Huntsman Corp (HUN) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the quarter three 2013 Huntsman Corporation earnings conference call. My name is Matthew 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 this conference.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes. And now I would like to turn the call over to Mr. Kurt Ogden, who is Vice President of Investor Relations. Please proceed, Sir.

Thank you, Matthew and good morning everyone. Welcome to our third-quarter earnings call. We are dialing in from a remote location and so hopefully the sound quality is okay. 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 open, we released our earnings for the third 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 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 third quarter 2013 revenue of $2.842 billion, adjusted EBITDA of $376 million and adjusted earnings per share up $0.54 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 joining us.

Let's turn to slide 3. Adjusted EBITDA for our Polyethylene division in the third quarter of 2013 was $215 million. This compares favorably to the prior years adjusted EBITDA of $243 million considering the extended force majeure as European MDI facilities which had a negative impact of approximately $10 million in the third quarter of 2013. And the approximate $30 million of nonrecurring PO/MTBE benefit from the industry supply outages in the third quarter of 2012 that we identified last year and last quarter. After these unusual events our earnings this quarter would have reflected an increase of approximately $12 million compared to the prior-year.

On August 29, 2013, we announced the completion of the acquisition of Oxid a privately held manufacturer and marketer of specialty urethane polyols. We are very excited about this business and expect it contribute approximately $15 million to $20 million of annual adjusted EBITDA. Excluding the impact of the force majeure outage our MDI volumes grew at approximately 9% globally compared with the prior-year. Within the quarter we saw double-digit growth in two of our largest end-markets insulation and composite-wood products.

We expect continued strong demand in the Americas and Asia with Europe showing modest growth driven by a recovery in our insulation end-market. We combined 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 coproduct of our manufacturing process. PO/MTBE earnings in the fourth quarter decreased $30 million compared to the prior-year, primarily due to the approximate $30 million of non-recurring benefit from industry supply outages in the third quarter 2012. Recently, we have seen a moderation in MTBE margins.

Butane prices which are a key raw material have increased since we approach the winter driving season in North America. In addition, the price of premium unleaded gasoline, to which the value of MTBE have a strong correlation, have decreased notably. At present, relative to last year's fourth quarter, we are seeing a margin squeeze of about $0.30 per gallon up 65 million gallons we expect to sell in the fourth quarter of this year.

Let's turn to slide 4, in the third quarter our Performance Products position earned $122 million of adjusted EBITDA, an increase of $14 million compared to the prior year period of $109 million. Following the successful first quarter maintenance shutdown of our olefins and ethylene oxide facility in Port Neches, Texas, we are seeing improved production yields which together with lower ethane, have lowered our manufacturing costs. During the quarter we saw strong demand in Europe and North America for maleic anhydride. We believe our butane-based process is an economically advantage compared to others that consume benzene. In addition, we believe we benefit due to some industry outages that occurred during the quarter.

Our amines business continues to recover. We saw an improvement in sales volumes and margins in the third quarter of this year. We expect this trend to continue. We have seen increased margin pressure on the European surfactant business that served the online personal care markets. On October 1, we announced plans to restructure this business and focus on more differentiated chemistry. We expect to be completed with these initiatives by the end of 2014 with an annual EBITDA improvement of approximately $20 million.

Let's turn to slide 5. Adjusted EBITDA for the third quarter, our advanced materials division with $39 million, an improvement of $8 million compared to the prior year $31 million, and an improvement of $7 million compared to the prior quarter of $32 million. Earlier this year we announced restructuring efforts within this business to improve efficiency and increase our global competitiveness. We are now seeing the benefit of these efforts.

Our results this quarter, and the first time in multiple years, where we've seen back-to-back sequentially improving quarterly earnings. I am very encouraged by the momentum within this business particularly when I consider the majority of our estimated $70 million savings program are yet to be realized. We are preferentially walking away from certain low-margin business most noticeably in the basic liquid resin markets. Where conditions to continue to be oversupplied and weak.

In response and in order to rebalance our internal material needs we are closing our Spanish and Indian basic liquid resin-producing facilities by the end of this year. Although our sales volumes decreased 15% compared to the prior year, the majority of this decrease was attributed to basic liquid resin which decreased 26%. Conversely, volumes have been growing at double-digit rate in our aerospace business and although it comprises only 10% of our total revenue, it has our highest margin and make up approximately 20% of our earnings.

Let's turn to slide 6. Our Textile Effects division reported adjusted EBITDA of $8 million in the third quarter, an improvement of $17 million compared to the prior year's loss of $9 million. Our restructuring efforts in this division have been focused on improving our sales profile to market share gains and improving margins as well as lowering our fixed cost. During the quarter our sales volume [increased] 6% compared to the prior-year, driven in large part by a bulk average growth in key countries that we have been focused on within Asia and Eastern Europe. More than half of our sales are generated in Asia where we saw double-digit growth compared to the prior year.

Our fifth cost decreased compared to the prior years as a result of our restructuring efforts that will be completed by the end of this year. We successfully finished production in our facility in Switzerland during the third quarter while maintaining excellent environmental and safety performance throughout the transition phase. We will de-commission the facility in the fourth quarter. We expect to capture approximately $25 million of incremental annual run rate savings next year.

Let's move on to slide 7. Our Pigments Division included $36 million of adjusted EBITDA in the third quarter. Share volumes improved 20% compared to the prior year with demand improved in all regions. Compared to the prior quarter, our sales volumes decreased as we experience production issues resulting from the ramp-up of production rates to meet current demand. We estimate the EBITDA impact on the third quarter of this year was approximately $4 million.

We believe our restructuring efforts known as Project Transform are having a positive impact on our sales portfolio and cost structure. We have successfully contained inflationary pressure on our fixed costs which were flat during the quarter compared to the prior-year. In addition, our ability to use low-cost sea salt ore such as sulfate slag and ilmenite in approximately 75% of our production capacity provide a structural cost advantage and the cost of higher quality ores remains elevated. We expect this advantage to remain for several years.

Our inventory base was approximately 45 days at the end of the quarter which is normal for this time of year. We believe the end of three was closer to 65 days at the end of the quarter. On September 17, we announced an agreement with Rockwood holdings to acquire their Performance Additives and Titanium Dioxide businesses for $1.1 billion in cash. With the exception unfunded pension liabilities estimated $225 million. We expect to close on the transaction in the first half of 2014. With improving market conditions in performance energies in excess of $130 million we believe this acquisition will add significant shareholder value.

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

Thank you Peter. Let's go to slide 8. In the third quarter of 2013 our adjusted EBITDA increased $35 million to $376 million from $411 million in the prior year. We experienced two meaningful headwinds in the quarter that secure the tremendous improvements in our underlying business.

First, our Pigments Division which has been going through an industry-wide restocking cycle decreased [to] $39 million compared to the prior year. This was most evident in the decrease of our average selling price when pigments decreased 24% in local currency terms. It's worth knowing however that we have now seen sequential quarterly stabilization in our Pigment Division selling prices. Second, within our Polyurethane Division last year we enjoyed the benefits of approximately $30 million of PO/MTBE earnings that were attributable to non-recurring industry supply outages.

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. These headwinds were partially offset by an increase in sales volumes and lower fixed costs of $37 million as a result of our restructuring efforts. Compared to the prior quarter, our adjusted EBITDA increased $72 million from $304 million. As noted in our press releases morning all of our divisions improved compared to the prior year. Most of the increase was attributable to lower raw material costs as direct costs improved $57 million. Continued sequential restructuring benefits of $13 million in lower fixed costs as well as improved sales volumes also lifted our earnings.

Slide 9. Our year-over-year consolidated sales revenue for the third quarter increased 4%. This was primarily due to an improvement in our sales volumes of 7% partially offset by a decrease in average selling prices of 3%. Regionally, our Rest of World category which makes up 20% of our total revenue and is primarily comprised of Latin America, Middle East and Africa saw sales revenue increase of 14% despite the fact that Brazil was down 6%. Asia-Pacific and Europe each grew 3%, partially offset by a 1% increase in North America. The decrease in North America was primarily attributable to lower PO/MTBE selling prices where last year's price was unusually high as a result of industry supply outages.

Our Polyurethane's business is our largest and made up 45% of total revenue in the third quarter. MDI revenue increased 8% and more than offset lower PO/MTBE prices. Performance Products and Textile Effects both saw attractive growth whereas we preferentially walked away from low-margin business in Advance Materials and Pigments is going through a industry destocking cycle. Compared to the prior quarter, sales revenue were flat. An increased average selling prices were offset by sales mixed effect. Sales revenue was flat to up in our large divisions, Polyurethane and Performance Products which represent more than 70% of our total revenue.

Let's go to slide 10. We spent $114 million on capital expenditures in the third quarter of 2013 and $295 million in the 9 months end of September 30. In 2013, we expect to spend approximately $450 million on capital expenditures which approximates our annual depreciation and amortization. On average our annual maintenance capital expenditures are approximately $150 million. However, this year and next we expect it to be between $175 million and $200 million as we update process safety systems in our largest facilities. In our review of discretionary capital expenditures we look for projects with un-leveraged internal rate of returns in excess of 20%. We summarized for you on this slide is some of the projects that are underway and we have been investing in.

In Polyurethanes we have been investing in an MDI expansion in the United States. And in Europe we have increased our capacity to further derivatize the MDI molecule downstream. We have also leveraged our PO/MTBE expertise and technology and partnered with Sinopec to build a joint venture PO/MTBE facility in China. One of the largest projects we have going on right now is an expansion of our ethylene oxide capacity in the United States which will allow us to maximize underutilized ethylene oxide derivative capacity existing already at Fort Neches, Texas plant.

Within our Performance Products division we also plan on adding additional polyetheramine capacity in Singapore to meet growing demand in the Asian region. Within Advanced Materials we are expanding our ability to produce multi-functional resins in the United States. These high-performance specialty resins are used in composite materials in the aerospace and other high-value markets. Our capacity will ramp up with increased demand for these strong lightweight materials.

In our Textile Effects business we have migrated our production out of Europe into Asia. We are expanding our production capabilities in Thailand to meet this shift in regional production. Large projects within our Pigments Business our focused on improving our manufacturing and production efficiency. In plants we are using byproduct from the manufacturing process to convert what would otherwise be wasted magnesium sulfate and sold it the fertilizer market. In Italy, we are increasing our ability to consume low-cost ilmenite ores. Combined we expect these projects to have an approximate $190 million EBITDA impact.

Let's turn to slide 11. Our adjusted effective income tax rate for the third quarter this year was 39%. During the quarter, we experienced higher earnings in the United States and losses in certain European countries where we don't enjoy the benefit of tax valuation allowances. We expect our fourth-quarter and full-year tax rate to be approximately 36%. We expect our long term effective income tax rate to be approximately 30% to 35%. At the end of the quarter we have a little more than $1 billion in cash and unused borrowing capacity.

We have made meaningful improvements in our working capital investment. During the quarter our primary working capital decreased providing a source of $121 million in cash. We expect the full-year 2013 primary working capital to be a cash flow positive. As it relates to the pending acquisition of Performance Additives in Kiev, the true business of Rockwood which was announced on September 17, we have been making good progress in a number of areas over the past 6 weeks.

This includes the following - we have secured certain amendments to our senior-secured credit facilities and have successfully completed syndication of a new $1.2 billion, 7-year term loan and $200 million increase in our revolver, that once funded will be used to finance the cash purchase price of $1.1 billion. S&P and Moody's have concluded their review of the acquisition on Huntsman's credit profile and have confirmed Huntsman's corporate credit rating of the existing BB and Ba3 levels respectively. We are fully engaged with competition law regulators in both the United States and EU as we begin the process of reviewing proposed combinations.

We have begun detailing -- detailed planning around the transition of the business from Rockwood ownership to Huntsman ownership with the goal to accomplish this as smoothly and efficiently as possible in order to put Huntsman in a position to capture the synergies that have been identified. We are committed to closing the transaction with Rockwood as soon as possible. However the exact timing is somewhat uncertain given the nature of the regulatory approval process. We expect to close on the transaction sometime in the first half of 2014. With that we will turn it back over to Peter for some concluding remarks.

Thank you, Kimo. I believe that the underlying quality of earnings in the third quarter were exceptionally strong. A year ago, at this time, our Textile Effects position loss $9 million of EBITDA. This past quarter, thanks to lower costs and stronger sales we improved EBITDA by $17 million. Our Advanced Materials business has seen continued downward pressure on its commodity product. Yet we saw a year-over-year EBITDA improvement of $8 million. As we have cut costs and push downstream formulated and specialty systems.

Our Performance Products division had the strongest quarter in it's history earning $122 million of EBITDA. While we are seeing very strongly results in our maleic anhydride business, I still see plenty of upside, as the means continue to improve. This past month we broke ground on our ethylene oxide expansion which will make our Port Neches, Texas, facility the largest North American ethylene oxide facility allowing plenty of growth in years to come.

With our European MDI force majeure behind us, we continue to see strong growth and margins in our MDI business. In fact, the result of our combined non-Pigment Divisions are as strong as they've ever been. Having said that, we still have plenty of opportunity to improve our earnings even in the sluggish global economy. While we've cut over $100 million in costs by the end of the next year, we will have off an additional $140 million in EBITDA as a result of our restructuring -- ongoing restructuring efforts. We continue to see our Pigments demand improve, industry conditions continue to get better and I believe we are positioned to see strengthening market conditions.

During the third quarter, we now see acquisition of Rockwood Performance Additives and Titanium Dioxide business. Having had a chance to visit additional site and meet with more associates I believe we are buying this business at the right time. I further believe that the $130 million in synergies that will come from combining our businesses will make a strong value-creating company.

Looking ahead, we expect to see the usual fourth-quarter seasonal slowdown typically impact our EBITDA by approximately 25% in the fourth quarter compared to the third. That being said, we continue to keep better than GDP growth in most major markets around the world and see continued opportunity to further create shareholder value. With that I will turn the call back over to Kurt for questions and answers.

Thank you Peter. Matthew, that concludes our prepared remarks. Will you explain the procedure for questions and answers and then open the lines?

Thank you Chris.

(Operator Instructions) Your first question comes from the line of Prashant Juvekar of Citi. Please go ahead.

Good morning. How much inventories do you have, old inventory - under old contracts? And is there an under the plunge of old contract that would expire at the end of 2013?

P.J., the legacy old contracts really expired at the end of 2012 and really carried over with inventory have, for the most part, all been consumed. So, really they were consumed in the third quarter. I think you will see in the fourth quarter our average ore costs won't move very much simply because ore prices have dropped. Pretty close to where those legacy ore prices were over-priced at, so there won't be much of a change in terms of our cost structure.

Okay, thank you. Secondly on MDI, can you just review the supply-demand balance and tell us what your view is on this India expansion and China? Thank you.

We're a bit premature to announce anything in China. I think we continue to make meaningful progress in the approval process. But I do not want to get ahead of Chinese authorities. And when we expect to come out there.

But we can certainly -- are expecting to have a new facility online sometime by the end of 2017. This is going to put some strain on our overall global demand picture. In that, we are today, essentially sold out. I think that we do have an opportunity to increase prices in the coming year and increase - bottom slide perhaps our less profitable customers and products and upgrades.

The recent maintenance work that we did in Rosenberg added the ability to slip more MDI and upgrade the quality of the MDI we are producing. Going forward I would expect MDI as we look into 2014 to continue to tighten. I think that industry rates and today are around 90%. I will say that it might be a little less than that in Europe. It would certainly be tighter than that in Asia, at least [well] and in North America.

As we go forward, I want to emphasize, we are putting as much emphasis on the margin for time in our ability to take that MDI further downstream and create more value on a part-time basis. Because I think that as we look at the out years of 2015, 2016 going into 2017 our fuller incapacity starts out. We're going to have a golden opportunity to increase the value of the tonnage we have rather than adding a lot of new costs.

Thank you.

Thank you P.J.

Thank you for your question. Your next question comes from Robert Koort of Goldman Sachs. Please proceed.

Thank you very much. Good morning.

If you could give us some data that might help us figure out the progression of pigment earnings as we go through 2014? Specifically, can you give us some sense of how variable operating rates were through 2013, through the quarters of 2013?

Secondly, can you give us some sense on what you'd expect for spreads on Ti02? I recognize higher rates would give you better fixed cost but what would be your expectation on price versus cost looking into 2014?

And then how quickly do ore contracts move relative to the past few years? Could we expect a coincidence effort by your suppliers to gain any price that you might see in the pigment market?

I think that the majority of our pigments, I'll start with the back end of that question. And maybe let Kimo answer on the front end of the question. I think that the ore contract, we envision ilmenite ore and ilmenite slag, and sulfate slag to remain pretty stable in pricing, if not over the course of the next quarter to have a bit of downward pressure on the pricing.

Conversely in retile, in the higher end ore, I would imagine those prices will probably stay pretty constant, if not have upward pressure on some of those ores. I don't foresee as much volatility in our ore prices over the next two years as we have seen in the last few years.

When you think of that, the progression of our own utilization rates, I'm sure they would reflect the rest of the industry. We really began the 2012 calendar year operating in the high 80% range. And really in the second half of the year that dropped to mid- to low-70% utilization rates.

The first half of 2013 we ramped up to mid-80% range and I think in the third quarter 2013 I would say our utilization rates are in the high 80%s between 85% and 90%. So you can see the progression of inventory restocking as Peter mentioned earlier. We actually brought our inventory down so far that we missed some sales in the third quarter with roughly 42 days of inventory. That is good news and bad news, right?

We have a pretty good inventory situation. We just need to ramp up our plants - a little harder.

And just to qualify, clarify, did you suggest in the fourth quarter there was a year-on-year NTB margin compression hit of around $20 million? Is that what I heard?

From what we're seeing today Bob, I think that is spot on. We may have missed one of your questions there, Bob. Is there one we did not get to?

I think that was it. Only just asking what you might expect on the price cost spread as you go through 2014 on Ti02? In other words, there seems to be plenty of price initiatives, I think you answered that your cost side would be pretty static, so maybe you didn't answer it.

I think our costs, we would expect our cost to be pretty stagnant. We expect our operating rates to be tightening and we are very aggressively - we have publicly announced an October-to-January price increase and we are going to very aggressively pursue these increases. I would certainly expect by the end of next year that the market should be tight enough that we would be able to get some price increases throughout the year.

Great, thank you.

Thanks.

Thank you for your question. Your next question comes from the line of Kevin McCarthy of Merrill Lynch. Please proceed.

Yes, good morning. Peter, can you comment on the outlook for epoxy resins? You mentioned you're rationalizing capacity in Spain and India I think it was.

One of your competitors looks like they are exploring strategic options for the business. How do you see the next year or two unfolding in terms of utilization rates and when do we start to turn the corner on volumes?

I guess I am not overly optimistic on the DOR, the commodity bulk end of the business. I'm going to hope it would have turned around long before now because we have just seen so much capacity in the market. That is why we are taking steps to rationalize our own capacity. We have been successful over this past year of shutting capacity down in Spain and in India.

We continue to look at the competitiveness of our other capacity that we operate internally. So, we either want to be in a position where we are supplying ourselves or that we're able to purchase.

And in some case in Europe I believe that their economics are such that we are able to manufacture our own epoxy raw materials to deal with, supply our own needs. And in Asia, we actually can produce, we believe we can actually buy, excuse me, epoxy is cheaper than we can produce. And in North America, we are going to that evaluation right now.

I think longer term, our focus is better spent to focus not on the upstream side of the epoxies but the downstream and the formulations, the systems, looking at the fast-growing advantages of growth that we see in the epoxy business. So when we talk about the epoxy business, I know that that's a phrase that gets thrown around a lot in our industry. We've got some competitors that talk their epoxy business and so forth.

We are actually getting out of as much of the commodity side as we can. Moving our focus and moving our cost structure and our alignment for shorter downstream applications where we continue to see significant growth and opportunity for margin expansion.

Kevin, the capacity we've shutdown represents about one third of our total basic liquid epoxy resin global.

That is helpful. Shifting gears to Performance Products.

Can you give us a sense of how the incremental restructuring benefits will flow through over the next several quarters? I think you mentioned $20 million of EBITDA. What is the cadence there look like and what are the associated cash costs?

Because we're either divesting or shutting down two facilities and parts of two others, you really get the benefit of all of it in one shot. We think that run rate we'll enjoy at the end of 2014.

Okay. Final question for Kimo if I may. What is your expected cash contribution to the pension plan looking forward to 2014?

Sure. We will -- in fact just about what we did last year and this year is pretty consistent -- about $150 million in cash. That is pretty consistent over those three years -- roughly $150 million. That includes taxes and expense and over and above expensing the cash costing.

Thank you very much.

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

Good morning Peter. You have identified a series of growth projects kicking in 2014. And then on top of that obviously there should be some accretion from the back of a variety of cost cutting measures.

My question was more around raw materials prices. Obviously butane prices have come down a fair bit as has benzene. How should we be thinking about potential tailwinds from that as we look toward 2014?

I think that you make a good point here. I think that when we look at the growth prospect, kind of where we're going Hassan,

I think that if you look at slide number 10, we show, as you pointed out, $190 million in the next few years is a relatively short period of time. $190 million of annualized EBITDA coming from this. This is in addition to the $140 million of further internal cost-cutting that we have that should be realized by the end of next year. And that's in addition to what we believe will be an extra $130 million of what we will be able to get out from the Rockwood acquisition.

That's over $450 million of improvement in EBITDA that I will say falls under the category of self-help and things that we can control. I don't know if we put it as much emphasis on that as we should. I think if anything comes from this call, it would be that in a sluggish global economy, we see real tremendous opportunities.

On the other hand, the impact of raw material prices (Inaudible) look into two or three buckets of raw material. If we could block raw materials that we buy for natural gas-related products. That would be methane, ethane, butane and the corollary natural gas that goes with that, that we burn our third generation systems, our ethylene production and so forth.

If we look at that, I think that when we look at the quote, North American shale gas advantage, I believe that that's probably going to release somewhere between three dollars and four dollars for ending PTU range for the foreseeable future.

As we look at the other bucket, that I would say heavier raw materials, that would be benzene prices and so forth, I am not sure that I -- you know that's going to be volatile. But I don't see that price really changing a great deal outside of the bandwidth it's been over the last two years or so.

And then the third bucket that I see of major raw materials that we are purchasing would be pigments that we have seen over the last couple of years. I have just said I believe given that 75% of our pigment acquisitions, excuse me, our ore acquisitions are ilmenite or sulfate slag. I believe that those prices are going to be relatively stable over the course of the next 2 years to 3 years.

I believe that we have a fairly stable raw material environment going forward. Now, I say that as -- something may happen in the Middle East or something obviously -- but as far as the macroeconomic issue I think we have an excellent opportunity to take advantage of a relatively stable US gas prices, stable ore prices and relatively stable heavier liquid prices which make up the vast majority of our raw materials. And really take advantage of this $450 million of self-help expansion projects and synergy projects that we have coming on over the next 18 months or so.

I hope that answers your question.

That does indeed. Just a follow-up on the polyurethane side of things Peter.

Nice sequential pick up in EBITDA margins of 16.5%. You've obviously talked about MDI tightening through the course of 2014. Could you just give us some sort of sense of how much more upside there possibly could be in polyurethane EBITDA margins or MDI EBITDA margins and 90%-plus operating environment?

I am always reluctant to try and call a peak or a valley. I would say that if we go back to the last peak of economics that we saw, the last margins that we saw in the Urethanes, I think we were earning about $700 millionish as an annualized number. If I take that mark and I put it over the $740 million in 2005. And if I look at that same margin, that 22%, EBITDA margin, over the volumes we have today, that's a number that would be exceeding over $1 billion just in Europe.

So, I see substantial upside from where we are today. Now, are we going to get that and so forth? I'd sure like to see us hit that but I think it is going to be more important -- it's good to look at over the next five years, what's really going to be important I think is creating as much value on a per pound basis, moving our MDI further downstream and making our MDI business as truly a core business.

We have got to take some of the volatility out of it that we have seen in the last couple of years and I think the best way that we can do that is to further move downstream. Move into more specialty and intermediate products and get an application for what we're going to see. Higher margins, less volatility. And frankly, less competition.

Very helpful Peter. Thank you very much.

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

Good morning. You talked quite a bit last quarter about MDI markets in China maybe looking a little softer. I know you touched on this in an earlier question.

It sounds like your view on the fundamentals in China for MDI have changed. Could you elaborate on that a little bit? And perhaps which end markets have changed your outlook the most?

When we look at Asia, I will take a shot at this, we continue to see a really strong automotive market. And of course, the insulation side of growth, we are seeing continued strong markets there. Asia, it never gets soft but there was a pause there last quarter where we looked at it and wondered if they are going to see a general slowdown. As we came up the end of the quarter, it felt very strong.

Right.

We have seen in the Asian market, about a 6% year-over-year increase. I would just note that last year at this time we had exceptionally strong MDI markets in Asia. One of our largest competitors there had some manufacturing problems and their plant was out. We were selling everything we could a year ago that we could get our hands on, everything that we could resell, everything that we could move in from the US.

A year ago markets were extremely tight in Asia. And so growing at 6% over (inaudible) a year ago I think that was an unusually strong market a year ago. While 6% may not be the 9% or 10% growth compared to where we were last year, I have more hopes today of Asian, particularly Chinese MDI demand than I would have been a quarter ago.

Yes, absolutely, thanks for that. And we don't spend a lot of time discussing Textile Effects but volume growth has been pretty tremendous even on difficult comparables. This quarter you're able to follow with a little pricing.

Do you see that top line growth leveling off in 2014 or is there still more runway? And I guess, as a follow-up to that could you discuss how you see that segment fitting in the portfolio long-term?

I see it the segment fitting into the broader portfolio. In that when we look at the return on assets which is very important to us, this camp should be a business that has a fifteen, mid-teen, sort of return on asset, and a 10% of -- the EBITDA. Given when we bought the business and how much cash we have tied up for the business. That's going to be a significant value-creator.

I believe that by the time we are done with our cost-cutting. I believe that the business going forward does have room for improvement. We have excess capacity. We have moved in expanded and made more efficient our production facilities in Thailand, in India, in Mexico. And we look at that business going forward with many of our competitors having gone through recent sales, from a sales process or to some sort of -- something that we can give our customers less than full confidence in the business.

We have actually been able to take market share and increase margins at the same time. I think that we are one of the few that are investing in real substative R&D. When we talk about these mills in Bangladesh and some of the environmental and psychological problems, safety issues and so forth in the textile industry, our products provide a great deal of safety. They provide a new formulation.

I think we're going to continue to see stronger than GDP and stronger than textile growth in our Textile Effects division. When I read that paragraph this morning in the script about making $8 million, I almost paused and wanted to read it again (laughter) (multiple speakers). We're talking a year or two this is [producing] and [eroding] $70 million not too long ago. I think we are still a ways away from being done with our restructuring.

I see upside to the business. I see upside with new products. I think that that business can and will become a real contributor, creating value in this company.

Interesting, thanks guys.

Thanks. I think at the beginning of this year you said we would be profitable this year in Textile Effects. I think that you said you would stake my job on that.

Thank you. Your next question comes from the line of Laurence Alexander. Please proceed.

Good morning this is Rob Walker on for Lawrence.

Hi Rob.

Hi guys. Thank you for the gross projects slide. It was very helpful. Should we read into the fact that your MDI expansion in China is not on the list?

No we think that we want to make sure we have full approval from the Chinese authorities. And I have all of the respect for that process. And one thing that probably wouldn't endear us all that much to the Chinese authorities would be for us to try to presume and assume that we know what they are going to be doing.

So we will wait for them to give us the green light. We believe we are making good progress here. And that the facility that we desperately need. And I'm confident that we will be getting it.

If you're modeling that one, it is in investment of about $100 million in roughly a $750 million, $800 million facility. It's not on the course financing. Our commitment, our cash investment over 2.5 years, 3 years will be roughly $100 million. And it is a project that would be done somewhere near the end of 2017. It is a ways out there.

Okay thanks. I guess on the bridge as you think about for Performance Products, you have the outage this year. You are seeing improvement in the means market. Your restructuring surfactants. Can you help us think about where profits or margins can get to next year?

We haven't been giving guidance on the division by division basis. I think that if we look at next year, Malay can be very strong, I am not sure how much stronger that will go. I think it is well-positioned to deal with, to continue to give material benefit to the position.

I think that by next year, by the end of next year we will see one way or the other, through a closure or divestiture, we will see improvements in our European surfactant business. I believe again, given the increase in demand and the increase in capacity utilization that our means position will continue to improve if not next year. All of that pieced together, I think that 2014 will be a good year for our performance products division.

One way to think about this business other than whatever we're going to do this year plus roughly $15 million that we missed out on the turnaround in the first quarter. The businesses will continue to operate as they have in 2013. Plus we get the benefit of not having that turnaround.

Good point.

Thank you.

Thank you. Your next question comes from the line of Frank Mitsch, Wells Fargo.

Good morning. Kimo, you staked your job on Textile Effects being positive in 2013?

Let's not jump to conclusions. We have four quarters here.

Yes exactly. (multiple speakers) Please tell me that October trends in textile has been very strong. (Laughter)

I just want to double back on the productions issues in the TiO2 side of the equation. Is that behind us? Is the expectation that, is that related to France start-up? And is expectation here that given the -- given that you are at low inventory levels you're going to be ramping up production fairly significantly here in Q4?

Really Frank, it's across-the-board. These plants, and this really leads to the stopping of cycles. They are slow to ramp up. When you are running, what I would say generally in 2012, we were in the 70% utilization rate. So now we are trying to run these plants at close to 90%.

It is hard to bring them all up. Likewise, sometimes it is not easy to bring them down. And slow them down. And that lends itself to increased inventories as well. But it is across-the-board, it is not specific to the Calais, France, plant.

Frank, while we're talking about that -- in my script I talked about the sales have improved 20% compared to the prior year. Had we been operating -- we talked about the EBITDA impact of slower operations. Had we been operating at capacity where we should've been operating, our sales would've increased by about 25% instead of 20%. I think it's probably more in line with some of the numbers that are in bantered about and not recorded.

We also, I would just like to note that as we look at our inventory levels as Peter mentioned to you, this year we are at 45 days. Last year this time we're at 85 days. The industry was at 94 days when we were at 65 days. So, certainly when you look at the macroeconomic conditions, this feels like it's heading in the right direction here.

Thank you so much. I just wanted to follow-up. I wasn't sure I understood exactly, the $140 million restructuring program that you have, what percent of that is incremental in 2013 and what percent is incremental in 2014? And if you could just recap the biggest buckets that that's coming from that, that would be very helpful.

Sure. We have amassed roughly $240 million in annual benefits in these restructuring programs in polyurethanes, Performance Products, Advanced Materials and Textile Effects. I think that we mentioned Performance Products benefits really pushed out all the way to the end of 2014 as we continue those two specific plans.

By the end of the year we will insure a benefit of $130 million run rate in the fourth quarter. That is roughly 55% of the $240 million benefit. By the end of 2014, we will be nearly 100% of benefit. Just a little bit of restructuring in 2015 but again, these are run rate numbers and so again, by the end of 2013, we will be at $130 million run rate and by the end of 2014 we will be at just about $240 million run rate.

Thank you so much.

I think Frank, if you look at that bridge from slide number 8. That is a pretty helpful slide in year-over-year and quarterly performance. We are pretty much on track from what Kimo just said. It is really falling to the bottom line here.

Matthew, this is Kurt. I believe we have time for one more question before we conclude this call.

Okay, thank you. Your final question comes from the line of Ivan Marcuse of KeyBanc Capital Markets.

Great guys. Thanks for taking my questions. I just have a couple of quick ones. In Oxid contribution of $15 million to $20 million does that assume any synergies or restructurings or is that the run rate that the business has been running at?

That is the run rate at -- at the first months of financial performance. Strong contributor right out of the gates.

Great. And on your Advanced Materials business, once the restructuring is done and you have closed and exited wherever you wanted to go, how much of the business would you gauge would be linked directly or indirectly to aerospace and the higher value industrial markets?

I would probably say higher value about 10%. And that probably would be closer to 20.5% of our EBITDA for the of the business. (Inaudible)

Of course there are electrical, insulation, and transmission markets. There are some specialty coating markets. There are several other high-value pieces to that. Aerospace specifically up 10%.

I would say as we look at Advanced Materials the first phase of that basic improvement is getting your costs right. The second phase is really around getting your pricing, your products and marketing and sales straight. When we are done with the cost side I think I forced over the course of the next year so a real opportunity to compete and push further downstream, looking at new products that are in the pipelines coming to market and so forth. I don't want there to be a perception that when you cut costs and materials then you kind of plateau and that's as good as it gets.

The good news is I think that there is new product and more opportunity in the product pipeline going out two or three years down the road. If you look at business as going forward I would definitely look at it from more than what you just get from cutting costs.

Great. And then my last question and I apologize if you already answered this I jumped on late. If you look at your cash flow on slide 10, how much have you on the cash outlay for these projects, how much has been spent this year? And how much would you project that would be spent in 2014?

I'm sorry, Ivan, one more time?

On the capital project that you laid out in slide 10, how much of the capital outlay has been spent to date and how much would you expect the CapEx to be for 2014 on these projects?

Of the roughly $500 million. We will have spent through the end of 2013, roughly $100 million of it. The rest of it is to come in 2014, 2015.

Great, thank you for taking my questions. I appreciate it.

Thank you Ivan and thank you everyone for joining us on the call today.

Thank you for joining us today for today's conference. Ladies and gentlemen this concludes the presentation.

You may now disconnect. Have a very nice day.