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Edited Transcript of HUN earnings conference call or presentation 25-Oct-19 2:00pm GMT

Q3 2019 Huntsman Corp Earnings Call

SALT LAKE CITY Dec 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Huntsman Corp earnings conference call or presentation Friday, October 25, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ivan Mathew Marcuse

Huntsman International LLC - 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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* Eric B Petrie

Citigroup Inc, Research Division - Senior Associate

* Frank Joseph Mitsch

Fermium Research, LLC - Senior MD

* James Michael Sheehan

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

* John Ezekiel E. Roberts

UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals

* Kevin William McCarthy

Vertical Research Partners, LLC - Partner

* Laurence Alexander

Jefferies LLC, Research Division - VP & Equity Research Analyst

* Matthew Robert Lovseth Blair

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

* Michael Joseph Harrison

Seaport Global Securities LLC, Research Division - MD & Senior Chemicals Analyst

* Michael Joseph Sison

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* 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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Greetings and welcome to the Huntsman Corporation Third Quarter 2019 Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ivan Marcuse, Vice President of Investor Relations. Please go ahead, sir.

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

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Great. Thank you, Kevin, and good morning, everyone. Welcome to Huntsman's Third Quarter 2019 Earnings Call. Joining us on the call today are Peter Huntsman, Chairman, President and CEO; and Sean Douglas, Executive Vice President and CFO.

This morning, before the market opened, we released our earnings for the third quarter 2019 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 this 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 also refer to non-GAAP financial measures such as adjusted EBITDA, adjusted net income 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.

I would remind you that on August 7, 2019, Huntsman announced the sale of its Chemical Intermediates and Surfactants businesses to Indorama Ventures. In accordance with generally accepted accounting principles, these assets are now reported as held-for-sale on the balance sheet and as discontinued operations on our income statement. Therefore, the results we have highlighted in our earnings release and we'll discuss on the call are for continuing operations of our business.

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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Ivan, thank you very much. Good morning, everyone. Thank you for joining us.

Let's turn to Slides #3 and #4. Adjusted EBITDA for our Polyurethanes division in the second quarter was $146 million versus $218 million a year ago. As Ivan mentioned, our North American propylene oxide and MTBE businesses are now reported as discontinued operations. Therefore, our continuing operations for our Polyurethanes divisions are now nearly entirely comprised of MDI-based formulated systems, elastomers and MDI components.

As a reminder and as we have called out in the past, in the third quarter of 2018, we were still experiencing exceptionally high margins in the component end of our MDI portfolio. These spiked margins, including above-normal operating rates, conditions accounted for approximately $45 million of the year-over-year variance. MDI volumes in the quarter were up 3%, as the business continued to benefit from the expansion of our Chinese facility that began to come online in the third quarter of 2018. Our downstream strategy continues to perform well. Our margins remain stable in the larger differentiated end of our Polyurethanes portfolio. This stability is a result of our continuous drive downstream, ongoing material substitution, product innovation, benefits from bolt-on acquisition, global scale of opportunities and increasing regional diversification.

In the third quarter, our total differentiated systems volumes were about flat compared to last year and our global component MDI grew 7% year-over-year due to the new capacity added at our Chinese facility. What we experienced in the third quarter within our Polyurethanes division was a continuation of what we were saying at the end of the last quarter in most of our key end markets. However, in Europe, the economic headwinds did intensify somewhat in September.

We believe that the destocking we reported impacting the first half of the year in Polyurethanes is finished, most specifically in China. However, customers are still cautious and inventories continue to be managed aggressively low in about every region which we compete. Consistent with what we have said in our conference call in July, visibility still remains challenging. Looking at Polyurethanes regionally for the second quarter, our Americas volumes were down from the prior year. We experienced a short-term outage near the end of the quarter at our Geismar facility impacting volumes a bit and EBITDA by about $5 million. Our spray foam insulation business, Demilec, that we acquired last year continues to be a bright spot for us and is growing at a low double-digit rate. We continue to expand this business by leveraging our global footprint. We're on track to achieve our expected synergies.

Just to illustrate the global opportunities for our Demilec business. The system house that we opened this past September in Dubai is equipped to support Demilec growth in that region. Our growth in spray foam in the quarter was offset by weaker volumes and other high-volume markets, such OSB and furniture. We're focused on growing our downstream business further in the Americas, and we're progressing with a new splitter at our Geismar facility. This should be operational in 2021 and will cost approximately $175 million to build, which is above our preliminary estimate that we shared with you this past February. The increased costs are primarily due to higher material costs, such as steel due to tariffs as well as very tight labor markets in the Gulf Coast. Despite these higher costs, the IRR on this project remains very attractive, well north of our 20% hurdle rate.

Turning to the Asia region of Polyurethanes. Our differentiated and component volumes were up, even when excluding the benefits of our recent expansion. Volumes are being helped by insulation growth in large-scale infrastructure projects and applications. The adhesives, coatings and elastomers in footwear markets in Asia are also contributing as we gradually shift our China portfolio and the newly added capacity to be more downstream and differentiated. We believe that customer inventories are at very low levels in this region. While we have experienced real growth within this region, demand in China remains well below average and erratic. We believe this will remain unchanged until trade discussions have some form of resolution, thereby helping customer confidence and visibility.

In Europe, our downstream margins are stable despite lower underlying demand. Our volumes in the region were marginally up, but that was primarily a result of favorable comparisons due to outages that impacted our results in the same period a year ago. The overall macroeconomic environment remains increasingly soft. We do not expect it to improve in the near term. The margins in our differentiated business remains stable despite the pressure on volumes in weaker industry conditions.

Our long-term strategy of growing our downstream business through strategic investments like our splitter, our new system houses will continue to be supplemented with bolt-on acquisitions having strong synergies and compelling financial metrics. We believe that the positive long-term fundamentals for MDI remain intact as above-GDP growth, driven by product substitution, will continue long into the future. However, for the short term, the demand headwinds are unlikely to change. On top of that, the fourth quarter is typically softer than the second and third quarters. Putting it all together, we would expect our fourth quarter results to look slightly better than our first quarter.

Let's turn to Slide #5. Our Advanced Materials business reported adjusted EBITDA of $51 million, a decrease compared to last year's EBITDA of $56 million. The decline in adjusted EBITDA was largely driven by 11% lower volumes in the quarter. I'd like to remind you that roughly 40% of this segment's revenues are in Europe. The automotive construction and industrial markets in this region continue to weaken through the quarter. The underlying European macroeconomic challenges largely explain the underperformance of this segment relative to our expectations. The Asian market also remained weak as customers managed inventories aggressively due to the soft end markets and lack of visibility due to international trade concerns. The Americas region showed improvement over last year, primarily due to aerospace offsetting weaker industrial markets. Despite these significant macroeconomic headwinds, the Advanced Materials business has demonstrated real margin resiliency due to the high-value specialty and formulated nature of the portfolio. It is important to note that this business added around $10 million of additional fixed cost to support future growth. We believe this will be a wise investment that these products will soon be coming to market. Advanced Materials remains a core platform for both organic and inorganic growth, and we'll continue to invest in this business in the long term.

I want to again emphasize, Advanced Materials remains one of our most consistent businesses. While we do not expect the macro environment to change in the near term, we expect full year adjusted EBITDA to be within 10% of last year's record earnings.

Let's turn to Slide #6. Performance Products segments reported adjusted EBITDA of $38 million. With our Chemical Intermediates and Surfactants business now being reported in discontinued operations, this segment is now largely comprised of our amines and maleic anhydride businesses. Total volumes were down 12% versus the prior year. This business is seeing similar market pressures that our other divisions are experiencing around the world.

Our specialty amines continues to see positive trends in certain markets such as polyurethane catalysts, especially in the spray form, automotive and furniture end markets, since customers look for low VLC solutions. Specialty amines going into different curing agents and specialty coatings are also doing well. However, these positive results are being masked by market weaknesses and competitive pressures in the ethyleneamines market, which is consistent with what we highlighted in last quarter's conference call.

With the recent acquisition of the remaining 50% of our European joint venture in Germany, our maleic business is now roughly 60% North America and 40% European. Soft market conditions in the North American unsaturated polyester resin market and weakness across most of the European markets puts some modest pressure on overall volumes and margins in this business. Despite these near-term headwinds, the margins for this business remain good, and we expect results to remain relatively stable. For the fourth quarter, we do not expect much change in the current markets service by the Performance Products division.

Moving to Slide #7. Our Textile Effects division reported adjusted EBITDA $16 million for the third quarter, noticeably down versus last year's third quarter. Results were muted due to an unusual slow September, which is the month where we typically start seeing a seasonal pickup in demand for this business. Customers remain cautious due to uncertainty around global trade and shifting manufacturing location. Total volumes were down 7% in the third quarter. We continue to see customer destocking. With such a deep supply chain, this business has seen more volume pressure than our other businesses. We believe there is little, if any, destocking left in the chain. Margins were also pressured due to lower volumes and the related competitive pressures versus the prior year. Despite these challenges, our new ecofriendly products and market-leading technologies continue to gain traction with our global customer base. However, these wins have been partially offset by volumes across -- by volume pressure across the portfolio. We believe that the total industry is down low double digits.

Even with the challenges this past year, we do not believe that the long-term fundamentals for the business or industry has changed. We remain positive looking out over the next several years. In near term, we do not expect the industry headwinds to abate until visibility and customer confidence in key markets begin to improve. As a result, we expect the adjusted EBITDA in the fourth quarter for Textile Effects to be similar to our third quarter results.

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. As Ivan stated at the beginning of the call, with the pending sale of our Chemical Intermediates and Surfactants businesses to Indorama Ventures, we now report these businesses as discontinued operations in the income statement and as held-for-sale on our balance sheet. This is our first quarter in doing so, resulting in an expected transition for Wall Street to align their models and estimates with our earnings on a continuing operations basis.

Now turning to Slide 8. Third quarter adjusted EBITDA declined year-over-year by $93 million. The decline in EBITDA can be largely explained in 2 primary parts. The first part being volumes. Because of the weak global economic backdrop, we saw volume pressure on our downstream businesses but with minimal impact on margin. Volumes were down in our Advanced Materials business by 11% and our Performance Products business by 11% and within our Textile Effects business by 7%. We saw downstream volumes within Polyurethanes largely flat.

The second primary part for the decline in EBITDA is due to margins, which is largely a portion to the upstream component end of our Polyurethanes division. Margins within our downstream Polyurethanes division remained stable. Margins also remained resilient with our Advanced Materials segment and largely so within our Performance Product segment. Margins within our Textile Effects division were mixed with more stability in the specialty end of this portfolio.

Turning to Slide 9. In spite of lower EBITDA, we saw strong free cash flow. With the softening global economic backdrop, receivables contracted, thereby freeing up cash. Additionally, we continued to proactively manage our inventory levels. Our free cash flow conversion continues to be consistently strong with an adjusted LTM conversion rate of approximately 40%. We have removed the impact of the chemicals and intermediates and Surfactants businesses that are pending divestment in early 2020. These discontinued operations have previously contributed to our strong free cash flow albeit with much more volatility. Going forward, we would expect our free cash flow conversion to experience less volatility and be above 35%. This excludes the capital required for the previously announced construction of a new MDI splitter at Geismar, Louisiana, which is expected to be in operation in 2021. The total cost of this splitter will be approximately $175 million of which approximately $15 million is estimated to be spent in 2019, $75 million in 2020 and the remainder in 2021. While this will impact our reported free cash flow conversion rate, we have been proactive and have taken steps to generate additional cash to support this larger one-offs scale project. For example, during the third quarter, we disposed of a vacated property previously used by Textile Effects in Basel, Switzerland, for $49 million. This is not reported in free cash flow. Additionally, last year, ahead of the announcement of our splitter, we found ways to better manage our liquidity in China, resulting in a onetime free cash flow improvement of approximately $70 million reported within the fourth quarter of 2018.

As we look into the fourth quarter with respect to free cash flow, we do not expect a typical seasonally large working capital release as much of this release has already occurred within the third quarter. Therefore, our fourth quarter free cash flow will be lower than seasonally expected. In combining our free cash flow from discontinued operations, our total free cash flow for the quarter was $310 million. We utilized this robust source of free cash flow during the quarter to reduce our short-term floating-rate borrowings by approximately $225 million and to repurchase approximately 4.1 million shares of our stock for $81 million. Since the first quarter of 2018, we have repurchased $472 million of stock or approximately 20 million shares, representing approximately 8% of our total shares. A balance of $528 million remains under our Board authorization for share repurchases. We intend to continue repurchasing shares in a similar, sensible and opportunistic manner.

During 2019, we expect to spend approximately $270 million of net capital expenditures, which as previously stated includes approximately $15 million related to our North American Polyurethanes splitter. As a footnote, we expect to spend approximately $70 million of capital in 2019 relating to our discontinued operations.

Regarding taxes. Our adjusted effective tax rate for the quarter was 21% and our forward adjusted effective tax rate remains between 22% and 24%. We ended the quarter with $1.7 billion of combined cash and available borrowing capacity. On September 30, 2019, we acquired the 50% noncontrolling interest in our Sasol-Huntsman maleic anhydride Joint Venture located in Germany. We paid Sasol $100 million, which included acquired cash net of any debt and is subject to customary closing adjustments.

In connection with this transaction because of very attractive available loan pricing in Europe, we entered into a new prepayable 364 days short-term EUR 92 million denominated term loan facility to fund this purchase. Pricing is Euribor plus 75 basis points with a Euribor floor of 0. Our net debt leverage stated on a total company basis was 1.6x as of September 30, 2019. Pro forma for the divestiture of the chemicals and intermediates and Surfactants businesses, our pro forma net leverage would be approximately one-half of a term.

In summary, we remain committed to generating consistent strong free cash flow, maintaining a strong investment-grade balance sheet and allocating our capital in a smart and balanced manner.

Peter, back to you.

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

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Thank you, Sean. We stated in our last earnings call at the end of July, there are many different variables out of our control that could either improve or worsen, which would impact our second half results. Unfortunately, not much has improved on a global stage as many of you see in the macro data, such as slowing GDP, weakening PMIs and a rather sudden fall-off in the European economic performance. Meeting with investors and analysts, we often get asked how our current portfolio of businesses will perform in a recessionary-type environment. I believe you are currently getting the answer. Between destocking and slow GDP, we are arguably in an industrial recession in many of our core regions and markets. However, while we are seeing lower volumes, it is important to note that our downstream margins are holding up well. We're generating strong free cash flow as our businesses are taking the appropriate steps to manage working capital as well as pulling back on discretionary spending, including more cautionary spending on capital projects. While we are not expecting the economic environment to change for the better in any material way in the near term, we will continue to focus on what we can control depending on a number of different factors. As we look into the fourth quarter, we expect adjusted EBITDA for our continuing operations to be about 15% below the third quarter. This gives consideration to the lingering economic challenges and the typical seasonality of our businesses.

Now let's turn to Slide 10 and 11. In conclusion, I'd like to spell out our priorities in the coming months. Number one, we'll continue to stay focused on operating safe and reliable operations while maximizing the value of what we sell into our global markets. Despite sluggish demand in many areas around the world, we continue to see growth and continued product substitution and innovation. Number two, we're on a path to close on the sale of our Chemical Intermediates and Surfactants businesses previously outlined. This process will commit Huntsman to provide ongoing transitional services through most of 2020. We will be fully reimbursed for these services, which were partially offset the retained costs over the short term. As these services are completed, we will be simultaneously restructuring our costs and aligning our business to better serve our growing downstream demand. In short, we'll be keeping some cost into 2020, while at the same time, restructuring our business services and cost structure.

Number three, we will continue to keep a strong balance sheet as we evaluate growth and M&A opportunities, share buybacks and pay a competitive dividend. At times of economic uncertainty, we have no intention of stressing our balance sheet.

And number four, we will carefully look for the best deployment of our capital after we close on the sale of our intermediates and Surfactants businesses. We will continue to look for opportunities to expand our businesses that have areas of synergies, new technology and market penetration. I believe we are seeing multiples for assets coming down and feel no pressure to act too soon. And if I look at the strength of our balance sheet, cash generation, product pipeline and opportunity to further align our business to move more aggressively further downstream, I have never seen this company in a better position to create shareholder value than I do at the present.

With that, operator, we'll open the line for any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today is coming from Kevin McCarthy from Vertical Research Partners.

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Kevin William McCarthy, Vertical Research Partners, LLC - Partner [2]

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Peter, as you anticipate the influx of $1.6 billion in cash proceeds from the Indorama deal, can you elaborate on how you're thinking about organic growth investments versus M&A? For example -- with regard to your splitter project, notwithstanding the higher cost, it sounds like you are looking at a return above 20% there. Do you see other projects or opportunities like that, that could claim a substantial portion of the capital? And maybe you could just elaborate, in general, on your latest thoughts there?

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

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Well, thank you very much, Kevin. I look at the splitter that we're building in Geismar, Louisiana, to be something almost akin to an acquisition. We have a very similar splitter in Europe, we have one in Asia. With the completion of this facility in the Americas, we're going to be very well positioned by producing crude MDI, splitting capacity in downstream. I don't see a lot of large CapEx projects. If you were to give me $150 million right now and say, "Go spend it internally." I think I would be rather be hard-pressed at the present time. I don't see a lot of large-scale projects like that.

And frankly, I'm not a big believer in that. It seems that as you build virtually anything in the last decade in the U.S. Gulf Coast, costs just continuously are going up. And I have never been a big proponent that this industry needs more capacity of just about any product. I think that we need greater diversity of technology, the ability to perhaps specialize the products we're producing. But frankly, I don't see this company going headlong into spending a lot of CapEx around building new capacities around the world. And so I -- and as I look at that threshold because of the risks of higher costs and uncertainty about making commitments today as to where markets will be 2, 3, 4 years down the road when you complete such projects, I think that they weren't a much higher IRR in general than M&A does, where you know what you are getting upon closing and you have a good outline of synergies, technologies, globalization and you can have a plan of action on day 1. That's rather difficult to do when you are planning a new MDI plant that won't be coming into the market for upwards of 4, 5, 6 years.

So I think that we're going to be certainly leaning more towards M&A opportunities. And again, I emphasize that on a cautionary note as I did in my script, and I would also say that we want to make sure that particularly while we are in the, what I would consider to be, rather challenging economic conditions, we need to make sure we retain a strong balance sheet. We've got plenty of capital to continue to pay a competitive dividend and we're very committed to a share buyback program when the share price is at appropriate levels.

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Kevin William McCarthy, Vertical Research Partners, LLC - Partner [4]

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It's helpful. I guess, on a related note, for Sean, I wanted to clarify in my own mind some of the comments that you made about the capital budget. I think you mentioned $270 million. Is that an indicative pro forma level, post the separation of the Indorama assets? And then I think you mentioned $70 million for discontinued operations, what is that? And is it in addition to the $270 million?

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Sean Douglas, Huntsman Corporation - Executive VP & CFO [5]

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Yes, thanks. Thanks, Kevin. Yes, you're right. Think about going forward that -- this remaining business will have probably between $250 million to $275 million of what I'd call ongoing CapEx and think about mandatory spend in that $250 million to $275 million of around $150 million to $170 million. The $270 million I stated includes $15 million for this new splitter. It does not include any of the spending that's in a discontinued operations. That $70 million for the discontinued ops is in addition to that, and we're now just reporting on a remaining basis of continuing ops. So the $70 million is apart and separate from the $270 million, and it is largely mandatory expenditure.

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Operator [6]

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Next question is coming from Laurence Alexander from Jefferies.

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Laurence Alexander, Jefferies LLC, Research Division - VP & Equity Research Analyst [7]

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Could you discuss a little bit for both Advanced Materials and in Polyurethanes, how you are seeing the competitive dynamic shift in response to a weak environment? That is, are you seeing capacity curtailments? Are you seeing changes in pricing behavior, extended outages, any other kind of indications of sort of how the market is reacting in this environment?

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Peter R. Huntsman, Huntsman Corporation - Chairman, President & CEO [8]

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I think, Laurence, it really is a little bit of a mixed view. The further upstream that you are or the more commoditized the product and the application, I think the more competitive pricing and margin pressure that you're seeing further on down the chain where you have a product that has been specked into a customer where you have a multiyear commitment and where you are selling an effect or performance rather than a commodity raw material that maybe has a little bit of work done to it. I think that we're seeing far less of that. And so as I look at something like our Advanced Materials in aerospace, as I look at our downstream formulation applications in MDI and Polyurethanes and so forth, margins are -- for the majority of the business, margins are holding up very well. It's volume that is hurting the bottom line, and I suspect that volume will obviously be coming back as the economy starts to stabilize, or, even if the economy doesn't stabilize, when you see a lot of the deinventorying, destocking that is out there taking place.

So again, I would say, it's always a -- probably I always get in trouble for saying something this broad, but I would say, I'd like to think that -- 2/3 of our business is more volume-sensitive, meaning that I think margins are pretty stable, by and large, and we're going to be more affected by volume. And maybe 1/3 of our business, you're seeing more competitive factors that might be impacting, to some degree or another, margins. And so it is -- and again, product-by-product, region-by-region, division-by-division, those things will vary, but I think that obviously we'd like to get more and more of our product into that 2/3 category.

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Laurence Alexander, Jefferies LLC, Research Division - VP & Equity Research Analyst [9]

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And are you seeing any sort of significant curtailments of customer, R&D cycles, innovation cycles, new product development in response with soft environment? Or is that inconsistent?

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Peter R. Huntsman, Huntsman Corporation - Chairman, President & CEO [10]

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I have not. As a matter of fact, I might be seeing -- and I don't want to say that this is going to continue, but for the time being, I think that there is -- you take an economy like Europe, where you are seeing virtually no growth in GDP, perhaps even a bit of shrinkage right now in the economies like Germany and so forth. Yet, product substitution, things around sustainability, things that have an environmental improvement and push, I think that there is actually more innovation in certain applications. I look in the footwear industry where a lot of the producers today are looking to have a single grade of material that goes into the sole of a running shoe versus 4 or 5 different elastomers and colors and so forth that go into the sole of a running shoe. You look at those sort of -- it might sound rather drab, but those are areas where we're seeing where there is increased reward, increased opportunity. And so I think, right now, I have not seen a decrease in the reward for innovation and the opportunity to replace product substitution. And if I would imagine 2020, I have not seen the budget yet, we've not completed for 2020, but I would imagine that the majority of our growth in 2020 will be through product substitution.

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Operator [11]

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Our next question is coming from Bob Koort from Goldman Sachs.

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Robert Andrew Koort, Goldman Sachs Group Inc., Research Division - MD [12]

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Peter, you commented, I think, that your seeing component MDI margins pressured. I guess your major competitor from Midland yesterday showed some charts at least in Asia Pacific that seem to suggest maybe things have bottomed out there some. Curious, where do you see the incremental theme coming from in commodity MDI?

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Peter R. Huntsman, Huntsman Corporation - Chairman, President & CEO [13]

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Well, given the number of competitors we have in Midland, I won't even try to guess who that might be. But I think that in earlier conversations, I think last quarter, we said that we thought that China was most aggressive in bottoming out its inventory. And I think that as we look at now and my earlier comments, Bob, I think that I said that we felt that China, not just in MDI but perhaps in several other products, but more particularly in MDI, it had -- the inventories there were very low. And I think that we're seeing, if anything, I think -- we saw a little bit of growth that took place in the third quarter in MDI after you take out the effect of our new capacity there. And I think that's probably the first quarter in the last 3 quarters or so where we've seen a return to growth in China. So I'm not here to say that China is off to the races, and we are going great guns here, but I do think that it has more to do with the idea that we're done with destocking on a large basis in China.

I would also just note, Bob, that as we look at a lot of the announced capacities that are coming into the MDI market, that seemingly a lot of those, likewise, have been either delayed or have been outright canceled. And so I think that between lowering of the -- or the kind of the destocking coming to an end here and perhaps some of the capacities either canceled or pushed out, I'm probably quite bullish on MDI to look at over the next 12 to 18 months, again, depending on the macroeconomic environment as well.

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Robert Andrew Koort, Goldman Sachs Group Inc., Research Division - MD [14]

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I guess maybe combining that with -- you made comments that multiples are starting to come down, but your own multiple, I guess, on a pro forma basis after the Indorama deal, it looks like it's, I don't know, maybe 6x forward EBITDA. That seems like a pretty large discount, given the enthusiasm you expressed and maybe high grading of the portfolio. So how do you square that with pursuing acquisitions and the risk that come with that versus buying your own arguably discounted equity?

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

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Well, I think that we need to continue to balance both of these very well. As I look at it, what I see is our multiple, I think we've seen an expansion over the course since we've announced this deal. And I think that the market will reward you a little bit when you announce it. I think they will reward you a bit more when you actually get it done, and I think that they will reward you quite a bit more when you redeploy the capital smartly. And I think that's got to be done by a combination of both share buybacks as we've seen in the last quarter or 2. I think we've -- just last quarter, we bought an $80 million worth of shares, all -- under $20 a share. And at the same time, we also bought in our 50% partnership of our maleic anhydride business, and simultaneously this last quarter, we sold off $2 billion worth -- $2.1 billion worth of our business. So I think we've got to do all 3 of those things very smartly, and I think that over time the market will reward you and the multiple will continue to improve.

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Operator [16]

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Our next question today is coming from Jim Sheehan from SunTrust Robinson Humphrey.

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James Michael Sheehan, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [17]

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Could you talk about your thoughts on monetization of the remaining stake in Venator materials? And how, if at all, that any loss associated with that sale could be used to shield taxes on your transaction with Indorama?

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Peter R. Huntsman, Huntsman Corporation - Chairman, President & CEO [18]

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Okay. I'll let Sean talk about taxes because that's certainly his favorite subject to talk about. And I think that as we look at the Venator share values, obviously, it's at a very low value. Obviously, I don't want to comment on what we may or may not be doing on a future basis, but we do need to be able to look at the potential monetization there factored in with tax implications with it and where that capital can be best deployed. So again, I -- it's a rather evasive answer, but we'll continue to evaluate that very carefully.

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Sean Douglas, Huntsman Corporation - Executive VP & CFO [19]

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Thanks, Peter. Jim, as we think about this -- think about it this way, the sale to Indorama will create on a portion of that sale a capital gain to Huntsman. And as you look at the Venator stock, there is a high basis left in that stock near about the IPO price. And so what that will allow us to do is upon the divestiture of Venator down the road, it will allow us to the degree that we are under that IPO price. It will allow us to have a capital loss that we can offset against the capital gain. And now there is a 3-year kind of a time frame that's allowed with the IRS to do that, which allows you to roll it back. And so think about potential value opportunity on the tax side in terms of savings, which helps the leakage on the Indorama sale to be up to around $140 million, all dependent again on the timing of the enterprise of the exit of Venator. Hope that helps.

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James Michael Sheehan, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [20]

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Very, very helpful. And then on the Demilec business, you are making progress, synergy capture seems to be on track, can you just talk about where EBITDA margins were in that business when you acquired it? And if you've experienced any margin expansion associated with this synergy capture and the double-digit growth in the business?

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Peter R. Huntsman, Huntsman Corporation - Chairman, President & CEO [21]

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Yes. I think that we see, at the time of the acquisition -- about 16% at the time of the acquisition and moving to about 20% now. Again, there is going to be a little bit of noise on that when you look at some of the transfer pricing in values and so forth. But I think, more importantly, if we look at the Demilec purchase, which is just over a year ago, and it's today around -- when we purchased it, it was about 11.5x EBITDA, and I think that, that EBITDA if I would annualize it, it's present run rate is an acquisition of around 7x EBITDA, and we look at that on an integrated basis, fully integrated MDI basis of somewhere in the low 20% and a very stable 20% and growing with that. So again, I think that it's something that we look at. Overall growth in that business is low double-digit growth, and we still have just a small, a very small fraction of the overall market in the spray foam. So lot of room to expand. I'd love to see more tonnage, frankly, from our MDI business moving into spray foam and out of the general market, if you will. And I think that's a strategy we're going to continue to push.

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Operator [22]

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Our next question today is coming from William Blair from 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 [23]

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This is Matthew Blair. In ad mat, Peter, you mentioned you had about $10 million of fixed costs rolling through that would support future growth and that products would soon be coming to market, could you just provide more details on exactly what kind of products those are and what EBITDA uplift might be?

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

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Yes. I think the EBITDA uplift that I'm looking at, I would think that -- I think that, that business operating in around 20%, low-20% EBITDA business, is something that I would like to see us maintain that. I would like to see more growth in that business rather than margin expansion in that business. I think that in order to have that growth, we need to be investing in a product pipeline. When you're looking at new applications going into the aerospace business, that's not a process that takes 6 months. That's a process that can take a year or 2. When you look at winning certain defense contracts on composite materials going into drones or armor-plated vehicles and so forth, those are processes that can take a year or 2. And once you're in, you're in for multiple years.

And so I think that as we look at that on a broader sense, we're certainly moving the chemistry into that business into areas that we haven't been into before. We feel that we need to be hiring the marketing, the sales and the technology in the manufacturing platforms to be able to access sales, and I think that we're making very good progress into those areas. Now how soon the Department of Defense or how soon the aerospace industry has rather full plate right now with the volatility around the number of different issues, how soon they will be coming into market and allowing us to come in the market, I think that's open to debate right now. But I do think that over the course of 2020, that we'll start seeing some of the dividends of that higher cost structure into the business taking effect.

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Matthew Robert Lovseth Blair, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Refining and Chemicals Research [25]

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Sounds good. And then I was hoping you could just talk a little bit more about the dynamics in the ethyleneamines business? And especially your view going forward? I think one of your competitors is now talking about building a new world-scale facility. So any comments there would be helpful?

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

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Well, we continue to look at where we can take that business, and I think that we've got a number of very unique applications and grades in that business. We will continue to take that business further downstream and be looking for the lubes, lube oil additives and the end markets that will allow us to, I would hope, to have fewer competitors because of our innovation technology and longer contracts with our customers. And so that's really where we're moving. And in a lot of these areas, we go further and further downstream as we're in MDIs, we're in Advanced Materials. We're not competing with traditional -- with our traditional competitors that we're often compared to. I mean the area of Polyurethanes, some of our competitors have announced system houses and moving it down into system house and so forth. I still don't see really any head-to-head competition downstream because they're just so many hundreds of different routes that you can go when you start moving MDI chemistry or epoxy chemistry, whether it's in coatings or adhesives or elastomers. And so it will be interesting to -- when we look at the EAs and -- ethyleneamines, we certainly will see some competition, but I think we've also got opportunities to further expand our downstream markets.

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Operator [27]

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Next question is coming from Frank Mitsch from Fermium Research.

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Frank Joseph Mitsch, Fermium Research, LLC - Senior MD [28]

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Peter, I appreciate the commentary that the fourth quarter EBITDA is going to be down 15% from the third quarter. Since we don't really have a history of monitoring this company on a pro forma basis, I'm trying to reconcile how much of that is typical seasonality versus what is more germane to this economic backdrop? And we heard earlier today from another company that suggested that October volumes were equal to September. Is that a comment that you might be able to make as well?

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

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Yes. First of all, Frank, let me just express my condolences with the recent passing of your mom and she raised -- tough for me to perhaps say, at times, she raised a great kid there. So I'm sorry to hear about that, Frank.

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Frank Joseph Mitsch, Fermium Research, LLC - Senior MD [30]

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Thank you very much, Peter, and I'm looking forward to some wonderful work coming out of the Huntsman Cancer Institute.

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

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We are too. As we look at our fourth quarter, Frank, typically, if you look seasonally, just across the Board, you're seasonally down usually 15% to 20%. Usually, the more commoditized end of that would be closer to 20% and the less commoditized would be closer to 15%, more commoditized closer to 20%. And I think that what -- where I would be just a little uncertain right now is probably my biggest concern -- again, as I sit here right now, it would probably be Europe. And we've heard rumors about automobile companies that typically shut down in the last week or 2 in December, starting to shut down earlier in the year, perhaps the 1st of December. And so do we take those at face value right now.

Some of the OSV industry, from what we understand, some of the building materials and so forth might have some pretty healthy inventories right now, longer-term housing starts and so forth in North America, the numbers look fairly decent. But depending on how much inventory you have going to the winter, some of those customers might be slowing down a little bit earlier in December. Again, I don't have the raw data in front of me to tell me exactly how much that's going to impact, and so I think that's a bit of a shifting number. So I take out some of the commoditized end of around that 20% seasonality, and I kind of come up with that 15% seasonality. And I think with our more differentiated, less commoditized portfolio than what we've had, I would hope that you're always going to see seasonality in the fourth quarter. I would hope that over -- in the coming years so that should start diminishing.

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Frank Joseph Mitsch, Fermium Research, LLC - Senior MD [32]

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That's very helpful. And as I think about the stranded cost, you called out $30 million in SG&A that -- how do we think about overall stranded cost in terms of a time line of your ability to take that out of your results?

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Peter R. Huntsman, Huntsman Corporation - Chairman, President & CEO [33]

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Well, I think it will be predominantly in the second half of 2020. Again, we want to make sure that we close on the business, which we see taking place very shortly after the first of the year. And then, we've got some number of shared services, transitional services to look at and supplying to Indorama here over the course, particularly over the first half of the year. Then those will be diminishing throughout the year, and as those diminish, I think some of those costs, frankly, will be eliminated outright; and others of them will be shifted as to how we can better focus the company. And I wouldn't be surprised that by the end of 2020 that we might have some completely different reporting structures and so forth within the company that would give shareholders greater transparency into the overall applications as we look at where we're in coatings, adhesives, elastomers, transportation, the aerospace industry and so forth, construction, industrial, insulation. We're seeing more and more where our urethanes, our epoxies, our amines and so forth are really selling into complementary applications. And I look at something as simple as adhesives, and a lot of times, we'll see our MDI in competing formulations and applications with our epoxy. I can't think of a better company we'd rather compete with than ourselves.

So as I look at some of those, maybe we ought to be looking more and more at the downstream applications. We're less asset-intensive, less asset-focused and more downstream focused on marketing growth and pricing excellence. So I think you're not just going to see a focus on eliminating cost, which obviously we'll continue to do but also on restructuring costs.

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Operator [34]

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Our next question today is coming from Michael Sison from Wells Fargo.

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Michael Joseph Sison, Wells Fargo Securities, LLC, Research Division - Senior Analyst [35]

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The -- for Polyurethane, your pro forma numbers for fiscal '18 was little over $800 million and looks like it will be somewhere a little over $550 million for this year on a pro forma basis. So just curious, Peter, when you think about -- at some point, we exit the industrial recession and things get better. Where can that Polyurethane EBITDA go on a pro forma basis if times improve?

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

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Yes. And as we look at 2018 that, obviously, was a better year in MDI, and I think we also saw the benefit of a fly-up and so forth. I would hope that as we look at the volumes coming back able to take advantage of the margins that we have in place, I would certainly hope that as we look at that kind of that $800 million sort of number that we saw for the 2018 that we can certainly be building on that number. Again, as I look at kind of the recession scenario, if you will, in this company, I think when we look at the last major '08/'09 recession, we saw our earnings drop at about 50%. And I would say that if we were to repeat that same sort of a scenario, you are probably looking at somewhere between the 30% to 35% drop. What I'm saying is I think that we ought to be seeing less volatility, a less fall off and a more stable earnings platform. So I would hope that, that $800 million will be more of the norm. As we look at 2018 too, I would remind you that when you take out the spike, that we're probably looking at a margin of around 15% in the business and as we look at our downstream business, our margins are around 20%. And so as you look at it moving more and more of that -- to that downstream portfolio, that's going to be essential to our growth, our expansion of margins, and more importantly, the stability in the maintenance of those margins.

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Michael Joseph Sison, Wells Fargo Securities, LLC, Research Division - Senior Analyst [37]

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Okay. Great. And then real quick, I think you mentioned you don't want to stretch your balance sheet, but just curious a little bit of color there. Would you consider as a good opportunity how far would you go in terms of the balance sheet, 2x EBITDA, and then other opportunities outside of polyurethanes that are interesting for you to do some acquisitions?

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Peter R. Huntsman, Huntsman Corporation - Chairman, President & CEO [38]

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Yes. Well, there are certainly a plenty of opportunities outside of polyurethanes. I think that when you just look at what percentage of our business is polyurethanes MDI and you look at the downstream growth that is taking place in a lot of those areas, most of those acquisitions that we've done to date, we've -- or have been our customers. And so we'll continue to focus in that area. As a matter of fact, if you look at over the last couple of years, the bolt-on acquisitions that we've done in our Polyurethanes business, if I look at this kind of on an LTM basis, we bought those businesses at today's EBITDA of around 4x EBITDA. And we're going to continue to look at those sort of opportunities, and as we find them in other ends of the businesses, we certainly will be taking advantage of that as well. As we think about leverage levels and so forth, look, we have fought, if anybody is listening to our calls for the last couple of years knows that perhaps the most consistent basis is we want to have a strong balance sheet, we want to have a balance sheet where we can have access to the capital markets regardless of what's going on in the macroeconomic environment, and we want to keep to the investment-grade metrics. And so those are just fundamentally I don't want to speculate it too what size of an acquisition and so forth or how it would be financed and what have you -- just because at this point it's hypothetical, but I would say that we would certainly put limits on what we would do when we look at that threshold of investment grade.

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Operator [39]

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Our next question is coming from Mike Harrison from Seaport Global.

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Michael Joseph Harrison, Seaport Global Securities LLC, Research Division - MD & Senior Chemicals Analyst [40]

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Peter, in the Polyurethanes business, you had the plant fire in Turkey, I believe, there was also an outage in Rotterdam. And then I think you referenced about $5 million worth of drag from Geismar. But can you just walk through the overall EBITDA impact that you saw from outages in the quarter? And let us know if there are any outages that we need to keep in mind for Q4, or I guess, early 2020?

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

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Well, as we look at the Q4, we certainly don't see anything at this point. And between the second and third quarter, we did see an outage we talked about last time that took place in Rotterdam that was due to a third-party supplier that went down. They shut down a number of facilities that were in the Rotterdam area, including ours. And Geismar, we did see an outage there that affected the third quarter numbers as well. So when you look at the third quarter, the total impact on that was right around $25 million, between Rotterdam and Geismar. The fire that we had in Turkey, we don't believe that, that could be impacting our EBITDA in any material way. We've been able to source materials from our other system houses throughout the European, Eastern European area. A few weeks before that incident took place, we opened up a new facility in Dubai that's going to be running very aggressively to supply the Turkish markets. I don't see us losing any business or materially any margins because of that, and we'll certainly be -- it's our intention at this time to rebuild that capacity.

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Michael Joseph Harrison, Seaport Global Securities LLC, Research Division - MD & Senior Chemicals Analyst [42]

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All right. And then we're about a year since you started up the additional MDI capacity in China. Can you talk about how that facility has performed relative to your expectations? And maybe give us an update on how you are progressing on shifting that Polyurethanes business in China toward a more differentiated product slate?

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Peter R. Huntsman, Huntsman Corporation - Chairman, President & CEO [43]

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Well, I think it's fair to say that I think that the product that has come out of there is very high quality. Reliability and operating rates have been very steady. The facility is sold out as of today, and we have the ability to move those products downstream because of the splitting capacity that we have. And so I think that we'll continue to shift our portfolio more and more downstream into formulated areas and so forth and that will be a multiyear effort. Right now, we're selling into the component market, and we'll be shifting out of the component market since we can and building up more and more of our downstream opportunities. But again, we have the splitting capacity in place to be able to do that without further investment.

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Operator [44]

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Our next question today is coming from John Roberts from UBS.

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John Ezekiel E. Roberts, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals [45]

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On Slide 11, where you've got the key end market overlap, Textile Effects has got consumer which doesn't overlap with anything else, obviously. And I'm guessing the automotive overlap is pretty small here. So with the weakness in the business, do we need to have some additional, if you are running it for cash, some additional restructuring here, rightsizing or maybe more variablizing of the cost structure there?

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

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No. I think that right now our biggest issue that we see in that business isn't that the costs are out of line as much as the demand and the deinventorying that is taking place. We see 2 things that are taking place in Textile Effects right now. One is the deinventory that is taking place. And frankly, a lot of capacity in the textile industry is moving out of China, and it is moving to India, Bangladesh, Pakistan. So mostly you're seeing a dislocation of your customer base and you are also seeing a destocking that is taking place that we haven't seen since 2008, 2009 time period. Are we losing customers? No. Are we losing value in the products that we're selling? We don't see that taking place. And I think that a lot of this is a short-term effect and in the coming quarters we think that that will be recovering.

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John Ezekiel E. Roberts, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals [47]

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And then just a follow-up, and I apologize if I asked this earlier before. But is the propylene oxide cost and the ethylene cost in the historical results essentiality equivalent to what you are going to get with the Indorama contract post closing?

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Peter R. Huntsman, Huntsman Corporation - Chairman, President & CEO [48]

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The transfer economics that we've had in the past will continue going into the future. We will not have the benefit of PO manufacturing economics in the Polyurethanes business, but the poly -- excuse me, the propylene oxide, we'll not have the manufacturing benefit of the PO that is going to the MDI business, but the MDI in the past that has been transferred into that business, into the system houses and so forth, that will remain the same economics. Or, say, virtually with all of our products across the board, with enhancement, we try to always transfer those at a market or at a most favorite nation sort of pricing. We don't transfer them at cost.

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John Ezekiel E. Roberts, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals [49]

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Okay. So the Polyurethanes segment, this quarter, doesn't have any benefit of the manufacturing margin?

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

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No.

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Sean Douglas, Huntsman Corporation - Executive VP & CFO [51]

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That's correct.

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

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It is not.

Operator, we typically try to not take more than an hour of people's time. Why don't we take one more question, if that's okay?

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Operator [53]

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Certainly, our final question today is coming from P.J. Juvekar from Citi.

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Eric B Petrie, Citigroup Inc, Research Division - Senior Associate [54]

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This is Eric Petrie on for P.J. Your Polyurethanes volumes year-to-date have increased 5%. If I were to strip out the Caojing plant start-up, what are your underlying volumes? And then how do you see the industry demand finishing out 2019?

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

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Yes. We've seen it in our MDI volumes growth for year-to-date, including the third quarter. We see that total in our -- our internal growth has been about 7%. And I see that what we've seen, by and large, Europe is up about 5% or 6%; the Americas is flat; and I would say that Asia -- well, Asia is up 24%, but a lot of that's because of the new capacity that we brought into the market. So -- but I would say without that capacity, it's probably flat to up slightly.

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Eric B Petrie, Citigroup Inc, Research Division - Senior Associate [56]

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Helpful. And secondly, could you just give an overall description of utilization rates by region? And if you see ability to push pricing in any of the regions?

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

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Yes. I would say that as we look at it globally, I get a sense that the capacity utilization -- though, I don't see a lot of data that's published in this area, but just anecdotally, it feels like it's around globally in the mid-80s. And I would say, the Americas, we're sold out in the Americas; Europe, you are probably somewhere 90%, maybe a few percentage points below that; and Asia, I'd say, you're probably somewhere in the mid-70s to 80s, somewhere in that area. And so I think that there is some room for -- I think any modicum of GDP growth should be the catalyst when you're operating in most of your regions economically around the world between 90% and 100%. It should be an environment for potential price increases. And in the chemical industry, hope always springs eternal.

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Ivan Mathew Marcuse, Huntsman International LLC - VP of IR [58]

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We reached end of our question-and-answer session. I would like to turn the floor back over to management for any further or closing comments.

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Peter R. Huntsman, Huntsman Corporation - Chairman, President & CEO [59]

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Great. Thanks, Ivan. If you have any follow-up questions, feel free to reach out to Investor Relations. Otherwise, we'll talk to you next quarter. Thank you.

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Operator [60]

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Thank you. This concludes today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.