The Urethane Blog

Urethane Highlights from Huntsman Call

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

Thank you, Kurt. Good morning, everyone. Thank you for joining us. Let's turn to slide number three. Adjusted EBITDA for our Polyurethanes division in the first quarter 2015 was $131 million. Compared to the prior year, we experienced $9 million of negative EBITDA from foreign currency exchange as a result of the stronger U.S. dollar, primarily against the euro. If currency rates are maintained in the second quarter it should be a drag on our year-over-year earnings comparison.

At our recent Investor Day, we provided a breakdown of earnings for our MDI polyurethanes (sic) [MDI urethanes] (3:02) and MTBE businesses. Based on feedback we have received, we know this has been helpful to many of you. We plan on continuing to provide transparency to these businesses so that you have a better understanding of their respective earning patterns.

Compared to the prior year, first quarter adjusted EBITDA increased $8 million in MDI urethanes and $18 million in MTBE. EBITDA last year was impacted approximately $60 million by our planned PO/MTBE maintenance outage. Much of that benefit this year was reduced by the negative foreign currency impact and lower MTBE margins brought about due to lower oil prices. We saw strong MDI volume growth in Europe and North America of 6% each.


Growth in Europe, which is our largest market, was driven by broad-based demand, notably in the automotive, composite wood products and adhesives, construction and elastomers markets. The strength in North America was primarily for commercial insulation products. Asia demand was down primarily due to the economic slowdown that occurred in the second half of last year.

Robert Andrew Koort – Goldman Sachs & Co.

Thanks very much. Peter, I just was reading from another actor in the polyurethanes market that Asia maybe was opportunistically better for them. Can you give us an update on exactly what's going on in Asia and also what you see on the capacity expansion front there?


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

Well, I think that as we look at the capacity expansion taking place in China, that we look at obviously a lot of new capacity shifts come on. I think that there will be a gap of a year or two before we see any new capacity coming on in China. So if anything, we look at the capacity – which I would estimate today in Asia general, China in general, capacity for MDI is around 70%, maybe a bit higher than that but around 70%, and that's going to tighten here over the course of the next year or two. I believe within all of greater Asia our plant is the next one to start up and that's probably about two years away.

As we look around the rest of the world, Europe's is around – operating in the low 90%. Americas is in the low-to-mid 90% capacity utilization rate; putting globally probably somewhere in the mid-80%. So as I look at the Asia market and China in particular, moving into the second quarter, I wouldn't say that market conditions are great but I would say that they are improving from what we've seen over the course of the third quarter and fourth quarter and early part of the first quarter of this year.


Aleksey Yefremov – Nomura Securities International, Inc.

Good morning. Thank you. Could you address the rising raw material environment in the second quarter, specifically benzene, and how do you expect this to be reflected in your second quarter EBITDA?

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

Well, if the markets are – is tied typically around 90% capacity utilization, you should have some pretty good ability to pass through price increases at that point. Raw materials across the board are putting upward pressure on our raw material costing and so forth.

Benzene did spike last month and this month it seems to have come down just a little bit. So I wouldn't put too much in any one given month. But I do feel that the markets on MDI in particular – you mentioned benzene, and obviously MDI is the single largest consumer of benzene – I do believe that the markets for MDI are strong enough that as prices increase, it may not be month for month but certainly within that quarter I believe that the pricing, we'll be able to increase to be able to offset any price increases in benzene.


John Roberts – UBS Securities LLC

My apologies here. A competitor reported this morning that its urethane systems had double-digit global volume growth. You're up 3%, adjusted for the maintenance outage. Have you had a chance to think about where the difference might come from in the performance?

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

No. To be honest with you, I have no idea who that would have been or where they would have seen it. I think that with our downstream systems business, I think that we have grown that much better than GDP over the years it now makes up a substantial part of our total EBITDA and I think that we are certainly not losing business in that area. And I think that as we look at our growth in Europe and North America, 6%, given the anemic GDP growth that we are seeing in those markets, I think that sort of 6% growth speaks extremely well for how we are doing year-over-year.


Unknown Speaker

Maybe as a follow-up, in the old days you mentioned that the change of price in benzene could be probably about a quarter of a lag to impact your raw material and product prices. So, benzene prices was lower in the first quarter versus 4Q 2015. So does that mean your second quarter you would see meaningful margin expansion in MDI? And also as crude oil prices started to recover, maybe benzene prices will start to improve starting in 2Q 2016. So does that mean that maybe second quarter is the highest margin for MDI and profit will come down a little bit through the remainder of 2016?

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

Well, depending on the end product that you're selling, some of our end products are very sensitive to raw materials and will actually move with the cost of raw materials because the way we sell them will be a raw material throughput. Others of our end products are free floating on pricing and so forth and have very little to do with raw materials. So typically I'd rather see lower raw material prices than higher raw material prices but, as I've said the last couple of quarters, I wouldn't get too transfixed on raw material prices. I'd stay focused more on the margin between raw materials and the product price that we are ultimately selling.

And when raw material prices come down, that's no secret to our customers. They are going to be pushing product prices down. When raw materials go up, we're going to be pushing those product prices back up. So there is not going to be an exact quid pro quo on a monthly basis. But I think on a quarterly basis, you'll see some of these spikes and some of the low pricing will really iron themselves out.

So what I'm trying to say is I think that as I look at – I've heard a couple of people say that the best of the MDI markets are behind us because benzene prices have stopped falling. I don't buy that theory and I think that the strength of MDI is going to be on the quality, the performance we give to our customers, and our discipline in pricing. It's not going to be just because of benzene prices.

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

In fact, an interesting exercise would be – and we've done this -is to correlate benzene prices with our margins and there is no good correlation between benzene prices and MDI margins on a quarterly basis. Now, on a monthly basis, as Peter said, maybe. But not on a quarterly basis. It suggests again that we are able to move benzene prices through our systems and our polymeric component businesses pretty quickly.