Huntsman Corp (HUN) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2014 Huntsman Corporation earnings conference call. My name is Stephanie, and I will be your operator for today.

(Operator Instructions)

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

Thank you, Stephanie, and good morning everyone. Welcome to Huntsman's second 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 second quarter of 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, Huntsman.com. Let's turn to some highlights on slide 2.

In our earnings release this morning, we reported second-quarter 2014 revenue of $2.988 billion, adjusted EBITDA of $363 million, and adjusted earnings per share of $0.59 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 polyurethanes division in the second quarter 2014 was $197 million. Compared to the prior year, we saw favorable earnings growth from our MDI urethanes business of $24 million, whereas PO/MTBE earnings decreased to $1 million as a result of a manufacturing disruption at Port Neches, Texas facility, negatively impacted our EBITDA by approximately $10 million in the quarter.

Demand for our MDI remains strong. Global sales volumes grew 7% compared to the prior year, with excellent growth in our insulation, automotive and adhesives, coatings and footwear businesses. The majority of this growth came from the Asia-Pacific region, where all markets grew at double-digit rates. In July, we formally announced and held groundbreaking ceremonies with our joint venture partners to expand our MDI capacity in Caojing, China. When complete in 2017, our off-take from this new capacity will be approximately 200,000 tons, and yield approximately $85 million of annual EBITDA at full run rates.

Second-quarter demand in the Americas was strong, and accelerated at the end of the quarter, as commercial construction conditions (technical difficulty) our European [band] was stable, year-on-year improvements in our differentiated automotive, adhesives and coatings demand. Most of (technical difficulty) came from Eastern Europe, partially offset by slower sales in Russia, as a result of the ongoing political turmoil. The cost of ben (technical difficulty) in the second quarter compared to the prior year, and global contract prices climbed further in late June, with prices in the US settling in at all-time records for July. We've been out-selling price increases to try to offset the high cost of raw materials.

Demand for PO/MTBE remains strong, and in recent weeks, have been an increase in our average MTBE selling prices, energy markets have strengthened. Let's turn to slide 4. In the second quarter, our performance products division earned $115 million of adjusted EBITDA. Within the quarter, we saw strong demand for amine, used in energy, oil field and agrochemicals markets. Margins continued to improve as a result of the tightening supply/demand balance. Maleic anhydride volumes also improved, and earnings benefited from certain one-off sales which won't repeat in the third quarter.

During the quarter, we successfully completed multiple maintenance projects that combined net impact of the maintenance and one-off sales, benefits was negative $6 million of EBITDA. On June 25, we announced the completion of the sale of our European commodity surfactants business to Wilmar. Along with this sale, the closure of our Patrica, Italy facility, and a refocus on differentiated surfactants, we believe we will improve our annual EBITDA by approximately $20 million, beginning in 2015. Let's turn to slide 5.

Adjusted EBITDA in the second quarter in our advanced material division was $53 million, an improvement of (technical difficulty) dollars compared to the prior year, and represents the highest earnings quarter since we bought this business. During this past quarter, we completed our restructuring initiatives within this business, the benefits from which are clearly evident in the improved earnings. In addition to taking action, in our fixed cost, we shut down two base resin units and preferentially walked away from certain low-margin business, which led to an 11% decrease in sales volumes compared to the prior year.

We have aligned our top line to focus on higher value areas, such as aerospace, transportation and industrial. These markets have the highest margin within advanced materials, and represents approximately 60% of its earnings. Our share of aerospace resins and hardeners is greater than 50% in most of the next-generation aircraft, and build rates continue to grow. Furthermore, (technical difficulty) transportation and industrials market, we're seeing increased demand for epoxies and resin in automotive applications, NGL tankers, and in oil field drilling. We're encouraged by long-term trends that we believe will continue to benefit this business. However, we expect a seasonal slowdown, specifically in Europe, in the third quarter.

During -- let's turn to slide 6. Our textile effects division reported adjusted EBITDA of $22 million in the second quarter, an improvement of $19 million compared to the prior year, and represents a record earnings since our acquisition in mid-2006. The benefit of our restructuring efforts and focused growth strategy are clearly evident in the improved earnings of this business. In addition to lowering our cost structure, we have re-focused our emphasis on key sectors and markets. In so doing, we have de-selected certain low value business. Our sales volumes grew 3% compared to the prior year, adjusted for this de-selection process.

Strong demand for our environmentally and economically sustainable chemicals and dyes has allowed us to raise our prices and improve margins. Our average selling price increased 19% compared to the prior year, as a result of our focus on high-margin products and increased raw material costs. We expect progressive environmental regulations to further increase our raw material costs. In July, we announced additional price increases to cover our ongoing raw material cost increases. Let's turn to slide 7.

Our pigments division earned $23 million of adjusted EBITDA in the second quarter. We saw an increase in demand, as our global sales volumes increased 3% compared to the prior year. Most of the growth in sales volumes came from Europe, which is our largest region, whereas sales volumes growth in North America was more modest. This was partially offset by lower sales volumes in other parts of the world, where we sacrificed some sales volume in order to maintain our sales price at current levels.

Our average selling price decreased compared to the prior year, and was unchanged compared to the first quarter. We are getting prices up in all sectors in Europe in the third quarter. However, it is very modest amounts. In other regions, we see stable pricing. We remain optimistic that we will get some price increase within the second half of this year. Before sharing some concluding thoughts, I'd like to turn a few minutes over to our Chief Financial Officer, Mr. Kimo Esplin.

Thanks Peter. Let's turn to slide 8. In the second quarter of 2014, compared to the prior year, our adjusted EBITDA increased 19% to $363 million, from $304 million. Most of the improvement came from higher average selling prices. However, we've also seen improvement in sales volumes, as well. Compared to the prior quarter, our EBITDA improved $34 million. A seasonal uptick in demand lifted sales volumes dramatically. Average selling prices improved across all our divisions, with the exception of pigments, where pricing was flat. Contribution margins improved by approximately $10 million, as we were able to stay ahead of higher raw material costs.

Partially offsetting these positive trends, among other things, was an increase in costs related to lower inventories and higher costs associated with maintenance. We've been delivering on the restructuring savings plans we've laid out, the benefits from which are clearly manifest in the improvement of our earnings. Most of the restructuring savings are included in our results this quarter, with the exception of approximately $20 million from our performance products division, which we will see in 2015.

Let's turn to slide 9. Our year-over-year consolidated sales revenue for the second quarter increased 6%. This was due to higher average selling prices of 3%, and an improvement in sales volumes of 2%. From a regional perspective, Europe improved 8%, whereas Asia-Pacific and our rest of world category, which is comprised of Latin America, the Middle East and Africa, each grew 9%. North America was impacted by the planned maintenance and manufacturing disruption, and decreased 1%. Second-quarter revenue increased across all our divisions compared to the prior year.

Polyurethanes is our largest division. It made up [33%] of our total revenue the second quarter, and grew 5%. MDI urethanes revenue increased 8%, and more than offset the negative impact from the PO/MTBE manufacturing disruption. Performance products revenue increased 7%, as a result of higher average selling prices. In advanced materials and textile effects, higher average selling prices more than offset the impact of walking away from certain low-margin business. Sales revenue increased 1% and 15%, respectively.

Pigments revenues increased 2%, as a result of higher sales volumes, which grew 3%. Our total sales revenue increased 2% in the second quarter this year compared to last year. Average selling prices improved across all our divisions, with the exception of pigments, where pricing was flat. Sales revenues increased in all of our divisions as a result of higher average selling prices and seasonally higher volumes. Slide 10. At the end of the quarter, we had approximately $1.072 billion of cash and unused borrowing capacity.

Let me remind you that generally, we build working capital the first half of the year, and reduce it in the second half of the year. In June 2014, we issued an additional EUR145 million of 5 1/8% senior notes, due 2021. The notes were issued at a premium, to yield 4.57%. The proceeds were used for general corporate purposes. 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.

As Peter mentioned, we broke ground in July for our new MDI joint venture project in China. Our net capital commitment to this project will be approximately $115 million, with the balance funded by partners and nonrecourse bank financing. We are accelerating depreciation expense this year by $17 million, primarily related to the closure of our commodity surfactants facility in Patrica, Italy. The accelerated charge in the second quarter was $5 million, and it is expected to taper off each quarter for the remainder of the year. Our adjusted effective income tax rate for the second quarter of 2014 was 25%. The low tax rate was a result of the release of tax valuation allowances, in part due to the restructuring of our European surfactants business.

We expect our 2014 full-year adjusted effective tax rate to be in the low 30%s, excluding the impact of the acquisition of the Rockwood businesses. We expect our long-term adjusted effective tax rate to be approximately 30%. Preliminary figures for the Rockwood performance additives and titanium dioxide businesses that we are purchasing indicate business generated approximately $100 million of adjusted EBITDA in the first half of 2014, well on track to earn the $200 million we forecast for 2014 when we announced the deal.

This performance was primarily due to the strength of the non-TiO2 portion of the business, which comprises approximately 60% of the first half adjusted EBITDA. These non-TiO2 businesses include wood treatment, color pigment, functional additives, water treatment and garment businesses. We estimate the cash purchase price for these businesses to be approximately $1 billion, after giving effect to certain adjustments in the purchase agreement.

At the time the deal was announced nearly a year ago, we also believed that our pigments businesses would have a second half run rate of $200 million, with the benefit of the midyear price increase, which now appears unlikely at this point. Peter?

Thank you, Kimo. This past quarter was a strong quarter that moves us closer to our forecast EBITDA run rate of $2 billion in two to three (technical difficulty) with our shareholders this part March at our investor day. In fact, that some of our non-pigment divisions equaled our best quarter ever, and we still a plenty of upside coming in the next two to three years. I would like to note that our restructuring is essentially complete within our textile effects and advanced materials division. Long-term, we will benefit further from our focus on aerospace, transportation, industrial applications and our advanced materials, and sustainable textile dyes and chemicals.

However, we expect near-term earnings to be more in line with current levels and seasonal trends. Our performance products continues to grow at attractive rates, specifically in our amines and maleic product lines, and we are well-positioned to take advantage of cheap North American raw materials. In the next year, we will see the benefits of our expanded ethylene oxide and amines production, as well as the improvements due to our European surfactants restructuring.

While recently in China, we broke ground on our MDI polyurethanes facility, as well as reviewed the ongoing construction of our propylene oxide MTBE joint venture with Sinopec. We continue to see strong demand for MDI in China and other Asian markets, as well as our urethanes North American markets. We believe that as some of the announced global MDI capacity expansions are further delayed, utilization rates will remain in the range of 90% for the next few years, and market conditions will be favorable.

While I am not happy with the market conditions of our TiO2 business, we are seeing gradually improving market conditions, and we'll continue to push for price increases in the second half of this year. This is certainly a division that has room for improvement. Regarding our proposed acquisition of the Rockwood holding performance additives and titanium dioxide businesses, as Kimo mentioned in his comments, we're right where we thought we would be with the Rockwood earnings for this year. We continue to work closely with the European commission in its review.

We have proposed certain remedies we believe address the commission's concerns, and are confident that final approval will be secured in the next -- by the end of the third quarter. We're in the process of extending the termination date of the agreement with Rockwood and related financing to accommodate any possible delays that may arise from the European commission review. I believe this is a great acquisition, at the right time and at the right value.

In short, we had a very strong quarter, but I see plenty of room for growth in earnings. Were on track to deliver our plan to the market, we're off to a great year, and we still a plenty more to come. With that, I'll turn the call back over to Kurt.

Thank you, Peter. Stephanie, will you please go ahead and explain the procedure for questions and answers, and then open the line?

(Operator Instructions)

Bob Koort, Goldman Sachs

Thank you, good morning.

Good morning, Bob.

I was wondering if you could help out -- I think you talked to some of the points. But it seemed that your cash from operations was relatively anemic compared to your EBITDA. And it looked like a big increase in receivables. Can you talk about what the factors are that led to some leakage down in the cash generation line? And then what you might see in the second half?

Sure. Actually, second-quarter cash generation was spot on what we thought it would be. Again, it's roughly $100 million billed in working capital in the second quarter. I think, when we look at our budgets, I think we were just a little higher than that. CapEx is on track, and cash taxes were a little higher relative to the rate, because we pushed some cash taxes from 2013 into the first quarter. But when you think about other cash payments in the quarter, $19 million of cash restructuring payments were made. Pension was $28 million.

Then of course, the dividend, but those were the items, so that from an operating cash standpoint, pretty well breakeven. But that was expected, again. Second half, you'll see that working capital line reverse. And our expectation is, for the year, that working capital will be flat, notwithstanding having built working capital by what? Almost $300 million -- a little over $300 million in the first half.

And if I might follow up, could you talk a little bit about -- obviously, you're not going to give guidance for next year. But more of a range of where you might expect cash generation to be? And then, can you talk a little bit about the scale of the businesses requiring the remedies in the Rockwood transaction? Is it 5%, 10%, 15% of the acquired assets? And I'm in an airport, so I'll put it on mute.

Sure. I think in our investor day, we outlined what we think the next couple of years will be, relative to cash generation, assuming a certain EBITDA level. But I think the important items, our cash restructuring this year, we'll spend over $100 million. I think you can expect, in the next few years, that that will fall to, say, $25 million. We've been spending, in terms of cash, on pension, $140 million to $150 million. My expectation, that will be cut in half, certainly, as most of our European defined-benefit plans are fully funded. And the with lower interest rate environment, our liabilities have come down relative to our funding.

The capital expenditure line item, I think, will stay right around depreciation, but at $500 million, I think we can accommodate the Rockwood businesses and still spend right around that level, adjusting for the Augusta new plant that will be completed here in the first part of 2015. And I think the last component of cash, Bob, is interest expense. We have $900 million of high coupon bonds that become callable early in 2015. We just issued some bonds at roughly 4.5%. And the bonds that we would be calling are -- have an interest rate of about 8.5%. So I think we can reduce our cash interest expense by a significant amount, as we call those bonds in 2015.

So all in all, I think what we outlined was, at our target level of $2 billion of EBITDA in the next couple of years, we can generate right around $700 million worth of free cash before distribution back to shareholders, in terms of share buybacks and dividends. To your second question, relative to the size of the remedies that we're talking about, they are insignificant. I would think about them in the neighborhood of $5 million to $10 million of EBITDA impact in the entire pigments business.

Great. Thanks for the help.

P.J. Juvekar, Citi.

Hi, good morning. We talked about $2 billion of EBITDA in the next few years. Is that a 2017 target? And then, what has to go right? Or which segments have to contribute the most to get to that number?

I think, P.J., as you look at this, I would ask that you go back to our investor day slides, where we broke out where we were in 2013 and where we expect to be over the course of the next two to three years. So I'm not sure that I would necessarily say that that $2 billion result will occur in any one specific calendar year. But rather we believe that the business will be running at the $2 billion run rate over the course of the next two to three years.

As we look at that, some of the divisions we believe are able to reach a very specific target that we've outlined and that we have on our investor day slides. And as you look at the improvement in each of those divisions, they are all associated with a specific project that's been attached to that division. So we see our polyurethanes going to $875 million, which is an improvement from where it is today of about $100 million. We see our poly -- our performance products going to $500 million, which is only about a 10% improvement over the run rate of where we are today.

We see our Advanced Materials going to $175 million annualized run rate, which is about where we are today. Our Textile Effects going to $75 million, which is about -- a little bit further than -- from where we are today. Our pigments, and I think that this is the area where we would be expecting, perhaps, the greatest step forward from where we are today, we see that number going to $225 million, which is really getting the business back to a minimal nominal margin -- positive margin for the industry. And then we see the Rockwood acquisition adding about $350 million of EBITDA on top of that, which was -- it is simply the present run rate today plus [affected] synergies.

So as we look at that $2 billion run rate, I don't see any pie in the sky, we have got to go out and double margins in any one product, or have some ridiculous, unrealistic price increase or anything. These are all projects that have been announced. They have been approved by our Board of Directors. And it is just a question of executing on those. And I think when you look at our past quarter earnings, from where we were in 2013 to where we are today, we continue to see that sort of trajectory, and that improvement in earnings, to get us to that $2 billion. So I feel, today, even more confident in that number than I was when -- in March, when we gave that number to our investors.

Thank you. That's very helpful. And just in pigments, you mentioned in your slides that inventory levels are high. Have you seen a change in strategy from some of your competitors, in terms price versus volume? Thank you.

I'm not really seeing any change in strategy that would be material. I'd be very hesitant to talk about any of our competitors' strategy, just simply because I simply don't know what goes on. Can't even begin to guess what goes on in some of our competitors' thinking and so forth, when it comes to inventory and so forth. But anyways, as I look at our PIO2 in the first quarter, we had inventories of around 62, 63 days. Today, we have inventories in about the mid-50s.

And typically, in this industry, if you have inventories in the mid-50s, that's usually a pretty good area for -- to be able to achieve pricing. But obviously, there are other variables aside from inventory. Raw material costs, and demand trends, and seasonality and so forth. But certainly, I would see the pigments industry in better [condition] today to push pricing through than I would have in the last couple of (technical difficulty).

P.J., I will add, we no longer have the transparency we once had with the industry reporting inventories. And that was part of a legal settlement where we no longer have that mechanism. So it's hard to know exactly where inventories are, so these are our estimates on industry days.

Thank you.

Kevin McCarthy, Bank of America

Peter, you expressed some confidence that MDI operating rates would remain at 90% plus. Can you talk about the changes that you've witnessed on the supply side of the equation? And perhaps give us some color on where you see operating rates today, on a regional basis?

I would say that operating rates on a regional basis, it certainly would be a fairly tight North America demand, particularly in the end of June, it seemed to pick up. I think we saw, at the end of the second quarter, demand pick up that we typically see at the beginning of the first quarter, around housing and construction demand. So I think that -- and obviously, it is no secret that we had a pretty late winter, pretty late spring. And I think that we've seen kind of a bounce in housing in North American demand across all of our businesses at the end of the second quarter.

I think as we look at Asia, there's been some recent capacity that's come on the Asian market, particularly in China. I'd say that we're probably operating somewhere in the high 80%s. And in Europe, demand has been -- growth in the last year has been pretty flat. We've seen some stronger segments in the higher-end automotive in Eastern Europe and so forth, but it's been pretty flat in Europe. I'd say globally that you're looking at capacity utilization rates, probably around 90%-ish rate globally, but that's going to vary a couple percentage points, depending on what region you're in around the world.

And as we look more and more to our business, I think that our objective is to have our business less dependent on operating rates. As we go further and further downstream, you're going to have a business that's less dependent on operating rates than we would have had a year or two ago. And I would imagine the next year or two, as we continue to move further downstream, we're going to be less sensitive to operating rates across the board. So I would say, again, globally today, you probably give or take a few points around that 90% utilization rate

Great. And then the second question, if I may. Going back to your investor day, you provided a helpful slide outlining your various growth projects, MDI in the US and Europe, but I think you've got up PO JV in China, EO expansion, et cetera. And so my question would be, if you think about the last four or five months, has there been any change in those projects, with regard to cost, time line or expected EBITDA, that you would considered to be meaningful?

On the costing side and on the EBITDA side, I would say no. I would say that on the EO expansion in North America, I would -- I think at the investor day, we were talking about more of a first or second quarter 2015. I would imagine that that's going to be closer to a third to fourth quarter, probably fourth quarter 2015 -- I'm sorry, so a delay of probably two quarters. Now again, I want to emphasize, I don't see the price of the project going up. We're just engineering -- third-party engineering that should have taken a quarter or two as taken 2 to 3 quarters.

This is not -- just pertaining to Huntsman, I think it's more of an industry issue around a slowdown in construction. As we look at our pigments project and so forth, I see those on stream -- coming on about at what we told people in the investor day. Textile effects should be about what we told people. The MDI expansion taking place in the US and North America, these are smaller de-bottlenecks. That might be pushed back a quarter or so. But again, the annualized EBITDA impact of these might be pushed back a quarter or two.

But I don't see the EBITDA, once those projects are up and going, being impacted at all. As a matter of fact, again, as I talked about some of the slowdown in my comments that we're seeing around the world, I'm -- I would certainly think that it's safe to assume that our competitors and competing MDI projects around the world, if anything, collectively are being pushed back quarters, or even a year or so. And so I think that that's just going to push out the added capacity by another year or so. And I think it's going to keep operating rates from going lower than I would have thought a year ago.

Kevin, maybe I could just add one thing. The very first project you mentioned was the MDI investment in the Netherlands and the US. I think you can think about half of that coming on early in 2015, the US piece. The European piece would be the other half, and that comes on the first part of 2016.

Great. I appreciate the color.

James Sheehan, SunTrust

Good morning. I was just wondering if you could discuss the sensitivity of your downstream MDI businesses to benzene prices? Are they less sensitive to raw materials as the result of them being more specialized? And how does that play into your overall expectations for the polyurethanes segment in the second half?

I think that, if you look at it from the second half/first half, I think that the markets are tight enough, we feel quite confident that we will be able to offset these higher benzene prices with price increases. We've got, in the second quarter, an $0.08 price increase per pound that was effective July 1. Another $0.08 that's been announced for August 1. And I believe, from what we're seeing in the market, that we feel very confident at this point that we'll be able to offset the benzene -- the higher benzene prices that we saw coming out at the end of the second quarter.

Now, as you look at the downstream businesses, obviously, when you differentiate your product, the advantage that we have when you go further downstream is that benzene becomes less of a percentage of your overall cost. You're mixing more raw materials, you're mixing more components into your MDI. And so instead of benzene being 20%, 30%, 40% of your cost, it's going to be, obviously, quite a bit less than that. And therefore, I think that our pricing to -- our need to increase prices to offset benzene price increases will be easier, because it will -- it's a simpler -- it's a smaller percentage of increase we will be looking for.

So yes, I think in the short-term for the second half, I believe that we do have price increases in place today to offset the benzene prices that we have seen thus far. I would remind you that benzene moves on a daily basis. So I don't think we can look at prices today and say, that's what it's going to be three months from now. But I think the market is tight enough that we can offset those prices in the second half.

Thank you. And also on the Rockwood acquisition part of the business. So you gave some good color on color pigments, and some of the various pieces there. I was just wondering if you could elaborate a little bit more on the actual TiO2 portion of Rockwood? How is that doing, especially in the more specialized applications?

The more specialized applications are maintaining good demand, maintaining their margins, and that's an area where we are seeing better opportunity for price improvements than we are the more commoditized coatings end of the business. And I think the pigments business in Rockwood is playing out a little bit less than we had anticipated. The other non-TiO2 ends of the Rockwood business are playing out better than anticipated. And obviously, as we improve pricing in our own TiO2 business, we will see an impact -- we will see an improvement in the Rockwood business, as well. So I think that, as we anticipate further price increases taking place in the pigments then, we will see that on both sides.

Thank you.

Hassan Ahmed, Alembic Global

Morning, Peter

Morning.

Just wanted to get more commentary around the comments that you made around TiO2 pricing in the second half, possibly not being able to get it, despite inventory levels being, say, close to the mid-50s. Is this more of a function -- like you said, inventory seems to have been right-sized now. But is this more of a function of trying to find some stability in ore prices? And as and when those stabilize, you can probably go ahead with these price hikes sticking?

I'm not sure that ore price movements have a great deal of impact on TiO2 prices. This is a question of producers being able to hold the line with customers, and that's where the battle is being fought. I don't see a great deal of influence being pushed on TiO2 finished pricing because of what's happening in ore. I do see ore prices stable, if not having a bit of a downward pressure across the board, and this may very marginally help pigments. But the pigments industry is just going to have to get out there and raise prices, and that's a tough thing for any product to do. And to see material improvement in the business, that's what needs to happen.

Fair enough. Now moving on to the polyurethanes side of things. Obviously, you have a two to three year full cost of $2 billion in EBITDA out there. Just trying to get a sense of -- I don't have the numbers exactly in front of me. But I do remember that you guys did around 20% EBITDA margin back in 2005 in polyurethanes. Since that period, obviously, I would imagine MTBE has become a far greater contributor to the polyurethanes segment. So just trying to get a sense of what is baked into that $2 billion EBITDA estimate that you have, in terms of polyurethane EBITDA margins? Particularly keeping in mind the higher contribution of MTBE now.

I would say that of the $2 billion, relative to today's MTBE price -- so if I look at our last year's 2013 EBITDA polyurethane around $750 million. And we're saying that of the $2 billion where we see ourselves in the next two or three years, $875 million of that is going to be polyurethanes. I don't believe that there's any -- we're not anticipating any material changes in the PO/MTBE business, as part of that $135 million improvement.

What we are seeing is an improvement in margins on the MDI side, further downstream. And we see continued growth of 7% to 8% over the next two to three years. So that's really the improvement that needs to take place on that end. I don't think that it would be right for us to sit here and say that we believe the MTBE margins are going to be materially higher in a year or so.

Fair enough. But just for the segment overall, the segment this quarter reported 15% EBITDA margins. Is it fair to assume that, as conditions, particularly within MDI, tighten from here, you could get to North of 20% EBITDA margins in that segment?

I think -- yes. You point to 2005, when we had [20%] EBITDA margins, and we had a higher percentage of our business in components. And obviously, in very tight conditions, as we had in 2005, those components achieved higher margins than what I would say our systems will do in an extremely tight market. So our estimate is that if we had the 2005 conditions all over again, with the current portfolio of polyurethanes, systems and components businesses we have today, we wouldn't do 22% margins. But I think we would be approaching 20%. So I think high teens, up to 20%, is probably a good way to think about it.

The $875 million that we have in our $2 billion number, Hassan, that's probably around a 17% margin. And we're not sitting here saying that we're going to get back to 20%. I think that there's a strong likelihood that we will. I think that the market could very well get back to those sort of levels. But when we look at the $2 billion number, again, I want to be realistic. We're looking, and it's something in the upper teens. Is that number. If we get back into the same operating rates that we saw back in 2005, you'll see a number well North of $1 billion, not an $875 million of EBITDA.

Very helpful. Thanks so much, guys.

Frank Mitsch, Wells Fargo

Good morning, gentlemen.

Good morning Frank

Gentlemen, I want to come back to the Rockwood deal, Peter. And back in March, you guys were able to modify the transaction such that you lowered the cash portion by $50 million. And I know that you're proposing certain remedies to try and get this deal closed by the end of the quarter. And I was just curious, how should we think about those certain remedies impacting either the purchase price or the asset base of what you're going to be acquiring, or would like to acquire?

Frank, a couple of points. First of all, I think that we can cannot give details at this point, as far as what we're doing with EC, but we are confident that the remedies addressed the EC's major concerns. I would also add that the remedies are immaterial to the overall business. And it's consistent with what we set in the past, and they will not include a divestiture of a facility. And I think that's an important part.

We're been very consistent in that, and I think that we've given some light around the EBITDA impact as being immaterial to the business and so forth. So I don't think that there's anything different to report at this time than perhaps what we were saying last time. Only that perhaps we're more confident today that something's going to get done by the end of the third quarter.

All right. That's helpful. So if you get the commission approval by the end of the third quarter, how should we think about the inclusion of those businesses flowing into Huntsman? What time frame should we think about?

Fourth quarter event. Obviously, once we get the EU approval, we will be closing the business in a matter of days. And from that point on, we will be including those earnings.

All right, great. And you mentioned during the discussion on the performance products business, something about one-off sales. And then that was part of something that was negatively impacting EBITDA. I guess I sometimes think about one-off sales as a positive event. Any kind of color that you could provide as to what occurred there?

My apologies if that was at all confusing. What I was trying to say is, we had a maintenance shutdown, or maintenance work, that was approximately $10 million in expenses. We had [one-off] sales that were a positive $4 million. And so these one-off sales, these were catalyst materials. And the reason I say they're one-off, we have catalyst sales throughout the year, but I can't sit here and say, third quarter next year.

I can basically tell you how much amines we're going to be selling next year. As far as catalyst sales, those sales come in somewhat haphazardly, as catalyst wears down and so forth in our maleic business and other sales dealing with technology. So we have this $10 million hit in maintenance work. We had a positive number on the one-off sales, which kind of is a net six. And so again, yes, any time a one-off sale would be a negative, I'd question why.

(laughter) Thanks so much.

Mike Ritzenthaler, Piper Jaffray

Yes, good morning. A follow-up on raw materials and polyurethanes. To what extent did raw material escalation impact profitability in 2Q, given that the price increases came relatively late in the quarter? And I'd be interested in commentary on the effects, geographically, given that the benzene escalation is mainly a North American phenomenon?

Sure. Our materials were about -- we're talking year over year in polyurethanes, there was headwind of about $10 million, almost entirely in benzene. We've been talking about third-quarter headwind, with benzene continuing to go up. If it stays at about $5 a gallon, that's another, I think, $20 million of benzene headwind, by the way.

Yes. Okay. That's helpful to kind of look at it --

The pricing initiatives in the second quarter offset that almost dollar to dollar. So it's -- we do of a little bit of a luxury, in that when benzene prices go up, we've got inventory. And so by the time we run through that inventory of, if you will, the lower price benzene, hopefully we've got our prices up by the time we're taking it in the chops on the benzene prices, so --

Okay. That makes sense. And then just a follow-up on the component MDI sales in China. And I'm just curious as to how long that market is? And the spirit of the question is around how transient those component sales, because you're calling them out as a bit weaker, how transient that is?

No, we think that those are pretty solid sales in China. We have -- we do very little third-party sales in China, where we're going through brokers and distributors. The vast majority of our product there is going directly to the automotive, directly to the construction materials, and so forth. And so I wouldn't characterize our sales there as transient. I think, as we look at those downstream sales, we see those continuing to grow, and we see it as a very solid base.

Okay. Excellent. Thank you guys.

Robert Walker, Jefferies

Good morning. I just wanted to follow-up on polyurethanes, and some of the bridge items, looking into Q3 and Q4. When you layer everything together, can you walk us through Q2 to Q3, and then Q3 to Q4? And then on that, just to follow-up the previous question, to what degree could lower component pricing in China impact the downstream systems pricing?

I think the last question I'll take, and that is, systems prices tend not to move much. And so what we should, as MDI prices fall, if they were to fall, we usually are able to retain the system margin, and therein lies the upside and, if you -- given a real fly up scenario, we have last upside in the system business, but much more stable. I mentioned that we have a third-quarter headwind relative to the second quarter of about $20 million of benzene, if you believe in $5 a gallon benzene. And so obviously, prices need to come up, and Peter mentioned the price initiatives.

We have seen some softness in China -- Chinese Polymeric MDI pricing, and that is a result of new capacity coming on in China from our competitors. But we expect that to come back, as that volume is placed in the market. And we also expect to see prices in other regions rising. And we expect to offset that pricing in the third quarter, where MDI pricing on a sequential basis -- excuse me, MDI urethanes EBITDA will improve second quarter to third quarter and year over year.

Okay. That's helpful, thank you. Just briefly in pigments, previously, you mentioned the floor in that business being $100 million on an annualized EBITDA basis. Do you need pricing in the second half to get to that this year?

To get to [$100 million] for the year? No. We're on a run rate now of about $100 million.

And I would just say that, as we look at pricing, I did mention that we see prices in the fourth quarter slightly improving between now and the end of the year. Obviously, demand slows in the fourth quarter in TiO2. So it's a small improvement in pricing, a diminishment in demand, as it seasonally happens. And I would think that, as we look at the pigments pricing today, the net effect on all of that is, I think you're looking at a pretty flat third and fourth quarter in comparison to the second quarter.

Thank you.

Edlain Rodriguez, UBS

Thank you, good morning guys. Just a follow-up on pigments, Peter. In the last call, you said you thought the deal back in April was a better deal than it was when it was announced in September. Given the unimpressive results of the pigments business, both yours and (inaudible) in Rockwood, do you still feel the same way? That the deal is a better deal, and why is that?

Absolutely, I feel it's a better deal. I do on two reasons. If you give me some more time, I think I can come up with a lot more reasons than that. But just (technical difficulty) look, TiO2 is a great product. Longer-term, the price of this is going to improve. And we may be off a quarter or two on when prices will go up and so forth, but inventory rates aren't coming down in the industry. Demand is building. Our principal market in Europe, demand continues to improve in Europe better [than] GDP.

And longer-term, TiO2 I think is going to be a great product. But I guess what I'm more enthusiastic about, with the Rockwood acquisition, is the non-TiO2 piece. What we're trying to do here with our pigments is not just try to get sale of TiO2, but we're also trying to get diversity. We're trying to, other than expand vertically and get into a business where we're digging for rocks. We're looking at getting a business that is more horizontal in nature, where we've got color pigments, water treatment, wood treatment. And when I look at the diversity of our technology and the diversity of applications, of pricing and customers, and so forth, that's what we want at the end of the day.

So here you got a pigments, not just TiO2, but a pigments business, that while pigment pricing is flat, the other side, the other end of the business is more than making up for it. So yes, while I am disappointed in TiO2 pricing, I'm very impressed that the non-TiO2 segments of the Rockwood business are performing as well as they are today. And I think that that's better than what I had expected. So again, TiO2 will come back. If it's not this quarter, it is going to be in the coming quarters. It's a great industry. But the non-TiO2 business, the more I get my hands around that, the more I see that, the more opportunity I see in that business. It is a great business, doing better than we thought it would be.

And again, let's just do the numbers for you and remind you. We talked about $1 billion cash purchase price, $200 million of what we're going to say is trough EBITDA for these business, certainly trough TiO2 economics. So we're buying the business at 5 times trough with upside, and post-synergy, we have a 3 times EBITDA business at trough. What's not to get excited about that?

That makes sense. And one last question on advanced materials. You noted that you walked away from some low-margin businesses. So when you look at the portfolio, how much of that type of business is still left? Those type of -- that type of low-margin business? How much is still left in the portfolio?

I think it's probably 10%, or perhaps even less than 10%. We might be, if I look over the next quarter or two, we might be exiting a few more of those applications and accounts, depending on pricing. And look, we have done two areas in that business. And I hope that the market doesn't focus so much on price cutting, but rather where we are positioning ourselves in aerospace and transportation and automotive and industrial applications and so forth with our advanced materials group. And so yes, we're going to see sales down in -- as we reported this last quarter, we might even see that in the next quarter or two, see that continuing.

But when we would get it at the -- as we look at the aerospace industry and all these other areas of applications, if you strip out [and] monetize non-profitable end of the business, we're seeing 2 to 3 times GDP growth taking place in the other ends of the business. And that's where earnings growth is going to take place, and that's were the future of the business is. So I think as we look at that business, probably in coming quarters, a little less focused on cost, and much more focused on growth margin expansion and opportunities to further improve that business.

Okay. Thank you much.

Herb Hardt, Monness.

Good morning. The questions regarding the operating expense line. I notice you've been holding it flat to down a little the last couple of quarters. Is that going to able to continue? Can you actually drive costs down a little more in that part of the business?

The announced restructurings, relative to fixed costs, are really coming to an end. As we mentioned, we have performance products that has another $20 million to go with the shutdown of the Patrica Italian facility, and the sale of our Lavera, France facility in European surfactants. The direct costs are going to be largely raw materials, and so they will move with energy prices, generally. So again, what we're focused on is growth in this business. And with that growth, I think we're going to be able to improve our profitability as we grow, without increasing our fixed cost portion of our business.

Thank you.

Thank you.

We'll take -- Operator, we've gone a little over time than what we had planned for. We will take one more question here. Jeff Zekauskas, JPMorgan

Thanks for squeezing me in. So two things. I think Chinese TiO2 exports are up something like 50% to 60% this year, to about 275,000 tons from 175,000 tons. Does that have an influence on the market? And how do you see Chinese exports through the year in TiO2? And secondly, you talked about additions in MDI capacity in China in 2014. How much capacity do you think was added?

As we look at the TiO2, I see that as being fairly flat from here on out. As we look at the exports into US and exports in North America, I should say, into European market, that's really not growing all that much from the Chinese export point of view. Where you see the Chinese really growing their product is in further APAC, Africa, Middle East, and a little bit in Latin America and so forth. Look, eventually, those tons that are displaced there will come back, and mean that we have got to compete in those market areas and so forth.

But I personally, and I mean absolutely no disrespect to Chinese producers. Their technology is getting better and better, and I look at them as being formidable [competitors]. I just don't see Chinese exports as having a great deal of impact on pricing and margin. There's plenty of capacity. There's plenty of supply and demand in North America and Europe. As the producers there want to get serious, they can improve margins. So I wouldn't read too much into the Chinese exports and the impact that the Chinese are having in the markets.

In China, with the announced additions of capacities coming on in 2014, I'm reticent to start naming competitors and capacities and so forth. I would just say that we believe that the volume that's been added thus far this year, with the present growth rate that we see in China, we think that the vast majority of that capacity will be absorbed in the Chinese market. And that operating will stay relatively consistent in that market, and that operating rates will improve in North America and in Europe. So globally, you will probably see an improvement of a couple percentage points throughout the year, because you're going to see tighter markets in Europe and North America, and it's going to be rough.

You have got a new facility come on and 200,000 or 300,000 tons coming on in China. You're not going to absorb all that in one month, or even one quarter. But I think that these plants don't come up just overnight. When somebody has (technical difficulty) 300,000 tons into the market, it usually takes a couple of quarters for a MDI facility to come up and run at capacity run at design rate, and run on on-spec materials. So it's -- statistically, you say 400,000 tons is added into the market in the second quarter, but I don't believe that much capacity comes in on-spec, in the second quarter, all at once. It's a gradual impact that hits the market.

Okay. Thank you so much. Thanks, Jeff.

This is Kurt Ogden. I believe that concludes our call today. We want to thank everybody for joining us. And of course, if you have additional questions, don't hesitate to reach out to us. Thanks, everybody.

Thank you. Ladies and gentlemen, that concludes your conference call for today. You may now disconnect. Thank you for joining, and enjoy the rest of your day.