Good day and welcome to the Q4 2018 Huntsman Corporation Earnings Conference Call. My name is Mathew, and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference.

[Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Ivan Marcuse. Please go ahead..

Thank you, Mathew, 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 it 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..

Thank you very much, Ivan. Good morning, everyone. Appreciate you taking the time to join us this morning. Let's turn to Slide number 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 business 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 quarters call, we saw destocking in softer demand in certain 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 number 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 America's composite wood products, due to seasonal slowness and the inventory 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 improved the construction of a new splitter at our Geismar, Louisiana facility.

We expect to commence this project in the first half of this year 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 installation 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 growth because 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 in the 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 the 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 exacerbated 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 that 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 number 4, we also transparently disclosed that in tight industry operating rates environments we benefitted from an additional approximate $30 million to $35 million per quarter, the red portion of the bar.

The global industry conditions in the further 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 number 5. It is indicated in these four charts, the margins in our core base differentiated business continues 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 in 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 the 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 in to 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 the 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 number 6. We’ve been successful in commercially and geographically scaling up our organic development 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 in markets.

March is our strongest month in the first quarter. At present time, we have very little visibility and we’ll update the market throughout the quarter. Our MTBE business reported an EBITDA loss of $6 million, which was slightly below 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 polyurethane business remains on track to meet our 2020 objectives.

Turing to Slide number 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 product still experienced 6% EBITDA growth, despite a challenging economic environment. Primary growth drivers in the quarter were in gas treating, oilfield chemicals, and agri-chemical 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 into more differentiated businesses and applications. Maleic anhydride demand remained 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 polyurethane’s division, we see very little customer inventory and an increase in last minute orders leading us to believe that we will see a pick in overall business in Q2. This business remains on track to meet its 2020 target as well. Let’s turn to Slide number 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 continue 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 in 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 be also be noted that this record result happened despite over $40 million of headwinds in raw material and higher cost 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 target. Let’s move to Slide number 9.

Our textile effects division reported EBITDA of $21 million, up 11% versus the prior year EBITDA of $19 million. This is the thirteenth 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 volume 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 like to turn a few minutes over to Sean Douglas, our Chief Financial Officer..

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 a 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 increase in 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 had 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 headwinds 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 three 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 polyurethane’s division was an excess of 30%. Our polyurethanes division retains a high ROIC year-after-year because of its downstream strategy. The ROIC for 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 one-time improvement in the way we managed liquidity in China. This is 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 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 one-time 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 1.3 times net leverage as compared to 1.4 times a year ago. Keep in mind that during the year we made two 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 the 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 remain 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 purchased approximately 10.4 million shares or $276 million. We have $724 million remaining under our $1 billion multi-year 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 in share repurchases completed during 2018 will return 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 [$90 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 pre-tax 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 pre-tax 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 non-operating special item, a mark-to-market change of Venator stock for its 49% ownership within its financial statement. 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..

Thank you, Sean. As we reported the final results of 2018, and look ahead to 2019, I’d like to take – just make a few comments and perhaps answers some often ask 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 to free cash flow.

We successfully integrated two 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 had been disappointed that we have not yet received in the investment-grade rating from the two dominant credit agencies. I feel we have done all that has been asked of us. In spite of this, we will remain focused on maintaining a strong balance.

We should generate about 40% of free cash flow to EBITDA this year and will be prudent with our CapEx. As is outlined on Slide 13, we are projecting 2019 to be one of the strongest years in our history. At the present time, two 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 complete will – 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 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 one to two quarters as we pass along duties and customers and cost that will likely be borne by our entire industry as there is no one polyurethane or world scale amines or maleic producer in the UK.

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 – 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 to 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 and 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..

Thank you. [Operator Instructions] And your first question is from the line of Robert Koort of Goldman Sachs. Please go ahead..

Thank you, good morning..

Good morning, Bob..

You’d mentioned that there was some destocking across several regional supply chains in MDI, and I think, you know, 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 – you know, so there is – it's a lack of visibility in the march makes it challenging, but can you talk about what metrics you see that suggests that maybe the destocking has run its course and its just waiting for a trigger for the restock?.

Yes, I – as we have Tony Hankins with us, I’m going to let him comment on what we’re seeing in polyurethane. 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 said that they need and they’re 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, 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?.

Yes, thank you. Good morning, Bob. I’d say I’m very confident the destocking in Europe and – particularly China is done and we saw, you know, I’ll say dramatic in November and December of last year, and I think that we’ve hit rock bottom in those two regions in terms of custom inventory.

In Americans, we have much better visibility by virtue of two things. One is long-term contracts that we had with some of our very large customers and we work very closely with them to understand their forecasting patterns and demand patterns to align production at 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, you know, I think things are looking pretty good in the Americas.

There is pockets of the slowness due to weather, particularly these couple of winter storms, which had come through, which always hamper the construction. But I think that, you know, overall that we have hit the bottom and the supply demand position is very tight.

It’s not going to take much an increased demand to really, you know, I think accelerate growth again. So, I think that we are, you know, we’re well poised with the moment for the recovery should confidence improve..

Tony, Can I just have a follow-up on the 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 do you think in terms of individual competition and your own plant ramp? Thanks..

Well, I think the, you know, the focal point for that question is China, Bob, and, you know, we’ve seen an 10% price increase in China in the first part of this year. We were talking to our team this morning. I went to 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 a going to hold. We’ve started to see orders come back more quickly than we expected in China, and I think there is real discipline at the moment.

I think we’ve – you know, will stick my neck out here and say, we hit the bottom in November/ December last year that that price increase of 10% now is firmly in place, and hopefully we’ll see further progress in the next few months.

So, you know, 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, you know, the tax increase will be kicked down the road somewhat and the increase from 10% to 25% might be several months away.

And therefore, with inventories being as low as they are that – that 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, you know, providing the market growth and our expectation is that it will continue to grow twice GDP, you know.

So, we are predicting 4% to 5% growth this year globally, conditions will remain balanced, Bob..

Great. Thanks for the help..

Thank you for your question. Your next question is from the line of Kevin McCarthy of Vertical Research. Please go ahead..

Good morning, this is Matt on for Kevin.

Just looking the $169 million that you reported polyurethanes in the quarter, I’m just trying to square the performance because, you know, price was down 7% and it took an $85 million headwind assuming a 100% margins and presumably, volume in FX and that should have been positive, but EBITDA was down $125 million.

You know, I know MTBE is part of that and rows [ph] were both up and down, but can you explain the way the differential there and why decrements were probably were so weak on the quarter?.

You’re talking about comparison to a year ago?.

Yes..

Yes, and I’d tell you – look there are a number of numbers that makes that up, but let me just try to hit in kind of four broad areas.

The first as we pointed out, you know, there's the $40 million of elimination in the spike economics that we would have seen a year ago; $35 million in the tight market that we’ve see the elimination of that; and – excuse me, $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 is about $30 million and from quarter-to-quarter. And so, maybe there are some FX headwinds that are in there and some other costs that were in there as well, I think it kind of lowered.

But I think if you look at the $85 million of spike, the $35 million of tight market conditions we’ve pointed out that we feel there are – you’re going to see that, I would say that tight market condition, when you're somewhere close to 90% capacity utilization, and you'll see that kind of across the board in the businesses in large whereas the spike was to, I think to more of a one-time 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..

Yes, sorry..

Yes, this is Sean. Just to simply say what Peter just said, so, you’ve got basically an $85 million loss in the spike margin. We’ve seen, as Peter pointed out, that sort of quarterly tight market, it's gone away call $30 million to $35 million.

MTBE shifts 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 get you there..

Okay, I appreciate the operating leverage. It’s probably lower on the destock.

But, and then, if you just look across all the businesses, how much should you believe volume headwind wise the destock was, just on a company level for 4Q?.

I think, you know, I – Sean and I are looking at each other and I don't think we’ve calculated that and I’d venture, I guess and it will probably be pretty inaccurate.

I think it’s a combination – I mean as I look at some of the big variables, this last year, you know, the company we took in some $300 million of higher headwinds in raw materials that would have had part of it. Part of that was seasonality; part of it was destocking. It’s just a number we haven’t calculated at this point..

Fair enough. Thank you..

Thank you..

Thank you. Your next question is from the line of Laurence Alexander of Jefferies. Please go ahead..

Hi, there are two questions.

First, is the right way to parse your comments that Polyurethane 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 three years or the next five years like just how should we think about the overall pipeline of projects?.

Sure. Laurence speaking about the growth CapEx, let me just remind you that as 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 a $175 million to $200 million is maintenance CapEx.

And so, as we go forward, 2019 adding this splitter, you know, we’re really going to be spending a couple of hundred million dollars of growth CapEx, and I think as you look in 2020, finishing that splitter, you’re going to end up similar to that number of a couple of 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 two years, a little higher on the growth with the splitter..

I would say that as we think about margins and MDI without getting into too much granularity here, I think that you will kind of see a V-shaped, 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 than it compared to the fourth quarter, but I think the fourth quarter started out much stronger than it ended, and we are saying first quarter will finish much stronger than it started.

And so, I think again, while the two numbers may be fairly similar, I think you’re going to see one directionally down in the fourth quarter and directionally up in the first quarter..

Okay, thank you..

Thank you for your question. Your next question is from the line of Jeff Zekauskas of JPMorgan. Please go ahead..

Thanks very much. 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 of 2017 on a per ton basis?.

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

It’s the volumes that are different, okay..

Yes.

And so, again the volumes are lower in the more recent quarter, but, you know, 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 and more commoditized products and demand dictates margins and we view that the margins that we have in this end of the business, they’re certainly more stable than what we’ve seen in many of our other ends of the business..

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

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

Okay, okay. Thank you very much..

Thank you for your question. Your next question is from the line of Aleksey Yefremov of Nomura. Please go ahead..

Good morning, everyone. Thank you. 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 three different negatives on your bridge on Slide 13, absence of spike and 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.

Sorry for a long-winded question, but where does this $120 million come from primarily?.

Well, 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 will 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..

Got it. And then, just little more details on the destocking. 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?.

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..

Thank you, Peter..

Thank you. Your next question is from the line Michael Sison of KeyBanc. Please go ahead..

Hi, guys.

Just curious, you know, given component MDI pricing was down a lot in the fourth quarter, how did that impact your, you know, differentiated MDI pricing? And did it affect margins at all? I mean meaning that if they’re down, should your margins may be expanded to some degree?.

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

Okay, great. And then, when you think about getting to your 2020 goals for polyurethanes, you'll be a $150 million away or so.

Did you need any spike pricing to get there or is that all just, you know, growing through the differentiated part of the business?.

No, we don’t. And I may have somewhat clumsily tried to say that some – 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 billion plus EBITDA.

What’s my bridge that I need to get there, and how do I account for that? And I think that there is two ways, when I 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 project, the pipeline, I feel that we’re there, which leaves Polyurethane and Performance Products. If I look at polyurethanes, the leap of faith there is really in three 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, you know, $50 million or so. We think that there are reliability opportunities this last year through [third-party errors] and perhaps some improvement that we 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 year and a half.

And then most importantly, our downstream growth. As we look at Demilec, as we look at the growth that 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 three components, you know, you’re kind of coming up with a $180 million of opportunity, and I think I said in my number, it’s around $175 million or so.

But those are kind of – you know, we’re not assuming from that any spikes; we’re not assuming any outages in the industry; we’re not assuming, you know, 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 say that that’s easy, but I think it’s doable, and our team has a lot of confidence behind that..

Great, thank you..

Thank you..

Thank you very much. Your next question is from the line of Matthew Blair of Tudor, Pickering, Holt. Please go ahead..

Hi, good morning everyone. The slides noted 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?.

Yes, and 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 two. 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 two 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'll be some opportunity there to gradually improve that..

Great, great. And then in Performance Products, you know, maleic prices, they fell a little bit in the quarter, but they’re still about – yes, about 10% year-over-year.

Any thoughts on why maleic is holding up relatively strong given the fall in crude prices?.

Well, I think that we've seen that market – end market 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 and a lot of the – 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..

Thanks..

Thank you. Your next question is from the line of Jim Sheehan of SunTrust. Please go ahead..

Good morning. Thanks for taking my question. So, with your outlook for Polyurethanes, you've got continued weakness in the first quarter. And it looks like you're expecting pretty good bounce back in the second half of the year, 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?.

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 remain where it's been. The U.S. market feels those pretty solid for us..

Great. And then also, when I look at your valuation versus peers, it looks 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 more of a consistent buyback pattern through the year?.

Well, I think it's going to be – I know that sounds like something of a frustrating answer, 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 windows close for trading, we 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 times 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 in the fourth quarter, we saw some of the low stock price that's absolutely no brainer in buying back stock.

Yes, so I – 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 it's a long-winded answer, but it's – we needed to take all those variables into account, rather than just saying it at absolute number and an absolute amount of cash..

Thanks, Peter..

Thank you. Your next question is from the line of Frank Mitsch of Fermium Research. Please go ahead..

Hi. Good morning gentlemen. 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 you 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? Roughly where is that facility running today? And I know that you guys said that you wanted to get 100% by the end of the year.

Can you give us some metrics as to how we should think about how that facility is ramping and for the balance of the year?.

Frank, good morning. This is Tony Hankins. We're running that facility today round about 75%, and during the last three months of last year, what we did was really do technology proving runs to prove its capability. And that plan lined out just great, I mean we are capable of running that plant now with full upgrading rates when we need to.

But as things stand at the moment, that was 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 still 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 though the course of the year..

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

That's very helpful. And I'd be remiss if I didn't ask the obligatory question on Venator, obviously suggested that you guys are going to be prudent, what does that suggest about patience, and you talked about possibly selling it off to a single party.

Where do we stand on that? What are your thoughts on it as to when you may be able to monetize that investment?.

I think that the Venator stocks is tremendously undervalued today. And I think that we're just going to continue to look at our options, and now that we deconsolidated it, I don't want to say that we're not in any hurry. But at the same time, I think that there is 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..

Thank you very much..

Thank you for your question. Your next question is from the line of Hassan Ahmed of Alembic Global. Please go ahead..

Good morning, Peter..

Good morning..

Peter, I'm just trying to get a handle on the Performance Products side of the business. Obviously, 2017 was a bit of a quirky year. The Port Neches 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 is at around 15.5%.

Just try – and obviously 2018 was also a fairly volatile year in terms of raw material prices.

So, as we look at 2019, just trying to get a sense of how we should be thinking about, be it run rate, EBITDA, EBITDA margin or the like in the business?.

Well, again, honestly, 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 sold on tolling basis. So, we're not going to be whipsawed greatly hereby by glycol margins.

But as I look at that, I think that the two 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 that it's just too early in the year to say what sort of improvement that we'll see in that business. But I did mention earlier, that we see – that there is 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 in the 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 kind of that $60 million improvement that we see now and through 2020, I think it's probably safe to kind of apply that across the board as we see that..

Understood. Now changing gears, a bit, on the China side of things, in Q4 2017, 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?.

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 – excuse me, a lower number of companies that we see that are impacted through environmental enforcement 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 did you say anything on MDI side?.

No, nothing in MDI, because all 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 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 there is often an event of a cycles 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..

Perfect..

Operator, why don't we take one more question, I know we've gotten over an hour and why don't we take one more question here and there are other people in-line, but we'll certainly remain available if anybody wants to call in follow-up calls and so forth throughout the day..

Okay. Thank you. Your final question is from P.J. Juvekar of Citi. Please go ahead..

Yes. Good morning and thank you for taking my question. Peter a quick question on ad mat. 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?.

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 $2 million. But we buy BLR in China and in U.S. as well. And so there might be a little bit of a headwind, but I don't see a whole lot of strength in BLR..

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 …?.

yes. So, the way we think about that is, we held down 19% this year. We said that we 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 2019, think of about 14% of EBITDA is kind of where we throw cash taxes..

Okay. Thank you..

P.J., thank you very much..

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

Great. Thank you for joining us on 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..

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