Urethane Comments from Huntsman Investors Call in July

Peter R. Huntsman – Huntsman Corp.

Thank you very much, Ivan. Good morning, everyone. Thank you for taking the time to join us this morning.

Let’s turn to slide number 3. Adjusted EBITDA for our Polyurethanes division was $167 million. Our MDI Urethanes business, which includes propylene oxide, recorded adjusted EBITDA of $165 million, which is up $13 million over the prior-year quarter in spite of a $15 million planned Rotterdam turnaround impact. It should be noted that our Urethanes business continues to consistently report 18% EBITDA margin. Our strategy and strategic focus remain on growing our differentiated downstream MDI portfolio.

In the first half of this year, we completed a planned maintenance project at our MDI facility in Rotterdam. As noted, this planned project, which occurs once every four years, impacted our results in Q2 by $15 million, in total by $20 million for the first half of 2017. We also had an unplanned outage at our PO/MTBE facility that decreased EBITDA by $10 million in the quarter.

As a result of the planned Rotterdam maintenance, our ability to grow MDI was impacted, down 6% overall versus prior year. Excluding the impact of our maintenance activities in the second quarter, our MDI growth would have been 4%, which even so is capped because of capacity constraints. End market demand for MDI remained strong. We expect our own growth to be positive next quarter now that we have our major maintenance activities behind us.

Our North American business grew at 7% versus prior year, driven by higher volumes in composite wood products and growth in our downstream differentiated consumer businesses. We were capacity-constrained in Europe and Asia, and we strategically grew our differentiated portfolio, while deselecting cyclical component volumes. Underlying demand in both regions remained strong across our insulation, automotive and ace businesses. While we expected some correction in margins in Asia during the quarter, profitability in both regions remain healthy.

In Europe, we were pleased to add to our growing downstream polyurethane system-house network as we completed the purchase of IFS Limited, the UK’s leading independent formulator of MDI-based systems. Our MTBE business reported EBITDA of $2 million, which was an improvement versus the first quarter, but down compared to the $19 million reported last year. The average C-Factor, which is an industry proxy for MTBE contribution margins, was $0.80 per gallon versus $0.89 per gallon last year.

During the second quarter, we moved closer to completing mechanical construction of our MDI joint venture facility in Caojing, China, that will be ready to be commissioned by the end of this year, and we expect commercial operations during the first quarter of 2018. As a reminder, we believe that once fully operational, this new facility will contribute roughly $85 million in annual EBITDA with an estimated $20 million benefit in 2018.

Also our world scale PO/MTBE joint venture in China is currently progressing through its start-up phase, which is so far occurred with minimal issues. A reminder, we own 49% of this joint venture, which utilizes Huntsman PO/MTBE technology. We expect our PO/MTBE joint venture to contribute roughly $10 million to $20 million of equity income in 2018. Finally, our previously announced 60,000-kiloton de-bottleneck at our Rotterdam MDI facility will be commissioned by the end of the year and will help us further grow our European business where we see strong end-market demand.

As we look forward to the third quarter, the fundamentals in MDI Urethanes business remain positive and our strategy to drive downstream remain our focus. With our maintenance projects behind us, we will see the third quarter yielding a stronger performance than this past quarter.

Kevin W. McCarthy – Vertical Research Partners LLC

Yes. Good morning. Couple questions on MDI. Peter, it sounds like your volumes there would have been about 4% as adjusted for various things. How do you think that compares to the market rate of demand growth? And do you have any price increases on the table for the third quarter in that business?

Peter R. Huntsman – Huntsman Corp.

Well, if you look at our MDI on a pro forma basis, again, if I strip out the outages that we had because of the planned maintenance, we saw volumes increase in North America – U.S. and Canada markets by about 8%. We would have seen growth in Europe of about 7%. And we would have been down a little bit in APAC as we redeploy MDI around the world and so forth.

We certainly are starting to bump up against capacity constraints. If we had the volume, we’d be able to sell it into the marketplace. And I think that our additional capacity that will be coming in Caojing at the end of the year, early part of next year is going to be very important for us to be able to continue that growth. But even without the growth of more MDI – of crude MDI, we’re continuing to take the crude MDI that we’re selling into the market, the MDI that we’re selling into the market and moving that into our formulation and downstream system houses as aggressively as we can. And that will be the area of the business that we’ll continue to see the growth in the margin expansion going forward.

Hassan I. Ahmed – Alembic Global Advisors LLC

Peter, obviously, as I take a look at your MDI results, I mean, not Polyurethanes generally, but MDI, in particular. Margins have been quite steady-Eddie. High teens, call it, 18% this quarter. From the sounds of it, supply/demand fundamentals seem quite snug. It seems demand at least in the near- to medium-term, demand growth will exceed supply growth. So first question is, are you in agreement that at least near- to medium-term, despite some incremental capacity coming online, supply/demand fundamentals should continue to be tight? So that’s the first part.

Second part is that as one sort of sits there and thinks about further tightness within the MDI chain, how much higher could your MDI margins go from where they are right now?

Peter R. Huntsman – Huntsman Corp.

Well, as I look at the supply and demand, I would strongly – well, I’d agree very much with what you had to say, and I would just note that as we look at the health of our MDI business, we’re reporting here $144 million just in MDI. And I would just note that $15 million was the cost of the maintenance impact on Rotterdam. So really as we look at our second quarter 2017 margins and pro forma basis, it’s around $159 million, $160 million versus $125 million of where we were last year. So as I look at that supply and demand basis, I do think that it’s going to be a relatively snug market over the course of the next couple of years here.

As we look at the large world scale projects that have been announced, there are only two of them that are really out there. I’m talking about large grassroots facilities. One of them is the (46:19) and I think that a lot of that – they’re going through their start-up right now, and I suspect that a lot of the pre-marketing for that is already out in the market. Their people have been out obviously pre-selling that material. So the impact of that while volumetrically may not be in the market, I think from a pricing perspective is already affecting parts of the market.

And then, Huntsman will be coming on with our project early next year. After that, I don’t see large grassroots facilities, nothing that’s on the horizon. I would remind you that it takes a couple of years to build these facilities, permit them, engineer, build them, and commission them.

So I think that we’re in a pretty well-balanced market environment for the next couple of years. I would just reiterate that as you look at Huntsman’s MDI business, 75% of our MDI goes into downstream businesses, goes into downstream formulation. We’re taking our MDI and we’re mixing it with our own polyols and mixing it with other amines and other products that we’re producing, products that we’re buying.

And as we look at that, if the markets get particularly tight and you see spikes that occur in more commoditized MDI, Huntsman may not be able to take full advantage of that because I think that most of our MDI – I’d like to see three quarters of it if not more going downstream because the majority of the time, I would much prefer to have an 18%-plus EBITDA margin business that’s consistent, it’s growing consistently, we have consistent performance, and you control that supply chain. You control that chemistry going downstream. You control the value of that chemistry.

So as I look at that on tightness, I’m not sure that Huntsman will be on its own without any partners or anything building crude MDI facilities in the future. I think that our focus and our resources and our capital is going to be much better spent continuing to move further downstream in those areas of growth and opportunity. Where we’re seeing solid – in many of our downstream applications formulation applications, we’re seeing in excess of 20% EBITDA margins in those applications and strong growth. So that’s going to be our focus longer term.

Hassan I. Ahmed – Alembic Global Advisors LLC

Understood. Understood. Very helpful. Now, as a follow-up, on the other side of things, as I take a look at your raw material costs, some of the core raw materials, be it benzene, be it methanol, and the like, came down decently through the course of Q2. So just trying to get a sense of, A, what sort of a tailwind was that for you, be it on a quarter-over-quarter, or year-over-year basis? And then, part and parcel with that, you’re guiding to being able to generate over $115 million in free cash in the back half of the year. So just trying to get a feel of what sort of a raw material pricing environment are you baking into that forecast?

Peter R. Huntsman – Huntsman Corp.

I think that on a macro basis, we’re assuming that crude and natural gas really stays fairly consistent. You’re going to see some choppiness in the downstream. A year ago at this time crude was in the mid to high $40s, and as we look at second quarter, crude WTI, though we don’t buy, it is an indicator, it was at $48. As we look at natural gas a year ago, it was around $2, and today it’s around $3, Benzene’s moved up a little bit. It’s up 9%, 10% over the last year. Butane a big raw material for us, it’s up 20%. You’re going to see some choppiness in that. But I think most of our businesses are – the products are running at solid capacities and we have enough downstream applications.

You might see a quarter delay in the raw materials that we take, and the prices that we’re able to pass on to customers. But I think within a quarter or two, we ought to be able to most all of our products are strong enough today, downstream enough, differentiated enough, we ought to be able to pass through those price – raw material price movements.

John Roberts – UBS Securities LLC

All right. And more operationally, are you fully self-sufficient on PO and polyols? And to move more MDI downstream, do you need to buy or build more PO or polyol capacity?

Peter R. Huntsman – Huntsman Corp.

I think that we’re in a very good position right now with propylene oxide. We are a large, very competitive producer, a low-cost producer in North America. We’re a net buyer in the European markets. We have long-term agreements. And obviously, with the completion of our PO/MTBE joint venture we have in China, we’ll be sufficiently supplied in China. So I do not see PO or polyols, either one, as being a limiting factor on the growth of profitability of our MDI downstream formulation business going forward.

Laurence Alexander – Jefferies LLC

Two quick questions. I think that it was back in 2016 you were highlighting your growth project pipeline, which I think was about $2.5 billion of investment for about $300 million, $400 million EBITDA tailwind. What’s your current thinking for what the pipeline for growth projects might be for 2018 to 2020? So that’s the first one. And then the second question is for the standalone new Huntsman, how much leakage do you expect for any pension costs, run-rate restructuring, other cash flow items that would be a bit of a drag on the cash flow bridge post the Venator spin?

Peter R. Huntsman – Huntsman Corp.

Well, I’ll go ahead and answer the growth project, and turn over to Sean the other questions. On the growth projects, I would say, Laurence, that over the last two years to three years, we’ve had fairly heavy capital investment in areas that we thought we would be needing excess capacity. And that would include our MDI, our downstream PO, which we’re satisfying through joint ventures, our downstream MDI that we have through our Caojing expansion, through our expansion in Rotterdam. We spent a lot of money in restructuring, expanding our capabilities in advanced materials and the aerospace industry.

We spent several hundred million dollars in restructuring and expanding and investing in the Venator assets as well. Our titanium dioxide. And I think that that $300 million in benefit that we see on an overall basis. If I look at just where we were last year to where we will come out this year, if we kept the Pigments and Additives business as part of our portfolio, I think you’ll see much of that $300 million just in this year to last year improvement that we’ll see in EBITDA because of that investment. That’s just over one year. So I think that investment is very sound over the last couple of years.

Now, as I look going forward, I think that the real growth drivers are going to be taking the volume that’s coming out of those capacities and continuing to move that further downstream. Moving that into formulations, moving that downstream into amines, moving it downstream through system houses, through the bolt-on acquisitions. I just announced one today in the UK.

Another one and so as I look at our MDI business, roughly about 25% of our EBITDA comes through these smaller bolt-on acquisitions that take our MDI, move it downstream, and we make more EBITDA margin than we otherwise would be making, if we were just selling into the market – into the polyurethanes market. So as I look over the next couple of years, I see real opportunity to take the volume, move it downstream, less capital-intensive, more R&D, more differentiated higher margin sort of opportunity.

James Sheehan – SunTrust Robinson Humphrey, Inc.

Thank you. Peter, where do you see global MDI operating rates today? And where do you see them going once your Caojing unit starts up?

Peter R. Huntsman – Huntsman Corp.

Global operating rates stay probably, I would say, in the low 90%s. Again, that’s a tough number to talk about – well, to try to calculate, because when I look at global operating rates, you’re looking at design capacities. And oftentimes MDI facilities in particular because they are trickier facilities to run, if you have a facility that’s designed to operate at 400,000 metric tons, it’s pretty rare that you actually get that 400,000 metric tons out of it, because you’re constantly having to go through maintenance work, T&Is and so forth. So oftentimes, we look at this capacity utilization on a theoretical basis that looks like today that it would be in the high 80%s, around 90%.

I would say globally that we’re in the low 90%, though it feels in some areas that it’s tighter than that. I would imagine that Europe is in the mid to high 90%s. America, it feels like is in the mid to high 90%s, and Asia is obviously below 90%. But, again, as I look at Asia, I continue to see what feels like pretty good market conditions in Asia, margin-wise, demand and growth. And I’m not sure that that stated capacity in Asia is – that necessarily means that’s how much MDI you can actually produce.

So sorry. That’s a rather long answer, but oftentimes, you look at a lot of these analyst reports and so forth that are showing MDI and somebody will start an MDI facility up midway through the next year, and they’ll show that facility starting up several hundred thousand metric tons over night, and then it just operates at that going forward. And that just is not the case in MDI. These facilities take months to commission and start up. And as we’ve seen over the last couple of years, not just in Huntsman, but in the industry, these facilities, especially, the larger you build them, you get a single contaminant that goes in, and the entire facility comes down, and you’re going through that start-up procedure all over again. So it feels that we’re right globally around 90%-plus.

James Sheehan – SunTrust Robinson Humphrey, Inc.

Great. And there’s been a new propylene oxide project announced in Texas in the next few years. Can you talk about supply/demand balances in that business? And how you see that developing over the course of time as that starts up?

Peter R. Huntsman – Huntsman Corp.

Well, that’s a lot of PO. I obviously had nothing to do with the decision to invest that much money and that much capacity, so I probably ought to keep my mouth shut or I’ll get in trouble.

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