Urethane Related Comments from Huntsman Investors Call

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

Thank you, Kurt. Good morning, everybody, and thank you for taking the time to join us this morning. Let's turn to slide number three.

Adjusted EBITDA for our Polyurethanes division in the first quarter of 2015 was $105 million, a decrease of $62 million compared to the prior year. The decrease was attributed to lower PO/MTBE earnings, partially offset by an increase in MDI urethanes earnings. During the first quarter this year we completed planned maintenance at our PO/MTBE facility in Port Neches, Texas. We estimate the first quarter EBITDA impact was approximately $60 million.

We experienced a delay of approximately 30 days in the restart of the facility during April. We are currently operating at normal rates. However, we estimate the second quarter EBITDA impact from the delayed start-up to be approximately $30 million within this division, and $35 million for the company as a whole.

Our PO/MTBE EBITDA declined $73 million, compared to the prior year. $60 million of this was attributed to our planned maintenance outage, while the other $13 million was attributed to lower MTBE margins following lower prices for high-octane gasoline. EBITDA for our MDI urethanes increased $11 million, compared to the prior year, notwithstanding approximately $11 million of foreign currency exchange headwind, as a result of the stronger U.S. dollar compared to the prior year.

We saw stronger MDI volume growth in North America and Europe, most notably in construction, insulation and automotive end markets. We're encouraged by the green shoots we saw in Europe, as this remains the region where we sell the most product. The positive trends in Europe helped offset slower than expected growth in Asia, where certain consumer end markets declined and we deselected low margin accounts.

In Polyurethanes, we have three meaningful growth projects underway, including the expansion of our MDI facilities in the Netherlands, the U.S. and China, as well as the completion of our PO/MTBE joint venture facility with Sinopec in China. We reiterate our earlier forecast of $875 million and feel confident with the market conditions that we see today that this is achievable.

James Sheehan – SunTrust Robinson Humphrey

Okay. And on Polyurethanes, how much margin expansion were you able to benefit from on benzene in the first quarter? And how much of the decline in raw materials do you expect to capture in the next few quarters, given that benzene has started to rebound here?

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

Well I think that as we look at the entire company, and again, it's kind of tough when you look at it quarter-by-quarter, month-to-month, inventory values from the beginning of the quarter to the end of the quarter and so forth, but as I look at the entire company, we've benefited by about $100 million for the quarter. You look at the volumes of our raw materials and the volumes of our products that we're selling, it's fair to say that polyurethanes is going to catch the biggest piece of that $100 million, and some of that $100 million is going to be offset with some of the FX and so forth, but again, I think that as we look longer-term in Polyurethanes and in most of our products, and I got a little bit of criticism in the follow-up from the last conference call that we didn't seem to have absolute clarity and certainty as to the impact of what $2 per gallon lower benzene was going to have on the business.

Well, so here we are a few months into the year, we've seen our biggest raw material in Polyurethanes dropped by 50% and the last couple of weeks, we've seen it increased by 50% and I think that, again, I'll say the same thing as when it dropped 50%; let's look at the overall strength of the margin that we're able to capture, the strength of our downstream, the strength of our ability for pricing increase and so forth. We're going to have a sector of our business that will fall with raw materials falling. We're also going to have a sector of our urethanes business that will, that is calculated on the movement of raw materials. We've also got a large section downstream that we don't really – we don't go to our customers and say, well the price has gone up or the price has gone down of our raw materials. We're selling them a solution. We're selling them a value that adds value to something that they're producing.

So as we look at our MDI margins across the board, I would say as I did, we kind of gave our forecast for the year, this is going to be a better year or MDI than the previous year. And we're going to see raw materials go down. We're going to see them come up. We're going to see FX headwinds and everything else. But if we've got the right MDI and Polyurethanes management team, we're going to continue to consistently focus on the right markets, the right pricing, the right relationships. And we're going to continue to create value in that division. And so we sit here now with raw materials having gone up 50% and I'm still confident that we're going to achieve what we've set out to achieve in urethanes.

Kevin W. McCarthy – Bank of America Merrill Lynch

Yes, good morning. Peter, in MDI, I think one of your U.S. Gulf Coast competitors had declared force majeure on Monomeric MDI in March. And I was wondering, is that part of the strength that you're citing in the U.S. market or is it more of a – in the industry level, demand strength? And then over in Europe – I'm sorry, over in Asia, what is driving the deceleration of demand regionally there? And maybe you can give us some color on operating rates?

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

What's happened in the U.S. is not – when I talk about the activity levels that we're seeing in demand in North America, I would not attribute the closure that you made reference to. That hasn't had any impact on our demand or on our margins. I think that's fair to say. I think that as we look at the Asian markets, I think that there's a general softening of the market conditions in China. I know they published some GDP numbers here recently. If we look at kind of across the board in China and in greater Asia, I think that people are certainly feeling the effects of lower prices, a longer Chinese New Year just as when it fell this year on the calendar and so forth, and as we look at the construction and materials business in China, it certainly has slowed down. Again I think that if we look at overall in China in general, this is going to continue to be a growing economy. It seems to be a growing market for us. Exactly where we are today, I'm not sure that I'd read that into a full year's sort of projection or condition.

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

Maybe just a little bit more color on Europe specifically, Kevin. Europe, we saw our construction and insulation business grow double-digit as well our composite wood area. Auto continues to be strong. It's been strong even over the last year when Europe was fairly flat. And correspondingly Asia, as Peter said, is down a bit on the construction and insulation side. And we think that reflects the market that it is a softer construction market right now.

Kevin W. McCarthy – Bank of America Merrill Lynch

How would you characterize operating rates globally in MDI?

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

I think again, you have to look at it regionally. I would say that in North America that it is in the low 90s%, and the market is improving. I think that it's been similar to last year. I think we had a later start to the construction year than we typically have seen. Looking at April, I think we're seeing a bit of the impact of a late winter. Looking to May, I think that we're going to see a rebound of those construction patterns. We're not seeing our North American construction, housing and so forth customers come back and say they're cutting their projections as much as just cutting the timing of their orders. So I continue to be quite optimistic on the North American economy in-spite of this point to GDP. I think a lot of that might have been weather related. I think again we saw a lot of that last year.

In Europe, as we look at capacity utilization, we're probably operating there in and it feels like in the mid to upper 80s% capacity. But again – well then in Asia, I would say that it's probably similar to Europe. Now we do have announced price increases in Asia in MDI, in certain grades of MDI. And as we look around Europe and North American markets, particularly in light of rising benzene prices, we're in the process of studying where we need to be going with pricing in those regions as well. But I would just emphasize that as we go further and further downstream and we look at a larger percentage, 60%, 70% of our business is more dependent on formulations and further downstream blending and so forth that I believe that those margins are going to be less operating rate sensitive than perhaps where we were a few years ago.

Aleksey Yefremov – Nomura Securities International, Inc.

Peter, just wanted to follow-up on the MDI question in Asia. Have demand and margins deteriorated progressively throughout the quarter? Or did things get worse in the beginning? And how are you exiting the quarter? Are things actually getting better for the second quarter and the rest of the year in Asia?

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

Well, if we look at Asia in the quarter, demand certainly softened. So I'd say that that was headwind. Margins would've increased during that same time period. So I think that there is a discipline on pricing. There is ability to take advantage of falling raw materials and so forth. So again, I wouldn't read too much into Asia when you look at capacity utilization and sensitivity towards that capacity utilization.

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

So you should remember, in 2014, let's see if I can remember this, demand in Asia grew 10%. Fourth quarter demand grew I think 6%. And here we are in the first quarter with a softer demand; a kind of flat market is what we can see. But as Peter said, the margins expanded in the first quarter largely because of raw materials.

Ryan L. Berney – Goldman Sachs & Co.

Just had a question on – within the Polyurethanes portfolio you have the component piece and the differentiated piece. I was wondering if you could comment on whether that mix is different in Europe versus Asia?

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

Yeah. I mean Europe, we would have as large of a components business, a differentiated business, than we have anywhere in the world.

Ryan L. Berney – Goldman Sachs & Co.

And then from your perspective, the capacity that's being added in Asia, not necessarily your own, but by competitors; is that, from your perspective, mostly a commodity grade?

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

Well, yeah. I mean it's crude MDI, and then what they do beyond that, further downstream. There certainly is more crude MDI, or base MDI, capacity than splitting capacity. And if you were to look at Huntsman, we have a large MDI manufacturing joint venture with BASF in China. We, as Huntsman, 100% wholly owned, our splitting capacity downstream from that has the ability to take that MDI to add value, and that's where you differentiate the MDI. So when you look at China, I think it's important not only to look at the crude MDI capacity that's coming out, but also the splitting MDI. The splitting MDI capacity that's coming out in China is quite small in comparison to the overall MDI that is coming on in China as well.

Ryan L. Berney – Goldman Sachs & Co.

Okay. Thanks. And then just lastly on that point, looking out over the next couple of years, do you anticipate there being a position in China where they would move into an export situation with polyurethanes?

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

Well, they certainly could, yeah, in the more commoditized grades. But again, let's remember that where Huntsman's focus, where we're growing the business and where we're going to make the most money is on our downstream grades. And when you talk about some of those grades, you're shipping cryogenically. This is product that'll discolor in a pretty short basis. These are customers that want the handholding customer service and technical support and so forth. I think it would be very challenging to build a North American or to build a Chinese business with a Chinese platform for North America or a Middle East platform for someplace else or a U.S. platform. Again, you can help supplement some of those volumes and so forth but, yeah. Are you going to see exports from China? Yeah. Are they going to attack the downstream and have a material impact on those downstream businesses? No.

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

Let's remind you, I think today a large Chinese manufacturer is currently an exporter of MDI out of China. I think all the western producers are importers of MDI.

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

Yeah, we're certainly a large importer into China from the U.S.

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

Right. So you got flows going both ways.

Mike Ritzenthaler – Piper Jaffray & Co (Broker)

Can you update us, if possible, on the timelines for the new MDI facility in China? Just remind us of what you've said before: so in China, the Netherlands and the incremental capacity in the U.S., when those might begin to contribute to earnings and the relative magnitude of the various projects?

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

Okay. So you're specifically on a project-by-project basis…

Mike Ritzenthaler – Piper Jaffray & Co (Broker)

Yeah. In the past – I was just going to say, in the past you had a chart of some of the different projects that you've got going on globally. I'm particularly interested in the MDI's ones that you were discussing earlier.

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

Okay. So in MDI, we're bringing our Geismar facility up to 500,000 metric tons of capacity. That should be done the fourth quarter of this year, and that will have an annualized EBITDA impact of around $30 million give or take, depending on where prices are at the time. What we see with our expansion in the Netherlands, that will be the second quarter of 2017. So that one's quite a ways off. The PO/MTBE joint venture should be completed in the fourth quarter of next year. Probably a startup, I would imagine, shortly after the Chinese New Years of 2017, so could have a first quarter start-up of 2017 on that one. And then our own MDI in splitter expansion in Caojing, China, again that would be the doubling of our business in our MDI supply in China, that should be in the second half of 2017. Yeah, all of those are subject to local permits and construction lead times and everything else, but that's pretty much what we're expecting at this point.

Mike Ritzenthaler – Piper Jaffray & Co (Broker)

Right. Of course. Yes. No, that's helpful. And I guess one for Kimo on free cash. You outlined some of the puts and takes for 2015 and clearly the first quarter was impacted by the -outage. Is it the contribution margins within the differentiated businesses that gives you the confidence in positive free cash in 2015? And just as an add on to that, if half the $700 million potential in the portfolio comes in 2016, is that, how much of that expectation, or how much of that improvement in free cash over 2015 is business specific, like MDI pricing and things like that? And how much is kind of financial, like working capital, I guess, maybe asked a little bit differently how much of that $350 million or so is within Huntsman's control, do you feel, versus end-market health and improvement?

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

Yeah. Well I think as you think about the $2 billion in 2017, I mean it's the same kind of question you're asking around 2016. I think we have growth projects that get us there. There's some margin expansion that we need to get to the $2 billion including, as Peter mentioned, roughly $135 ton margin expansion in TiO2. And we have some MDI margin expansion baked in there. But for the most part it's topline growth and it's fixed cost reduction in our businesses. So our view on 2016 and free cash flow is again a continuation of restructuring benefits, some growth in our business and bringing on projects on time and on cost. So we feel pretty good about both of those metrics, free cash flow and EBITDA. And don't think we have crazy assumptions relative to cycles or raw material assumptions.

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