Huntsman Urethane Related Comments from Investors’ Call

Peter Huntsman

Thank you, Ivan. Good morning, everyone. And thank you for taking time to joining us this morning. Let’s turn to Slide 3 & 4. Adjusted EBITDA for our Polyurethanes division second quarter was $201 million versus $269 million a year-ago. Our MDI urethanes business, which includes our MDI, polyols, propylene oxide and formulated systems businesses, recorded adjusted EBITDA of $186 million. This compares with $246 million a year-ago and $149 million for the previous quarter.

As a reminder and as we called out in the past, the second quarter 2018, we were still experiencing exceptionally high margins in the component end of our MDI portfolio. These spike margins including above-normal operating rate conditions in the prior year period accounted for approximately $60 million of the year-over-year variance.

MDI volumes in the quarter were up 11% as the business continued to benefit from the expansion of our China facility that began come online in the third quarter of 2018. Even with the backdrop of a tough operating environment, many of our key markets, our global volumes would have been about flat with a prior year, when excluding the new capacity in China.

Our downstream strategies performing well and our margins remain relatively stable in the differentiated end of our portfolio. The stability is a result of our continued drive downstream, innovation, bolt-on acquisitions, expanded operations and regional diversification.

In the second quarter, our total differentiated systems volumes increased 7% compared to last year and our global component MDI grew 18% year-over-year. This growth was primarily due to our new capacity added at our China facility and favorable comparisons in Europe. The second quarter was a tale of two halves for our MDI urethanes business.

We began the quarter with guarded optimism as order patterns improved significantly in March and continued into April as well as a good part of May. Also in China we were seeing high prices in the component end of the business. Customer confidence was improving and there was an increased willingness by our customers to build inventories.

However, his trade talks with the U.S. and China began to breakdown a high degree of uncertainty and a lack of visibility once again entered the market in order patterns slowed significantly in late May and into June. Component MDI prices particularly in China also fell back to the levels we experienced in the beginning of the year.

In addition to the volatility associated with the US-China trade talks, our European region remains weak. We are seeing limited growth in our America’s region. Putting this all together, the second half of 2019 for our Polyurethanes division is starting off weaker than we would have expected at this time of our last earnings call and visibility remains challenging.

Looking at polyurethanes regionally for the second quarter, our Americas volumes were flat with the prior year. The integration of our Demilec acquisition that was completed last April remain on track, and we are now in the process of taking this technology into international markets to accelerate the growth of this business over the coming years.

We had a positive EBITDA contribution in the quarter from Demilec’s new international efforts. Markets wherein, we experienced modest volume growth in the Americas include insulation, automotive, and the composite wood board market. These were offset by volume declines in our furniture, adhesives, and coating markets. While competitive, the margins in this region remain relatively stable.

Our investment in a new splitter at our Geismar facility is core to our strategy to expand margins and broaden our product range to accelerate growth in our downstream businesses in the Americas. We are still targeting 2021 for this investment to be operational.

Turning to the Asian region of polyurethanes. Our China expansion fueled our growth in the region. However, it should be noted that our differentiated volumes were up even when excluding the impact of the recent expansion. This region continues to benefit from insulation growth into large scale infrastructure projects and applications. The adhesives, coatings and elastomers and footwear markets in Asia are also contributors to our growth as we continue to gradually shift our China portfolio and the newly added capacity to be more differentiated.

Our automotive business in China declined roughly 8% with the prior year despite a mid-teen decline in the overall market as we continued to benefit from product substitution and gain new customers. We believe that customer inventories are at very low levels in this region.

Overall demand in China is soft, which we believe is likely to remain unchanged until customer confidence and visibility improve. While component prices are now back to about where they were at the start of the year, there does seem to be some stability at current levels.

In Europe, our downstream margins are stable despite lower underlying demand versus the prior year. Our volumes in the region were up, but that was primarily a result of favorable comparisons due to an extended outage that impacted our results in the same period a year ago.

The overall macroeconomic environment remains soft. We do not expect it to improve in the near-term. Additionally, at the end of the second quarter as we were bringing our Rotterdam facility back online from a planned maintenance program, our outage was extended due to issues from a third party supplier. That outage is now behind us that it will impact EBITDA in the third quarter by roughly $20 million and negligible impact on the second quarter.

The margins in our core base differentiated business continue to remain stable. The graph lines in the upper left hand quadrant reflect the margins experienced globally in our component and differentiated urethane portfolios. A majority of our business is differentiated and was not materially impacted by the volatility of component MDI prices.

As shown here, our downstream margins remain resilient in spite of continued volatile MDI component market conditions. Our EBITDA in the Americas continue to be less volatile than other regions globally. On the other hand, Europe and Asia primarily China are down sharply reflecting the challenging macroeconomic environment and its impact on component margins.

The good news is that we believe customer inventories in Asia are at very low levels and with any potential clarity and visibility on the horizon, it could lead to a sharp improvement in results similar to what we saw in April and the first part of May. For Europe, the region remains soft, however it is not getting materially worse and we continue to make strides in markets such as insulation and elastomers.

I’m pleased to see how our urethanes portfolios performing in these challenging macroeconomic conditions. Our longstanding strategy to drive this business more downstream through internal investment and bolt-on acquisitions is paying off and remains unchanged.

We continue to move forward with our high return projects such as our Geismar splitter investment and building new system houses in certain regions as well as aggressively looking for bolt-on acquisitions that will enhance our portfolio. We expect the third quarter of our MDI urethanes business will be comparable to the second quarter. Our MTBE business reported an EBITDA of $15 million in the second quarter and we expect a similar result in the third quarter.

Sean Douglas

Thank you, Peter. Turning now to Slide 8. Second quarter adjusted EBITDA declined year-over-year by $97 million. Our Polyurethanes division accounts for approximately 70% or $68 million of this decline. Within the Polyurethanes adjusted EBITDA variance approximately $60 million of the decline is due to the loss of spike and tight margins within polymeric MDI and $8 million from MTBE largely due to lower MTBE margins from our PO/MTBE China joint venture.

Peter Huntsman

Thanks, Sean. At the beginning of the year, we gave a total year forecast based on our best assumptions that we saw at the time. As we look at the second half of this year, we see a number of variables that will affect our second half earnings performance. We are always seemingly a single tweet away from economic or political change in market conditions. I think it is worth sharing with you our latest views.

Should we see a more positive market environment over the next six months? We believe that our adjusted EBITDA results will be down around 15% or better from last year, hence that we could see impacting our results positively would include a beneficial outcome on a handful of trade deals, lower energy prices, improved Chinese GDP, a stabilization of the auto and construction industry and falling interest rates. However, at the present time, we are seeing more negatives than positives as trade disputes fab consumer and customer confidence.

The Chinese and European economies continued to slow. Energy prices remain volatile and housing and automobile markets continued to be lethargic. Should these trends continue? We see our adjusted EBITDA down about 20% plus or minus that from last year. In spite of where we are in the economic cycle, aggressive steps are being taken to create further shareholder value.

These steps are in our control. These steps include one; we remain committed to an investment-grade balance sheet and generating a targeted ratio of 40% free cash flow to EBITDA. During this past quarter, we generated $240 million of free cash flow. Number two, this past quarter we purchased $81 million of our own stock and we’ll continue to do so on an opportunistic basis. Number three, we continue to invest in our organic growth, so we have a number of investments in both manufacturing and research including our Geismar, Louisiana MDI splitter expansion that will allow us to upgrade 70 tons of commodity MDI to more profitable and specialty grades of MDI.

I repeat that I am particularly pleased to see how our strategic downstream focus on polyurethanes is resulted in a much more resilient in high quality urethanes business. Number four, we continue to take advantage of our strong balance sheet to acquire assets that further enhance value.

Aleksey Yefremov

Thank you. Good morning, everyone. Peter, I believe you said – you expect MDI Polyurethanes EBITDA to be flat sequentially. Does this include the negative $20 million from Rotterdam outage? And if so, does this mean that underlying business is actually improving sequentially?

Peter Huntsman

Yes, it does. It does mean that. And so, yes, we’d see that sequential and that’s what the adjustment.

Aleksey Yefremov

And if I have a follow-up on those, what is a source of improvement in Polyurethanes?

Peter Huntsman

Typically I think, we’ve saw a pretty sluggish de-inventorying of product during the second quarter. I don’t think that you’re going to continue to see that that de-inventorying and I’m sure that’s a word or not. But de-inventorying of product take place in the third quarter of the way did in the second quarter, typically to June, July and August, outside of Europe, typically a pretty strong month.

And so typically a third quarter is a strong month for us. We’ll also say further expansions in our last summer’s business; we continue to be very bullish on that and our Demilec business as we grow that internationally. I just remind you a little over a year-ago, we bought that business.

We had virtually no international sales on that and we’re now gradually expanding that into Europe and into Asia. And that’s going to continue to grow. And I would just say that as we look at automotive, there’s some very bearish sentiments. I know coming out of Asia and so forth, but as we look at the replacement of competing materials, new applications and so forth. We continue to be quite bullish on that.

Jeffrey Zekauskas

Thanks very much. I have a question on Slide 4. Is the meaning of the graph that you have that your component MDI margins dropped in half year-over-year roughly? You stress the stability of the differentiated margins as the meaning of this that your component margins drop then half.

Sean Douglas

Jeff, this is Sean. That’s a good approximation. As you look at the percentage of our portfolio, which we know is not a lion share, the lion shares downstream differentiated, but the upstream more component end did see that as you probably seen announced in some of the public views of competitors.

Jeffrey Zekauskas

Okay. And then I was looking in the lower right hand quadrant of that slide and it’s the meeting of the volume piece that differentiated volumes year-over-year fell sharply and component volumes rose sharply? Is that the meaning of that or that’s not the meaning of this lower core trend?

Sean Douglas

No, the lower right hand quadrant, what it’s a literal statement there that year-over-year you’re seeing growth rates. So as you look at the differentiated volume growth, the downstream growth you’re actually literally seeing a 7% growth versus last year. And you’re seeing on the gray bar you’re seeing a growth in the more commoditized upstream part. And that’s largely driven by the expanding capacity that’s come on in China.

Peter Huntsman

Jeff, just remind as we bring on China, we’re first selling that product into the component market and where the demand is largest in that particular market and that we are going to continue to take that product and move it into the downstream differentiated growth within China and within Southeast Asia.

So you’ll continue to see that shift of expansion taking place across the board because it’s a new facility. But I would hope that over time we will continue to see that component volume in China moving further and further and to differentiate it. And as we look at where we’ve been investing in our systems houses and expanding that in Taiwan and so forth, we will continue to see that we have the infrastructure and we’re building out the platform to be able to accomplish that.

Jeffrey Zekauskas

So why does the blue bar fall a lot and the gray bar raise a lot? What’s the meaning of that in the second quarter of 2018 versus the second quarter of 2019?

Peter Huntsman

Well, yes, again I would think that a lot of that has to do with the growth that we’re seeing in the component end of the market versus the differentiated side of the market. And so has been part of that also remember that during a chunk of that time for period, we were also able to see the Rotterdam expansion that took place in the latter part of 2017 and 2018.

And also Demilec and so you’ll see an unusual, I mean, I wouldn’t expect to see differentiated growth around 16%, 17% on a quarterly basis. And so with the expansion we saw in Rotterdam coming on at the end of 2017 with the Demilec acquisition so forth, we did see differentiated growth quite aggressive during that time period. And that’s going to fluctuate a little bit as we – it’ll be overshadowed by the growth that we see in component with – the startup that you see from this chart starting in the third quarter of 2018 – fourth quarter of 2018 and going into early 2019 as well China.

James Sheehan

Thank you. And in terms of MDI spot prices in Asia, it looks like some consultants are calling for prices to move higher in the fourth quarter. But one of your competitors expressed some skepticism of that. What is your view on the potential for higher pricing into the fourth quarter?

Peter Huntsman

Well, again, all manufacturers will have different end use applications, combination of the customers and so forth. And so I’m not surprised that there wouldn’t be some variations and differences of what people are seeing with different customer bases and so forth. I think as I said in my comments, we’re convinced that we’ve seen the bottom of prices in third quarter and fourth quarter, and if anything, prices are starting to edge up and I would think that we would see a gradual improvement in the fourth quarter on component pricing.

Matthew Blair

Hey, Peter. I think in the past, you talked about normalized global MDI demand growth in kind of like the 5% to 6% range. Do you have a number and what does that look like today? And then perhaps simplistically, could you just force rank the end markets, from best to worst, like insulation, furniture, autos, if you just had to force rank it, what would it look like from best to worst?

Peter Huntsman

Well, first of all, as we look at MDI, I think a long-term number to use on MDI, is realistically somewhere between 6% to 8%, right around 7% or so. At any given time, if we’re going to see the inventory taking place or restocking taking place, you’ll see short-term volatility, if you look at it on a month-to-month or even quarter-to-quarter basis.

I would say today that MDI growth as you take a snapshot right now is probably in the two to three percentage range of growth. But I think again, as you look at an overall basis on averages, it’s a product that has grown not just last couple of years, but the last decade or so.

It right around a 7% growth, as I look and I’m speaking about Huntsman here, I’m not speaking about the industry because I look at areas where we’ve seen the greatest amount of growth for Huntsman on a global basis. I’d have to probably point out insulation, yes, as a composite wood material ACE, which is our adhesives coatings in the last summer footwear. We continue to see growth in those areas.

Furniture for us continues to be quite lethargic. And for us that we’re I’m not saying they’re not dedicated to that end use, but it’s – there’s not a lot of high-tech growth that’s involved in that. And I’m not sure that you’re going to see a Huntsman really ever growing at 10% or something in furniture.

I would say this, we look at automotive or globally is we compare automotive in the second quarter to last year. It’s flat. I would say that if you look at the massive step down in demand that we’ve seen, particularly in China, I think that we’ve performed remarkably well, in the growth that we’ve seen in automotive and that that too is going to continue to be an area that we are quite bullish on.

Matthew Blair

Sounds good. And then with the China component MDI volumes ramping up. What is your current systems MDI share? I think in the past that’s been roughly 72% to 75%. And I guess where do you see that share, that system share in say like three-years to five-years from now?

Peter Huntsman

I think it’ll probably remain fairly close to where we are right now, it overall within the company. And that’s not to say, I think there might be a little bit of a perception that that component MDI is bad and the system MDI is good. And I would remind you that a lot of our component business it’s very high margin business, it’s very stable business, and it’s business that we’re going to be in for many years to come.

So I think that when we look at those macro percentages, that kind of that 75 to 30, 25 sort of split between the two, that’s not to say that we’re standing still. It’s to say that within that differentiation, within that separation of chemistry that we’re always upgrading; our formulations business and we’re always upgrading our component business.

And we’re going to have different marketing and sales approaches in each of those areas. But I would hope that, year-on-year that we’re always going to see the quality of the customer, the margins that we’re able to achieve focusing on smaller – perhaps smaller applications and higher margin applications.

As we look at the overall split for the next couple of years, we’re going to continue to see, have a 60, 40 split in Asia between component and formulation. And overall we’ll be moving China to be that same sort of balance that we see in the rest of the company of around a 75, 25 split.

Joshua Spector

Yes. Hey, guys, so just a question on Polyurethanes volumes. So if you had differentiated up 7%, MDI up around 18%, the segment as a whole is around 7% with that Rotterdam included. What was down year-over-year to bring the segment to 7% overall?

Peter Huntsman

You mean from a finished application and finished product?

Joshua Spector

So just overall, I mean overall Polyurethanes reported 7%. And I mean I know that the biggest piece would be differentiated part of that. The MDI component was up so much. I would think it would have dragged the segment up more with polyols that were down or something else in that?

Peter Huntsman

I think when you look at the biggest flywheel in volumes quarter-on-quarter, you’d be looking at MTBE, which we include as part of that overall volume is a Polyurethane.

Hassan Ahmed

Very well, thank you, Peter. Peter, you addressed some of these things on the goal, but just want you to dig a bit deeper into the evolution of sort of business condition to the goals of Q2 in MDI. Obviously was a bit of quirky water because, you had several maintenance turnaround in China in particular in April, right.

So it seems pricing went up a bit on the back of affective utilization rates tightening. Then that capacity came back online, pricing went down. So it seems that ahead of those turnaround there was a restock exercise, then a destock exercise.

So sort of two questions on that. Where do you see effective utilization rates in Q3 relative to Q2? And the second part is you mentioned inventory is rarely leading and it seems that way. So if it all business conditions do normalize and I think you alluded to this. Could we actually see a pretty big risk in terms of restocking?

Peter Huntsman

So yes, if you see business conditions, kind of normalize again, I think you definitely would see something like that take place as far as an improvement in margins. The prices where they are today, where there were a few weeks ago. It’s very similar to where they were earlier in the year when we kind of saw a low multi-year, low point in component prices in China.

And I see those prices gradually edging up, during the third quarter and the fourth quarter. I would say that that again, just anecdotally, my gut feel is that, customer sentiment probably has more to do than capacity utilization.

And as we look at the, the sentiment and that what I was referring to earlier about how much confidence do I have in the next quarter, how much inventory am I going to be caring? How much in pricing a direction? Do I want to take a hedge on that? I think that has more to do than capacity utilization.

So yes, during the shutdown, phases that we saw earlier this year, a lot of those people, when they shut down, have inventories that are built up. They’re swapping pounds from other facilities and other producers and so forth.

I’m not sure that that really drives margins in demand and sentiment nearly as much as his pessimism around a trade deal that seemingly has just gone on now for a year and a half, two years, and there’s a bunch of false rumors and false starts and something is coming to a conclusion, we never seem to get there. I think that’s probably weighing as much on sentiment in margins in Asia is anything right now.

Hassan Ahmed

Understood, understood. And as a follow-up, I mean you talked about obviously your customer sentiment, but the other part of it is producer sentiment. In a couple of companies not in other MDI, but in other sort of clinical product areas, seem to be announcing project deferrals. Are you seeing any sort of a semblance of that or any, any indication of that within the MDI side of things?

Peter Huntsman

I’m really not. There are not a lot of MDI projects right now that are announced in the pipeline that are actively, I mean there’ve been some announcements of late, but I’m talking about projects where there’s actually construction and huge spend that are taking place right now. I’m not sure that there’s a lot of that in polyurethanes that’s taking place.

Michael Leithead

Got it. And that’s helpful. And if I could just return to Slide 4, component margins are down, I think you said call it roughly 50% year-over-year, but your component volumes are up call 15%, 17%-ish year-over-year. So I guess is there any concern that as you’re ramping out the expansion in your Chinese facility that somewhat exacerbating the situation that you have there in Asia? Or is the goal really to just kind of fill that facility out as quick as possible and get unit margins positive there?

Peter Huntsman

No, I think that I personally, I’m sure there might be some different views on this. As we look at our product, I think that we put it into the market responsibly. I look at when the biggest volumes improvements that we saw of Huntsman moving that component materials particularly into the Chinese market was during the first quarter moving into the second quarter, which is actually a time when we saw component prices going up.

So I think we’ve done a very good job and putting that product into the market as our customers grow and as we have an opportunity to expand. But now we are not going to be a manufacturer for capable of running at 100% – of running at 100% and just flogging the market.

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