Huntsman Corp (HUN) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2005 Huntsman Corporation earnings conference call. My name is Maria and I will be your coordinator for today. At this time, all participants are in a listen-only mode and we will be facilitating a question and answer session towards the end of the conference. (OPERATOR INSTRUCTIONS). At this time, I will now turn today's presentation over to Mr. John Heskett. Please proceed, sir.

Thank you, operator, and good morning to everyone. My name is John Heskett and I am Vice President of Corporate Development and Investor Relations for Huntsman Corporation. Welcome to Huntsman's investor conference call for the fourth quarter of 2005.

Joining us on the call today are John Huntsman, our Founder and Chairman; Peter Huntsman, our President and CEO; Kimo Esplin, our Executive Vice President and Chief Financial Officer; and Sean Douglas, our Vice President and Treasurer. A recorded playback of this call will be available until midnight March 3rd, 2006. The recorded playback may be accessed from the U.S. by dialing 1888-286-8010 and from outside the U.S. by dialing 1617-801-6888. The access code for both dial-in numbers is 21472374. A recording of this call may also be accessed through our website.

Before we begin a discussion of our earnings, I would like to say a few words about forward-looking statements. Statements made during this conference call that are not historical facts are forward-looking statements. Such statements are predictions or expectations and are subject to a number of risks and uncertainties. Our actual results could differ materially based on a number of factors, including but not limited to, future global economic conditions; changes in the prices of our raw materials and the energy we consume in our production processes; access to capital markets; industry production capacity and operating rates; the supply demand for our products and that of competing products; pricing pressures; technological developments; changes in government regulations; geopolitical events and other risk factors. In addition, completion of the transactions described in this call is subject to a number of uncertainties and subject to negotiation and execution of definitive agreements among parties, in closing, will be subject to approval and other customary conditions. Accordingly, there can be no assurances that these transactions will be completed. Please refer to our SEC filings for a more complete discussion of the risk factors applicable to our business and our Company.

Turning to earnings, I would like to point out that as I summarize earnings, I will be referring to adjusted EBITDA, which is EBITDA adjusted to exclude the impact of discontinued operations, restructuring impairment and plant closing costs, loss on the sale of accounts receivable, net gains and losses arising from the early extinguishment of debt, non-reoccurring legal and contract settlement charges and related changes in accounting principles.

In the fourth quarter of 2005, we recorded a net total of 101.9 million of such costs and expenses and in the fourth quarter of 2004, we recorded 129.8 million of such costs and expenses. We focused on adjusted EBITDA from a management standpoint as we believe it is the best measure of the underlying performance of operations and we have received feedback from many of you in the investment community that this is how you prefer to look at our business. A reconciliation of both EBITDA and adjusted EBITDA to net income can be found in our fourth-quarter earnings release, which has been posted to our website.

Today, Huntsman Corporation announced fourth-quarter earnings as follows. Huntsman Corporation recorded adjusted EBITDA from continuing operations of 205.4 million as compared to adjusted EBITDA from continuing operations of 404.8 million in the fourth quarter of 2004.

Net loss available to common stockholders for the fourth quarter of 2005 was 61 million or a loss of $0.27 per diluted share. This compares to a net loss available to common stockholders for the fourth quarter of 2004 of 23.1 million or $0.10 per diluted share. Excluding the after-tax impact of 20.2 million in restructuring and plant closing charges, 46.1 million in charges related to the early retirement of debt and 27.7 million related to the cumulative effect of changes in certain accounting principles, net income from continuing operations was 33.3 million or $0.14 per share on a diluted basis. This compares to 99.8 million of adjusted net income from continuing operations or $0.43 per share for the comparable period in 2004.

Lower sequential results on an adjusted EBITDA basis was primarily attributable to direct impacts related to Hurricanes Katrina and Rita, which we estimate at 140 million in the fourth quarter. Lower results in our Polyurethane segment due primarily to seasonally weaker PO/MTBE profitability and lower results in our Advanced Materials segment.

We have outlined on Page 4 of our earnings release the estimated impact of hurricanes by segment in the fourth quarter. We've also included a breakout of the EPS impact, which we have estimated at approximately $0.60 per share.

I would also like to remind you of the estimated hurricane impact in the third-quarter results, which was 27 million, as well as the estimated cost of the unplanned outage at our PO/MTBE Unit in the third quarter, which was 32 million. So if you were to adjust both the third and the fourth quarters to exclude the hurricane impact and the PO/MTBE outage impact, adjusted EBITDA was down a bit over 30 million sequentially or less than 10%, with most of the decline attributable to normal seasonal patterns, which we experienced in the fourth quarter.

I would now like to briefly outline the performance of each of our six segments. Polyurethanes recorded adjusted EBITDA of 150 million for the fourth quarter of 2005, which was 49.3 million higher than last year but 45.2 million lower than the third quarter. Adjusting for the hurricane impact from both periods as well as the impact of the PO/MTBE outage on the third quarter, adjusted EBITDA decreased by approximately $55 million sequentially. Almost all of this decline was due to lower MTBE profitability with the [C] factor declining from record levels achieved in the third quarter when it averaged a bit over $1.40 a gallon to $0.45 per gallon in the fourth quarter. This was not unexpected and represents a fairly typical seasonal pattern for MTBE.

We continue to see solid market conditions for MDI globally as volumes in the fourth quarter were up approximately 4% as compared to the third quarter and up 3% compared to a year ago. Pricing trends at MDI has also been strong, posting an 8% improvement on the fourth quarter of 2004.

Advanced Materials recorded adjusted EBITDA of 19.7 million for the fourth quarter of 2005. This was down from 41.3 million in the third quarter and 40.8 million in the fourth quarter of last year. In Advanced Materials, sequential results were lower primarily as we experienced very soft volumes in our base coatings and construction markets, particularly in Europe in the month of December. We also booked a onetime non-cash accounting charge of approximately 6 million, which negatively impacted results.

Performance products recorded adjusted EBITDA of 2.7 million in the fourth quarter 2005 as compared to adjusted EBITDA of 30.8 million in the third quarter and 64.4 million a year ago. The estimated hurricane impact in this division was significant at approximately 44 million. Adjusting out this impact, EBITDA actually improved modestly in the quarter, as we were able to offset higher raw material prices with price increases.

Segments recorded adjusted EBITDA of 32 million in the fourth quarter, which was roughly flat as compared to the third quarter of 2005 and the fourth quarter of last year.

Volumes increased about 3% as compared to the third quarter as we were able to pick up some quarters as a result of the DeLisle outage. Prices in dollar terms increased by about 1% while in local currency terms, prices were up about 2%. We announced a $150 per metric ton increase in October and we were able to realize approximately 10 to $30 per metric ton in the quarter. And we think a good portion of the balance will be realized in the fourth quarter of 2006 -- excuse me the first quarter of 2006.

Offsetting most of the improvements from higher pricing and volumes were higher production costs, some of which were related to the hurricanes but also a 10-day outage at our Calais, France plant due to a strike.

Polymers recorded adjusted EBITDA of 31.4 million in the fourth quarter of 2005, which was down from the third quarter and the fourth quarter of a year ago. Although not directly impacted by the hurricanes, we did experience lower volumes of polypropylene and polyethylene, particularly in December. Results also declined at our Australian styrenics business, the stats of which we continue to review given the poor financial performance and the bleak outlook for styrene.

Base Chemicals recorded adjusted EBITDA of 17.8 million in the fourth quarter of 2005, an increase of 1.8 million as compared to the third quarter but a decrease as compared to 79 million in the fourth quarter of last year. We did see significant impact from the hurricanes in this segment as well, estimated at 65 million, all of which was in the U.S. Results continue to be soft in Europe, particularly on the aromatic side of the business, where raw material costs were high.

With bad, I'd like to turn the call over to Kimo Esplin, our CFO, for his comments on our financial outlook.

Thanks, John. I guess John should've mentioned in his opening remarks that in addition to reducing costs, growing our differentiated chemicals and reducing our debt, we're also endeavoring to shorten the length of this quarterly call. We'll see how we do. We have a lot to get through.

Anyway to that end, I'd like to focus my comments on three primary areas this morning. First, our acquisition of AdMat minority interest, which occurred in December. Second, a discussion of our capital expenditure, interest expense and effective tax rate guidance for 2006. And third, some directional guidance for the first quarter of 2006.

As a part of our continued effort to simplify and streamline our legal, financial and borrowing structure, on December 20, 2005, we completed the acquisition of substantially all the minority interests in our subsidiary Huntsman Advanced Materials LLC for 125 million cash. These interests were held by affiliates of SISU Capital Ltd. and other third parties, which represented approximately 9.7% of the equity in Advanced Materials. As part of this transaction, we amended the Huntsman International senior secured credit facility and increased its existing Term Loan B by 350 million. We used the proceeds of the term loan together with approximately 74 million of cash on hand to redeem all of the 11% $250 million AdMat senior secured notes, plus 125 million acquisition price of minority interests, 36 million in call premiums and other related costs. In the quarter, we recorded 46 million in expenses related to the early retirement of debt, primarily related to this refinancing. This was a great transaction and financing for us and we expect the transaction to be accretive in 2006.

We believe this consolidation along with the Huntsman LLC/Huntsman International merger in August simplifies tremendously our legal, finance -- financing and reporting structure and have reduced the number of SEC filers from five to two.

Now, I would like to discuss our capital expenditures, interest expense and tax guidance for 2006. We expect capital spending for 2006 to be approximately 575 million. This is up from the 339 million we spent in 2005. The 2006 figure is a bit higher than our last estimate, as some spending from 2005 was deferred due to the hurricane. The 2006 figure includes approximately 200 million related to the ongoing construction of our Wilton, UK polyethylene facility. We spent approximately 37 million on this in 2005 and another 90 million will follow in 2007. But 2006 will represent the bulk of the spending on this project.

Interest expense for the full year 2005 was $427 million as compared with 613 million during the 2004 period, which represents a reduction of 186 million or 30%. During 2005, we reduced our weighted average cost of borrowings to 8% at year end 2005 as compared to 9.5% at year-end 2004, even though underlying LIBOR rates increased by approximately 200 basis points due to a number of Fed tightenings. The benefits of deleveraging the balance sheet through the IPO, the voluntary debt reduction coupled with the capital structure simplification and opportunistic refinancing, are pretty clear when you look at the year-over-year comparison. We estimate that our total interest expense will be approximately 375 million for 2006, which is a 12% reduction from 2005 levels.

Now, a comment on taxes. During the fourth quarter, we recorded approximately 45.3 million in income tax benefit. Included in this figure were onetime benefits totaling approximately 42 million resulting from OCI accounting, the release of certain valuation allowance reserves and a favorably audit settlement in France. If you exclude the impact of these items, our adjusted effective tax rate for the year was approximately 15.4%, which was at the low end of our range previously given for 2005.

We estimate that our effective tax rate during 2006 will be in the range of 15 to 20%. This rate is lower than we previously estimated at the time of the IPO because we ended up using less of our NOL's and therefore released less valuation allowance in 2005 than we expected. As a result, much of these NOL's will carry over into 2006 and should have the effect of reducing our book rate well below our traditional statutory rate.

On the cash side, we would expect our effective cash rate to be approximately 10% as we would expect to continue to utilize our available NOL's for the next couple of years.

A few thoughts on the first-quarter directional guidance. In our commodity segments, we believe pigments and polymers will show moderate improvement over the hurricane-adjusted levels experienced in the fourth quarter, as volumes are expected to be stronger and announced price increases in pigments should be implemented. In Base Chemicals, results are likely to decline in the first quarter as Europe continues to be soft and the U.S. business will be impacted by the 22-day outage and our Port Arthur ethylene cracker, which will lower results by approximately $15 million.

In our differentiated segments, Polyurethanes may decline modestly from the hurricane-adjusted levels of the fourth quarter as the first quarter tends to be the slowest quarter from a seasonal perspective in both MDI and PO/MTBE.

In Performance Products, results should be slightly better than those of the hurricane-adjusted fourth quarter while in Advanced Materials, we would expect the business to begin to return to the levels of profitability that it enjoyed throughout much of 2005. We would also expect to see our unallocated corporate costs settle in at approximately 150 million for the full year.

Generally speaking, after you net the puts and takes from all of our different businesses, we expect the first quarter of 2006 adjusted EBITDA to be down slightly as compared to the fourth quarter 2005 adjusted EBITDA of 345 million as adjusted for the impact of the U.S. Gulf Coast hurricanes.

Finally, as it relates to the hurricane damage and business interruption insurance coverage, we are in the process of submitting a claim to our insurance carriers and believe that our policies will allow us to collect as much as $40 million towards our losses from the storms last fall, as well as the Motiva outage this month. We would expect to receive these proceeds by midyear.

With that, I'd like to turn things over to Peter Huntsman, our President and CEO.

Thank you, Kimo and thank you to everyone who has joined us this morning. The fourth quarter of last year was a very challenging period for Huntsman, both from an operating perspective as well as overall profitability. I remind you that Huntsman has the vast majority of our North American base and polymer businesses in the Port Arthur/Port Neches, Texas area, the very area that was hit by the eye of Hurricane Rita. All of our major facilities on the U.S. Gulf Coast were off-line for a significant period of time during the quarter. All of our businesses divisions were adversely affected as the logistics in the region were very problematic and as it turns out, the buying patterns of our customers were disrupted more than we would have expected. All in all, it was a very difficult quarter, one that we are glad to have behind us. We don't expect any material impact from these storms to carry over into this year.

That being said, if you parse through all the noise in the fourth quarter, there were some very positive changes in our businesses in the quarter which give us a lot of optimism as we enter 2006. In our Polyurethanes/MDI markets, conditions rebounded in the fourth quarter with volume growth up 4% on the third quarter. This followed two consecutive quarters of decline, which is very encouraging given that this is typically a seasonally slower quarter. It was an incredible year for our core urethane business, where adjusted EBITDA was almost $600 million versus about $350 million in 2004. 2006 is poised to be a good year as well for this business. We're estimating industry volume growth in the range of 5 to 6%. Although pricing may soften a bit as new capacity comes on stream in Europe and Asia, in fact we have already seen the effects of some of this in the marketplace, but this new capacity should be absorbed fairly quickly. Things are likely to be softer on the PO/MTBE side of things, where we are unlikely to experience the record MTBE profitability we saw in 2005.

In pigments, we have finally seen prices starting to edge up at the end of the year. After a couple of quarters of decline, this was particularly apparent in the European market. There was $150 per metric ton global price increase announced in October that was partially implemented in the fourth quarter. TiO2 is priced on a quarterly basis, thus the hurricane-related pricing initiatives will not be fully realized until the first quarter of 2006.

A disruption in the North American markets related to the DuPont outage allowed us to further strengthen our European customer base and reduce our need to export product. Despite a pickup in the fourth quarter, underlying demand was soft in 2005 with global pigment demand down about 5% as compared to 2004, which if you recall, was a strong year with demand up 7% over 2003.

However, as we enter 2006, we believe that the fundamentals are in place to support a good year, with the DuPont DeLisle outage, operating rates are above 95% for the industry. Industry stock levels ended the year below 50 days relative to the 60 days we were seeing in late summer and price increases appear to have some support in the customer level and demand appears to be trending above the levels we saw in 2005. Conditions should remain favorable well into the paint season this spring. We had a great paint season in 2004, very disappointing in 2005; things look very positive for 2006 but it's still a bit too early to tell for sure.

In our Performance Products business, we have seen price increases take hold from the fourth quarter. As raw material prices have started to fall, we've seen little if any finished product price erosion taking place in our performance specialties, maleic anhydride and catalyst businesses. And demand continues to remain strong, particularly in North America.

In our Base Chemicals operations, conditions continue to remain soft in Europe. Fourth-quarter adjusted EBITDA in Europe was about $9 million, which was a small improvement over the break-even conditions we experienced in the third quarter, as higher earnings in olefins were mostly offset by margin weakness on the aromatic side of the business. As we look into the first quarter, despite strong demand, we should note that late December, contract prices for ethylene and propylene settled down EUR40 and EUR25 per ton, respectively. This, together with the continued high cost of raw materials and the soft aromatic markets, is unlikely to result in any margin improvement in the first quarter. With stronger first-quarter demand, we are optimistic for improved financial conditions in the second quarter and beyond for the European petrochemical markets.

On the U.S. side of things, market conditions were pretty decent in January. However, our large cracker in Port Arthur was off line for a couple of weeks in February as the neighboring Motiva refinery, which supplies much of our steam requirements, took their plant down for unplanned maintenance due to the hurricane-related startup. Unfortunate but something that is out of our control. We brought the unit back up on February 20th and things seem to be running fine but we lost about three weeks of production in the process. Since this Motiva outage was hurricane-related and took place at a facility where we have already exceeded our insurance deductible, we expect to collect our financial losses later in the year.

In summary, the fourth quarter was challenging in many respects. However, we're optimistic as we head into 2006. Demand continues to grow in most of our differentiated businesses in all regions of the world. With record inventories of natural gas, prices have fallen over $5 per MMBTU since their historical peak that occurred near the end of last year.

Though volatile, crude prices have come off their highs as well. Should demand remain strong and raw materials continue to fall, we believe that market conditions throughout 2006 and into 2007 should improve. In fact, we believe that the back half of 2006 could result in the peak type conditions for many of these commodities that has been expected for some time now. Should such conditions prevail, Huntsman is expecting a record year in 2006. 2006 will also see the full impact of our ongoing cost reduction efforts. We set an objective to cut over $200 million of indirect expenses by the end of 2005. I'm happy to report that we are operating at a run rate in excess of $225 million of cost savings as compared to our 2002 levels on a fixed currency basis.

Finally, I would like to comment on strategic direction. As I'm sure everyone is aware, late last year, we received an unsolicited proposal from a party who had expressed an interest in acquiring the Company. We spent a lot of time late last year and through January working with this party and others developing and evaluating their proposal. As we indicated in our press release, on February 5th, we terminated discussions related to the proposal to acquire the Company by these special parties after the board and its special committee concluded that none of these proposals were in the best interest of our shareholders. The board has also disbanded the special committee.

We continue to be frustrated with the valuation which the market has placed on our business since the IPO. More specifically, we believe that our differentiated portfolio, which comprised about 75% of our adjusted EBITDA in 2005, is overshadowed by our smaller and more volatile commodity petrochemical business. Since our IPO, our objective has been to pay down debt, grow our differentiated business group and control costs, thus creating shareholder value.

We announced earlier in the week the planned acquisition of Ciba's the see the Ciba's Textile Effects business. We believe that this is a vital step in growing our differentiated business and I'll comment more on this in just a minute.

To further our objective to pay down debt, we're also pleased to announce this morning that we intend to sell our North American butadiene and MTBE extraction business to Texas Petrochemicals, LP for a sale price of approximately $275 million. This sale price represents approximately 6.5 times 2005 EBITDA of $43 million. We would expect this sale, although subject to customary closing conditions, to occur by midyear, following which, we will be able to focus more of our attention and resources on our differentiated businesses. The sales proceeds will enable us to cover the costs of the tax Textile Effects business from Ciba and pay down additional debt. Again, this is very consistent with the portfolio shift from commodities to differentiated that we have been pursuing and will continue to pursue. It also helps in achieving our objective to aggressively pay down debt.

We're also announcing today our decision to pursue the legal separation of our Base Chemicals and Polymer segments from our differentiated segments. This would form two separate companies. Additional details of the separation will be announced in the coming months as developments warrants. In addition to forming a world-class commodity chemical company, we will be creating an approximately $9 billion in revenue differentiated chemical business with a solid, stable earnings and a technological and growth platform. Both companies would be run by present Huntsman management personnel.

To help achieve this objective, we announced earlier the acquisition of Ciba's Textile Effects business. I want to take a few minutes and talk about the specifics of this transaction, walk you through our strategic rationale, finally talk a bit about our plans to restructure the business going forward.

The headline purchase price was 332 million Swiss francs or about $250 million. Included in this figure is approximately 75 million Swiss francs in assumed debt and long-term pension obligations. In addition, Ciba had agreed to initiate and fund certain restructuring activities pre-closing to the tune of approximately 40 million Swiss francs. And any amount not spent between now and closing will be a further purchase price reduction. So when you put all this together, the cash purchase price at close will be approximately 180 to $190 million.

On 2005 EBITDA of $92 million, this represents a valuation multiple of roughly 2 times, which we think is extremely attractive and should result in a transaction being immediately accretive to our earnings. The strategic rationale here is fairly straightforward if this acquisition is entirely consistent with our stated goal of expanding our differentiated portfolio. We think this is a fundamentally sound business and the demand for textile formulations will continue to grow.

Ciba as an organization has great technology and has always been the clear market leader in textile chemicals and dyes and has remained on the leading edge of developing new technologies and innovating to meet the changing needs in the marketplace.

We intend to leverage off this leadership position. This is really a formulation business and in many ways is similar to the formulation side of our Advanced Materials and Polyurethanes businesses. In fact, this deal will allow us to extend our formulation business even further downstream and closer to our customers.

The business has seen some margin pressure over the last few years as the traditional apparel customer base is relocated from the U.S. and Western Europe into Asia and other low-cost manufacturing regions, like Central America, Turkey and Pakistan. We are particularly excited about the Asian growth where Textile Effects already has $360 million or roughly one-third of its total revenues in sales. With the startup of our MDI Polyurethanes plant this summer and our other Asian growth opportunities, this acquisition will help us achieve over 20% of our differentiated sales in Asia in the next two to three years. We think that this trend will likely continue for a couple of years. We would expect to continue to operate low-margin business, particularly in dyes, where we don't see the value of competing with local Asian producers. There is a core business here, which not only reflects Ciba's leadership in cotton and wool materials but also includes technical textiles used in carpeting, automotive and nonwoven applications. We expect to restructure and refocus the business around these attractive areas. It may be a smaller business in a couple of years but we intend for it to be considerably more profitable.

With this business, we are acquiring a very dedicated, experienced senior management team that was brought in for the sole purpose of restructuring Textile Effects. They have made a good start in the last year, which is certainly reflected in the improved financial performance in 2005 and have a clear idea of the opportunities that lay ahead. We think that by leveraging our in-house expertise, restructuring with this team in a much more aggressive posture, we can continue to redefine the business model to reflect the realities of today's marketplace. We look at this transaction and see a lot of similarities with our Advanced Materials business formally known as Vantico, which incidentally was also a former Ciba business. We think there are further steps that are necessary to optimize the manufacturing platform and drive costs lower by utilizing common Huntsman capabilities in areas such as purchasing, IT, finance and EH&S. This is what we were able to do with Vantico and it resulted in doubling the EBITDA over an 18-month period.

As it relates to our forecast for Textile Effects, we think 2006 should look similar to 2005 from a profitability perspective, which should result in positive net income from day one, given the low amount of debt required to finance the purchase and the fact that there will be very low levels of depreciation expense due to the purchase price allocation.

In the back half of 2006 through 2007 and into the beginning of 2008, we would expect to spend roughly $50 million in cash restructuring and an incremental $100 million in restructuring-related CapEx. This should drive EBITDA growth by approximately 15% compounded per year over the next couple of years and we would be disappointed if this business wasn't achieving mid teens EBITDA margin by 2008, which should push roughly $0.30 per year to our EPS.

In conclusion, it's been one year since our IPO. I believe we have done everything we said we were going to do. As I look forward to the next twelve months, I see a time of genuine opportunity to further reduce debt, build a world-class differentiated chemical business, as well as a strong commodity business and maximize shareholder value.

I would like to turn some time over to our founder and Chairman, John Huntsman.

Thank you, Peter, and good morning, folks. Since entering the plastics and petrochemicals and chemical industry over 40 years ago, I think I have now seen it all. The fourth quarter of 2005 is now behind us. It's history. Thank goodness. I hope our Company never again will have two major hurricanes hit us head on, which in turn created the highest priced natural gas and the highest cost of oil in the history of America. But as I just stated, that's all now history. So, let me share with you our vision for going forward.

This week's announcement of the expansion of our differentiated businesses through the purchase of Ciba's Textile Effects, in addition to today's announcement of the divestiture of one of our major commodity units, the butadiene business, marks an important transformation for our Company. Moreover, as our CEO has stated, this transformation will continue through the pursuit of the spinoff of our entire commodity chemical business and to a separate and distinct company. Thus, after its completion, Huntsman would be comprised of two public companies, a major differentiated chemical company and a stand-alone, very significant commodity chemical company. With these changes and others underway, we are building businesses that are more global, less energy dependent and more technologically advanced than ever before. We will accomplish this while at the same time paying down debt and increasing equity value. Our principal mission as we accomplish these above stated goals is to continue building the world's largest, most profitable and most competitive differentiated chemical business while simultaneously creating a very competitive global commodity business. All of us at Huntsman are very excited about the future.

I applaud our CEO and our Board of Directors for moving in this much more aggressive direction. It should clearly be a major factor in enhancing shareholder value.

With that, I would like to turn the discussion back over to John Heskett, our Vice President of Corporate Development and Investor Relations.

Thank you, John. Operator, I think we're now ready to turn the call over to question and answers.

(OPERATOR INSTRUCTIONS). Mike Judd, Greenwich Consultants.

Yes, good morning and thanks for taking my question. I have a short-term-related question for the first quarter. I think you mentioned in the past in Europe a lot of your pricing for some of your more commodity-oriented types of products are done on a quarterly basis. I guess you have talked about hoping to be able to move those contracts to shorter term and I just wanted to check in and see where you were with that?

A number of our aromatic products have gone to monthly pricing. We are still very disappointed to see the industry still on quarterly pricing for olefins and there still continues to be a lot of talk back and forth. And I am very hopeful that in the coming next few quarters that the olefin, ethylene, propylene pricing will change to a monthly basis. That trend certainly seems to be picking up steam and discussions with customers and I very much would like to see that take place. But no, it has not taken place nor will it take place during the first quarter.

Sergey Vasnetsov, Lehman Brothers.

Good morning. With so many things going on I think John Heskett now, who had two jobs before, I think he has four jobs right now. So hopefully he deserves a raise.

Don't encourage him, he will want more money.

I want to ask you just to clarify on your MTBE [this year], a couple of [related] questions. One is on the profitability of the business, you reported 43 million on a base of 625. That comes out to the EBITDA margin of about 7%. That seems to be very low for the business which ran through the [particular] cycle in 2005 with MTBE and butadiene being strong. Is 43 million essentially not adjusted for the significant outages and the hurricane impacts you've had?

As you'll remember, Sergey, and thank you for the question, we have two MTBE businesses. About two-thirds of our volume, about 60% of our volume comes from our propylene oxide facility, which is sold on a long-term contract. And the MTBE that is part of our extraction business from our butadiene, the 40% of our production that is being sold off here, that is produced on a tolling basis. And so the margins on the MTBE on the C4 business, are very consistent. We bring local refiners, C4 butylene streams. We give them back on a toll price, MTBE. And so that plant really does not swing nearly as much as the market would have you swing.

Our MTBE that comes out of our propylene oxide is more profitable; it's produced at a lower-cost basis; is a byproduct of propylene oxide. And had we not been affected by the hurricane and the unexpected shutdown in the third quarter that went into the fourth quarter of our PO/MTBE facility, we certainly would have seen better margins coming out of our MTBE propylene oxide facility.

Okay, thank you for the clarification there. Second part of the question is, what are your plans for this remaining Port Neches facility? Are you going to keep it as part of PO operations or there are some other plans?

At this time, Sergey, we have only announced the C4 divestiture -- or butadiene divestiture. This is an isolated facility from the rest of our Port Neches operations, where we have our propylene oxide, MTBE facilities. We have some of our olefins, ethylene, propylene production there, our EO/EG production and some of our surfactant production is located in Port Neches as well. And all of those sites, as well as our cogeneration facilities, those will all be unaffected by the sale.

Okay. Lastly, your comments on separation of the legal entity from the basic and specialty chemical companies, can you give us some at least preliminary views on the timing and the methods for the [steam] the IPO sale -- just whatever else you can add to that. I think it is of primary interest to us.

Sergey, you know that these sorts of things take some time. We are expecting kind of six to nine months. It's going to be midyear before we even have our audits complete. And then of course there is the separation of the businesses, inter-company agreements and management issues that we need to develop along the way. So we would think that it would be some time in the second half of the year.

PJ Juvekar, Citigroup.

Hi there. Quickly on MTBE. As MTBE gets phased out, what are your plans either switching to ETBE or isooctane? Can you talk about that and how much capital you'll need?

Well, PJ, as we look at MTBE, again, by this summer, we would expect to be producing MTBE to the tune of about 18,000 barrels a day out of our propylene oxide facility, again as a byproduct. If you look at our sales for at least over the next 12 months, half of that is contracted to be sold in Latin America, where they don't have the screwy politically motivated, idiotic laws that we do here surrounding MTBE. And that price incidentally, it's just about the same as the Gulf Coast. The shipping there is very competitive. So we, in past conference calls, we've talked about taking MTBE, shipping it to Europe or Asia. Latin America markets have been quite strong for us and we see this as a very attractive market. So half of our MTBE volumes is contracted that goes into Latin America and the other half of it, we have in excess of another year on a take-or-pay contract with a large oil company. And so, we do see MTBE continuing to be in high demand in international markets. But we also see a large customer here in North America taking it.

We have no plans at this point to directly answer your question. We have no plans at this point to convert over to ETBE or isooctane.

Okay and then [totally] on textiles, besides being cheap, I'm still scratching my head on the strategic rationale. I mean is the idea is that you are a better cost cutter than Ciba and so you can get more benefits out of that business than Ciba did?

I think that as we look at the business going forward -- I can't talk much about what Ciba did in the past. We think that this business -- that parts of this business are very attractive from a growth basis. There's tremendous synergy with our existing business. We believe that as we focus more and more downstream, value-added formulation formulated products, building on customer relationships and so forth, as we look at the manufacturing sites, we share a number of sites in China and Europe, where we will be able to drive cost out of this system. We see areas of opportunity to further technology with our surfactants technology, our amines technology and with some of our other technologies that we have in house, we see opportunities to expand into the textile industry here and move further downstream.

This has been a business that has a very consistent EBITDA. And again as we look at being a less volatile, less petroleum related, trying to get away from that volatility and growing and really building a growing and consistent earnings stream here in our differentiated businesses, we think this business fits the portfolio and we're quite excited about it.

Has the historical EBITDA been declining in that business?

Absolutely and that was the real geographic shift to Asia that is ongoing. And I think you'll see the restructuring that we are going to start up will accelerate that shift to Asia. These guys have a great position in Asia and some great technology and relationships.

But let me just answer it to one other way, PJ, if I could. When you think about our three differentiated businesses, we have good intermediate positions in MD and we have formulation businesses that really bring it right down to the customer level. And in Advanced Materials, we have great intermediates in basic liquid epoxy resins and then we have really good formulation houses throughout the world that go into adhesives and composites and all sorts of things.

In our third differentiated business, Performance Products, we don't have that formulation business. We have a great intermediates business in amines and surfactants and maleic anhydride. And we believe this Textile Effects business will give us that formulation approach that is close to customers, particularly in Asia, where we can move beyond the intermediates into the more formulation area.

As I also mentioned in my comments, we'd like to see in our differentiated businesses 20 to 25% of our sales, our manufacturing and our sales in the Asia markets. I think we have some very aggressive growth plans there. We're expanding in our polyether amines facility in Singapore, MDI in China. This is an area too that we think from a synergy point of view, operating point of view, back office point of view, building labs and expanding the markets. We're not looking to eventually get into Asia. We're there now and this we see as a great opportunity to further that growth in that region of the world.

Okay. And if I may ask just one quick question on AdMat. If I look back a year ago, there were a lot of higher expectations for AdMat than what happened in 2005. And maybe some of that was related to hurricanes and all that. But looking into 2006, do you see EBITDA improvement in AdMat? Thank you.

Yes, I continue to be very optimistic about our Advanced Materials business. As you look into the January -- I will probably get kicked under the table for giving you this in such detail -- as I look in our January sales, well in excess of 100 million pounds. And I think that as we look at the growth trends of that business, as we said a year ago at this time, we were going to get out of the less profitable, bulk into that business and where we wanted to focus our growth was on the specialty applications and formulated products and so forth. I think that that strategy has worked and you'll see much better performance and growth opportunities coming throughout 2006.

(OPERATOR INSTRUCTIONS). Bill Hoffman, UBS.

Good morning. I just wonder if you can give us a little more details about the legal split and maybe what your strategy with the debt structure could be?

Bill, we really haven't determined how we're going to do it nor how much debt will be on each of the individual entities. That's something that we're going to need to work through over the next couple of months and we certainly will let you know as we sort of determine that.

Okay. And I guess can we sort of look at this as a step of potentially splitting the stock down the road as well, actually more formally creating two separate companies?

I think that is what we said, Bill, is that in fact this would be a spinoff and there would be ultimately two separate stocks, a commodity stock and a differentiated stock that our shareholders would hold.

Thank you. And just last question, the Performance Products business, obviously has taken quite a squeeze here in the second half of '05. And you talked about obviously the hurricane impact there in the fourth quarter and we can see that. Can you just talk a little bit about going into '06? We would assume that you're still experiencing quite a bit of a margin squeeze there and what you are doing to sort of get the margins recovered, maybe back to where you were the first half of '05?

As we look at '06, again, as we think of '05 in the second half of '05 in our performance business, the raw materials from that business come from our ethylene oxide and propylene oxide in large part from those facilities located in Port Neches. So even though our businesses that produce a lot of our amines and a lot of our specialty materials, are outside of the area hit by the hurricane, these were some of our last facilities that started up. And so I think in this business of all of our businesses was inordinately hit from the impact of the hurricane. As we look at our '06 outlook for our Performance Products, specifically for our maleic anhydride, for our differentiated amines, for our catalyst businesses and so forth, we see better times in '06 than we saw in '05.

Jeffrey Zekauskas, JP Morgan.

Hi, this is Dave Silver. I had a couple of questions about your Polyurethanes business. So certainly there was a lot of volatility I guess in the MTBE component of that segment's results. And I was wondering if you could provide any rough guidance about how big a contribution MTBE made in 2005?

And then secondly, I was wondering more broadly if you could kind of talk about the year-over-year price increase, I think you said it was 8% in MDI. And if I'm not mistaken, that has come down quite a bit since let's say the middle of the year when there was some scarcity situations in the market. So I was wondering if you could give your outlook for MDI, let's say for the first half of '06 in terms of pricing. You did discuss volumes before.

Let me give you a sense for 2005, sort of the split. Propylene oxide MTBE contributed $146 million of EBITDA. And Polyurethanes was about 530 million, roughly. If you looked out on a fourth-quarter basis, PO/MTBE was 13 million and Polyurethanes was roughly 128 million. That's on a pre-adjusted basis, if you will. So, you can see the contribution of propylene oxide; that's in spite of -- we lost a bunch of money by having our PO unit down in the third quarter, roughly $32 million.

Okay. And then the pricing outlook for MDI going forward?

We'll probably have to look at it. I think as we look at pricing, Dave, I don't want to get into forecasting MDI pricing, but certainly, raw materials for MDI have fallen faster than the price of MDI. Bear in mind that one of the major raw materials for MDI is benzene. Benzene a year ago was trading at all-time record high prices. And while it's still in my opinion too high right now, it has been cut by more than half from where it was a year ago. And if you look at our North American business, about 40, 50% of our North American customer base are on locked margin contracts, supply contracts, if you will, where there is a throughput for benzene and natural gas. So while prices may be coming down in certain market segments, that doesn't necessarily mean that margins are coming down as well. I would look at that on a pro rata basis because prices are down 5% and margins are down 5%.

Dave, I'll just add to that, in terms -- I think Peter mentioned -- but for MDI, price increased in the fourth quarter 8%. And as Peter said, we're starting to see the growth really come back. So we would expect that we would be able to hold price.

If I could just ask you one other question. So in thinking about -- I'm thinking about the Polyurethanes business and you did talk about cost pass-throughs or feedstock cost pass-throughs. And I'm thinking about that in relation now to your intention to spin your Base Chemicals unit. Do you lose any integration benefits, you know, from your Polyurethanes business if you do complete this spinoff and kind of separate the back integrated parts to the --

Absolutely not. As we look at that major supply there of raw material being benzene, we buy benzene in North America on the open market. We don't produce benzene here that goes into MDI. The benzene we produce in North America goes into cyclohexane, which would remain a commodity side of the business. In China, we buy on market-related prices, our benzene. And in Europe, we produce our own benzene and we also buy benzene. And that benzene is transferred into our Polyurethanes business at market prices. So we believe that the prices that have been seen in our Polyurethane results are really market-based prices for benzene and any other product we produce.

We would likely keep the nitrobenzene aniline operations in the differentiated part of the business.

So we'd be starting at benzene and keep that supply chain within the Polyurethanes realm.

Terrific, thank you for the detail.

Bill Young.

I had a couple of quick questions here. With regard to TiO2, DuPont is gradually moving back into the market, part of their plan in DeLisle is back up; it should be fully running by second quarter. What makes you so confident about getting further price hikes, especially if DuPont tries to regain its market share that's been lost in North America, and especially in Europe?

I think that DuPont gradually comes back into the market and I have no idea how DuPont markets or sells their products. But from what we have seen, it probably looks like they have defended their U.S. North American customer base quite aggressively. As we said on our call, we have used that, Bill, as an opportunity for us to export less TiO2 from Europe and to refortify our customer base in Europe. No doubt DuPont will coming be coming back into the market. Probably sometime this summer, they will be coming in full force.

But I think if you look at inventories in this market being below 50 days right now, inventories actually having fallen during the wintertime, when inventories traditionally increase, if we have anything close to an average or better than average paint season, I think that it bodes very well for the entire titanium dioxide industry. And the price increases that have been announced, I am very confident that those will take hold and I'm very hopeful that additional price increases will be coming through.

Bill, we see the European market in dollar terms as being lower-priced currently than the U.S. market, almost $150 a ton. And we are seeing, as we speak, in January and February, prices move up to complete the $150 a ton price increase we announced in October responding to the DeLisle outage.

Okay. And secondly, given what you said about the NOL's, the fact that you haven't used them up, what should we be thinking about for 2007 with regard to your book tax rate?

Well, we will still have a sizable NOL in the U.S. certainly. And you would expect that the cash tax rate would consistently be right around 10%. The book effective tax rate will move up depending on how strong '06 is to the more regular normalized statutory rate of 35%. So again on a cash basis, you should expect 10% for the next two or three years as we consume the on-balance sheet NOL. But depending on how good '06 is, our valuation adjustments will be released, which artificially reduces that book affected tax rate.

Okay. And you mentioned Latin America and your take-or-pay contract for MTBE for 2006. How long does that contract last and what are you considering here going forward on a longer-term basis?

The take-or-pay contract goes until next March here in North America. The other Latin American contracts throughout Central America, we could certainly expand on that position today. We think that that pricing is, as I said in my comments, that pricing is strong; it really is the U.S. Gulf Coast price. And it's a relatively new market that we have entered into in the last year or so. Bill, I think that we will stick with obviously with the take-or-pay contract for the next year or so and then gradually move more product to the south.

I think that as we look at those options, that's much, much better for us than investing in ETBE or anything else in the PO/MTBE facility.

I also personally -- this is my personal belief -- that as you look at the gasoline supplies going into this late spring and early summer, I think that we are going to have a very, very difficult time in North America supplying the amount of gasoline when you look at the amount of MTBE that will be taken out of the North American markets. So I guess I still remain an optimist that the North American market isn't going to completely dry up. But again should it dry up, we are seeing very strong demand south of the border.

Bill, let me give you a better answer on '07 because I know everyone is going to struggle with taxes there. Let me answer it this way. If we have a similar year in '06 that we had in '05 on an adjusted hurricane basis, then you would expect the effective book tax rate to be in the mid to high 20% in '07.

Okay, great. Last but not least, what are your current goals for net debt reduction over the next say 12 to 24 months? What do you think you could achieve?

Our stated objective is this $2 billion debt reduction by the end of '07. We have completed 550 million of that and as we said, we have some asset sales that we have announced and we are expecting good cash flow in '06 and '07. So that certainly is the stated objective of management. We're a little over 25% of the way there.

Okay, so no change in that '07 number?

Absolutely not, Bill. I would hope that we would be able to exceed that number.

Operator, we have run about an hour so how about just a couple of more questions here?

Don Carson, Merrill Lynch.

Just a follow-on. Kimo, a question for you on interest expense and related to your debt reduction plans, you're guiding to 375 million in interest expense. If you annualize Q4, you're only at about 340. So with further debt reduction, I'm wondering if that is not a little on the high side, if you could just go through that.

And then, Peter, you talked pretty optimistically about the second half commodity outlook. I'm just wondering on what you base that optimism? Is it relatively low inventories out in the system, both producer and end user and some view of pent-up demand? Can you just talk a bit about your outlook?

I think that there is some element of pent-up demand out there. I think that when we start looking at the least competitive areas of the world for commodity chemicals, obviously, it is North America because of the high gas prices. And I will appease my colleagues here and not get into my views on gas prices. But as you look at the record high levels of inventory in natural gas, it's just -- I don't think that the prices even at these levels are really sustainable.

I think that as we look at the underlying demand for Base Chemicals and polymers, I think that as we look at what's going to happen with the ability to import gas and to produce gas in North America and you start seeing North American gas prices becoming more competitive with the rest of the world, I think that we can see continued demand on a global basis. And I think that when you look at the projects that are coming on in the Middle East, I don't personally believe that -- I do believe eventually those projects will come on. I don't believe that they'll come on as quickly as has been stated. I think that when you start winding up a number of these factors, as we look at it, customer demand and so forth, a growing economy here in North America, Asia continues to be strong, we are quite optimistic as we look through '06 in all of our products, particularly in the latter part of the commodity side.

Don, we are expecting the Fed to tighten more and so we are expecting LIBOR rates to move up a little bit beyond kind of where we are. So yes, 375 is a bit more, quite a bit more than the annualized fourth quarter. There was in the fourth quarter some benefits from some swaps there that we wouldn't expect to see in '06, but we are expecting things to be a little bit more expensive on the floating-rate side. And if you will recall, we have just about $2.5 billion worth of floating-rate debt. So whatever your view is on where the Fed is, 25 or 50 basis points, we're obviously going to [field] that to the tune of 2.5 billion.

This is John Huntsman. Let me say something and unfortunately I have to speak at a memorial service.

But while I've got you all on the line, I just want to commend our special committee and our Board of Directors for the tremendous work and the numerous meetings they held with respect to determining proper valuation for shareholders. And one of the reasons quite frankly that we have been sought after as a company is the bifurcation of our Company into a specialty and into a commodity business dramatically adds value for our shareholders and we felt we could simply do that ourselves and do it more effectively and more timely and let the benefits accrue to our own shareholders. And so, that's the principal reason that we didn't proceed with an acquisition at this time and we are excited about being in the driver's seat and giving that value to our own shareholders.

Frank Mitsch, BB&T Capital Markets.

My question was regarding the fact that you did have some interest in Huntsman from private equity. And can you handicap it one way or another whether going through the exercise of splitting the Company into two makes it more or likely that actually one half gets sold prior to shareholders getting a share of Huntsman commodity stock and Huntsman differentiated stock?

Let me take a crack at that before I leave. Anything that -- the first thing we have to look at as a Board of Directors is shareholder value and how to enhance it. And that is our first and foremost goal. And we will always remain in that position, where we would entertain and look at any legitimate offer that comes in our direction that would enhance or increase shareholder value. Right now, we see a very substantial improvement in our differentiated business valuation. And also the ability, as you know, I have spent my first 30 or 40 years building a commodity business and quite frankly really know that business well and enjoy it and know all the ramifications and pitfalls around the world in it. And we have a great team in that area. So between our new team that -- I say new -- the folks who have been with us the last 15 to 20 years and have been through a lot of the pitfalls of the chemical business, they are very, very good in the differentiated businesses. We have brought the superstars from these different companies we have bought over the years and yet, we still have some of the old pros you know in the commodity side. So we are excited about both businesses. Should somebody come forward and step up and say here is a fair and some strong offer that would enhance shareholder value for either or both of these, sure. Our special committee would come together again of our board and we would weigh that very, very carefully.

Gregg Goodnight, UBS.

Good morning, gentlemen. The spinoff of your commodity chemicals group, during the IPO, you touted the benefits of being back integrated and how your commodity and feedstock chain was joined at the hip with the downstream differentiated integrated businesses. Splitting these obviously is going to add some complexity contracts, nonproductive efforts, maybe even headcount additions and all that. My question to you is, is the primary reason for the split to get what you guys think is a proper EBITDA multiple of evaluation on your Company? And if that is all that is driving it, would you split the Company if you felt your stock was properly valued?

Well, I think that -- we only deal with what is reality today. I think that the Company is undervalued when you look at 75% of our EBITDA coming from differentiated businesses this past year. I think that we are very frustrated with our valuation and we see this as an opportunity to have a higher multiple on the differentiated side of the business and the commodity side of the business will probably remain about where it is today on a multiple basis. So, yes, that is obviously the reason why we're doing the separation.

I think that we did tout the opportunity to have that sort of supply integration all the way back to the wellhead through the finished product to the customers. We believe that we can achieve that on the differentiated side of the business through competitive market-based contracts with the commodity side of the business and through open market purchases. So again, I don't think that either side of the business will be disadvantaged with the split going forward.

I think I would add to that, Peter, that our Board of Directors is really focused very, very heavily on the differentiated businesses and on the growth of those areas, particularly in Asia and the growing, moving parts of the world. And I think you'll see in the future that our preeminent growth will be in that area and that's probably a little bit different than it was a year or two ago as far as our priorities.

What do you value your business at? What do you think a proper valuation would be in its current form?

I'm not going to try and tackle that one. Maybe one of our financial guys would want to but -- I think that again --

Only if Sam wants to.

It's obviously more than the $23 IPO price. I was just thinking you might have a range that you thought was more appropriate?

Well there is a range and the special committee of the Board did a terrific job. They brought in, of course, as you know, their own investment bankers and their own counsel as did the Company. So we had four separate eyes looking at this other than the special committee. I think that there is a valuation out there that would be acceptable and that the Company would be excited to entertain. But I think at this point in time, it would be premature to try and guesstimate what the special committee and their advisors and others would say that could be.

I was going to say the word substantial, but I won't. So Gregg, thank you very much for your question.

Okay, I had some follow-ups but I know it's been a long conference, so thank you for your answers.

Okay.

Thank you one and all. I'll sign off, Peter, and wish everyone a great day.

Thank you for your time.

Thank you, bye bye.

Thank you, operator, and thank you, everyone, for joining and as always, we are available to take follow-up questions here in Salt Lake and down in Houston.

Thank you for your participation in today's conference, ladies and gentlemen. You may now all disconnect your lines. Enjoy your day.