Huntsman Corp (HUN) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2014 Huntsman Corporation earnings conference call. My name is Kim, and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session.

(Operator Instructions)

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

Thank you, Kim, and good morning, everyone. Welcome to Huntsman's first-quarter 2014 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 first-quarter 2014 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 number 2. In our earnings release this morning, we reported first-quarter 2014 revenue of $2.755 billion, adjusted EBITDA of $329 million, and adjusted earnings per share of $0.43 per diluted share.

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

Thank you, Kurt. Good morning, everyone, and thanks for taking the time to join us. Let's turn to slide number 3.

Adjusted EBITDA for our polyurethanes division in the first-quarter 2014 was $167 million. Compared to the prior-year period, we saw favorable earnings growth from our MDI urethanes business of $6 million, which was more than offset by lower earnings from PO/MTBE. Our MDI urethanes first-quarter EBITDA has exceeded the previous year's first quarter in each of the past five years.

Demand for our MDI remains strong; global sales volumes grew 6% compared to the prior year. Notably, 50% of the volumes growth came from the Asia-Pacific region, where our differentiated automotive, adhesive, coatings, elastomers, and furniture businesses all grew at strong double-digit rates. Solid demand in the Americas and European region were led by 14% growth in composite wood products, as we continue to substitute for other materials while benefiting from improved housing conditions.

Despite some moderation from the record high benzene prices we saw in the first quarter, raw materials overall remain high. We successfully raised our MDI urethane selling price late in the quarter and were able to offset some of the increase in raw materials. We expect to improve margins in the second quarter, as the full impact of our announced price increases take effect.

We combine propylene-oxide-based popolyols with MDI to create specific polyurethane system solutions for our customers. In the US, we manufacture our own propylene oxide. MTBE is a co-product of our manufacturing process. PO/MTBE earnings in the first quarter decreased $17 million, compared to the prior year, due to lower MTBE selling prices as a result of a slightly weaker gasoline market than the prior year's first quarter.

Let's turn to slide number 4. In the first quarter, our performance products division earned $118 million of adjusted EBITDA, an increase of $64 million, compared to the prior-year period of $54 million, which was impacted approximately $55 million by planned maintenance.

During our fourth-quarter earnings call Q&A, I indicated that maintenance in the first quarter of this year may reduce our EBITDA by $8 million to $9 million. Our operations team successfully completed the maintenance sooner than planned, and some will be carried over into the second quarter. The impact on the first quarter was negligible; however, we expect planned maintenance projects in the second quarter to decrease our EBITDA by approximately $15 million in the second quarter.

We continue to see strong demand for our means. Noticeably, we have seen earnings growth for ethyleneamines used in oil-field applications. Maleic anhydride was particularly strong as well in the quarter.

A few weeks ago, we announced an agreement with Wilmar, whereby they agreed to buy our European commodity surfactants business. Coupled with the closure of our Patrica, Italy commodity surfactants facility, we believe these actions will improve our annual EBITDA by approximately $20 million beginning in 2015.

Let's turn to slide number 5. Adjusted EBITDA in the first quarter in our advanced materials division was $46 million, an improvement of $19 million, compared to the prior year of $27 million. We've had -- we've seen a tremendous improvement in this business as a result of our recent restructuring efforts. We are on schedule and on target to deliver the full $70 million of annual EBITDA-restructuring benefit by the middle of this year.

In addition to taking action on our fixed costs, we have preferentially walked away from certain low-margin business, which led to a 16% decrease in sales volume compared to the prior year. We have realigned our top line to focus on higher-value component and in formulations such as the aerospace, transportation, and industrial markets, the benefit of which are reflected in the 6% increase in average selling price and the 6% improvement in sales mix compared to the prior year.

In the first quarter this year, demand for our products serving the aerospace market grew at 9% compared to the prior year. This important end market comprised approximately one-third of our earnings in the quarter.

Turning to slide number 6, our textile effects division reported adjusted EBITDA of $16 million in the first quarter, an improvement of $19 million compared to the prior-year loss of $3 million. This division has successfully completed the realignment of its business and manufacturing footprint from Europe to Asia.

We continue to see sales growth significantly above GDP through increased market share. This increased demand for our products is being pulled through by improving consumer confidence and the demand for more sustainable products at US and European brands in retailers. This has allowed us to successfully increase our selling price and expand margins in the first quarter. Offering the most environmentally and economically sustainable textile chemicals and dyes within the industry allows us to win business on tighter technical specifications, not just on price.

Let's turn to slide number 7. Our pigments division earned $26 million of adjusted EBITDA in the first-quarter 2014 compared to $9 million in the previous year, an improvement of $17 million. Much of the improvement was a result of stronger production volumes and increased fixed-cost absorption.

Our a global sales volumes were essentially unchanged compared to the prior year. Strong volume growth in Europe, which is our largest region, was offset by lower sales volumes in other parts of the world where we sacrificed some sales volumes in order to protect our selling price. Although our average selling price decreased compared to the prior year, it was essentially flat compared to the fourth quarter. We saw notable demand strength in Europe, where we have 45% of our revenue.

We are encouraged by the general trends within the industry and believe that warming weather in North America will help boost demand in this year's paint season, which begins in earnest in April, although, the second-quarter seasonal increase in demand may be muted by maintenance currently taking place at one of our facilities. As a result, we expect second-quarter EBITDA to be flat with the prior-year comparable quarter.

We remain actively engaged with the European Union in their antitrust review of our proposed acquisition of Rockwood's performance additives and titanium dioxide businesses.

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

Thanks. Let's turn to slide 8. As Peter has already outlined in the first quarter of 2014 compared to the prior year, our adjusted EBITDA increased 50% to $329 million from $220 million. Much of the improvement was a result of the maintenance that took place at our Port Neches, Texas site last year, which impacted the EBITDA by approximately $55 million. In addition, the benefits from our self-help restructuring accounted for approximately $53 million in lower SG&A and indirect costs.

Compared to the prior quarter, our EBITDA improved $16 million. Increased raw material cost more than outpaced our ability to raise selling prices during the quarter, resulting in a squeeze on margins of approximately $25 million. Fortunately, the benefits of improved sales volumes, lower SG&A and indirect costs, and other benefits, more than offset lower margins. We expect our restructuring efforts to contribute an additional approximately $45 million of future EBITDA.

Turning to slide 9, our year-over-year consolidated sales revenue for the first quarter increased 2%. This was primarily due to an improvement in sales volumes of 8%, partially offset by a decrease in average selling prices of 2%, and sales mix effect of 4%. The increase in volume was affected by our first-quarter 2013 maintenance and performance products.

Regionally, our largest category, North America, which makes up 31% of total revenue, increased 4%. Our second largest region, Europe, increased 5%, whereas Asia-Pacific sales revenue increased 5%. This was partially offset by a 9% decrease in our rest-of-world's category, which is comprised of Latin America, the Middle East, and Africa.

Our polyurethanes business is our largest; it made up 43% of our total revenue in the first quarter and grew at 2%. However, the MDI urethane segment revenue increased 4% and more than offset lower PO/MTBE segment prices.

Textile effects revenues increased the most at 19%, as a result of increased selling prices and improved sales volumes. Performance products revenue benefited from the first-quarter 2013 maintenance; however, we saw significant revenue growth in our important amines and maleic anhydride products.

In advance materials, we preferentially walked away from certain low-margin businesses, resulting in a 5% decrease in sales revenue. And pigments revenues decreased 4%, as a result of lower industry selling prices for Ti02.

Our total sales revenue increased 2% in the first quarter this year compared to last quarter, and are encouraged by improvements in sequential selling prices, as well as overall sales mix. Sales revenues increased in all our divisions, with the exception of polyurethanes, where volumes were seasonally low.

Let's turn to slide 10. At the end of the quarter, we had approximately $900 million of cash and unused borrowing capacity. During the quarter, we spent $107 million on capital expenditures. We expect to spend approximately $500 million on capital expenditures in 2014, excluding any amounts associated with the planned acquisition of the performance additives and titanium dioxide businesses of Rockwood.

We are accelerating depreciation expense this year by $17 million, related to the closure of our commodity surfactants facility in Patrica, Italy and the sale of our ethoxylation facility in Lavera, France. The accelerated depreciation charge in the first quarter was $6 million, which will continue each quarter at slightly lower levels through the remainder of the year.

Our adjusted effective income tax rate for the first-quarter 2014 was 32%. We expect our 2014 adjusted effective tax rate to be approximately 35%, excluding the impact of the acquisition of the performance additives and titanium dioxide businesses of Rockwood. We expect our long-term adjusted effective tax rate to be approximately 30%.

Peter?

Thank you, Kimo. This past month, we held an investor day event where our senior leadership team presented our vision for each division. We also outlined our expectations for the next two to three years. I invite you to review the material from this event on our website at Huntsman.com.

We set out an objective to reach $2 billion of adjusted EBITDA over the next two to three years. In order for this to happen, we outlined certain acquisitions, capital projects, and business improvements that will take place. As we report our first-quarter results, we continue to see improvements in our advanced materials and textile effects business, thanks in large part to self-help initiatives.

These two divisions earned nearly $40 million of adjusted EBITDA this past quarter over the previous year's results. We see the benefits of strong growth and past investments in our MDI urethanes, amines, and maleic product lines where our adjusted EBITDA increased by [$15] million over the previous year.

As we told you last year, when we announced our intention to purchase Rockwood's performance additives and titanium dioxide businesses, we continue to expect improvement in our pigments business during the second half of this year. While I'm frustrated at the pace of the approval process, I firmly believe that this deal will get done. We are committed to closing this transaction, and feel it is a better deal today than we did six months ago.

Our future growth is not dependent on a single product or geography. As I stated in our last call, I believe that all of our divisions will improve this year over the previous year In short, we've outlined bold and record-achieving objectives for this Company over the next few years. I believe the results we've reported in the first quarter are right where we need to be to reach these objectives.

With that, I'll turn the time over to Kurt, and we'll take some questions.

Thanks, Peter. Kim, will you go ahead and explain the procedure for questions and answers and then open the line?

(Operator Instructions)

Robert Koort, Goldman Sachs.

Peter, (inaudible) in performance products, the impact that getting out of the commodity surfactants business might have on your margin structure for the segment?

We believe that the earnings of the business will improve by about $20 million EBITDA starting in the 1st of 2015, as we will have closed on the sale of one of the sites, the closure of another site, and in cutbacks in some of our other sites. The business, the European surfactants businesses is about $450 million in sales. We will be reducing the top line by about $140 million of sales and taking that margin from a sub-5% margin to something above 10%, I think it is like 12% EBITDA margin from a 3% EBITDA margin.

That's helpful, thank you. And in the advanced materials business, obviously, your aerospace margins are pretty spectacular. Can you talk a little bit about what the cadence of the growth rate for here is? It seems like maybe on the Boeing side of things, you are reaching more of a steady state growth period, whereas Airbus is still accelerating. Can you net it out and what you see over the next couple of years? I know at your investor day you gave a date 2018 target that was pretty impressive, but what is in the interim between here and 2018? What is the cadence?

I think it is going to be growing at a very strong single digit, pushing 10% growth rate. We have been averaging 12%, and we might see that slow just a little bit with the build rate on the 787 project. We do have the 350 Airbus, which is part of -- which I believe we have all of the business going into the 350 Airbus. It actually has more of our product per plane than the 787.

Looking out over the next couple of years beyond that, the next year or two beyond that, comes in next year or two beyond that the 737 Max and the 777X, while the 737 will only have about 5 tons of Huntsman product per plane in 20,17 is pushing 550 -- 575 units which is about 4 times the amount.

As I look at each one of these projects, we have a very strong market share in this segment, and I see that continue really growing that 10% growth rate, certainly for the next three to four years here.

Kevin McCarthy, Bank of America.

Peter, I am not sure how much you are at liberty to discuss as it relates to the pending deal with Rockwood, but you did express some confidence that the deal will get done. I was wondering if there was anything incremental or any changes in your recent discussions that would engender that confidence? And also with regard to timing, when you might expect to wrap it up relative to the deadline of July 22?

I think it will be a third-quarter event, and I would be reluctant to get into any details of the discussions that we have had with the EU and I would only say that we continue to make progress there, and I continue to be very confident that we will be closing this in the third quarter.

Great. On the pigment earnings pattern, I was just wondering if you could comment a little bit on the sequential dip in EBITDA. It looked like your volumes were up 10% sequentially and price minus 1, not a terribly big move there. So wondering if you could comment on why the sequential drop?

I think most of that was due to mix and a little bit in pricing, but the volumes were about the same as a year ago. As we look going forward in that business, we are out aggressively pushing price as much as we can, and I feel quite confident that in the second half of this year that we will be successful in getting some price traction.

Last one, if I may, on advanced materials, really excellent result there. Just wondering if I look at the pattern there, how much restructuring might have contributed relative to -- sounds like you walked away from some lower margin business, presumably on base LER? Any color on the strength there would help.

I think that we're seeing the benefit; the overall segment really is not doing much better than it was a year ago. When I look -- it's a basic liquid resin in the commoditized end of that business; it has too much capacity and the pricing hasn't had traction probably for years, literally on the commodity side. And part of the restructuring wasn't just getting the cost right, but longer term, making sure that we are in the right product segments where we are going to see both growth and we're going to see growth in earnings. I think the first quarter of this year was one of the -- actually in the fourth quarter of last year, I think that we saw strong improvement over the previous year, and first quarter this year, we see that same reflection. As I look in that division going forward, I think that we are getting the cost rate, and I think that we're getting the product mix right.

I would just add, when you think about the three segments, there is base, there is formulated systems, and specialty components, base sales were down as much as 50%, so again, reflecting the shutdown of two facilities. When you look at formulated systems from a volume standpoint, up 11% year over year, really driven, as we have mentioned, by aerospace. But we had strong transportation in industrial segment and wind actually showed some strength in the quarter. So while we don't have a huge wind business, we are starting to see some of that wind business come back in the formulated area.

Mike Ritzenthaler, Piper Jaffray.

A question is about price stickiness of MDI. Peter, I am taking from your prepared comments that raw material headwinds might persist somewhat in Q2. Is that fair, in terms of a timing standpoint?

Yes, think so. When we look at raw material in polyurethanes, this is mostly an American US phenomenon that we have. So from the fourth quarter to the first quarter, moving to the second quarter, we've seen prices moving up. We have seen them come down a little bit on benzene. There is still bouncing around the record level. We have seen about a 15% increase in our raw material cost during that time period.

Between price increases that were initiated in the first quarter and will be further pushed in the second quarter, we believe that certainly by the end of the second quarter, unless there is a massive increase to take place, we believe it will offset all of that 15% and then a little bit more.

We think that we'll see margin expansion in Europe and Asia. We haven't seen necessarily the same amount of price increase in those areas. We have seen some increase, but not nearly as much as in North America where we are pushing for price increases during the first and second quarter. And given the success we have had thus far, I would expect margins to expand throughout the second quarter, moving into the third quarter as well.

Maybe I will just comment on PL, the question was broadly polyurethane pricing. While the comparison year over year in PO/MTBE was down relative to price on the MTBE side, we think the second quarter will be flat with last year's second quarter relative to the value of MTBE and propylene oxide.

Second question as a follow-up, on the sale of surfactant -- the surfactant assets to Wilmar, I was wondering if you could elaborate a bit on the supply-agreement side of that deal and its strategic importance to Huntsman in the overall framework of how that came together? And then maybe, perhaps, update us on the self-help line of projects, specifically in European surfactants as we progress through '14.

I think that we look at the self-help on the European surfactants piece, I think that we pretty much have outlined -- when we just talked about the improvement that we are going to see in that business, that is not due to any one of them; it is due to a combination of a site closure, of selling off capacity to Wilmar, and looking at reducing some commodity surfactants at other sites. It's in three buckets there. ¶ We will see a reduction of about $100 million in sales and an improvement of about $20 million of cost benefit. The relationship with Wilmar is interwoven within those agreements. In some of our facilities they will be taking back some production; some of the facilities will be shut down, and the volumes will be moved to other plants. The third facilities will outright be sold to Wilmar. So that certainly is going to be an expanding relationship that we have with Wilmar. And I think that it makes a lot more sense for them to be in these certain surfactant rates, than us, given their raw material integration.

Laurence Alexander, Jefferies.

Two questions on MDI, can you give a little bit more detail on MDI price trends, like why they haven't improved year over year in Q1 and what you think will happen this summer? But also, can you give a little bit more detail on the MDI profit bridge into Q2 for polyurethane, either year over year or quarter over quarter, just to give a sense for what is going on in the industry?

We are in the process right now of moving prices up in the second quarter, and a lot of those are going to be effective June 1. I'm a bit reluctant to give any guidance in the second quarter on MDI, given the fact that we are negotiating those price increases as we speak right now. I think the significant item that should be noted, and I will see if Kimo has anything to add to this, but when we think about the first quarter this year versus first quarter last year, we will have seen very strong double-digit raw material cost increases during that time period. Yet, we've also been able to expand margin during that time period. We have seen prices go up to not only offset record high raw material increases, but we have also seen it expand margins as well.

That is exactly what I was going to say. We saw prices increased in the first quarter; it was toward the end of the first quarter, and we will continue to see those move up through the second quarter where you see a second quarter results that will have offset all those raw material costs, and we will see the benefit of the growth, which we continue to see at the 6% to 8% per year, and we expect that to continue. We are reaching great utilization levels in our three facilities around the world, and the incremental economics of growth will fall to the bottom line very quickly.

What are your utilization rates?

We think in 2014, our plants will be in the high 90% utilization rate levels. And that is why we have announced certain debottlenecks that will need to be effective in 2015 to be able to facilitate further growth.

Ivan Marcuse, KeyBanc.

Real quick on your direct cost for the quarter in polyurethanes, what was the impact of raw materials?

As we look from the fourth quarter to the first quarter, and I would say, I would use that just because the first quarter we saw benzene peak at a record high. And since then it has come down a little, bit but not a great deal, it was a 15% increase in our raw material cost.

Excuse me, I was just going to say in dollar terms, it was as much as $20 million, I think in the quarter of headwind. And I think that was consistent with what we outlined on our last call and in the investor day presentation that we expected that would be the headwind roughly.

Do you expect the same degree going into the second quarter?

I think there might be a little bit of a decrease, but not much. I am not seeing a collapse taking place in benzene pricing, which they are already out discussing May nominations and so forth. We are two-thirds the way done with the quarter, and haven't seen a great deal of movement.

Just looking at cash flows real quick, the restructuring cost, how much were they in the first quarter? What is your review of cash restructuring costs going off to 2014, and the same question would be in regards to the pension?

In first quarter our cash restructuring payments were $25 million, and the pension payments in excess of the expense in the P&L for adjusted EBITDA was about the same amount, $25 million. In both of those categories, in restructuring, obviously, once we are done with this round of restructuring, that will fall significantly. For the full year, cash payments on restructuring will be about $100 million, and we would expect that to decrease significantly. On the pension side, we are close to 90% funded globally, and we would expect that the pension funding requirements would come down also in 2015 significantly by as much as 50%.

Real quick on the working capital, that was a much bigger use on a year-over-year basis. Where do you anticipate that to unwind going out through the year? Or where do you think the most improvement could be coming from over the next couple of quarters in regards to working capital and cash generation?

We always expect and plan for significant working-capital build in the first and second quarters of the year. That is our seasonal trend, and then it cleans down in the third and the fourth quarters. We have seen that for the last couple of years, as you know. First-quarter working capital was higher than we originally had expected, because of not inventories but receivables. Our sales growth, volumetrically at 8%, lends itself to higher receivable levels. Obviously, that will turn into cash and will benefit us in the next few months if that rolls.

For the year, we would expect working capital, if our current crystal ball of raw materials holds true, that we will be flat from a cash standpoint in terms of working capital. That would include improvements I think in all of our businesses on the inventory side in terms of days held in inventory.

Hassan Ahmed, Alembic Global.

Apologies, I joined the call a bit late, so if you've already stated this, apologies again. I was trying to figure out where Ti02 inventory levels sit at Huntsman? And you're always kind enough to give us the industry view as well. Just wanted to figure out where those two numbers are at.

As we look at our inventory days today, year end, we have reported about 66 days at the end of the year, and today, we are right around 62 days. And I would remind you, if we look back at the average for the first quarter, it is in the high 50s, low 60-ish. So we're pretty much in that envelope with 62 days. I would estimate the industry, and I say estimate because usually the industry publishes its data by now, but it has not. I would estimate that the days inventory for the industry is probably right around 70, 71 days of inventory.

Right, so I guess it's fair to assume, one of the things you talked about, at least in the press release that was stated was lower manufacturing cost. So I would imagine you have jacked up your operating rate fairly significantly? Yes, we are seeing demand coming out, but I don't think that, that's two significant.

I think increased production relative to last year at this time where inventories were much higher than they are now. I don't think that is a good sequential [climate], that is a good year-over-year view.

PJ Juvekar, Citi.

This is Eric Petrie in for PJ. On pigments, do you still expect to reach a normalized run rate of $200 million in second half?

The $200 million, let's first talk about Rockwood. We think $200 million is a good number for Rockwood, and we think their first quarter will reflect that they are on pace with that. The $200 million number I think we have updated since our -- the last time that we talked. We don't think we are going to be at $200 million. We think that we will be at a $200 million run rate second half.

Could you provide an update on your Ti02 or flexibility project in Italy, and whether or not you will see some of that benefit in second half?

We are on track to bring that on. I cannot remember the exact date that is coming on, but I think that is closer to the end of 2014 as opposed to mid-year.

I would imagine that we will see the benefit of some of those ores probably falling in the fourth quarter, but I would question if that would be material to the business until it is fully up and running.

You mentioned expanding your capacity, MDI capacity, and just wondering how that timeline is progressing in the Netherlands and here in the States?

I think that what we presented in the investor day presentation, that we would be having that completed by the fourth quarter this year. We believe that both of those projects, both in the Netherlands and the US, that will be done by the fourth quarter this year.

James Sheehan, SunTrust.

I was wondering if you could elaborate on some of your comments on the amines and maleic hydride results. Looked like they are pretty strong. How are the end markets doing there, and what are some of the dynamics that are contributing to your results?

I think as we look at some of the end markets growth in there, some of the strongest growth is happening in the oil field services and the energy section. So that is a whole bunch of different areas in there, quite frankly. It is not just fracking, but it is also enhanced oil recovery and being able to extract sulfur and so forth from crude oil. We're talking about the energy sector; it's not just a single issue.

In the amines, we are also seeing strong improvement through this time of year around the agricultural industry and the demand, the pull through on that. And also we have a number of specialty surfactants that continue to do well for us. In the first quarter of this year, we also benefited maleic by some coproducer issues and some of the disruptions that took place in some of the other producers during that time period in the first quarter, but by and large, maleic is strong just across the board.

The multiple end use from everything, from food sweetener to unsaturated polyester [resiglene] to the home market to the spandex and the textile industry. Those industries, they're all not going through the roof, we are just seeing good solid support in growth in all of those end-use applications. It is really a broad front that we are seeing these improvements.

Also, just wanted to ask, there was some chatter about Bayer being interested in selling its material science unit. Is there any reason to think that some of their businesses, particularly in downstream applications, might be a good fit for Huntsman?

I wouldn't be commenting on that. We're always going to be looking for opportunities and so forth, and rumors have been abounding for the last year on that one. So I'm really not sure where they're going and what they have decided to do with that business.

Last question on the housing market in the US, it looks like we have got some headwinds from mortgage rates. Has that affected your outlook for the insulation market and other MDI businesses for the US?

Not really, we're still going to see double-digit growth, I believe, throughout the year and the US is going to be a good market for us. I would just remind you that our biggest growth, our biggest factor in the growth rate there isn't just the housing recovery, but it's also product substitution and replacement. So when we about spray-on foam, our biggest opportunity there is we are starting at such a low basis. We've got years of opportunity to expand market share, to displace that cheap, pink stuff people sometimes put in the house. And we just -- I think for the next couple years, our biggest opportunity is going to be product substitution replacement.

You probably heard a lot of our competitors talk about weather-related issues. When we think about weather and insulation demand in North America, that affected North American demand by 2% to 3%. So we may see even stronger insulation results in the US in the second and third quarters as those bounce back.

John Roberts, UBS.

You talked earlier in advance materials about different margins in the other segments and how high the aerospace-related margins are. How separable are the aerospace margins from what happens in the other parts of advanced materials? That is, can you proactively shrink the lower-margin parts without affecting the aerospace margins?

I think that we pretty much have effectively done that, and as you start shrinking too much, you get into your fixed cost spread out over smaller pounds that are produced. And so what we have done, is where we can close dedicated lines and facilities in BLR, th basic liquid resins, and the commodity products, we have done that. We still might have a little ways to go on that, but the vast majority of that has been done already. I don't see that as something that is going to significantly impact the business going forward. I think the benefit of doing just that has been shown in the numbers in the fourth quarter and more completely in the first quarter this year.

Is there a way to think about how you can migrate resources from the lower margin assets into airspace over time? Should we expect you to be able grow for a long period from no additional capital (inaudible) for the business?

We think, and again, if you go back and you look at our investor day presentation on advanced material, we have the capacity pretty much in place today. We are in the process of also putting that capacity in, that will be able to satisfy our needs for probably the next four to five years for the aerospace demand increase that we are expecting. We are not expecting to add capacity every year. We have oversized the production facilities and so forth -- I take that back, we're probably looking out for the next five or six years.

I was good to say maybe even a little bit longer. We are in the process of spending $60 million in our Macintosh Alabama facility, that is going to take us -- aerospace out, as you said, seven, eight years.

When we look at the resources to service aerospace and the resources to service the basic liquid resins, it is really not either or. If we cut back on the commodity side of the business, there is not a whole lot of overlap where you're able to take those pieces of machinery and utilize them in aerospace. The first part of your question, you're talking about this overlap of pre-deploying resources. We will be perhaps, with some of the technicians and some of the operators and people, but not a lot of overlap there; two completely separate manufacturing processes.

Operator, I think we will take one more question here.

Frank Mitsch, Wells Fargo Securities.

Thanks for sharing some of the details on MDI in the US. You also talked that demand would be strong in Asia, but modest in Europe. And one of the things that has been a positive surprise has been the strength of MDI and insulation in Europe. Can you comment a little bit more about what is going on in those two regions?

I think as we look at that, I think it is going to be continuous buildup as to what we have done. Again, when we think about insulation on MDI, we are starting at such a low percentage of the overall market. There really is substantial room for years to come on expanding that footprint, expanding our market share, and as the result of the effectiveness and the efficiency of MDI insulation become more apparent, and the means of distribution, the people that are out moving the product, that are out selling it and so forth, it is going to continue to, we think, be think be a very strong product for us.

It is not only going to be in new commercial, but also in residential housing where we are seeing a pickup not only in the US but also in Europe and Asia in that area. And it is also going to be in the area of retrofitting existing buildings. In all three of those segments, they're going to have their various strengths, depending upon which region. The US is going to be a lot focused on residential housing, and Europe is going to see more retrofitting and probably commercial, and Asia will have a good mix of all of them.

When you think about first quarter, we saw volume growth in Europe of 4%, and when we say it will grow modestly, it is not the 10% we saw in Asia-Pacific in the same time period. But when you look in the sub-segments, it is really in a lot of value-added areas, like our adhesives, coatings and elastomers, that are our higher businesses. That grew in Europe 7% in the quarter year over year.

We think it is going to be solid growth, we think it is going to be profitable growth, but it's not going to be the 10%. In the Americas, while growth was only 3%, weather affected that by 2%, and we walked away from some low-margin business there, we think fundamentally, the US is growing 7%, 8%. We think 4% relative to GDP in Europe is not a bad growth rate for that segment.

Peter and Kimo, I would be remiss if I did not ask you the topic du jour. Obviously, you guys have an ethane cracker, and we are seeing some announcements about [MLP] ethylene assets. What are your thoughts on the potential for Huntsman to get involved in that as well?

Frank, I think it is safe to say that this is an area of interest to Huntsman. We think that there potentially could be more than ethane, but it is something that we want to approach very carefully, but it is something, as we look at our overall group of assets and as we evaluate how best to create shareholder value, that is certainly something that is safe to say that we have looked and we continue to look at options.

This is Kurt. I believe that will conclude our call today. We want to thank everybody for your interest in Huntsman and look forward to talking with you throughout the quarter. Thanks again.

This concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.