Huntsman Urethane Comments from Investors’ Call

Peter Huntsman

Ivan, thank you very much. Good morning, everyone. Thank you for taking the time to join us. Let’s turn to Slide number 3. Adjusted EBITDA for our Polyurethanes division for the fourth quarter was $294 million. Our MDI urethanes business, which includes propylene oxide, polyols, and system businesses, recorded adjusted EBITDA of $291 million.

This compares with $130 million of year-ago and $254 million for the previous quarter. Our MDI delivered 12% volume growth year-over-year, demand remains solid and all of our MDI production units operated at full rates during the fourth quarter. MDI urethanes EBITDA margins remain strong globally as we continue to operate at full capacity.

Let’s turn to Slide number 4. We remain strategically focused on growing our downstream specialty and formulation businesses. We continue to shift more MDI from components to systems. In the fourth quarter, we saw 17% year-over-year growth in volumes within our differentiated business. While overall focus is to move as much tonnage downstream in our differentiated portfolio we benefited this past quarter from a continued spike in our component MDI.

We said in our third quarter call that we believe we benefited by approximately $40 million of extra margin due to this temporary spike largely in China and Europe. This continued into the fourth quarter with the industry facing shortages due to outages in geographical raw material constraints. We believe that the fourth quarter benefited by approximately $85 million due to these constraints.

We believe that these one-off conditions will abate and margins will revert to more normal levels in coming quarters. No one can accurately predict how this will play out. This will depend upon the absorption of the anticipated new industry capacity addition including our own.

The status of outages and the resolution of raw material supply in certain regions. Even with all these capacities included supply and demand dynamics remain tight. We expect that the industry will remain this way for the foreseeable future and believe that the growth that we have seen in our base business will be sustained moving forward.

I reemphasize however, that we are focused on what we can control and we continue to move more of our business downstream. We estimate that approximately 75% of our MDI urethanes are in derivatives and formulations.

Looking at growth regionally, our North American volumes increased 16% as both commercial and residential construction markets drove demand in our composite wood products, adhesives and insulation sectors. Demand is robust in this region and we expect to show a positive rate of year-on-year growth in MDI North America throughout 2018.

In our European region, MDI volumes increased 22% in the quarter as this region is benefiting from stronger demand in addition to our recent 60,000 kiloton, the bottleneck at our Rotterdam facility that started to come online in the third quarter of this past year. We saw strong growth across all of our key European markets including excellent demand in our differentiated insulation systems business. India, the Middle East and Russia also saw double-digit growth in the quarter. As we start out in 2018 demand in Europe continues to be positive.

Asia volumes declined as we logistically balanced our production geographically in anticipation of our new facility in China coming online. Industry demand for MDI continues to grow at about 6% to 7% globally on an annual basis. As such industry capacity needs to expand at about 400,000 kilotons annually. This is the equivalency of a world scale facility per year.

As we stated this last quarter, we believe industry manufacturing capacity will grow to approximately 4% annually from 2016 to 2021. We believe we had good visibility over the next several years. Currently, we estimate that industry effective utilization rates are in excess of 95%. We would expect short-term rates to fluctuate a bid as capacity additions are absorbed, raw material constraints are resolved and recent outages come back into the market. But overall, we see continued favorable supply and demand dynamics into the foreseeable future.

Now moving into 2018, our outlook remains positive despite our expectations for the short-term spike in margins to decline in our Asian European markets. Our Chinese MDI expansion, which has begun its start up phase, will begin contributing to EBITDA in 2018. We will bring capacity into the market as demand requires. We expect MDI volume growth across our key regions and markets to continue in the 2018.

We will remain strategically focused on growing our downstream and differentiated MDI formulation. Putting it all together, we anticipate modest EBITDA growth in our MDI urethanes businesses in 2018 with year-over-year EBITDA growth being more in the first half of the year.

Looking out to the first quarter of the year, we expect MDI demand to remain strong on a year-over-year basis. While too early to know for sure, I suspect the short-term spike in margins will soften a bit and that the first quarter will look more or like the third quarter of last year. As we look beyond the first quarter, the remaining short-term spike in margins could soften a bit more as commodity component prices cool.

But this is subject to various stated assumptions, future operations problems may cost similar short-term spikes in pricing. To be clear, we see tight market conditions remaining for the foreseeable future. Notwithstanding the near-term volatility in Asia and European MDI commodity component prices, we believe average 2018 prices for the region will be similar to 2017 prices.

Peter Huntsman

Thank you, Sean. Let’s turn to Slides 11 and 12. We close out 2017 with a strong EBITDA of $1.260 billion and strong cash generation from both our operations as well as partially monetizing our ownership of Venator equity.

At this time, as we look out to 2018, we see our four divisions each earning more than they did in 2017. In 2017 cash flow generation was about $600 million. I believe this next year; we should be in the range of $450 million to $650 million.

As Sean reported, our debt-to-equity ratio is now at 1.4 times. We will continue to prioritize and maintain a strong balance sheet that will allow us to focus on four priorities. Number one, we will continue to invest in our organic growth as we improve our reliability and bring new capacity in products into the marketplace.

Number two, we will seek out acquisitions that will allow us to expand our downstream margins deliver consistent earnings and grow the business at stronger than GDP rate. These acquisitions will be focused primarily on our downstream MDI epoxy, amines and surfactants businesses. When pursuing these acquisition opportunities, we will remain committed to maintaining long-term investment grade metrics. Three, returning cash to shareholders. Our board recently approved a 30% increase in our dividend shareholders.

Frank Mitsch

Peter, you mentioned you view or your vision on doing some M&A or looking at M&A. How are you looking at multiples right now and I mean – because we’ve heard from other people that multiples tend to be on high side. And so from your perspective, how likely is it that Huntsman will pursue some M&A in 2018?

Peter Huntsman

Well, I think that we are looking at a number of projects before us right now. I would characterize these, Frank more is bolt-on acquisitions. Now that obviously can change depending on what’s out there and what comes available. But I would – I think it would be very difficult for us to find and justify an acquisition that did not have some element of integration to it.

I think that when we look at some of these double-digit multiples that are being paid particularly by some strategic – particularly by private equity. I think we’ve worked too hard to get a balance sheet where it is. And I think that in the past, I think we’ve been very successful in buying and integrating smaller bolt-on acquisitions I think with a stronger balance sheet will expand the target, will expand what we’d be the size of those target, but I think that we need to continue to be very balanced in that approach.

Kevin McCarthy

Yes, good morning. I appreciate the detail you’ve included on Slide 4 regarding MDI. Peter, I was wondering if you could comment on how much price you’ve been able to achieve in MDI systems specifically and to the extent that you have been able to raise price there? What is your degree of confidence that you can hang on to that when and if component MDI prices regress?

Peter Huntsman

Well, I think that Slide number 4, we’ve put a lot of thought into this one as to what is really reflected here as what we would consider to be our base EBITDA business, what we would say would be the tightening when we talk about the tight market conditions on Slide number 4. I would say that those are price increases that we’ve been able to achieve really through two means.

One, targeting higher end value-added applications in customers and also because the industry is operating in the low 90 percentile utilization. I think that we’ve also tried to be very clear into how much we think this is – how much of this is kind of the commoditized components. And I want to be clear, I don’t look at all components as being commodity, but there certainly is a majority of the component business that’s out there that I would characterize as more commodity than not.

How much of that is – really what I would consider to be the short-term spike. And so if you look at the third quarter, looking to the fourth quarter kind of a $40 million benefit in the fourth quarter, $85 million benefit in the fourth quarter that what we show on the red bars on Slide number 4.

I expect that we will keep that on a longer term basis, quarter-in quarter-out may not be exactly flat. Again there are variables about operating conditions and how much people bring into the market and starting up a facility that are now shut down. But I would expect us to certainly maintain and keep the majority of that red section.

Kevin McCarthy

And then as a follow-up, if I focus on that gray bar of $85 million in the fourth quarter, is all of that component MDI or do you have anything else in there?

Sean Douglas

Yes, I would think that 95% plus of that, I don’t want category, to say 100%, certainly the vast majority of that would be component MDI and would be MDI business that I would assume that I think it’s safe to assume that I look at that as being kind of more spot oriented business or businesses where you would have and end use application where competitors can take the business kind of just over pricing.

And of course that’s the business longer-term that we want to be kind of slowly pulling away from and being able to have either a formulation or downstream systems or a longer-term contract or longer-term price type of a contract. But that’s why that business is largely Asian centric at this time.

Hassan Ahmed

Always loved his company. Peter, question about the sustainability of MDI margins. Obviously, we’ve seen some outages in the industry, some incremental capacity coming online.

But as I sort of reflect on 2017, particularly in the Middle East and Saudi Arabia, we saw incremental MDI supply come online and it seems it was very, very quickly digested by the market and pricing actually didn’t even negatively react to that, which to me suggests that demand continues to be very strong.

Now you talked about maybe some hiccups along the way in 2018 because of sort of incremental supply, some of the facilities that have underwent outages and then coming back. But is it possible that we see a repeat of 2017 and 2018 again just because of call it above trend MDI demand?

Peter Huntsman

Well, I would – certainly if you see major outages in the industry and what we don’t know is the – how much capacity is truly coming out of the Middle East that it would appear just by reading public information that the new Middle East capacity is running probably in excess of 80% capacity.

That’s a lot of new volume that’s come into the market and I’m not prepared to say that we haven’t seen any impact of that coming into the market, but I think as you kind of think about how much capacity has been taken off during the fourth quarter? How much has been added on during the fourth quarter? I think there’s probably a fairly close balancing act here and I think over the course if I was to just express candidly an uncertainty over the first quarter is that $80 million, $85 million we show on Slide number 4.

I said earlier in my comments that that we think that that softens. The question is to what degree that softens and how soon that softened and that’s going to be and a fact is to how much capacity comes into the market, the startups that that will becoming into the market and how that overall impacts the market.

But I think you hit on a good point there Hassan that throughout 2018 MDI plants as you go back over the last four or five years, it’s not unusual, but in any given point you have a world scale facility that is down and the scale that we’re seeing built today these facilities of around 400,000 tons facilities, you all of a sudden see a market go from 91% to 96%, 97% capacity utilization almost overnight and that will affect prices and I think to that I’m not good say that’s that could well be the new norm.

But as I look at over the last couple of years, it seems as though there’s kind of on average a world scale facility that’s either going down, coming up or shutdown for some unplanned problem so.

Jeffrey Zekauskas

Yes. Lastly, are there any areas where you need new capacity and how much would it cost to get that capacity?

Peter Huntsman

I’m just not a big fan of new organic capacity. I mean I’m just seeing across the board, I mean we’ve obviously got MDI coming on in China and that’s going to be – I think it will be over the next 12 to 18 months that we absorb that, and we will absorbing it as the grades and as the market – as the grades are able to be producing as the market’s able to absorb that.

Michael Sison

Hey guys. Nice end of the year. Peter, I thought you mentioned that you felt each of the segments could grow EBITDA this year and in 2018 versus 2017 and given how strong you had the short-term spike margins for MDI. Can you maybe frame up the type of growth you could do in polyurethanes in 2018 versus 2017?

Peter Huntsman

Yes, I think that when we look at our base EBITDA and that red line again going back to Slide 4. I think that we’re going to see that being maintained and expand throughout the year. And I think that as we look at the what I would consider to be our short-term spike, we’ll see kind of a reversal in the early part of the year, the benefit of that spike in the early part of the year, and the second half of the year we would see our earnings mostly what I’d consider to be our base EBITDA and our growing EBITDA which would be that red section.

So I think when you average out the two years, you’re going to see pretty similar pricing, but throughout the year I’d say that you’ll also see an additional line building up throughout 2018 on Slide 4 which is the Chinese capacity.

Is that comes into the market? It will expand as you saw – as we saw this last quarter year-over-year at 16% growth overall in the Americas. That’s a lot of product that used to be going to Asia that’s coming back into the Americas. There’s a very strong demand right now in North America. We’ve been able to place a lot of new tons and to expand with our customers in that area.

So I think we’re going to see some repositioning were MDI that used to go from North America to China will stay onshore, Europe will stay onshore, and China and Greater Asia not just China, but that whole Greater Asia market, will be supplied as we take on another 200,000 tons of capacity over the next year or so.

Michael Sison

Okay. Great. And then I was impressed with the other bar chart which showed 16% and 17% growth in the high value differentiated business. Can you maybe walk us through what – where that growth is coming from and is that a similar type of growth that we could see in the next couple quarters into 2018?

Peter Huntsman

Well, I think a lot of that as we look the year-over-year sort of a growth taking place, the CWP, the composite wood construction market continue to be strong for us. We continue to see strong growth in automotive both in Europe and in Asia rather flat in the Americas, but Europe and Asia most parts of the world. Our ACE businesses, particularly in Europe continue to do very well. That’s the adhesives and coatings and elastomers businesses.

And then our insulation business, we continue to see strong growth in Europe and in the Americas, certainly stronger than GDP growth in the Americas, double-digit growth in Europe. So that’s why I say it looks really broad based as I look across the board, and I look in areas like construction, the insulation markets. We’ve made very little penetration relative to the size of those industries as I look in the composite wood as I look in a lot of the automotive applications and so forth.

There really is polyurethanes and MDI in particular, as we look at these downstream segments. MDI is a great chemistry to be able to build on and to be able to take that chemistry to move it aggressively downstream. That certainly is going to be one of our larger focuses here.

Robert Koort

Peter, I appreciate the candor on the segments in MDI and some of this potential over earnings in the short run. Trying to calibrate that a little better, so we can figure out what might happen in 3, 6, 12 months out. Can you give me a sense I think even the past talked about the component business having normalize or typical EBITDA margin of 10%. Give us a sense of where that might be today?

Peter Huntsman

Yes, as we look at that today, it is probably again depending on the region and depending on the application. You’re probably looking in some of these is being in excess of 20%. But again sometimes you haven’t – we look at the components as being kind of this monolithic product that sells kind of it all commodity or not commodity in all one price, not one price.

So I think again as I look at it is more is to where do you have customers down – where do you have MDI customers, but those customers are vulnerable and they’re just price buyers and I want they all of them are priced buyers. But what do you have a more commoditize component business.

So today I would say that that’s around 20% on average, and that’s I say that typically we’ve said in the past, it’s around 10% normally and I’d say that’s – those are pounds that eventually would like to be moving further downstream into formulation applications.

Robert Koort

And on MDI, it seems like Covestro and some others have talked about how it takes quite a while to get these facilities ramped up? Can you give us some sense on your own plant in China that expansion there? What your cadence of introduction, you mentioned obviously you do it diligently into the market? But if things stayed as good as they are how quickly could you bring and ramp that capacity up.

Peter Huntsman

Well, I think typically when we look at ramping up of facility, assuming you don’t have mechanical issues. I mean look at our own experience with our own technology and our own MDI plant that today I’m obviously biased and saying if I think our plant Caojing today is one of the most reliable finest MDI facilities operating in the world.

But it took us over a year to start that facility up. There were some mechanical issues and some – it was a 14-month process. Now I look at the Caojing 2 the present facility, we do have product coming out of that that is going to customers today and – but we are going through a gradual startup process. Making sure that is as you go through these things that can be damaging the equipment in that you’re going to be able to produce a non-spec product.

So I would think that typically a six-month to nine-month sort of a process, thinking that we are quite kind of started at the first of the year and I think that six to nine months out if for some reason you could sell the plant out. You’re not going to do it the next six months.

Unidentified Analyst

Thank you. This is [indiscernible] for Aleksey. Just following up with ramp of MDI, how quickly do you think debottleneck in Europe can be filled?

Peter Huntsman

It’s still right now and it’s filled out right now.

Unidentified Analyst

Okay, all right. Perfect.

Peter Huntsman

And that’s why in Europe we’re looking at a 22% year-over-year that’s not just because markets are necessarily strong. Markets are better than they were a year-ago, but we’ve also got more capacity.

Eric Petrie

Hi. This is Eric Petrie on for P.J. could you remind us the EBITDA benefit from Rotterdam and China MDI expansion? And then Peter, you noted that U.S. MDI volumes to China are expected to decline. Could you give any quantification of the $125 million benefit that trade arbitrage played into?

Peter Huntsman

Yes. I’m a bit lost as much as the trade arbitrage played into the $125 million benefit.

Eric Petrie

Yes. Did you realize any benefit from shipping from the U.S. and Europe to China and could that contributes to the $125 million?

Peter Huntsman

No. I think no. I wouldn’t say that there’s any arbitrage to be played on that. That should kind of just be considered flat. We haven’t really – I don’t think that we necessarily look at how much EBITDA is generated by an expansion per se. If all of those pounds were being sold at the same price, same margin I think that would be apropos.

But we produced a lot of that MDI that then some of it sold directly to pure MDI, some of it goes into components, some of it goes into the formulation. I think that we kind of look at that as just being part of a rising tide rather than a specific number that we’ve broken out on the P&L. So I guess a crafty way of saying I don’t know.

Eric Petrie

Okay. So you aren’t pulling out commodity grade and reducing differentiated, take advantage of the short-term opportunity?

Peter Huntsman

No. I mean if anything we’ve got excess splitting capacity with an expansion we did earlier last year and this just allows us to add more tons to be able to take in and actually address some of the more specialty side.

Matthew Blair

Got it. Thank you. And then on MDI, so in 2017 there are a lot of unplanned outages that really grabbed a lot of headlines, but there’s also a fair amount of planned activity. Do you have a sense industry-wide what planned MDI turnarounds look like in 2018 compared to 2017?

Peter Huntsman

No, I’d say that on – MDI facilities typically go down once a year when you look at the maintenance and so forth. It’s not very often that you find an MDI plant that goes four years without any closures. And so I think that what you’ve seen in the past as far as planned outages, I even would imagine that’s probably going to continue. We’ve seen a pretty consistent operating rate over the last couple of years that way.

John Roberts

And I’ll ask just one question. If you could have all of your component in MDI business used internally in systems, would you go that far or do you structurally kind of always want to have a presence or intelligence about what’s going on in the component market?

Peter Huntsman

I think that our objective is not that – I want to be clear, it’s not that components are good or bad. If we could structure components and we have these today particularly in North America around our OSB businesses where you’ve got long-term contracts with price escalators or de-escalators. And that’s why you’ve heard me say that we’ve looked at volatility of component pricing in Asia and Europe.

I’ve not mentioned anything about components in North America, much of our component sales in North America are larger volume, longer-term businesses where we’ve given up perhaps some of that upside margin to make sure that we’ve got long-term consistent earnings. And so I wouldn’t say that we want all of our – and those large volume accounts help base load facilities and frankly it’s good business.

So I wouldn’t want to say that we see a day when we’ll be completely out of the components market. I would hope that we can see a day where we have taken what I would consider to be the commoditized end of that component business, and we’ve upgraded that either to higher value-added component longer-term stable contracts or we’ve somehow derivatized that by formulating it, putting into a system house and blending it with something else of value.

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