Huntsman Corp (HUN) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2011 Huntsman Corporation earnings conference call. My name is Laura, and I will be your operator 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 call is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Kurt Ogden. Please proceed.

Thank you, Laura, and good morning, everyone. I am Kurt Ogden, Huntsman Corporation's Vice President of Investor Relations. Welcome to Huntsman's second-quarter 2011 earnings call.

Joining us on the call today are Jon Huntsman, 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 second quarter 2011 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 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 gap 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, acquisition related expenses, unallocated foreign exchange gains and losses, certain legal and contract settlement costs, losses from early extinguishment of debt, gain on consolidation of variable interest entity, 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 this 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 and in our second-quarter earnings release.

Let's turn to Slide 2. In our earnings release this morning we reported second-quarter 2011 revenue of $2.934 billion, adjusted EBITDA was $318 million and adjusted earnings per share of $0.48 per diluted share. Our adjusted EBITDA was $318 million in the second quarter 2011 compared to $257 million in the prior year, an increase of 24%. Compared to the prior quarter of $302 million, our adjusted EBITDA increased 5%. The improvement in earnings compared to the prior year and prior quarter was primarily due to improved contribution margins. Peter and Kimo will provide greater insight into the improvement along with other trends within our Business. I will now turn the call over to Peter Huntsman, our President and CEO.

Thank you, Kurt. Good morning everyone and thank you for taking the time to join us. Let's turn to Slide number 3, talk about our polyurethanes division. Adjusted EBITDA for our polyurethanes division in the second quarter 2010 was $143 million. A substantial increase from the prior year and prior quarter which were $70 million and $114 million respectively.

During the second quarter, we successfully increased our average selling price for MDI and related system solutions. Average MDI products selling price increased 20% and 9% compared to the prior year in prior quarter respectively.

We've seen general inflationary pressure on our raw material costs. Benzene costs increased approximately 20% compared to the prior year. As a result of our strong pricing initiatives, we were able to improve our earnings in the second quarter and recapture margin previously eroded due to raw material pressures.

In total, we're seeing growth in our MDI sales volume, most notably during the second quarter demand was particularly strong in the insulation, automotive and composite wood sectors. Sales related to insulation applications are our largest end-market. We estimate that approximately two-thirds of our insulation related sales are used in commercial applications and the other one-third is used in residential applications.

The supply-demand balance for the MDI industry has improved. We estimate that the MDI industry operated in the low 90% as a percent of nameplate capacity in the second quarter. Propylene oxide and its co-product MTBE performed very well this quarter with EBITDA above historical averages. Combined with the spike in energy prices resulting from Middle East turmoil, the largest spread between Brent Crude, which has an impact on MTBE pricing and WTI Crude, which derives certain MTBE raw material costs, has had the effect of improving our margins. Margins have moderated from the peak we saw in the quarter but remained above historical averages.

Let's turn to the fourth Slide here. In the second quarter our performance products division earned $102 million of adjusted EBITDA. Our average selling price increased 23% and 10% compared to the prior quarter and -- excuse me, compared to the prior year and prior quarter respectively, in direct response to increased raw material and energy costs.

On average, we were able to pass on cost increases within 30 to 60 days in most of our products. Demand remains strong within this business. Though most of the improvements in sales volumes compared to the prior year of 6% was related to the consolidation of our Sasol Huntsman Maleic Anhydride joint venture in the second quarter of 2011 and greater production from our Arabian Amines Company joint venture, which was started up in the second quarter of last year.

On April 2, we completed the acquisition of the Indian chemicals business of Laffans Petrochemicals Limited. The business manufactures amines and surfactants and is the division's first production facility in this rapidly growing part of the Asia Pacific region. Though we are still assimilating this acquisition it has already had a positive impact on our earnings and will have strong prospects for further earnings and revenue growth. During the third quarter, a part of our Port Neches Texas facility will undergo scheduled maintenance. The impact to EBITDA is expected to be approximately $7 million to $10 million.

Turning to Slide number 5, adjusted EBITDA in our advanced materials division was $31 million in the second quarter. During the second quarter we successfully raised our average selling price within this division. Unfortunately they were outpaced by increases in raw materials and energy costs which led to lower contribution margins. Pricing for key raw materials such as bisphenol-A and epichloro hydrine, have eased somewhat which should allow us to recapture margin in the back half of 2011. Compared to the prior year, volumes decreased 4% as demand in the Asia Pacific region slowed down in the electronic and wind energy markets. In the Americas and European regions, demand slowed within the paints and coating markets as well as in construction and other manufacturing activity sectors.

Approximately 40% of the cash fixed costs for our advanced materials business are denominated in Swiss Franks. The foreign currency impact of a stronger Swiss franc against the US dollar had a net effect of decreasing our EBITDA by an estimated $9 million in the quarter compared to the prior year. The foreign currency impact on our overall Business is a topic that Kimo will discuss in his remarks.

Turning to Slide number 6, our Textile Effects division reported an adjusted EBITDA loss of $7 million in the second quarter. This business has been impacted by the continued weakness in the textile consumer market and high cotton prices. Sales volumes decreased 11% compared to the prior year. Consumer demand for apparel has been improving, specifically those items made from synthetic and man-made fiber. However, demand for certain home textiles, such as cotton sheets, cotton towels, and cotton apparel remain weak.

Approximately two-thirds of our Business is oriented towards natural fibers such as cotton and wool. The increase in cotton and wool prices has had a negative impact on our customers, the textile mills, as they've tried to pass these costs on to retailers. For the first time in a decade, apparel retailers have raised prices in an attempt to pass these costs on to consumers. As cotton and wool prices decrease, we expect to see improved demand for consumer items which are cotton preferred such as sheets, towels, and certain apparel items. Approximately 50% of the cash fixed costs of our Textile Effects Business are denominated in Swiss francs. The foreign currency impact of a stronger Swiss franc against the US dollar on our cash fixed costs had the net effect of decreasing our EBITDA by an estimated $10 million compared to the prior year's quarter.

Let's turn to Slide number 7. Our Pigments division earned $115 million of adjusted EBITDA in the second quarter. Demand for TiO2 remains robust across all major sectors including coatings and plastics. Further, we do not believe there is much slack in the supply chain as industry producer inventory levels remain less than 40 days. The supply demand balance within the industry is very tight and expected to continue.

We have successfully raised prices in an effort to offset increases in raw material and energy costs. Our average selling price increased 35% compared to the prior year on a local currency basis. We expect to be able to offset future raw material and energy costs increase with additional price increases. Margin improvements resulting from increased selling price will allow us to incrementally add capacity to our current asset base by around 35,000 tons over the next few years.

In addition to benefiting from improved industry economics, we've been reshaping our revenue mix to higher value added products. This includes growing new product such as our free flowing DELTIO product, which increases customer ease in use and mixing as well as increasing sales volumes into higher value added categories such as food and pharmaceutical grades and specialty inks. This portfolio shift has contributed to increased average selling prices and improved margins. Before sharing some concluding thoughts I would like to turn a few minutes over to Kimo Esplin, our Chief Financial Officer.

Thanks, Peter. Let's turn to Slide 8. In the second quarter 2011, our adjusted EBITDA increased to $318 million from $257 million in the prior year. The primary reason for this year-over-year increase was an improvement in margins as increased selling prices more than compensated for the increase in raw material costs. The chart on the left shows that margin expansion accounted for $125 million of the improvement in earnings. We also saw an improvement in general demand as higher sales volume contributed an additional $47 million in earnings. The improved margins and volumes were partially offset by an increase in SG&A and other indirect costs including foreign currency movements against the US dollar.

Compared to the first quarter of 2011, our second-quarter adjusted EBITDA increased from $302 million to $318 million. The primary reason for the sequential increase in adjusted EBITDA was an improvement in margins as increased average selling prices more than compensated for the headwind of increased raw material costs. The chart on the right shows that margin expansion accounted for $57 million of the improvement in earnings partially offset by an increase in SG&A and other indirect costs including again foreign currency movements against the US dollar.

Turning to Slide 9, our year-over-year sales revenue for the second quarter increased 25%, primarily as a result of higher average selling prices. Improvements in revenue were most notable in Europe, which is our largest market, and improved 41% in large part due to increased selling prices for MDI. The rest of the world category, which includes emerging markets such as Central and South America and the Middle East makes up 16% of our total sales and improved 27%, while the North American market, which is our second largest market, improved 21%. Asia Pacific, which makes up 21%, saw the most modest increase in revenues of 11%.

The Chinese government actions to stem inflation by tightening access to capital have made it more difficult for smaller downstream customers to finance working capital and growth in China. In addition, the slowdown of civil construction has moderated growth. In the near term we expect this region to grow at a more modest pace than we have seen recently. That said, we believe there are tremendous growth opportunities in this important region of the world, and we expect our Business to grow at a multiple of whatever the underlying GDP is.

Our largest divisions, Polyurethane, Performance products, and Pigments, which account for approximately 80% of our total revenue, recorded revenue increases of 22%, 34%, and 48% respectively. In total, our average selling price improved 19% adjusted for impact of foreign currency and sales volumes improved 4%. Compared to the prior quarter, revenues increased 10% entirely due to strong improvements in average selling prices which increased 8%, adjusted for impact of foreign currency.

Now to Slide 10. Foreign currency movements against the US dollar have had a meaningful impact on our earnings. Approximately one-third of our fixed costs are denominated in US dollars. Another third are in euro, and approximately 10% are denominated in the Swiss franc. Most of our Swiss-based production is sold in euros and, so long as the euro and the Swiss franc move in unison there is an natural hedge.

Unfortunately, as investors have sought a safe haven from the financial crisis in the United States and in Europe, the Swiss franc has appreciated more than 20% in the past year compared to the US dollar, and more than 10% compared to the euro. In the second quarter, the appreciation of the Swiss franc compared to the prior year had the effect of decreasing our EBITDA by approximately $9 million in our Advanced Materials Business and $10 million in our Textile Effects Business. We are refining our plans to address this issue.

Let's turn to Slide 11. At the end of the quarter we had approximately $1.2 billion of cash and unused borrowing capacity. During the first half of the year, we have invested $395 million in cash to increase our primary working capital. The working capital increase of 21% was consistent with an increase in sales revenue of 27% during the same period.

As prices have increased along with the cost of underlying raw materials, so has our working capital investment. Our days outstanding for primary working capital components is in line with historical averages; accounts receivable approximately 50 days, inventory approximately 60 days, and accounts payable right around 50 days.

We have continued to extend our shorter term debt instruments as we have in the past. In April we amended and extended our accounts receivable securitization program to April 2014. Debt reduction is a priority of Management and our Board. In July 2011 we redeemed the remaining $75 million of our 7.375% senior subordinated notes due 2015 with available cash.

During the second quarter of 2011, we spent $61 million on capital expenditures. In 2011 we expect to spend right around $350 million on capital expenditures. We'll turn the time back over to Peter.

Thank you, Kimo. During the second quarter, we saw a sluggish global GDP and the US revised its growth to a meager 1.3% and further announced a revised first quarter GDP to a sluggish 0.4% growth. It would appear that much of the global economy is somewhere between slow and stagnant growth. However, if I look at our past quarter's performance, combined with that of the previous quarter, we're off to 1 of the strongest years in our history.

As I've said in the past, I believe that, within the range of our global markets, our technology, our talented associates, and commitment to improve our balance sheet, that we will continue to create shareholder value. While this past quarter was 1 of our strongest second quarters in history, I still see much room for improvement in our earnings as MDI continues to tighten globally as we see the full potential of our Pigments Business and as we see new capacity in maleic, aimines, surfactants, and epoxy products come fully online and operate at full capacity.

In China, we're seeing steps taken to slow inflation if liquidity requirements change and inventories are brought down. In certain, areas we've seen slowing demand but this is a market with enormous long-term potential. We will continue to invest and grow in a wide variety of applications. I believe we will continue to see growth in higher earnings as this market grows over time. I mentioned earlier our acquisition in India, which will provide yet further opportunities to grow and expand our products and business in this growing market.

Europe, particularly northern Europe, continues to grow in areas of building construction, energy conservation, transportation, and agricultural application. As the North American economy recovers in housing, automotive, consumer textiles and other sectors return to more normal levels, we will be in a position to benefit even more than we are seeing today. The North American markets is a large production base -- is our largest production base in the world and much of this is based on natural gas liquids, which we believe will continue to be very advantageous when compared to competing prices around the world.

We remain optimistic that, as challenging as this economic recovery may be, we are confident in our ability to continue to create further shareholder value. With that I will turn the call back over to Kurt.

Thank you, Peter. Laura, that concludes our prepared remarks. Would you explain the procedure for questions and answers and then open the line for questions.

Lawrence Alexander.

How would you evaluate regional demand trends in July and August? In particular, I'm thinking US and North America. And secondly, does corporate cost run-rate, reporting line is at the highest level since you came public. Is this a new run-rate, or do you think it will go back down to the $25 million to $35 million run rate it's been historically?

Well, in answer to your first question, we look at regional trends in the US and North America. I'm speaking here categorically across many different sectors and so forth. I would just say that we're certainly not seeing robust growth but I would say that we are seeing stronger business activity and stronger demand than what the business headlines are that are -- that you would read on a daily basis. We continue to see segment growth that's taking place and product substitution. We continue to see insulation continuing to grow. Our surfactants, our amines. And as I said earlier in my comments, I believe that the raw material advantage that we're seeing, particularly North America, I believe is going to allow us to continue to export product from North America on a global basis. So again, without getting into specific product-by-product analysis here, I feel that things are better than what you are reading in the newspapers.

Laurence, on the corporate line item we have had about $20 million of LIFO in the first half of the year that's embedded in that corporate line. I think about it as roughly $45 million a quarter of LIFO is flat.

I would say across the Board, aside from the LIFO, we've seen quite a flat number in our costs in corporate.

Then lastly, any plans to improve free cash flow generation or have any additional levers you can pull in the back half or 2012?

We expect our inventory on a relative basis to come down 3 or 4 days. And that's just the typical seasonal trend towards the end of the year. But so much of it depends on crude and natural gas and basic raw materials.

Thank you.

PJ Juvekar.

In TiO2 you don't use much rutile ore where prices are going up, can you talk about your ore prices in ilmenite? What do you see happening there?

Well we said on our last call that prices this year would be going up about 35% to 40%, and that would be throughout 2011. 2012, a little too early to tell, but I would imagine 2012 that prices will increase at a greater pace than that. But PJ, as we look at the market today and the tightness in the market, as I sit here today, I'm very confident that we will be able to pass those price increases on to customers, and that we should continue to see strong margins coming out of our TiO2 division.

PJ, when you look at rutiles, and we do consume -- we have 2 chloride plants. Rutiles are up significantly, in the 70%. Ilmenites are up as high as 50% 2011 versus 2010. The sweet spot frankly is in the slag area, it's up about half that much. But really both ends of the quality spectrum in terms of ores, ilmenites and rutiles are up pretty significantly.

Okay. And, Peter, you mentioned in you saw some slowdown in the electronics and wind power in Asia. I was wondering if you can shed some light on that and what specific end-markets are slowing down.

Well, I think that most of that, from what I'm seeing at this point, is mostly inventory de-stocking on the customer side. I don't see that necessarily as a macro global trend that is taking place as much as I see it. A lot of the wind producers of blades and a lot of the electronic companies, or smaller companies, as Kimo mentioned in his comments that we're seeing a lot of our smaller customers, medium size customers in China, that are, with the tightening of capital that are reducing their inventories, and -- but I don't see that as really a long-term trend that is taking place.

And just lastly on the previous calls, you've talked about your amines being used in high-speed rail network in China. Are you seeing some slowdown there? Thank you.

Thank you, PJ. No, I don't see any -- if we see slowdown again, I believe the slowdown that we're seeing is on a quarterly basis that would be adjustment for inventory and so forth. I don't see a slowdown where all of a sudden the Chinese government has put the brakes on infrastructure projects and so forth that would unusually affect the amines capacity and so forth. Again, you will see monthly or quarterly slow downs as people will make inventory adjustments in their supply chain, but the commitment to proceed for the next couple of years in high-speed rail lines, I certainly haven't seen any slow down in that area.

Jeff Zekauskas.

What was your adjusted taxes in the quarter?

20%.

That's the percentage. What I was wondering is what's the number.

Jeff, if you have another question, go ahead, we'll dig the dollar amount out.

Right. So if I could just make one comment, when you report your earnings, it's about an hour and a half before your conference call, and your financials are quite complex, and it's very difficult to reconcile all of the income statement numbers to the data that you provide. And so what you might consider is you might consider a more complete reconciliation so that the adjustments can be made more easily, and so it's easier for people to focus on the fundamentals of what you've reported rather than trying to reconcile the numbers. Or it's at least something to consider.

Fair enough. Thank you, Jeff.

In terms of TiO2, you talked about being able to offset the raw material price pressure that you're facing. So as you see the TiO2 business is the idea that your margins will remain relatively constant as you offset your raw material pressure, or over time do you expect your margins to expand or to contract temporarily? How do you see the margin progression in the future?

Well, we've seen the margin -- look, I'm not going to comment on where I would expect margins to be 2 or 3 quarters down. I would say that we expect that the market to be tight enough to be able to offset our raw material costs. We also believe that there's room for margin improvement to recover our cost of capital in that business and to be able to justify the de-bottleneck and the further investments that need to be taken into the future.

If I look at the historical margins of TiO2, on average over the last couple of years, I believe that any Board of Directors would be hard-pressed to build a greenfield brand-new TiO2 facility. I mean, we just now are starting to get back into the sort of margins that would justify new plant capacity. So I would hope that in the coming quarters that we're able not only to offset raw material cost increases but we're also able to expand margins, because this division, particularly when we look at the losses over the last 6 or 7 years, this division needs to be able to justify the invested capital going forward.

What's the extent of your de-bottlenecking efforts?

That will be, at this point what we have announced that will be in existing facilities where we can de-bottleneck around present kilns and around present capacity. That does not include the addition of any new lines or new what I would call material CapEx investment in the Business capacity. How much do you think you can de-bottleneck? I think I mentioned about 40,000 tons of TiO2 capacity.

Okay, thank you very much.

Jeff.

Yes.

The cash taxes paid for the first 6 months, the Q will show $35 million. But it is a relates to the adjusted income tax expense, it's $32 million for the 3 months. And we're happy to walk you through that reconciliation in the back of the release after the call, if would you like.

Okay, I would like that. Thank you very much.

Edlain Rodriguez.

Just a quick question on prices. Most of the segments, they have shown significant price increases, and of course, a good chunk of it is cost push. So does that suggest lack of heavy commoditization of the portfolio of the businesses in there, and does that mean you are going to have to give up all those prices if raw material costs abate in the future?

No, I don't believe that's the case at all. I think that the fact that we're able to increase prices as quickly as we've been able in to the last quarter would indicate to me that the markets are tight and that we have pricing power to be able to put those prices up and pass those raw material costs on. Traditionally, in most all of our products, raw materials are not the key driver for pricing. You're looking at raw materials as 1 of the drivers, you're looking at the performance of the product, logistics, timing, contract obligations and so forth.

So as raw material prices would drop, I do not believe that all of our pricing will drop in situ with that. Again, in some of our product that will indeed be the case. We sell some products on a tolling basis and so forth. That obviously will be the case. But typically, it takes us anywhere from 30 to 60 days to raise prices when raw material prices go up. And when raw material prices go down, a lot of that depends on competitive pressure but I would expect us to be able to retain those margins going forward.

Okay. Just quick question for modeling purposes. Interest expense went up quite a bit this quarter versus Q1. Is that the run-rate going forward? Why that increase? And also in the tax rate, should we expect that 20% or so in the second half of the year?

Yes. So interest rate -- interest expense went up because we consolidated 2 joint ventures in the last year that we could call variable interest entities. And so there is $300 million of additional debt from those 50/50 joint ventures that were consolidated. Of course, the interest expense came with them. So that was an increase in interest expense. As it relates to our effective tax rate, we think it will be in the mid-20%s for the second half of the year.

Okay. Thank you.

Andy Cash.

First of all, Peter you mentioned in your outlook statement you mentioned Polyurethanes and Pigments in favorable terms, but noticeably absent was Advanced Materials and Textile Effects. My first question is given the private equity funds and chemical companies, a lot of cash, looking to spend some money. Would now be a good opportunity to try and reshape the portfolio?

We obviously haven't made any decisions around that area. But as we look at Advanced Materials, I believe that when you look at our second quarter versus first quarter performance, we continue to see strong demand that is building for aerospace and so forth. We were hit with a $9 million FX charge in the second quarter that frankly was rather unexpected that happened I think much quicker than most people anticipated with the rise of the Swiss, and I think longer term we expect the Advanced Material Business to have a strong year. Textile Effects, again, we had a rather large, a $10 million hit for the quarter, just on the cost of the Swiss currency fluctuation alone, and I believe that we're taking aggressive steps to try to mitigate that. So, no, I think in that both of those businesses we would expect those to be improving over the course of the next few quarters coming forward.

All right. But they could also be improving in someone else's hands. That was really kind of the spirit of my question is now might be a good time to think about raising some cash and using the cash in some of your higher growth businesses.

We're always looking for opportunity to create value for shareholders, but, Andy, as we look at those businesses now, I believe that those businesses are as profitable in our hands as they would be in anybody else's.

Okay. Second question. Turning to MDI, plans for Asia, sounds like it's getting a little crowded over there with Dow's announcement with Saudi Aramco, BASF they raised some money to build a plant there in Yantai Wanhua. Where does Huntsman stand on this? Are you still looking at some new capacity in MDI over there or are you looking at perhaps just expanding your Caojing plant?

No, we're looking at continuing to receive the permitting approval to expand our Caojing facility. And as anybody that's listened to the last couple of calls would perhaps get a sense of a little bit of frustration in my comments as to a permitting process that is -- that has been at a snail's pace here. I don't believe that our permitting process is any different from anybody else's, and I believe that a lot of these -- this is just my personal opinion, I believe that a lot of these announced expansions in Asia, particularly in China, are going to be coming on substantially later than what some in the market have been publishing and been speculating.

Okay. Fair enough, thanks.

We are still working now over a year just to get the environmental permitting. I just want to emphasize, I don't believe that there's anything that's unique about Huntsman's experience. I believe that when you look at the recent BASF approval in Caojing, that was a multi-year process. And I certainly don't want to speak for anybody at BASF, but I would be surprised if they were expecting it to take as long as it did. I would think that a lot of these announcements that you see right now, again, just my opinion, I would think that some of those can be pushed out multiple years, not quarters.

Okay. Thanks.

Roger Spitz.

In Performance Products, was there sequential contribution margin compression as raw materials rose faster than prices, and if so in which area was most impacted by that maleic, performance specialty or performance intermediates?

Performance Products in EBITDA terms, prices went up the same amount as direct costs did. So contribution margins were flat.

Perfect. And Advanced Materials. Was there reduced contribution margin sequentially, was that hitting more of the base resin business or the downstream businesses?

It's mostly base resin business. The formulation business was pretty consistent and the specialty component business as well.

Remember, part of that base resins business in the second quarter too, we experienced a force majeure for some of our suppliers of bisphenol-A and epichloro hydrine so we had some raw material price increases that took place, and I believe that as we look in the second half of the year that much of that will be mitigated, and we hope to get that back.

Perfect. Finally, just on the MDI portion of Polyurethanes, was their contribution margin compression sequentially? I may have missed that.

I believe those margins improved during the quarter. For MDI.

Perfect, thank you very much.

Robert Koort.

Hi guys, this is Manif today. Just on the Performance Product, even if I add back the 1-time $15 million credit and some currency effects, there was some sequential decline in Performance Products as well as in Advanced Materials. So my question here is, the raw materials are off their highs. How much more do they have to come in before you can start seeing the margins as far as in the first quarter and at least Performance Products and Advanced Materials?

Well, Performance Products is the 1 business that we account for on a LIFO basis. So all the other businesses are average costing basis. So you may see a little different reaction to the major raw materials, which are ethylene oxide and propylene oxide. At least in North America as it relates to Performance Products.

And as far as Advanced Materials, where do you see the margins in the second part of this year?

Well, as Peter indicated, we're starting to see some of the raw materials epichloro hydrine and bisphenol-A come off, which helps our base resin business. Remember, we don't make a lot of money in our base resins business. It's really feeding our formulation and specialty components business but nonetheless it does affect those margins.

And any signs of improvement in the sales volumes in Textile Effects, or it's in line with second quarter itself right now?

I think it's probably too early to tell. As we look into the third quarter, but again, I would be heartened by some of the decreases we've seen in cotton prices. Cotton prices have come down about 25%, 30% in the last 2 quarters or so, so the mills and so forth are looking to restock their inventories. I'm very hopeful that we'll be able to see an improvement in the volume in that area of the business.

Thank you.

Bill Young.

I noticed on the -- in the Polyurethane segment, looked like volume was only up 2%. Maybe I'm missing something here. How did it compare for the MDI and urethanes versus the PO/MTBE area?

When you look at MDI. We had a year-over-year 8% growth in Asia. In the Americas it was 5%. In Europe we were down 4% getting to you that sort of 2% MDI number.

Okay. And what was the reason for that, for why it was down 4%?

We had an outage in our Rozenburg facility. Air products had an outage which really took a lot of our variance or more pure other specialty grades of MDI out of the market, Automotive and some other areas that were pretty tight for us, and we lost some volume with that outage.

Fair to say, Bill what we're producing in Europe, what we're capable of producing in Europe we're producing and we're selling.

Okay. Great. 1 more, please. On -- in TiO2, I think you mentioned strong demand in Coatings. I know there are a lot of Coatings out there, but US Architectural is a pretty big business, and again, I realize you're global, but how does that fit into the equation and what happens to the business when this market returns, and related to that, are you worried about customer inventory building given the rapid price increases in the Pigments?

I'm not seeing -- Firstly I'm a little bit fuzzy on the North American decorative coating market just because we're mostly a European player and we're not going to be competing aggressively in the North American markets just because we don't have a lot of product to sell in that area. But we continue to see healthy demand particularly in the European markets around TiO2. Again, that's going to fluctuate on a quarter-by-quarter. That's a seasonal pattern that you typically see there. So I don't want to make it sound like that's a straight line demand growth.

As you look at -- I'm sorry, the second part of your question, Bill? On inventory, I don't believe that there's been a great deal of inventory build on the customer. Now, I'm just speaking from Huntsman's point of view, as we look at right now as we look at our days of inventory. We're at less than 30 days as a Company, and the industry is a little bit over 30 days of inventory. And so there's not a lot of -- if you were a paint company out there, and you saw price increases coming, you were to come to Huntsman and say I want to increase my volume from Huntsman so that I can build my volume internally, I'm not sure that there's a lot of volume in the market to do that. I've not seen, just anecdotally, speaking with customers and so forth, I have not seen this large inventory bubble that's moved from the producer to the consumer of Pigments.

Generally, Bill, if you talk to the paint folks, they do not have the logistics capacity to take on a lot of inventory. Typically would you see a couple of weeks at most of inventory is the maximum a paint company can take. So really when you're looking at inventories you really are looking at the producer levels which Peter indicated are above 30 days but well below 40 days.

Okay great. Thank you.

Michael Shrekgast.

Could you just talk a little bit more about the margin in Performance Products sequentially? What changed in that the margin came down relative to the first quarter? And what's the outlook for going over the next -- do you sort of recoup that through price increases? Thanks.

I think Peter indicated, and hopefully you noted that in the third quarter we will have some down time in 1 of our facilities that will impact us as much as $10 million. So sequentially plan on that impact in the third quarter. As it relates to Performance Products -- are you asking about sequentially or year-over-year?

Sequentially.

I indicated that prices rose about the same amount as direct costs. So contribution margins were pretty flat there. You do have some pressure on SG&A and indirects because we consolidated a couple of joint ventures, and you saw some more costs come in from new facilities that we just started up.

Okay. So is the current trend more the trend we should likely see for the rest of the year?

Adjusted for that turnaround in the third quarter, yes.

Okay, thanks.

Operator, if there are no more questions, we'll conclude the call.

There nor questions at this time. I'd like to turn the call over to Kurt Ogden for closing remarks.

Thank you, everyone, for joining us this morning. If you have any additional questions, feel free to reach out to us directly, and we'll talk to you then. Thanks again.

Ladies and gentlemen that concludes today's conference. Thank you for your participation. You may now disconnect.