Huntsman Corp (HUN) 2012 Q4 法說會逐字稿

Welcome to the Q4 2012 Huntsman Corporation's earnings conference call. My name is Alex. I'll be your operator today.

At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes.

Now, I'd like to hand the call over to Kurt Ogden, Vice President of Investor Relations. Go ahead, please, sir.

Thank you, Alex. Good morning, everyone. Welcome to Huntsman's fourth quarter 2012 earnings call. Joining us on the call today are Jon Huntsman, our Founder and Executive Chairman; 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 fourth quarter and full-year 2012 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. 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 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 some highlights on Slide 2. In our earnings release this morning, we reported fourth quarter 2012 revenue of $2.619 billion, adjusted EBITDA of $233 million, and adjusted earnings per share of $0.24 per diluted share. Our full-year 2012 adjusted EBITDA was a record $1.396 billion.

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

Thank you, Kurt. Good morning, everybody. Thank you for taking the time to join us.

Let's turn to Slide 3. Adjusted EBITDA for our Polyurethanes division in the fourth quarter 2012 was $186 million, an improvement of $107 million compared to $79 million in the prior year. The majority of the EBITDA increase came from the improvement in our MDI Urethanes business. Despite the weak global economy, demand for our MDI products is growing at historical rates. Fourth quarter sales volumes increased by 7%. Including our acquisitions in Turkey and Russia, our sales volumes increased by 9%. In North America, we've seen a modest recovery in the housing market.

However, our penetration in Composite Wood Products has accelerated and grew at double-digit rates throughout the year. We believe that in 2013, with housing starts of approximately 900,000, our MDI sales volumes in Composite Wood Products will approximate peak levels in 2006, when housing starts were nearly 2 million units. Composite wood adhesives represent approximately 15% of our total MDI sales volumes; however, in the Americas, it represents approximately 25%. In the Americas, we saw total MDI demand improve at double-digit rates in the fourth quarter. Growth in the Composite Wood Products was the biggest contributor.

During the fourth quarter, we successfully raised our MDI selling prices and were able to offset the increase in raw material costs. The costs of our largest raw material, benzene, increased by approximately 50% in the Americas, compared to the prior year period and may continue to be a headwind. However, as utilization rates tighten, we expect MDI margins to continue to expand. We blend propylene oxide-based polyols with MDI to create specific Polyurethane systems solutions for our customers. In the US, we manufacture our own propylene oxide.

MTBE is a by-product of our manufacturing process. The combination of strong pricing and lower priced butane led to an improvement in margins in the quarter and the year. In November, we entered into a joint venture agreement with Sinopec to build a world scale PO/MTBE facility in China. In January, we broke ground at the site of our construction. The facility is expected to be completed by the end of 2014. We will have a 49% interest in the unconsolidated joint venture. Our equity investment will be approximately $120 million before any licensing income. This partnership represents a unique opportunity to leverage our manufacturing technology and build a strong relationship with China's largest and one of its most respected companies.

In 2012, we estimate our Polyurethanes division benefited by approximately $90 million as a result of MTBE industry supply outages, which we don't expect to repeat in 2013. However, we believe that continued improvements in our MDI business and the benefits of our $75 million cost reduction initiative, of which approximately 40% will be realized in 2013 compared to 2012, will compensate for most of the nonrecurring PO/MTBE earnings such that our Polyurethanes earnings in 2013 should be similar to 2012.

Turning to Slide 4. In the fourth quarter, our Performance Products division earned $79 million of adjusted EBITDA, an improvement of $19 million compared to $60 million in the prior year; earnings improvements primarily as a result of higher sales volumes and higher contribution margins for amines. We also saw a strong improvement in contribution margins for our maleic anhydride and North American intermediates business, which benefits from the lower cost of ethylene and butane.

During the first quarter of 2013, we are performing scheduled maintenance on our olefins and ethylene oxide facilities in Port Neches, Texas. This maintenance occurs once every four years. We plan to complete the maintenance by the end of February and expect the EBITDA impact to be approximately $45 million in the first quarter. Led by a continued recovery in amine margins, we expect a full-year 2013 EBITDA for Performance Products to be similar to 2012, offsetting the estimated $45 million impact of our scheduled maintenance.

Turning to Slide 5. Adjusted EBITDA in the fourth quarter in our Advanced Materials division was a disappointing $6 million compared to $15 million in the prior year. Weak economic conditions in key global markets, combined with rising fixed costs and continued volatility in the cost of our raw materials, have led us to implement a comprehensive restructuring of this business. In January, we announced a program designed to improve efficiencies and increase our global competitiveness in this division. We expect the program to be completed by the middle of 2014, with future annual benefits of approximately $70 million, of which an estimated $25 million will be realized in 2013 compared to 2012. We expect the EBITDA from our Advanced Materials division to improve in 2013, primarily as a result of these restructuring benefits.

Turning to Slide 6. Our Textile Effects division reported adjusted EBITDA of $1 million in the fourth quarter, which represents an improvement of $23 million compared to the prior year loss of $22 million. We are encouraged by the direction this division is headed. Our sales volumes improved at double-digit rates in the key markets of Turkey, Brazil, India, and China. This growth is in large part due to market share gains, as we introduced new products into the marketplace and partner with the right customer. Our restructuring efforts are proceeding slightly ahead of plan, the benefits of which are improving our bottom line. When complete in the end of 2013, we expect the full benefits of these efforts to yield approximately $75 million of savings. Approximately $40 million will be realized in 2013 compared to 2012. We expect positive EBITDA contribution from our Textile Effects division in 2013.

Let's move to Slide 7. Our Pigments division earned $10 million of adjusted EBITDA in the fourth quarter. Global sales volumes decreased 17% compared to the prior year and 2% compared to the prior quarter. The Asia-Pacific region was a bright spot, however, as destocking appears to have come to an end, resulting in positive year-over-year sales growth. We believe industry inventories remain elevated at the producer level, close to 100 days. Ours is closer to 75 days at the end of the year.

We further scaled back our production in the fourth quarter, which resulted in approximately $15 million of unabsorbed fixed costs in the quarter. So we think about the business having operated at a $25 million run rate in the fourth quarter when adjusted for the lower production rate. In the first quarter, we expect sales volumes to be slightly higher than the fourth. However, we expect an additional decline in contribution margin of approximately $300 per ton, primarily from lower selling prices. This view suggests that, based upon current operating conditions, our Pigments business earnings will bottom out in the first quarter of this year.

We believe volumes and selling prices will improve in the second half of 2013, following the paint season. We also expect to see the benefit of cost reduction programs across our business during the second half of 2013. We expect 2013 EBITDA in our Pigments division to be well below 2012, but improving as the year progresses.

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

Thanks, Peter.

Turning to Slide 8, let me add a few comments to Peter's about Pigment's business cycle. Long-term, we think about our Pigments division as having approximately a $200 million normalized EBITDA run rate. This represents an improvement of approximately $200 per metric ton from pre-2008 recession averages. This improvement is primarily the result of our cost-reduction initiatives and the lower cost ilmenite feed stock advantage certain of our sulfate plants have, relative to traditional chloride ores. Although 2013 earnings will be lower than this normalized level, we are optimistic that the business conditions will improve and our business will exceed the normalized run rate of $200 million EBITDA in 2014.

Earlier, Peter talked about the aggressive restructuring under way in certain of our businesses. Our current restructuring initiatives have targeted annual savings of about $220 million, of which $30 million was achieved in 2012. We expect future benefits of approximately $190 million, of which approximately $105 million should be captured in 2013 versus 2012. We expect to complete these programs by the middle of 2014.

In 2012, we estimate our Polyurethanes division benefited by approximately $90 million as a result of MTBE industry supply outages, which we don't expect to repeat in 2013. In the first quarter of 2013, we are performing a scheduled maintenance on our olefins and ethylene oxide facilities in Port Neches, Texas, as Peter said. We expect the EBITDA impact to be approximately $45 million. In 2013 we expect increased pension expense of approximately $25 million, primarily as a result of lower discount rates. In 2013, we expect our adjusted effective tax rate to be approximately 35%, which is higher than our 2012 rate of 30%. This is primarily due to the effective tax valuation allowances and expected regional mix of income.

Let's go to Slide 9. In the fourth quarter of 2012, our adjusted EBITDA decreased $10 million to $233 million, from $243 million in the prior year. Our Pigments division earnings decreased $135 million. Margin compression caused by higher raw material costs and lower average selling prices in our Pigments and Advanced Materials divisions was partially offset by earnings improvements in our Polyurethanes, Performance Products, and Textile Effects divisions. Consistent with expected seasonality, our adjusted EBITDA decreased from $401 million in the third quarter to the $233 million in the fourth. The decrease was attributable to lower seasonal sales volumes, lower prices and higher raw material costs.

Slide 10 -- our year-over-year consolidated sales revenues for the fourth quarter was essentially unchanged. Sales volumes increased 2%, offset by the strength of the US dollar against major international currencies, which had a negative impact on revenues of 2%. Average selling prices, adjusted for the impact of foreign currency, were essentially unchanged. Regionally, our sales revenue increased 14% in our Asia-Pacific region and 11% in our Rest of World category which includes emerging markets such as Central and South America and the Middle East. Together these regions comprised 44% of our revenues. These increases were offset by a 10% and an 8% decrease in our European and North American markets, respectively.

Our Polyurethanes business is our largest and made up 44% of our total revenue in the fourth quarter. Its revenue increased 13%; however, I would like to point out that the urethanes market, which consists of MDI products, increased 16%. As Peter mentioned earlier, sales volumes for our MDI products increased 7%, excluding acquisitions; and was led by the Americas which grew at double-digit rates. Consistent with normal seasonality, consolidated sales revenue decreased 4% compared to the prior quarter. A seasonal decrease in sales volumes of 3% accounted for most of the decrease. A decrease in average selling prices adjusted for the impact of foreign currency of 2% was partially offset by a 1% increase attributable to foreign currency.

Let's go to Slide 11. At the end of the year, we had approximately $900 million of cash and unused borrowing capacity. During the fourth quarter, we generated $218 million in cash from operations. For the full year 2012, we generated $774 million in cash from operations. Our Board has declared a dividend of $0.125 per share payable on March 29 to shareholders of record on March 15. This represents an increase of $0.025 from the previous quarterly rate. This is the first change since we began paying a dividend in 2007, and comes after having completed two successive EBITDA record earning years.

During the fourth quarter, we pre-paid $50 million of outstanding term loans. Reducing our debt remains a priority of our Management team and our Board. Our current net debt to12 months adjusted EBITDA is 2.4 times. Our target is to have sustainable net debt leverage of 2 to 2.5 times. We will continue to pay down our debt.

In the fourth quarter, we completed the refinancing of $400 million of our senior notes due 2016, by issuing new 4.875% senior notes due 2020. As a result, we booked approximately $77 million loss on the early extinguishment of debt, $73 million of which related to the write-off of the unamortized discount on the 2016 notes. As a result of the refinancing, we extended the maturity of this debt by four years, reduced our annual cash interest by $3 million, and reduced our book interest expense by approximately $27 million annually going forward. We spent $164 million on capital expenditures in the fourth quarter of 2012; in 2013, we expect to spend approximately $450 million on capital expenditures, which approximates our annual depreciation and amortization.

Turn the time back to Peter.

Thank you, Kimo.

We conclude a record year of adjusted EBITDA while operating in our current product mix. I feel that we are ending the year on a very strong note. Since our Investor Day nearly one year ago, we told you that our focus was going to be to improve the quality of our earnings, controlling our costs and growing our business. With respect to our growth in 2013, each of our divisions are projecting sales volume growth rates greater than projected GDP.

Additionally, we continue to make progress in the expansion of our Chinese MDI capacity. This past month, we joined our partner Sinopec in a ground breaking ceremony in Nanjing, China, to construct a world-scale PO/MTBE facility. We continue to work towards a DGA morpholine facility in the kingdom of Saudi Arabia. These three projects alone represent nearly $2 billion of investment, of which our capital contribution before licensing income will be approximately $250 million. When complete, these projects will increase our earnings per share, further establish our Asian footprint, and do so with a minimal risk and investment.

Regarding our focus on cost controls -- between now and the end of next year, we will restructure much of how we do business, as we align our operations and functions closer to our customers. This transformation will eliminate $220 million of costs by the end of next year. $105 million of these savings will be realized this year.

With respect to the increase in the quality of our earnings, we are ending this year in a very strong position. Our Polyurethanes, Performance Products, and Textile Effects businesses represent approximately 80% of our revenue. Their EBITDA improved approximately $150 million in the fourth quarter, compared to the prior year. Looking into 2013, our non-TiO2 divisions are projected to have a record year. While on TiO2, our Pigments business will start the year around break-even. Conditions today lead us to believe that we will see this business improve throughout the year, especially in the second half.

We leave 2012 quite satisfied with what we have done. As we look to 2013, we see continued opportunities to increase shareholder value.

With that, I will turn it back over to Kurt.

Thank you, Peter.

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

(Operator Instructions)

PJ Juvekar, Citi.

This is Eric Petrie, standing in for PJ.

Just wanted to target your comments on lower contribution margin in Pigments for first quarter due to prices. Last week, we saw European TiO2 prices decline by 5%. Do you expect that weakness to spread to North America and Asia-Pacific? Or do you see differences in regional supply and demand?

I'm not sure that we see it spreading as much as we see it simultaneously taking place. I don't think one region falls and then eventually the other regions will fall with it. But I think that what you're seeing in Europe, you are seeing that taking place in North America and Asia simultaneously.

We think that this erosion in pricing will continue probably through the first quarter. I would expect in the second quarter, you will start to see strengthening return into the markets. Demand will be picking up. Prices will be picking up in the second quarter and going into the latter part of that quarter and into the early part of the third quarter.

Okay. Then my second question was on free cash flow. Generation improved year-on-year in 2012. Do you have any goals in 2013 for working capital ratio targets? Then as a follow-up, CapEx increased from $80 million to $164 million. Could you give us a breakdown or any color on to that?

Sure. I will take the last bit of your question first.

In terms of CapEx, we thought we were going to spend roughly depreciation in 2012 and that's where we came at it. It was a little more back-of-the-calendar weighted, but still pretty close to what we thought we would spend. So no surprise there.

As it relates to operating cash flow and working capital metrics, we do have inventory days that we look to. We, in fact, have an incentive compensation scheme for our Managers that is working-capital related. So we're very focused there. We would expect in 2013, if our crystal ball is right around raw materials, that we will generate cash from working capital in 2013.

Laurence Alexander.

First of all, just eyeballing the gives and takes, it looks as if -- do you think your EBITDA can be flat in 2013? Or are you looking for it to be down a little bit by, like, $100 million or $200 million?

Much of that is going to depend on our TiO2 business. I think that, as I said in my comments, the non-TiO2 businesses, I think, are in total going to have a record year for us. You can look at a scenario where TiO2 is going to be down from the previous year, $200 million plus. You can look at scenarios where it is going to be less than that. But that really is going to be, in my opinion, depending on how you view and project your TiO2 numbers, it is going to be the biggest difference.

But I certainly would say, in 2013 that the quality of the earnings -- meaning from the source of the earnings geographically, the source of the earnings technologically, and the source of the earnings from all of the divisions across the board, with the exception of TiO2 -- we believe will be strengthening throughout the year and will end the year equal to if not stronger than where they were in 2012.

Laurence, if I can just add -- you heard us say in our opening comments that we have about $140 million worth of headwind, 2012 to 2013, when you include the turnaround in Performance Products and the $90 million of MTBE benefits we had in 2012 because of outages. So we said very clearly, we think those two divisions offset that headwind in 2013 and will be similar to 2012 profitability.

Textile Effects would be up. Advanced Materials would be up. Then we said that in Pigments, that normalized EBITDA is $200 million, roughly, and we will be below that. So when you think about $200 million, or lower relative to what we did in 2012, that is another fairly large market headwind, if you're really trying to get to that 2012 level. My guess is, we won't make that 2012 EBITDA level.

Separately, on poly, on the MDI business -- as you look farther out 2014, 2015, how comfortable are you that utilization rates continue to improve into the middle of the decade?

I think that we feel very confident about that. I mean, we have a pretty good view as to who is bringing capacity into the market. As we look out over the next 24 months here, there is roughly about 100 -- well, there is about 300,000 metric tons of capacity, new capacity, that will be coming into the market over the next two years. Now, if the market is expanding at the rate that it expanded this past year, which is about 7%, that's an expansion on 5.7 million tons of capacity. The industry will need about 400,000 tons of capacity per year of new capacity, just to stay even with where we are today. So I would say that over the next 24 months, obviously, we need about 800,000 tons of new capacity coming into the industry, to stay flat with where we are today. What our numbers are showing us is that we believe that the addition of new tonnage in the industry is going to be closer to about 300,000 tons.

Now, depending if somebody -- there might be some small gives and takes in those numbers, but we believe over the course of the next two years or so, that you're going to have a -- certainly, a tighter market, two years from now, than you see today.

I believe that the industry is operating in the very high 80% utilization rate. So that is a tough one to get your hands around, because it is tighter in some areas around the world than in other areas. But by and large, I feel very confident that over the course of 2013 and moving through 2014 and even into 2015, that you are going to see utilization rates tighter than they are today, barring a major global economic upset, which obviously we can't control.

I just want to say one other thing on your previous question. As we look at 2013, I mentioned in my comments, and Kimo has too, about the quality of our earnings. I think that where we need to be focused on is in the improvement of the quality of these earnings. We believe that gets us to a more traditional multiple of our EBITDA that is substantially higher than where we are today.

I think that as we look out over the course of the past year or so -- the last two years -- I think that people have looked at this Company more of as a TiO2 Company with some urethanes and other byproducts. I certainly don't want to say anything that would diminish the performance of TiO2, but I think as we look at the core of our earnings -- I said earlier, 80% of our sales, Polyurethanes and Performance Products making up nearly 80% of our sales; you add on to that Textile Effects -- that's where you're seeing the real growth of our earnings today taking place. If you put anything that resembles a reasonable multiple on those sort of cash flows, you see obviously a higher value, a higher stock value, and a higher total enterprise value coming throughout 2013 and 2014 for this Company.

Frank Mitsch, Wells Fargo Securities.

Congratulations on the end of a nice year.

Peter, when were you talking about the Polyurethanes business, I'm trying to look at the puts and takes on the various -- the two major drivers. The urethanes versus the PO/MTBE. It looks like you've got that $90 million headwind. But you've got about $40 million of incremental savings. So you're expecting that business to grow about 7% EBITDA, ex that restructuring growth. How would you parcel that out between the two major segments? I just wanted to get a little more information on that.

Well, I would say that about two-thirds of our -- if you look in the past, you're about two-thirds of our improvements. When you strip out the one-time benefits of outages, about two-thirds of the improvements that we experienced this last year came from MDI over PO/MTBE. I think that, going forward, as we look at the improvement in that business, we would say that this next year, probably about half of that improvement will come through cost reduction and half that improvement will come through an improvement in our MDI and our margins and moving further into our systems and moving further downstream. Of that $50 million, $40 million-ish of cost reductions, $45 million or so of improvements in the MDI.

Frank, you've heard us describe this business as -- half of it is utilization rate-sensitive and half of it is more system-based and more stable margins. We're starting to see that more utilization rate-sensitive side of it really expand in terms of margins. We think this is a business that can do $1 billion of EBITDA in the future. That's not going to be driven by PO/MTBE. That is MDI-based uplift.

So we should continue to see an improvement in MDI operating rates in 2013?

Well, absolutely. I look at where we were in 2005 -- 2004, 2005, and 2006, and that time period. We're still quite some distance away in MDI of reaching what I would say would be a peak level of margin performance. I'm happy with where we are in MDI, but we've still got a ways to go.

Okay. All right. Great.

Then lastly -- Peter, I think when you were talking about Advanced Materials, you said that you anticipate 2013 to be better than 2012. But I think you attributed all to the restructuring benefits that you anticipate realizing. What are the difficulties that you're seeing in your end markets there? I mean obviously wind energy is an issue, but can you spend a moment or two talking about the pluses and minuses by the various parts of AM?

Well, I think that as we look at the business, we look at it over a multi-year period. We continue to be very satisfied with the growth of our aerospace business. The electronics business is growing for us robustly around the world. A lot of the coatings, flooring, businesses, some of the more niche and specialty adhesive business applications, continue to grow and do quite well. But we have a large volume driver of what I would call very commoditized BLR, Basic Liquid Resins. That business is at historical lows.

You probably have heard some of the CEOs of some of the other companies that have made comments that are in that same business, talking about some of their plant closures and so forth, that are taking place. I personally believe if we look at BLR -- I'm not projecting this next year that the thing turns around and goes through the roof, but I think that there is a sense in the industry that there are so many people that are hurting in BLR, that capacities will be rationalized throughout the year. That's already been publicly announced by some of our competitors.

We're evaluating some of our own capacity as part of that exercise. So I would think in the BLR side, that you probably have seen a bottoming of that taking place. You will see a gradual recovery. But as we look to this business, our growth rate over the course of 2013, 2014, and 2015, is really going to be largely based on those applications that continue to do well for us. I look at our January order patterns and so forth -- they continue to do well for us today, in aerospace, electronics, coatings, and so forth. This is going to be the engine of our growth going forward.

Kevin McCarthy, Bank of America Merrill Lynch.

Kimo, in putting forth your TiO2 Pigment earnings guidance for 2013, what are you baking in with regard to costs of titanium-bearing ores? Perhaps you could just comment a little bit on what you're seeing out in the marketplace as it relates to your rutile, ilmenite, and slag.

Sure. Ilmenite really hasn't changed. It was, 18 months ago, maybe $200 a ton. Now it is $300 a ton. It really didn't move up that high and it doesn't look like it has come down much.

As it relates to the slags, chloride slag hasn't moved much at all either. It is about $1,500 a ton. Now, sulfate slags are lower than chloride slags, by $200 a ton, roughly. Rutile is the one that really has come down quite a bit. You will remember it was $2,200, $2,300 a ton a year ago. Right now, we're seeing it at parity with the chloride slags on a contained titanium basis.

So if you do your numbers on a contained titanium basis, you've got roughly $600 a ton for Ilmenite; call it $1,600 a ton for rutiles and slags. You're really $1,000 a ton different in contained titanium between the two ores.

Okay. That's helpful.

Then second question, if I may, on taxes -- I think in your press release, Kimo, you indicated an increase to 35% for 2013. You talked a little bit about geographic mix and also valuation allowances. Can you explain what is going on with the valuation allowances? Also comment on whether or not your cash tax rate might change in 2013 versus 2012?

Sure. It is really all about TiO2 and European countries.

So we have NOLs in places like the UK, France, and Spain. We have several manufacturing facilities from our different divisions in those countries, but for the most part, they're driven by TiO2 profitability. In the year -- well, in a quarter, like the fourth quarter, when we generated $10 million of EBITDA, you can expect that those countries saw pre-tax losses. Unfortunately, when you have pre-tax losses in valuation allowance countries, you can't book a benefit for that loss. It has the effect of pushing your effective tax rate up.

So in 2013, when we're projecting it to be a tough TiO2 year, you would expect that our effective tax rate will be higher, because we will have losses in certain European countries because of TiO2, which will push that rate to the higher end of our range.

If I look out to 2014, you signaled TiO2 goes back above your normalized levels. Presumably that is the reason your tax rate starts to drift back down from the 35% level. Is that correct?

Exactly. You start making money in the UK. You start making money in places like Switzerland because of Textile Effects. You will see that effective tax rate drop to -- well, something like we did in 2012, kind of a 29% rate.

Robert Koort, Goldman Sachs.

I've got a couple of unrelated questions.

First, on the MTBE side, I think you said you had an increment of $90 million of extra earnings this year. Could you give us a sense within that $800 million Polyurethane EBITDA for the year, how much, in total, MTBE would have been?

It is a tough calculation, because you've got a big plant and the fixed costs relates to, of course, both PO and MTBE. So you're just -- you're making up numbers at that point, truly. I suppose you could try to look at MTBE profitability on an on-purpose basis, but we don't run an on-purpose plant. We would be guessing at some of those assumptions as well.

So the guess for $90 million of incremental earnings was just based on what?

Outages. We saw MTBE prices rise above what we would have expected otherwise. Because MTBE markets were tight. So that is purely a price view in terms of what we thought we got from these outages.

Okay. Then when I look at your $5 billion Polyurethanes business, in trying to figure out what kind of leverage you would have to US housing, can you tell me what share of that revenue base would be into the US housing market?

Well we said that 25% of our US Polyurethanes business is composite woods. So that is clearly US housing. Before we go to insulation, let's just try to think about what percentage of our overall business is North America -- it is roughly about one-third. Yes. When you think about our business, it is probably one-third Europe, one-third US, and one-third sort of Asia, Rest of World. That gives you the composite wood.

There is some insulation that goes into the housing in the US. But for the most part it is commercial application, in panels and so forth. But there is some Polyurethane that goes with that into homes.

So, maybe somewhere in the order of 10% of the Polyurethanes division? Does that seem reasonable?

That's a good number. It is probably a little higher than that, actually.

Yes. It would probably be a little higher than that, Bob. I would think also, if you think about some of the fastest-growing markets that we see in Europe and in Asia, is also around OSB in those markets as well. So I know you're focused on US housing, but we're also -- one of the areas that we're seeing of growth taking place in a lethargic economy like Europe, is in OSB applications in Europe. That's one of the growth industries that we see growth year-over-year. In Asia, we're seeing the same thing. People are moving more and more towards similar building materials as we see in North America.

Got it.

My last one -- in Performance Products, you guys talked about a $45 million hit in the first quarter, which seems like a pretty large hit, if I think about lost production volumes and ethylene cracker spreads and that sort of thing. So can you give me a sense of what you're getting for that $45 million?

Well, the $45 million -- we're having to do a maintenance turn-around that we have to do, whether that number was $100 million or nothing. Every four years, we have to take the facility down and completely overhaul it and replace a lot of the equipment, and so forth. So it is really not -- it is more of a license to continue to operate the facility, if you will, more than any incremental expansion or business investment case that's taking place.

Bob, not to throw fuel on the fire, but it's -- in fact, the investment is a lot more than the $45 million, right? The cash cost of this turn-around is roughly $70 million. We take that and we amortize that over the next four years. On top of that is lost sales or having to purchase outside raw materials that otherwise we would have manufactured -- that's the $45 million that we're speaking to. So those together --

I got it.

But are you squeezing out a little extra production from that cracker?

It will have a higher rate of operation -- a slightly higher rate. The reliability will be better. Typically, when you get to the end of your four-year cycle, your catalysts and so forth start to deteriorate. So I would hope that we would have stronger production rates. These aren't -- I don't think this is going to be material to our earnings.

Also, Bob, I would just note that when we talked about that $45 million, that is our best estimate that we have right now. We won't know that number until, really, we're completely done and we've been able to go back and look at the price of raw materials during that time period and the price of ethylene and the price of product for resale that we had during that time period. So unlike the turn-around itself, where we know that we're going to be spending $70 million-some-odd in parts and labor and so forth, the actual EBITDA hit,-- it may come in a few million less than that. But I think that from what we're seeing thus far, the $45 million, I think, is a very safe number as far as the lost EBITDA that we've incurred by having the plant down for maintenance.

Got it. Thanks for the help.

I need to make sure we emphasize this. Because some people may look at our -- when they project our first quarter, for some reason, they forget that number. So a $45 million hit in our Performance Products. What we're telling investors, again, is, in 2013 we believe that the business -- the Performance Products business -- will improve its EBITDA enough in 2013 to be able to make up for that $45 million EBITDA hit -- to be able to make up for that. Which is to tell you that's a bottom line growth in the business of greater than 10% that we will see throughout the year.

Mike Ritzenthaler, Piper Jaffray.

In your outlook for 2013 in Polyurethanes, do you have a good sense for the Yantai JV facility in PO/MTBE? You did a good job of articulating the Sinopec agreement for next year. But I was wondering if you could give us a little more context around the first such agreement that you entered into with Yantai?

Yes. You're talking about the Yantai Propylene Oxide/MTBE joint venture?

Yes, exactly.

Yes. We're just licensing that technology to them. We will be receiving a licensing income from that. But we will not be deriving any value from the sales and so forth of that project. So that really shouldn't be something that we're factoring in to our MDI business strategy going forward.

Okay. Then on -- I just wanted to touch briefly on Textile Effects, if I could; and the year-over-year increase in volumes. You highlighted in your prepared comments that were you taking share. Is there something specific that's going on there that is enabling to you do that? How much runway is left in that incremental capture?

Well, I think there is that incremental capture, virtually in my opinion, it is just starting. When you look at most of our major competitors in that business -- either they are in the process of selling their business or trying to sell their business. They're making substantial reductions in their R&D and so forth. We are in the midst right now of a cost reduction, but much of that cost reduction is actually strengthening the business. We're shutting down production and our costs in Switzerland, and we're moving it to Asia.

The same week that we have the ground-breaking in Nanjing, China, for the PO/MTBE joint venture with Sinopec, we also have the ribbon cutting for production of -- in Mahachai, Thailand -- of a lot of our production that has taken place in Switzerland, has now been qualified, is now up and running. We have product out of that Thai facility that will be servicing customers.

So as we look at the Textile Effects business going forward, I think that we have an opportunity to continue to grow that business at strong single-digit sales rates, assuming that the industry itself grows only at 1% or 2%. I think that we are investing more in new products. We're investing certainly more in new production than our competition is. I think that the customers and the ultimate consumers are really rewarding us for that.

Gregg Goodnight, UBS.

I want to say I appreciate your transparency in your disclosures and your commentary. It is very helpful in all of these areas, especially TiO2.

Thank you.

One question I had -- Peter, you're laying out a pretty good argument in terms of industry growth and the lack of capacity after 2014, 2015; that the industry is going to require some more capacity. Could you update us on what your thinking is on your potential North American MDI expansion? When might you get to some sort of decision point?

Well, I think that we are presently evaluating debottlenecking projects. Our next phase is then to evaluate putting in a new line. Then you would look at actually adding something that would be similar to a new facility. I think like most chemical investments in North America right now, we feel pretty good about the market conditions today. But there is just still a great deal of uncertainty. Unless you're building a large commodity facility around the cheap gas play, on gas fracking, I think that we're taking a longer term. We're optimistic about where MDI is going, about where the demand is going. But there just seems to be a sense of uncertainty in the overall economy of North America. So I think that we're looking now more at projects that will further incrementally expand and further downstream derivatize our MDI business.

Again, one of the areas of MDI growth for us as a Company, I believe, is not necessarily adding more tonnage to the industry, but it is taking out existing tonnage and moving that further downstream through systems, through variance, and adding that with other Huntsman chemistry to create value with that. So in North America, Polyurethanes, MDI, we're going to be focused on where we can get the cheap pounds, at a cheap pound, and also where and how we're best going to be able to add value to the existing tonnage that we already have.

A decision point on, say, an incremental expansion, when would that be?

I think that if we decide to do something, that you are probably looking in the next six months or so. I also would just like to correct something I said earlier, that 40% of our $76 million cost savings in MDI would fall to the bottom line this year. I should have said $40 million. So $40 million, we view -- in the MDI business, we have a cost-improvement process that is going on right now, $75 million. $40 million of that is going to be hitting the bottom line in 2013.

Okay. Second question, for Kimo -- in terms of your 2013 CapEx target, can you mention any big bucket projects that are included in that CapEx? How much is just purely maintenance?

Yes. Every year, it moves around in terms of maintenance, Gregg. I think about maintenance, meaning sort of mandatory environmental health and safety -- that sort of thing. It's $125 million. In a turn-around year like this year, it would probably be $150 million. So there is a lot of discretionary capital, as you mentioned.

Some of the projects that we're focused on in titanium dioxide are providing greater ore flexibility around Ilmenite, around some of our current sulfate slag plants. We have a large project in Calais, France, in TiO2 related to magnesium sulfate fertilizer that will deal with some of the byproduct that comes off that plant. We also have expansions in, as Peter said, in some of our variants, or more specialty MDI businesses in Europe that is a large project. We have expansions in our amines businesses. Then in Advanced Materials, we have announced publicly a large expansion in our McIntosh facility here in the US for aerospace.

So there are several projects -- not any one big throw, but we have several of them. Another project is expanding our ethylene oxide facility in North America that will capture some of the North American advantage that exists here.

Hassan Ahmed, Alembic Global.

Listen -- first question, if I may, on the TiO2 side. I know everyone has been talking about it a fair bit, but just wanted to get a better sense of -- or your views of -- just the shape and base of this evolving net cycle. The way I'm thinking about it, as I look at current quarter's EBITDA margins, 3.5%, very comparable to the distressed period of Q2, Q3, 2009. Then thereafter, going back to 2009, we saw this snap-up in terms of margins -- 17.5% EBITDA margins in 2010, 30% EBITDA margins in 2011, at Huntsman.

We're really not seeing much of a supply response right now. You clearly have a bit of a feed stock advantage as well. So is there a case to be made that we see a similar snap-up?

Well, sure. There is a case to be made.

I think that if we looked at 2013 -- I think that as you look at the Q3 and Q4 performance of 2012, you definitely see destocking that is taking place. You see customers that are burning through their inventories; and the worst place that we saw that happen was in Asia. That's why, specifically, I tried to highlight in my call that, as we look at the turn-around, we believe that for the turn-around really to come into this industry, you've got to start seeing Asia, seeing some year-over-year growth. For the last couple of quarters, we haven't seen that. Then in the fourth quarter, we actually did see a year-over-year growth in TiO2.

Now as we look at 2013, I would say that 2011 was definitely a year of almost panic buying on the sense of the customers. I think that 2012 was a year of massive destocking from the customers. The world didn't come to an end. I think 2013, as we look at the volume, I think 2013 is going to be more of a normalized year. It is going to start the year very poorly, obviously, as we have already said. But I think that throughout the year and by the end of the year, I think that you're going to be going into more normal operating conditions.

Now, could it swing up from there? I think that it certainly could. I'm not going to sit here and say that we're going to see margins go from zero to 30% in the next couple of quarters. I think it has a much likely higher probability -- just again my opinion -- has a higher probability of doing that than it does at staying at fourth quarter run rate margins throughout the year.

Fair enough.

But I think that again, my view, it's kind of more between the two. I think that by the end of 2013, you're operating this business more in normalized market conditions. We define, for Huntsman at least, normalized, this business ought to be doing around $200 million EBITDA conditions.

Very good. A follow-up, if I may.

On the Polyurethanes side of things, obviously right now in this market, there should be a huge differential between the PO/MTBE production versus the PO/SM production. So just your views on where those two stack up on the cost curve as it stands today?

I'm trying to expunge all of the styrenic memories from my mind, to be honest with you.

(laughter) Fair enough. But there clearly is capacity out there.

I've got to be honest with you, I have no idea what PO/SM economics are. I would say that, from what limited knowledge I have in that area, I think that PO/MTBE is absolutely the right way to go, particularly if you have a strong MDI business that can take that PO and create value with it.

But I mean, just a sense of scale or whatever. I mean -- do you think that PO/SM would be break-even-ish right now on the cost curve?

I'm not trying to evade an answer. I'd share with you if I had it; I just have no idea. Internally, that's not even a number that we track as far as propylene oxide styrene monomer.

Fair enough. Okay.

Hassan, let me jump in to your first question and just add a little bit of color on TiO2 trends regionally that I think is interesting. Maybe a point that we haven't made -- that is, in the fourth quarter, we saw something interesting in Asia, as Peter pointed out. We've showed slides before in our conferences where we show a five- to seven-year band of demand, and where we sit today in that five-year, seven-year demand. Asia, actually, in the fourth quarter moved to the top of that band.

So clearly, not only through the inventory correction, but really on the high side of demand -- at the same time, we saw Chinese exports to Europe, primarily, fall dramatically; which leads me to believe that Asia is consuming much of their own production in TiO2, which really allows Europe primarily to see pricing stabilize and actually strengthen. I think that is an important dynamic.

Andy Cash, SunTrust.

You were mentioning titanium dioxide in Europe. I was just curious -- with the TiO2 business in Europe up for sale, do you think that has had an impact on the TiO2 market? Do you think there's any -- what are the odds of a transaction happening in 2013?

I don't think that it's-- we don't really compete with much with that facility. I wouldn't say that -- I wouldn't categorize them as a stabilizing force or a reckless force. To be honest with you, we don't really come across that particular facility very much. As far as what they might do, I have no idea. I mean, it looks like they've been fairly aggressive last year, so trying to get rid of it. I don't know if the markets are really improving that much.

If it goes in the hands of a newcomer to the business, maybe that could be disruptive for a longer period of time until they learn the ropes. Do you think there is any risk of that happening?

If it does happen, we -- again, we really don't compete against that certain -- the output of that facility goes into a specialty niche area. We have a little bit of overlap there, but not a great deal. If somebody got in there and had the learning curve, or whatever, where they messed up some of those end markets, I just don't see it affecting our pricing and margins. Because we just compete in different areas.

Okay. That's very insightful.

Just one other thing. So most of this disruption in the TiO2 is clearly just an inventory disruption. Do you have any evidence -- is there any demand changes in TiO2 made from chloride versus TiO2 made from sulfate? Or is it just too disruptive right now to figure that out?

I don't think that it's -- I think again, as I've said in previous calls, I think one of the big misconceptions of this industry is somehow that this chloride product gets a premium. It is in higher demand. That's the new product that is coming into the market.

If you look at when was the last chloride facility built or really added into the market -- years and years ago. You look at all of the new capacity that is coming into the market, that is displacing chloride, it is sulfate material. We sell both into the market. There is absolutely no difference in demand trends or pricing trends, and I think it is going to continue to remain that way.

We have no further questions left in the queue.

This is Kurt.

We want to thank everyone for joining us on the call today. I want to remind everyone that a replay of the conference call will be available later on this afternoon. Feel free to reach out to us if you have additional questions. Thank you for joining us.

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