now live.
Arun Viswanathan (Equity Research Analyst)
Great, thanks for taking my question. Yeah, I just wanted to go back to your earlier comments. Now, I understand that the interest rates could help in North America and, you know, maybe in 2025. But, again, I think, Hassan was asking maybe where you are kind of in your normal demand levels. Would you say that you're seeing demand at maybe, say, 50% of normal or 60% of normal? How much recovery would you expect, I guess, over the next couple years? And, you know, maybe what's your visibility on, on... Are there any markers that you've seen recently that would tell you that we're either improving or incrementally or getting worse? Thanks.
Peter Huntsman (Chairman, CEO and President)
Well, well, we're certainly, as we look at, as we look at demands, and we break that down on a segment for everything from appliances to composite wood to flexible foam, insulation, elastomers, automotive, spray foam, and we break it down on a base by base, case by case basis. As we look at our internal capacity around the areas of construction, I would say that globally, it's gonna vary a bit. You're probably somewhere in the low- to mid-80% capacity utilization in those areas of what I would consider to be normalized run rates. So again, you know, some room for expansion, but certainly a lot better than where we were a year ago this time.
Operator (participant)
Thank you. We've reached the end of our question and answer session, and ladies and gentlemen, that does conclude today's teleconference webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.