Huntsman Urethane Comments from Investors’ Call

Peter R. Huntsman – Huntsman Corp.

Ivan, thank you very much, and thank you, everybody, for taking the time to join us this morning.

Let’s turn to slide number 3. Adjusted EBITDA for our Polyurethanes division for the fourth quarter was $261 million. Our MDI Urethanes business, which includes our propylene oxide, polyols and system businesses recorded adjusted EBITDA of $245 million. This compares to $148 million of a year ago, and $291 million for the previous quarter. Our MDI Urethanes delivered 10% volume growth year over year, demand remained strong, and we continue to operate at a high rate of capacity.

Let’s turn to slide number 4. Our strategic focus of growing our downstream specialty and formulation businesses remain unchanged as we shift more MDI from components to systems. In first quarter, we saw 15% year-over-year growth in volumes within our differentiated business. Looking at growth, regionally in the quarter, our North American volumes increased 14%. The strong volumes were primarily driven by our composite wood products, insulation and adhesive sectors. With our China expansion gradually ramping up, some North American product previously earmarked for China is now being freed up, enabling stronger growth in North America.

Demand remained strong for our MDI in this region, and we expect to show a positive rate of year-on-year organic growth in North America throughout 2018. Our European region MDI volumes increased 11% in the quarter. We saw growth across all of our key European markets, including our differentiated insulation systems business, along with our ace (00:04:23) and automotive businesses. India, the Middle East and Russia also continue to see double-digit growth.

Asia volumes increased 4% versus the prior year, as we remain capacity constrained in this region. Our new China facility continues to start up, which we expect to take a period of about nine months to reach full capacity. We will bring on this new capacity as market dictates.

Fully in line with the market conditions that we described in our last earnings call, our component business continues to benefit from remaining spike in margins, specifically in Asia and to a lesser extent in Europe. As expected, as the result of industry outages being resolved and new capacity entering the market, the short-term spike in margins was reduced. We estimate the remaining benefits of the short-term spike to be roughly $40 million, which is less than half of the benefit we saw in the fourth quarter.

We expect that potentially half of the remaining $40 million will be lost in the second quarter and the remainder throughout the rest of the year. However, this will be partially offset by strengthening MDI systems margin and the gradual addition of higher Asian sales as our new Chinese MDI capacity comes on line.

It is very important to point out that the industry remains tight globally and any significant unplanned outages could cause the return of short-term margin spikes, as we have seen in the past. Recent demand for MDI is growing at about 6% to 7% globally on an annual basis. As such, in order to keep up with this expected demand growth, industry capacity needs to expand at about 400,000 (sic) [400] kilotons annually. This is the equivalency of a world-scale facility per year. With recent announcements of additional debottlenecks within the industry and coming into the market in the next three years, and assuming a timely delivery of such expanded capacity, we believe capacity will grow at 5% per annum between now and 2022, which is still short of the expanded demand growth of 6% over the same timeframe. Therefore, industry supply/demand dynamics will remain tight for the foreseeable future. This may be a new normal for the industry. As we have good visibility, do not see any greenfield capacity entering the market for years to come.

Regardless of possible periods of tightness in the future, we are focused on what we can control. We remain steadfast in our strategy of moving more of our business into stable and higher margin derivatives and formulations. In addition to our organic initiatives, we will continue to look for value creating and creative downstream bolt-on acquisitions that allow us to pull through significant volumes of lower margin polymeric MDI into more specialized and higher margin formulations.

These acquisitions will give us entry into new markets and an opportunity to leverage our global platform to grow the existing business. We have a proven track record of downstream urethane bolt-on acquisitions that provide significant synergies through MDI pull-through and global scale-up. The acquisition of Demilec is our most recent addition in our continued strategy to grow our downstream business. While there will be some cost-related synergies, the majority of the benefits will be seen over the coming years from our ability to pull through roughly 50 million pounds of polymeric MDI into more stable, higher margin formulations that are growing at a double-digit rate per year.

By the end of 2018, we expect to achieve a run rate of approximately $15 million (00:08:32) of synergies, giving us an annualized run rate EBITDA in excess of $40 million. In addition, it’s our intention to leverage our global MDI Urethanes platform to expand spray foam insulation systems in the global markets in Europe and Asia.

Looking out to the second quarter, we would expect our MDI Urethanes business to be slightly down sequentially, but significantly up from levels of a year ago, as we anticipate further reductions of the short-term spike margins, given where we see Chinese polymeric margins today. Again, this will be partially offset by our seasonally stronger volumes and continued growth in our downstream businesses.

Matthew DeYoe – Vertical Research Partners LLC

Okay. And then, we had heard about some operational issues in MDI during the quarter, specifically, Rozenburg, I think, is said to be operating below rate, though I don’t think you declared force majeure. And then similarly, we kind of suspect Geismar might have had some issues, just given the freezing conditions experienced throughout January. Can you quantify any operational hits during Q1 for MDI that you might have had, if there were any?

Peter R. Huntsman – Huntsman Corp.

Yeah, I think most of the industry went through some phase of a freeze along the US Gulf Coast in that January, late January, early February. While our Geismar facility wasn’t affected, some of the ancillary offsite suppliers of services were affected, and which subsequently affected our facility indirectly. And we also did have some issues again with an offsite facility in our Rotterdam MDI facility. I’d say that in the first quarter, it’s fair to say that both of those upsets, the one in Geismar and the one in Rotterdam, probably cost us around $4 million or $5 million a piece during the quarter. So had we not had those, we probably would have done $5 million, $10 million better in the quarter. But, again, I would not say that either of those were terribly unusual, given that you usually have upsets like that during your winter months.

Daniel Rizzo – Jefferies LLC

Okay. And then just with the acquisition, could just give us color on timing to capture the synergies?

Peter R. Huntsman – Huntsman Corp.

I think that it will probably be the latter part of the year when we have the full impact. Again, most of those synergies are that we will be taking our lowest valued MDI margin business, and moving that into the Demilec acquisition. That’s obviously going to be a process that will require some requalifying and making sure that the supply chains and so forth don’t cause any disruption, the changeover of supply doesn’t cause any disruption to our customers. But when you look at what we’re really trying to do here in the business, it’s really gradually to take that commodity component MDI business and continuously uplift that, in this case, 50 million pounds of business into higher-margin applications.

And so, it’s a process that won’t take place overnight. Now, obviously, I kind of see three components to the synergies in the business growth opportunities there. Really four. I see one as being the organic growth of what was the Demilec business, now Huntsman. And I think they have an aggressive growth that has been over the last couple of years growing at better than 10%. We see that continuing internally. Number two, we see the integration of taking low value component MDI and upgrading that through the Demilec routes to market. Number three, we see an opportunity to look at the SG&A, the overall cost of doing business and so forth, and while that number won’t be nearly as large as the pull-through economics on MDI, there will be a synergy component there.

And lastly, we’re interested (00:29:17) to take the great marketing, sales expertise and so forth that Demilec has and take that to rapidly expanding markets around the world, something that Demilec has been unable to do. We already have routes to market in China, throughout Europe, throughout Central Asia and so forth. And so, we see all four of those steps as being vital to this business becoming a $40 million, $50 million EBITDA business here over the next year or two.

Eric B. Petrie – Citigroup Global Markets, Inc.

I wanted to ask about your MDI capacity forecast of the 5% CAGR through 2022. Does that include any discounting of announced projects or similar ramp to full capacity of the nine months that you assume for your own capacity at Caojing?

Peter R. Huntsman – Huntsman Corp.

That is assuming that everybody that has announced in the industry comes on when they say they’re going to come on at the capacities that they say they’re going to come on, which I don’t believe has ever happened in the history of the industry. But again, that’s our assumption. I’m not here to discount what competitors may or may not do, but that is taking every publicly announced debottleneck expansion and assuming that it’s all going to come on at full capacity, as stated publicly.

Eric B. Petrie – Citigroup Global Markets, Inc.

Okay. Following the completion of your Rotterdam and Caojing joint venture expansions, how does your capacity split change between the component or polymeric MDI versus your more downstream specialty MDI?

Peter R. Huntsman – Huntsman Corp.

Well, today that split would be in the mid to high-70s. And I would imagine that if we were operating – we get to a point later in the year, early next year, when we’re operating at full capacity in Caojing, that split would probably drop down to the low-70s. And you lose a couple of points on that, but again, I also just want to make sure that the market doesn’t have this perception that it’s either low margin component or high valued differentiated formulation. I think that it’s more of a line going from the bottom left hand to the upper right hand, along that line, there are going to be some component businesses and business opportunities, particularly, for instance, in North America, where it’s a more valuable, higher margin, strategic, bigger volume business for us. In certain areas, it’ll be component, then some of our downstream formulation businesses may be in Europe or Asia.

So I don’t want to leave the market with the impression that eventually we’ll be at 100% all formulation. I’m not sure that’s the right strategy. I think the right strategy is that you continuously want to be bottom slicing your MDI margin business and upgrading that. And some of that is going to be upgrading to higher value component. Some of that’s going to be upgraded – most of that would be upgraded into higher value added formulation. And I believe that that formulation, the beauty of the formulation, while you may jeopardize some of the peak margin in that formulation, is that you will have higher and more stable margins on average through the cycle. And that ultimately is what we want to do, not just in Polyurethanes, but in Performance Products, and Advanced Materials, Textile Effects, to be able to have a total group of assets that are going better than GDP, and where you see a stable and consistent generation of cash and value.

Hassan I. Ahmed – Alembic Global Advisors LLC

Very well, thank you. Peter, in the past, you’ve talked about how long it takes to sort of start to finish, set up a MDI facility, and even once an MDI facility is mechanically complete, it could take as much as two years for the facility to be sort of at optimal operating levels. So with that in mind, you talked about a dip in MDI margins, Q4 to Q1. Obviously, I would imagine some of these facilities that had some sort of short-term issues coming back on line. But obviously, you had some greenfield facilities coming on line in the Middle East in particular. Have you guys seen that product in the market now? Or asked differently, the facilities that came on line in 2017, are they in your view fully sort of running at optimal operating rates?

Peter R. Huntsman – Huntsman Corp.

Well, I obviously can’t speak for what the competition might be doing in the Middle East, but I believe from everything I’ve heard from what they’ve said publicly, that they are running that facility full-out. And I would remind you, Hassan, that that is a component capacity, all the MDI coming out of that is component. And so, while I think it may have an impact on the wider component market, we’re not seeing a great deal of impact and (00:43:58) competition, obviously on the downstream business. Now, there might be a knock-on effect that you’ve got some component going into a market and then other competitors are taking their component business and moving it, perhaps into the formulations and so forth. But by and large, on the non-component business, which is the vast majority of our MDI sales, we’re not seeing a lot of impact on that competition. But from everything I’ve heard and from everything that I’ve anecdotally seen within our own business, I believe that they’re running at or very near capacity and then I think that they probably started up initial from, again, just news reports (00:44:34) about a year ago. And so, I think that’s probably – that seems about right.

Unknown Speaker

Hi, good morning. This is Connor Cody on for Mike (00:48:29). So I was just wondering your volume in differentiated MDI has been in the mid-teens the last three quarters and is that a good rate going forward? And what have been the strongest geographies and end markets to drive that growth?

Peter R. Huntsman – Huntsman Corp.

Well, I think that what we’ve been doing in the past with our differentiated formulation business, I think that we showed you a chart last quarter that kind of showed a solid base to the business, which largely was that formulation downstream business. And I think that that sort of margin and so forth should continue going forward. And I would hope with further downstream focus and derivatization of products and so forth that we ought to see a gradual improvement on something like that. Businesses like this typically don’t improve by 5%, 6% a year. They typically improve incrementally, but they hold the gains that they make, and that’s, in my opinion, the sign of a real quality business. And so, as we look at that MDI business moving further downstream, we want stability. We want cash generation, and I think that we’re consistently building on that. We’ll take advantage of the component fly-ups and spikes and so forth and we’ll call those out like we did last quarter. But, I don’t think that that necessarily is the basis of our future value creation. And where are we seeing it? I think that we’re seeing it really across the board, but particularly in Europe and in North America. Those are the businesses and (00:50:02) more developed end use applications and so forth and I think that those are the businesses where we’ll continue to see that formulation and the reward for that differentiation. It’s not to say it won’t happen in China. It’s just that – I think that you look at a number of our system houses and where we have those downstream polyol assets and so forth, and TiO2 assets and what have you, it’s largely Europe and North America.

Matthew Blair – Tudor, Pickering, Holt & Co. Securities, Inc.

Good, good, thanks. Peter, you mentioned that your Caojing MDI plant, you’re looking at a nine month startup process here. It’s been four months since the start of the year. Could you disclose what percent utilization that that plant is currently at?

Peter R. Huntsman – Huntsman Corp.

Well, I think it’s safe to say that today we’re getting about 30% of our potential volume out of that plant today. Remember, that’s a joint venture facility. So we’ve got some Chinese and partner offtake agreements and so forth in other parts of that plant, and I think that you’re probably – when we talk about starting up a facility, we’re probably five months or so into that process. So that’s about where we would expect to be at this time, and we expect to see that ramp up. And it’s not only the volume that you want, but it’s also the quality of the product that’s being produced.

Aleksey Yefremov – Nomura Instinet

Good morning. Thank you. Peter, you mentioned some MDI component price declines in Europe recently, and I think North America prices are about flat. In this environment, do you expect systems pricing to rise in the remainder of 2018 in North America and Europe?

Peter R. Huntsman – Huntsman Corp.

Well, I think that by and large, they’ll be steady, but again, I want to just – I want to have this perception out there that our systems and our formulation businesses, some of our products that we’re selling under that title of systems and formulations, some of those products will have less than 50% MDI as part of the formulation. And so, when we talk about pricing, we’re talking about hundreds of different price points, thousands and tens of thousands of different SKUs, batches, formulations and so forth. And so, when we talk about (00:53:58) the prices are rising or dropping, it’s kind of – I kind of think back to this monolithic polyethylene and polypropylene where the entire tide goes up or goes down simultaneously.

I think that as you’re able to create value with a customer, you’re creating value, and that value isn’t necessarily a molecular value. It’s the effect that your product has on the customer’s end use application. And if we’re doing our job in sales and marketing and pricing, we ought to be valuing and pricing that product around the value given to the customer, not necessarily what’s happening with capacity utilization, or even raw materials. So I would say that the macro condition is fairly stable, but I would hope that we’re always out trying to create greater value, thus greater pricing to both Huntsman and to our customers.

Aleksey Yefremov – Nomura Instinet

Thank you, Peter. And just to clarify your outlook for Polyurethanes segment, you talked about a small decline in the second quarter, and I think in the remainder of the year, you mentioned there would be -any declines could be offset by ramp of Caojing facility. So should we expect sort of EBITDA where you are (00:55:16) roughly in the first half and Polyurethanes to be about the same as in the second half, including any effect of seasonality, et cetera?

Peter R. Huntsman – Huntsman Corp.

Goodness, my forecasting is usually good for about 48 hours, and so I – as I think about this, but I think in Q2, as we look at it, we look at component, that component price, and mostly in Asia, a little bit in Europe, coming off probably $20 million from the first quarter. We see a chunk of that being offset by an improvement in our formulation businesses downstream, margins gradually improving, and more tonnage coming available to us in China. So as I look between now and the end of the year, I see fairly stable markets, but I feel I’ve got a fairly decent take on Q2. Q3 and Q4, you’ll have to listen to the next conference call, I guess.

Christopher Evans – Goldman Sachs & Co. LLC

Got it. Thanks. And then going back to MDI, in your slides, you put out some CAGRs for demand and supply out to 2022. If we were to look at maybe nearer term, something like 2019 or 2020, how might those CAGRs on supply and demand change?

Peter R. Huntsman – Huntsman Corp.

I’m not sure that they’re going to change appreciably. Bear in mind that when we forecast our numbers, you’re looking at these projects that are 100,000 tons, 200,000 tons, 300,000 tons, all coming on in one fell swoop, one quarter. And even if it’s a debottleneck, you’re not going to see products – you are not going to capacity ramp up in a matter of weeks. It’ll come on over the course of a couple of quarters. You’ve got qualifying, you’ve got a whole bunch of different issues and so forth, not just operating issues, but at the customer level as well of qualifying those areas (01:06:06). So it’s rather a lumpy 1% here, 1% there, but as you look at it across the board, I think that it’s going to be fairly consistent.

If there’s anything – again, this is just my opinion. If there’s anything, I think that when you look at MDI growth, that we’re seeing at (01:06:30) 6% growth globally, if anything over the last year or two, that’s been rather conservative. And I think on the other hand, when we factor in all the capacity that’s coming in, all these announced debottlenecks and plant conversions and everything, we’re factoring that every one of those come in on time, they all come in rather on budget, right at specification, right as planned, I think that may be a little ambitious, and I think that our industry growth rates might be a little conservative. So I think there might – when we look at that CAGR and as we look at that the capacity, demand and the supply, I think that it may be a little tighter than what we’re saying, but that’s just kind of anecdotally my opinion on this.

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