Peter Huntsman

Ivan, thank you very much. Good morning, everyone, and thank you for taking the time to join us. Let’s turn to Slide number 3. Adjusted EBITDA for our Polyurethanes division was $245 million. Our MDI urethanes business, which includes propylene oxide, polyols and systems businesses, recorded adjusted EBITDA of $254 million. All of our MDI production units operated at high rates during the third quarter, and as a result, we delivered strong global volume growth of 8%. We estimate that the impact of Hurricane Harvey was about $15 million for the quarter.

We’ve remained strategically focused on growing our downstream specialty and differentiated businesses, notwithstanding the sustained strong component margins. As part of our long-term strategy to shift more of our portfolio to differentiated and more specialty MDI products, we continue to deselect the less stable margin component business in favor of long-term, more stable differentiated MDI systems. These differentiated MDI systems saw a 16% year-over-year improvement in volumes globally. Strong ongoing global demand combined with continued tight supply conditions advanced favorable price dynamics in component MDI in both China and Europe. Though subject to seasonality and industry operating reliability, these positive demand trends should continue well into the future.

Let’s turn to Slide number 4. Our global differentiated MDI sales represent approximately 75% of our total MDI urethanes business. As a result, our portfolio is much less susceptible to swings in component MDI pricing. Industry operating rates are very tight with global effective operating rates above 95% capacity utilization. Industry demand for MDI is growing at about 6% globally on an annualized basis. As such, industry capacity needs to expand at about 400,000 kilotons annually, or about one world-scale facility per year. As of today, we believe industry manufacturing capacity will grow approximately 4% annually from 2016 through 2021.

Given the long lead time, in excess of five years, required to bring on greenfield MDI capacity, we have good visibility over the next several years. The only new greenfield MDI facility entering the market is Dow Sadara, with a stated capacity of 400,000 tonnes. No other greenfield site is under construction.

We do expect some brownfield expansion and debottlenecks including our own, Caojing, China, facility of 240,000 tons of stated capacity. As is normal and seen historically, we would expect unplanned and planned outages in the industry every year. As newer MDI facilities have fewer and larger production lines, single plant outages will potentially impact the market, especially when capacity is operating at greater than 90% utilization. We do expect short-term rates to fluctuate a bit as these capacity additions are absorbed, but overall we see the continued favorable supply and demand carrying well into the future.

The chart in the bottom right of this slide shows our exposure to component MDI by region. Our Asian MDI urethanes business represents 24% of our global MDI urethane sales. Within Asia, about 35% of our Asian MDI urethane sales are component, which equals about 9% of our total global MDI urethanes exposure. Globally, we estimate that our total exposure to component sales is about 25%. Compared to the prior year’s quarter, our European and Asian component margins have doubled, representing approximately 16% of our global MDI urethane sales.

In North America, due to the structure of our long-term formula contracts, we have much less elasticity and movement in margins, therefore much less exposure to upside and downside margin expansion. We benefited from the margin expansion component in MDI. However, this component margin expansion is confined to a subset of our portfolio. Our differentiated MDI sales are more stabled and have higher margins over the long haul. Our MDI urethanes EBITDA has shown steady growth since 2009. This is a product of our relentless focus on growing our differentiated portfolio.

Our North American volumes increased 10% as both commercial and residential construction markets drove demand in our composite wood products, adhesives and insulation sectors. With our Rotterdam facility, recently expanded by 60,000 kilotons, now running at full rates, our European region volumes increased 8% in the quarter. This high growth was driven by our differentiated adhesives, coatings and elastomers, footwear and insulation systems businesses.

Asia volumes rose 5%, driven by demand in the Chinese automotive and insulation markets, though we remain capacity-constrained in this region until our new facility in China comes online. As stated, we expect our Chinese MDI expansion to begin commercial operations in early 2018 with capacity coming online as demand requires.

During this past quarter, our PO/MTBE joint venture with Sinopec in China successfully started up and is now running at close to full capacity. While our MDI urethanes business went well, our MTBE business continues to operate in trough margin conditions. For the quarter, MTBE reported a loss of $9 million in EBITDA, which is similar to the period a year ago. We were impacted by Hurricane Harvey at this facility, but we are now running at full rates. Looking at the next quarter, we expect MDI demand to remain strong with a seasonal slowdown versus the third quarter and MDI margins to remain attractive versus the prior year.

Kevin McCarthy

Good morning, Peter, very strong results in MDI. Would you comment on your utilization rates in the U.S. as well as Europe in light of the ramp in the new capacity in Rotterdam? And then secondly, you alluded to a typical seasonal slowdown in 4Q, yet as we look at component MDI prices particularly in Asia, they’re up in some cases more than 50% in that region since the first of July. And so in that context, could you comment on your outlook for profitability in the fourth quarter for MDI from the 3Q strengths that you posted?

Peter Huntsman

Yes, first of all, I think from the capacity utilization, as we look at our three major operating centers of our MDI Caojing, China and Geismar, Louisiana and then Rozenburg in the Netherlands, all three of those facilities are operating at capacity. And they have been for the past quarter or so barring some maintenance work that was done earlier this year. We see that continuing – there’ll be a little bit of a typical seasonal slowdown in the fourth quarter, but I really don’t see margins eroding much in the fourth quarter.

You’re right in the component Chinese MDI, which makes up about 9% of our global MDI business, we continue to see – we have seen a real run up in pricing in some of those products, and some of those might cool a little bit in the fourth quarter. But I think from a – as we look across the board, I don’t see any slowdown on our margins on a per-ton basis. Again, you might see a little bit on the fringes on some of the more commoditized pieces, but I think by and large, we should see pretty stable pricing and margins into the fourth quarter. A little bit of slowdown perhaps on volume.

Frank Mitsch

All right. So it doesn’t look like there’s anything that we should be thinking about in the 2018 time frame in terms of that megamerger, but certainly we could be looking at some strategic bolt-ons where they make sense in your more specialty businesses. Am I reading that correctly?

Peter Huntsman

Yes. Well again, Frank, I’d look at our past. I’d just take our Polyurethanes business, where about 20%, 25% of our EBITDA in that business comes from bolt-on acquisitions that we’ve done over the last couple of years. I get very, very few questions about the M&A work that we’ve done over the last couple of years. And yet when you look at it in its composite, it delivers a meaningful part of our EBITDA and it is combined to make our urethanes business, which obviously volumetrically and from an asset point of view is the core of the business, a very stable and a very steady growing business.

Aleksey Yefremov

Good morning, everyone. Thank you. On Page 4, you’re showing margin for your MDI systems business, it looks like going up this year. Would you expect the systems margin to continue expanding in the fourth quarter and in 2018?

Peter Huntsman

Well, I think that, Aleksey, I think that in the fourth quarter, it’s going to be pretty stable. And as we look at 2018, we continue to see gradual improvement in those systems and formulations business. Again, this is a business that as we look at the formulation into systems business, you’ll be able to get a little bit of the fly-up as you see the components side. Some of that will past through obviously on the components side, but those price – on the formulation system side. But by and large those prices are pretty sticky. They’re not going to go fly-up one quarter and they’re not going to come crashing down the next quarter. And they’re typically not dependent on the cyclicality of supply and demand in the market. People are paying you for an entire package of chemistry, of which urethanes is a key component, not the only component.

And so I would assume that over 2018 as we continue to see between 2018, 2019, 2020, continued market tightness. I would see a global capacity utilization being somewhere between the low to mid- and perhaps even going into the upper 90% capacity utilization. We ought to have an opportunity to continue to gradually improve our business margins there.

Aleksey Yefremov

Thanks Peter. And to follow-up, you provide us earlier with EBITDA expectations for Caojing and Rotterdam expansions, have your expectations there changed, with MDI margins being higher now?

Peter Huntsman

Well, I think that what we’ve given you in the past, we’ve told around $20 million I think is what we’ve told you. I would say that obviously if today’s prices continue to be what they are in China, or anywhere close to what they are today, it should be north of that.

Mike Sison

Hey, guys, nice quarter as well. Peter, when you think about – you’ve got EBITDA margins at 60% in the third quarter, when you think about longer term, what do you think the total company can get to, given the momentum in polyurethanes and a lot of the investments that you’ve made?

Peter Huntsman

Well, I certainly think that it ought to be, over the course of the next year or two, it ought to be closer to 20% than it is to 15%. I think that when you look at this month or this quarter, people might say well, this is an unusual quarter because of component MDI. I would remind you the component MDI is a minority of our urethanes business. We still see a recovering Performance Products business, our MTBE business continues to be flat on its back. And we were hit with $50 million in the quarter from Hurricane Harvey. So I mean you back those things out, it tells me that we ought to be doing much better than 16%, 17% margin here.

So I would say that while these are strong margins compared to our past, now that we’re focused on a new portfolio with the pigments division spun out and so fourth, we certainly, as a company, ought to be much closer to 20% than we are today.

Mike Sison

Okay, great. And then in terms of the Venator monetization, can you just remind us kind of the timing and lockup periods of when you can continue to start – restart that process?

Hassan Ahmed

Makes complete sense. Thanks for that. As a follow-up, Peter, you talked about, particularly in the Polyurethanes business, call it 20%, 25% of earnings consistently coming from sort of ongoing bolt-ons. Obviously, the market’s rallied not just here in the U.S., but globally. I mean, have you seen a meaningful change in the valuation for some of these assets that you may be interested in? Or I mean are they still sitting at levels, which are quite attractive once you fold them into the broader sort of Huntsman Corporation?

Peter Huntsman

Well, I think that to answer your question, I think asset valuations right now are high. And as we look at where we want to be going downstream on an ongoing basis, we’ll probably be looking at as much organic growth and organic investment perhaps a little bit more than we have in the past. I don’t believe that these high values that we’re seeing in some of the assets are sustainable. And so, I think we do need to be patient, but I think that at the same time, when their high raw material prices to some of the downstream material consumers of urethane raw materials, remember we’re enjoying the higher margins. Some of those downstream applications are enjoying – well, are struggling with perhaps higher raw material prices and struggling margins. The combination of their business and our business may make more sense today than perhaps it did a couple of quarters ago. Integration works in some of these cases. So I think you really have to take it on a case-by-case, asset-by-asset basis.

Robert Koort

Peter, I’m trying to figure out the importance of that component MDI market. So that the data you put on Slide 4 is quite helpful. I’m wondering if I look maybe sequentially from the second to third quarter, you guys had about $80 million more EBITDA in that segment. Can you parse that out? How much of that was from component MDI versus differentiated?

Peter Huntsman

I would say, if you look at it in broad numbers without getting into specifics on customers and exact applications or regions, it’s pretty close I’d say that about half of that number. About $40 million of that, I would say, is attributable to – I don’t want to use the phrase the component fly-up, but I used the phrase components fly. I think that the other $40 million of that really is we see it in further growth. I talked about 16% year-on-year growth in some of our downstream businesses and so forth. And again, those are – I see those as really being sticky. And I see that differentiated growth in that mix as being a big chunk of that other $40 million. There’s greater volume obviously when we saw volume over the prior quarter of 11% globally on MDI and over the prior year of 8%. Those are – there’s a big chunk of that $80 million that’s volume, a big chunk of that is margin, and a chunk of that is other. So I think that fair to say about half of that.

John Roberts

And then would could you remind us of your propylene oxide balance, sort of the same way you did with MDI? You only have PO capacity in the U.S. So I assume you buy all of the PO for your overseas systems. And do you use all of the PO that you produce in the U.S.?

Peter Huntsman

No. We don’t – we’re actually short on PO globally. We’ve secured that PO globally through various means and contracts sometimes even through exchanges and so forth. Obviously with the start-up in China of our facility with Sino Pak, we will have a very healthy source of propylene oxide supply – who supplies in China. In the U.S., we also we commercially sell the PO. We also derivatize the PO into propylene glycol and then into other surfactants and amines applications. We also do some of our own polyol manufacturing as well. So I think we try to have a good balance. I have absolutely no problem buying from a competitor PO if we can turn around and make money off that. So I think we try to balance that between derivatizing our own downstream, buying from competitors and also producing with our own joint ventures.

Jim Sheehan

Thank you. With respect to the hurricane impacts on the U.S. Gulf Coast and other natural disasters, are you seeing any signs of abundant demand for polyurethanes from the auto or housing construction industries? And if so, when would you expect to start seeing that?

Peter Huntsman

I met with our Polyurethanes leadership, commercial leadership team here just earlier this week, and we’re really not seeing anything. I would say that you probably – let’s not say it’s not coming. you’ve got 210,000 structures that were damaged, either completely or partially, with a lot of insulative material and so forth, and just in the Huston area that didn’t include the damage that was done in other parts of the Gulf Coast and Florida with the weather problems that are there.

I think that as we speak with our customers, and you look at some of the downstream derivatives, you’re probably looking at the first quarter of next year where you’ll see – first, second quarter of next year, where you see some of that demand. I don’t think that you’re going to see a big huge wave of demand coming through. I wouldn’t be counting on something like that. But no, that the – the strong demand that we’re seeing right now in the third quarter and that we’re even seeing in the fourth quarter, I would say that virtually none of that volume is due to the storm.

Jim Sheehan

Great. Where do you see MDI inventories today? And when will you expect them to normalize?

Peter Huntsman

We don’t carry a lot of MDI inventory. I mean, it’s not like TiO2 where you’re building from one season to the next and so forth. I think that capacity utilization is a better means of inventory, rather than producing huge stockpiles. We would just choose to slow down a facility, rather than have a stockpile of MDI. And as we look at today, global capacity rates are around – I would say it’s in excess of 95% capacity utilization. If you look at the design rate, you’re probably in the low 90s. Again, how much is actually designed and what you’re able to operate it, and as I said in my earlier comments, MDI lines as you get these larger and larger facilities, you will get some of our facilities in Europe or in Geismar, we have three or four lines in a facility. And it’s not unusual to lose a single line due to contaminants or switching over products or maintenance issues and so forth.

And we lose a line in one of those facilities, and it’s not something that we feel we have to report to the market. It’s not a big financial hit. you just – we’ll ameliorate the other lines and make up for it. If you have a single line, train line of 200,000 to 400,000 tons and you lose that single line, you’ve got a world-scale facility that’s going to come down. It’s going to cause repercussions on a global basis.

So when we look at inventory, I would say nearly as MDI, I’m looking more at capacity utilization, and where we’re operating today, something north of 95% globally. And exactly where we go with that going forward. I think that that’s something that we’re going to keep an eye on.

Traditionally, we’re sitting at about total days of usually around 40-some-odd days. And our business today as I just look at our DIOs, we’re in the low 30s, which would be pretty standard if you’re operating at – in the capacity that’s better than 95% utilization. So you typically are trying to rebuild a little bit of capacity here in the fourth quarter, but it’s not a as terribly seasonal time. But I – again as you look at that entire supply chain the customer and that manufacturing, end it’s all quite snug right now.

P.J. Juvekar

Yes. Hi. Thank you. Peter, quickly, I know there have been some shutdowns in the urethane exchange in China related to environmental crackdown. Can you just describe that for us? What’s going on there? And how does supply – how much supplies were taken down? And so when adds capacity, how do you see supply demand going forward?

Peter Huntsman

Yes. I think that as I look at our pigments business, our textile business, these things have been materially impacted because of environmental policies. And I look at our urethanes business, I don’t see anybody in – I’m not aware of MDI capacity that is being shut down because of Chinese environmental regulations. I haven’t seen that and I wouldn’t say that has anything to do with the lack of available product.

P.J. Juvekar

Okay. So it is purely because of high demand that you’re seeing this?

Peter Huntsman

Yes, it really is. And again, as I look at the demand in China in Asia, I would just remind you that Asia for us now partially because we don’t have as much product as we’d like to be able to supply, but most of the demand that we’ve seen globally is coming as I look year-over-year versus even the prior quarter, most of the demand growth that we’re seeing is in Europe and the U.S.

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