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Edited Transcript of HUN earnings conference call or presentation 12-Feb-19 3:00pm GMT

Q4 2018 Huntsman Corp Earnings Call

SALT LAKE CITY Feb 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Huntsman Corp earnings conference call or presentation Tuesday, February 12, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anthony P. Hankins

Huntsman Corporation - Division President of Polyurethanes & CEO of Asia-Pacific

* Ivan Mathew Marcuse

Huntsman Corporation - VP of IR

* Peter R. Huntsman

Huntsman Corporation - Chairman, President & CEO

* Sean Douglas

Huntsman Corporation - Executive VP & CFO

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Conference Call Participants

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* Aleksey V. Yefremov

Nomura Securities Co. Ltd., Research Division - Research Analyst

* Frank Joseph Mitsch

Fermium Research - Senior MD

* Hassan Ijaz Ahmed

Alembic Global Advisors - Partner & Head of Research

* James Michael Sheehan

SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst

* Jeffrey John Zekauskas

JP Morgan Chase & Co, Research Division - Senior Analyst

* Laurence Alexander

Jefferies LLC, Research Division - VP & Equity Research Analyst

* Matthew P. DeYoe

Vertical Research Partners, LLC - VP

* Matthew Robert Lovseth Blair

Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Refining and Chemicals Research

* Michael Joseph Sison

KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst

* P.J. Juvekar

Citigroup Inc, Research Division - Global Head of Chemicals and Agriculture and MD

* Robert Andrew Koort

Goldman Sachs Group Inc., Research Division - MD

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Presentation

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Operator [1]

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Good day, and welcome, everyone, to the Q4 2018 Huntsman Corporation Earnings Conference Call. My name is Matthew, and I will be your operator for today. (Operator Instructions) As a reminder, this call is being recorded for replay purposes. And I would like to turn the call over to Ivan Marcuse. Please go ahead.

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Ivan Mathew Marcuse, Huntsman Corporation - VP of IR [2]

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Thank you, Matthew, and good morning, everyone. I'm Ivan Marcuse, Huntsman Corporation's Vice President of Investor Relations. Welcome to Huntsman's Fourth Quarter 2018 Earnings Call. Joining us on the call today are Peter Huntsman, Chairman, President and CEO; Sean Douglas, Executive Vice President and CFO; and Tony Hankins, President, Polyurethanes.

This morning before the market opened, we released our earnings for the fourth quarter 2018 via press release and posted to our website, huntsman.com. We also posted a set of slides on our website, which we will use on the call this morning while presenting our results.

During this call, we may make statements about our projections or expectations for the future. All such statements are forward-looking statements, and while they reflect our current expectations, they involve risks and uncertainties and are not guarantees of future performance. You should review our filings with the SEC for more information regarding the factors that could cause actual results to differ materially from these projections or expectations. We do not plan on publicly updating or revising any forward-looking statements during the quarter.

We will also refer to non-GAAP financial measures such as adjusted EBITDA, adjusted net income or loss and free cash flow. You can find reconciliations to the most directly comparable GAAP financial measures in our earnings release, which has been posted to our website at huntsman.com.

In our earnings release this morning, we reported fourth quarter 2018 revenue of $2.2 billion, adjusted EBITDA of $275 million and adjusted earnings of $0.52 per diluted share.

I'll now turn the call over to Peter Huntsman, our Chairman, President and CEO.

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Peter R. Huntsman, Huntsman Corporation - Chairman, President & CEO [3]

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

Let's turn to Slide #3. Adjusted EBITDA for our Polyurethanes division for the fourth quarter was $169 million versus $294 million of a year ago. Our MDI urethanes business, which includes our MDI, polyols, propylene oxide and formulated systems businesses, recorded adjusted EBITDA of $175 million. This compares with $291 million a year ago and $242 million for the previous quarter. As a reminder, in the fourth quarter last year, we temporarily experienced exceptionally high margins in the component end of our urethanes portfolio. That short-term spike in margins of roughly $85 million of EBITDA is now gone. So we explained in our previous quarter's call, we saw destocking and softer demand in certain market segments and we saw softer component MDI prices. Nevertheless, we grew our overall MDI volumes by 5%, and our downstream differentiated strategy proved to be a success as we saw stable margins in the larger differentiated end of our portfolio. I think it is important to point out that despite a very different market backdrop in this year's fourth quarter versus a year ago, our MDI urethanes business still reported the second-best fourth quarter ever in our history. We accomplished this because of our continued drive downstream, bolt-on acquisitions, expanded operations and regional diversification.

Let's turn to Slide #4. In the fourth quarter, our total differentiated systems volume decreased 1% compared to last year, while our differentiated margins remained roughly flat. Our global component MDI grew 16% year-over-year due primarily to increasing capacity at our China facility. This plant is capable of running at full capacity and we will bring supply into the market as demand dictates.

Looking at Polyurethanes regionally, our Americas volumes increased 4%. Our 2018 acquisition of Demilec added about 8% to our Americas volumes. The integration of our Demilec acquisition is well on target. We are now focused on scaling this business up by gradually expanding it into international markets, thereby further accelerating its growth. We experienced sluggish demand in our Americas composite wood products due to seasonal slowness and deinventory of customer stocks. Our adhesives, coatings, elastomers and automotive businesses did continue to experience growth in this region.

In order to give our North American business more flexibility in growth in downstream differentiated applications, we recently announced and approved the construction of a new splitter at our Geismar, Louisiana facility. We expect to commence this project in the first half of this year and to be completed in the first half of 2021 at a total cost of about $125 million. This new splitter will be very similar to the splitting technology that we have recently built in Europe and Asia. The splitter will enable us to expand margins in our North American business as we expand our product range, not our overall product capacity.

The start-up of our China expansion has fueled solid volume growth in Asia. This region continues to benefit from insulation growth in the large-scale infrastructure projects such as district central heating and other new infrastructure applications. The adhesive coatings and elastomers and footwear markets in this region were also contributors to our growth, as we continue to gradually shift our China portfolio and the newly added capacity to be more differentiated.

In spite of published decline in the Chinese automotive industry in the fourth quarter, our MDI systems into automotive increased 5% driven by high-end automotive and continued trends around substitution. While this region did grow for us in the quarter, the uncertainty around trade, softness in the Chinese economy and substantial customer destocking caused volatility in this region that negatively impacted component MDI demand in margins. I remind you that our largest exposure to component MDI volatility is in Asia.

Current visibility in this region is somewhat difficult given the backdrop of trade talks and being only a week out from the Chinese New Year. We would expect the softness in MDI margins that we saw in the fourth quarter to bottom out in the first quarter. We believe at the present time that we have seen an end of destocking as inventories at the customer end are at very low levels. Regardless of the environment, our focus will be on growing our downstream business in this region.

Our downstream margins in Europe were stable. However, our volumes in Europe were negatively impacted by lower demand and substantial destocking through the fourth quarter. Our installation and adhesive businesses were impacted by lower commercial construction demand as well as in automotive. The destocking in Europe that we discussed on our third quarter call increased through the quarter. We believe this is temporary and somewhat exasperated by geopolitical issues, most notably Brexit. We believe that the spike margins pointed out in our previous calls contributed approximately $85 million to last year's fourth quarter. These short-term spike margins are now fully eliminated. We currently believe the global industry operating rates are in the mid-80s compared to a year ago when they were in the low 90s. Separate and apart from our highlighted spike margins, the gray portion of the bar -- and I'm referring to the upper right-hand corner of Slide #4 -- we also transparently disclosed that in tight industry operating rates environments, we benefited from an additional approximate $30 million to $35 million per quarter, the red portion of the bar.

The global industry conditions in the fourth quarter that we have referenced, especially in China and Europe, have resulted in the erosion of this portion of the tight margins as well. Notwithstanding this, our core business, the blue portion of the bar, is robust and stable. The MDI industry operating rates have minimal correlation to our core business. The more we move downstream, the less we will be impacted by MDI industry operating rates.

Let's turn to Slide #5. As indicated in these 4 charts, the margins in our core base differentiated business continued to remain stable. The graph lines reflect the margins experienced globally and by region within our component and differentiated urethane portfolios. A significant majority of our business is downstream and was not materially impacted by the short-term volatility of polymeric MDI margins.

Despite the recent global destocking and economic uncertainties, we have not seen a material change in the long-term fundamentals of the MDI market. While there have been recent announcements of capacity addition by other parties in the industry, we believe that the industry will absorb the new capacity over time when this supply eventually enters the market. Industry utilization rates may ebb and flow over the short term but on average, we expect the industry to remain balanced over the long term.

Absent a major macroeconomic change or major unplanned outages, we believe that 2019 capacity utilization rates will remain in the mid- to upper 80s and that 2020 will move into the upper 80s to 90%. Our outlook for average annual global demand growth is in the mid-single digits, which translates to roughly 400,000 kilotons annually, the equivalent of a new world-scale plant each year. Again, irrespective of this long-term view, the more downstream we move, the less relevant these upstream utilization rates are to our integrated portfolio.

Let's turn to Slide #6. We've been successful in commercially and geographically scaling up our organic developments and bolt-on acquisitions to achieve enhanced synergies, resulting in meaningful growth and value creation. Our bolt-on acquisitions have provided substantial growth to our portfolio. In 2018, the combined EBITDA of these acquisitions was above $180 million, representing 24% cumulative annual growth rate.

Looking into the first quarter for our MDI urethanes business, we anticipate the first quarter to be modestly lower than our fourth quarter due to normal seasonality and a $10 million to $15 million negative impact from higher-cost inventory, in addition to continued tepid demand across several of our key regions and markets. March is our strongest month in the first quarter. At present time, we have very little visibility and will update the market throughout the quarter.

Our MTBE business reported an EBITDA loss of $6 million, which was slightly below our expected -- our expectation of breakeven. Our first quarter is usually our slowest demand period for MTBE. This seasonality and the recent embargoes with Venezuela, a large consumer of MTBE, I suspect our first quarter results will be softer in MTBE while we ought to be breaking even on a total year basis.

Our Polyurethanes business remains on track to meet our 2020 objectives.

Turning to Slide #7. The Performance Product segments reported EBITDA of $78 million, considerably higher than last year's EBITDA of $47 million when the business was negatively impacted by approximately $27 million due to a planned maintenance turnaround, weather-related issues and an unplanned outage. Excluding these issues in the fourth quarter last year, Performance Products still experienced 6% EBITDA growth despite a challenging economic environment. Primary growth drivers in the quarter were in gas treating, oilfield chemicals and agrochemical markets.

Looking forward to 2019 and beyond, we expect further growth in these markets as well as our fuel and lube additives in advanced technology markets. We also will continue to drive our downstream derivatives in the more differentiated businesses and applications. Maleic anhydride demand remains strong with good margins given falling butane prices.

In the current economic environment, combined with some tough comparisons this time last year, we expect first quarter to be similar to fourth quarter, maybe a little bit stronger. Similar to our Polyurethanes division, we see very little customer inventory and an increase in last-minute orders, leading us to believe that we will see a pickup in overall business in Q2. This business remains on track to meet its 2020 targets as well.

Let's turn to Slide #8. Our Advanced Material business reported adjusted EBITDA of $48 million, a decrease compared to last year's EBITDA of $53 million. While our aerospace volumes were up year-over-year, we experienced lower volumes specifically in our power and automotive-related end markets, particularly in Asia. Higher selling prices offset raw material price increases. Fixed costs were a bit higher, including costs from our 2018 technology acquisition of Miralon, as we continued to make planned investments in R&D for next-generation technology to drive future growth.

Our specialty volumes decreased by 2% versus the prior year. We do not expect this to be a long-term trend as order patterns in our key specialty businesses are returning to more normal levels as temporary destocking and inventory corrections at customers come to an end. Notwithstanding the softer fourth quarter of 2018, was a record year for Advanced Materials with a total EBITDA of $225 million. It should also be noted that this record result happened despite over $40 million of headwinds in raw materials and higher costs associated with investments in R&D and product development.

We expect specialty volumes to recover through the first quarter. However, currency and higher costs are likely to continue to be headwinds for Advanced Materials in the near term. We would expect first quarter 2019 to be moderately lower than last year but meaningfully better than fourth quarter. This business remains on track to meet its 2020 targets.

Let's move to Slide #9. Our Textile Effects division reported EBITDA of $21 million, up 11% versus the prior year EBITDA of $19 million. This is the 13th straight quarter-over-quarter increase in EBITDA within Textile Effects. Because of pricing initiatives to offset raw material price hikes, revenues for the quarter were up 6% while overall volumes were down 7%. The decline in volumes was primarily due to some deselection of lower value business, raw material constraints in China related to certain regulatory enforcements and some slower order patterns in Asia and South America.

Our specialty volumes increased 6% and the long-term macro trends remain intact relating to increasing environmental and sustainability standards in both chemicals and dyes. 2018 was a record year for Textile Effects, which reported EBITDA above $100 million for the first time in its history. This level of earnings was achieved even in the face of over $20 million of raw material headwinds. We still expect continued growth in this business, driven by continued innovation and technological expertise throughout our specialty and differentiated portfolio. Looking forward, this first quarter will look similar to last year's first quarter.

Before sharing some concluding thoughts, I'd like to turn a few minutes over to Sean Douglas, our Chief Financial Officer.

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Sean Douglas, Huntsman Corporation - Executive VP & CFO [4]

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Thank you, Peter. Turning to Slide 10. In total, adjusted EBITDA declined year-over-year in the fourth quarter from $360 million to $275 million. This was roughly on target as we had guided the market to approximately $280 million. Peter mentioned that the $85 million of spike margins in Polyurethanes have been removed. Our increasing volumes for the quarter year-over-year, largely the result of China MDI expansion, were offset by a decline in margins, primarily in component MDI.

In the fourth quarter, we have little impact from foreign exchange. But for full year 2018, we benefited by approximately $60 million, largely due to a stronger euro earlier in the year.

As we look into the first quarter of 2019 versus the prior year, we expect some foreign exchange headwind as the average euro rate for the first quarter 2018 was approximately 1.22 versus the current rate of 1.13. At the current euro rate, we estimate this impact to be approximately $20 million.

Turning to Slide 11. We were consistent in generating strong free cash flow of $651 million during 2018. Our free cash flow percentage was 44%. This is 3 years straight of free cash flow in excess of 40%. Our free cash flow yield of approximately 12% is a compelling value. A metric on which management focuses is return on invested capital or ROIC. Our ROIC for 2018 was 19%. Our ROIC for the Polyurethanes division was in excess of 30%. Our Polyurethanes division retains a high ROIC year after year because of its downstream strategy. The ROIC for our Advanced Materials business is also above 30%, with our Performance Products business at approximately 15% and Textiles near 20%.

During the fourth quarter, we exceeded our expectation of 40% free cash flow, largely due to a onetime improvement in the way we manage liquidity in China. This was primarily the result of improving the cash collection cycle in China. This added approximately $70 million of free cash flow and contributed approximately 4% to our free cash flow percentage. This improvement will be -- will help to fund this year's expanded capital plan, which includes the new MDI splitter at Geismar, Louisiana.

Even with this expanded capital plan in 2019, we still target a 40% free cash flow in 2019. If we land just shy of this, it is because of the timing of these onetime funds already received. We spent $305 million in capital expenditures in 2018 and expect to spend approximately $390 million during 2019. We ended the year with greater than $1.5 billion of liquidity. I would like to point out that we ended the year with a 1.3x net leverage as compared to 1.4x a year ago. Keep in mind that during the year, we made 2 bolt-on acquisitions totaling approximately $375 million and repurchased $276 million of Huntsman shares. We are well within investment-grade metrics and even better than a year ago. We reaffirm our intent to be an investment-grade company.

As we look into 2019 with respect to other components of free cash flow, we would expect cash interest expense and cash pension to be similar to 2018 levels. We expect cash taxes to be higher in 2019, largely because we have fully utilized certain net operating losses. In addition, there are some timing effects in certain jurisdictions.

With respect to restructuring, consistent with previous guidance, we expect to spend approximately $30 million per year. We remain focused on managing our working capital effectively. Our overall cash conversion cycle, measured in days, remained relatively flat on average year-over-year. We have plans to continually improve our days inventory as we look into 2019.

Our effective tax rate for 2018 came in at 19%. Our long-term effective tax rate is expected to be between 22% and 24%.

During the fourth quarter, we purchased 4.5 million shares for approximately $101 million at an average price of $22.40 per share. For all of 2018, we repurchased approximately 10.4 million shares for $276 million. We have $724 million remaining under our $1 billion multiyear share repurchase program authorized by our board. We expect to continue repurchasing shares in a balanced and opportunistic manner. Our current dividend yield is approximately 3%. And when combining both dividends paid and share repurchases completed during 2018, we returned approximately 9% to our shareholders.

On December 3, 2018, we entered into a forward sale transaction with Bank of America Merrill Lynch, whereby we sold 4.3 million shares of Venator and deconsolidated Venator in our financial statements. We have received approximately $19 million relating to the sale of 4% of total Venator shares. Following this transaction, Huntsman has retained 52.1 million shares in Venator or 49% of Venator.

Regarding the accounting for Venator, in connection with the deconsolidation on December 3, we recorded a pretax loss of $427 million reported in discontinued operations. We then elected the fair value option to account for our equity method investment in Venator post deconsolidation.

Accordingly, we also recorded a pretax loss of $62 million to record our equity method investment in Venator at fair value for the change in Venator stock price between December 3 and December 31. Going forward, Huntsman will record as a nonoperating special item, the mark-to-market change of Venator stock for its 49% ownership within its financial statements. We believe this gives greater transparency to the value of Huntsman's investment in Venator.

With Venator now fully deconsolidated and given where TiO2 companies are trading at the current time, we will be prudent in monetizing Huntsman's remaining stake, giving proper consideration to all material relevant factors.

In summary, Huntsman's balance sheet has never been stronger. We have been true to our commitment to deliver strong consistent free cash flow and maintain an investment-grade balance sheet.

Peter, back to you.

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Peter R. Huntsman, Huntsman Corporation - Chairman, President & CEO [5]

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Thank you, Sean. As we report the final results of 2018 and look ahead to 2019, I'd like to take just a -- make a few comments and perhaps answer some often asked questions. I thought we finished 2018 on a very strong note. We generated record EBITDA and EPS. We bought back a record number of shares and generated $650 million of free cash flow. We successfully integrated 2 acquisitions and continued to grow our business through organic focus and investments.

Perhaps a few comments on what we presently see in the markets and our view towards our 2020 objectives we presented last year at our Investor Day. I would be less than honest if I didn't say that I've been disappointed that we have not yet received an investment-grade rating from the 2 dominant credit agencies. I feel we have done all that has been asked of us. In spite of this, we'll remain focused on maintaining a strong balance sheet. We should generate about 40% of free cash flow to EBITDA this year and will be prudent with our CapEx.

As is outlined in Slide 13, we are projecting 2019 to be one of the strongest years in our history. At the present time, 2 large variables are yet to be fully determined. The first is the state of trade negotiations between the U.S. and China. While we remain optimistic that an agreement will be completed and is in the best interest of both parties, particularly China, no agreement being completed will potentially further slow the Chinese economy and decrease consumer confidence globally. We presently see very low customer inventories and a high level of last-minute ordering. Should there be an agreement, demand may potentially pick up rather quickly as inventory is refilled. This will likely put upward pressure on pricing.

In the event that no deal is reached and hundreds of billions of dollars of tariffs are implemented, we will likely see products, particularly textiles and some durable goods, moving from being assembled in China to other competing countries. We will see a short-term dislocation of supply as those producers who can will shift production elsewhere. It is more a question as to where products will be assembled, not if. Huntsman, like many -- like most in our industry, would fare much better with the trade deal done and uncertainty removed. However, we also are in a position to continue to supply a global customer base.

The second variable yet to be determined is the outcome of a Brexit negotiation. I think that a hard Brexit will cause short-term delays and perhaps $15 million of short-term impact over 1 to 2 quarters as we pass along duties and customers -- and costs that will likely be borne by our entire industry, as there is no one polyurethane or world-scale amines or maleic producer in the U.K. While difficult to foresee the outcome, I don't think that we are disadvantaged or advantaged in any material way with our main product lines. The biggest unknown is overall consumer confidence. In short, the next few weeks will be very telling.

At the present time with the current forecast we have, our 2019 should be within 5% to 7% of our 2018 EBITDA and our free cash flow at about 40% conversion. Our largest CapEx project will be a new MDI splitter in North America. With a completion date of early 2021, this project will not expand our MDI production but rather our MDI capability as we will be able to split more MDI into a greater number of downstream products.

As we look at the 2020 goals that we set out a year ago at our Investor Day, we remain confident in achieving our objectives of free cash flow and EBITDA over the next 18 months. We will see the benefits of our Polyurethanes division -- in our Polyurethanes division as we fully sell out the remainder of our Chinese MDI expansion. We also expect further downstream growth while also seeing improved operating reliability. These steps alone should generate close to $175 million of benefit during that time frame.

In our Performance Products division over the next 18 months, we will see the benefit of additional capacity via debottleneck projects, improved reliability and a further push downstream into our before-mentioned routes to market. This should add an additional $60 million of opportunities that are unique to our business in Performance Products. As I look at the product pipeline and marketing efforts in our Textile Effects and Advanced Materials division, we remain equally optimistic of meeting our previously stated goals.

While there remains potential short and long-term obstacles, I'm confident that we have the right focus, balance sheet and opportunities to continue to create further shareholder value.

With that, operator, can you give instructions as to how to initiate the Q&A?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question is from the line of Robert Koort of Goldman Sachs.

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Robert Andrew Koort, Goldman Sachs Group Inc., Research Division - MD [2]

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I think you had mentioned that there was some destocking across several regional supply chains in MDI and I think you gave some confidence about low customer inventories and maybe some recovery. I'm not sure I heard you say that about the U.S. So can you talk a little bit about your -- so there's -- it's a lack of visibility into March makes it challenging, but can you talk about what metrics you see that suggest that maybe the destocking has run its course and it's just waiting for a trigger for the restock?

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Peter R. Huntsman, Huntsman Corporation - Chairman, President & CEO [3]

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Yes. As we have Tony Hankins with us, I'm going to let him comment on what we're seeing in Polyurethanes. But as we look kind of across the board, we're seeing similar areas of where we're able to track inventory in North America, Europe as well as Asia. We see very low inventories across the board. And we see a lot of last minute ordering, which tells us that people are running on very low inventories when they place an order and they say that they need and are willing to even pay for an expedited delivery system to get to them. When you start seeing that in multiple customers in multiple areas that tells you, at least anecdotally to some degree, that people are running on proverbial fumes. Now Asia is a little bit tougher and China in particularly a little bit tougher because typically people deal with multiple stages of distributors and brokers and so forth when you get into the Chinese market. And so you actually have more pockets of inventory and I think there we're seeing some of those similar trends. Tony, anything you'd add on Polyurethanes?

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Anthony P. Hankins, Huntsman Corporation - Division President of Polyurethanes & CEO of Asia-Pacific [4]

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Yes. Thank you, Peter. I say I'm very confident the destocking in Europe and particularly China is done. We saw -- it was fairly dramatic in November and December of last year. And I think that we've hit rock bottom in those 2 regions in terms of customer inventory. In Americas, we have much better visibility by virtue of 2 things. One is long-term contracts that we have, we sell by our very large customers. And we work very closely with them to understand their forecasting patterns and demand patterns to align production out of Geismar with their demand. And the other big advantage we have now is Demilec. Demilec gives us real end-consumer visibility into those construction, particularly spray foam insulation markets where a lot of that growth is. And I think things are looking pretty good in the Americas. There's pockets of slowness due to weather, particularly these couple of winter storms which have come through, which always hamper construction. But I think that, overall, that we have hit the bottom and that the supply-demand position is very tight. It's not going to take much in increased demand to really, I think, accelerate growth again. So I think that we are -- we're well poised at the moment for a recovery should confidence improve.

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Robert Andrew Koort, Goldman Sachs Group Inc., Research Division - MD [5]

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Tony, could I just follow up on that last point about the supply-demand side? I mean, there seems to be a number of projects that are out there. You guys have talked about being disciplined with the entry of your increased output into the marketplace. But it looks like in light of maybe restrained demand this year for MDI, at least relative to the last few years on these destocks, that you could get a little bit of a troubling supply-demand balance. So could you talk maybe through specifically which projects out there you expect to have an impact on the market? I know Peter gave some operating rate guidance, but what are you seeing in terms of individual competition and your own plant ramp?

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Anthony P. Hankins, Huntsman Corporation - Division President of Polyurethanes & CEO of Asia-Pacific [6]

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Well, I think the focal point for that question is China, Bob. And we've seen a 10% price increase in China in the first part of this year. We're talking to our team this morning. I went out to China for 10 days before Chinese New Year and I detect an increasing sense of confidence in our customers out there. I think our 10% price increase is going to hold. We've started to see orders come back more quickly than we expected in China. And I think there is -- there's real discipline at the moment. I think we've -- I'll stick my neck out here and say we hit the bottom in November, December last year, but that price increase of 10% now is firmly in place, and hopefully, we'll see further progress in the next few months. So I think that it's not going to take an awful lot, particularly in terms of those trade talks. And customers believe, I mean, rightly or wrongly, customers in China believe that either a deal will be done. And if a deal isn't done, then the tariffs will be -- the tariff increase will be kicked down the road some more and the increase from 10% to 25% may be several months away. And therefore, with inventories being as low as they are, they're starting to order and renew and I think that will keep supply and demand in a good position. The only new capacity coming on globally this year is going to be in Germany later in the year. I don't have any visibility of that. That's something that maybe Covestro will talk about on their call, but that's the only new extra capacity that we see coming on. So I think providing that the market grows and our expectation is it will continue to grow at twice GDP, so we're predicting 4% to 5% growth this year globally, conditions will remain balanced, Bob.

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Operator [7]

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Your next question is from the line of Kevin McCarthy of Vertical Research.

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Matthew P. DeYoe, Vertical Research Partners, LLC - VP [8]

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This is Matt on for Kevin. Just looking at the $169 million that you reported, Polyurethanes in the quarter, I'm just trying to square the performance because price was down 7%. That's like an $85 million headwind, assuming 100% margins. And presumably volume and FX net should have been positive, but EBITDA was down $125 million. I know MTBE is part of that and raws were both up and down. But can you kind of explain away the differential there and why decrements were -- probably were so weak on the quarter?

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Peter R. Huntsman, Huntsman Corporation - Chairman, President & CEO [9]

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You're talking about comparison to a year ago?

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Matthew P. DeYoe, Vertical Research Partners, LLC - VP [10]

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Yes.

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Peter R. Huntsman, Huntsman Corporation - Chairman, President & CEO [11]

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Yes. And I'd say, look, there are a number of numbers that make that up but let me just try to hit it in kind of 4 broad areas. The first, as we pointed out, there's a $40 million elimination in the spike economics that we would have seen of a year ago. $35 million in the tight markets that we've seen the elimination of that. And excuse me, there's $85 million in the spike that we pointed out a year ago and $35 million in what we would say are tight market conditions. And then MTBE was about $30 million and -- from quarter-to-quarter, so yes -- and then there's some FX headwinds that are in there and some other costs that were in there as well. I think [gee] is kind of lower. But I think if you look at the $85 million of spike, the $35 million of tight market conditions we pointed out that we feel are -- you're going to see that, I would say, that tight market condition when you're somewhere close to that 90% capacity utilization. And you'll see that kind of across the board in the businesses at large, whereas the spike was due, I think, to more of a onetime anomaly of certain facilities not being able to operate for any number of reasons, be they maintenance or government regulations and so forth, and then the MTBE portion of that as well.

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Matthew P. DeYoe, Vertical Research Partners, LLC - VP [12]

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Presumably the spike -- yes, sorry.

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Sean Douglas, Huntsman Corporation - Executive VP & CFO [13]

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Matt, this is Sean. Just to succinctly say what Peter just said. So you got basically an $85 million loss in the spike margin. We've seen, as Peter pointed out, that sort of quarterly tight market that's gone away, call it $30 million to $35 million. MTBE shift quarter-to-quarter, call it about $10 million and then you've got a softer demand that we've talked about as it related to destocking. I think that kind of gets you there.

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Matthew P. DeYoe, Vertical Research Partners, LLC - VP [14]

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Okay, yes, I appreciate the operating leverage was probably lower on the destock. But -- and then if you were to just look across all the businesses, how much do you believe volume, headwind-wise, the destock was, just on a company level, for 4Q?

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Peter R. Huntsman, Huntsman Corporation - Chairman, President & CEO [15]

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I -- Sean and I are sitting here looking at each other. I don't think we've calculated that. And I'd venture a guess and it'd probably be pretty inaccurate. I think it's a combination. I mean, as I look at some of the big variables this last year, the company we took in, some $300 million of higher headwinds in raw materials, that would have had part of it. Part that was seasonality, part of it was destocking. It's just a number we haven't calculated at this point.

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Operator [16]

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Your next question is from the line of Laurence Alexander of Jefferies.

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Laurence Alexander, Jefferies LLC, Research Division - VP & Equity Research Analyst [17]

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I have 2 questions. First, is the right way to parse your comments that Polyurethanes segment margins probably troughed in Q4? And then secondly, can you give a sense for what your growth CapEx looks like for, say, the next 3 years or next 5 years? Like, just how should we think about the overall pipeline of projects?

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Sean Douglas, Huntsman Corporation - Executive VP & CFO [18]

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Sure, Laurence. Speaking about the growth CapEx, let me just remind you that if we think about 2018, we spent about $305 million on CapEx. Think about growth CapEx in that equation of around $100 million to $125 million in the last year. Generally speaking, we would say $175 million to $200 million is maintenance CapEx. And so as we go forward 2019, adding this splitter in there, we're really going to be spending a couple hundred million dollars of growth CapEx. And I think as you look at 2020, finishing that splitter, you're going to end up similar to that number of a couple hundred million dollars of growth CapEx. So I would say, generally speaking, in a normal year, $175 million is kind of reliability maintenance, and then about $125 million to $150 million would be growth. But next 2 years, a little higher on the growth with the splitter.

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Peter R. Huntsman, Huntsman Corporation - Chairman, President & CEO [19]

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I would say that as we think about margins in MDI, without getting into too much granularity here, I think that you'll kind of see a V shape, if you will. I think fourth quarter and first quarter are going to look fairly similar. As we said in the call, first quarter might have a little bit of destocking headwind in it compared to the fourth quarter. But I think the fourth quarter started out much stronger than it ended, and we are seeing first quarter will finish much stronger than it started. And so I think, again, while the 2 numbers may be fairly similar, I think you're going to see 1 directionally down in the fourth quarter and directionally up in the first quarter.

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Operator [20]

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Your next question is from the line of Jeff Zekauskas of JPMorgan.

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Jeffrey John Zekauskas, JP Morgan Chase & Co, Research Division - Senior Analyst [21]

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I just want to be sure that I understand some of your statements about Polyurethanes. Are you saying that your derivative profits in 2018 in the fourth quarter were the same as your derivative profits in the fourth quarter of 2017 on a per-ton basis?

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Peter R. Huntsman, Huntsman Corporation - Chairman, President & CEO [22]

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The margins are roughly the same. It's the volumes that are different.

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Jeffrey John Zekauskas, JP Morgan Chase & Co, Research Division - Senior Analyst [23]

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It's the volumes that are different. Okay.

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Peter R. Huntsman, Huntsman Corporation - Chairman, President & CEO [24]

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Yes. And so again, the volumes are lower in the more recent quarter but by singular percentage points. But I think that, again, this is something that I think that we kind of pride ourselves on that segment of the business at least is that typically volumes dictate margins in more commoditized products and demand dictates margins. And we view that the margins that we have in this end of the business are certainly more stable than what we see in many of our other business.

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Jeffrey John Zekauskas, JP Morgan Chase & Co, Research Division - Senior Analyst [25]

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So is your idea in 2019 that you'll earn more in your MDI derivatives than you did in your MDI derivatives in 2018?

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Peter R. Huntsman, Huntsman Corporation - Chairman, President & CEO [26]

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Assuming that we see an economy that doesn't collapse, yes, that certainly would be our forecast.

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Operator [27]

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Your next question is from the line of Aleksey Yefremov of Nomura.

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Aleksey V. Yefremov, Nomura Securities Co. Ltd., Research Division - Research Analyst [28]

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I'm just trying to assess the Polyurethanes EBITDA guidance for the full year. It seems like it's pointing to around $850 million. And then you're listing 3 different negatives on your bridge on Slide 13, there's absence of spike in margin, utilization and MTBE. So we get to about $730 million if we include these negatives. So this implies about $120 million of growth in Polyurethanes. So sorry for a long-winded question, but where does this $120 million come from primarily?

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Peter R. Huntsman, Huntsman Corporation - Chairman, President & CEO [29]

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I think that it comes from really across the board. We're going to see a lot of it in China as we come in -- again, in China, we have a new plant that's coming on. We'll be adding -- not only will we be adding tonnage, but we'll be taking existing tonnage in China. We have excess splitting capacity and upgrading that as well. And so between the opportunity to increase productivity to get more tonnage and to be able to upgrade that tonnage is where we're seeing that growth take place.

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Aleksey V. Yefremov, Nomura Securities Co. Ltd., Research Division - Research Analyst [30]

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Got it. And then just a little more details on the destock. It sounded like the destock itself was November, December. So if we kind of exclude the effects of seasonality, volumes in Polyurethanes should be better in the first quarter than the fourth quarter. Is that a fair assessment?

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Peter R. Huntsman, Huntsman Corporation - Chairman, President & CEO [31]

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I think it's probably just too early to tell. I would certainly hope so. But I think until we get some sort of a view on March, a little bit better view than we have today, again, I'm probably venturing there where I shouldn't go.

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Operator [32]

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Your next question is from the line of Michael Sison of KeyBanc.

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Michael Joseph Sison, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [33]

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Just curious, given component MDI pricing was down a lot in the fourth quarter, how did that impact your differentiated MDI pricing? And did it affect margins at all? I mean, meaning that if they're down, should your margins maybe expand it to some degree?

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Peter R. Huntsman, Huntsman Corporation - Chairman, President & CEO [34]

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No, I think when we look at it on an integrated pull-through basis, they were very flat and the margins were pretty stable. So as we look at that on an integrated basis, it stays -- it's very resilient.

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Michael Joseph Sison, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [35]

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Okay, great. And then when you think about getting to your 2020 goals for Polyurethanes, you'll be $150 million away or so. Did you need any spike pricing to get there? Or is it all just growing the differentiated part of the business?

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Peter R. Huntsman, Huntsman Corporation - Chairman, President & CEO [36]

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No, we don't. And I may have somewhat clumsily tried to say this. I mean, as I look at our 2020 goals, if I was sitting in your position, I'd be saying from 2019 to a run rate in 2020 that's kind of a $1.6-plus billion EBITDA, what's -- what do I -- what's my bridge that I need to get there? And how do I account for that? And I think that there's feeling that look at Textile Effects, we're pretty much there. If I look at Advanced Materials and I look at the ongoing expansion we see in aerospace and the projects, pipeline and so forth, I feel that we're there, which leaves Polyurethanes and Performance Products. If I look at Polyurethanes, the leap of faith there is really in 3 components. One would be selling out the remainder of the Chinese plant. We think that, that plant will be sold out by sometime around the end of this year, beginning of next year, depending on economic conditions and so forth. That should add about $50 million-ish or so. We think that there are reliability opportunities, this last year through third-party errors and perhaps some improvement that we can do on our own. If we look at the plant, just being able to operate our plants, being able to operate on kind of their more traditional operating rates, which we've already taken steps to correct and to ameliorate those issues, we think there's about a $50 million improvement there that will come about over the next 1.5 years. And then most importantly, our downstream growth. As we look at Demilec, as we look at the growth continuing that we've seen in the bolt-on acquisitions, there's about $80 million-ish sort of an opportunity there in growth. So when you look at those 3 components, you're kind of coming up with $180 million of opportunity, and I think I've said in my numbers it's around $175 million or so. By those are kind of -- we're not assuming from that any spikes. We're not assuming any outages in the industry. We're not assuming any real economic uptick better than what we're seeing today of a very low single-digit sort of GDP. And so I feel -- again, I'm not going to say that, that's easy, but I think it's doable. And our team has a lot of confidence behind that.

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Operator [37]

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Your next question is from the line of Matthew Blair of Tudor, Pickering, Holt.

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Matthew Robert Lovseth Blair, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Refining and Chemicals Research [38]

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The slides note that your Advanced Materials segment saw some customer destocking in autos in the fourth quarter. I think there's a pretty big Europe component here. Could you talk about what you're seeing in autos so far in Q1?

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Peter R. Huntsman, Huntsman Corporation - Chairman, President & CEO [39]

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Yes. I think that we're starting to see us come out of -- a lot of that auto business that we see in that end of the business is China and the EU, kind of split between those 2. And I think that in both of those, we think that we've seen the bottom. Again, I don't want to say that a week or 2 of orders is going to be the basis of a turnaround. But we think we've seen the destocking that has taken place in that. And we think that there will be some opportunity there to gradually improve that.

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Matthew Robert Lovseth Blair, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Refining and Chemicals Research [40]

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Great, great. And then in Performance Products, maleic prices, they fell a little bit in the quarter but they're still up about 10% -- yes, about 10% year-over-year. Any thoughts on why maleic is holding up relatively strong given the fall in crude prices?

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Peter R. Huntsman, Huntsman Corporation - Chairman, President & CEO [41]

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Well, I think that we've seen that market, end market in particular, that's obviously centered into unsaturated polyester resin in the construction markets and so forth. I think that the industry is fairly snug in maleic anhydride. There's been no new capacity additions here in the last year or so, snug market. And I think that the construction market and the remodels and so forth in a lot of the recreational motor homes and boats and so forth, that market has been surprisingly robust here during the fourth quarter. And we've also had the advantage of some lower butane prices that we saw in the fourth quarter that certainly helped the business as well. So a number of factors ranging from capacity utilization, raw materials that are in our benefit to, I think, a very strong and diverse customer base there that continues to make that one of the best-performing businesses that we have.

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Operator [42]

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Your next question is from the line of Jim Sheehan of SunTrust.

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James Michael Sheehan, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [43]

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So with your outlook for Polyurethanes, you've got continued weakness in the first quarter. And it looks like you're expecting a pretty good bounce back in the second half of the year if you're going to make the full year outlook. Can we assume that most of the recovery in Polyurethanes is led by China, where you've got the new plant ramping up, and also Europe?

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Peter R. Huntsman, Huntsman Corporation - Chairman, President & CEO [44]

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I think as we look at that, I think it's going to be something that's pretty broad across the board. I think that we saw the most severe destocking that took place in Asia, and it feels that, that's where possibly the biggest bounce would occur. I don't think that we were affected as much by the destocking in North America and so forth given the contracts and supply agreements that we have there that Tony mentioned earlier and also to a lesser degree. But I think that a China recovery, somewhat in Europe from a restocking point of view, and I think that the U.S. just kind of remains where it's been, the U.S. market feels pretty solid for us.

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James Michael Sheehan, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [45]

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Great. And then also when I look at your valuation versus peers, it looked like you're still pretty discounted. What are your thoughts on share buybacks at these levels? Are you going to be opportunistic? Or do you see you're more of a consistent buyback pattern through the year?

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Peter R. Huntsman, Huntsman Corporation - Chairman, President & CEO [46]

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Well, I think it's going to be -- I know this sounds like something of a frustrating answer, but I think it's going to be a combination of both. I mean, we're obviously locked out of the market. Some of the time when the window is closed for trading, we'll put in plans to buy shares during that time and we'll also look at opportunistic chances to be able to buy in our shares. But I do think that we need to make sure that we maintain a strong balance sheet. We remain cash on the balance sheet. In terms of economic uncertainty, cash is king, more so than at other times. And I want to make sure that we maintain a strong balance sheet before we go on any binges in buying in stock. I mean, this last quarter, obviously the fourth quarter, we saw some of the low stock prices. That's absolutely a no-brainer in buying back stock. So we'll just take it. And we'll also be able to look at our stock price relative, not just on an absolute basis, but also relative to our peers and where the macro industry is trading. So I know that's a long-winded answer, but we need to take all those variables into account rather than just saying at an absolute number and an absolute amount of cash.

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Operator [47]

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Your next question is from the line of Frank Mitsch of Fermium Research.

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Frank Joseph Mitsch, Fermium Research - Senior MD [48]

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I wanted to follow up on that new facility in China that you've been ramping up through the third quarter and into the fourth quarter and had mentioned that you're going to ramp it as demand dictates. Obviously, we saw pricing collapse in Q4. What extent do you think you may have exacerbated that decline? Where -- roughly, where is that facility running today? And I know that you guys said that you wanted to be at 100% by the end of the year. Can you give us the metrics as to how we should think about how that facility is ramping and -- for the balance of the year?

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Anthony P. Hankins, Huntsman Corporation - Division President of Polyurethanes & CEO of Asia-Pacific [49]

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Frank, this is Tony Hankins. We're running our facility today at around about 75%. And during the last 3 months of last year, what we did was really do technology proving runs to prove its capability. And that plant lined out just great. I mean, we're capable of running our plant now at full operating rates when we need to. But as things stand at the moment, that's about 75%. I think that we introduced that product in a very select way in terms of the routes to market that we use and that it did not contribute to the overall pressure on pricing. I think that was a result of pretty dramatic destocking and real concerns around the trade deal that's halted in the U.S. So I think that plant is in great shape and it's ready to go if and when demand comes back through the course of the year.

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Peter R. Huntsman, Huntsman Corporation - Chairman, President & CEO [50]

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Yes. Frank, let's also remember that as we think about the Chinese market, you're looking at a market of just shy of about 6 billion pounds of MDI consumption and moving that plant in the fourth quarter an additional 10%, 15% operating rate, I -- it's a thimbleful of product compared to what would, I think, really affect that market.

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Frank Joseph Mitsch, Fermium Research - Senior MD [51]

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That's very helpful. And I'd be remiss if I didn't ask the obligatory question on Venator. Obviously, you suggested that you guys are going to be prudent. What does that suggest about patience? And you talked about possibly selling it off in -- to a single party. Where do we stand on that? What are your thoughts on -- as to when you may be able to monetize that investment?

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Peter R. Huntsman, Huntsman Corporation - Chairman, President & CEO [52]

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I think the Venator stock's -- is tremendously undervalued today, and I think that we're just going to continue to look at our options. And now that we've deconsolidated it, I don't want to say that we're not in any hurry. But at the same time, I think that there's a tremendous amount of upside opportunity there. We're not going to try to get the absolute high dollar, but I think -- I certainly think that we need to be looking at something that's materially higher than where it is today.

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Operator [53]

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Your next question is from the line of Hassan Ahmed of Alembic Global.

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Hassan Ijaz Ahmed, Alembic Global Advisors - Partner & Head of Research [54]

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Peter, just trying to get a handle on the Performance Products side of the business. Obviously, 2017 was a bit of a quirky year. The [bordnetage] outage, hurricanes and the like. And you did roughly around 14% EBITDA margin that year. Nice jump up in 2018. EBITDA went up, call it, around $70 million, EBITDA margin at around 15.5%. Just trying -- and obviously, '18 was also a fairly volatile year in terms of raw material prices. So as we look at '19, just trying to get a sense of how we should be thinking about, be it run rate, EBITDA, EBITDA margins or the like in the business?

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Peter R. Huntsman, Huntsman Corporation - Chairman, President & CEO [55]

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Well, again, Hassan, it's very early in the year to be able to try to forecast where we're going to be there. But I think that we'll probably see growth opportunities in the downstream businesses, surfactants, amines and maleic. We'll probably see more pressure on the upstream side of the business, the ethylene, ethylene oxide and glycols. And I would remind you that a lot of that's sold on tolling basis. So we're not going to be whipsawed greatly here by glycol margins. But as I look at that, I think that the 2 will -- I think that the benefit that we'll see in the downstream business will more than offset any weakness that we see in the upstream business and we ought to continue to see improvement in that business. And I'd say it's just too early in the year to say what sort of improvement that we'll see that business. But I did mention earlier that we'd see -- that there's about $50 million of kind of self-help opportunities and -- that we have in that business that include some capacity improvements. We see more tonnage being shifted from commodity applications into downstream specialty or differentiated applications. And we see an opportunity to differentiate ourselves a bit more in pricing in that division as well. And so when I look at that $60 million improvement that we see now and through 2020, I think it'd probably be safe to kind of apply that across the board as we see that.

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Hassan Ijaz Ahmed, Alembic Global Advisors - Partner & Head of Research [56]

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Understood. Now changing gears a bit. On the China side of things, in Q4 '17, the global industry kind of benefited from partly the rationing of natural gas because of the cold winter, but also fairly strict environmental-related curtailments in production. So it seems, obviously, the whole winter natural gas rationing isn't sort of currently happening, but there's a lot of noise around some of that curtailed -- environmental curtailment-related capacity coming back online. So what's your view about that?

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Peter R. Huntsman, Huntsman Corporation - Chairman, President & CEO [57]

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I don't see -- I'll ask Tony here to comment on MDI. But I'm not aware of any large-scale MDI facilities that are being curtailed right now production-wise because of environmental issues. I think that there certainly are a lower number of projects -- or excuse me, a lower number of companies that we see that are impacted through environmental enforcements and so forth. Most of those probably are occurring in Textile Effects. But again, I'd say that, that impact is less this year than in previous years. And Tony, do you see anything on the MDI side?

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Anthony P. Hankins, Huntsman Corporation - Division President of Polyurethanes & CEO of Asia-Pacific [58]

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No, nothing on MDI because all of the facilities on MDI are relatively new. So they meet the high standards, environmental standards, et cetera. On our PO business, particularly our joint venture in Nanjing, we continue to benefit from those environmental reductions in propylene oxide. I think if there isn't a resolution to the tariffs and sentiment worsens as a result of that, then I think they'll ease off on their benefit cycle because it's all about bringing people back to work and jobs. And I think that, that's what it hinges on. But at the moment, we're seeing still very good demand on the basis of the improvements the Chinese are driving on the economy.

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Operator [59]

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Your final question is from P.J. Juvekar of Citi.

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P.J. Juvekar, Citigroup Inc, Research Division - Global Head of Chemicals and Agriculture and MD [60]

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Peter, a quick question on AdMat. In that business, earnings held up quite well despite some slowdown in China. And I know that you are not in BLR, but the bulk epoxy pricing has been weak. Do you expect any impact of that going forward in that business?

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Peter R. Huntsman, Huntsman Corporation - Chairman, President & CEO [61]

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I think near term you might see BLR prices strengthen just a little bit, which might be a little bit of a headwind to us of a couple of million dollars. But we buy BLR in China and in the U.S. as well. And so that might be a little bit of a headwind. But I don't see a whole lot of strength in BLR.

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P.J. Juvekar, Citigroup Inc, Research Division - Global Head of Chemicals and Agriculture and MD [62]

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Just a quick question for Sean. Sean, I know you had some valuation allowances that you released in 2018. What is the impact on tax rate in 2019, both book and cash?

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Sean Douglas, Huntsman Corporation - Executive VP & CFO [63]

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Yes, yes. So the way we think about that is we had about 19% this year. We said that we'd guide up to 22% to 24% next year. That valuation release impacts us on an adjusted effective tax rate by about a couple of percent. From a cash tax basis, if you're looking into '19, think of about 14% of EBITDA as kind of where we'd throw cash taxes.

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Operator [64]

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I'll now turn the call over to Ivan Marcuse for the closing remarks. Thank you, sir.

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Ivan Mathew Marcuse, Huntsman Corporation - VP of IR [65]

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Great. Thank you for joining us in our call. We look forward to catching up with you next quarter. And if you have any follow-up questions, feel free to give Investor Relations a call through the rest of the week.

Thank you.

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Operator [66]

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Thank you for participating in today's conference, everyone. This concludes the presentation. You may now disconnect. Good day.