Huntsman Corp (HUN) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter two 2013 Huntsman Corporation earnings conference call. My name is Julie Ann and I will be your operator for today. At this time, all participants are in 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. I would like to turn the call over to Mr. Kurt Ogden, Huntsman Corporation Vice President of Investor Relations. Please proceed, sir.

Thank you, Julie Ann, and welcome, everyone, to Huntsman's second quarter 2013 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 second quarter 2013 via press release and posted it on our website, Huntsman.com. We also posted a set of slides on our website which we intend to use on the call this morning in the discussion of our results.

During this call, we may make statements about our projections or expectations for the future. All such statements are forward-looking statements and while they reflect our current expectations, they involve risks and uncertainties and are not guarantees of future performance. You should review our filings with the Securities and Exchange Commission for more information regarding the factors that could cause actual results to differ materially from these projections or expectations. We do not plan on publicly updating or revising any forward-looking statements during the quarter. In addition, we 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 measure in our earnings release which has been posted on our website at Huntsman.com.

Let's begin on slide number 2. In our earnings release this morning, we reported second quarter 2013 revenue of $2.83 billion, adjusted EBITDA of $304 million, and adjusted earnings per share of $0.39 per diluted share. I will now turn the call over to Peter Huntsman, our President and CEO.

Thank you, Kurt. Good morning, everyone. Thank you for taking the time join us. Let's turn to slide number 3. Adjusted EBITDA for our Polyurethanes division in the second quarter 2013 was $174 million. During the second quarter of 2013, we declared force majeure in Europe on the supply of certain grades of MDI products. The situation was primarily caused by a lack of critical raw material supply and off take from our MDI facility in Rotterdam, The Netherlands. We estimate the EBITDA impact on the second quarter 2013 to be approximately $25 million and although the facility is now operating at full rate, we expect an approximate $10 million of EBITDA impact in the third quarter as our production catches up with demand. Excluding the impact of the force majeure outage, our MDI volumes grew at approximately 3% globally. In the Americas, we continue to see strong growth in a number of end markets driven primarily by a strong housing rebound.

Our composite wood products business grew at over 20% in Q2, while our commercial insulation sales increased over 10%. In Asia Pacific, we are seeing the development of different growth rates across the region. Outside of China, we are experiencing attractive growth, notably in the ASEAN countries and Japan. However, China's growth has clearly slowed and we remain cautious relative to the second half expectations. The demand environment within Europe is expected to continue to be flat driven by consumer weakness impacting both our automotive and furniture end markets. We blend propylene oxide based polyols with MDI to create specific polyurethane system solutions for our customers. In the US, we manufacture our own propylene oxide. MTBE is a by-product of this manufacturing process. Propylene oxide MTBE earnings in the second quarter improved $11 million compared to the prior year primarily as a result of lower butane costs.

On July 8, 2013, we announced a definitive agreement to acquire the business of Oxid, a privately-held manufacturer and marketer of specialty urethane polyols. Oxid generates $86 million of revenue in 2012. This transaction is expected to close during the third quarter of 2013. The acquisition price is for an amount up to $75 million.

Let's turn to slide number 4. In the second quarter our Performance Products division earned $111 million of adjusted EBITDA, an increase of $24 million compared to the prior year of $87 million. Contribution margins in our maleic anhydride business improved as a result of raw material costs and firm demand in Europe as well as North America. Earnings also improved in our US ethylene derivatives, primarily as a result of improved sales volumes. We feel confident about the trajectory of our amines business which continues to improve. We have seen increased margin pressure in our European surfactants business that serves the home and personal care markets. Thus far, demand in margins for specialty surfactants have offset this earnings pressure but we are looking at ways to improve the earnings in our European business.

Let's turn to slide number 5. Adjusted EBITDA in the second quarter in our Advanced Materials division was $32 million, an improvement of $6 million compared to the prior year of $26 million. Our self-help measures announced earlier this year to improve efficiencies and increase our global competitiveness is benefiting this business. Increased average selling price and lower fixed costs more than offset the negative impact of lower volumes compared to the prior year. We are on track to deliver approximately $70 million of savings by the middle of 2014. While globally, commodity basic liquid resin margins remain weak, we are seeing strength in pricing or demand in more of our specialty products.

Regionally, in Europe, we are successfully improving selling prices in coatings, construction, and wind applications. In Asia, certain specialty applications such as NGL tankers and storage have been a bright spot. In North America, we see continued growth in aerospace and other multi-functional products. And finally, in India and the Middle East, basic liquid resin weakness is offset by a number of do it yourself applications.

Turning to slide 6, our Textile Effects division reported adjusted EBITDA of $3 million in the second quarter and improvement of $7 million compared to a prior year loss of $4 million. We have been focused on key market growth as part of our overall restructuring efforts within this division. As a result, our sales volume grew 9% compared to the prior year. We believe the majority of our growth exceeds improvement in the underlying market. Most of the increase in earnings is attributed to reduced fixed costs resulting from our restructuring efforts. We expect this business to slowly improve as approximately 50% of our expected $75 million in annual restructuring benefits are yet to come.

Let's turn to slide 7. Our Pigments division earned $33 million of adjusted EBITDA in the second quarter and improvement of $24 million compared to the prior quarter of $9 million. We are encouraged by the sequential improvement in our TiO2 business and believe the earnings in our business bottomed out in the first quarter will improve throughout the remainder of this year. We believe our restructuring efforts known as Project Transform are having a positive impact on our sales portfolio and cost structure. In addition, our ability to use sulfate ores in approximately 60% of our raw materials production capacity provides a structural cost advantage as the cost of higher quality ores remains elevated. We see this advantage remaining for the next several years.

During the fourth quarter, we will further reduce our inventory -- during the quarter, we further reduced our inventory days to approximately 40, which is normal for this time of year. We believe the industry is closer to 60 days at the end of the quarter. We are seeing price stabilization for TiO2 as a result of lower industry inventories and improving demand. We expect margin improvement in the second half of this year. We also expect earnings in the fourth quarter to approach seasonally adjusted normalized run rate levels, and 2014 is setting up to be at or above our EBITDA normalized run rate of approximately $200 million. Before sharing some concluding thoughts, I would like to turn a few minutes over to Kimo Esplin, our Chief Financial Officer.

Thanks, Peter. Let's turn to slide 8. In the second quarter of 2013, our adjusted EBITDA decreased $72 million to $304 million from $376 million in the prior year. $103 million of this change was attributable to our Pigments division which is going through an industry-wide business cycle. This was most evident in the decrease of our average selling prices where pigments prices decreased 26% in local currency terms. It's worth noting however that we are -- we have now seen sequential stabilization in our Pigments division selling prices. Compared to the prior year, we saw an increase in our raw material costs, which is reflected in the direct cost column on the chart. Notably within our Polyurethanes division, the average cost of benzene increased approximately 5%. These head winds were partially offset by an increase in sales volumes and lower fixed costs as a result of our restructuring efforts.

Compared to the prior quarter, our adjusted EBITDA increased $84 million from $220 million. Most of the increase was attributable to lower raw material costs as direct costs improved $75 million as well as planned maintenance in our Performance Products division which was completed in the first quarter of 2013. The impact of the maintenance was approximately $55 million. Lower fixed costs from our restructuring efforts, as well as improved sales volumes, also lifted our earnings sequentially.

Slide 9. Our year over year consolidated sales revenue for the second quarter decreased 3%. Sales volumes improved 3% but were limited as a result of the force majeure at our European MDI facility. Regionally, our sales revenue increased 7% in our North American region where we saw favorable economic conditions. Sales revenues were flat in our Asia Pacific region where we have seen lower growth in the Chinese economy. Sales revenues decreased in other regions of the world.

Our Polyurethanes business is our largest and made up 43% of our total revenue in the second quarter. Its revenue decreased 1% as a result of the force majeure at our European facility. Excluding this impact, we believe our revenue growth would have been approximately 2%. The revenue decrease for PO/MTBE was a function of lower average selling prices as sales volumes were flat compared to the prior year. Compared to the prior quarter, sales revenues increased 5% as a result of increased sales volumes partially offset by a decrease in our average selling prices. Sales revenues increased in all of our divisions with the exception of Advanced Materials.

Slide 10. At the end of the quarter, we had approximately $838 million of cash and unused borrowing capacity. During the second quarter, we completed an amendment to our accounts receivable securitization programs that extended the maturities and reduced the applicable borrowing rates and increased the availability under these low cost programs. We spent $92 million on capital expenditures in the second quarter. In 2013, we expect to spend approximately $450 million on capital expenditures which approximates our annual depreciation and amortization. Peter?

Thank you, Kimo. As we hit the midway point of the year, I think it is worth reviewing a few of the objectives that we set out to accomplish earlier in the year. We said at the beginning of the year that we intended to see all of our non-TiO2 Pigment businesses improve over the previous year, regardless of a slowing economy. While recognizing the steep fall off in earnings that we experienced at the end of last year in our TiO2 business, we believe that through our own initiatives and small market improvements in the TiO2 industry, that our earnings would end the year very close to a normalized annualized run rate of approximately $200 million. While many parts of the global economy continue to languish, if you adjust for the impact of our polyurethane force majeure, our non-TiO12 divisions earned more than $50 million compared to last year.

We continue to weigh various options for our TiO2 division. I would like to reiterate what I've said in the past. We continue to explore opportunities to participate in a TiO2 consolidation that would create value for our shareholders. Of course, most major TiO2 producers, DuPont, Rockwood, Tronox, have made similar public statements in the last six months. Given the recent volatility of the TiO2 profitability cycle, we understand that a transaction of any nature would need to be accretive before we would consider deploying additional capital too or exiting this product line. As we continue to evaluate options that are before us, we will refrain from answering questions dealing with potential M&A activity in this area.

Despite modest or flat economic growth around the world, we continue to see real opportunity to expand shareholder value. Just two years ago, our Textile Effects division was losing $70 million per year. Today, it is contributing to our earnings. Our Advanced Materials division is showing its first year-on-year and sequential improvements in earnings in over two years. Our Polyurethanes business continues to improve its cost structure and expand its operations with the recent Oxid acquisition. We stand to benefit in our propylene oxide, MTBE, and maleic businesses with lower butane prices and I believe that our TiO2 segment business is advantaged compared to most of our peers. As we enter the second half of 2013, we will continue to see the benefits of our cost reduction initiatives as we move closer to completing these projects in early 2014. These projects remain on track or ahead of schedule. To date, we have seen approximately $65 million of cumulative annual run rate benefit from these initiatives and expect an additional approximate $155 million of annual benefit by the middle of next year.

While we are well positioned to take advantage of an improvement in global economic conditions, by this time next year with the completion of an additional $155 million of further cost reduction and continued market growth, all of our divisions should be stronger than they are today. In short, we are well positioned to see continued growth in earnings throughout the remainder of the year and 2014. This across the board improvement in margin growth I expect to improve the mix of our earnings and the multiple of our stock value. With that, I will turn the call back over to Kurt.

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

(Operator Instructions)

Your first question comes from the line of PJ Juvekar, Citi. Please proceed.

Good morning. Peter, I just wanted some clarification on your TiO2 comment about consolidation. Are you a buyer or seller of TiO2?

That would depend on where we think the most value can be created for our shareholders. PJ, at this point given where we are in discussions and so forth, I don't wish to comment if we are specifically buying or selling. But again, I would just reiterate that our objective in anything that we do would be to do something that is accretive and something that will add value to our shareholders.

Okay. And then one of your competitors was talking about some real issues in epoxies, the new capacity in China. What are you seeing in that business and will you act proactively to look at any options for epoxies? Thank you.

I think that as we look at the business globally, we continue to be concerned about the margins in the basic liquid resin, which is, I'll remind you, is the commodity side of the Business. As we look at the more differentiated side of the Business, the more specialty side of the Business, we remain very optimistic. I think that we continue to see growth in the aerospace, in the multifunctional, do-it-yourself applications. We continue to see growth opportunities. This is a division also that is benefiting directly from the $70 million of costs that are being cut from this division.

So a combination of growth in the specialty ends, reducing the footprint of our commodity side of the Business and cost initiatives. Again as I said my comments, we are seeing quarter-on-quarter and sequential growth in our earnings in this business when many of our competitors are seeing a deterioration of earnings in this business. Again, as we see longer term in this business, in spite of some of the weaknesses we will see in the commodity side of the business, this business will continue to improve I believe year-over-year throughout the remainder of this year and going into 2014.

Thank you.

Thanks, PJ.

Thank you. Your next question comes from the line of Robert Koort, Goldman Sachs. Please proceed.

Good morning. This is actually Neil Singhania on for Bob. A question on polyurethanes. With the slower growth in China, has there been any impact to some of the capacity expansions in the region?

None that I would think would be material to the Business and none that I have read publicly. I would just note that typically the expansions that we see that are taking place, and I'm talking about new facilities, go through a multi-year process of approvals and then go through a multi-year construction and start up phase. Anything that would be under way today as far as construction, would have been started years ago and probably still have another year or two until completion.

You know, I want to emphasize, too, that as we look at China we were certainly seeing a slowdown in the growth, but we are still seeing growing markets. And as Huntsman looks at our position in China, we continue to see growth opportunities there. We continue to export product into China, and this is going to continue to be a very important market for Huntsman. I think longer term, as you look out over the next couple of quarters and over the next year, we certainly see this as a growing market and quite an aggressively growing region outside of China, as well.

And then on TiO2. In the past when looking at these consolidation opportunities, you have given some pretty robust synergy targets. Is there any update there as you've looked at some of these options?

No, I would just say that as we -- you characterized those synergy numbers as being robust and I would say that that is an accurate characterization. I think that as we look at everything from raw materials to operating synergies, logistics, and so forth, I would continue to believe that that is a potential advantage that we may have.

Okay. Thank you.

Thank you.

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

Good morning. This is Alex Yefremov for Kevin. I had a question on your TiO2 profit commentary. Does your expectation of $200 million EBITDA next year assume any price increases in TiO2?

Yes, it does.

And could you share the extent of what kind of price increases are required to get there?

We believe by the end of this year, that is in the fourth quarter, we will be really close to, as Peter said, a seasonally adjusted run rate of that normalized level and that comes with just very modest price increases largely outside of the US. We are hopeful that we will get more significant increases in 2000 -- toward the end of 2013 and into 2014 as inventories fall. Generally, we believe we can get to that normalized run rate with very modest price increases.

Thank you. And I had a follow-up on polyurethanes market. You indicated that growth is slowing in China and Europe. If you look out maybe over the next two to three years, should we assume a slower growth rate in that market in terms of demand growth from 7% to 8% over the last few years? Could it come down from that level, or do you think it could sustain -- could be sustained at that level, given that China seems to be slowing?

Well, obviously that is going to be dependent on the macro-economic direction that these large economic blocks of the European Union or China or North America take in general. It is worth noting that as you look at the growth rates over the last 20 years in MDI, it has largely dominated by the growth in North America and in Europe. As you look at the growth rates going forward, as Asian demand for and consumption of MDI now exceeds that of Europe or North America. The growth rates in Asia will start to dominate global growth patterns in MDI.

I remain of the belief that as you look out over the next decade that global growth rates for MDI should be stable, if not even better than they have in the past couple of years, because China is going to continue -- and the Asian market. Asia in general, India and so forth. These are going to -- the growth rate of these countries will start dominating the global growth rate, where again in the past, that would have made up 20%, 25% of the global demand. Now you see it closer to 30%, 40% depending on which region you are looking at here.

So I remain bullish and again, I would just note that as you look at what is taking place in China, I don't see this necessarily as a long term slow down in China. I think that you will see a quarter or two of a slowdown and then a return to a more traditional growth in China of 6%, 7%, 8% GDP.

I would just add, Peter, I think in Europe and in Asia, we can continue to see a trend, an accelerating trend of interest and investment in energy efficiency, and so this growth in the construction insulation markets, we think, will continue at well above normalized or average levels.

Thank you.

Thank you. Your next question comes from the line of Ivan Marcuse, Keybanc. Please proceed.

Hi. Thanks for taking my questions. The first question, on your Performance segment, you had sales that dropped $7 million year-over-year but your EBITDA was up nicely, I think, $24 million, if I remember correctly. Was that more of a function that raw materials fell faster than pricing did? Or was there something that came out, or cost savings. Can you bridge how that contribution margin was so high?

Sure. Yes, you are right on. Costs -- raw material costs fell on a direct basis and we held prices pretty flat. We enjoyed an increased contribution margin.

Great. And then as a follow up to that, in for Performance, even with sort of the -- I guess you mentioned pressure and surfactants in the European region, with everything else going right, would you still expect to see year-over-year improvement in EBITDA margin in the third quarter? And going forward?

Yes. We believed that the run rate for the second quarter is sustainable at these $100 million quarter levels.

Okay. Great. And then my last question. For Europe and your Polyurethanes business, there has been a couple -- a few companies that have recently mentioned there has been a weakness in the Insulation business and specifically in Northern Europe. Are you seeing that, and is that incorporated into your outlook in Europe in regards to a flat European demand in polyurethanes? Thanks.

I think that we continue to see -- compared to the -- we continue to see things pretty flat in Europe on a construction basis. And I think that's probably going to continue. We will continue to see modest growth in the areas of insulation and construction materials. As I read recently this last week, as we look at the producer, excuse me, the purchasing managers index and so forth of Europe, I guess I have been pretty bearish on Europe in the past.

I'm not saying that I think Europe is going to go through the roof, but as I look at the overall trend in Europe, I am hopeful in the next couple of quarters here that we will start seeing gradual improvement that is taking place in Europe as you see a lot of pent up demand.

We believe that the market year-over-year was flat in Europe in MDI consumption. We were down double digits because of the force majeure. But we think the market generally was flat.

Great. Thanks a lot.

Thank you. Your next question comes from the line of Andy Cash, SunTrust. Please proceed.

Good morning. Staying with polyurethanes. You had overall flat volume. Could you break out rough terms in the second quarter or the first half? What was the year-over-year volume growth in the Americas versus ex-Americas? And then, in order to achieve similar EBITDA for this year versus last, what sort of volume do you expect in Americas and outside the US?

In the Americas in the second quarter, year-over-year we grew at roughly 11%.

Okay.

And we continue to see those sort of growth trends driven by construction and in the overall economy in the US. If you look at the first half versus first half last year, I think we are on track when you adjust for the force majeure in Europe. So the kind of growth rates we would expect would be similar to what we are experiencing now. I think we would hope to see Europe and Asia strengthen in the second half. But we can achieve these -- last year's profitability in MDI specifically, with these kinds of growth rates.

I will note that in the second half of the year last year, there was an industry outage in propylene oxide, MTBE, specifically in MTBE, that benefited us by $30 million in the third quarter last year. That comparison will be negative. But the core MDI business, we are on track to meet last year's profitability and a little bit more.

Okay. That's very helpful. Then just I'm assuming that raw materials in the second half will be a little bit of a help compared to the first. Is that a fair assessment in polyurethanes?

Yes.

Thank you.

Next question comes from the line of Frank Mitsch, Wells Fargo Securities.

I wanted to get a better understanding on the TiO2 side of things with respect to the comment that the fourth quarter will be quote seasonally adjusted normalized EBITDA. Just to make sure we are on the same page. You are talking something shy of that $50 million per quarter run rate, I would imagine, given the it is normally a little bit of a fall off. And to that end, as you are ending -- the industry is ending Q2 at a 60-day inventory level, which is above normal, and here we are at the end of the coating season. Just pick through some of the factors that gives you confidence in being able to hit that quasi above current run rate in the TiO2 space.

As we get to the fourth quarter, we said that we would be approaching or slightly below that run rate of annualized run rate of $200 million, which would say that the guidance that we are giving for the fourth quarter, and again, that's still a distance away, when you take the volatility of the TiO2 market, but we are saying that we believe that there will be quarterly improvement going into the third quarter and subsequently going into the fourth quarter, and the fourth quarter would be just under that $50 million run rate.

We base that on improving demand and on our ability to improve pricing, particularly outside of North America. We are not a major player in the North American markets. And I think that it's -- North America has got substantial pricing protection with the rest of the world where I think we have got a little more of an ability to adjust prices on a more timely basis.

All right. And I think you earlier mentioned that you are seeing benefit on the raw material side there, as well.

I would suspect it in the third and fourth quarter, we will see some gradual benefit in raw material. But the majority of our raw materials is ilmenite, and that's in the $200 to $230 per ton pricing, and you might see a bit of incremental improvement there, but it's not going to be substantial.

Frank, let me just add, of course, we have had a legacy or contract most of which expired at the end of last year that we have continued to enjoy the benefit of because ilmenite and sulfate slag prices have continued to fall. The benefit of those contracts or that legacy inventory is much smaller than it was. And so, moving into 2014 without the benefit of that ore, you are not going to see a big increase in ore prices for us.

That's helpful, Kimo. Coming back to slide 8, the waterfall slide, obviously you showed the year-over-year price decline, and much of that was TiO2 but you showed sequentially a $118 million negative impact from Q1. What is the major driver or drivers of that?

Well, we saw -- excuse me, $118 million on price, sequential. Is that what you are asking, Frank?

Yes. Correct. Yes.

It's -- you saw it in our MTBE business and of course that tracks crude oil and octane prices. So that's half of it. And we saw some decreases in our Performance Products businesses in terms of price.

All right. Great. But raw has dropped even more, so therefore you saw the benefit in the Performance Products. All right.

So in Performance Products, specifically, roughly $40 million decrease in price on an EBITDA terms, but our benefit was $65 million. On the direct cost.

Terrific. Thank you so much.

Thank you. The next question comes from the line of Laurence Alexander, Jefferies. Please proceed.

Good morning. This is actually Rob Walker on for Lawrence. I guess just on the cash flow, I'm having a hard time getting to the cash from operations. If I look at your net income, your D&A, your working capital, it still leaves about $180 million use for the first six months of the year. I understand there is some outages and so forth. Can you roughly break out that $180 million? And what are your expectations for the second half of the year for cash from operations?

Yes. We built some receivables. Inventory came down and payables, we lost some of our cash from payables. We expect the second half of the year to be positive cash flow from working capital. Again, specifically on cash flow from operations, what was your question?

I guess even if you factor in the use of from working capital the first half of the year, there is still a large use of cash from about $180 million to get to the negative two from the six months. So, what was that and what are your expectations for cash from operations for 2013.

We have -- of course, we're using cash for restructuring. We used roughly in the second quarter $30 million of cash for restructuring, and we have been funding our pension over and above our expense, and that's roughly $40 million. So, that's probably the lion's share of what you are looking at.

Great. Do you expect that in the back half of the year, we should see the more of net income being converted to cash from ops?

Yes, absolutely. Again, first half of the year from a working capital standpoint is always a big use, and we usually enjoy pretty good cash flow from working capital in the second half of the year.

Okay. Thanks. Just a quick question on maleic anhydride. Can you talk about your ability to hold pricing, given falling butane prices?

Well, butane obviously is just a component of that maleic pricing. I think the more important with the maleic profitability is going to be around overall demand and the overall basket of raw materials. Many of our competitors are using other raw materials other than butane, specifically benzene. So there is also a difference there, as well. But, yes, I believe that what we certainly will be able to hold our margins in maleic.

Great. Thank you.

Thank you. Our next question comes from the line of Mike Ritzenthaler, Piper Jaffray. Please proceed.

On Oxid, you've shown the benefits of focusing on specialization on the isocyanate side, and as it sounds like from Oxid, it's a relatively small acquisition, but the opportunity seems like it's in the technology leverage. I was curious about your view on the potential for margin lift in that segment when the polyol side of the polyurethane is specialized as well as the isocyanate.

I believe that globally, we intend to take this technology, we'll first capitalize on the acquisition itself and make sure that we've fully integrated it to customers, and the overhead and so forth. And this is certainly a technology and know how that we want to take globally. This is an end of our Polyurethanes business that we continue to move downstream. We also continue to move horizontally and using -- utilizing our own propylene oxide to develop propylene, or polyol production in consumption and internally, both in Asia, Europe, and in North America.

So, as we look at our improvements that we have seen in MDI, year-over-year, a nice part of that is the acquisitions not only that we have seen, or will be, from the acquisition of Oxid but also the acquisitions we've had in Turkey and Russia, Systems House in Germany, an acquisition in Japan. These have all contributed to, again, diversifying and moving further downstream our MDI strategy, margins, and pricing. And I think longer term, this is certainly going to give us better stability. Yes, we do intend to take this acquisition to leverage it on a global basis.

We have had and have great operations in polyether polyals. This is -- we've never been basic in polyester polyols that go into spray-on foam and insulation. And so, this is a great acquisition for us. It gives us that technology, as Peter said.

Okay. That's helpful to put that in context. And then I guess I am going to ask the China question from a little bit different angle. On the potential for licensing some of your technology over there, is there an impact on the NPV on some of the royalty streams that you've already licensed over there? And has it impacted the conversation around other licensing opportunities?

You are talking in context of the slowing growth?

Yes, exactly.

No. I have not seen anything that would -- that has materially moved any of our discussions or licensing payments.

Okay, that's helpful. Thanks, guys.

Thank you. Your next question comes from the line of Hassan Ahmed, Alembic Global. Please proceed.

Good morning, Peter. One of the things that you talked about as you were talking about considering any transaction within Pigments was you wanted it to be net and accretive, which, obviously, is completely understandable. If one were to think about the longer downside of things, you know, let's say if you were to take a look at the 5 or 10 year history of TiO2 within your broader portfolio, what the returns looked like there and what the returns historically over, call it 5 to 10 years, have looked like without TiO2 in the mix? Would the overall Company returns be higher or lower?

And obviously the only reason I'm asking this question is just in terms of considering any transaction, I would imagine, that you would be considering such things.

Let me just comment on the macro side of that question and I am going to ask Kimo to comment on some of the percentages of make up of earnings and so forth. We have talked about in TiO2 in the past about our wanting to be part of a consolidation play or something that would create value. I would remind you that we have also mentioned about the opportunity to give us optionality in TiO2, and this may include something that would be the opportunity to take our TiO2 business and perhaps merge it, sell it, or combine it with another and spin it.

You know, there is -- I think when we talk about TiO2 and its optionality, I don't want to see us get pigeonholed into there's only one or two options here. I really do think that there are multiple options here, and including the idea of taking a group of assets, a combination and looking at that as outside of our portfolio, but continuing to benefit from that.

Fair enough.

As it relates to return on capital, at roughly $150 million of EBITDA the business generates above its cost to capital. It's probably around 13%. In our forecasted -- in our forecast of a normalized EBITDA of $200 million that generates kind of a 16% return on assets. And so it is accretive. It is a positive generator of value relative to the capital we've employed. So again, we think there is a step change here with the ore situation and our ability to consume sulfate based ores, it's going to increase that normalized level and of course the return.

Very good. And follow-up again sticking to TiO2, as I take a look at your slides, the quarter-over-quarter volume improvement was 4% within Pigments. Now if I compare that to say DuPont, that number was closer to 18%. So just trying to figure out what the reason was behind such a delta. Was it maybe in the quarter you had much stronger chloride based sales such as sulfate, or anything to that effect?

We have -- over 50% of our sales are in Europe and obviously European growth rates were a lot lower than North American growth rates.

So that was the main cause for the drag? Well, not a drag, but sort of delta.

Our view of year-over-year growth rates was roughly in line with what we grew. Year-over-year we were at 9% and we think global growth rates were really, really close to that. Sequentially we think the industry grew at about 10%. We were a little less than that and that -- well, we were about, what, 4%, 5%, and that's largely due to our European mix.

Very good. Thanks so much.

Thank you. Your next question comes from the line of John Roberts, UBS. Please proceed.

Good morning, guys. Do you think down the road it might make sense at some point to combine your Advanced Materials and Performance Product segments into one and take out another layer of cost? It just strikes me that Advanced Materials isn't all that much more advanced than the Performance Products in terms of the financials. It's just one big portfolio that maybe you might be able to rationalize a little better and take more costs out if it were combined.

I -- in the short term, I certainly don't see that happening. I look at the chemistry, the manufacturing, and the end-use applications between our performance products and our advanced materials. I don't see a great deal of synergies. I think where we see overlap in these businesses in the areas of procurement and SG&A, in the areas of environmental health and safety, and so forth we're certainly capitalizing on those things. But if we were to combine those businesses, I don't see really any cost savings that would come from that. The reason that we have the businesses broken out is to be able to maximize our focus on manufacturing costs and managing that supply chain going all the way from raw materials all the way to the customer. And if we have commonality, we will combine.

But as we look on the a broad sense to the applications where we are supplying in advanced materials and performance products, I think they are distinct. Where we have overlap, for instance, in wind, where we are supplying both an epoxy product and an amines hardener in the production of wind blades, we are working internally to take advantage of those sort of opportunities.

But I think as we look at a broad sense, and again, I don't mean to expand the answer here, but I hope that people on this call get a sense for the magnitude of the synergies that we are focused on company-wide. Those -- the magnitude of pushing $0.25 billion -- and we are looking at a number of positions of full time and contractor positions over the course of last couple of quarters and over the course of the next few quarters. 1,700 positions that we reduced in the Company, as we continue to wring out these synergies and the market improvements that will continue to see that we have seen so far this year, we will continue to see throughout the year and we will see going into next year.

And certainly if we see opportunities of combining divisions, we will do those. But right now, our focus on the divisions is managing that supply chain as effectively and as efficiently as we can and I think we are benefiting from that structure.

The only thing I would add is the Advanced Materials business, for the most part, is a Formulation business and Performance Products is a component business. So if you look at Jurong Island and look at the amines we produce there, they are components. You go to Panyu, China and it's a Formulation business, where you are mixing all sorts of different things together to make a more custom product. We think fundamentally the manufacturing footprint is very different.

And do you have an intermediate term view on butane prices. There is a debate whether they are more linked to the lighter NGLs or will go back to being more net backed from oil-based raw material pricing.

I think if I had an accurate view on that, I would probably be more into trading. I do think that as we look forward, there will be more C4s or butane products that will be coming off of the shale gas production. A lot of that shale gas that is being produced is a heavier and wetter gas that does contain butane. And I believe that butane fundamentally going forward will be an advantaged raw material in North America and that it will lean a bit more towards the natural gas area of pricing rather than its traditional ratio to crude oil.

I think that you will see it advantaged pricing, particularly in the summer months, when it's coming out of the gasoline pool and it continues to be supplied from the natural gas production. And you will see prices probably increase a bit throughout the winter months. But I think in North America, butane -- in North America, particularly, butane is going to be an attractive raw material relative to crude oil and its ratio to crude oil, I think that it will continue to improve going forward.

Thank you.

Julie Ann, this is Kurt Ogden here. I believe we have time for one more question.

Thank you. Your next question comes from the line of Roger Spitz, Bank of America. Please proceed.

Hi. Good morning. Your basic epoxy resins, is that EBITDA in Q2 still negative and did it decline or improve versus Q1?

It's negative, and it's in line with the loss in EBITDA terms with the first quarter.

Can you give the size of the negativeness?

It's roughly $5 million loss in the quarter.

Perfect and last, excluding the Rotterdam MDI force majeure, would MDI contribution margins have strengthened year-over-year?

Yes. Yes, it would have and I think that we reported -- I know your question is around contribution margin, but as look at EBITDA, we reported a flat EBITDA, and when you take out the impact of the Rotterdam force majeure, I think that we would have seen, particularly in MDI, a nice improvement in earnings during time period. About $25 million higher.

Excellent. Thank you very much.

Thank you. Operator, I think that will conclude the time that we have this morning.

Thank you. I would like to turn the call over to Kurt Ogden for closing remarks.

We want to thank everyone for joining us on the call today. If there are any additional follow-up questions, feel free to reach out to the IR team. Thanks again for joining us.

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