Huntsman Corp (HUN) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2011 Huntsman Corporation Earnings Call. My name is Modesta, and I will be your coordinator for today. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host today, Mr. Kurt Ogden, Vice President of Investor Relations. Please proceed, sir.

Thank you, Modesta. And welcome to Huntsman's First Quarter 2011 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 first quarter 2011 via press release and posted it on our website, 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 and 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'll be referring to adjusted EBITDA, which is EBITDA adjusted to exclude the impact of discontinued operations, structuring, 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 exchanged gains and losses, certain legal and contract settlement costs, losses from early extinguishment of debt, and losses and gains on disposition and acquisitions 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 operations, and we have received feedback from many of you in the investment community that that's 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 and in our first quarters earnings release.

Let's turn to slide two. In our earnings release this morning, we reported first quarter 2011 revenue of $2.679 billion, adjusted EBITDA of $302 million, and adjusted earnings per share of $0.47 per diluted share. Our adjusted EBITDA was $302 million in the first quarter 2011, compared to $123 million in the prior year, and $219 million in the prior quarter. The improvement in earnings compared to the prior year was primarily due to increased demand and higher contribution margins. Earnings compared to the first quarter increased as a result of higher contribution margins as well as increased demand. Peter and Kimo will provide greater insight into the improvements within our business.

I'll now turn the call over to Peter Huntsman, our President and CEO.

Thank you, Kurt. Let's turn to slide number three. Adjusted EBITDA for Polyurethanes division in the first quarter 2010 was $114 million. The supply demand balance for the MDI industry has tightened significantly. We estimate the MDI industry operated in the low 90's as a percent of nameplate capacity in the first quarter. For the most part, all idled industry capacity has been restarted.

Compared to the prior year, our MDI sales volumes improved across almost all sectors. In total, our year-over-year MDI sales volumes increased 9%. Improved demand was particularly strong in the insulation and automotive sectors. Approximately 40% of our MDI revenue is generated by sales related to insulation applications. We estimate that approximately two-thirds of our insulation related sales are used in commercial applications and the other one-third are used in residential applications.

We have been successful in increasing our average selling price for MDI and related system solutions. Average MDI selling products selling price increased 11% and 2%, compared to the prior year and prior quarter, respectively. The sharp increase in benzene and other raw materials cost in the first quarter negatively affected our MDI margins on a sequential basis. During the first quarter and early second quarter, we announced price increases in all regions. We started the second quarter with higher margins than we started the first quarter.

Demand for MTBE is very healthy, particularly in Latin America where we sell most of our product. The large spread between [Brent], which is a reasonable proxy for MTBE Gulf Cost prices and natural gas prices which drives certain MTBE raw material costs, had the effect of improving our contribution margins. EBITDA from PO MTBEwas very strong in the first quarter and well above historical averages. These appear to be moderating some in the second quarter.

Let's turn to slide number four. In the first quarter, our Performance Products division earned $115 million of adjusted EBITDA, more than any other division in the quarter. I am pleased with the strong results from the first quarter and encouraged by the incremental EBITDA expected from future capacity expansions in de-bottlenecking projects.

On April 2nd, we completed the acquisition of the Indian chemicals business of Laffans Petrochemicals Ltd. The business manufactures amines and surfactants. In February, we announced our intent to move forward with the capacity expansion of our Jurong Island, Singapore polyetheramine facility. We continue to expand our presence within the Asia Pacific region. Over the next decade, we expect demand for our amines to grow at least 10% per year in the Asia Pacific region. I would like to highlight the point that we are not only expanding our revenue footprint, but these businesses are very profitable, with EBITDA margins in the mid teens.

Approximately two-thirds of our production capacity in this division is North America. Our Port Neches, Texas facility experienced mechanical shutdowns in the first quarter related to freezing weather that resulted in lower EBITDA of approximately $7 million. This complex is integrated from ethane gas all the way through to ethylene oxides, surfactants and amines. As a result of the North American natural gas advantage, we saw strong integrated margins in our Intermediate chemicals in the first quarter that more than offset the negative impacts of the temporary shutdown. Part of our Port Neches, Texas facility will scheduled maintenance in the second quarter. The impact to EBITDA is expected to be $8 million to $10 million.

Turning to slide number five. Adjusted EBITDA in our Advanced Materials division was $39 million in the first quarter. This division is compromised of formulated systems and specialty components businesses which represent approximately 90% of our earnings. The other 10% comes from our base epoxy resin which is lower margined and more commoditized. Compared to the prior year, volumes improved 17% within formulated systems and specialty components, primarily as a result of improved demand for wind energy products used in windmill blades and within industrial paints and powdered coatings. Average selling prices increased in specialty components where as formulation system pricing is more static and generally moves only two to three times a year. We expect higher selling prices for our formulation systems as we progress through the year.

Earnings in our base resin business improved as a result of increased average selling price. However, our volumes in the Americas decreased due to raw material constraints from one of our Bisphenol-A suppliers. The bottomline impact was minimal. We expect these supply limitations to be resolved in May.

Turning to slide number six. Our Textile Effects division reported an adjusted EBITDA loss of $6 million for the first quarter. In 2010, we exited [third and] high volume, low margin commodity products. Excluding the impact of this bottom slicing, our year-over-year sales volumes were flat. Although there were certain bright spots for demand, such as automotive and synthetics, overall demand can well be characterized as muted.

There's a lot of press regarding the record pricing of cotton, which has increased approximately 200% over the past year. This has had an impact on our customers, the textile mills, as they have tried to pass these costs on to the retailers. In turn, for the first time in a decade, we are now seeing apparel retailers raising prices in an attempt to pass these costs on to consumers.

Approximately 50% of our fixed cost are denominated in Swiss Francs. The foreign currency impact of a stronger Swiss Franc against the U.S. dollar on our fixed costs, had an effect of decreasing our EBITDA by approximately $6 million compared to the prior year. Our priority remains focused on expanding our sales and relocating our costs closer to our end use markets.

On slide number seven; our Pigments division earned $87 million of adjusted EBITDA for the first quarter. The supply-demand balance within the Ti02 industry remains very tight and is expected to continue. We believe industry producer inventory levels are less than 40 days, which is unusually low for this time of year when we enter the traditional coding seasons for Europe and North America. We are operating our facilities at full capacity and do not expect a seasonal increase in sales volumes during the second quarter. Although we are operating at high production rates, we are staying on top of the necessary maintenance of our assets. To this end, we will bring our Calais, France facility down for scheduled maintenance during the second quarter. We expect a financial impact on EBITDA to be minimal.

We continue to raise prices in an effort to offset increases in raw materials and energy costs. Compared to the prior year, our average selling price increased 23% and 7% compared for the fourth quarter. We've announced further price increases in April to offset additional raw material and energy costs. There's been a lot of attention around ore supply. Ore costs, along with other raw material costs, are increasing and supply-demand is tight. That said, we have successfully procured adequate supply for our needs.

Before sharing some concluding thoughts, I would like to turn a few minutes over to Kimo Esplin, our Chief Financial Officer.

Thank you, Peter. Let's turn to slide eight. In the first quarter of 2011, our adjusted EBITDA increased to $302 million from $123 million in the require year. The primary reason for the year-over-year increase was an increase in general demand and corresponding higher sales volume, when you exclude the impact of the turnaround at our Port Neches, Texas facility in the first quarter of 2010. This chart shows that volumes accounted for $120 million of the improvement in earnings. Margins also improved as increased average selling prices more than compensated for the increase in raw material costs.

Compared to the fourth quarter of 2010, our first quarter adjusted EBITDA increased from $219 million to $302 million. The primary reason for the sequential increase was an improvement in margins, as increased average selling prices more than compensated for the headwind of increased raw material costs. We saw an improvement in demand as sales volumes increased 5%. Our adjusted EBITDA for the 12 months exceeds $1 billion despite polyurethanes profitability well below normalized levels, which is just starting to gain traction with operating rates in excess of 90%.

Turning to slide nine. Our year-over-year sales revenue for the first quarter increased 28% as a result of improved demand and higher average selling prices. Improvements in revenue were most notable in our rest of world category, which makes up 17% of our total sales, and improved 50%. This category is emerging markets such as Central and South America and the Middle East. In Europe and North America, our largest markets, each improved 30% and 23% respectively. Asian markets continue to grow nicely as revenues improved 18%.

Our largest divisions, Polyurethanes, Performance Products and Pigments, which account for approximately 80% of our revenue, recorded revenue increases of 36%, 31% and 35% respectively. Within our Polyurethanes division, the growth rate for PO MTBE is not meaningful because of our turnaround in Q1 2010. However, the urethanes growth rate is helpful as we saw strong improvement. In total, our sales volume improved 23% and our average selling price improved by 10%, in terms of local currency. We saw similar trends in quarter-over-quarter comparisons; strong regional growth as a result of higher average selling prices which increased 7% and increased sales volumes of 5%.

Turning to slide 10. At the end of the quarter we had approximately $1.2 billion of cash and unused borrowing capacity. During the first quarter we invested $245 million in cash to increase our primary working capital or 12%, roughly consistent with the increase in sales during the same period. As volumes and prices have improved along with the cost of underlying raw materials, so has our working capital. Notwithstanding this, in many of our businesses, inventory relative to expected sales are at historically low levels.

We continue to take advantage of attractive debt markets in and effort to improve our debt maturity portfolio. In March, we amended our credit agreement and extended $650 million of our Term Loan B from April 2014 to April 2017. In April, we amended and extended our accounts receivables securitization programs to April 2014. Debt reduction is a priority for our Management and for our Board. In January of 2011, we completed an early redemption of $100 million of our 7-3/8% senior subordinated notes to 2015 with available cash. We expect to further delever the balance sheet with further free cash flow.

During the first quarter of 2011, we spent $60 million on capital expenditures. In 2011, we expect to spend approximately $350 million on capital expenditures.

I'll now turn the call back over to Peter for concluding remarks.

Thank you, Kimo. As we conclude a very positive first quarter, we continue to see the positive impact of our geographic and product diversity. At a time when crude oil appears to be moving towards historical highs, we are benefiting by having nearly 50% of our raw material purchases North American based. Our integrated natural gas based manufacturing will continue to allow us to access competitive North American feedstocks. With our acquisitions and capital projects in Singapore, Thailand, China, India, and Saudi Arabia, we are uniquely positioned to further take advantage of fast-growing Asian markets.

As I look at the industry longer term, I continue to express caution regarding the macro economic condition of oil prices, stubbornly high unemployment rates, and the fragility of U.S. and European economic recoveries. However, we continue to express a high degree of confidence about our Company's capacity utilization rates. These high operating rates and strong demand have allowed us to pass on rising raw material costs to our customers. We also believe that the strength of our customers and their end use markets will allow us to take advantage of improving market conditions as we continue to see global economic growth.

As I stated earlier, Huntsman had a great first quarter. And I believe that we have even better times ahead of us. With that, I'll turn the call bark to Kurt.

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

(Operator Instructions). Your first question comes from the line of Laurence Alexander with Jefferies. Please proceed.

Good morning,

Hi, Laurence.

Two quick questions. First, are you seeing any end markets where you're seeing beginning signs of demand destruction because of the higher prices to pass-through input costs?

I personally -- Laurence, off the top of my head can't think of any. I see some statistics that tell me some trends about consumer confidence. I have not, on a macro basis as I look across our businesses, and even the larger segments within each of our divisions -- I'm looking for two areas here, I'm expanding just a little bit on your question. Am I seeing area product replacement, where because of the price high price of oil, other products are moving in to replace that? I'm not seeing that -- of any materiality taking place.

And are the higher prices driving end use consumers away and so forth?We are seeing some product substitutions that are taking place, something such as with a record high price of cotton and textile effects, you see The demand for polyester is rising because of the high cost of cotton. But again, I think we're uniquely positioned to take advantage because of our customer mix and product mix --to be able to take advantage on either one of those. To answer your question, no, I'm not seeing anything that is material at this time, as far as demand destruction or even product substitution that's taking place.

And how would you characterize your M&A pipeline? And in particular, the valuations that companies are asking for in negotiations?

I'll let Kimo comment on that. But again, I would say that while we see transactions that are out there, I think that from a macro sense, like Kimo mentioned in his comments, we remain very committed to making sure that we maintain a strong balance sheet and focus on debt paydown. We also, as you've seen over the course of the last year or so, have had a number of smaller acquisitions, of $10 million, $20 million. We believe that these are -- a couple of criteria -- that these are easy for us to integrate within our existing business; that they are a downstream add-on, where we're able to take our MDI or our amines products or what have you, and further move that down and to further formulated or component products, value-added components; and usually in regions of the world where we're seeing fast growing developing markets, in India and in areas that we're looking at today in South America and throughout Asia and so forth.

Yes, Laurence, as Peter said, we are really going to be interested in more bolt-on acquisitions, nothing that would change the credit profile of the business. So we're not very active in the M&A market, so I don't know that we would be the best source to give you that color.

Thank you.

Thank you.

Your next question today comes from the line of Bob Koort with Goldman Sachs. Please proceed, sir.

Good morning, thank you. Peter, I guess you guys have what I characterize as a pretty unique window on Asia, given your presence there. It seems like, of all the regions, maybe that one saw some decelerating growth. Could you comment a little bit about what the tightening policies have done to the business activity there? And how you see that progressing through the year?

Good morning, Bob. I would just say that we continue to see very robust growth taking place in Asia. I think that it is fair to say, as we've said on past calls, Bob, that across the board as we look at our Asian capacity -- I'm talking about our amines capacity, our polyurethanes capacity, our Ti02 capacity -- we are essentially sold-out in Asia. So the growth that we're seeing in those markets are exports that are coming in from Europe and North America. As we see the European and the North American markets continue to strengthen, we'll make that decision to cut exports to Asia and to supply the local markets, where we have an opportunity to make more money. That is not to say that we're pulling out of the Asian markets. That's also not to say that we're not continuously upgrading our customer base with the product that we have available. But I'd be lying to you if I told you that we have an extra 20% to 30% of idle capacity sitting around in Asia and we're going to continue to grow the business at strong double-digit growth rates in Asia because we have all this excess capacity. We are in the process of adding capacity in amines in Singapore, we are continuously looking to de-bottleneck our MDI capacity, we are expanding our textile manufacturing capacity throughout Asia.

But having said all of that, Bob, our single largest source of product going to Asia today, aside from the products being produced in Asia, is coming from the U.S. and Europe. And gradually again, if those markets strengthen, that product will probably be staying in those markets where we can make more money.

Generally, as it relates to our insight into local demand, it continues strong. We're not seeing cracks anywhere in the Chinese demand profile.

You mentioned adding some capacity. Could you talk a little bit about MDI?It appears you and your partner there are building your own plants as opposed to doing something together. Is that a pretty decided outcome? Or is there still scope for maybe doing a joint venture for your next round of MDI large scale capacity there?

Well, DSM is definitely -- they publicly announced that they are moving forward into [Zhongcheng]. And we continue to look at various options, but our priority right now in China and MDI is a continuation of our expansion of our [Guangzhou] facility. And we fully believe that we continue to be on track to expand that facility. And that is our priority with or without a partner there.

Great, thanks very much.

Your next question comes from the line of Jeff Zekauskas with JPMorgan. Please proceed.

Hi, good morning.

Good morning, Jeff.

What was cash flow from operations in the quarter?

Give me a second there. We had negative $124 million of net cash flow from operations.

Excuse me, let me just see. I'm looking at my Q and I know you haven't filed it yet.

Sure. Thank you for your trouble.

I've got negative $74 million, excuse me. What that is, Jeff; $302 million of EBITDA, and then CapEx of $60 million, cash interest is $66 million, cash taxes of $5 million, and changes of working capital of $245 million.

$245 million.

Getting me to a use of cash of $74 million.

So if your CapEx was -- the CapEx usually isn't included in cash flow from operations. So you're giving a net use of cash for the entire quarter, is that right?

Well, I'm sorry, yes, probably. That's how we define it. I'm sure the market may look at it differently.

So the cash flow from operation then was really negative $14 million, is that correct?

If that's how you'd define it, yes.

All right. Secondly, in terms of the Polyurethanes business, if you excluded the strength in MTBE from the fourth quarter to the first quarter, would EBITDA have grown sequentially in Polyurethanes?

Yes. Let me give you a sense for PO MTBE.

Sure.

I think listed C factors year-over-year were probably up $0.20 a gallon and we have roughly 250 million gallons of capacity. So call it -- yes, normal EBITDA was higher, but on a quarterly basis, what is that --? $50 million over four quarters, kind of $15 million better than what you would have experienced last year if we hadn't had the turnaround. Just to give you a sense of the magnitude of the MTBEs.

In Performance Products, I always forget whether you're tolling ethylene glycol or exactly what status that has?Was profitably in ethylene glycol very important in the growth in MTBE and Performance Products? And how do you see that market through the course of the year?

So MTBE is in the Polyurethanes business.

Right. I was switching over to performance markets. Forgive me if I misspoke.

That's fine. And glycols was up year-over-year, as you would expect. But it's not that meaningful. It's less than 10% of our Performance Products business and that's on the high end. It's usually closer to 5% of the profitability of that business.

Okay.

We would say longer term, that throughout the year that ethylene glycol should remain fairly tight. Look at the demands that is taking place in the polyester chain. As we look at the operating capacity utilization, particularly in the Middle East, that will remain tight at least for the next couple of quarters here. I think with the low cost ethane advantage that we have here -- I'm speaking about Huntsman, not the industry -- that Huntsman has with our oxides production, that will continue to advantage our position in ethylene glycol. I think it's going to be a pretty good year for that product.

Then lastly, you had really nice sequential growth in EBITDA in Advanced Materials. And I was wondering how you accomplished that. Because there was some revenue growth sequentially, but the profit growth was really pretty remarkable. How does that work?

I think it's fair to say that in the fourth quarter that we had quite a few one-off charges that were taken during that time period. We saw quite a bit of growth and some traction that took place -- margin improvement that took place in our formulated systems of our Advanced Materials. We did have some one-time charges that affected us in the fourth quarter.

Okay, thank you very much.

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

Good morning. This is [Eric Petrie] in for P.J. Quick question in Ti02;if ore costs grind higher, do you think prices can be passed on to your customers ?

I believe that with the condition of the markets that we see today and with the ore costs that I see on the horizon in the next few quarters, I believe the simple answer is yes. That may not be in [Zichou] where it's instantaneous, but I believe that within a quarter's time period, those rising costs of ore and energy -- remember that ore only makes up about 50% of the costs that we have of producing Ti02. When we talk about ore and energy and other costs, I believe that the market is such that we will be able to pass on those price increases to our customer.

Okay. Then my second question is, what is your Ti02 demand outlook in Europe where you have a strong presence?

I believe in Europe we'll see a continued gradual recovery. Again, as you look at the two largest end use applications, you'd be looking at automotive, then you would be looking at housing and construction. The automotive markets in Europe, particularly on the high end, are surprisingly robust and continue to be that way. And I think they'll be that way for a couple of quarters here. As we look at Polyurethanes and in Ti02, those two segments, in particular, are benefiting from a strong European automotive sector. As we look at the housing and commercial real estate in Europe, it remains quite sluggish, it has been for some years. But the remodeling and the painting sales and coding sales in Europe actually are quite decent.

Okay, thanks.

Your next question comes from the line of Frank Mitsch with BB&T Capital Markets. Please proceed.

Good morning, gentlemen.

Good morning, Frank.

Peter, one of the common themes in going through your five segments, in terms of an outlook, was talking about higher raw material costs. But I also heard you talk about various price increases that you had been implementing, some as early as April 1. Just curious, as you look at the Company as a whole, in terms of margins, would April margins be higher, flat, or lower versus a Q1 average?

I think that across the board, Frank, it's going to be -- not categorically in all divisions, revenue is going to be higher. What I see in April today and the traction we're getting in prices that we received in April, I think on average it's going to be a bit higher.

Terrific. And I noted that year-over-year volumes contributed the most to the increase sequentially -- margins contributed most to the increase. How are you -- where were -- I think you said MDI operating rates were in the low 90s. For the Company overall, where were the operating rates in Q1, roughly? And how did April shake out, in terms of operating rates?

I think as we look at Q1 -- and I'll just quickly go by kind of division by division --

Great.

As we look at Ti02, we're obviously sold out. Typically, in this time of year, going from first quarter to second quarter, second quarter is your strong year for paint production and construction in Ti02. You're looking at first quarter, typically, you're getting into a stronger second quarter in sales. I think in Ti02, we're going to continue to be sold out. Second quarter in MDI we continue to see strong growth globally. And I see no reason why, from what I'm seeing today, why MDI should not be -- and polyurethanes in general, across the board, should not be stronger the second quarter than the first quarter and going up around the world.

Amines and surfactants, again, I see that volume again gradually increasing in the second quarter. I see no reason why that should be diminishing. Textile Effects, we move into this time of year, typically, we start seeing wool processing coming in this time of year. I would hope that there's some relief in cotton prices, as people have moved from cotton into polyester and you see cotton prices coming down. I think that should be a positive sign. I'm probably forgetting one --in Advanced Materials, in wind, aerospace construction, so forth -- again, I would say that it would be gradually improving in the second quarter again.

Frank, in two of our five divisions, we don't even tract utilization rates, so Textile Effects and Advanced Materials really are not utilization rate kinds of business. And in half of our Performance Products businesses, really we don't look at the utilization rates. But in the capital intensive, utilization rate sensitive businesses, I think we said -- in MDI we're in the low 90% utilization rates as an industry. And I think that's probably a good number for us. Also, in PO MTBE, that business runs full out, it's a 100% utilization rate business. You look at Pigments, I think Peter said, we're full out. So in the utilization rate sensitive businesses, pretty tight.

Terrific, thank you.

Your next question comes from the line of Andrew Cash with UBS. Please proceed.

Hi, good morning, everybody.

Good morning.

I wanted to talk about urethanes and Textile Effects. Going back to product shortages and urethanes first;you guys are spending substantial money on some front-end engineering work on the China plant, but no government approval yet. I'm curious if you could lay out for us what's going on in the delay of the approval process? When you might see an approval there?

Well, I think as we look at an approval in Asia, I do believe it is coming. Andy, I wish I had more control over the Chinese regulatory process. And at this time, I don't even want to speculate other than to say that I am confident that, one way or another, that we will see more MDI capacity from Huntsman coming into the Chinese market as soon as possible.

Is it possible that there's some staging going on, maybe the government is trying to stage how much new capacity is coming when? Is that part of the equation?

I wouldn't want to speculate one way or the other. The Chinese are very large buyers of MDI, it's a very important component of their infrastructure and on their energy conservation programs. As you look right now over the course of the next -- given the fact that it takes three plus years to engineer, procure the equipment, build a plant, start-up the plant, bring full capacity into the industry, it takes that much time to bring a plant into the industry. China is going to be very short on MDI two, three years down the road. They're getting short today. It's going to get a lot worse before it gets better. I struggle to see that there's a concerted effort within the government to hold back MDI capacity being built. But again, I'm just speculating.

Okay, just a quick one on urethane -- follow-up. I think there's a Euro 100 to 200 per metric ton price discussion for the second quarter in Europe. Do you care to put any odds on that going through?

Yes, I think we feel very confident that the vast majority of that , if not all of it, will be going

The other question about textile. If I recall correctly, I think the goal was 15% EBITDA margins down the road. I think you've cut $100 million in costs -- cutting about one-third of the workforce so forth and so on. I was just curious, when might we expect to see that business starting to turnaround? I know you mentioned wool season -- but I would expect big margin improvement.

Our expectations for that business continue to be high, Andy. I think that when we've talked in the past, we have always assumed and I will continue to assume that we will return to the sort of pre-recession demand. And that's the key here, that we can get to the pre-recession demand of consumer textiles and textile consumption. And when that happens, I believe that you will see a 10% to 15% EBITDA to sales margin business. I'm totally open here. I would have thought we would have had stronger textile demand than we have today. I'm talking as an industry, not Huntsman, because I don't think that Huntsman's doing any worse. I think we're probably doing better than the average in the textile industry. But I think that as you look at the impact over the last quarter or two of higher retail prices being pushed through and higher cotton prices, and the changes that have taken that, I believe that there has probably been a few quarters delay in what we were hoping would be a quicker recovery on the consumer side for textiles.

Let's not minimize the impact on North American housing in this business. We often think about apparel, but also think about carpets and draperies and towels and sheets, which really follow housing starts. And that business continues to be very, very difficult.

You just have to look at the furniture stocks and can you see that. Good luck with that and good luck with all of those product shortages out there.

Thank you very much.

Thanks.

Your next question comes from the line of Bill Hoffmann with RBC Capital Markets. Please proceed.

Yes, good morning.

Hello, Bill.

I wonder, Peter, if you could talk a little bit about the Performance Products business, the Indian acquisition and your Singapore expansion; I want to get a sense of what incrementally that might add to topline growth at this point?

I think on topline growth in India, we announced that there's $100 million of revenue that should be coming from that. With the Singapore polyetheramines, as we look at that, that will be about 40,000 tons of capacity coming on and that will probably take a year, to a year and one-half for that product to be sold out. That's probably an incremental $100 million there as well. I believe that with polyetheramines, you're probably going to be staying mid to upper teens sort of EBITDA to sales. And with the Indian markets, that's a real scattering of end use applications, from amines to surfactants and we're bringing in products from overseas to blend with that. But on average, we should expect the surfactants to be in the high single digits, the amines to be in the low double digits, probably a 10% EBITDA average there in India.

Terrific, thanks. My second question is back to the MDI business. Outside of the Chinese expansion, given the fact that you're operating, currently, in the low 90% range. It feels like the business is relatively back to a steady state. Do you wait for more geographic economic growth here? Pr are there things you can do to get a higher growth rate out of that business over the next year or so?

I'm quite satisfied with the growth rate of MDI. I think for the last two years we've seen growth, not just in Asia, but on a global basis, on around 8% growth and -- perhaps closer to 9% growth. As we look at that on a global basis, I think the opportunity for MDI, as far as I see it, is not necessarily the volume growth, so that's important to us, it's the market expansion. I would remind you that in 2005 when we saw 100% capacity utilization rate in this industry, if you were to take those sort of end EBITDA margins and put them on a per ton basis today, six years later, we have our Chinese facility is now committed and we further de-bottlenecked and brought capacity expansions and efficiencies into our other two MDI facilities. This year looking at 2005 margins today of somewhere between $800 million and $1 billion of EBITDA coming out of the polyurethanes division. Again, volume is important to us, but where we need to be focused and where we are focused over the next two to three years here is margin expansion. And being able to grapple with historical high benzene prices, and not just catching up to those, which I feel we've done from the first going into the second quarter, but further expanding margins to capture where we were a few years ago in MDI.

Bill, let me remind you. Over half of our MDI is consumed in systems so there's a lot of innovation going on in this business. It's not just MDI component sales and waiting for utilization rates to strengthen. There's a lot of value-added product that is going on out there where we're adding value to these molecules.

Kimo, can you grow that? Is there a growth rate on that percent you're sending into systems, at this point in time, that you want to talk about?

It's growing about the same as the industry generally. It's more value-added, higher margins, much more stable kind of business. It's a real focus of our systems houses that are scattered throughout the world.

We just should note --not just in polyurethanes, but if you look in amines, over the last two or three years, where we have tried to change this business the most is not necessarily adding more tonnage of capacity, but how do you take MDI, how do you take basic amines and surfactants, how do you take bulk liquid resins and formulate those further downstream? I hope that it has been apparent to people following our Company -- it is to how do you add value to the molecules further downstream. How do we diversify and differentiate ourselves from the competition? I don't want to be competing on MDI molecules with six or seven other competitors out there. I would like to be producing a product that only one or two people in the world can produce, where you have real leverage and specifications and pricing and product formulation and technology. And that really -- as we look at Huntsman over the next couple of years, that needs to be our uniqueness, is what we can bring technologically, in through our innovation and creativity into fast-growing markets throughout Asia, and also in mature markets in the U.S. and Europe.

Terrific, thanks. It's certainly given you a lot of momentum at this point.

Your next question comes from the line of Dan Chandra with DW Investment Management. Please proceed.

Congratulations on a good quarter.

Thanks.

I was wondering if you could -- in Pigments, it seems like you guys are in a real sweet spot. Your selling price is going up. You're sold-out. But your ore costs are going up. You guys have said that your raw materials more than offset that. A, would you expect to see margin improvement expansion over the next coming -- several coming quarters? Can you comment on what your thoughts are on the duration of the cycle?

This is Kimo. Let me take margins sequentially and remind you of some things that Peter mentioned in his remarks. We saw ore prices really rise at the beginning of the year, say January 1. And with our inventory average costing system, you really won't see those ore costs come through until the second quarter. So we really didn't see that in the P&L, if you will. Having said that, prices have risen as well. So you will not see, I do not believe, sequentially, all of the price increases that are effective the first or the second quarter flow through to the bottom line. You're still going to see some noise of price increases earlier on in year in the P&L.

I would say, as far as the duration of the cycle, I'm quite bullish, as far as the entire Ti02 industry for the long-term, largely because of three issues here;number one, is that there's still -- one of the largest consumers around the world of Ti02 product, obviously paint, is U.S. -- North American housing construction and that continues to languish. We really have not moved much off the floor and that's not going to continue forever. There's going to be continue to be an improvement in the coming years in the housing market and the automotive markets in North America. So I look in the overall demand and it does not appear globally that we are operating anywhere close to peak consumption. I don't see a bubble in housing or automotive, or the large consumers of Ti02 that are out there right now.

Secondly, as I look at Ti02 capacity, if Huntsman, right now, could wave a wand and all of a sudden we could build a 150,000 metric ton facility that could come on tomorrow; is there sufficient ore supply in the industry today to supply that facility? If I were to say that about ethylene, if I were to say that about polypropylene, if I were to say that about most chemicals, yes, there's plenty of raw material. I'm not sure there's enough ore out there to supply, right now today, a world scale facility that could come onto the market.

As I look at the second area -- as I look at the ore supply, I believe that there's sufficient ore to satisfy the needs of the industry today. And I believe that Huntsman is well-situated in the coming years in the longer term contracts that we have. But nevertheless it's going to take years for the ore situation to rightly balance itself. Again, it takes longer time for you to go out and mine the ore, process the ore, and bring on new ore capacity than it does to bring on Ti02 capacity. That is the second.

The third area, I would just say, is around Ti02 capacity itself. And yes, there are incremental expansions that are taking place. Anybody that has a simple expansion project probably has already done it by now or has announced it by now. So as you look at the grassroots Greenfield facilities that could be built, I've not heard of any facilities -- world-scale grassroots facility --as a matter of fact, the last grassroots Greenfield facility was probably either our facility in Lake Charles, Louisiana, or the ICI facility in [Tikai], Malaysia. As you look at those -- and that was nearly going on 17, 18 years ago.

As I look at the Ti02 capacity, there's incremental expansions that are coming out. I don't see world-scale capacities coming on, those are years away. It's going to be some time before the new ore capacity and mines come into the market and affect that. I think the Ti02 demand is going to continue to be -- its' not going to go through the roof, but it's going to continue to grow quarter-on-quarter, year-on-year. And it's going to be a nice steady expansion, which is ideally what we want.

Great, thank very much and congratulations again.

Thanks, Dan.

Your next question comes from the line of Mike Shrekgast with [inaudible]. Please proceed.

Sorry, it's Longacre. Real quickly on Ti02, these facilities for the last, let's call it five to 10 years, barely ran at 90% -- maybe they ran below 90% -- it was below 90%. Now within the last year or so, you shut down capacity, these facilities are running at close to 100%, as you said. Can you just comment on the preparation or what you think the possibility of outages might be and price spikes that you might benefit from? Just because, from what I understand, the Ti02 process is very intense on the facility -- the facilities are very -- the process is highly corrosive. And it runs -- the plants run very hard, so there's a possibility of outages. Can you just talk a little bit about that?

Yes. Most Ti02 plants are a single, maybe a dual line facility. So when you have an operating upset within the facility, the entire facility usually comes down. The entire facility will feel the impact. This isn't a -- something like -- if I were thinking of our amines facilities, where we have multiple terrains, one terrain can go down or one reactor goes down, you continue to operate other reactors. Typically you have one in the Ti02 plant -- or one or two reactors, and that's it. I would just say that -- again, I'm not going to speculate on which plants or what impact the plant coming down, but the average age in this industry of Ti02 facilities has got to be counted in the decades, not years.

As you look at that, you're at that point where you are putting more and more money and time into maintenance, typically TNI or scheduled maintenance turnarounds occur more often, will take longer. And you're pressing up against the [metallurgy] and you are pressing up the wear rate of pieces of equipment, frankly, that you've never operated for this amount of time. That's not to say that these facilities are all susceptible to falling apart. But that is a bi-product of facilities that are the age of the Ti02 facilities.

Do you have a view at all, if one facility around the globe, went down because of -- let's call it three months, how that might impact pricing of Ti02 into the marketplace?

That would depend on the size of the facility in question, but yes, it would have an impact. When you're operating in the high 90%, mid 90% capacity utilization, which is where we are, I don't believe that a Ti02 plant can run, necessarily, at 100% nameplate capacity. You just -- you don't -- it's just that that design is not susceptible to what you see in other chemical processes. So one 40,000, 50,000 ton facility coming down for a couple of months, that's not an unrealistic time period that you pointed out, you will see, probably, a force majeure environment that would come about through pricing and supply.

Is there one major facility that was down as a result of the Japanese earthquake, is that correct?

Yes, it was pretty small. It was 60,000-tons.

Okay, thank you.

Modesta, I think we're approaching the top of the hour, so why don't we go ahead and take one more question.

Your final question today comes from the line of Gregg Goodnight with UBS. Please proceed.

Good morning, gentlemen.

Hi, Greg.

A question on your titanium dioxide capacity, just to do a spot check here. I believe you have about 550,000 tons of global capacity; that correct?

Right.

And one of your competitors reported yesterday -- and they were successfully to operate over 100% rates. Could you sort of benchmark where you think your operating rates are going to be this year? And then comment on any possible incremental expansions at any of your facilities you might be execute fairly quickly?

Gregg, nameplate capacity is a funny thing in this industry, because generally no one operates above nameplate, because these plants usually require turnarounds through a year. And on average, they will run it maximum 96%, 97% utilization rates. So when we say 550, that truly is a name plate capacity. And would you expect, again, use that 95% rate, we'll be full out at 95% of that.

And any de-bottlenecks you might be able to pull off in the near term?

There's real small 1% opportunities over the next 18-24 months and we think that's typical in the industry. But nothing significant.

Okay. Could you update us on your German maleic anhydride expansion? It was supposed to start up in the first half of this year. How is that coming? And will it be sold-out in the near term?

That facility is coming on online. And I'm not sure as it will be sold-out as it comes online. But we believe it will be one of the most competitive facilities globally. And we'll be moving a lot of volume to that facility and taking advantage of that lower cost.

We think that will be consolidated beginning the second quarter, for financial purposes. And we think the EBITDA impact of that will be around $20 million.

Okay. Thanks for the guidance. Last question. Kimo, you're showing on page four of your release, a sales mix of negative 17% in Polyurethanes. Can you qualitatively describe what that mix is?

It's just the mix between MDI urethanes and PO MTBE which is a lower-valued product, suggesting that we had higher sales of PO MTBE in the quarter. But that was a mix issue as opposed to a price. Both MTBE PO and MDI prices rose, but we sold more PO MTBE.

Got it. I should have been able to figure that out. But thanks for the help, anyway.

No problem.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.