Huntsman Corp (HUN) 2016 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the Huntsman Corporation second quarter 2016 earnings conference call. My name is Sheila and I am your operator for today.

(Operator Instructions)

I would like to turn the call over to Mr. Kurt Ogden, Vice President, Investor Relations and Finance. Please proceed.

Thank you, Sheila, and welcome, everyone, this morning. Joining us on the call today are Jon Huntsman our Founder and Executive Chairman; Peter Huntsman, our 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 2016 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, adjusted net income or loss, and free cash flow. 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.

In our earnings release this morning we reported second quarter 2016 revenue of $2.544 billion. Adjusted EBITDA of $325 million and adjusted earnings per share of $0.53 per diluted share. I will now turn the call over to Peter Huntsman, our President and CEO.

Thank you, Kurt. Good morning, everyone, and thank you for taking the time to join us this morning. Let's turn to slide number 3. Adjusted EBITDA for our Polyurethanes division in the second quarter 2016 was $171 million, an improvement of $12 million compared to the prior year. More specifically, however, we saw a tremendous improvement in Urethanes EBITDA of $29 million compared to the prior year, whereas MTBE EBITDA decreased $17 million. Last year our EBITDA was impacted approximately $30 million by our planned PO/MTBE maintenance outage. The split was approximately $15 million in Urethanes and $15 million in MTBE. The $30 million benefit this year was more than offset by lower MTBE margins.

We continue to see strong MDI volume growth in North America and Europe, which grew 10% and 5% respectively. Most of the growth in North America is coming from our commercial insulation products, where underlying demand is strong. MDI continues to substitute for alternative materials we've partnered with successful customers. Demand in Europe is broad-based with notable strength in the automotive and elastomers markets.

Asia demand remains weak, primarily due to the economic slowdown in China. Within China, our differentiated products grew 7%, more than offset by a decline in lower margin commoditized component business. Our strategic emphasis on growing our downstream differentiated MDI business is yielding benefits. Our differentiated MDI business represents approximately 70% of our MDI Urethanes revenue. During the second quarter we grew our differentiated business by 6% compared to the prior year, and EBITDA margins expanded by 300 basis points.

MTBE EBITDA decreased due to lower margins. MTBE is valued as an octane enhancer and fuel oxygenate. C-Factors is an industry proxy for MTBE contribution margin. The C-Factor decreased 43% or $0.66 per gallon compared to the prior-year. The decrease in C-Factors was primarily attributed to lower-priced oil and lower refining margins partially offset by the lower cost of methanol. Today the MTBE C-Factors is 50% or $0.75 per gallon less than the third quarter 2015 average.

Depending on where it trades the remainder of the quarter, this represents an approximate $40 million to $50 million headwind in the third quarter year-over-year comparison, and an approximate $15 million sequential headwind in the third quarter. We expect to partially offset the MTBE EBITDA headwind with further improvements in Urethanes EBITDA. Though compared to a year ago our MTBE margins are under pressure, our integrated propylene oxide MTBE business generated 26% margins in the second quarter.

Let's turn to slide number 4. In the second quarter our Performance Products division recorded adjusted EBITDA of $86 million. Compared to the prior year, we had lower sales volumes and lower margins. Margins decreased compared to the prior year for a couple of reasons. Ethylene and other olefin margins decreased primarily due to the lower-priced energy complex. The means margins are lower primarily due to new industry capacity that came online at the end of 2015. Maleic margins are lower because competitors that experienced production issues in 2015 are now back in the market with full production.

With all of that said, our underlying margins remain healthy and are merely back to where they were two years ago. In 2015 the market was tight due to competitor production issues and the lack of new capacity to feed strong global demand. As you would expect, we maximized our position in the market at that time.

It will take a little while for the market to absorb the new capacity but we believe margins will improve.\ We are not standing still waiting for this to happen. We have a number of self-help measures underway to improve earnings. More specifically, we're leveraging our learning from our Advanced Materials restructuring, and have brought that expertise to bear in Performance Products. We expect minimal restructuring costs as we are focused on business optimization, not capacity rationalization.

Our ethylene oxide expansion is complete and will yield benefits in the second half of this year. We are integrating our Singapore polyetheramines facility into downstream polyols, eliminating the costs and inventory required to supply from North America. Our polyetheramines expansion in Singapore will be mechanically complete at the end of this year, with benefits flowing into 2017. With softer market conditions it will take some time for us to reap the full benefits from this expansion. During the second half of this year, we expect each successive quarter to be better than the last, primarily based on lower costs and improved volumes.

For modeling purposes, we have postponed our planned maintenance in our ethylene oxide and ethylene glycol units in Port Neches, Texas to the second half of 2017. This maintenance occurs once every four years, the cash cost will be less than $50 million and will last approximately two months. The EBITDA impact will be conditioned on economics at the time, and we estimate that would be approximately $15 million.

Let's turn to slide number 5. In the second quarter our Advanced Materials division reported $58 million of adjusted EBITDA, and EBITDA margins of 22%. Sales volumes decreased primarily due to soft demand for lower-value resins in our coatings and construction market. Importantly, however, we saw growth in our key aerospace market, which makes up more than one third of our earnings. Contribution margins improved in the second quarter compared to the prior year, as raw material costs decreased and we sold higher-value products. This business continues to produce quality results, and has become core to our business portfolio.

Let's turn to slide number 6. Our Textile Effects division reported adjusted EBITDA of $24 million in the second quarter. Sales volume grew 1% compared to the prior year. We've targeted certain countries as key markets such as China, India, and Bangladesh. These three countries represent nearly 50% of our total sales volumes. Our key countries combined grew 7%, primarily due to strong demand in Bangladesh and India, whereas demand was soft in China.

Continued focus on higher-value product ranges, lower raw material cost, and lower selling, general and administrative costs led to increased EBITDA margins to 12%. This business is really improving, and is running on an LTM return on net assets basis of 11%. Our second-quarter is seasonally our strongest as mills and retailers are preparing for the fall and winter season. We expect a seasonal moderation in EBITDA in third quarter.

Slide number 7. In our Pigments and Additives division we earned $31 million of adjusted EBITDA in the second quarter. Our TiO2 business is back in black with $10 million of positive EBITDA, and our Additives business reported $21 million. TiO2 sales volumes improved 4% compared to the prior year. In Europe, which makes up roughly half of our Ti02 volumes, our growth was greater than average, whereas we saw weaker conditions in Africa, Latin America, and the Middle East regions.

We continue to be disciplined with our sales volumes in an effort to maximize the effective capture of the announced TiO2 price increase. On a dollar basis, TiO2 prices improved approximately 5% compared to the prior quarter. This positive traction is encouraging; however, we are only now back to where prices were at the end of last year. We have much further to go, and we are pushing for further TiO2 price increases in the third quarter. [Key] industry TiO2 producer inventory levels are down relative to the first quarter, our inventory days decreased to the mid-40s, which is the lowest level in three years, and right where we would like to have it for this time of year.

We continue to see market conditions early in the third quarter that make us optimistic that we will carry momentum into the third quarter for further price increases. Trends and conditions for this business are improving. We should be well-positioned for our planned separation. In the second half of the year we will have some seasonality in demand. We have achieved to-date roughly $200 million in benefits and have ongoing initiatives for further benefits in South Africa, France, and Augusta, Georgia. The key driver for future improvement will primarily be conditioned upon improved additional recovery in TiO2 prices.

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

Thanks Peter. Let's go to slide 8. Our adjusted EBITDA decreased to $325 million in the second quarter of 2016, from $385 million in the prior-year period. During the second quarter of 2015, EBITDA was impacted by approximately $35 million due to a planned PO/MTBE maintenance outage. Sales volume, adjusted for the PO/MTBE outage, increased to 7% in the current quarter primarily due to strong demand growth for MDI and titanium dioxide.

Average selling prices decreased more than raw material costs, which led to an overall reduction in margins of $97 million. The lower margins were primarily in our cyclical businesses, but we also experienced tighter margins in our amines and maleic businesses due to competitive market conditions. Margins remain strong in our MDI, Advanced Materials and Textile Effects businesses.

Indirect costs increased $74 million in the current quarter, primarily due to higher sales volumes and reduced inventory levels. Compared to the prior quarter our adjusted EBITDA increased to $325 million from $274 million in the first quarter. Sales volumes increased due to seasonal patterns, average selling prices decreased at a more modest pace than raw material costs which led to an overall improvement in margins of $9 million. Indirect costs were $63 million higher in the current quarter, primarily due to higher sales volumes and introduced inventory levels.

Slide 9. As previously indicated, we are focused on generating more than $350 million of free cash flow in 2016. As of the end of the second quarter we are well on track towards our goal. During the quarter we generated $282 million in free cash flow, in part due to our increased focus on primary working capital. The second quarter has historically been a quarter where we have built working capital; however, this year, we generated $145 million of cash from primary working capital during the quarter. This was in large part due to our disciplined inventory management, reducing our average inventory days on hand by 14 days compared to the same quarter last year, and 13 days compared to the first quarter.

At the end of the quarter we had liquidity of $1.213 billion. This is an increase of $190 million from the end of 2015 due to our free cash flow generation. On July 22, we made $100 million early repayment of debt on our term loan B, due 2019. We expect to record less than $1 million in early extinguishment of debt costs in the third quarter related to this payment.

During the second quarter we spent $90 million on capital expenditures. As part of our completed ethylene oxide expansion in Port Neches, Texas, we received $26 million of capital reimbursement during the second quarter from our customer, with whom we have a multiyear offtake agreement. We expect to spend approximately $450 million annually on capital expenditures in 2016 and 2017.

We expect our annual depreciation and amortization rate to be approximately $430 million per year. Our income tax expense for the second quarter this year was $32 million. We paid $16 million in cash for income taxes during the quarter. Our adjusted effective tax rate for the second quarter this year was 23%. This was lower than forecast primarily due to lower MTBE and Performance Products earnings in the US. We expect our 2016 adjusted effective tax rate to be approximately 25% to 30%. Our MTBE earnings are taxed at the US statutory rate of 35%. Variability in our MTBE earnings will have a meaningful impact on where our adjusted tax rate will be within that range. We expect our long-term adjusted effective tax rate to be approximately 30%. Peter?

Thank you, Kimo. Let's turn to slide number 10. We are focused on three primary strategic financial objectives. The first is generating more than $350 million of free cash flow in 2016. As Kimo noted earlier, during the second quarter we generated $282 million in free cash flow and subsequently made $100 million early repayment of debt. In the near term, we anticipate further early repayment of debt.

Our second objective is growing margins and earnings in our downstream differentiated businesses. Our MDI margins are expanding, and our Performance Products margins are healthy, and our Advanced Materials business is maintaining strong margins.

Our third objective is separating our TiO2 business. At this point we are intensely focused on separating our TiO2 business through a spinoff, and although we continue to pursue other possibilities they will not slow down our spinoff process. With the next few slides, we want to give you a better view as to how we think about this, specifically the expected timing and what we're doing to accomplish this objective.

Let me state up front that I think we have a great TiO2 business, and we believe it is well-positioned for future success. However, it is our belief that the cyclicality of TiO2 causes the valuation of Huntsman Corporation shares to be undervalued. We think a separation will allow equity markets to value our businesses more fairly, and lead to higher independent valuation multiples of the different businesses. The separation will also enable the businesses freedom to pursue independent business strategies including, among other things, strategies regarding capital expenditures, mergers and acquisitions, and incentive compensation.

Our goal with the spinoff will be to create a Huntsman-type company. We will not overburden it with debt or abnormal environmental liabilities, or any other items that may jeopardize shareholder value. We aim to set up SpinCo for success. There are some meaningful milestones that need to be accomplished for a successful spin. We think these all can be accomplished within six to nine months. We are targeting year end or first quarter of 2017. Of course at some point we will make a definitive announcement and provide details for the separation.

We have been working on audited financials and expect to have those completed soon. After we make a definitive announcement we will file a Form 10 with the SEC, followed by some marketing before the separation date. We are currently contemplating a number of items that will impact the spin. These include the determination of which businesses will be most successful in SpinCo. More specifically, in addition to our Pigments and Additives divisions we are planning to include our Textile Effects division.

Other meaningful considerations we are currently contemplating include management, potential capital structure, tax implications, and Huntsman Corporation's retained ownership percentage. We're balancing the probability of other separation alternatives such as strategic combinations. We also want to make sure that we maximize value in a manner that will enable Huntsman's participation in the upside opportunity of the TiO2 cycle.

Let's go to slide number 11. We've provided an illustrative example of what's SpinCo may look like if we include our Pigments and Additives divisions along with our Textile Effects division. We are still working through what the corporate overhead costs for SpinCo would look like, so please consider that caveat. Fundamentally, we think that due to the TiO2 trough-like earnings conditions we are in today, there is a meaningful difference between current SpinCo EBITDA and what we expect to be on a more normalized basis.

Both businesses will have a diversified geographic business footprint, and both will have leading market positions. The addition of the Additives and Textiles business will stabilize the earnings cyclicality of TiO2 within SpinCo. Huntsman will end up with a portfolio highlighted by solid positions and above GDP growth. We think both companies will represent attractive investments, we look forward to providing greater clarity and detail in the coming months.

In summary, we had a solid quarter. We are seeing attractive MDI margin growth, TiO2 selling prices that are improving, and we're seeing a substantial improvement in our free cash flow generation. We think company shareholders will see meaningful appreciation in their investments in the coming months. With that, I will turn the call back over to Kurt.

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

(Operator Instructions)

Bob Koort, Goldman Sachs

Thanks very much. Peter, I was wondering if you could comment on your EO expansion given the economics in the markets today, do you think that still adds $35 million on an annualized basis to your EBITDA rate?

Yes it does, the vast majority of that EO going into EG, Bob, has been sold on a long-term pulling basis. So, I believe that again, in that expansion we wanted to get the incremental ethylene oxide for our own downstream consumption and amines and then surfactants on the ethylene glycol side, which is where the lion's share of the new EO will be going. We didn't want to be exposed to the market cyclicality of ethylene glycol so, the vast majority of that will be sold on a longer-term basis at fairly consistent margins.

Thank you for that. On Advanced Materials, it seems to be a continued trend here where you are leveraging your higher-margin aerospace business, but I was a little struck by your comments of weak markets in coatings and construction, which seem to be end markets globally that are still hanging in there. Is there something specific to your product line or the regions where you sell, or competitive intensity that made those tougher markets?

No, I think we're certainly not losing customers, I think that there are is a little bit of a softness that we are seeing in the Asian markets. Specifically around wind and in some of the general coatings areas around infrastructure and so forth. But longer-term, Bob, I think that is going to be a very consistent growing end of the business, and improving end of the business. But there will be some lumpiness quarter to quarter, but I do not see any trend that would raise any alarm.

Bob, when you think about our end markets and Advanced Materials, coatings and construction is the most commoditized market that we have.

Got it. Thanks guys.

Thank you. Hassan Ahmed of Alembic Global.

We much appreciated the additional color that you give on SpinCo, and the potential spin of TiO2. My question basically is twofold. One is associated with the spin. How are you thinking about the trade-off between a potential spin and sort of a strategic combination? So that is part one, part two is, if at all you do go via the route of a spin, do you believe that there is enough investor appetite for four publicly traded TiO2 companies in the US domain? What are your bankers telling you right now?

On the first one, as far as the strategic combination, one thing that this board is very focused on, management of the company is that we have certainty, and that we are able to deliver to the market as soon as we are able to, a successful spin.

I think that if we look at a combination, while they may look attractive some of the time -- and believe me we have kerry-combed the countryside looking and exploring various combinations with various partners around the world -- I think that a spin allows us to have a process that we control, a process that we believe that we will be able to reap a good portion of the upside as a corporation going forward, and our shareholders will be able to reap that benefit as well going forward, and this is something that has greater certainty behind it.

I do not think that our shareholder base, and I am speaking for myself in that base, has a great deal of appetite. It is a risk of perhaps going through yet another TiO2 cycle. So I think it is of paramount importance that we put certainty almost at the top of that list. It has got to be right up there with the value of having something completed. As we look at the overall appetite, I think that there is always an appetite for well-run, for strong market-leading positions in any industry segment. I believe that this TiO2 businesses is not just going to be another TiO2 business on the market.

We may not be integrated back up into the mining processes as some of our competitors are, but I do think that we bring a very attractive complementary set of businesses in the Additives end of the business in the color Pigments end of the business, where perhaps, horizontally, we have better integration and diversification than some of our peers, or any of our peers in my opinion. And I think that the added diversity of Textile Effects being added to that and consistent cash flow and the consistent EBITDA margins that business has matured into is going to provide a downside cushion, if you will, so that during trough economics we have a business that is going to remain profitable, cash flow positive, and continue to -- at the bottom of the cycle -- continue to be a strong viable ongoing entity.

Based on our current trading multiples relative to comparables in TiO2 and our other peers for Huntsman Corporation we think both companies will trade up relative to the current multiples.

Very fair. Now as a follow-up, sort of switching to TiO2 fundamentals for a second, obviously some of the price hikes for Q2 start, it seems that you guys sound quite positive in terms of prospects for Q3 price hikes sticking. Could you comment a bit about trade flows because one of the price dampers, at least over the last year, was incremental product arriving from Europe into the US. Primarily I would imagine because of the dollar strength to Euro weakness or the like. In terms of trade flows, are you seeing normalized trade flows, anything sort of suspicious going on over there?

We are not seeing any -- we look at over the last quarter so we are not seeing anything unusual that would give us any belief that there is a great deal of an overbalance that is going from one region to another region, or a great deal of volume moving around the world at this point. Out of what we would normally be seeing.

Perfect. Thank you so much Peter.

Thank you.

Jim Sheehan of SunTrust Robinson Humphrey.

Morning. Peter, are you still expecting your 2016 EBITDA to be basically consistent with 2015 levels?

Well, as we look out over the next year we really have not been in a position where -- we gave some first-quarter guidance, and I think that there might be some lumpiness in some of those numbers like MTBE and so forth that are volatile, but I am not aware of any 2016 guidance that we have given in comparison to 2015 of late.

Okay. So then on TiO2 pricing, you have got some pricing in the second quarter, could you comment on what your realization was relative to the nominated pricing, and how much realization do you expect in the third quarter as well?

Taken together with both of those increases, I would say that it is safe to assume that we will get half, perhaps slightly over half of the announced increases between those two quarters. That would be spread over second and third quarter.

Okay. And on your free cash flow it looks like that really changed from the normal seasonal pattern you have had over the last few years, and you talked about the inventory changes that you made. Do you think that, that type of benefit from inventory is sustainable in the second half, and relative to that, what do you think that free cash flow would look like if you sustain that type of performance?

I think that we brought our inventories down to what they needed to be from a normalized standpoint. Now from here on out, second half, you will see the normal seasonal trends, so you will see benefits in working capital in the second half of the year, primarily in the fourth quarter as we usually do. This was a very focused effort using outside help in some cases to really systematically bring our inventories down from a supply chain process standpoint, in three of our five divisions.

And, you heard the -- specifically kind of the efforts that we have made in our Pigments business, but also in polyurethanes and in Performance Products. So, we believe, again, second half of the year you will see normal seasonal trends as our fourth quarter tends to be softer and you see working capital come off, but this is a sustained improvement from a relative days perspective that we should be able to hold onto in the years to come.

Kimo, how confident that you are that you can exceed the $350 million free cash flow this year.

We are confident.

I feel very confident on that.

Frank Mitsch of Fargo Securities.

Good morning. I want to start with an unrelated comment. I know Jon is there, hey Jon, my wife and I had chance to visit Huntsman Springs in Driggs and were extremely impressed. Congratulations on a terrific community you set up there.

That certainly would be an area of great focus and I would encourage anybody and everybody to take advantage of it.

I tell you it is something else. Peter, you talked about trying to bring some of the self-help that you did in Advanced Materials over to Performance Products and improve the profitability there. Any sort of metrics that you might be able to give to us in terms of the size and the timing of those efforts there?

I think that as we continue on through the remainder of this year, I am not sure that from a market perspective we are going to see a great deal of market improvement, but we think that the self-help should be about a run rate of around $80 million improvement in 2016.

Now, some of that, I think we might lose that as we see margins compress the first half of the year. But as I said in my comments, we are expecting in the second half of the year, margins to be flat and/or improve in the various businesses there. So the margin improvement that we see between now and the end of the year, 100% plus of that will come about through self-help exercises.

So that's run rate $80 million by end of the year.

All right. That is helpful. Obviously on the polyurethanes side you have a yin and a yang, MDI is doing a bit better, MTBE not much, can you give us your take on MDI supply/demand balance for the balance of the year and into 2017?

I think the we're at that -- kind of that tipping point of being somewhere in the high -- globally -- being somewhere in the high 80% to pushing that 90% capacity utilization. And again that is globally. Obviously in China and in Asia you're going to be below that, and in the US -- in Europe you are going to be right in that area and in the US I think you are going to be a little bit tighter than that.

So I think that you are going to have opportunities to expand further margins and so forth as we go throughout the year. You will see some seasonality in demand and so forth. But right now we are seeing global capacities somewhere in the mid -- 86% to 87% capacity utilization. With Europe and Americas in the mid 90% and China substantially below that, probably even below 80%.

All right. That is helpful. Thank you.

Thank you.

John Roberts with UBS

Good morning guys.

Hey, John.

On the original separation idea way back when, I think there were going to be two classes of stock, and I think there was a 30% IPO initially, but with the super voting stock you could maintain cash flow consolidation. Are you thinking about that, or something more simple this time?

Well, you are talking about two years ago, three years ago when we announced the transaction we were thinking about an IPO and the ability to spin post-IPO. We are moved off the IPO idea, this is a straight spin with a retained portion on the back end. As you know, the IRS rules are 50% economic, 80% control, or vote, and so we're working within those parameters in terms of thinking through the spin.

Then, once you deal with the spin, maybe one of the next problems they are going to have to deal with at some point might be MTBE, since that seems to be a big part of the volatility for new Huntsman, post-spin? Is there any option there to have a tolling arrangement, like you just talked about you do with ethylene oxide?

I am not sure that -- yes, we have looked at those sort of things but you know while MTBE does have some volatility with it, I think that when you look at the cash generation of that business and when you look at the overall margins of that business, as I said in my comments, this last quarter our propylene oxide/MTBE business had a combined margin in the mid-20%. That is a very healthy business, and it's a business that is generating quite a bit of cash out of that, so, as we look at the possibility of perhaps looking at some means or mechanism of controlling some of that volatility, I seriously would be remiss to do it if it's going to come at the expense of margin or cash generation.

Thank you.

Alexsey Yefremov, Nomura Securities.

Good morning. Thank you. Peter I just wanted to confirm, did I hear you right that Performance Products will trough in the second quarter and will improve in each subsequent quarter this year.

At the present time, as we look at market demands, pricing and the improvements that we're making in the business, that would be our forecast, at this time. I would remind you that our performance product is made up of our amines business, our maleic anhydride business, our upstream business of ethylene, ethylene oxide, ethylene glycol and our surfactants business. So within that portfolio you have got businesses that range, are pushing the 20% margin, more of a specialty-oriented application down to a very commoditized sort of an ethylene.

I think on an integrated basis it all fits together quite nicely, but it does have a bit of lumpiness in there. So, if we look at market conditions right now, in the second half of the year we are expecting the business to have troughed. The capacity that has come on in the amines sector, that has kind of laid some of the margins back to what I would call more normalized levels, has fully hit the market and has been absorbed in the market. And, I think that certainly market conditions from here on out certainly ought to be looking better in the coming quarters than it has in the past couple of quarters.

Thank you. Then turning to TiO2, if you take the second quarter price increase and what you could realistically get in the third quarter and then fast-forward to eliminate the effect of all the lags, where would it put your annual EBITDA run rate for Pigments and Additives.

I think it puts it right in that range of around $100 million run rate, which is kind of where we told the market we think you need to have it be for a spin. Now, as we look into the third quarter I think that we are going to see the benefit of price increases. You are also going to see seasonality, last year we saw a fall off of high single-digit percentage of demand, which is again, that's seasonal for the entire industry in the third quarter.

So you'll see the balance of both of those two coming into the third quarter, and we are a few weeks into the third quarter. It's a little bit early to speculate as to exactly where we think the outcome of the third quarter is but all of the trends that we see in TiO2, from demand to pricing to inventory levels and so forth, lead us to believe that we are certainly going into an improving market condition in the Pigments business.

Thank you in the final question if I may for Kimo, how big is sort of this one-time working capital benefit that you experienced in the first half, that we may sort of not get next year?

Well, I think we broke it out in the release, our inventories improved by about $100 million. That is sort of what we typically do not see in the second quarter.

Okay. Thank you very much.

Ivan Marcuse of KeyBanc

Hi. Thanks for taking my questions. My one question would be on the new Huntsman, what would the free cash flow profile look like? Meaning, how much CapEx of the $450 million goes with the spin, and how much of the inventory benefit that you have had this year would be related to the pigment and textile businesses versus the NewCo.

So, of course free cash flow is difficult to determine before we put the capital structure together in terms of interest and so forth. But I can comment on CapEx. We typically will spend roughly $80 million of CapEx in our Pigments and Additives business and $20 million in our Textile Effects business. There's probably an additional $20 million of pension needs in those businesses, fundamentally. And, then of course you have got interest and so forth. The Pigments and Additives business from an inventory standpoint had good improvements, their inventory improved I think in the order of $60 million.

Okay. Great, thanks. Then last a follow-up, I know this is maybe a little too early, but where would you expect the dividend, do you expect it to stay with the NewCo, or would you split evenly, or how do you envision that? Thank you.

I think for the time being the plan would be that, that would remain with the existing Huntsman Corporation and as we get closer to a spin our Board of Directors will be addressing any change that may be taking place there. But at this time it would be planned that, that would remain with the existing company.

P.J. Juvekar Citigroup

Thank you, good morning. Can you talk about the ore market, ilmenite, slag waters, rutile. It seems like the sulfate ores are a bit more advantageous right now. So can you talk about your mix today and what you are seeing in terms of ore pricing?

I think that the mix that we have today is really the same mix that we have had for the last year. We have been saying for the last year that we think longer-term just because of the number of players, and the number of mines and so forth, that sulfate mines and supplies of slag are going to be advantage to other slags, and our capital investments over the last year or so in this business have been focused on: how do we take further and better advantage of those economics? Everything that I am seeing in the ore markets would lead me to believe that, that is exactly what is happening. And, we are continuing to see the advantage for sulfate bores, and that is where the preponderance of our raw materials sourcing is coming from.

MMI prices are low, they are very low, call it about $120, $130 a ton, and if you look rutiles, you are at $1500 a ton and chloride slags in the -- $500, $600 a ton, so those ilmenite prices are significantly lower than chloride ores are.

Thank you for that. Are these prices moving up as these guys see you raising prices and they are too? And what is happening to Chinese TiO2 exports?

Well, TiO2 exports are -- I would not say that they are giving us any concern. There has been a surprising amount of consolidation in the Chinese market so, I think that the Chinese exports are probably going up a bit, EU and US is pretty flat with inner market trades and so forth. As far as increases on ores and so forth, certainly a lot of talk out there, but I think that as we look at the ilmenite ores, I think that again we are in an enviable position there. We are certainly not in any position, when you look at the pricing of TiO2 today, to be accepting raw material price increases.

Thank you.

Thank you next question Laurence Alexander of Jefferies

Good morning. Two quick questions, one, with the spin, what is the thinking around -- will it be as independent, would it be a separate set of managers, or will you have oversight on the SpinCo, or how are you thinking about that?

As you know Laurence, these are dictated by the IRS and they are very independent. Management and independent boards that will be required to get a tax-free spin done here.

Secondly, when you think longer-term about the CapEx cycle and the leverage ratios for the new Huntsman, you have a history of some fairly capital-intensive growth opportunities. How do you think about managing leverage ratios across that cycle, and if you can also maybe speak to appetite for diversifying the new portfolio if you get a better currency to use for acquisitions.

I think we get a better currency used acquisition, that is going to be something that can be very appealing to us, and something that we would expect to be seeing from NewCo would be a higher multiple, and the opportunity to use equity as cash in that sort of instance. But our priority today Laurence, is the continued paydown and reduction of our debt, and again I think we will be reporting on the capital structure of NewCo but I would not see it being any more leveraged than what the Huntsman Corporation is today.

Okay thank you.

And Laurence, just to remind you, there will be some debt on SpinCo, so there will be a dividend back, and then this retained interest will be -- the reason for the retained interest, frankly, is just that as TiO2 recovers the Huntsman Corporation can enjoy some of that upside and use some of those proceeds to repay debt as well.

We mentioned, of our $450 million of normalized capital, roughly depreciation, $100 million of that will be capital from SpinCo, and I think if you look at certainly 2016, and in the past few years, those businesses didn't generate a whole lot of cash, and so our cash flow profile and our ability to repay debt will be enhanced with the Spin.

Perfect. Thanks.

Jeffrey Zekauskas of JPMorgan

Thanks very much. What was your unadjusted EBITDA in the quarter? Was it about $280 million?

If you look on page 8 of the earnings release. Sorry, give me a minute and I will calculate it for you.

Okay, maybe while you are looking I can ask another question. In bringing down your inventories quite a lot, did you liquidate any LIFO layers and was there a benefit or a harm to earnings per share from that?

There was a significant fixed cost movement in stock, and LIFO noise in the quarter, and it was significant. It was in the order of $30 million, $40 million Jeff.

$30 million, $40 million -- forgive me, is that in addition to earnings (multiple speakers).

It's headwind.

It's headwind at a DA basis.

And unadjusted EBITDA is $278 million.

$278 million. Okay, good. Did you say what your China MDI growth was, or China MDI market growth in the quarter?

China -- well, Asia was flat which is mostly China.

Asia was flat. And if, in your Pigments and Additives business, if you're TiO2 prices were up 5% sequentially, but the division as a whole, you were up 2% sequentially, then I guess the performance additives prices must have been down my guess is about 7%? Is that true and what is happening in performance additives?

I think we had pretty good quarters. Walk me through, Jeff, again, the numbers you are using?

I thought you said that TiO2 prices went up 5% sequentially, and in your slide it said that your sequential price increase for the division was up 2%, and TiO2 is a much bigger operation then performance additives, so if TiO2 is up 5% you need a large decrement to get up to, sequentially, for the whole division.

Sorry. I am looking at year over year, so sequentially the way I think of it is, TiO2 price gave us roughly $12 million. There was some benefits from insurance in the quarter from our explosion at Uerdingen, that gave us really the rest of it. So we were going from $15 million to $31 million, there was a couple million bucks from the Uerdingen insurance proceeds, but it was almost all price.

So what is happening in price in performance additives, and forgive me, did you start up your new capacity in that area, is it producing, what are the conditions like there?

Yes we are. We are not really seeing the benefit, the benefit really comes from shutting down smaller facilities throughout the US and consolidating. So, while it is up and going and we are producing on spec material, it's not running at capacity and we have not yet seen the real EBITDA benefits from the Augusta, Georgia facility.

Okay. Great. Thank you so much.

Just also as a reminder, part of that is going to be with the construction season and so forth you do have grade variation and all of that as well. So I would not say that they are long-term macro trends here, Jeff, that we are focused on, as much as you are going to have a variability in mix of product.

Okay great. Thank you so much.

Roger Spitz of Bank of America

Yes, this is Chris Ryan on for Roger. In the Performance Products, which amine saw increased competition, and for that increased competition what was driving that, was that all new capacity or was that lower demand as well?

I think that it was mostly the polyether amines, and it would have been a combination of de-bottleneck projects that were started a year, year and a half ago when markets were exceptionally tight. Most all of that was coming from Asia, where there was a large demand pull-through on infrastructure, wind projects and so forth and so, yes, it is really in those two areas.

Okay. Thank you. That is all of my questions.

Thank you.

David Wang with MorningStar

Hi. Thank you for taking my question. I just have one on Polyurethanes business. You made a comment that MDI margins are expanding, and on the slide it shows that quarter-on-quarter pricing, at least in local terms, was flat. So I was wondering if you could walk us through what has driven the improvement in margins, is it lower costs and is the a margin impacted by a mix shift between your components and differentiated businesses, or are they expanding in both segments?

We are creating an expansion as I said in the comments, of 6% in our downstream differentiated basis. We are also seeing a 20% drop in benzene raw materials costs and so forth. So, I think it's a combination both of raw material benefits and also moving further downstream and improving margins there.

And remember, we saw some growth, so 4% global growth on our volumes is greater than $10 million of EBITDA as well, on a year-over-year basis.

And, presumably your competitors would also benefit from the drop in benzene raw material costs, so would you expect to see greater pressure at least on the component side for margins going forward?

Not really. I mean, when we're looking at capacities in Europe and in the Americas in the mid-90s, I do not see that the market is sloppy enough to be giving away raw material fluctuations and so forth. So, no, I do not see that at this point.

Thank you.

The last question is from Edlain Rodriguez of UBS

Thank you. Good morning. Two quick questions, Peter. One on TiO2, one is a clarification. Of the two price increases, $158, almost like $300 per ton, how much did you say you expect to be implemented by the end of the year and, two, looking into 2017 what is going to keep the pricing momentum going?

Well, I think that as we look between now and the end of the year, I'll only speak between now and the end of the third quarter, because we have not announced any pricing initiatives or anything in the fourth quarter. As we look at that $300 a ton, I would expect that we should get slightly more over the second and third quarter, we should get slightly more than half of that spread out over the two quarters.

And, I think that as we look at 2017, going forward, just some of the macroeconomics that I see, I do not see people formulating away from TiO2 as we have seen in the past years. I think that there have been a number of closures that have taken place in China, there have been some that have been taking place outside of China in 2017. I do not see any new capacity anywhere coming into the market that is not being correspondingly offset by capacities that are being restrained. And I think that with the low margins in TiO2, that manufacturers of TiO2 frankly have to generate more money for shareholders in these areas.

So, I see greater pricing discipline taking place in TiO2. I see a lot more positive than negatives in TiO2. I think it is going to be an ideal time to be spinning this to shareholders, and I think the business is going to be on a strong footing on a standalone basis and it is going to provide some significant upside in the next couple of years as you look at the TiO2 pricing and margin expansion that will be taking place.

This is a business that on a normalized basis, would normally be kicking out $400 million plus dollars of EBITDA, and you do not have to go back very far in the past where the business was doing double that, on an adjusted basis, when you take into account the cost cutting, the combination of assets our spin, and the execution of our spin. So, I think it is the right time and I think that we have got the right combination of assets doing this going forward.

Okay. Thank you very much.

Thank you.

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

Thank you, Sheila. We want to thank everybody for joining us on the call today. To the extent that you have additional questions please feel free to reach out to the investor relations team, we are happy to engage further with you. Thank you again for joining us.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.