Urethane Comments From Huntsman Investors Call

Peter R. Huntsman – President, Chief Executive Officer & Director

Thank you, Kurt. Good morning, everyone. Thanks for taking the time to joining us. Let's turn to slide number three. Adjusted EBITDA for our Polyurethanes division in the fourth quarter of 2014 was $171 million. Compared to the prior year, EBITDA was essentially unchanged for both our MDI urethanes and PO/MTBE businesses. Our Polyurethanes division has the most absolute foreign currency translation exposure to the euro on an EBITDA basis of all of our divisions.

In the fourth quarter, our MDI business was negatively impacted by approximately $7 million as a result of the stronger U.S. dollar compared to the prior year. MDI volume growth was lower than the full year average of 5%, lower fourth-quarter growth was primarily the result of destocking effects as some end market customers anticipated price relief combined with a weaker economic climate in Europe. North America continues to be a bright spot as MDI volumes grew at strong rates across all of our major end markets.

Asian growth was comparable to North America, although the construction related end markets were less robust. The global automotive market remained strong, which grew almost 20% compared to the prior year. The primary raw material in the manufacture of MDI is benzene, we purchase approximately 200 million gallons of benzene annually. Benzene is a derivative of the oil refining process and as the cost of oil has decreased, so has the cost of benzene.

As we've indicated, in many of our end markets, we provide differentiated customer-specific products, and as such we expect near term margin expansion from the decline in benzene. In addition, PO/MTBE pricing is highly correlated to the cost of premium unleaded gasoline, which has decreased. Lower PO/MTBE margins will partially offset the benefit of lower benzene costs. As a reminder, we started scheduled maintenance on our PO/MTBE facility in Port Neches, Texas on January 26, we estimate the facility will be offline for approximately 60 days with an EBITDA impact of approximately $60 million. This amount includes lost revenue and unabsorbed fixed cost for the period, in addition the maintenance cost will be approximately $90 million. However, these costs are capitalized and amortized over approximately 5 years as we've done in the past. The total estimated cost of the maintenance will be approximately $150 million.

Robert Andrew Koort – Goldman Sachs & Co.

Peter, I was wondering if you could talk a little bit in the MDI business, in the fourth quarter, did you see any benzene relief? And then, how would you expect that to flow through during 2015? And can you help us size – you get some moving parts with the PO/MTBE outage, which sounds like maybe it's a little bit bigger hit in the first quarter than before. But, of your $730 million of EBITDA in that segment, can you give us some sense of what's MDI and other things and what's PO/MTBE? Thank you.

Peter R. Huntsman – President, Chief Executive Officer & Director

Thank you, Bob. Yeah, as we look at the pricing in the fourth quarter, we saw average pricing for benzene in the fourth quarter was just under $4 a gallon. That was down where our average price in the third quarter was around $5 a gallon. So we started to see the falloff in benzene prices take place in the fourth quarter. We currently see benzene today depending on where you're buying it around the world somewhere between $2 a gallon and $2.20 a gallon and that price does move every day.

I would note that we have a supply chain of about 75 days to 85 days from the time that you buy benzene somewhere around the world and we transport it, we ship it, you store it, you put it into to nitrobenzene, you then put it into aniline, you're putting it through your MDI processes, you're taking that to system houses and so forth. So – and then you're ultimately selling that to a customer. So, from the time that we're buying $2 benzene today hypothetically in the market, we're going to see the full impact of that probably sometime in the middle of the second quarter to the end of the second quarter – excuse me – even into the third – yeah, the second quarter of this year.

And so, when we think about that impact to the bottom line, when we think about the impact in the fourth quarter, I would think that the impact that we saw in benefit during the fourth quarter would probably be in the singular millions of dollars. And so, again depending on where that is in the supply chain. I would expect that to obviously gradually start expanding in the second quarter and through the – the first quarter, and throughout the second quarter, and how much of that we actually keep? I think that's – I think it's going to be obviously a net benefit for us, Bob. But let's remember the last time that prices fell this suddenly in the market. It was something of a disaster. It was something of a disaster because of the massive destocking that took place and the demand wasn't there on the backend to be able to have any pricing support. I think that as we look at the industry today, the industry is operating,depending on where you are around the world, North America is probably, I would guess, in the 90%, 91% capacity utilization. Asia is probably in the high 80%. I think there's a – the capacity on a global basis is such that we ought to be able to hold on to pricing. We ought to be able to expand margins. And then certainly as you get out towards the end of the year, your price for MDI products will calibrate. Some of the more commodity side of the MDI products will move down with the price of benzene.

Others of our MDI will move with the price of benzene because we have locked-in formula prices, we've communicated in the past. This is a smaller portion of our sales obviously. And then we have a differentiated piece of our business where the raw materials make up a relatively smaller percentage of our overall cost and the cost of labor, delivery, service, research, other products that go into making that MDI systems product is going to be factored in as well.

So, I guess what I'm saying is when you look across the board, we think that as the price of benzene falls, we ought to be able to capture that margin. It will not be instantaneous, as benzene falls. And it will not be permanent. And obviously, any more than it would be a permanent hit on the business if benzene prices were to go up, we'd be expected to get our finished prices up.

So, I would think with the margin expansion here over the next quarter or two, and that will gradually fall off at the end of the year, but I think that the growth in the industry, the expansion that we have taking place around the world, the recent acquisitions and so forth, that will continue to allow us to more permanently expand our EBITDA. And, Bob, I apologize for that answer, I wish I had a more concise, a dollar for dollar, customer for customer, but I think that in the world of – this is volatile as it is, we've tried to listen to what some of the other companies are doing. There's just a lot of unknowns out there as far as our ability to hold up pricing and so forth. I'm more optimistic today as I look at global demand than I would have been two or three months ago when prices were falling. So I think again, we take the gives and the takes of this. Falling oil prices, I believe, will be a net plus for this company. And from where I'm sitting today, I continue to believe that. Now, I'm – I really apologize, I forgot the second half of the question.

Robert Andrew Koort – Goldman Sachs & Co.

Well, I was just asking the MDI business that you're rightfully proud of, and which should show some progress, gets obscured by the PO/MTBE component within polyurethane. So can you give us some help in sizing those businesses, so we can make a judgment on how important MDI is, as you look forward, and that – the penalty from the turnaround in PO/MTBE would be for 2015?

J. Kimo Esplin – Chief Financial Officer & Executive Vice President

Yeah. So in 2015, the EBITDA hit from the turnaround is $60 million, that's the same number we've been out with for a while, so we haven't changed that. And we're in the middle of that turnaround and everything is going well there. If crude oil stays at kind of where it's at today, there may be as much as another $50 million reduction in PO/MTBE profitability, relative to the last couple of years. So, when you take sort of Peter's comments around urethane, and PO/MTBE, we think the urethane benefit from falling raw materials will offset the reduction in profitability in PO/MTBE because of lower crude oil prices, net benefit, if you set aside the turnaround of one-time impact in the year.

Robert Andrew Koort – Goldman Sachs & Co.

Got it. Thank you.

Peter R. Huntsman – President, Chief Executive Officer & Director

Bob, I also just say that as we look at our percentage of margin from MDI this year in 2015, we will see a higher percentage of our overall EBITDA from the combined businesses coming from MDI, I think I'm just – I'm trying to look back the last couple of years, we'll see a higher percentage coming from MDI than we've seen in the overall business probably ever. Perhaps you have to go back 10 years or so, the last MDI spike, so this business is becoming more and more dependent on the MDI, the differentiated, the downstream. And less so on the PO/MTBE. I would just note that the PO/MTBE though, much of the success of the PO/MTBE comes about, because we have a home for the propylene oxides, an integrated piece of our business, it's a value-added component and it's more than just a big MTBE facility.

Sabina Chatterjee – Wells Fargo Securities LLC

Hi, good morning. Just hitting in for Frank Mitsch today. Just, it sounds like between the puts and takes that you just talked about in polyurethanes that you're calling for EBITDA growth in 2015. Just wanted to see if that was a fair assessment or is the outlook still uncertain given all the variables between FX and whether your competitors actually hold prices in MDI or what have you?

J. Kimo Esplin – Chief Financial Officer & Executive Vice President

No. I think you're reading it right, I think what we've said is, is that again, urethanes will offset any erosion in the PO/MTBE side, but then you have the turnaround, so we're really talking about an adjusted turnaround year. So again, if you adjust for the turnaround, it would be up.

Edlain Rodriguez – UBS Securities LLC

That makes sense. Another quick question on MDI, I mean when you look at – there are still some skepticism about the sustainability of the benefits of lower benzene cost into some of the products. And one thing we're trying to figure out, so when oil prices were going up and benzene prices were going up, did you experience like a significant margin correction – contraction in the differentiated businesses there, because if you're going to see the benefit from lower cost, then you must have seen some headwind from costs going up.

J. Kimo Esplin – Chief Financial Officer & Executive Vice President

Yeah, I mean, we've talked in prior quarterly calls about the lag in our pricing on our differentiated side and our ability to get our prices up as benzene moved up. So, that's completely fair. And I think if you listened to what Peter described, we're going to keep margin as benzene falls but our component business and in our businesses that have pass-through contracts, which is roughly 50% of our business, we're going to see that benefit go away after 90 days or 120 days or something like that. We're hopeful that longer term we can keep the most differentiated system business but in a big chunk of this business; we keep that for just a short while.

Aleksey Yefremov – Nomura Securities International, Inc.

Good morning, everyone. Peter, first question on Polyurethanes business and in particular MDI in the systems business. So, so far what we have seen on MDI benchmark prices, they've been pretty stable, only $0.05 per pound decline in January and then flat in February. Are you seeing any discounting to these benchmark levels in MDI specifically? And also, do you see the systems business prices maybe declining more than MDI? And I'm just asking it to you maybe get additional color on your comments about competitive pressure and competitive behavior in the Polyurethanes business. Thank you.

Peter R. Huntsman – President, Chief Executive Officer & Director

Yeah. Alex, I – again I don't mean to sound evasive in this answer. But 2,500 different SKUs, almost 3,000 different SKUs that we've got in this business. Some of our business – some of our products will not be moving down at all in pricing even in the face of falling benzene, some of our products are already coming down because of benzene weakening and so forth. The benchmark prices that you see for MDI, I think directionally that they're probably somewhat accurate, when we look at the individual prices that they record, I mean we have MDI pricing that is all over the board, right? I mean if you were to – unlike polystyrene or polypropylene, ethylene propylene, something where you have a pretty tight range of a couple of pennies per pound. We go from dollars per kilo, tens of dollars per kilo. And so, it's tough for me to say that a $0.05 reduction here or there is really what we're seeing. I mean if anything, we want to try to get away, as far away from possible as the benchmark of MDI. We want to add as much value to that, move it further downstream.

So, again I'd say that we are seeing a softening taking place in MDI pricing, but it is nowhere near at this time the softening that we're seeing in raw materials. That's what gives me the confidence that MDI is going to benefiting throughout 2015 in the face of falling raw materials.

J. Kimo Esplin – Chief Financial Officer & Executive Vice President

So, just a little more color there. 30% of our MDI is sold as a component. There is absolutely a very strong correlation with prices – MDI component prices and benzene prices. So 30% absolutely we will see MDI prices follow benzene, there may be a bit of a lag and I think that's what you see in benchmark consultant pricing. You will see that component price and that is polymeric MDI. The other 70% is differentiated variants and systems, you will not see a listing for that and that is a bit that we will hold onto longer than the components and hopefully for a long time. But of that, there are some prices that are pass-through contracts and so we won't keep that. So, really, we have talked to the market about roughly 50% of our MDI that is differentiated, that is not protected from a contractual pass-through standpoint that we are battling to hold on to.

Aleksey Yefremov – Nomura Securities International, Inc.

Great. Thank you and a follow-up on MDI market as well. I think you had mentioned in your outlook, strong demand for in the U.S. and China and softer in Europe. How do you see supply demand in MDI given continued ramp of capacity in China and do you expect that to impact either U.S. or European markets in 2015? Thank you.

Peter R. Huntsman – President, Chief Executive Officer & Director

Well, as we look to 2015, I'm kind of – I'm kind of starting to look beyond 2015, looking to 2016. Remember, when somebody comes on with a facility, if we're coming on with a facility, and it's going to open and it's going to start operating in July 1 of this year hypothetically, Huntsman sales representatives are going to be out six months, nine months before the startup of that facility, and we're starting to get pricing commitments and volumes, right? You see the pricing impact of new capacity, you actually see it coming on a couple of quarters before the actual capacity comes on. When the capacity itself comes on and hits the market, that's usually less disruptive than when you see a couple of quarters in front of that, when people are out trying to buy up excess volume to fill the capacity. I hope I am making sense. So, you don't just start up a plant and say, let's go out and start selling now that we've started up a plant.

So, as I look at the capacity that is coming into the market today, I believe that there is enough capacity that is coming into Asia that will continue to supply the Asian market. There is a little bit of – there's some few debottlenecking projects, there's no grassroots capacity that's coming on in the next year or even two in Europe or North America. And so, as I look at that European and North American market, I believe that they're going to get tighter. I believe today, they're operating at close to 90% capacity utilization. I think over the course of the next year or two, they're going to be moving into the 91%, 92% capacity utilization. And the Chinese material is going to be – is probably going to keep capacity utilization there probably in the high-80%s, 88%, 89% capacity. And I think that – and again remember, on those commodity grades of MDI, you can ship some of that crude MDI, if you will, around the world. But on the downstream, the system, the higher end value-added components of MDI, it's very difficult to make those products in China. You have to ship them to the U.S., hypothetically to U.S. or Europe, you have to ship them in a cryogenic refrigerated storage and over time, and I'm talking weeks, maybe a month or so there, the products starts to discolor and goes off spec.

So, excess capacity in China does not necessarily mean that all of that tonnage kind of slops (69:29) over the rest of the world as it does in other products. So, long answer, my apologies. As I look at capacities in MDI, I think that they're tight today and gradually over the course of the next year or two, they're going to keep getting gradually tighter outside of China and I think they're going to stay pretty well balanced within China.

J. Kimo Esplin – Chief Financial Officer & Executive Vice President

The Yantai – what is it, 600,000 ton plant in Bajiao is in the market today. So it's there and they are selling. I don't think they're selling anywhere near 600,000 tons out of that plant, but at the same time, they shut down a Yantai city plant of 200,000 tons, that is already in the market. So, as Peter said…

Peter R. Huntsman – President, Chief Executive Officer & Director

They're out there putting it in the market.

J. Kimo Esplin – Chief Financial Officer & Executive Vice President

There really isn't a lot – there's debottlenecking, but there's not large chunks coming on in the next couple of years.

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