Huntsman Corp (HUN) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2012 Huntsman Corporation earnings conference call. My name is Shanae and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session toward the end of today's conference.

(Operator Instructions)

As a reminder, this conference is be recorded for replay purposes. I will now turn the presentation over to your host for today, Mr. Kurt Ogden, Vice President of Investor Relations. Please proceed sir.

Thank you, Shanae, and good morning, everyone. Welcome to our second quarter 2012 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 2012 via press release and posted it on our website, Huntsman.com. We also posted a set of slides on a 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 that 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 will also refer to non-GAAP financial measures such as EBITDA, adjusted EBITDA and adjusted net income or loss. You can find reconciliations to the most directly comparable GAAP financial measures in our earnings release which has been posted on our website at Huntsman.com.

Let's turn to Slide 2. In our earnings release this morning, we reported second-quarter 2012 revenue of $2.914 billion. Adjusted EBITDA of $365 million and adjusted earnings per share of $0.58 per diluted share. Our adjusted EBITDA was $365 million in the second quarter 2012 compared to $321 million in the prior-year. An increase of 14%. I will now turn the call over to Peter Huntsman our President and CEO.

Thank you, Kurt. Good morning, everyone. Thank you for joining us. Let's turn to Slide number 3. Adjusted EBITDA for our polyurethanes division in the second quarter 2012 was $170 million, an improvement of $27 million compared to the prior year of $143 million of adjusted EBITDA. The increase in earnings was entirely attributed to improvements in our MDI urethanes volume and margins. Sales volumes for our MDI products increased 12% compared to the prior year.

We are encouraged by the strong growth in demand from our largest end markets, installation, adhesives, coatings, elastomers, and composite wood products. All of which grew at double-digit rates compared to the prior year. Despite economic concerns that dominate current headlines, sales volumes in Europe improved 15% compared to the prior year and 9% compared to the prior quarter. Most of this growth came in northern Europe where sales volumes for our MDI products improved 14%, whereas southern Europe grew only 1% compared to the prior year.

During the quarter we successfully raised our MDI selling prices, which combined with stable benzene costs, had the effect of increasing our contribution margins. Recently, benzene costs have spiked in the US primarily as a result of regional supply dislocation. We believe this will rebalance in the near term, and pricing will moderate, but it will be a slight headwind in the third quarter. Overall, the margin expansion we enjoyed in the second quarter will be sustained in the second half of 2012 as utilization rates continue to tighten.

Propylene oxide and our co-products MTBE continued to be to perform very well, primarily as a result of an attractive spread between premium gasoline and lower-priced raw materials. Earnings for this product were in line with the previous year and decreased approximately $40 million compared to the first quarter when industry supply outages led to exceptional margins.

In July we suffered an unplanned outage at our PO MTB facility due to a lightning strike. This facility is back up and running now but the repairs and loss production will have an approximate EBITDA impact of $10 million in the third quarter.

Let's turn to Slide number 4. In the second quarter our performance products division earned $85 million of adjusted EBITDA. During the second quarter we experienced in an unplanned outage at our ethylene oxide unit which reduced our EBITDA by approximately $5 million. We've elected to delay our previously announced third-quarter planned maintenance on this unit until the first quarter of next year to coincide with our planned olefins cracker maintenance.

Although the second-quarter contribution margins for some of our amines was low, we expect an improvement in the third quarter as the lower cost of ethylene and propylene work their way to the value chain of these products. Further, the lower cost of benzene should benefit our Malaga High Dry business. We are encouraged by early demand trends within the business as order patterns have been strong thus far.

As a result of the planned maintenance postponement we expect third-quarter earnings to be slightly higher than the second. Turning to Slide number 5. Adjusted EBITDA in the second quarter in our advanced materials division was $24 million. In light of troubling macro economic headlines are in the quarter, we saw a reasonable demand for most of our products. Compared to the prior year, sales volumes increased in all regions with the exception of Asia-Pacific, with Chinese demand for electronics, wind and power continue to be soft.

We expect business conditions for these Chinese markets to remain difficult at least through the end of this year. Challenging market conditions and competitive pressures have led to reducing pricing leverage and made it difficult to maintain margins and more than offset the benefits of our recent restructuring efforts.

Let's turn to slide number 6. Our textile effects division reported an adjusted EBITDA loss of $4 million for the second quarter. Sales volumes improved 5% in the second quarter compared to the prior year primarily as a result of market share gains. We track consumer confidence levels and retail data in major markets such as the US, Europe and China. We remain cautious with regards to our near-term demand.

We are proceeding slightly ahead of plan on our $75 million restructuring program, although we've seen some benefits from early restructuring efforts. We don't expect to see meaningful benefits until the latter part of this year because we are operating two redundant manufacturing platforms as we transition out of Switzerland.

Within the textile industry, the third quarter is historically the softest from a demand perspective. Largely driven by European mill operations. As result, we expect our earnings in the third quarter to be sequentially lower from the second. Let's turn to Slide number 7. Our pigments division earned $133 million of adjusted EBITDA in the second quarter. Global demand for TiO2 was soft within the second quarter compounded by an absence of a historical seasonal increase.

Anecdotally speaking, we do not hear evidence from our customers of reformulation away from TiO2 products. However, we have heard of a greater acceptance and use of lower quality Chinese-produced materials. Estimated industry inventory days on hand increased during the second quarter and are at very high levels. Our inventory days on hand are well below the industry, less than 0.75%.

Average selling prices increased 1% compared to the first quarter driven by increases in North America. Pricing momentum has clearly slowed down. Consistent with the guidance that we provided earlier and the year we expect or 2012 earnings to be less than 2011 in our pigments division. In the third quarter we expect the effect of pricing increases in titanium-bearing ores to be more evident in earnings as supply contracts have renewed and lower cost from older inventories have been consumed.

We expect selling prices to come under pressures in usually high TiO2 industry inventory levels are fed into the market. We believe the combined -- the combination of higher priced ores and lower average selling prices may produce a headwind of up to approximately $350 per ton in contribution margins in the third quarter compared to the second. We also expect softer sequential demand in Europe. Before sharing some concluding thoughts I'd like to turn a few minutes over to Kimo Esplin, our Chief Financial Officer.

Thanks Peter. Let's go to Slide 8. In the second quarter of 2012 our adjusted EBITDA increased $365 million from $321 million in the prior-year. The primary reason for this year-over-year increase was an improvement in margins, average selling prices increased and raw material costs decreased. Sales volumes increased as we saw improved demand for some of our products. Most notably within our polyurethanes division. These improvements were partially offset by an increase in SG&A and other indirect costs.

Compared to the first quarter of 2011, our second-quarter adjusted EBITDA decreased from $397 million to $365 million. The decrease was primarily attributable to our PO MTBE business which decreased $40 million from the first quarter when we enjoyed exceptional margins as a result of industry supply outages.

Slide 9. Our year-over-year consolidated sales revenue for the second quarter decreased 1% primarily as a result of the strengthening of the US dollar against major International currencies which had a negative 4% impact on revenues. Our pigments business was affected the most of any division by the negative impact of foreign currency movements.

Revenues for this division decreased 4%, but foreign currency had negative 7% impact where nearly half of its revenues are in Europe. The net EBITDA impact from foreign currency movements in our pigments businesses is approximately $8 million in the second quarter compared to the prior year.

Our polyurethanes business which accounted for approximately 42% of our second-quarter revenues, recorded a revenue increase of 12% while performance products, our second-largest revenue contributor, recorded a revenue decrease of 14%. Primarily due to a greater shift to tolling arrangements for our sales volume which is excluded from our change in revenue calculations and the impact of the unplanned outage of our ethylene oxide unit. Our total company average selling price improved 1%, adjusted for the impact of foreign currency, while our sales volumes were flat when compared to the prior year.

The majority of our sales in the quarter came from North America and Europe which decreased by 2% and 8% respectively. Sales revenue increase in the Asia-Pacific region by 3% in large part due to an increase in sales volume in all but one of our segments whereas our rest-of-world category which includes emerging markets such as Central and South America and the Middle East saw the most growth compared to the prior-year of 10%.

Compared to the prior quarter, consolidated sales revenue was flat. An increase in average selling price and sales mix was entirely offset by a decrease in sales volume and the impact of foreign currency. Notably, urethanes saw a 12% sequential increase in revenue as a result of higher average selling prices and higher sales volume.

Slide 10. At the end of the quarter we had approximately $1.1 billion of cash and unused borrowing capacity. Reducing our debt remains a priority of our management team and our board. During the quarter we reduced our net debt by $60 million. Our current net debt to last 12 months adjusted EBITDA is 2.4 times. Our target is to have a sustained -- a sustainable net debt leverage of 2 to 2.5 times and we will continue to pay down our debt to achieve that.

We spent $82 million on capital expenditures in the second quarter of 2012. In 2012, we expect to spend approximately $425 million on capital expenditures which approximates our annual depreciation and amortization. We are investing in our -- in growth opportunities within our business. In July, we acquired the remaining ownership in our Russian polyurethanes joint venture which supplies polyurethane systems to the adhesives coatings and footwear markets in Russia, Ukraine and Belarus.

Later in July, we opened the polyurethane systems house in Indonesia focused on providing polyurethane systems for the fast-growing MDI installation automotive and footwear markets. Peter?

Thank you, Kimo. I'm very pleased with the second-quarter results and with the first six months of our financial performance. While we can't control issues impacting global economic markets we can effectively manage and operate our company in a way to take advantage of prevailing market conditions.

Since our last earnings call it our Chairman, Jon Huntsman, our newest board member, Jon Huntsman Junior, and most of our senior management has spent the better part of this summer in Europe, India, China, more than a dozen other Asian countries visiting thousands of customers, suppliers, partners and associates. Together with the rest of our Huntsman Associates we continue to build a robust and expanding customer base that I believe over time we will continue to grow better than global GDP rates.

In fact, in the second quarter with the exception of TiO2, we saw growing volumes compared to the previous quarter and previous year. Most of our products and applications are seeing increasing demand and our end markets are expanding. Starting in the third quarter and continuing throughout 2013 we will see the benefits of over $150 million of cost initiatives that will improve our operations and financial results. We're paying down debts from operating cash flows and continued to strengthen our balance sheet. Initiatives throughout this year and next should improve our working capital.

We are well-positioned to benefit from anticipated growth in the North American economy as we are a significant supplier of materials and products in the improving housing, automotive and energy industries. We have a stronger customer base in Asia than we've ever had and continue to see opportunities for growth in this region. While European markets conditions are a challenge, with the exception of pigments, we saw company-wide sequential and yearly improvements led by our polyurethanes division.

In the third quarter, we expect to see margin pressures on TiO2, as I stated earlier. But I continue to see our other divisions improving their cost positions and growing their volumes. I expect that our other divisions earnings will improve over time as we become less dependent on our TiO2 earnings as a percentage of our overall business. This improvement is being led by our polyurethanes division and a recovering specialty ameans business.

I continue to believe that TiO2 will see short-term destocking but longer term this will continue to operate at higher than historical margins and will continue to be a strong contributor to our business. In short, barring a major economic event, we are poised to have another very strong year. With that, I will turn the call over to Kurt.

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

Yes, sir.

(Operator Instructions)

Your first question comes from the line of P.J. Juvekar with Citi. Please proceed.

Yes, good morning. Can you talk about TiO2, you talked about high TiO2 inventories but can you talk about destocking that happened in China, and what are inventories like in China?

I don't think that we have the granularity, particularly for the entire market, to see inventory levels in China per se. We started to see a destocking and a lowering of demand in China in the fourth quarter of last year and that's continued up through the third quarter. I think that China in particular, Asia in general, is unique in that you have a number of distributors and you have a number of brokers that you typically don't have in European and North American markets that stand between the producers and the ultimate consumers, and so you have a much larger built-in inventory in that supply chain in the Asian Region. But as I look throughout the entire industry, that's why say and in my comments, is I see continued destocking taking place in the third quarter. I think that again, across the board, and this is not going to be in all regions to all customers, but I think that this entire destocking that has taken place over the last two to three quarters globally, particularly in Asia, I think that's going to start coming to an end here in the third quarter. You will see in the fourth quarter -- I think that the inventory level in the supply chain, particularly on the customer and on the distributors side, will certainly be lower than it was a year ago.

PJ, I'd just add to that. I think as an industry, the Asia Pacific region is probably down year-over-year 25%, 30% in the first quarter and second quarter compared to the prior year. So down significantly. We were probably down even further than that, simply because the local Chinese producers were very aggressive on price and we probably gave up market share.

Okay. So it is fair to say that China destocking began earlier the North American destocking?

Yes. I would certainly say that's the case. Not only did it start early but I think it started more aggressively because of the intense competition we saw from Chinese producers.

And just secondly, your volumes in polyurethanes picked up nicely even in Europe. Are you getting share and what is differentiated about your polyurethanes that allows you to gain share?

The polyurethane customer base is quite different. We are going to have competitors that are going to be stronger than Huntsman in certain end-use applications, and frankly, Huntsman is going to take more of its resources in our efforts and we're going to focus more in the MDI applications and markets in areas like insulation, automotive, some of our coatings and adhesive applications and so forth. Others of our competitors are probably going to focus more in synthetic leather and so forth than Huntsman has, but as we look at our customer base, we continue to believe that longer-term, as you look at such things as insulation, as you look at the higher end automotive applications and so forth. As you look at the building materials and adhesives, I think that longer term these are going to be very strong and continue to grow even in areas like Europe, perhaps better than our competition.

PJ, just to reiterate. When you think about 15% growth rates in Europe -- again, it's led largely by insulation that -- our observation has been that it is decoupled a bit from GDP. It really -- conservation and retro-fit of existing buildings with spray-on foam and panel polyurethane insulation.

And government mandates.

And government mandates. It is really -- there is not a lot of correlation with GDP.

Thank you.

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

This is Rob Walker on for Laurence. Just briefly on TiO2, I saw in the trade press that inventories in the industry are above 100 days. I guess I'm wondering if you agree with that figure, and how long would it take to go from 100 days to a more normalized level, around 60 days?

I really can't comment on what the competition is doing, but I would just note, and I think we've been pretty clear in the last couple of calls, that we believe that industry wide that there's quite a few ore contracts that are coming to expiration. Certainly, I don't think that it would be out of the ordinary for those people that are seeing large increases in ore pricing to buy what they can at the lower prices, produce as much of the low-cost TiO2 as they can under those contracts. And to sit on the inventory and perhaps reduce their off take at the higher-priced ore prices. So you might see a drop in that inventory a little bit quicker than you normally would see as people reduce their ore consumption and reduce consumption of the higher-priced ores. I would say that I'm a bit concerned of these higher-priced inventories, but I don't think that that should be too surprising, given the situation in raw materials. And I think that as you see a destocking, a slowdown in the destocking taking place, that you can see that inventory build, I wouldn't say fall off a cliff, but I think you can see it start to decrease quicker than anticipated.

Rob, just to confirm, I think some of the industry data is about 100 days and I think as Peter mentioned in his comments, we're less than that, we are closer to 70 days.

Great, that's very helpful, thanks. And then finally, on polyurethanes, wondering if you can help us parse the moving pieces to the sequential bridge? I guess MTB margins look to be lower, benzene looks to be higher and then the outage. It seems like if you add all those together it could be $40 million or $50 million sequentially. Is that too draconian?

When you say sequentially, from the first to the second quarter?

Looking to the third quarter from the second quarter.

Well, I wouldn't see a -- when we talk about a $40 million MTBE, that was really between the first and second quarter and we won't see that between the second and the third quarter. We will see $10 million less than we otherwise would've had in the third quarter than the second quarter from MTBE. But where we stand today, MTB margins are pretty healthy today.

We think that we will continue to hold on to the margin gains that we achieved in the second quarter in urethanes and we would expect the volumes would be similar to, if not better than, the second quarter.

Great, thank you.

I'd say we're probably looking at flattish to slightly improved in the third quarter.

Your next question comes from the line of Frank Mitsch with Wells Fargo. Please proceed

Hi, this is Maggie on for Frank. I was just wondering about the pricing conditions by region for TiO2. Can you give us more color on that?

Well, pricing is an interesting one if you look at it in US dollar terms, simply because the softening of the euro relative to the dollar. So you shouldn't be surprised that euro pricing in Europe is fairly flat, and -- but as you look at the end of the quarter, after we saw the significant drop in the euro, that in dollar terms that's the lowest priced product in the world. It can be as much as $400 to $600 a ton cheaper in dollar terms in Europe than it is in the US. But again, we haven't seen prices fall in Europe in local currency terms.

Okay. Then in terms of your MDI demand, you said that was expected to improve in Q3. You had really good Q2. How long is this trend expected to last?

We have, I think 20 years of data to suggest that MDI grows at above 7%. So we would expect to see 7% growth, and maybe that will accelerate, given the focus on insulation. Insulation now represents roughly 40% of our sales demand in MDI polyurethanes, and we see that growing above that 7% trend line over 20 years.

I will note that in the US we are experiencing low natural gas prices and lower utility costs for natural gas based utilities in North America. The rest of the world -- if you look at China and India and so forth, you're looking at natural gas prices that in some cases are seven to eight, nine times higher than what we are seeing in North America. So as you look at insulation and energy conservation, it is as relevant today as it ever has been and I think we are bullish on the long-term demand prospects on MDI on a global basis.

All right, thank you very much.

You bet.

Your next question comes from the line of Kevin McCarthy with Bank of America Merrill Lynch. Please proceed.

Good morning, this is Aleksey Yefremov for Kevin actually. Question on TiO2. Given industry wide volume declines, do you see prospects for cost relief in titanium ores in the second half or maybe in 2013? Could that market loosen up and offset some of the price weakness in TiO2?

I wouldn't be surprised to see that, particularly as you go into the early part of 2013. We've mentioned in past calls and meetings that while there might be some short-term benefit being an integrated ore and pigments producer, it typically -- you rarely do you see very strong ore prices if TiO2 demand is not there. I believe that with the destocking that you are seeing on the customer side, the destocking on the pigment side is, in effect, and I think this is going to have longer-term pressure on ore prices, particularly on some of the higher end ore prices. I will mind you that as you look at ore prices on a per-ton basis is between rutile to ilmenite, that you are seeing a spread from anywhere from $1,500 to $1,700 per ton. Very, very large swing there -- variation in ore prices.

The other thing I think we are seeing and would expect to see with these chloride ores, is a shift in mix at a typical chloride plant away from rutile. You remember natural rutile doubled in price second half of 2011 to first half of 2012. If a typical chloride plant was running 80% chloride slag and 20% natural rutile, they may flex that a little bit away from rutile because it got so expensive. That's not to say that chloride slag isn't expensive, it is very expensive, but at least rutile is more expensive, so you are seeing shifting in mix of ores. But ilmenite ores continue to be the lowest-cost route to titanium dioxide and we believe that sulfate slags are also lower cost than chloride slags and rutiles that are consumed in chloride plants.

Great. Thanks for that. Peter, you mentioned some increased sales of Chinese TiO2 in Europe. Do have a sense of how permanent that market shift is, whether European customers are now ready to consistently buy from China? Or if it's an opportunistic market shift rather?

I think longer term to the degree that the Chinese producers are competitive in pricing and in quality that European producers or consumers of TiO2 will probably continue to buy Chinese material. So I wouldn't be surprised at this trend, and this is certainly something that we've expected, and as a natural course, as you see, most all of the expansion globally that's taking place in TiO2 production coming out of China.

Please don't misunderstand us. When we think about utilization rates, which will really drive margins over time, we include the Chinese producers. We have never, ever set them aside and have thought of them as swing, producers somehow only in the region. They are lower quality, but they are improving that quality very rapidly and we are seeing more and more Asian produced product in Europe and in the US, and while it is expensive and it is lower quality, we are seeing more of it. But we include them as true competitors in all regions and include them in our utilization rate calculations. Notwithstanding the Chinese aggressiveness, we still see long-term and normalized markets for titanium dioxide after destocking is complete, industry utilization rates in the low 90% area. We think that is an area in which we can have pricing leverage and maintain higher than normalized margins.

Okay. Final question if l may, Peter, you mentioned some recovery in specialty amines, Could you maybe elaborate -- what is driving that, how sustainable it could be?

I think last year we saw our margins in amines were under pressure because of the large capacity that was added to the industry. As that added capacity to the industry is absorbed by the markets, the industry started tightening again. We started to have some pricing leverage, and I believe that over time, as you can look out over the next year or two you can see how much capacity is coming out. I believe the markets are gradually going to be tightening over the course of the next year or two, given present demand utilization rates. And that we will have an opportunity to continue to expand our margins in our specialty amines. I think that over the course of the next year or two that our margins in specialty amines is going to improve.

Great, thanks a lot.

You bet.

Your next question comes from the line of Mike Ritzenthaler with Piper Jaffray. Please proceed.

Good morning, everyone. Within the performance products, is there any commentary in market for -- on the surfactant side, and what's the outlook for products exposed to things like ag, given the dry conditions. I guess the spirit of the question is around any unusual seasonality in Q3 that can move the needle?

We are not seeing any material harm done to the business or falloff in demand because of the drought. At least nothing that's come to my attention.

I think we mentioned and I'll just repeat it if you allow us to -- we had some unusual things in the second quarter relative to our demand because of our outage, but also because of a shift in -- from a direct manufacture and sale customer to a toll sale. We are still selling the same amount of product but we don't account it for the same way so it appeared that we had a much softer quarter and we really did. But there's not lots of seasonality, say, in the surfactants and amines businesses. They are pretty consistent. We have seen some European pressure, but not significant in some of that demand. It is a pretty stable business.

Okay.

I would just note, I hope we're not talking to much in these answers, but I do think it is worth noting that what Kimo said earlier about the difference in demand in our performance products. A great deal of that was shifting customer sales volumes into a tolling category which we typically don't count because these are under long-term contracts. Again, I hope that you got the point that as you look at the sales volumes and the revenues coming out of performance products, it continues to be a very strong and very consistent division for us.

Yes, that makes good sense. Switching to a little bit different segment here, on China wind numbers. Insulation has obviously been weak as you pointed out, but [imagine] teams exposed to China wind have expressed some optimism that they'll still hit some of their installation plans in 2012 and I would guess that you guys would be the first to see -- to see that EPO, those end markets actually develop as expected as they were laid out, I guess, in late 2011. So are you seeing any of those leading indicators on your side and anything that could suggest that they might be right?

I'm just looking at our year-over-year Asian wind energy demand, and it was down 15% so we haven't seen strength in wind in Asia. Actually where we saw strength was in the Americas wind. But of course Asia is a larger market for that product. We are optimistic that that business will come back. It historically -- not only for our advanced materials epoxy businesses, but also for our amines which are used for curing agents in wind, has been a good business for us, but it is been soft for several quarters now.

Right, and you had sort of answered the follow-up there, has any other pockets, and it sounds like Americas, but is it Brazil in particular or anything else within the Americas that look optimistic?

Relative to wind?

Yes, exactly.

No, as I look at wind I would just comment as well that in Europe, we continue to see growth opportunities in wind as well. I think Asia is -- we did see a fall off there, but as we look at Europe, which for us is a larger market than Asia for wind, in our advanced materials group, all in all, we are seeing growth in the wind area.

All right, thank you very much, guys.

Yes, good talking to you.

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

Hi, good morning. You were kind enough in your commentary earlier to talk about your cost per ton of TiO2 going up $350 a ton. From what base? Is that the second-quarter base? Or that's the year-ago base? I didn't understand.

Yes, that is first quarter to second quarter, not just cost, but really contribution margin per unit. Excuse me, I'm sorry, second to third, sequential, second to third and its contribution margin per ton.

Its contribution margin per ton. So in your slides your TiO2 prices and on a local currency basis were up 1%, so is it the case that now you believe that your local currency prices will it decrease in the third quarter? And that's part of that contribution margin?

Yes.

Okay. And order of magnitude, is this 5%, 10%, 2%? 0% to 5%?

(laughter). Bigger than a breadbasket. Of course we are still in the quarter and we will see how it all comes out, but it is single-digit percentages.

Single digit percentages, okay, that's great. Your corporate cost have been running much, much lower than they were last year. I think corporate last year in the first half was $113 million and maybe it was $83 million or so for the first half. Will you continue to see lower corporate cost in the second half? Or will they level off or be higher? How does that line look and what's behind the change?

There's some movement in that line because of LIFO. For the quarter, LIFO was a benefit of about $9 million. So you are seeing some movement in that.

Okay. And for the second half? Maybe flattish year over year? Will it go up?

I'm terrible at forecasting LIFO. It is not intuitive to me, frankly. But in our own internal forecast typically don't try to even attempt. It has to do with lots of different products and layers and I wish we didn't have it. But it creates a little bit of noise in our own internal view.

Right, and so in textile effects, you said that the losses would increase in third and fourth quarter and that was sort of the pattern of last year. That is, you didn't really lose very much in the first half and you lost a lot in the second half. Is that the pattern this year, or the gain or the losses really should moderate quite a lot because of your restructuring efforts?

I think the losses really should moderate because of the restructuring starting to come in and the third and fourth quarter. I would hope personally, that we are starting to see break even economics by the end of the year, due largely to our restructuring efforts. If you see any improvement in the market, that's certainly going to be on top of that, but I think that right now textile effects the improvement that we're going to see are going to be more around self-help. We should start seeing that in the second half of 2012.

Great.

Jeff, we're not going to see brackets on that line in 2013.

Well, that's good, I've not modeled it with brackets that way. Lastly, in very rough terms in MDI, when you look at your profits in the US and Europe and China, what are they, relative to each other? How much of your MDI profits come from the US, how much from China, how much from Europe in ballpark terms?

There are different regional pricing structures. Asia tends to be not a contract market and so you might see little bit more volatility in prices and margins. Historically, we have had probably our better margins in Europe because we probably sold more of our product there in systems. So, it's not so much a market, it is where we have more differentiated products and customers. I'm sorry?

I meant in absolute terms. Just if you could divide up your MDI products and profits into those three regions. Do you make 0.50% in the US, or 0.75%?

We've broke out what our revenues are by region, they are not all that different. We are a little bit more profitable in Europe, but it follows revenue pretty well so just to remind you, MDI in Europe for 2011 was 39%. The US was 25%. Asia Pacific was 25% and rest of world was 11%. It is not wildly different. As I said, differentiated products will move that a bit.

Okay, thank you for your patience.

Yes.

Your next question comes from the line of Roger Smith with Bank of America. Please proceed.

Thanks, good morning. In ag mat, could you comment on what happened in liquid epoxy/resin margins and also epoxy derivative margins sequentially looking past the sales mix which you explained, but just on a like for like basis what was going on with those margins?

I think there's probably a combination of a number of things. On the BLR side, I think that you saw an erosion in pricing that took place on the commodity on the raw material side. Capacity utilization rates particularly in Asia are very, very low right now on the BLR side. I think that you're seeing that evident not just in Huntsman but in a number of competitors that reported earnings in like applications and businesses and so forth. I will no longer term that as we look at the business, as we look at our improvements in market share, as we look at our cost improvement initiatives that we have in that business. Our large position on aerospace and so forth, longer term and advancement materials I think that by the end of this year you will see year on year improvement in that division. But as you look at wind in Asia, as you look at electronics in Asia, and as you look at the exported BLR, the base materials coming from Asia, it is putting pressure on a global -- in the global market.

Where do you think industry BLR operating rates were in Q2 versus Q1?

I would say it is probably in Asia it is probably operating around 70% capacity utilization rate. Excuse me, in Asia, it's probably closer to about 50% capacity utilization rate and you're probably better than that outside of Asia. Therefore you are seeing a lot of exports that I mentioned earlier coming from Asia. That's on the BLR side. So again, as you look at the further downstream formulations and your specialty side where Huntsman plays a lot, I believe that we have an opportunity to see an improvement in those areas going forward.

Okay, and pigments. Can you break down your fixed cost versus your total cost if you were to combine say COGS our SG&A or however you would like to discuss that?

For what period? Of course, ore price are variable, cost have changed dramatically in the last year on a quarterly basis Pardon?

This past quarter, Q2.

Roger, we are going to need to dig that out. We will come back to on it, okay?

All right, thank you very much.

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

Good morning gentlemen. Operating rates for titanium dioxide, what were your operating rates in the second quarter, what are they now, and how do you see them progressing in the rest of the year?

I think that we are seeing operating rates today are probably right around 80%. I believe that as you see an end to this destocking that is taking place. So when we talk about that 350-ton added pressure in the third quarter, I'd based that on an 80% operating rate. As we see the destocking taking place in the -- that is slowing in the third quarter, I think that you're going to see operating rates move more traditionally into their 90% rate going forward.

I think that seems right relative to our own numbers when you think about a year ago we were operating at capacity. That's lower than stated capacity, our effective capacity is probably around 500,000 tons as opposed to 550,000 of nameplate capacity so think about 500 -- we said our demand is down 20% which is the 80% number that Peter is talking about.

Okay. Excellent. The same question I had was MDI pricing, it seems like MDI pricing got some legs in the first quarter, slowed down a bit in the second quarter. But now with the benzene settling at $460, do you see additional price increases with those -- some level of the second quarter price increases [PVA], can you move on your pricing pretty quickly now that demand seems to be recently firm?

We are seeing our average selling price up about 5% in the second quarter in comparison to the first quarter. I think we've made some pretty good headway in the second quarter. We are pushing for an increase in pricing in the third quarter to help offset with the benzene spikes that we are seeing in the third quarter. It is too early to comment on the success of those initiatives, those are mostly going to be centered in North America. Like I said in my comments, I believe that the high benzene prices that you are seeing are more -- they're regional and its the regional dislocation of supply, so I believe that that price will be perhaps cooling a bit here as you get into the third and fourth quarter.

Last question if I could. Your Chinese MDI plant has the approval to do that project keeps slipping -- some of your competitors may beat you to the line in terms of starting up their new capacity. Are you still committed to that plant and do you expect the approval anytime in the near future?

Yes, at this time we are committed to that facility. We are frustrated with the pace of approval that is coming from the Chinese, and all that I can say is it pertains to competitors. I have seen nothing that would lead me to believe that we somehow are any slower or being somehow held up or penalized in comparison to our competition. When I talk about our competition with Chinese approval and Chinese regulators, I will exclude from that the one Chinese local MDI producer, they seem to have things on an expedited path, if you will, to the Chinese government. But I don't think that any other MDI producers that are looking for expanding their capacity in China are getting any preferential treatment from what we are getting today. I think that we are all getting slowed down.

All right, thanks for the response.

Be for the next caller, let me go back to Roger's question. So if you think about cost of goods sold, ore represents probably a little less than half of our cost of goods sold, and our fixed costs are a little less than a quarter of that. That's a dramatic change from 2010 where ore was probably 25% of our cost, and fixed cost were probably closer to 40% of our cost of goods sold so, again, I think in response to Roger's question around ore and fixed costs, it has changed dramatically 2010 to 2012. Operator, we will take another call.

In next question comes from the line of Ivan Marcuse with Key Banc Please proceed.

These for taking my questions, most of them have been answered, just have a couple quick ones. On raw material costs, if you look at the polyurethanes in the performance segments, how would you gauge that on a year-over-year basis in the second quarter -- the basket?

As I look at raw material pricing in general, it is obviously benzene is up at nearly a historical high level as we look at that our price -- let me figure out here -- our prices we see right now in natural gas is up slightly and as we look at most of our other raw materials, they are pretty flat from where they've been over the last six months or so. I think, if anything, there's probably going to be downward pressures, you see crude looks like it is cooling just a little bit.

The one exception, Peter, I think you already made a point of it, is that benzene spike we saw here just recently and it should be -- we expect it to fall.

Our other raw mature prices really across the board have been fairly flat if not having a little bit of downward pressure. I think that the falling price we are seeing in ethylene and propylene in the overall markets. Again, we are a large buyer of propylene and ethylene, and I think that the longer-term the capacity, the new capacity that's coming out, particularly in North America, around these products is going to benefit Huntsman on a longer-term basis.

Got you, but you would look at the past -- first half of the year for the second quarter that you're -- the basket for each of those businesses were probably in general all up on a year-over-year basis?

Of our raw materials? No, I'd say they are down. With the exception of benzene I think most of all of our raw material prices -- again that's excluding all ores going towards to TiO2, I'd say they are down on a basket.

When you think about first quarter to second quarter again, they would have followed the trend in crude which was down about 8% and natural gas which was down 18% sequentially.

Then the performance products, it sounds like margins should continue to expand on a sequential basis -- if you put everything together you will have -- are not going to have the shutdown and material costs have come in a little bit and volumes tend to be hanging in there, is that sort of a fair assumption?

Yes, I'd say as you look at our performance products as we look into the third quarter, demand looks good. Raw materials are easing a little bit. We're pushing off our maintenance, the life of our catalysts are little bit better than expected, so we are able to push off our maintenance until the first quarter of next year. So yes, I would agree with that.

Great, thank you for taking my questions.

Shanae, this is Kurt Ogden. I believe we have time for one more question.

Your final question comes from the line of Edlain Rodriguez. Please proceed.

Thank you. Just one quick question on TiO2. The trade papers are reporting that prices are going down in the US. Are you seeing that or do you expect prices to be down in the US for the third quarter?

We have said that a combination of price, a little lower price, and higher ore prices will compress margins by approximately $350 a ton. So do we do believe that Global prices will ease slightly.

Again, we won't comment on where that will take place on a regional basis. We will obviously be pushing to have -- we believe that prices ought to be going up and we will be pushing prices as aggressively as we can on an upward basis, but again, I think that when you look at the overall momentum, we cannot stand here and say that prices are going up consistently across the board.

Okay and one last one on taxes. What's driving the higher tax rate?

Well, we have seen a greater percentage of our profitability in the second quarter, relative to the first quarter and prior year in the US which is our highest effective tax rate region. So we saw 33% adjusted effective tax rate in the second quarter. We would expect to be right around 30% going forward as a long-term plan or medium term expectation. Our cash tax rate is closer to 25%.

Okay, thank you.

Thank you, everyone for joining us on the call today. If you have additional questions, please feel free to give us a call. Thanks again.

Thank you for your participation in today's conference, this concludes the presentation. You may now disconnect. Have a great day.