Huntsman Corp (HUN) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Huntsman Corporation third quarter 2010 earnings conference call. My name is Jen and I will be your coordinator for today. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host, Mr. Curt Ogden, Huntsman Corporation's Vice-President of Investor Relations. Please proceed, sir.

Thank you, Jen, and good morning, everyone. Welcome to our third quarter 2010 earnings call. Joining us on the call today are Jon Huntsman, our Executive Chairman and Founder, 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 third quarter 2010 via press release and posted it on our website, www.huntsman.com. We also posted a set of slides 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 www.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, the sale of accounts receivables, acquisition-related expenses, unallocated foreign exchange gains and losses, losses from the early extinguishment of debt and losses and gains on disposition of businesses and assets. We focus on adjusted EBITDA from a management standpoint as we believe it is the best measure of the underlying performance of our operations. And we have received feedback from many of you in the investment community that that is how you prefer to look at our business. A reconciliation of EBITDA, adjusted EBITDA and adjusted net income or loss can be found in the appendix of our slides in our third quarter earnings release.

Let's turn to slide two. In our earnings release this morning we reported third quarter 2010 revenue of $2,401million, adjusted EBITDA of $273 million and adjusted earnings per share of $0.34 per diluted share. Our adjusted EBITDA increased to $273 million in the third quarter 2010 compared to $205 million in the prior year and $257 million in the prior quarter. The improvement in earnings compared to both periods was primarily the result of improved demand and corresponding higher sales volumes across across our business. Peter and Kimo will provide greater insight into the improvements within our business. I will now turn the call over to Peter Huntsman, our president and CEO.

Curt, thank you very much. And thank you all -- to everybody who's taken the time to join us this morning. Let's turn to slide number three. Adjusted EBITDA for our polyurethanes business in the third quarter of 2010 was $102 million. We've seen two separate earnings trends occur within this business. More specifically our MDI business continues to improve, whereas our propylene oxide MTBE earnings have declined compared to last year. We are seeing a strong recovery in global demand for MDI. Revenues for MDI and related products increased 11% compared to the prior year as a result of increased demand and an improvement in average selling prices.

In Europe, our largest market, sales volumes were limited as a result of supply limitations and forced measures on certain product lines, most noticeably in automotive and furniture. We saw strong demand in all regions for adhesives, coatings and elastomer products, as well as automotive, insulation and composite wood product sectors, all of which were partially offset by weaker demand in appliances. As we consider the broad trend affecting our business, sales into the insulation markets increased 9% compared to the second quarter and 6% compared to the prior year. This is our largest sector which represents approximately 40% of our volume. We are confident in its growth trajectory. Despite little to no improvement in housing starts, our composite wood products revenues increased 16%, compared to a prior year driven -- compared to the prior year driven in large part by increased momentum in the wood industry defined formaldyde free substitutes. We estimate the MDI industry operated at around 95% effective capacity in the third quarter, which due to published idle global capacity we believe is approximately 88% of name plate capacity.

MDI price initiatives were announced in all regions and we are seeing some signs of progress. MDI margins improved on a sequential basis, however, they are still lower than in 2009, as a result of increased raw material costs.

Outside the United States there is a strong demand for MTBE as a fuel oxygenate. This demand has attracted additional production capacity in the US to supply the offshore market. The additional production capacity, along with a global slowing in gasoline demand growth , has had an effect of lowering margins. As a result, our propylene oxide MTBE earnings were well below the prior year.

Turning to slide number four, earnings within our Performance Products division improved to $100 million, an improvement of $16 million compared to 2009 and in line with our second quarter after adjusting for a $15 million nonrecurring second quarter positive adjustment related to our Sasol/Huntsman maleic anhydride joint venture. We are particularly pleased with the quality of these numbers. This past quarter our specialty amines earned $15 million of of adjusted EBITDA. This is the best performance these products have achieved, demonstrating the growing strength of this group. We continue to see a strong recovery in global demand, most notably in the Asia Pacific and North America regions.

Trial production of our recently completed ethylene amines manufacturing Saudi Arabian 50% joint venture began in the second quarter and started generating meaningful revenue in July. We began consolidating this joint venture in the third quarter, which resulted in $4 million of additional EBIDTA. The facility is still ramping up to full capacity rates, and once it does we expect it to generate approximately $30 million to $40 million of annual EBIDTA.

In 2011 we expect to consolidate our German maleic anhydride 50% joint venture with Sasol. Once the facility is fully utilized, the expected annual EBIDTA is approximately $30 million. We recently announced our intent to increase our total global polyetheramines capacity, approximately 20% by 2011 through debottlenecking projects at our Singapore and Kennethleigh, UK facilities. Within 12 months of completion, we expect these projects to generate approximately $25 million of additional EBITDA..

Turning to slide number 5, adjusted EBITDA for our Advanced Materials division was $42 million in the third quarter. Our Formulated Systems and Specialty Components businesses represent approximately 90% of the earnings of this division. Sales volumes increased within these businesses 21% compared to the prior year. We saw an increase in the global demand that was most evident in the Asia Pacific region, which was driven by a strong wind energy market. We produce approximately 100,000 tons of base liquid resins each year, which is more -- a more commoditized product. We consume approximately 30% of this internally and the remainder is sold on the open market, which represents about 20% of our advance materials revenues..

Earnings slightly improved for our Base Liquid Resins business as a result of increased selling prices despite lower sales volumes.

Turning to slide number six, our Textile Effects Division reported $8 million of adjusted EBITDA in the third quarter. This business has undergond dramatic restructuring efforts over the last few years. Improved demand, coupled with the the benefits of the restructuring efforts, has lifted earnings into positive territory. Sales volumes increased in all product groups in global regions. Our year-over-year volume improvements understate the improvement in demand that we have seen. In 2010 we exited certain high-volume, low-margin commodity markets. Our current business portfolio is more profitable on a per ton basis than it was in 2009.

Retail sales continued to improve, although at a modest pace. While we've seen a recovery in underlying demand from 2009 recession levels, our sales volumes are down 31% compared to 2007 normalized demand levels. The US remains the largest consumer of our textile effects business, and we'll see improved earnings as the US consumption gradually returns. As we see broader demand return to a more normalized level, we should see results for this division improve significantly. With our current product mix and cost structure, we estimate that if the industry were to recover to 2007 levels, our annual EBITDA would be more than $100 million.

On slide seven our Pigments Division earned $66 million of adjusted EBITDA in the third quarter. The increase in earnings was primarily the result of an improvement in industry dynamics and self-help benefits derived through our transformed restructuring programs. We continue to see a strong recovery in global demand for quality pigments. Sales volume within emerging markets, such as Asia Pacific, Africa, Middle East and Latin America, are at an all-time high. The recovery in sales volumes for more developed economies, such as Europe, the US and Canada, have been more modest and remain within six-year historical averages. As a result of structural long-term and short-term supply reductions across the industry, the supply-demand balance for quality pigments remains very tight and is expected to continue. We estimate the industry is currently operating close to full capacity, as evidenced by producer inventory levels remaining at less than 40 days inventory on hand for a sustained period, which we have not seen for many years.

We continue to see positive momentum in our price increases. Our most recent price increase was announced in August with an effective date of September 1 for approximately $200 per ton depending on the region. We expect the benefits to flow into the fourth quarter and more than offset the rising costs of raw material. Our increased earnings are also the direct result of our own restructuring efforts focused on reducing fixed costs, improving our manufacturing efficiency, and realigning our market focus.

In 2009 we idled our Huelva, Spain facility in the midst of the recession and reduced head count by approximately 25%. We have since brought the restructured facility back online earlier than originally planned in order to satisfy the recovery and demand from our customers. Before sharing some concluding thoughts, I'd like to turn a few minutes over to Kimo Esplin, our Chief Financial

Thanks, Peter. Let's turn to slide eight. In the third quarter of 2010 our adjusted EBITDA increased to $273 million from $205 million in the prior year. The primary reason for the year-over-year increase in adjusted EBITDA was an increase in general demand and corresponding higher sales volume. This chart shows that volumes accounted for $83 million of the improvement in earnings. In total, the increase in average selling prices more than compensated for the increase in raw material costs, which lifted our overall margins.

Compared to the second quarter of 2010, our third quarter adjusted EBITDA increased $16 million. The sequential improvement in earnings is even greater when you take into consideration the non-reoccurring second quarter benefit of $15 million associated with our Sasol/Huntsman maleic anhydride joint venture that we pointed out in the second quarter earnings call. Historically, there has been an economic slowdown in the third quarter earnings compared to the second quarter within the chemical industry. The strong recovery and global demand eclipsed that effect this year and was the primary reason for improved earnings.

Slide nine. We've shown a quarterly year-over-year sales volume chart for the last several quarters, and we think that it is a great measure for showing how our business was affected by the recession and its subsequent improvement. Demand and corresponding sales volumes have been the most significant determinant of earnings over the last two years. As I have pointed out before, contribution margins have been very constant through this period. Our year-over-year sales volumes improved 11%, representing the fifth consecutive quarter in which we've seen an improvement in global demand. We have used 2007 as a benchmark for normalized demand environment and in the third quarter our volumes exceeded those from the same period in 2007, albeit with a very different product mix and geographic profile. This represents an important milestone for the company. However, there are certain businesses, such as Textile Effects, which are still below normalized volumes.

Turning to slide 10, our year-over-year sales revenue for the fourth quarter increased 16% as a result of improved recovery in global demand and higher average selling prices. Sales growth of 33% was most dramatic in the rest of the world region, which includes Latin America. The Asia Pacific region improved by a healthy 22%. The US and Canada and Europe improved by 11% and 7% respectively. 80% of our revenue comes from our polyurethanes performance products and pigments divisions, which recorded revenue increases of 11%, 25% and 25% respectively. In total our sales volumes improved 11%, and average selling prices increased 8% in local currency terms. Despite the expected traditional seasonality within the chemical industry, our revenues improved 2% on a quarter-over-quarter basis. Revenue increases in the rest of the world and European regions outweighed seasonality experienced in the other regions of the world. In total, volumes improved 7%, whereas average selling prices decreased in local currency terms 2%, corresponding to lower raw material costs and decreased another 1% as the US dollar strengthened against -- primarily against major European currencies.

Let's turn to slide 11. During the third quarter 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 increased as a result of higher sales volumes from the strong -- stronger demand environment. Inventories increased primarily due to higher raw material costs, as well as increased raw materials inventory volumes to support increased customer demand. On a year-over-year comparison, inventory volumes increased only 3%, whereas the value increase was 24%. Our sales volumes increased 11% over the same period of time. We expect our working capital needs to ease in the fourth quarter as our sales volumes moderate consistent with the seasonal -- normal seasonal patterns in demand.

Onto slide 12. At the end of the quarter we had approximately $1 billion of cash and approximately $460 million of unused borrowing capacity summing to a total of $1.5 billion of liquidity on hand. Our cash balance included approximately $159 million as a result of a note refinancing that straddled the quarter end. We have proactively taken advantage of attractive debt markets to improve our debt maturity profile. On September 24th we issued $350 million of senior subordinated notes due 2021 at an interest rate of 8.58%. On October 28 we priced an additional $180 million of the same senior subordinated notes due 2021 at 108 that will have an approximate interest yield of 7.25%. We used the proceeds from these issuances to redeem a comparable amount of senior subordinated notes due 2013 and 2014. In connection with these offerings, Standard & Poors upgraded our corporate credit rating by one notch to B plus. Thus far in 2010, we have extended the maturity of our revolving credit facility by four years and have issued approximately $900 million in new senior subordinated notes at an average interest rate of 8.25%, extending our maturities of this junior debt by almost seven years.

Because of recent accounting changes, we are required to consolidate certain 50/50 joint ventures where we are deemed to have a controlling interest. We began consolidating our recently-completed ethylene aminess manufacturing Saudi Arabia 50% joint venture in the third quarter, which resulted in $199 million of debt recognized on the balance sheet, but only one quart of earnings which accounted for $4 million EBITDA. The facility is ramping up to full production rates, and once it does we expect it to generate approximately $30 million to $40 million annual EBITDA.

Beginning in the first quarter of 2011 we also expect to consolidate the debt and earnings of our German maleic anhydride 50% joint venture with Sasol when a major expansion is completed. The expected debt is approximately $100 million with an annual EBITDA of approximately $30 million.

During the firs tnine months ended September 30, 2010 our capital expenditures were $132 million. In 2010 we expect to spend between $200 million and $225 million on capital expenditures net of reimbursements. I'll now turn the time back over to Peter for concluding remarks.

Thank you, Kimo. We've made comments at our Investor Day and on this call about our volumes returning to prerecession 2007 levels. While this is a significant return of business for our company, the geographic footprint and the product profile is worth noting. In 2007 our Polyurethanes Division adjusted 55% of our adjusted EBITDA. During this past quarter our Polyurethanes Division earned 30% of our adjusted EBITDA, signifying both the potential up side, but equally important the growth for our other divisions. In the third quarter of 2007, our Asian sales accounted for 19% of our revenue as a company. During this past quarter our Asian revenues accounted for 23% of our revenues. During this time period we saw similar growth rates in Latin America as well. I mention this because I believe our company's uniquely positioned to see further growth as our Polyurethanes Division continues to recover, Asia's growth continues to outpace other regions in the world, and we continue to see better than GDP growth in most of our other divisions. In short, while I'm delighted to see our volumes recover to our pre 2007 prerecession levels, I'm even more encouraged by our future growth prospects around the world and the most innovative pipeline of new products and technologies that I believe will continue to create shareholder value. With that I'll turn the call back over to Curt.

Thank you, Peter.

Operator, that conclude our prepared remarks. Would you explain the procedure for QA and then open the line for questions?

Thank you, sir. (Operator Instructions) . Our first question comes from Robert Koort with Goldman

Thank you, good morning.

Good morning.

A couple questions, if I might, around TI02, which seems to be a hot topic these days. One could you discuss a little bit of what you'd expect in terms of seasonality as we get ramped up before the coating season next year? Secondly, you mentioned some higher raw materials. Could you outline your integration there? Are you completely reliant on outside oars? And what's your sort of expectation on pricing and availability there? And then lastly, still on TI02, given that industry, I think Peter you said it's nearly at full capacity, but the coatings market I would suspect, particularly western market architectural coatings are still quite weak, is it conceivable we'd run out of TI02 or is there some way to bring on incremental capacity if that market comes back?

Well, I'll answer the last of your question, perhaps, first. Because the first part requires some statistics and we'll quickly try to throw those together, Bob. I would say as we look at the demand coming from the paints and coatings industry we believe this is going to gradually ecover over the next course of year or so as we see a GDP recovery in the US and Western Europe, which, of course, is the largest markets for the coatings and paints industries. I would just remind you, again, we feel very confident about TI02 businesses and industry going forward. But this is an industry that has not seen a new grassroots facility built in almost , what, 15 to 20 years. So there is plenty of room, I believe, for debottlenecked capacity, particularly for the sulphate capacity that is being built on a continuous basis in China.

Obviously, we've seen fairly decent growth over the last 15 years or so in TI02. And the industry has been able to more than adequately cover the needs of our customer base. And I believe this is going to continue going forward. As we look at the market, as we look at the estimated inventory days, they're probably somewhere between 32 to 35 days of inventory as we sit here today. And as you look at over the last couple of years, last year at this time the days were kind of in the mid 40s, and year before that kind of in the low 40s. And here we are kind of in the low to mid 30s. So there's no doubt that demand is recovering, inventories are low, and pricing should be able to improve. Margins should be able to improve as well. We're looking at fourth quarter. Margins should be able to even offset rising raw material costs, which is something this industry will have to deal with here over the course of 2011 as raw material pressures will continue to be on this

In terms of seasonality, Bob, we see about 55% of our volume demand in the second and third quarters and 45% in the first and fourth quarters. First and fourth quarters are pretty even in terms of demand levels. Given the holiday seasons.

Okay. And one last quick one, if I might. The Saudi specially amines plant, you mentioned you brought the debt on the balance sheet and you'll bring in annualized run rate of $30 million or $40 million of EBITDA. What is the annualized revenue rate that you would assume to get to those numbers?

Let's see. It's a 60,000 -- excuse me, 60 million-pound plant. It's probably $100 to $150 million in sales. Sorr, I don't have that in front of me, but I think that's about right.

I'd say about $150 million if you look at the average selling price.

Thanks.

The next question is from Laurence Alexander with Jefferies.

Good morning. This is Lucy Watson on for Lawrence today.

Hello, Lucy.

Have volumes in any of your segments surpassed prior peak levels?

Yes. Without looking at statistics right in front of me, I think that as we look at most all of our areas of business we have seen our volumes improve over 2007, certainly in our Performance Products group. We are yet to get back in volumetrically in our textile effects.

We're yet to get back to the 2007. I would not say 2007 was a peak year. I would say it's a normalized year. Advance Materials and Textile Effects, volumetrically have not returned back to 2007, though, I see them getting to that point here in the coming quarters. MDI and polyurethanes, I would say that those have -- are back to very close to 2007 levels. And our Performance Products and our Pigments have exceeded that level. So again, I'd say it's a mixed bag. I certainly wouldn't want to have anybody come away from this call when we talk about a normalized level in 2007. We certainly don't look at that as sort of peak demand and peak performance of the business. I think there's still plenty of up side.

Generally, peak demand doesn't necessarily coincide with peak earnings. 2005 probably represents for these companies -- for group of businesses sort of our historical peak earnings. That wasn't necessarily a period of time when we had peak demand.

Thank you. And going back to Ti02 briefly,how much idoled capacity in the industry do you think can come back next year?

Well, it's interesting. In 2006 -- excuse me, 2007 we had roughly 5.6 million tons of global capacity in the industry. Today we think that's probably about 300,000 tons lower than it was in 2007. Call it 5.3 million tons of capacity. We think that roughly 6% has been permanently taken out of the industry and cannot be restarted for permitting or for other reasons. In most of the cases the facilities like ours in Grimsby, UK has been dismantled.

Thank you very much.

By the way, I'll just note that we think demand this year in Ti02 globally will be about 4.95 to 5 million tons of demand relative to that 5.3 million tons of capacity, giving you sort of amid 90s, sort of 93-94% utilization rates. And these plants really don't run given down time and so forth more than say 96%, 97%. So you're really effectively pretty darn close to effective capacity.

Thanks.

The next question comes from P.J. Juvecar with Citi.

Hi, good morning, Peter.

Good morning, P.J.

In the past past you've talked about overcapacity in MDI in Asia. There was a 500 bases point margin squeeze in the quarter in MDI. I note elmotrose was an issue. But was the over capacity an issue as well, or no?

I think that over capacity does, obviously, have an effect on MDI. I think our biggest issue around MDI right now is raw materials. I would say that that's 90% of the volume recovery as I look at Benzine, which is one of our largest raw materials for MDI in the third quarter our average price on benzene was $2.87. As I look at the price of benzine today per gallon it's $3.42. That's going to be all over the board. I think that trying to keep the MDI pricing ahead of the raw material cost curve is going to be the biggest challenge of improving margins. More so than capacity utilization in Asia.

Okay. And then on Ti02 again, one of your competitors is working on a new acrylic formulation that they're talking about that reduces Ti02 usage by 15% or more. Now, I don't know if that product works or not. But if it does,could that be a step change in demand? Have you looked at that?

I'm not familiar with that particular application. But I am quite familiar with what we're doing in our own shop here with Ti02 and UV reflectivity. What we're doing with Ti02 and improving in a number of food grade and pharmaceutical applications. When I look at TIi2and what we're doing on molecular sides around being able to handle and process Ti02 easier for the paint manufacturers and so forth, I think if anything that the opportunities to expand Ti02 usage and to take advantage of its properties will, in my opinion, will offset a lot of those things. Now again, I'm the first to say here I am unfamiliar with the acrylic application that you're talking about. But I continue to be quite excited about the growth of -- particularly, in the specialty applications of what Ti02 has in the coming year or two.

Generally, PJ, I'd say that there has been some substitutes. But I think most of the paint companies have really maximized their ability to use other products like calcium carbonate that's for the most part a filler, but is used a little bit in opacity -- for opacity. More than anything when Ti02 gets expensive you see folks decrease the amount of Ti02 and reduce the quality of paint. I think for the most part the paint companies have done that. And there's really not a lot of other substitutes for Ti02 including reformulating a way.

Okay. Thank you.

The next question comes from Frank Mitsch with BBT Capital Markets.

Hey, good morning. Hey, good morning. It's Sabina Chattergy in for Frank Mitsch today. So to be to beat a dead Ti02 horse, how would you you guys assess the threat of additional Chinese capacity? And, actually, at what point do prices get attractive enough to perhaps justify the building of additional capacity?

I would say the threat of new Chinese capacity, given the fact that that's where most of the growth seems to be taking place in the industry, it's real. And as I said in my earlier comments, the industry seems to have been able to satisfy its customer base without building a new grassroots facility. Now again, I'm not -- when I say grassroots facility there have probably been smaller facilities, grassroots facilities, 10,000 20,000 ton size facilities built in China, that typically aren't known outside of China. But without a major world scale grassroots facility having been built in 15 plus years. Obviously the capacity has come from stretching debottlenecking existing facilities and new capacity, for the most part sulphate capacity, that's come on in China. I would imagine if you look at the lower-quality material, sulphate material, that's coming out of China, this is capable of being built at a much faster pace than you see in Europe or the US and at a significantly probably 25%, 30% lower cost. So it's there. And just like most of the other products that we sell around the world, Chinese capacity is an issue. But I don't see it as being a factor that's going to necessarily suddenly turn the market dynamics that we see today.

When you look at China's sulphate capacity, because they don't have chloride capacity, for the most part, in the year 2000 there was 200,000 tons of Ti02 capacity in China. In 2010 there's roughly 1 million tons of Chinese capacity. So they've been building at roughly 100,000 tons a year. We expect that to continue. But when you take the current demand of roughly 5 million tons and assume a 3% growth rate, or a 4% growth rate, that's 150,000 to 200,000 tons of additional capacity needed every year. So even with Chinese capacity growing at its historical rate of 100,000 tons a year, you're still going to need another 50 ,000 to 100,000 tons. And we think that it's difficult, but probably doable with the existing western European and US producers. But I think what it means is it's going to continue to be snug.

All right. Thanks. That was helpful. And then Peter if you could just talk about fundamentals in Europe, which markets are you seeing better than expected recovery, perhaps which ones are lagging and maybe what your outlook is for Q4, given seasonality and perhaps maybe an outlook into 2011?

Well, we've just barely started Q4. And I'm hesitant to say much about Q4 and where we're going. I would say that as we look at the October sales patterns, and so forth, while I expect there to be the typical seasonal holiday slowdown that will come at the end of November and, obviously, the end of December as we look at the order patterns in November it looks like it's going to be an I would say better than the last year and the-year before that as far as the demand. As we look at overall Europe, Europe GDP wise continues to be a sluggish economy. But we continue to see areas of growth in insulation. We're seeing areas of growth in automotive. And the return of the automotive segment in Europe, our surfactants business and our amines business in Europe, obviously, in the paints and coatings industries in Europe. I don't see a lot of new housing construction but, obviously, there's quite a bit of remodeling, and so forth, that seems to be going on. People instead of buying new homes, perhaps, are repainting their existing homes, and so forth.

And so Europe's one of our largest markets. It's not as large as North America volumetrically for us, but it continues to be a market where we see opportunities for growth in the market. And those are mostly going to be areas of opportunities around energy conservation, making things lighter, making things stronger. The aerospace industry where our epoxies are going into, into the new 380 into the coming 350 Airbus. These things that are innovative that are going to be able to capitalize on higher energy costs, on limited raw material supplies I think are going to con -- I think Europe will continue to be an innovative and a market that will continue to reward innovation and coming up with solution to some of these problems.

All right. That's all I have. Thank you.

Thank you.

The next question comes from Roger Spence with Bank of America Merrill Lynch.

Thank you. Good morning, guys.

Hey, Roger.

Why was European base epoxy resin less available? And has it become more available now?

I would say that most of that is around feed stock constraints that we've seen in the past in Europe and some of those constraints have become better for us.

I think generally would say -- well, generally, for some time that basic liquid epoxy resins have been over supplied. It is a basic commodity. And we haven't made money in basic liquid epoxy resins for some time. Frankly, when you look at third quarter, while basic liquid epoxy resins improved, we're just barely positive. We're making all of our money in specialty components and formulations. And that's been the case for awhile. I know that there was some news articles about tightness in epoxy. That didn't translate into very good mar -- to great margins. It just really hasn't been that profitable for some time.

Okay. Okay. And BPA and EPI prices, I undertand have been up considerably over the past Q2 Q3. But you're still doing very well. Apparently, even though those prices are up you're able to push your final products, move up your price in your final products even more so. Is that a fair statement?

Yes. I think that because a lot of our high-end demand and so forth will favor the producer, the wide end of the margin on that supply chain will go on the formulated and specialty component side, not on -- not necessarily on the raw materials side.

Okay. Great. Thank you.

Thank you.

The next question is from Edlain Rodriquez with Gleacher & Company.

Thank you. Good morning, guys. Hopefully, the last question on Ti02. Prices have continued to firm up quite nicely, are you sensing or seeing any resistance from your customers as they are not able to pass through those higher costs to their own customers?

Well, I think that when we look at resistance from customers, sure, whenever you raise prices there's going to be tales of doom and despair and resistance coming from customers just as we will do the same to our raw materials suppliers. But I think that when you look at the value of a can of paint, and when you look at the cost of a can of paint, and you look at the incremental cost of Ti02 going into that paint and the incremental cost of rises in Ti02, I don't see how those incremental costs of Ti02 are going to destroy people's incentive or desire to go buy that can of paint. This is not like gasoline going from $2 to $4 a gallon and people cutting back on their driving habits. So I don't want to sound unsympathetic to our customers, but there's a lot more cost that goes into a can of paint and the decorative coatings and papers and pigments and so forth than Ti02. So I don't see these prices increasing to the point of destroying demand on the customer's side.

On the contrary, I think major paint companies are concerned about future supply of titanium dioxide. And I think there's genuine concern they're not going to be able to continue to produce and fulfill their own customer orders based -- because of the scarcity of that product.

Okay. That makes sense.

I would agree with that. I think there's probably more concern about supply availability than there is around pricing.

Okay. Next question, I'm not sure if you addressed that already, in the businesses where you are seeing higher raw materials, are you having any success in raising prices yourself? And how quickly do you believe you can narrow or close the price cost gap?

I think that we have been -- I think if you look at our improved margins in the second quarter over the first quarter, and the third quarter over the second quarter, that has been -- in all of the last couple of quarters our improvements in earnings have come around through incremental improvements in volume and also incremental improvements in margins. And I think that we have been successful. Again, I will not say in every single business group. But certainly in the majority of our businesses of being able to increase prices faster than raw materials have moved across the board.

Okay. Thank you.

The next question is from Jeff Zekauskas with JP Morgan.

Hi, good morning.

Good morning, Jeff.

A few questions. Is the quality of Ti02 made in China good enough to export to Europe or to the United States? And do you see that as a factor over time? Or do you not see it as important?

I see it in the past couple of years of being less important, but I see it becoming more of an impact today and certainly going forward. Look, there are plenty of examples where our industry, and virtually every industry in the world, will underestimate the Chinese ability to develop their own technology, to build on other people's technology and so forth, and to come up that learning curve very rapidly. I would just assume that the same will be said for Ti02 and that the Chinese producers will have more and more of an impact as they improve their quality and as they improve on their efficiencies. Today I don't see that as a major issue. But I certainly wouldn't underestimate what they're capable of doing.

My guess -- as I mentioned, Jeff, 20% of the global capacity is Chinese capacity. Mostly all staying in the Asian region. I would not guess that a major western European or US paint company consumes Chinese pigment. You should ask Sherwin or someone like that. But I don't think so. I don't think that quality is there yet. But as Peter said, it probably will get there.

So you don't think that they consume their pigment even if they have Chinese operations?

I do not believe that is the case today. But again, we've got to think of a global supply and demand issue here. And if the Chinese are able to supply their own demand, products that traditionally have gone to satisfy lower-grade demand in China is now being covered by new Chinese capacity. And that product that was being exported from Europe and the US now stays in Europe and the US. So I'm not sure that it's necessarily that the Chinese are selling into the high-end paint, as much as quality product that used to go to satisfy more commmoditized applications in China are finding its way back to Europe and the US, and the Chinese are becoming more and more self sufficient. But at this time, I do not see when we look at a competitive grades and so forth we don't see a great deal of Chinese production.

So secondly, when I looked at your Ti02 results, it looked to me like on a sequential basis prices had gone up about 4% or 5%. Is that correct? Or is that not correct?

I think on average globally -- again, you have to take into effect the FX impact and so forth, but I think anywhere from 3% to 5% price increases during the third quarter would be accurate.

And what happens with price increases is that there's always a lagging effect. So I take it you would assume that your average prices would be higher in the fourth quarter than they were in the third quarter. Is that correct?

Given where we are today with our present price announcements and the increases that we would expect in the fourth quarter, I would assume that that is correct.

So our September 1 announcement we will realize in November. And we announced, what was it, $200 to $150 a ton. And we would expect to get most of that.

I'm sorry. That's to what level now when you add the $200 or $150 per ton?

Well, depending on what region, right? Each region has a different price.

Yes, the prices will go anywhere from the low to the mid $2,000 US per ton. And so you'd add anywhere from $100 to $200 a ton, depending on the region, depending on customer acceptance and so forth. And contracts that permit that to go through. During that same time period, as we said during the -- our scripted comments, you'll also see increasing cost of raw material ores most likely coming through during that time period as well.

But in the fourth quarter, Jeff, based on current Foreign Exchange rates, because prices are in local currencies, in dollar terms I don't think in the fourth quarter you'll see an average price below $2,500 a ton in any region.

That's helpful. So just two last things. Can you talk about your your urethanes business just roughly by geography? So if you compared urethanes in the US and urethanes in Europe and urethanes in China, can you talk about which areas seem to be doing better or worse and why?

Well, I think as we look at our growth in our products, if I compare third quarter, and this is just in the MDI urethane segment. I'm not talking anything to do with MTBE here. As we look at our third quarter 2009 versus third quarter 2010, in the APEC area we've grown between 4% and 5%, Europe about 1% and in the Americas 7% to 8%. And so, some of that growth is, obviously, recovery from a very bad 2009, and some of that growth is replacement of competing materials, as we said in the call. And some of the growth is the economies starting to rebound in those various regions. So I think it's kind of a wide variety, but we are seeing growth globally take place at this time.

Was profitability in Europe especially good or especially bad or neither in the quarter?

I think that it was pretty close to what we averaged globally. It improved throughout the quarter. As we mentioned in the call, capacity during the -- in our furniture and in our automotive was at force by the end of the quarter. So from the beginning of the quarter to the end of the quarter profitability improved and we would hope to see that improving margin continue through the fourth quarter.

That margin recovery was most dramatic in Europe, second quarter to third quarter.

Which, again, is something that we very much want to see. That's our singest largest MDI market globally, the regions I've just outlined between APEC and the Americas.

I think that roughly 40% of the urethanes business is Europe.

Okay. And then lastly, in Textile Effects, were you a little bit disappointed with the third quarter results? And sort of what do you see the demand trends as being like?

I personally -- I was glad to see us have a positive EBITDA given where we were a year ago in our Textile Effects business,and the continuous changes that we continue to see in that business. As I look in that business, there's only so much we can do around cost-cutting and around new product development. When the textile demand globally drops 30%, 35% globally in a relatively short period of time through 2007, 2008 going into 2009 and we've seen a 10% recovery, for us to get back to where we would expect to see $20 million, $25 million a quarter of EBITDA we've really got to see the textile industry recover back to where it was in 2009.

Now, I believe that that is achievable. I would question if there are certain segments of our economy, particularly in North America, that are going to return to 2009 I mean are we going to see anytime soon 2 million homes being built per year? I don't believe that's going to happen any time soon, personally. But I do believe that when we talk about textiles coming back, I do believe that 2009 was not -- people buying clothing and so forth. 2007 was not, what I would call, a bubble year for textiles. So to return to 2007 volumes I don't think that it takes a great stretch of how the consumer and consumer confidence, particularly in North America, gets us back to that level. So if there's a business that has tremendous up side as the economy continues to recover and as consumer confidence comes back, it's probably Textile Effects.

Okay, thank you very much.

Thanks, Jeff.

The next question comes is from Lee Arger with HSBC.

Hi, good morning. I am sorry to beath the Ti02 horse to death. About two years ago you were quite interested in Ti02 assets. With hindsight, I would say, that was a good interest, but it didn't work out. Do you think there is still a lot of value in purchasing assets nowadays?

Well, it's going to be something just we did two years ago. We will very closely evaluate opportunities that may come onto the market. We do believe that we are uniquely positioned to achieve synergies with a global footprint that would certainly benefit from being a player in that merger. But we are not in a position where we are going to over pay for something. And that's about all I can say. I think that we'd have the same interest today that we did two years ago if there is something that would give us optionality with our Pigments business and will create shareholder value.

Okay, great. Thank you very much.

Thanks, Jeff.

The next question is from Andrew Cash with UBS.

Good morning. I think you've answer probably every question that you could think of about MDI, but I do have one more. WIth Benzene down as much as it was in the US in the third quarter, I think it's somewhere around $0.40, $0.45, and with volume back up the '07 run rate I'm just a little baffled that while MDI was up sequentially, I thought it could have been a little bit higher. So is there something there with some contract caps, or something else going on there that kind of held it back?

No, there certainly weren't any contract caps, and so forth. And when we looked at the average benzene price of the $2.87, that -- we did see a lower than probably expected number for a month or so during that third quarter time period. When we look and compare that number to where we were a few years ago, it is still significantly higher than where we were in 2005, 2006, and some of the peak years of MDI profitability. There is no doubt that the industry is running at an effective rate today. I believe the industry is running at about 88% capacity. Now, you have about 600,000, 700,000 tons that are idled in the industry and that would bring the effective operating rate up to probably somewhere in the low 90s, percent capacity utilization. But, eventually, a lot of that idle capacity is going to be coming into the market, as we've seen happen in Europe in the third quarter. And I believe that that will have something of an impact on margins as well.

Let me make sure I understand. You said later in the quarter, later in the third quarter, your numbers, I'm assuming you mean your EBITDA or your EBIT margins, they were as high as they were back in the prior peak?

No. No, I'm not sure I said that.

Okay. I just wanted to make sure. But they did improve, the margins improved over the course of the quarter. Is that right?

We did see margins improve over the course of the quarter. And I would note that that's -- over the course of the quarter we also saw raw materials price increase.

Right.

So I would -- what I would take away from that is that our price increases were going faster than our raw material costs.

Okay, so from the run up in August of raw materials your price increases are more than keeping up?

Yes, I would say that in most all of the applications and regions that would be the case.

Okay, thank you very much.

Thank you.

Operator, I think we're on top of the hour right now. So we have time for one more question.

Okay, sir. The next question is from Herb Hardt with Monness.

Good morning. I was curious as to whether you folks had the capability to restart the Grimsby plant.

No, the Grimsby plant no longer exists.

That answers that. Okay, thank you very much.

I'll just add that when you look at all the other plants that have been shut down over the last couple of years, Mohavre, which is a crystal plant, and I believe Baltimore, which is a crystal plant, I don't believe those plants are standing today.

Okay, thank you.

Thank you all very much for taking the time to join us this morning. And this should conclude our call.

Ladies and gentlemen, we thank you for your participation in today's conference. This does conclude the presentation, and you may now disconnect. Have a great day.