Huntsman Corp (HUN) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2010 Huntsman Corporation earnings conference call. My name is Carol, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator instructions). As a reminder, ladies and gentlemen, this conference is being recorded for replay purposes. I would now like to turn your presentation over to Mr. Kurt Ogden, Huntsman's Vice President of Investor Relations. Sir, you may begin.

Thank you, Carol, and good morning everyone. Welcome to Huntsman's second quarter 2010 earnings call. Joining us on the call today are Peter Huntsman, President and CEO, and Kimo Esplin, Executive Vice President and CFO. This morning before the market opened we released our earnings for the second quarter 2010 via press release and posted it on our website, huntsman.com. We also posted a set of slides which we posted on our website, which we intend to use on the call this morning in the discussion of our results.

During this call we may make statements about our projections or expectations for the future. All such statements are forward-looking statements, and while they reflect our current expectations, they involve risks and uncertainties and are not guarantees of future performance. You should review our filings with the Securities & Exchange Commission for more information regarding the factors that could cause actual results to differ materially from these projections or expectations. We do not plan on publicly updating or revising any forward-looking statements during the quarter. In addition, we may also refer to non-GAAP financial measures. You can find reconciliations to the most directly comparable GAAP financial measures in our earnings release posted on our website at huntsman.com.

As we refer to earnings, we will be referring to adjusted EBITDA, which is EBITDA adjusted to exclude the impact of discontinued operations, restructuring, impairment and plant closing costs, income and expense associated with the terminated merger and related litigation, acquisition-related expenses, unallocated foreign exchange gains and losses, and losses from early extinguishment of debt. 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 EBITDA, adjusted EBITDA, and adjusted net income can be found in the appendix of our slides, and in our second quarter earnings release.

Let's go ahead and turn to Slide number two. In our earnings release this morning, we reported second quarter 2010 revenue of $2.343 billion, adjusted EBITDA of $257 million and adjusted earnings per share of $0.31 per diluted share. Our adjusted EBITDA increased to $257 million in the second quarter of 2010, compared to $93 million in the prior year, and $123 million in the prior quarter.

The improvement in earnings compared to both periods was overwhelmingly the result of improved demand, and corresponding higher sales volumes across all of our businesses. We look forward to sharing more details about this improvement with you. I will now turn the call over to Peter Huntsman, our President and CEO.

Thank you very much, Kurt. And thank you everybody for joining us this morning. Let's turn to slide number three and talk about our Polyurethanes division.

Our Polyurethanes division adjusted EBITDA of $71 million reflects two separate trends within the division. More specifically, earnings within our MDI urethanes business continued to improve, where as propylene oxide MTBE earnings have declined. In the second quarter, sales revenue for our MDIurethanes business increased 34% compared to the prior year, and 9% compared to the prior quarter. The favorable increase in revenue was primarily due to a combination of strong demand in MDI growth and higher selling prices implemented to offset higher raw material costs.

In Europe, our largest market, we saw double-digit growth in both a year-over-year, and sequential basis, largely as a result of strong demand for insulation, even with an overall soft construction market. We saw strong sales volume growth in the Americas despite slow housing market. MDI substitution for other less efficient products is most evident in these more developed economies. Overall demand in Asia slowed somewhat in the second quarter compared to the first, but increased compared to the prior year, as customers reduced inventories and some Chinese government stimulus initiatives ended.

Price initiatives were announced in all regions and are progressing, but overall margins were squeezed with the increase of raw material costs. Strong demand for MTBE outside of the United States has attracted additional production capacity in the US to supply the market. The second quarter MTBE Gulf Coast sea factor, which is a published industry benchmark used to set contract selling prices, was half of what it was in the prior year. As a result, although our Port Neches, Texas facility is operating at full capacity following the turn around in inspection in the first quarter, our PO MTBE earnings were well below normalized levels.

Let's turn to slide number four and focus on our Performance Products division. Earnings within this division improved tremendously to $116 million, although $15 million of this was the result of a nonrecurring credit related to our Sasol/Huntsman maleic anhydride joint venture in Moers, Germany. I'm very pleased with the underlying performance of this business. In the second quarter, we saw double-digit increases for both selling prices and sales volumes compared to the prior year. An increase in margin was a significant factor in the increase in earnings.

Selling prices increased across virtually all product groups, while raw material prices stabilized during the quarter. The business also benefited from better operating performance at our Port Neches, Texas facility, where we had some unplanned outages during the first quarter. Demand recovery has been strong across the globe, particularly in North America and Asia-Pacific. We saw demand recovery across all of our product groups, but most noticeably in amines in certain of our surfactants. We have recently announced our intent to increase our total polyetheramines capacity, approximately 20% by 2011 through debottlenecking projects at our Singapore and [Kennethleigh], UK facilities.

Recently we entered into an agreement to purchase the amines and surfactant businesses of Laffans Petrochemicals in India. The acquisition cost is approximately $21 million including debt, a non-compete agreement and other obligations. This business has revenues of approximately $45 million, and will be immediately accretive to earnings. We expect to close on this acquisition in the first half of 2011.

With the US housing market remaining sluggish, unsaturated polyester resin demand for products such as bathroom fixtures has been soft. However, we have managed to reduce our unsaturated polyester resin exposure through greater penetration in other markets such as automotive, oil additives, and paper. Looking forward, we think this will give us a more constant demand profile for our business. We were quite excited about our opportunities for this division, and view it as a key growth engine for the future.

Let's turn to slide number five. Adjusted EBITDA for our Advanced Materials division in the second quarter improved dramatically to $52 million. Our formulated systems and specialty components businesses represent approximately 90% of the earnings of this division. Increased sales volume within these businesses was the overwhelming reason for the increase in earnings. Demand within these businesses improved 33% compared to the prior year, and 11% sequentially.

This strong recovery in demand was most evident in our wind and automotive markets. In addition, raw material costs decrease, provided stronger contribution margins. We produce approximately 100,000 tons of base liquid resins each year, which is a more commoditized product. We consume approximately 30% of this internally, and the remainder is sold in the open market. Earnings improved for our base liquid resins business primarily as a result of double-digit increases in selling prices, both on a year-over-year, and sequential basis.

Turning to slide six, our Textile Effects division reported $8 million of adjusted EBITDA in the second quarter. A significant improvement in a business that has garnered a lot of scrutiny since its acquisition. We saw volume increases in all product groups in global region. Our year-over-year volume improvement of 10% understates the significant improvement in demand we have seen.

In 2010, we exited certain low-margin commodity markets. Excluding this 2009 volume, our year-over-year sales volume increase was 20%. Sales volume increases in apparel and home textiles were the strongest at 19%, compared to the previous year. Retail sales continued to improve, although at a more modest pace than we saw during the first quarter. The US remains the largest consumer of our Textile Effects business, and we'll see more earnings improvement as the US consumption returns.

Our product mix continues to improve. We have been focused on select market segments, such as high-end reactive dyes, wool, automotive, and sporting apparel where we believe customers are willing to pay for the innovation and technical support we are able to provide. As a result, our underlying sales product mix has improved along with the return in general demand. This business has undergone dramatic restructuring efforts over the last few years, and within the last few weeks, we announced additional restructuring efforts to consolidate production facilities in Basel, Switzerland, further enhancing our competitiveness.

Let's turn to slide seven. Our Pigments division earned $49 million of adjusted EBITDA in the second quarter. This greatly improved level of earnings is a result of two primary factors. First, improving industry dynamics, and second, self-help benefits derived through restructuring programs. We continue to see a recovery in demand for quality pigments across the globe. Sales volumes are within or exceeding historical ranges globally with the exception of the US and Canada.

In Europe, which represents approximately half of our sales volume, we are experiencing broad-based demand recovery in all major Ti02 consuming countries. As a result of structural long-term and unplanned short-term supply reductions across the industry, the supply demand balance for quality pigments remains very tight, and this is expected to continue. As mentioned in our Investor Day meeting in May, approximately 7% of the industry capacity has been closed or idled. We continue to see positive momentum on our price increases announced earlier, and expect further benefit to flow into the third quarter.

Our stronger earnings are also the direct result of our restructuring efforts focused on reducing fixed costs, improving our manufacturing efficiency, and realigning our market focus. Part of this restructuring, included adding new capacity to our Greetham, UK facility, while closing our Grimsby, UK site. In addition, we idled our Huelva, Spain facility in 2009 in the midst of the recession, and have since brought the restructured facility back online earlier than originally planned in order to satisfy the recovery in demand. Before sharing some final thoughts, I would like to turn a few minutes over to Kimo Esplin. Our Chief Financial Officer. Kimo?

Thanks, Peter. Let's turn to slide eight. We've shown a quarterly year-over-year for the last several calls, and we think it's a good measure of underlying demand as it compensates for seasonal fluctuations, but of course doesn't take into account product-mix variations. We have made some adjustments to remove the effects of toluene, by--product, and certain businesses that are no longer a part of our business portfolio. We have also added lines showing our actual pounds sold, and our 2007 pounds sold by quarter, as that was the last full normalized demand year we have had.

Our volumes for the second quarter increased 19%, compared to the prior year, which was down 18%, compared to the second quarter 2008. Compared to the second quarter of 2007, our volumes were down 2%. More specifically, we were well below the 2007 volume pace in Pigments and Textiles, approaching 2007 volumes, but still below in Polyurethanes and Advanced Materials, and exceeding the 2007 levels of demand for Performance Products. We are encouraged by the overall improvement in demand trends and expect to continue as the global economy improves.

On to slide 9. In the second quarter of 2010 our adjusted EBITDA increased to $257 million from $93 million in the prior year. The primary reason for the year-over-year increase in adjusted EBITDA was a significant increase in sales volume. You have heard Peter talk about the improvements in demand within each of our businesses. The overall impact of the demand recovery is more transparent on this chart, which shows volume accounted for $119 million of the $164 million year-over-year increase in earnings. We also saw a positive benefit in margins, as average selling prices increased more than direct costs, which include our raw material costs.

Compared to the first quarter of 2010, our second quarter adjusted EBITDA increased $134 million. Our first quarter earnings were negatively impacted by $51 million in production disruptions at our Port Neches, Texas, facility. Improved operating performance, as well as an increase in seasonal and general demand lead to increased sales volumes, which accounted for $135 million of our sequential improvement in earnings.

Turning to slide ten. Our year-over-year sales revenue for the second quarter increased 27% as a result of improved recovery in global demand and higher average selling prices. Sales recovery was most dramatic in the US and Canada, and Asia-Pacific regions, which both improved by more than 30%. The rest of the world region, which includes Latin America, improved 26%, whereas Europe was the laggard at 18% improvement.

Two-thirds of our revenue comes from our Polyurethanes and Performance Products divisions, which recorded revenue increases of 34% and 39% respectively. In total, our sales volumes improved 19% and average selling prices increased 7% in local currency terms.

On a quarter-over-quarter basis, the 12% improvement in revenue was the result of seasonality and improved global demand. We saw double-digit growth around the globe with the exception of Europe. All of our divisions saw an increase in sales revenue. Volumes improved 19%, whereas average selling prices decreased in local currency terms 4%. Corresponding to lower raw material costs. Average selling prices decreased another 3%, as the US dollar strengthened against major European currencies.

Let's turn to slide 11. During the first six months of 2010, we saw the value of our primary working capital increase as a result of increased selling prices, reflected in accounts receivable, and the absorption of higher raw material costs reflected in inventory. Our accounts receivable also increased as a result of higher sales volumes stemming from an improvement in overall demand. Inventories increased primarily due to higher raw material costs, as well as increased raw material inventory volumes to support increased customer demand. On a year-over-year comparison, inventory volumes increased 1%.

Slide 12. At the end of the quarter, we had approximately $773 million of cash, and approximately $412 million of unused borrowing capacity, summing to a total of $1.2 billion of liquidity on hand. This amount is more than adequate to provide operating flexibility and strategic growth for the Company.

Capital expenditures for the quarter were $41 million, and $78 million for the first half of 2010. Given our current pace of spending, it is unlikely we will spend the $275 million targeted earlier in the year. As a result, we have lowered our 2010 capital expenditure guidance to approximately $225 million to $250 million.

During the second quarter, we received $110 million from our reinsurance carriers in the final settlement of our insurance claim as a result of the April 2006 Port Arthur, Texas fire. On June 22, 2010 we used all of those proceeds to prepay $110 million of bank term debt. This settlement closes a lengthy arbitration process that resulted in recoveries of approximately $475 million between 2006 and 2010. We continue to be proactive in reducing our outstanding debt. In addition to the $110 million prepayment I just discussed, we also prepaid $164 million of our bank debt on April 26th, 2010. I'll now turn the time back over to Peter for some concluding marks.

Thank you, Kimo. At our recent Investor Day meeting in May, we outlined normalized levels of EBITDA based on historical averages for our current business of $1 billion that we expect to achieve on a run rate basis in sometime in 2011. The first half of 2010 puts us well on track to achieve those levels in all of our businesses with the notable exception of one, Polyurethanes. The Polyurethanes growth story is well intact, but prices have lagged raw materials prices. As MDI margins improve in the coming quarters, the Company will meet and exceed normalized run rate levels of profitability. We continue to have confidence in these levels of profitability that they will be achieved in 2011.

In spite of a sluggish EU, and US economy, and raw materials remaining stubbornly high, we continue to see growth markets for our products, both technologically and geographically. While the rate of growth may temporarily slow in Asia, and our industry will see its customary slowdown in demand within Europe as a result of the summer holiday period, we continue to believe that as the global economy continues to gradually recover, we will see earnings improve. While we experienced our best operating results during the second quarter that we have achieved in over two years, I do not believe this to be peak performance.

We continue to have new product applications to bring to market, opportunities for further growth in developing markets around the world, and idle capacity that we will gradually bring back on line as demand improves. We continue to maintain a strong balance sheet, focus on keeping our cost competitive, and aggressively growing our market share through better service and innovation. There is no doubt that these continue to be tough market conditions, but we are very confident in our direction and look forward to an even stronger future.. With that I'll turn it back over to Kurt.

Thank you, Peter. Carol, that concludes our prepared remarks. Would you explain the procedure for Q&A and then open the line for questions?

Thank you, Kurt. (Operator instructions). Gentlemen, your first question will come to you from the line of Robert Koort of Goldman Sachs. You may proceed, sir.

Hi, this is Luisa Hermann in for Bob.

Hello, Luisa.

Can you guys just give us a bit more detail on the weak margins that you guys experienced in the Polyurethanes segment? Maybe give us a bit more breakout, what the MTBE percentage was in terms of sales and margins?

Well, as we look at the weaker margins in Polyurethanes, we're able for instance in Asia -- we were able to obtain a 10% improvement in pricing, and I think as I mentioned in my comments that this is really about us catching up with our raw material price increases. We continue to achieve an increase in our selling price, and we continue to see an increase in growth as well. We have seen increases on a sequential basis and year-over-year basis in Europe and in the Americas. We saw a bit of a decline in Asia in the second quarter, but I think that as we look at our margins in MDI and in Polyurethanes, we're very optimistic that with the price increases that we were able to achieve in the second quarter, the price increases we have announced going into the third quarter that we will continue to make headway and be able to improve on those margins that we obtained in the second quarter. The second part of your question was around MTBE?

That's correct.

And what was that question, again?

Well, I'm just trying to get a sense of the impact here. That MTBE is having on these margins. You said that in the quarter you had lower margins for MTBE, and we see you had a 10% decline sequentially in terms of pricing. So just trying to get an impact on what that had and what that could have going forward.

Luisa, in the Investor Day we gave you an average normalized MTBE number of roughly $100 million. When you look at the second quarter PO MTBE profitability, that is well below 50% of that run rate to give you a sense for what we're expecting, or what we're currently operating at.

Okay. Thank you.

And obviously, I just wanted to make sure that we reiterate this, MTBE is a product that is priced on a global basis, literally on an hour-by-hour basis. This is unlike MDI or amines or anything else that we are able to go out and announce a price increase. We are able to obtain a higher value for the product because of our service or because of our quality. MTBE is a component of the gasoline pool, and the value of it is really set by overall global markets around gasoline.

Okay. Gentlemen, your next question is going to come to you from the line of Frank Mitsch of BB&T Capital. Please proceed.

Good morning, gentlemen.

Good morning, Frank.

Peter, I was wondering if you could talk about the pace of business that experienced in the second quarter and how July was as well? If you could give us some idea there? Were things getting better as you were progressing through the quarter?

I think that we saw things gradually getting better as we went through the quarter. Obviously there's some lumpiness that occurs. I'm not sure that is a correct financial term. As you go out for instance in Asia, where we saw demand drop in something like MDI, and yet at the same time we were able to obtain a 10% increase in prices in Asia. Obviously, you are going to have prebuying that most likely took place in the first quarter. People building stocks, prices go up, they will work through those stocks sometime during -- a part of the second quarter, and then they come back into the market, and to what degree and how quickly they come back into the market that's subject to overall market demand and so forth. But as we see on a global basis, again, I think that as we look throughout the quarter, I think, again, there might be some notable exceptions, but I feel that throughout the quarter that we gradually saw momentum building on a global basis and volumetrically and on a margin basis. Look into July, it really is just too early Frank. I'm not trying to avoid your question. I have not seen any earnings yet coming in from any of our divisions and so forth. The volumes look a lot like they were in June, and I would expect in August we'll see a little bit of a slowdown in our European businesses as we go through the typical holiday period. But that's experienced, really, by all of -- not just the chemical industry, but by industry in general, and as I look at the business today it still feels good.

All right. That's helpful. And Peter, I was struck by the comment talking about MDI business, you were talking about strong insulation demand in Europe. Can you expand on that?

Well, as we look at the various applications we have in Europe, insulation, we have spray-on foam. We have some relatively new applications in Polyurethanes, where we're able to go into existing buildings, and more readily apply our products in existing buildings and retrofitting buildings, new construction, panel construction. New applications where in Europe you are seeing a very anemic construction market, but you are seeing legislation in Europe. And I would note that legislation we have seen is moving more and more to North America, where building standards are improving, and people are being forced to have higher insulation values. As you see legislative change like that taking place, where really it started in Europe, and it's moving into Asia and North America now. Polyurethanes is really one of the few products, it is not the only product but it's certainly one of the few products that can readily meet the higher specifications and so forth around insulation and building materials.

So you are seeing the legislative action is having a material impact on your business in Europe right now?

Well, I would think that as we look at something like insulation in Europe, where there's very anemic growth in construction, short answer to that is yes. Yes, we are seeing meaningful improvement in those businesses, and continuing improvement in demand. I would just note that I would be quite optimistic as I gradually see that legislation moving more and more towards energy conservation, moving into North America and Asia as well.

Frank, when you look at insulation, very similar numbers globally. We're seeing quarter-over-quarter volumes up 22%, and year-over-year 19%. So insulation continues to be a big driver.

Terrific. Thank you so much.

Thank you, Frank.

Thank you, sir. Gentlemen, your next question will come from the line of P.J. Juvekar of Citi. Please Proceed.

Good morning, guys. This is [Eric Petrie] standing in for P.J.

Hi, Eric.

On Polyurethanes can you discuss sales margin expectations by region for second half despite reconstruction market outlook and recent competitor comments on lower polyurethane margins in Asia-Pacific? And more specifically what are you seeing in China?

At this point I'll avoid anything that talks, in specifically, in third quarter margins on MDI. Not because I am trying to avoid the answer as much as I don't know. As I look at the volatility around benzene, around pricing, and around demand. But overall as we look at the second quarter versus the first quarter, where we saw the most volatility was certainly in Asia, and I would say that was brought about by two areas.

One, as we look at appliances, a lot of the stimulus packages that the Chinese government had in place around the purchases of appliances, mostly energy-efficient appliances, those stimulus packages ended during the first part of the year. And so as I look at something like appliances, the volume of appliances on a worldwide basis, on a quarter-to-quarter basis, we saw the demand there shrink by about 6%. That is quite counter to the flow that we're seeing in the insulation market. Where we are seeing that same prior quarter growth in the low 20s improvement. So I look at that small section of the stimulus program in Asia coming to an end.

I mentioned earlier about the pre-buying that took place in the first quarter ahead of raw material -- ahead of MDI price increases in the second quarter, and we have continued to move prices up in the third quarter on a global basis. But again, we continue to see improvements in demand moving into the third quarter as I look at the order patterns. We haven't got any results in from July, and it certainly is too early to talk about third quarter, but from what I am seeing thus far, it looks like demand will continue to grow into the third quarter.

The only thing I would add is remember MDI margins have been squeezed a bit by benzene prices. And benzene pricing can be a regional effect. For example, year-over-year, US benzene prices were up 68%. In Europe they are up 85%. When you look at it sequentially, America benzene prices fell, but European benzene prices rose 12%. So we saw some squeeze in Europe because of benzene prices.

Having said that, as we said today, benzene prices are lower today than they averaged in the second quarter of 2010. So there is a always a bit of a lag. These are not contracts in MDI that pass through benzene. There tends to be 30 to 90-day lag depending on the individual market. So we see price initiatives. We're moving prices up, and depending on where benzene flies up in the next few months will really drive that regional market question you asked.

Those benzene prices that Kimo talked about today, that will work into our system in the coming two to three months. Those aren't instantaneously going into our system today.

Great. Could you discuss what end markets drove EBITDA margin improvement within Performance Products and Advanced Materials?

We're seeing end use market segments there growing largely in wind energy, in aerospace, and as you start getting into to Advanced Materials, you start breaking it down on a market-to-market basis -- oh, excuse me, you were talking about Performance Products or Advanced Materials?

Both.

Both. Okay. In Advanced Materials, it largely is around the demand in wind and aerospace. As we look at the demand that is coming from our Performance Products, a lot of that is coming from our surfactants and specialty amines. And there you are literally talking about scores of end use applications.

Some of those end use applications that we're particularly excited about and continue to see strong growth would be gas treating. That would be amines that are used to take a lot of the sulfur compounds and so forth out of natural gas liquids and refined products. It would be in the wind industry. Amines are used for curing epoxies in the construction of windmill blades. The amines don't actually go into the blade itself, they are helping with the curing of the epoxy, the manufacturing process of building these blades.

As we look at -- particularly in Asia, the strong demand in Asia around amines around concrete curing, a lot of the bridges, rail work and so forth that is taking place on a multi-year basis in China, and throughout Asia. We're seeing our products going into these end use applications. And our surfactants applications continue to grow. A few years ago we were marginally dependent in our surfactants around personal care products. We since then have expanded our surfactant applications end uses going into the paper industry and into agricultural applications and so forth. As we look at the Performance Products, and as we look at the Advanced Materials, we're really talking about -- well, we may be talking about two or three broad end use categories, it really is going into scores of even hundreds of end use applications beyond that.

Eric I'll add, you remember Performance Products is the division we had the most investment in over the last three or four years, including a new Singapore polyetheramines facility, Saudi Arabia an ethylene facility , and a new maleic anhydride facility in Geismar, Louisiana. You are really starting to see the benefit of those investments because of the downturn in the economy in 2008 and 2009 you really didn't

Great. Thank you.

Thank you, sir. Gentlemen, your next question will come from the line of Roger Spitz of Bank of America Merrill Lynch. You may proceed.

Thank you. Could you talk about how tight each of Epichlorohydrin and Bisphenol A are. And how much you think that may have impacted Q2 EBITDA?

Well, you remember we don't produce Epi and Bisphenol A, We purchase them; tend to be longer-term contracts, and it did not limit our ability to produce basic liquid epoxy resins or formulated resins.

I was thinking then -- if it was tight, maybe the price for these, for Epi and Bisphenol A were up, and may of had an impact on your liquid epoxy resin --

On a sequential basis, prices were fairly flat in BPA and Epi . Base resin profitability was fairly flat, which we have suggested in the last couple of quarters was pretty well break even for our

Got it.

If you are really asking, Roger, if this is a base resin commodity flip, it is not. This is really driven by our formulated business. Our base resins aren't generating incremental margins relative to a year ago or even first quarter.

That answers my question. In Pigments, could you give a sense of the timing and the amount of any recent price increases that were actually achieved, so we get a sense of what the uplift might be from achieved price increases?

As we look at the price increases, in July that we are implementing, in Europe it's $120 a ton, NAFTA it's around $112 a ton. Around A-Pac, it's around $77 a ton, and rest of the world is around $120 a ton. How much of this will you actually be successful? I would say we're lucky to get 50% to 75% of this actually coming through, being successful. Obviously we're going to be pushing this quite aggressively, but we do expect pigment sales prices to be going up during the third quarter.

And if you announce in July, when would that actually be captured? How quickly does it move through the system?

Typically it used to go on quarterly pricing, so what we would be announcing in July would be coming 90 days after that. As I have said on previous calls, there's such a backlog of price increases in Pigments, I believe that we will be able to achieve many of these price increases during the month of July, moving into August. And as we look at the inventory days in Ti02, we're sitting today, as an industry, around 37 days of inventory, and that's about as low as it has been in about two years.

That largely is because of improved demand, whereas two years ago, it was just plain bad economics. Everybody was shutting down capacity, inventories were down because of the margin squeeze that was taking place on the producers' side. Today inventories are down because of the improvement in demand that we're seeing in Europe, and in Asia. I think that with the low inventories and the price announcements that have been made in the second quarter, moving into the third quarter, I would expect in the third quarter that we should see an improvement in pricing in Pigments.

Thank you, Peter, and Kimo.

Thank you, Roger.

Thank you, Roger. Nice to hear from you.

Gentlemen your next question will come from you from the line of Laurence Alexander of Jefferies. Please proceed.

Hi, good morning, this is Amanda Sigmund on for Laurence.

Hi, Amanda.

First Question. What were the utilization rates in MDI and Ti02 in the second quarter?

As we look at our MDI capacity rates, they are operating at about 95%. That's globally. Now when I talk about 95%, let's remember that there's about 15% of the industry right now, and I'm talking about public announcements, that is idled. So when I talk about operating at 95% of effective capacity, that's after I have taken out 90 -- or excuse me, 15% of the idle capacity. So how much of that idle capacity will gradually be restarted, and what discipline will there be in the restarting of that idle capacity? That's probably the lingering question that I'm in no position here to answer as much of that capacity is in the hands of our competition.

We have 150,000 tons of idle capacity right now, so as we look at global demand improving and so forth, we're looking at gradually bringing that capacity back into the market as demand warrants it. On an effective capacity basis, we're running at about 95% capacity, but there is quite a bit of idle capacity that's in the market right now.

And just to add, that can change very quickly. Globally, there's about 4.5 million tons of demand, and we expect 2010 to see global growth of between, say, 10 and 15%. So if there's 750,000 tons of idle capacity globally in Peter's 15% number. That can change very quickly if you see sustained growth for 12 to 18 months.

Okay. And also could you please talk about how you think about balancing deleveraging, and any opportunities going forward? And if you could just comment on the strength of the M&A pipeline. Thanks.

You had also asked about Ti02 capacity if I could just answer that quickly.

Thanks, sorry.

The Ti02 capacity. We believe that the overall operating rate for the industry is about 97%, as we said during our Investor Day conference. We believe that about 7% of the overall industry capacity has been shut down, and, and perhaps a little bit more than that has been temporarily idled, or there have been short-term maintenance problems, particularly in Europe. So that 97% capacity is obviously subject to change, but any time when an industry is operating at 97% capacity, and there's a pricing margins demand and so forth. It will tell you that about everything that effectively can be operating today Ti02, is operating. I'm going to let Kimo talk about some of the balance sheets and liquidity issues.

I would just say on the M&A side, we recently announced the acquisition of Laffans Petrochemicals in India. We see this as a very strategic bolt-on acquisition of around $20 million. As you look over the last seven years, a lot of people have looked at Huntsman as being a company that goes and makes these wild bets and leveraging up our balance sheet.

I would just remind you that over the last five, six years here, with the exception of Textile Effects, which we purchased for about $170 million, most all of our acquisitions have been smaller acquisitions, most of them we believe are accretive on day one. They fit in very neatly into our overall portfolio of businesses and we're able to achieve very quick synergies and so forth. They improve our overall capacity utilization.

And I think that this sort of a trend every other quarter or so of looking at these smaller bolt-on acquisitions that we're able to assimilate very effectively that are accretive on day one, I believe this is going to be an area of opportunity for us. That is not to say that we're not looking at larger acquisitions at the same time. I think that -- now public information that we looked very closely at the Tronox acquisition, and I believe that when you look at synergies and so forth that would have been a very good acquisition for Huntsman. But I think that we certainly are going to be, during these times of economic uncertainty, we want to make sure that we maintain a strong balance sheet, strong position of liquidity, and perhaps be a bit more cautious with larger acquisitions and potentially bringing on more debt.

We have about $3 billion of net debt. We have talked about roughly $1 billion of normalized EBITDA, which of course, is roughly three times leverage. We have stated clearly for the last year or so that our target in the next two to three years would be between two and two and a half times total net debt to normalized EBITDA. So we need to pay down, at least $0.5 billion of net debt over the next couple of years, and we think it's very achievable with the free cash flow we would generate once we get back to those normalized times.

Great. Thank you.

Thank you, ma'am. Gentlemen, your next question will come from the line of Bill Young of ChemSpeak. Please proceed.

Good morning, gentlemen.

Good morning, Bill.

Good morning, Bill.

You mentioned epoxy base liquid resins, and of course, MDI. I think your strategy is to move downstream into the value-added parts of those businesses. Can you give us an update on how this is progressing, and apparently it is not progressing fast enough in the urethanes, but why don't you fill us in on that, please?

I think it is progressing well in both areas, Bill. On the Advanced Materials, when we look at 90% plus of our earnings coming from the formulation and specialty components side, I think that we would like to focus on consuming even more of the commoditized BLR, taking that internally, and moving that into specialty formulations, and specialty component applications. So I think we have been very successful in transforming that business. Again, we're 90% of our EBITDA is coming out of those specialty formulated ends, where you are looking at selling in to literally hundreds of end use applications, where there's no one dominant competitor in those various fields and so forth.

In the area of MDI, I think that as we look at our ace growth over our prior year. When I talk about ace, I'm talking about our coatings and elastomers, and adhesives; end of our business for MDI. Looking at our growth sequentially at 5% year-over-year at 22%, we continue to see strong growth in this area, and I think that as we look at those areas where it sounds like it is a non-commoditized -- it may sound more commoditized, we talk about construction and insulation, but when we talk about quarterly and yearly growth in the low 20s, mostly coming from mature economies into insulation and so forth. I'm quite excited about the growth prospects in these areas around energy conservation, and so forth.

In the coming years, not just the coming quarters, in the coming years, these are real growth markets for us, and I think we have a tremendous pipeline of new products that are coming in, new applications that are coming in. I think we have been successful in those areas. I would just remind you that in the area of MDI, when we look at our more specialty component end use applications, those typically are more stable in their pricing, and might be more susceptible when we talk about benzene prices going up week-on-week or month-on-month. Typically when you look at an adhesive end use application, or a coating, an elastomer, some of the long-term pricing that goes into insulation, those aren't going to be sold around raw material pricing.

We want to sell those products around the properties that they are able to achieve and the value they bring to customers. So some of that you are going to see perhaps some volatility in the margins because those prices don't move as quickly. I think most specialty products, they are in that same arena as you know, Bill. And so I wouldn't interpret that because we see an inability to move our pricing as fast as raw materials to somehow think that we're not as successful in getting into the end use applications, more specialty end use applications. To the contrary, I think it's a sign we are moving aggressively in those areas.

Over half of our sales are system sales and not MDI component sales.

And that has been growing too over the last couple of years.

Yes, that's what I want to know. Over half versus say, what was it a couple of years ago?

I don't have that number, but it certainly has been growing steadily as we have grown our systems businesses, Bill.

Okay. Great. Thanks. And second, the electronics area, I don't think you mentioned that -- if you did, I can't catch it, when talking about Advanced Materials, how have things been progressing there?

We're just looking for the data here, Bill. It's quite a profitable, but it's not a large end use application for us.

We think more about electrical insulation for transmission lines and so forth in our business, as opposed to electronic components. The power generally is a pretty big business for us.

So as we look at something like power, where we're getting in and replacing porcelain and some of the new transmission lines and so forth that are using carbon fiber support, and so forth. As we look at the growth in the last couple of years, and add in to the business, we're seeing on an annualized basis a solid 8% to 9% growth in those areas.

Okay. Great. Thank you very much.

Thank you.

Thank you, sir. Gentlemen, your next question comes from the line of Philip Birbara of RBS. Please proceed.

Okay. Thank you. Hey, guys. I think you mentioned that the PO MTBE segment EBITDA was about 50% of normalized, and this is normally a seasonally strong quarter for that. So I was just wondering what was going on there?

I think it was a combination of higher raw materials, and frankly, the early part of the quarter refining margins were just plain bad. I know this is going to sound somewhat confusing, but MTBE is a unique product in that it's raw materials are more closely related to natural gas, being methanol, and being butane prices. You will see times, for instance last year, if you were to go back a year ago and look at third and fourth quarter of 2009, MTBE during the slow driving period and during bad refining times, MTBE margins were some of the strongest we have ever seen. And that was because we saw low raw material costs going in to a product that typically competes with crude oil-based raw materials.

I think longer term, I wouldn't say here -- as I sit here today looking over the next couple of quarters, I'm quite bullish on MTBE. Not that it necessarily exceeds its normalized basis, but as I look at second quarter results, I think there's definitely room for improvement. Merely because of the fact that you are looking at a crude-based pricing for MTBE, and you are looking at a raw-material component that is natural gas based, and as I look at natural gas prices in North America, I think that there going to be lower than its relative value to crude because of all of the Shell gas, and the amount of gas that's being produced in North America. So longer term, again, I'm not here saying that MTBE is going to go up through the roof. I think we ought to be able to maintain closer to that historical level of earnings for MTBE rather than where were in the second quarter.

The driving season hasn't been what it's been in the past years as well. And the whole gasoline pool is down significantly in Europe and the US, and with that driving season demand on the [C] factor as well.

Okay. And do you have any significant turnarounds in the second half of the year that might affect your results?

We certainly don't have anything to the effect that of what we had in the first quarter, when we saw the PO MTBE plant that was down for 60 some odd days. We will be doing some maintenance work on some of our MDI facilities and so forth. But those are typically going to be around one to two weeks, and they would have singular -- less than $10 million sort of impacts here and there. And those are typically T&Is that we do on a yearly basis, so I'm not sure that it is going to be anything that is out of the ordinary.

All right. Thank you, guys.

Gentlemen your next question will come to you from the line of Bob Cornell of Barclays Capital. Please proceed, Bob.

And I think that given the time constraints and so forth, we may take this one as a last question here, Bob.

I hope it is a good one. I think you actually answered this in part. Because my question was the adjusted EBITDA year-over-year Polyurethanes, and I think you referenced the natural gas raw material impacts so forth, but maybe just clarify why the adjusted EBITDA was down so much on Polyurethanes on such a strong increase in volume year-over-year.

I think most of that had to do with MTBE. And as we look at MTBE on a year-over-year basis, second quarter to second quarter, it was down nearly $40 million.

But then there was a bit of a squeeze -- well, volumes were up, and obviously that was a positive variance, and prices were up year-over-year for MDI and polyols. Raw materials exceeded that, and so there was a squeeze. And what we've said is with price initiatives we think we are going to regain that and expand contribution margins relative to raw's.

What period?

Second half we think margins will expand in MDI.

Thank you.

Thank you. And operator, I think that concludes the time that we have available this morning.

Thanks, everyone for joining us.

Ladies and gentlemen, this concludes your conference for today. Thank you very much for your participation, and have a great day.