Huntsman Corp (HUN) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the Huntsman Corporation 2006 second quarter earnings call. My name is Colby, and I will be your coordinator for today.

[OPERATOR INSTRUCTIONS.]

I would now like to turn the presentation over to your host for today's call, Mr. John Heskett. Please proceed, sir.

Thank you, Operator. And good morning to everyone. My name is John Heskett. I am the Vice President of Corporate Development and Investor Relations for Huntsman. Welcome to Huntsman's investor conference call for the second quarter of 2006.

Joining us on the call today are Jon Huntsman, our Chairman and Founder, Peter Huntsman, our President and CEO, Kimo Esplin, our Executive Vice President and CFO, and Sean Douglas, our Vice President and Treasurer.

A recorded playback of this call will be available until midnight, August 9th. The recorded playback may be accessed from the U.S. by dialing 1-888-286-8010, and from outside the U.S. by dialing 1-617-801-6888. The access code for both dial-in numbers is 81899738. A recording of this call may also be accessed through our web site.

Before we begin our discussion of earnings, we'd like to say a few words about forward-looking statements. Statements made during this call that are not historical facts are forward-looking statements. Such statements are considered to be 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 balance for our products and that of competing products, pricing pressures, technological developments, changes in government regulation, geopolitical events and other risk factors.

Please refer to our most recent Form 10-Q and Form 10-K 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 which has been adjusted to exclude the impact of discontinued operations, restructuring impairment and [bank] closing costs, loss from the sale of AR, net gains and losses arising from the early extinguishment of debt, gains related to the sale and acquisition of assets, legal settlements and expenses related to our recent fire and outage at the Port Arthur olefins unit.

In the second quarter of 2006 we recorded the net gain of 136.9 million related to such costs and expenses, and in the second quarter of 2005 we recorded an aggregate net loss of 53.6 million related to such costs and expenses.

We focus on adjusted EBITDA from a management standpoint as we believe it is the best underlying measure of the performance of our 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 second quarter earnings release, which has been posted to our web site.

Today, Huntsman Corporation announced second quarter earnings as follows. Huntsman recorded adjusted EBITDA of 362.4 million as compared to adjusted EBITDA of 429.9 million in the second quarter of 2005 and 292.3 million in the first quarter. Net income for the second quarter of 2006 was a record 262.9 million or $1.13 per diluted share. This compares to net income for the second quarter of 2005 of 112.7 million or $0.48 per diluted share.

Excluding the after-tax impact related to restructuring, impairment, and [bank] closing credits, gains from the sale of assets, gains from legal and contract settlements, onetime expenses related to the olefins plant outage, and the extraordinary gain related to the acquisition of the Ciba Textile Effects business adjusted net income from continuing operations was 123.4 million or $0.53 per diluted share. This compares to 169.5 million of adjusted net income or $0.73 per diluted share for the comparable period in 2005 and 76.6 million or $0.33 per diluted share in the first quarter.

While our results on an adjusted EBITDA basis as compared to the previous year was primarily attributable to lower results in our base chemical segment, although results improved dramatically in the European portion of our base chemical business, in the U.S. results were impacted by the fire and outage at our Port Arthur olefins unit, where we estimate that the lost profits related to business interruption were approximately 47 million, regarding which we have not included any amounts related to insurance claims that we will be entitled to claim in future periods.

Results were also slightly lower in our polyurethane segment on a YOY basis. Although energy prices were high and volatile, with some reaching all-time record levels, we've reacted swiftly to pass these on to our customers.

We'd now like to briefly outline the performance of each of our six segments. Polyurethanes recorded adjusted EBITDA of 172 million for the second quarter of 2006, which was 14.5 million higher than in the first quarter but 26.2 million lower than a year ago. We continue to experience very strong conditions from MDI globally. Volumes in the second quarter were up 16% as compared to the first quarter, and up 11% as compared to a year ago.

Our core markets and insulation and composite wood products continue to experience very strong customer demand, particularly in Asia. As expected, average pricing for MDI softened a bit, down about 3% from the first quarter, primarily due to new capacity in Europe and Asia which will come on this year. Despite all the turmoil surrounding MTBE in North America, our [POL TVE] business posted another strong quarter.

Material that affects adjusted EBITDA of 33.6 million for the second quarter of 2006, this was down from 37.2 million in the first quarter. On a sequential basis volumes were relatively unchanged and pricing moved up about 3%, which just about covered the increases we experienced in raw material costs. However, we did incur about $3 million in nonrecurring foreign exchange losses due to the devaluation of certain foreign currency exposures, primarily in Turkey.

Performance products recorded adjusted EBITDA of 70.8 million in the second quarter of 2006 as compared to adjusted EBITDA of 46.6 million in the first quarter. Profitability improved in all our major product groupings as compared to the first quarter due to a combination of higher pricing, stronger volumes, and lower raw material costs. We also benefited from reduced sales of ethylene glycol as their primary units were down for most of the second quarter due to ethylene supply constraints related to the Port Arthur fire.

Pigments reported adjusted EBITDA of 31.9 million in the second quarter which was down about 11% as compared to the first quarter of 2006. Our volumes improved by about 5% compared to last year and 2% as compared to the first quarter as the spring and early summer paint season was reasonably solid this year.

Prices in dollar terms increased by about 3% or approximately $57 a metric ton as compared to the first quarter. With energy, raw material costs, and transportation expenses all higher in the quarter, margins were compressed.

Polymers recorded adjusted EBITDA of 32.5 million in the second quarter of 2006, which was down about 6.2 million as compared to the first quarter and about a million as compared to a year ago. Total volumes in our core products were down about 2% as compared to the first quarter, where you will recall we experienced very strong volumes. Volumes were up, however, by about 4% on last year. Margins slipped a bit, particularly in polypropylene, as higher sales prices were insufficient to cover higher propylene and energy costs.

Finally, in base chemicals we recorded adjusted EBITDA of 61.1 million in the second quarter, a substantial increase as compared to 20.7 million in the first quarter, but still down compared to the 83.1 million in the second quarter of 2005.

Results improved dramatically in Europe, as selling prices settled higher across the board. Results in North America were obviously impacted by the fire and outage related to [the olefins] unit which we experienced at the end of April.

As I previously mentioned, we've not included any income related to the insurance claims, which we would expect to receive in future periods.

With that, I would like to turn things over to Kimo Esplin, our CFO, for his comments on our financial outlook.

Thanks, John.

Let me start by reviewing a couple of financing activities that took place in the quarter. We amended the terms of our bank credit facilities to provide 100 million in additional term loans priced at LIBOR plus 175. In July we funded this financing and used the net proceeds to redeem all of our outstanding senior floating rate notes which were priced at LIBOR plus 725. A good opportunity to continue to take advantage of attractive institutional loan market conditions. This should save us about 6 million in annual interest expense.

In July we purchased in the open market and issued a redemption notice for a combined total of 100 million of our 9-7/8s senior notes due 2009, using existing liquidity. We have also recently, yesterday, in fact, prepaid $50 million due under our credit facilities. All of these reflect our desire to continue to reduce our debt and drive-down the overall cost of our financing.

As most of you are aware, during the quarter we completed two M&A transactions. First, on June 27th we completed our previously announced transaction to sell certain of our butadiene and MTBE assets in North America to Texas Petrochemicals LP. We received 192 million in cash with an additional 70 million of purchase price deferred until the restart of our Port Arthur olefins unit. Our Port Arthur olefins unit has historically supplied approximately 20% of the crude butadiene raw materials supplied to this plant.

So we think this deferral of purchase price is very reasonable under the circumstances, and we would expect to receive this 70 million in the first part of next year. Also, we will settle the final working capital with TPC in the next couple of moths, and expect this to result in approximately $14 million of additional proceeds to us. This business generated approximately 651 million and 32 million in LPM revenues and adjusted EBITDA, respectively.

Finally, we recorded 88.1 million after-tax gain related to the sale. As you can see from the earnings release, we have adjusted our earnings and EBITDA to exclude the impact of this gain. We would expect to record an additional gain when we receive the 70 million. This is the first step in our strategic shift away from the commodity petrochemical elements of our portfolio and would expect that this shift will continue in the coming quarters.

Second, on June 30th, we completed our previously announced acquisition of Ciba Specialty Chemical Textile Effects Division for an aggregate cash purchase price of approximately 172 million. In addition, in conjunction with the acquisition, we assumed approximately 51 million in pension and other long-term liabilities. We will also settle working capital in the next couple of months and would expect to receive approximately 35 million in cash related to this.

We are very excited about the addition of this business in our portfolio of differentiated businesses, and we will begin reporting it together with our existing advanced materials business as a new materials and effects segment, which will have over 2 billion in annual revenues, 24 manufacturing and formulation facilities, and over 6,000 employees. Our transition plan is well underway, and we've received a very high degree of acceptance from the business' employees, customers, and suppliers. The feedback to date has been overwhelmingly positive with regard to this change in ownership.

The Textile Effects Division continues to perform well. Ciba reported that first half revenues were up approximately 3% as compared last year to approximately 524 million, while EBITDA was up 10% to 45 million. We believe the business has benefited from more stability in the marketplace this year, and the impact of some of the restructuring activities Ciba had implemented in late 2005 are clearly showing up in the bottom line as costs are lower.

In terms of the outlook for the second half of 2006 for Textile Effects we think the overall profitability generally looks a lot like the first half of the year. However, as a result of purchase accounting, we will bring inventories across at stepped up values, which will result in lower margins for the first quarter or so, until we turn-over that inventory.

As it relates to our future plans to restructure the business, we have already begun and in the back half of 2006 through 2007 and into 2008 we would expect to spend approximately 75 million on 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 margins by 2008, which should push roughly $0.30 per share to our EPS.

Finally, in the second quarter, given the fair market value of the current assets acquired, was well in excess of the cash purchase price and the acquired liabilities, we recorded an after-tax 50.5 million extraordinary gain related to the acquisition. In calculating the adjusted EBITDA and adjusted diluted income per share from continuing operations we have excluded the impact of this gain.

Let me now walk you through the impact of the Port Arthur fire outage on our second quarter, and attempt to give you a sense as to how we can expect the P&L to be impacted over the next several quarters while we rebuild and repair the damaged unit and collect insurance proceeds from our carriers.

Let me remind you that we do carry typical insurance coverage. For this incident we have a $10 million deductible on property damage and a 60-day waiting period for business interruption. Having passed this threshold at the end of the quarter we should be entitled to full reimbursement for both lost profits and costs to repair.

In the second quarter we booked 9.4 million in onetime expenses, primarily attributable to impairment of fixed assets that were destroyed and the write-off of capitalized turnaround costs. As you can see, both adjusted net income from continuing operations and adjusted EBITDA exclude the impact of these expenses.

In the second quarter we also incurred approximately 4.8 million in expenses related to the repair of the damaged facility. We would expect to be reimbursed by our insurance carriers for these amounts as they are in excess of our deductible, so we have booked a corresponding receivable on the balance sheet. As such, there was no P&L impact in the second quarter related to these expenses.

Finally, we estimate that the lost margin related to business interruption from April 29th until the end of June 30th at approximately 47 million, as our business interruption insurance coverage didn't begin until 60 days after the event we are not entitled to recover the vast majority of these profits.

As it relates to physical damage, we will continue to incur expenses and spend capital related to the repair and reconstruction of the damaged facility. Generally, GAAP allows us to accrue for the anticipated recoveries to the extent such expenses incurred net of deductibles. Any recoveries that we receive from insurance carriers that are in excess of the accrued amounts or for capital expenditures will be recorded as income in the period of receipt.

As it relates to business interruption, as we have now met our 60-day deductible we would expect to be reimbursed for all lost profit until restart. Generally, GAAP allows us to accrue for anticipated recoveries to the extent of our unabsorbed fixed costs, which we estimate at $6 to $7 million per month net of deductibles. Again, any recoveries received in excess of this accrual will be recorded as income in the period of receipt.

In summary, we have incurred lost profits in the first 60 days of approximately 47 million and expenses of 10 million, thereby meeting our deductibles. We would now expect that all future lost profits, charges, and capital relating to the fire will be recovered by our insurance. The issue will be the timing of such collections and the timing of recording it as income.

As it is typical that insurance recoveries tend to lag the period that the losses were actually incurred, we would expect to record little, if any, income in 2006. Although we may receive some progress payments, the majority of the income related to these recoveries isn't expected until 2007. We will attempt to isolate the expense and income items related to the outage in adjusted net income from continuing operations and adjusted EBITDA, so you can get a better sense of the true underlying profitability of the business.

Finally, a few thoughts on the third quarter directional guidance. In our commodity segments we believe pigments will show slight improvement over the second quarter as we expect to continue to push hard on announced price increases. In our UK based chemicals business prices for the third quarter for ethylene and propylene settled up by 35 Euros per metric ton and 5 Euros per metric ton, respectively. However, with the recent increase in crude, NAFDA prices are up to $650 per metric ton relative to an average of about $605 per metric ton in the second quarter which absent a downward trend in the next couple of months will compress margins.

In the U.S. with the butadiene business sold and the large ethylene cracker down, and given the accounting treatment I just discussed, EBITDA should be in the neighborhood of breakeven over the course of the next several quarters. In polymers results should improve slightly as we expect to implement announced price increases in polyethylene.

In our differentiated segments, profitability for polyurethanes is expected to be similar to that of the second quarter. In our Materials and Effects Division advanced materials margins should improve, and we will begin reporting profitability for the Textile Effects business in the third quarter.

As I mentioned earlier, we would expect the earnings profile for Textile Effects to approximate that achieved in the first half of the year. However, the onetime affects of purchase accounting stepped up inventory values, which we discussed, will reduce profitability, but this should be limited to the third quarter.

In performance products results will be softer as raw materials are expected to be higher. This, along with scheduled maintenance at our [Malait] Plant will impact margins and profitability achieved in the second quarter.

When you put this all together, we think that the profitability and fundamentals of our business will be similar to that of second quarter. However, normal seasonal patterns, particularly in Europe, may cause adjusted EBITDA to be down slightly as compared to the second quarter.

Peter.

Thank you very much, Kimo.

I'm Peter Huntsman, President and Chief Executive Officer of the company. I'd like to thank all of you for joining us this morning.

We're very pleased with the results for second quarter. As we expected, they showed substantial improvement compared to the first quarter, with adjusted EBITDA and adjusted net income per diluted share of 24 and 61%, respectively. In fact, second quarter EBITDA was the best quarter we've had in the past four quarter. All the more impressive given the major ethylene outage we experienced at the end of April and record high energy costs. Certainly, there's been quite a bit of speculation in the media recently about the falling global economy, but from my perspective I haven't seen much, if any, signs of this.

We are experiencing very solid demand across our business. Keep in mind that this represents a fairly broad cross-section of the global economy in terms of geographies and end consumer and industrial demand. So if there's softness out there, we're not seeing it beyond the normal seasonal trends we experience each year.

The profitability in our business continued to recover nicely in the second quarter, with June being a stronger month than April and May, especially in our differentiated segments. I believe that we are poised to see continued strength into 2007. There certainly are some risks out there, particularly around $70 + per barrel crude oil, and what that means for the global, macro global economy, but from where I sit today we are cautiously optimistic.

Let me start by briefly reviewing the fire we experienced at our Port Arthur ethylene facility. As most of you are aware, on April 29th we had a major fire at our Port Arthur olefins unit. Preliminary feedback from our investigation indicates that the fire appears to have started with a rupture in the line and quickly spread to an adjacent portion of the unit. After extinguishing the fire, which took the better part of a week, we've spent much of the last three months securing the plant from a safety perspective, investigating the root cause, and working closely with our insurers.

We are nearing completion of a detailed assessment and inspection of the extent of the damage and are close to completing the preliminary engineering work. Fortunately, it appears as though the damage to the critical pieces of equipment, including the compressors, is limited, and we expect to be able to repair the damaged unit and have it back-up and fully operational by early in the second quarter of next year.

Now, let me spend a few minutes, and talk about a couple of our key business segments. It was a great quarter for our polyurethanes Division. We saw very strong demand for our MDI products, with volumes increasing by 16% as compared to a seasonally weaker first quarter and 11% as compared to the second quarter of last year. Demand was good in all regions, but particularly in Asia, where industry demand appears to be more than double that of the developed regions in the last quarter.

While we have seen this demand across essentially all applications, the strongest drivers of growth have been in the insulation and composite wood products applications. Insulation continues to be the growth driver for our MDI business, and we think given the continued emphasis to become more energy efficient this will continue to accelerate growth for the industry. We also continue to see MDI growth increasing, too, on the ongoing substitution of TDI in a number of applications.

On the pricing side, as expected, we saw MDI pricing drop by about 3% in local currency terms, which is very similar to what we've seen the last couple of quarters. There is new capacity coming on in the market this year, both in Asia and Europe. However, given the strong growth we see in the second quarter, which is showing no sign of letting up in the third quarter, we think selling prices are poised to increase in the second half of the year.

We announced a 150 Euro per metric ton increase in Europe in June, and just this past week we've announced an increase of $110 per metric ton in North America. We expect similar increases to be accepted in Asia during the next month, as well.

We believe that overall industry supply conditions are tight, and we are essentially sold out of MDI. Given energy and raw material costs, combined with the overall market tightness, we are fairly confident in implementing these price increases.

Finally, we're very pleased to announce that we commissioned our new MDI splitting facility in China on June 30th. This facility which is 70% owned by Huntsman is now operational. Work continues with the commissioning of the precursor MDI plant, which is also part of our Chinese JV. The JV is working through a number of minor mechanical issues, not unusual for a project of this scale in a new manufacturing location. And we expect final commissioning and startup in August.

This is a remarkable achievement for Huntsman in our Polyurethanes Division. We first began planning for this expansion almost 15 years ago, and to bring a facility of this complexity up in China under budget and on schedule is quite an accomplishment. After replenishing our supply chain in Asia we expect to have about 25,000 metric tons of additional MDI production to sell in the global market in the second half of this year. At expected average selling prices this should generate a bit over $60 million in additional revenues for us.

In 2007 we expect Huntsman polyurethane Shanghai splitting facility to produce over 60,000 metric tons of MDI production, which should generate more than $200 million in revenue. Again, we're very pleased with the progress on both facilities and to have our MDI facility in startup mode. It's been a long time in the making, and couldn't have come on at a better time for us given the strong demand we're experiencing both globally and in the Asian region.

Another segment where we experienced improved results in the second quarter was our performance products group. Adjusted EBITDA was a little over $70 million, which was up over 50% as compared to the first quarter, and about 8% above the level we achieved a year ago. On a sequential basis profitability improved on all of our key product groupings. Volume growth was very solid, up 6% as compared to the first quarter, most notably in our performance specialties SBU, where volumes were up 7% as compared to the first quarter and 10% relative to a year ago.

On the pricing side we saw momentum across all major product groups with average selling prices up about 1% relative to the first quarter and 7% versus last year. This has enabled us to expand our margins, not only in our [Malacan high drive] and specialty businesses, which continue to benefit from strong demand and tight market conditions, but also to a lesser extent in our intermediate business.

Finally, following the Port Arthur fire we were forced to substantially reduce our ethylene glycol production in the quarter. As you know, ethylene glycol has been a drag on the earnings in this segment in the past several quarters. We lost $9 million in ethylene glycol business in the first quarter, and this dropped to $6 million in the second quarter.

In pigments, to be frank with you, we were disappointed. Volume demand has been reasonably strong through the paint season, up about 4% over the industry from a year ago. Stock levels appear to be in reasonably good shape at about 45 days, and we think capacity utilization rates are approaching 98%. All of these indicators have historically resulted in fairly decent pricing leverage for producers.

There have been multiple price increases nominated by producers, but in local currency terms as we were largely unsuccessful in implementing previously announced price increases in the second quarter. We have experienced some very aggressive pricing in the market by certain of our competitors who appear to be more concerned with regaining or retaining market share, which is obviously very frustrating in our efforts to improve profitability.

Before turning the call over to questions, I would like to briefly update you on the progress as it relates to management's objectives, as well as the strategic actions we've announced and have been pursuing.

We're very pleased to announce the successful completion of our Coronado cost savings project. Almost two years ago we set an objective to reduce our controllable fixed costs by $200 million on a sustainable basis. I am pleased to announce that we have exceeded this objective. This doesn't mean we're finished with cost reduction efforts. There are [inaudible] in our company and inflation creep on salaries and benefits alone total almost $40 million a year in this company. We will continue to drive costs lower in order to offset this inflation.

We continue to make good progress in our debt reduction efforts. During the quarter we've reduced our net debt by approximately $200 million. Since the end of 2004 and excluding the IPO process and amounts used to acquire minority equity interests we have reduced our debt by approximately $700 million. This, obviously, has had an impact on our bottom line as interest expenses have been reduced by over 35% as compared to pre-IPO levels.

Finally, as a management team, we've been aggressively pursuing those elements of our various business strategies that we think will thrive in this high energy environment. Part of this revolves around developing and commercializing new green chemistry that leverages renewable resources of energy. We are making progress in our effort to replace some crude oil base material with raw materials that are byproducts of biofuels and other renewable resources.

We are also seeing the benefits on focusing on the marketing and developmental efforts in markets such as insulation, lightweight composite materials, and other energy saving applications. We think these initiatives will result in acceleration in growth in the coming months and years.

The completion of the sale of our butadiene business and the closure of our acquisition of Ciba Textiles Effects Division, which occurred in the second quarter, represent the first step in our ongoing effort to reposition our business portfolio away from cyclical slow growth commodity petrochemicals and more towards a focus on differentiated chemistry.

Both of these transactions was completed in a very attractive valuation for Huntsman and when taken together we have swapped a cyclical North American based petrochemical business with $32 million in EBITDA for a global differentiated textile chemicals business with approximately $90 million of LTM EBITDA.

In the process, we've also generated almost $150 million in cash to be used to further reduce debt. We think there are additional opportunities to reposition this portfolio in a similar fashion, which we will pursue.

Six months ago we announced a decision from our Board of Directors to spin-off or sell our commodity businesses, including our base chemicals and polymer segments. By the end of the year it is our objective to have a differentiated chemical company that will be among the largest in the world. I would expect this new company to generate revenue growth at a rate in excess of 25% greater than the old Huntsman, and average profit margins will be almost 40% higher. Our balance sheet will be even stronger, and our capital spending requirements would drop significantly.

We will be a strong, vibrant $9 billion differentiated chemical company with tens of thousands of different products and formulations. We will be less dependent on volatile crude oil based raw materials and more leveraged to the products where we can capitalize on our technology, global marketing, and low cost of manufacturing. We expect this to result in a more stable and growing earnings profile.

As it relates to our plans to separate our commodity business from our differentiated businesses we have made, we've been making good progress in exploring a full range of available options. As we have described in the past, this could include a spin of these assets or an outright sale. As we sit today, we've received a number of very serious offers related to these assets from potential strategic buyers. We think that a sale or series of sales is the likely outcome. We are not ruling out a spin at this point, but I would say that an outright sale seems to be the more attractive solution.

I can assure you that we are dedicating quite a bit of our internal resources and management attention to this process, and would anticipate to have announcements in the coming months. Given the ongoing discussions that we're having it would not be prudent for us to say any more on the subject at this time. And, unfortunately, we won't be able to answer any of your detailed questions during our q and a session.

But, again, let me assure you that this is 'the' top strategic priority for this management team and the Board. We're making good progress and we would hope to be able to communicate additional details shortly.

Before we open the call up to questions, our Chairman would like to share his thoughts on our ongoing efforts to maximize shareholder value. Dad.

Thank you, Peter.

First, my congratulations to our management team on both completing an excellent recordsetting 2006 second quarter and projecting a strong second half for 2006.

Now, may I share my vision of Huntsman Corporation, and its 36-year history and future. 36 years ago, I had the opportunity to start a small plastics packaging business. At the time, it was a difficult decision to leave Dow Chemical Company, where I was then serving as a Subsidiary President. But our fledgling company became very successful. And in 1982 we expanded into commodity chemicals, and as a team built one of the world's leading petrochemical firms. At times the financial and energy challenges were almost overpowering, but we persevered and became stronger each year.

Now, we are beginning an exciting and very profitable third phase of our great chemical dream. We are selling all of our commodity businesses and focusing our efforts strictly in specialty chemicals. In fact, negotiations to complete this major transformation and move out of all of our commodity businesses are progressing smoothly and on schedule.

Huntsman Corporation will soon become the world's leading specialty chemical company with revenues in excess of $9 billion. Our dependence on energy will be dramatically reduced, as will our current debt. Our management team is experienced and dedicated, led by our CEO, Peter Huntsman. Our specialty product mix is superb and in great demand globally. Our growth in specialty chemicals will be strong, and our cash flow will be consistent.

Our Board of Directors, officers and employees are excited to move aggressively ahead in this great new endeavor. Perhaps no other chemical firm in the past half century has reinvented itself and moved forward with such profitable products as has Huntsman Corporation. I am so proud and honored to still be around after 45 years in the chemical industry and to see this great transformation occur.

I thank you. Operator, we are happy to now take questions.

[OPERATOR INSTRUCTIONS.]

Your first question comes from the line of [Mike Judd] with [Grenich Consultants]. Please proceed.

Good morning.

Hi, Mike.

A question about, you know, your comments about the strategic activities that you're looking for your basic business, you know, on schedule. I believe that on schedule or in the past you had basically indicated that you were hoping to perhaps be able to IPO the business perhaps in the fourth quarter or so. And so just in relation to the comment on schedule, I'm just curious as to, you know, what that means?

And, secondly, I'm just curious, having Port Arthur down and potentially not back-up until the beginning of the second quarter next year, does that change in any way an option of, say, selling the business to somebody else versus actually IPOing? How does that impact your options, please?

Well, we think the damage of the Port Arthur facility is quite contained. It was an extensive fire but the facility, the startup of the facility, the rebuild of the facility is not going to be a risk. And so we think that the people that have been and continue to look at any potential purchase of that facility understand the rebuild, the scheduling and so forth, and we do not see that as delaying any of our planning.

We had talked about in our first conference call regarding this subject, I think six months ago, and again three months ago, that we wanted to be completed with our strategic decisions here by the end of the year. It certainly is our objective and our expectation at this point that by the end of the year that we would have these Divisions sold-off contractually. Obviously, this would be subject to government clearances and so forth, but we would certainly hope that well before the end of the year that we essentially have the businesses contractually sold at this point.

Thank you.

Your next question comes from the line of Laurence Alexander with Jefferies. Please proceed.

Good morning. First, a question on the advanced materials. Can you discuss the comments on the increased competition in some of the product lines in advanced materials? And do you see, do either of your businesses have enough scale? Do you need to either consolidate or divest any of them to get a better competitive position?

We believe in the advanced material section, on the epoxy formulations and other formulated products on the advanced material side, that we are among the market leaders. And the four major segments where we compete in our advanced materials we are either number one or number two in the vast majority of those applications and in the production of those products on a global basis. So I believe that we do lead the industry as far as new technology, as far as the ability to service on a global basis.

As we look at our Textile Effects, when you look at the combined business, we would be either first or second largest in the world. I do believe in Textile Effects that there may be room for some consolidation in that particular end of the business.

And but I think that our position, Laurence, where we are today I think we're in a very competitive position in both of these businesses, especially as I look at Textile Effects, the opportunity that we have there to take that business from where it is today, roughly to a 10% EBITDA to sales business and move that up to a mid-teens EBITDA over the course of the next two years or so, regardless of improvement in market conditions. Now, I think that there's real up side in that business.

If I can just add, Peter mentioned sort of our market position, whether it be in power and electronics or composites or [inaudible], we are, you know, one or two in the region.

As it relates to manufacturing, let me remind you these are formulation plants, they're not big plants. And capacity utilization isn't critical in driving profits in these businesses. These are downstream formulation type businesses.

And so the near-term problems that you cite in the release about particularly in wind and electronics, is that more competitor behavior? And do you see that improving or do you see that deteriorating going forward?

Well, electronics is a competitive environment in Asia, clearly. As lots of folks are trying to compete for that business. Wind power, we have dominated that industry for a long time. We see some competitors be a little bit more aggressive on price. There's only a couple, very small handful of competitors in the wind power energy, area, where folks have product that is spec'd in and approved and these big long windmill blade businesses.

If you look, though, where that industry is going, they're going to longer and stronger blades, and when you look at that particular market segment depending on what region of the world that you look, we have anywhere from 70 to 90% market share of that longer blade with stronger properties and so forth. So longer term we believe that this is a strong double-digit sort of growth segment of our business, Laurence.

And, finally, just longer term, once you've finished with the asset shuffling, what debt to EBITDA ratios would you be comfortable with on the differentiated portfolio?

We think that -- well, a lot of that, obviously, will depend on where we come out as far as a divestiture versus a spin. But we would be shooting as a company within the next year or so to have probably a 2.5 to 3 times EBITDA to debt sort of a ratio.

Thank you.

Your next question comes from the line of PJ Juvekar with Citigroup. Please proceed.

Yes, hi. Good quarter there, and your new China plant is about to start-up. Was there any volume related to the seeding the Chinese market before the plant comes online?

We've been seeding the Chinese market for some time, gradually over the course of the next couple of years, or over the course of the last, past four to five years. And, obviously, with the splitter that is already up and running, we have the opportunity to take MDI, precursor MDI material from our U.S. and European plants and gradually upgrade that through the MDI splitter and have Huntsman produce MDI in the Chinese market, and gradually start building up even before we have the precursor MDI facility that's up and running in China. So that, in my announcement, when I talked about kind of two MDI facilities, both the splitter and the precursor, it's important to note that both of those are in startup, and we already have started operating the splitter.

As you look at the growth that is taking place in that particular market, our original marketing plans had us marketing over 50% of that Chinese production in China. The rest throughout southeast Asia. Today our marketing plan will show us marketing 100% of that in China and still after we've started up full production at 240,000 metric tons, still importing product into China.

So, PJ, this is a market that for us, not only for exports in China, but largely on domestic consumption of MDI in China, this is a product that we think will continue to have very strong growth in China, as well as North America and in Europe, as we now [inaudible], we're also debottlenecking on North American and European facilities. As we debottlenecked these over the last six to nine months, that product is also in the market. And even with that additional product we are still sold out today in MDI and see very tight conditions.

Great, great. If you look at your polyurethanes business, how [inaudible] MDI versus the polyurethane?

We haven't broken out MDI.

I know you don't break it out, but just a ballpark number?

Well, it's – the vast majority of the profitability is MDI. As you know, in polyol's that facilitates us selling systems, but for the most part the value is in the PO molecule not the polyol molecule. We do make on average 100 milloinish a year in [PO MTBE], which is a part of that, of the polyurethanes business. And MBTBE sort of bounced that around a little bit. But for the most part about 100 million is PO MTBE, the rest is really MDI driven.

Yes, okay. And then one or two questions for Kimo, you know, you have two new plants coming up, MDI and the [inaudible] plant. What do you think will be the contribution from those two plants next year? You talked about revenue contribution from MDI plant, but if you could just give us some idea on EBITDA contributions?

Sure, let's take China first. Roughly 80,000 tons of MDI, you remember we have two JVs, the MDI manufacturing facility is off balance sheet and rally is transferred on balance sheet at a fully costed price, including CapEx and project finance interest burden, price. So it's going to have roughly half of the contribution per ton that our on balance sheet product will have. You know, so 80,000 ton times, you know, $400 or $500 per ton in terms of profitability is a good shot at what value may be on the P&L for the JV contribution.

Now, as it relates to the polyethylene business, obviously, you have lots of good models. You have your crystal ball around what is polyethylene going to be. I think we're pretty bullish on polyethylene for the next couple of years, particularly low density in Europe, and this will be the lowest cost plant in Europe and will be very competitive.

Great, thank you.

Your next question comes from the line of Sergey Vasnetsov with Lehman Brothers. Please proceed.

Good morning. A question on Ciba units, can you remind us of what was your initial expectation of cost savings and if this number has changed after you acquired [inaudible] now?

I think we're pretty consistent. What we said was $75 million of restructuring expenses. By the way, that's all reserved in the opening balance sheet. And so you won't see that hit the P&L, so that's cash that we'll spend over the next 2, 2.5 years. There's $100 million of CapEx, which really is sort of shifting manufacturing to Asia.

And, again, let me remind you of the sales we have of about $1 billion in sales, almost $400 million of those sales are already in Asia. A lot of that product is manufactured in Europe and shipped to Asia. Like the rest of our competitors do. We need to move that production base to some of our wonderful facilities already established in Asia, including our [Panu] China facility.

So in terms of cost of restructuring, our views really haven't changed. We have been surprised, frankly, that the business has been as strong as it has been over the last six months, since we really started negotiating for this business. You know, 90 million of EBITDA is ahead of where we thought we'd be on an LPN basis and for '06.

We do believe we're going to get this business up into the mid-teens, which means there's another 50 million plus of EBITDA we think we can generate out of this business. And restructure to the growth areas of the world.

Kimo, also touched just very briefly on the transition that we have gone through in the acquisition of the Textile Effects. I can't emphasize enough, with the number of customers, we've got more sales representatives in this Division than we almost have in the entire company combined.

The customer acceptance and just the excitement that the customers have that this business is finally on firm ground with the chemical manufacturer that's dedicated to the future of expanding and investing in this business has really been overwhelming. The employees of Textile Effects and so forth have really been – it's been a tremendous opportunity for us. And I believe this business is stronger than it was when we initially looked at it six months ago. I think that the prospects going forward are everything we were hoping and then some.

I guess there has been one other sort of up side surprise for us, as we've gotten to know the business better. And that is the core fundamental technical textile business that will continue to stay in Europe and the U.S., notwithstanding a real shift in apparel to Asia. This includes nonwoven, it includes carpet, it includes things like tents, tent materials from nylon. All of these sorts of technical textiles, automotive textiles. These things will stay in the U.S. and European markets. And we've been very surprised at how robust and strong they've been and what a good position Ciba had.

Okay. My second question is about your CapEx in the basic chemical segments, all the plants in [Wilson]. Do you plan to proceed with a CapEx outlay you had planned initially or in light of the sale you will slow-down a little bit, or will you just go ahead and hope to get paid by the buyer?

All of the strategic buyers that we have spoken with, as well as our own internal plants, we all think that is an excellent project, and we have continued to move forward with that. I see no reason why that would be slowing down.

We still expect to spend 200 million of the 360 million in capital for that plant in 2006.

Got it. Thank you.

Your next question comes from the line of Chris DeYoung. Please proceed.

Hi, [inaudible] North America. A couple of questions on the Port Arthur situation. Beyond repair costs and insurance relief, I'm wondering if you could quantify the costs or the opportunity costs, if you will, of having the facility out for about five quarters, and being unable to take advantage of a strong pull in market conditions?

Well, I think we gave you a pretty good sense for what that was. We said there were lost profits of 47 million.

Okay.

Which really represents the 60-day business interruption period, and then there's a $10 million property deductible. So if you kind of throw those together it's roughly $50 million.

Yes.

Go ahead.

No, you go ahead, I cut you off.

No, no, I was just going to say I think that really quantifies it. You know, we are required by our insurers to have a model that really reflects what this plant would have done if it were operating, and we're entitled to reimbursement on that basis.

And I think that's the key. So as we go forward, from the beginning of the third quarter onward we run a virtual P&L as though we were in the market. We're able to take full advantage of market conditions, we're able to take full advantage of the swap that we had in place and everything else. We think that we'll be able to benefit from that. And we'll obviously be collecting those, all of those insurance proceeds from the beginning of the third quarter on, and as we look at the total repair costs, which will probably be somewhere around $100 million, you know, 90 + million of that will be reimbursed to the company, as well.

Okay. Second question on the commodity business, I'm not sure if you can answer this, but in terms of the buyers or [offers] you received, were any of those offers received subsequent to the Port Arthur mishap?

They all have been.

They all have been, okay. Super. Thank you.

Your next question comes from the line of Robert Ritsis with Bear Stearns. Please proceed.

Yes, hi. Can you hear me?

Yes, you bet.

I was just curious on the Port Arthur facility that you're rebuilding, one, did you guys, are you getting full reinsurance to build that back? Or are you going to have to pay some, you know, millions of dollars also?

The deductible is $10 million. We would expect the plant to cost about $100 million to rebuild, so we would expect other than that $10 million deductible that we will get reimbursed fully.

Okay. And then in the second quarter you expect it to be fully operational or, you know, just you'd be starting it up and it'll be sometime in the second half of the year?

Given the area of the facility that was damaged, when this facility, the startup of this facility should be a matter of days, not weeks or months.

Okay.

So when this is done, furnaces, the hot end of the plant, most of the cold end of the plant is fine. You know, we tested the other ends of the facility. This will be a very quick startup.

So we indicated it would be early in the second quarter. We won't have the benefit of the plant for the full second quarter but for most of it.

Okay. Two other questions, really. Will it be at the same capacity or since you're, you know, probably doing some more stuff will it be more capacity or basically the same?

I think it'll be basically the same. Certainly, no worse than where it was before, perhaps a bit better.

Okay. And the last question for the facility, this obviously will also be put into the part of that business that will be sold at some point, is that correct?

Yes, that's right.

All right. Thanks for your help.

You bet.

Your next question comes from the line of David Begleiter with Deutsche Bank. Please proceed.

Thank you. Peter, do you intend to keep any ethylene capacity? If not, what are your plans for sourcing, that billion pounds of ethylene and performance products? What are your plans? Are you going to have to contract the stuff to buyers of assets going forward?

Well, it would be our intention to have contracts with the buyers going forward. We have always transferred ethylene at full market price that is comparable to what we're selling to other large consumers. And so whether we do it at a contract with a potential buyer or whether we just buy on the open market, I see no impact on the ongoing differentiated businesses going forward.

And, Peter, you did say you thought you would sell all commodity businesses by yearend, including Port Arthur, correct?

That's right. That we will be in a position, again, we maybe will not have closed on the transaction but certainly we'll be, it is our expectation that we will be contractually completed by yearend.

And, Kimo, could you discuss the NOLs you have and perhaps shielding some of the gains on the sales of these pet chem assets?

Sure. We believe that if the UK business is sold separately that we will not incur taxes, not significant taxes. As it relates to our U.S. NOL we have over $1 billion of NOL. Those will be available to us if we generate taxable gains in the divestiture of those assets. I would, I can't imagine that we would be a significant taxpayer with those divestitures.

And the last thing, Peter, you mentioned an option [inaudible]. What could derail these sales beyond events beyond your control?

I haven't really given that a great deal of thought. I would just be speculating at this point. You know, an act of war or something. I think that with the people that we've talked to would be, you know, the multiple parties where the interest has been shown and our discussions to date, I feel very confident in the plan that we have in place and having it completed.

So the announcement in the next few months, couple of months?

That's what we've said.

Thank you very much.

You bet.

Your next question comes from Brian Cianci with UBS. Please proceed.

Hey, guys. Maybe this is a question for Kimo. On, and I know you can't comment in detail, but you mentioned the balance sheet [inkling] up by sales, and let's say we get a certain amount of cash, what percentage of that cash would go to debt pay-down? Philosophically, how much would you keep in the pocket for acquisitions? And then perhaps related to that, what do you expect your debt rating and, or debt to EBITDA or any other ratio, do you have a goal for that long term?

Sure. Yes, we would expect almost all of that, all of the proceeds to go to debt reduction. I think our differentiated businesses lend themselves to bolt-on type acquisitions, not significant sort of credit changing type acquisitions. So, you know, yes, absolutely, we would do sort of bolt-on deals, but for the most part the proceeds from these divestitures will go to pay-down debt.

We believe that that will put us squarely in investment grade range, and because of that we believe that will be, it will be appropriate to have a dividend on our stock, a quarterly dividend, and we would expect that folks could look forward to something like that once we've completed these divestitures.

That's a great answer. Thanks.

Your next question comes from the line of [Greg Goodknight]. Please proceed.

Good morning.

Good morning, Greg.

Good morning, Greg.

A question, the virtual cracker or the virtual plant, does this imply that these ghost earnings will show-up on your PL for the third quarter? And is that included in Kimo's directional guidance to flat, to slightly down or perhaps flat in the third quarter?

Greg, I wish it was that easy. We're able to accrue for the unabsorbed fixed costs. We said that was $6 to $7 million a month.

Okay.

We're not allowed to accrue for lost profits. And so my directional guidance was assuming that we're able to absorb, cover our fixed costs but not any sort of profitability that we would have generated in terms of EBITDA for our ethylene business in North America.

Okay, great. That makes that clear. Second question I have is your earnings from operation of $0.53, I thought I understood that that didn't have any addback for the Port Arthur outage, which is 47 million or $0.20, is that correct?

That is correct.

Okay. A final question, if I could? There's a textile processing chemicals business for sale by [Lanzas]. Two questions, are there overlapping products to your Textile Effects business, or a second question, is this something you might be independently interested in?

Greg, we probably ought to say no comment on that. Is there overlap between the two businesses? I think publicly we can say, yes, there is, anything beyond that we probably would be best to say no comment.

Well, you answered my question very well then. Thank you.

Your next question comes from the line of William Matthew's. Please proceed.

Yes, hi, guys. Just a brief clarification. In terms of the differentiated businesses that you would keep going forward, a number, a revenue number was mentioned of $9 billion. If I kind of look through the businesses would that mean that the differentiated businesses that you would keep would include pigments and polymers?

It would include the pigments but not the polymers side of the business. If you look at the business, if we had been operating it kind of on a last year's basis it'd be about $9.3 billion. That would include the polyurethanes, our pigments, our performance products, and our advanced materials and Textile Effects Divisions.

And, interestingly enough, if you look at that on a geographical basis, about 40% of that is in North America, 60% of that is in the rest of the world. So not only does this business, as I mentioned in my comments earlier, not only does it change from a margin point of view and a growth point of view, but also from a geographic point of view. And I think we're in an excellent position to capitalize here. It's 20% of the business in Asia and Asia-Pacific, Chinese markets. You know, 40% in the U.S., 40% in Europe and the rest of the world. Excellent geographic diversity in this business, as well.

Okay. And that's all my questions for now. Thank you.

Thank you.

Your next question comes from the line of [Ben Burrington] with Citigroup. Please proceed.

Hi. Just on the, if you could quantify for me, the commodity business? You've got polyethylene and polypropylene capacity, I just wondered how much capacity you have in that excluding the new plant that you're building in [Wilson].

We have a little over a billion pounds of polypropylene, and most of that is in one of the largest and lowest cost plants in North America. We have about 750 million pounds of polyethylene in North America before the new plant in Europe.

Okay. And what's – I don't know if you can disclose it – what sort of EBITDA do you generate from polymers?

It was in our press release, we break it out as a separate segment.

It was just a bit over $30 million in the quarter.

That, by the way, over the last two-and-a-half years, each quarter has been very, very consistent, between 30 and 40 million of EBITDA.

Okay, so you're looking at about 120 to 160 million EBITDA for the whole year?

On an annualized basis that is what that calculates to. We indicated that we thought polymers would be a little better in the third quarter versus the second.

Okay, and also the Wilson plant, when do you expect that to be ready?

That plant should be ready by the end of '07.

Okay.

Operator, why don't we just take one last question. We're coming up on an hour here.

Your final question comes from the line of [Bob Amenta] with JP Morgan Asset Management. Please proceed.

Thank you. Hi, guys.

Hey, Bob.

From the bondholder side, a couple of quick ones. On the repair costs and the sale potentially of the commodity business, and then maybe the timing for closing won't make much of a difference on this, but you're not expecting a two-step payment like you're getting with the recent sale due to the fact that depending on timing the plant may not be rebuilt? You don't expect someone to hold back and have you guys supervise the final rebuilding? Or how would that go?

Well, we don't want to comment on exactly what structure we'll end up with. I'm not expecting that, but I suppose something like that could happen in some form. I don't want to comment on the structure that we'll end up with.

Okay.

Between the negotiations with insurers and everything else it's not just a simple black-and-white issue.

Okay. And a quick thing on the rebuild, do you expect, and I don't know how you rank that plant in terms of the quartiles cost curve, do you expect it to slot in as a lower cost plant when it's done due to any kind of new technology or will it basically be the same from a cost position, as well?

We are reviewing at this point our options with that facility. Obviously, with the work that we are doing with the insurer, their responsibility is for the rebuilding of the facility, period. We also are looking at additional projects that, obviously, we would be looking at as a company above and beyond any insurance proceeds that may look at making that facility more competitive.

Obviously, when you replace damaged portions of that facility, the parts that were damaged in that facility for the most part were bits of equipment that were put in in 1978 when the plant was built. We're certainly not going to go back and find 1978 equipment to put in the facility, so, yes, I think just by nature of the rebuild you're going to have newer, you know, better material put in there. And you're probably going to see an increase in the flexibility of the unit, itself, being able to go from gas to heavy liquids and so forth.

Anything we do to improve the plant will not prolong the downtime period.

Okay. And then, lastly, on the potential sale, you guys just identified kind of ballpark polymers, EBITDA of in round numbers 150, and base chemicals is obviously all over the board, but give or take 200 million for the last 12 months. So obviously not going to ask you to say a price, but if you got 1.5 billion or 2 billion or whatever the number would be and no taxes, would you imagine this money coming in and just solely paying down debt?

I'm guessing, and maybe this is more in case you spin it, but it doesn't appear to me as a bondholder reading covenants that it would be very easy given that this, or easy for you to allocate existing bond issues, if you will, to the commodity business given that it's only going to be ballpark say 25% of current EBITDA give or take. Do you have any comments on that?

And, lastly, would you view this as an opportunity if you sold it to do a broad refinancing of your balance sheet, or would you just take the money that came in and pay-down bank debt, maybe a bond issue and then just move on?

I think to the last question, because it's probably the only one I'll remember, Bob, is that we'd obviously take the debt and the proceeds and pay-down debt, and look to see where the market is and see if we could do a global refinancing. Obviously, we'd only do that if it was a positive present value analysis.

But as it relates to the spin scenario and allocating portions of our bond structure or a bank structure to this spun commodity business, we don't believe that is the way we would go. That likely the new co, if you would, would incur its own debt and proceeds would come into the differentiated business for – so in other words, an internal asset sale structure. We don't believe there's a way to or it would be prudent to try to allocate existing bonds to one business or another.

Okay, great. Well, great quarter, and good luck.

All right. Thank you very much.

Thank you, everybody. We'll, I guess, talk to you next quarter if not before.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.