Greetings and welcome to Huntsman Corporation Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [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. Thank you, sir. You may begin..

Thank you. Good morning, everyone. I'm Ivan Marcuse, Huntsman Corporation's Vice President of Investor Relations. Welcome to Huntsman's second 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 second 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 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 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 huntsman.com.

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

Thank you, Ivan. Good morning, everyone. And thank you for taking time to joining us this morning. Let's turn to Slide 3 & 4. Adjusted EBITDA for our Polyurethanes division second quarter was $201 million versus $269 million a year-ago.

Our MDI urethanes business, which includes our MDI, polyols, propylene oxide and formulated systems businesses, recorded adjusted EBITDA of $186 million. This compares with $246 million a year-ago and $149 million for the previous quarter.

As a reminder and as we called out in the past, the second quarter 2018, we were still experiencing exceptionally high margins in the component end of our MDI portfolio. These spike margins including above-normal operating rate conditions in the prior year period accounted for approximately $60 million of the year-over-year variance.

MDI volumes in the quarter were up 11% as the business continued to benefit from the expansion of our China facility that began come online in the third quarter of 2018.

Even with the backdrop of a tough operating environment, many of our key markets, our global volumes would have been about flat with a prior year, when excluding the new capacity in China. Our downstream strategies performing well and our margins remain relatively stable in the differentiated end of our portfolio.

The stability is a result of our continued drive downstream, innovation, bolt-on acquisitions, expanded operations and regional diversification. In the second quarter, our total differentiated systems volumes increased 7% compared to last year and our global component MDI grew 18% year-over-year.

This growth was primarily due to our new capacity added at our China facility and favorable comparisons in Europe. The second quarter was a tale of two halves for our MDI urethanes business. We began the quarter with guarded optimism as order patterns improved significantly in March and continued into April as well as a good part of May.

Also in China we were seeing high prices in the component end of the business. Customer confidence was improving and there was an increased willingness by our customers to build inventories. However, his trade talks with the U.S.

and China began to breakdown a high degree of uncertainty and a lack of visibility once again entered the market in order patterns slowed significantly in late May and into June. Component MDI prices particularly in China also fell back to the levels we experienced in the beginning of the year.

In addition to the volatility associated with the US-China trade talks, our European region remains weak. We are seeing limited growth in our America's region.

Putting this all together, the second half of 2019 for our Polyurethanes division is starting off weaker than we would have expected at this time of our last earnings call and visibility remains challenging. Looking at polyurethanes regionally for the second quarter, our Americas volumes were flat with the prior year.

The integration of our Demilec acquisition that was completed last April remain on track, and we are now in the process of taking this technology into international markets to accelerate the growth of this business over the coming years. We had a positive EBITDA contribution in the quarter from Demilec’s new international efforts.

Markets wherein, we experienced modest volume growth in the Americas include insulation, automotive, and the composite wood board market. These were offset by volume declines in our furniture, adhesives, and coating markets. While competitive, the margins in this region remain relatively stable.

Our investment in a new splitter at our Geismar facility is core to our strategy to expand margins and broaden our product range to accelerate growth in our downstream businesses in the Americas. We are still targeting 2021 for this investment to be operational. Turning to the Asian region of polyurethanes.

Our China expansion fueled our growth in the region. However, it should be noted that our differentiated volumes were up even when excluding the impact of the recent expansion. This region continues to benefit from insulation growth into large scale infrastructure projects and applications.

The adhesives, coatings and elastomers and footwear markets in Asia are also contributors to our growth as we continue to gradually shift our China portfolio and the newly added capacity to be more differentiated.

Our automotive business in China declined roughly 8% with the prior year despite a mid-teen decline in the overall market as we continued to benefit from product substitution and gain new customers. We believe that customer inventories are at very low levels in this region.

Overall demand in China is soft, which we believe is likely to remain unchanged until customer confidence and visibility improve. While component prices are now back to about where they were at the start of the year, there does seem to be some stability at current levels.

In Europe, our downstream margins are stable despite lower underlying demand versus the prior year. Our volumes in the region were up, but that was primarily a result of favorable comparisons due to an extended outage that impacted our results in the same period a year ago. The overall macroeconomic environment remains soft.

We do not expect it to improve in the near-term. Additionally, at the end of the second quarter as we were bringing our Rotterdam facility back online from a planned maintenance program, our outage was extended due to issues from a third party supplier.

That outage is now behind us that it will impact EBITDA in the third quarter by roughly $20 million and negligible impact on the second quarter. The margins in our core base differentiated business continue to remain stable.

The graph lines in the upper left hand quadrant reflect the margins experienced globally in our component and differentiated urethane portfolios. A majority of our business is differentiated and was not materially impacted by the volatility of component MDI prices.

As shown here, our downstream margins remain resilient in spite of continued volatile MDI component market conditions. Our EBITDA in the Americas continue to be less volatile than other regions globally.

On the other hand, Europe and Asia primarily China are down sharply reflecting the challenging macroeconomic environment and its impact on component margins.

The good news is that we believe customer inventories in Asia are at very low levels and with any potential clarity and visibility on the horizon, it could lead to a sharp improvement in results similar to what we saw in April and the first part of May.

For Europe, the region remains soft, however it is not getting materially worse and we continue to make strides in markets such as insulation and elastomers. I'm pleased to see how our urethanes portfolios performing in these challenging macroeconomic conditions.

Our longstanding strategy to drive this business more downstream through internal investment and bolt-on acquisitions is paying off and remains unchanged.

We continue to move forward with our high return projects such as our Geismar splitter investment and building new system houses in certain regions as well as aggressively looking for bolt-on acquisitions that will enhance our portfolio. We expect the third quarter of our MDI urethanes business will be comparable to the second quarter.

Our MTBE business reported an EBITDA of $15 million in the second quarter and we expect a similar result in the third quarter. Let's turn to Slide number 4. Performance Product segments reported EBITDA of $71 million.

Total volumes were slightly up versus the prior year, largely because of favorable comparisons due to a planned turnaround that impacted last year's second quarter. This business is seeing similar market pressures that our other divisions are experiencing around the world.

Additionally, a more competitive environment in glycols and certain amine markets, specifically ethyleneamines has put pressure on margins in that segment. Despite the short-term challenges, we are focused on extending on executing our strategies to push forward in our derivatives downstream into more differentiated businesses and applications.

We did continue to see growth in our downstream targeted markets such as gas treating, oilfield services and urethane additives. Our maleic anhydride business remains relatively stable in North America and Europe.

We announced this last Friday that we agreed to purchase a 50% of our maleic anhydride joint venture in Germany that we did not own from Sasol. This is in line with our strategy to invest in businesses with stable earnings and attractive margins.

We expect this acquisition to be immediately accreted to our earnings and free cash flow after we close, which is expected to happen in the fourth quarter of this year. The multiple paid for this business is less than five times EBITDA.

For the third quarter, we expect lower fixed costs and continued growth in certain differentiated markets to result in modestly better quarter-on-quarter earnings. Let's turn to Slide number 6.

Our Advanced Materials business reported adjusted EBITDA of $55 million, a decrease compared to last year's record EBITDA of $62 million, but improved versus a previous quarter of $53 million.

Higher sales in our aerospace markets were offset by lower sales and other markets such as power, automotive and construction driven by weak macroeconomic fundamentals in Asia and Europe.

EBITDA in the quarter was impacted by lower volumes, unfavorable currency translations in higher fixed costs due to recent investments to support future growth in our R&D and manufacturing capabilities. We will continue to invest in this business, so that it may capture both short-term and long-term opportunities.

We considered Advanced Materials a core platform for both organic and inorganic growth. Like our other businesses, customer order patterns in Asia remained very cautious, demand and nearly all of our European markets except for aerospace is also tepid.

Full-year growth in this economic environment will be difficult to achieve, although we do expect results in the second half to be marginally better than last year.

I want to emphasize that Advanced Materials remains one of our most resilient businesses, despite the challenging economic environment in Europe and Asia, more than $15 million invested to-date in future growth in foreign currency headwinds. Full-year EBITDA in this business should be close to 2018. Let's move to Slide number 7.

Our Textile Effects division reported EBITDA of $28 million, slightly down versus last year's record second quarter. This decline was driven by lower volumes due in part to uncertainty surrounding trade across many of our Asian markets causing softer customer demand and supply chain disruption.

Adding to the volume pressure, we saw raw material shortages for some of our products due to increase environmental regulation in China impacting certain suppliers.

Total volumes were down 11%, but net sales were down only 5% because of the improved mixed of higher specialty sales and pricing alignment that have helped to offset the higher raw material costs and currency headwinds. We believe that the total industry is down mid-teens.

However, it is important to note that while our non-specialty volumes were down in line with the overall market, our specialty volumes were up 3% in the quarter, as customers continue to move towards more sustainable and environmentally friendly solutions that we offer and can supply on a global basis.

We believe the long-term fundamentals for the business are unchanged and remain positive looking out over the next several years. Though in the near-term, we expect the current headwinds in the industry to continue. We will likely keep next quarters EBITDA modestly below the prior year.

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

Thank you, Peter. Turning now to Slide 8. Second quarter adjusted EBITDA declined year-over-year by $97 million. Our Polyurethanes division accounts for approximately 70% or $68 million of this decline.

Within the Polyurethanes adjusted EBITDA variance approximately $60 million of the decline is due to the loss of spike and tight margins within polymeric MDI and $8 million from MTBE largely due to lower MTBE margins from our PO/MTBE China joint venture.

Our Performance Products segment was down year-over-year, largely due to lower upstream intermediates profitability and lower profitability in certain amines. We were also negatively impacted by approximately $17 million year-over-year due to foreign exchange translation as the euro and yen were weaker against the U.S. dollar by about 7%.

Turning to Slide 9. During the quarter, we improved on our working capital by bringing inventory levels back in line with prior year metrics. Despite a 23% decline in our EBITDA year-over-year, we improved our free cash flow by approximately 38% versus the prior year second quarter.

Our improved free cash flow also benefited from reduced maintenance spend as we had a significant plan, multi-year maintenance turnaround at our Port Neches facility in the first half of 2018.

As we look into the second half of 2019, we will remain focused on a working capital management and we remain confident in our ability to deliver a free cash flow conversion of EBITDA of near 40%. For the full-year 2019 we now expect to spend between $350 million to $360 million in capital expenditures.

In the current economic environment we will be diligent in evaluating our discretionary spend. Turning to taxes. In the second quarter our adjusted effective tax rate was 25%. For the full-year 2019 and looking forward we now expect our adjusted effective tax rate to be between 22% and 24%.

This is a bit higher than our previous projected rate due primarily to a change in the regional distribution of our earnings. Our cash tax rate remains approximately 300 to 500 basis points below our adjusted effective tax rate. We ended the quarter was about $1.5 billion of combined cash and unused borrowing capacity and a net debt leverage of 1.7x.

As we announced last Friday, we acquired the remaining 50% interest in maleic anhydride joint venture in Germany from Sasol Chemical Holdings. We already consolidate this joint venture within our consolidated earnings.

However, upon closing of this acquisition, which is expected within the fourth quarter of this year, we will receive the benefit of 100% of its cash flow going forward and no longer reflect the minority income deduction from our earnings.

Within our financial statements for 2018 the minority income attributed to the joint venture partner was approximately $11 million. This business generates a strong free cash flow, which in 2018 is estimated to be around 80% of EBITDA. The agreed purchase price is $92.5 million adjusted for our share of cash net of debt.

Using 2018 EBITDA, we estimate a multiple paid of less than 5x for our partner share of EBITDA. During the first quarter, we repurchased roughly 4 million shares for approximately $81 million. At the end of March, we have approximately $608 million remaining under our $1 billion board-authorized amount for the multi-year share repurchase program.

We expect to continue to repurchase shares in a balanced and opportunistic manner. We continue to hold our 49% interest in Venator, which represents approximately 52 million shares. In conclusion, we are confident we will deliver on our annual free cash flow conversion target of near 40%.

We remain focused on a balanced approach to capital allocation and growing our downstream differentiated businesses and we remain committed to our investment-grade balance sheet. Peter, back to you..

Thanks, Sean. At the beginning of the year, we gave a total year forecast based on our best assumptions that we saw at the time. As we look at the second half of this year, we see a number of variables that will affect our second half earnings performance.

We are always seemingly a single tweet away from economic or political change in market conditions. I think it is worth sharing with you our latest views.

Should we see a more positive market environment over the next six months? We believe that our adjusted EBITDA results will be down around 15% or better from last year, hence that we could see impacting our results positively would include a beneficial outcome on a handful of trade deals, lower energy prices, improved Chinese GDP, a stabilization of the auto and construction industry and falling interest rates.

However, at the present time, we are seeing more negatives than positives as trade disputes fab consumer and customer confidence. The Chinese and European economies continued to slow. Energy prices remain volatile and housing and automobile markets continued to be lethargic.

Should these trends continue? We see our adjusted EBITDA down about 20% plus or minus that from last year. In spite of where we are in the economic cycle, aggressive steps are being taken to create further shareholder value. These steps are in our control.

These steps include one; we remain committed to an investment-grade balance sheet and generating a targeted ratio of 40% free cash flow to EBITDA. During this past quarter, we generated $240 million of free cash flow. Number two, this past quarter we purchased $81 million of our own stock and we'll continue to do so on an opportunistic basis.

Number three, we continue to invest in our organic growth, so we have a number of investments in both manufacturing and research including our Geismar, Louisiana MDI splitter expansion that will allow us to upgrade 70 tons of commodity MDI to more profitable and specialty grades of MDI.

I repeat that I am particularly pleased to see how our strategic downstream focus on polyurethanes is resulted in a much more resilient in high quality urethanes business. Number four, we continue to take advantage of our strong balance sheet to acquire assets that further enhance value.

We announced this past Friday the acquisition of 50% of our German Maleic anhydride joint venture from our partner Sasol. Over the past few years this business has earned over 20% EBITDA margins and 75% free cash flow to EBITDA ratio. We are acquiring this valuable asset at less than 5x EBITDA.

In spite of some of the economic headwinds that we see around the world, we feel that we are building a stronger and more valuable business that will continue to create shareholder value. With that, operator, you please open the lines for any questions and comments..

Absolutely. Ladies and gentlemen, at this time we will be conducting the question-and-answer session. Our first question comes from the line of Bob Koort with Goldman Sachs. Please proceed with your question..

Good morning. This is John Campbell on for Bob.

Can you guys go through the cadence of earnings into the second half of the year breaking out between third quarter and fourth quarter? It seems like you talk about inventory return in normal levels in terms of your own inventory and then talking about pretty low inventory levels in Asia for your customers.

You just kind of talk about how that maybe could impact the cadence of earnings into the third and fourth quarter?.

Well, I’ll let Sean comment on the numerical side of that. On the business trends side that we see, I think that we're seeing a lower demand on products right now than what GDP numbers are performing. Per se in times when people are deinventorying is they are right now times of uncertainty.

They're carrying less inventory because of the uncertainty going into the future. I think that in many regards, we're seeing a very similar scenario that we saw at the beginning of the year where inventories came down faster than normal. And subsequently any good news has a tendency to turn that sort of sentiment around.

I would say that in my personal opinion, that is certainly more the case in Asia than the rest of the world. And if there's a bounce back, I think that you'll see that in Asia versus Europe where I think Europe is probably suffering more from true GDP sort of 0% growth, perhaps even negative in many parts of the EU.

I'm less optimistic about a turnaround in pricing and demand, whereas in Asia, I certainly would be more optimistic about a positive results coming from trade negotiations in any number of things. Stimulus spending that's taking place in China, the economic vitality of the Southeast Asia markets and so forth.

If we start to see a restocking of that inventory, we most likely will see prices and margins improve with that.

Sean, anything you want to add from a numerical point of view?.

Peter, you've covered it well. I would just say you've pointed out well that we received a significant benefit in quarter two for the inventory reductions. There was an impact offsetting that on the P&L.

And as you look at the second quarter, you had a big impact on Performance Products, largely about $15 million of impact on fixed cost movement in stocks because of that. As we look forward, I would expect that not to reoccur. So I think from a cadence perspective relating to inventory, I think we've taken that impact in the second quarter..

Got it. That's helpful. Thanks.

And I guess on last quarter you guys talked about global effective average for MDI came in the mid-80s, you kind of provide an update of where you see operating rate today and kind of how you expect that to trend in the second half of the year?.

Yes, I would say the second half we'll continue to see where we are today. Europe is operating in my guesstimate; Europe is probably operating around 90% capacity utilization. The U.S. at 100%. I’d say that because U.S.

is importing in product right now, so it's capable of consuming all the MDI produced in North America and further supplementing that with imports coming in from Asia. And Asia is probably operating somewhere in the mid-70 percentile.

Always tough to get the visibility of what's happening in Asia because you have some very large facilities, single line facilities over there. And if any one of those lines coming in or out of the market or down for maintenance and so forth, can take anywhere from 1% to 5% of the Asian market down on a single line.

So I'd say globally we're probably somewhere in the mid to high 80% capacity utilization. And again, I would see that probably, as I look across, particularly Asia, I'm not seeing demand and I'm not seeing prices deteriorate further. Have they hit a bottom? I'd like to think so.

I think polymer prices, the more commodity grades or if anything ticking up slightly in those areas, but I think that it's going to take something more than just GDP growth to get prices up. I think you can see some resolution to some of the trade negotiations..

Very helpful. Thank you..

Thank you. Our next question comes from the line of Kevin McCarthy with Vertical Research Partners. Please proceed with your question..

Yes. Good morning. Peter question for you on capital deployment. You bought back shares in the quarter and it sounds like you got a pretty good deal on the JV buyout with Sasol.

Can you comment on your expected balance of future repurchases against the $608 million you still have authorized relative to what you're seeing in the M&A pipeline today?.

Yes. I think particularly at these prices that we're going to continue to be buying as we move forward. But I would say Kevin, that as I hope I've been consistent in the past saying that we are going to continue to look at a global economic dynamics and so forth.

And if we have a low stock price and that is brought about because of massive global uncertainty unrests. I think it’s tempting that I would be to go out and I'd be very aggressive in share buybacks.

First and foremost is going to be the strength and the vitality of our balance sheet and making sure that we've got plenty of dry powder first and foremost for our organic growth and our internal operations.

And then we'll be looking at share buybacks and we'll continue to be doing that on a go forward basis and assessing that almost on a daily basis..

Okay. Thank you for that. And the second question, if I may on, is the capital budget and an opportunity for any incremental cost cuts. It looks like you did ratchet down the CapEx for 2019.

Can you talk a little bit about, kind of where you are versus maintenance levels at this point and what the possible trajectory could be into 2020? And I guess related to that, if the world does remain quite uncertain and demand continues to languish.

Are there additional costs that you might be able to take out of the equation?.

Well, if you think about what I would consider to be our core CapEx maintenance costs, it's about $175 million a year. And anything much beyond that $175 million to $200 million kind of range is discretionary. Now, you don't stop that spending on a dime if you're halfway into a project and you want to try to save cash.

You've already pre-ordered a lot of materials. You're under contract and so forth. That discretionary spending wallet doesn't stop on a dime. It certainly can be slowed. If you were to make an announcement today for instance, you certainly can pullback tens of millions of dollars in the fourth quarter.

It's not always the right thing to do, because you'll get cancellation fees and so forth.

But yes, I would just say that if you really were very bearish about 2020, and you saw an economic calamity taking place, which I don't say, but if you were to see that you would be looking at a budget that you probably could – you could probably cut $50 million to $75 million, maybe upwards of $100 million of that for next year..

And on the costs side, Peter?.

You mean on the personnel side?.

Well, it could be any sort of restructuring initiatives that you might have in terms of optionality?.

I think that again – I think in a business like this, we're always trying to offset the rise of inflation that comes into the business. If that's not being clearly offset by growth, and then we expect the businesses to be able to control their costs, is we don't automatically see our margins expand on an inflation adjusted basis.

So I think that you've always got an opportunity to tweak your cost basis by a couple of percentage points. But as I look through the company today, Kevin, I struggle to see, there's 250 individuals that we have that don't have anything to do and we're just going to go – cut those individuals.

But yes, if you get into a major recession, if you get into an economic calamity, as I said earlier, where you're looking back at 2008 sort of economics. We'll certainly assess the needs then and assess the business ability to pay for those expenses and the customer's ability to pay for those services..

Great. Thanks so much for the color..

Thank you..

Thank you. The next question is from Aleksey Yefremov with Nomura. Please proceed with your question..

Thank you. Good morning, everyone. Peter, I believe you said – you expect MDI Polyurethanes EBITDA to be flat sequentially.

Does this include the negative $20 million from Rotterdam outage? And if so, does this mean that underlying business is actually improving sequentially?.

Yes, it does. It does mean that. And so, yes, we'd see that sequential and that's what the adjustment..

And if I have a follow-up on those, what is a source of improvement in Polyurethanes?.

Typically I think, we've saw a pretty sluggish de-inventorying of product during the second quarter. I don't think that you're going to continue to see that that de-inventorying and I'm sure that's a word or not.

But de-inventorying of product take place in the third quarter of the way did in the second quarter, typically to June, July and August, outside of Europe, typically a pretty strong month. And so typically a third quarter is a strong month for us.

We'll also say further expansions in our last summer's business; we continue to be very bullish on that and our Demilec business as we grow that internationally. I just remind you a little over a year-ago, we bought that business. We had virtually no international sales on that and we're now gradually expanding that into Europe and into Asia.

And that's going to continue to grow. And I would just say that as we look at automotive, there's some very bearish sentiments. I know coming out of Asia and so forth, but as we look at the replacement of competing materials, new applications and so forth. We continue to be quite bullish on that..

Thank you..

Thank you. Our next question is from Jeff Zekauskas with JPMorgan. Please proceed with your question..

Thanks very much. I have a question on Slide 4. Is the meaning of the graph that you have that your component MDI margins dropped in half year-over-year roughly? You stress the stability of the differentiated margins as the meaning of this that your component margins drop then half..

Jeff, this is Sean. That's a good approximation. As you look at the percentage of our portfolio, which we know is not a lion share, the lion shares downstream differentiated, but the upstream more component end did see that as you probably seen announced in some of the public views of competitors..

Okay.

And then I was looking in the lower right hand quadrant of that slide and it's the meeting of the volume piece that differentiated volumes year-over-year fell sharply and component volumes rose sharply? Is that the meaning of that or that's not the meaning of this lower core trend?.

No, the lower right hand quadrant, what it's a literal statement there that year-over-year you're seeing growth rates. So as you look at the differentiated volume growth, the downstream growth you're actually literally seeing a 7% growth versus last year. And you're seeing on the gray bar you're seeing a growth in the more commoditized upstream part.

And that's largely driven by the expanding capacity that's come on in China..

Jeff, just remind as we bring on China, we're first selling that product into the component market and where the demand is largest in that particular market and that we are going to continue to take that product and move it into the downstream differentiated growth within China and within Southeast Asia.

So you'll continue to see that shift of expansion taking place across the board because it's a new facility. But I would hope that over time we will continue to see that component volume in China moving further and further and to differentiate it.

And as we look at where we've been investing in our systems houses and expanding that in Taiwan and so forth, we will continue to see that we have the infrastructure and we're building out the platform to be able to accomplish that..

So why does the blue bar fall a lot and the gray bar raise a lot? What's the meaning of that in the second quarter of 2018 versus the second quarter of 2019?.

Well, yes, again I would think that a lot of that has to do with the growth that we're seeing in the component end of the market versus the differentiated side of the market.

And so has been part of that also remember that during a chunk of that time for period, we were also able to see the Rotterdam expansion that took place in the latter part of 2017 and 2018. And also Demilec and so you'll see an unusual, I mean, I wouldn't expect to see differentiated growth around 16%, 17% on a quarterly basis.

And so with the expansion we saw in Rotterdam coming on at the end of 2017 with the Demilec acquisition so forth, we did see differentiated growth quite aggressive during that time period.

And that's going to fluctuate a little bit as we – it'll be overshadowed by the growth that we see in component with – the startup that you see from this chart starting in the third quarter of 2018 – fourth quarter of 2018 and going into early 2019 as well China..

Okay, great. Thanks so much..

Thank you. The next question is from Jim Sheehan with SunTrust. Please proceed with your question..

Thanks. Good performance on free cash flow this quarter and you're still targeting that 40% conversion rate.

Can you just talk about what your outlook is for network and capital in the second half, and also maybe what pension and some of the other items might look like?.

Sure, Jim. This is Sean. You'll always see in our business in the fourth quarter a benefit on working capital just from seasonality. So as you look to the rest of the year, you're still going to see additional benefit coming from working capital in addition to just ongoing efforts to continue to improve on inventory and receivables.

As it relates to pension, I think we've mentioned before that on an annual basis, our cash spent on pension is about a $100 million. And so I wouldn't expect that really to be anything different than you've seen in prior years. I think the rest of the components of the cash flow Jim, shouldn't be all that surprising.

Cash interest should be what we've always indicated it would be. From a cash tax perspective, as we look for the full-year, I would expect that number to be somewhere around $150 million for a full-year on cash taxes. And that fits in with the percentages we've stated.

So I think from a perspective of maintenance and so forth, in that category, I don't expect a lot of gyration coming into the second half of the year. We do have a little bit of spending ahead of a PO/MTBE turnaround that we have scheduled for 2020. That will happen as we finish up this year.

But I wouldn't expect a lot of surprise on that maintenance line between now and the end of the year either..

Thank you. And in terms of MDI spot prices in Asia, it looks like some consultants are calling for prices to move higher in the fourth quarter. But one of your competitors expressed some skepticism of that.

What is your view on the potential for higher pricing into the fourth quarter?.

Well, again, all manufacturers will have different end use applications, combination of the customers and so forth. And so I'm not surprised that there wouldn't be some variations and differences of what people are seeing with different customer bases and so forth.

I think as I said in my comments, we’re convinced that we've seen the bottom of prices in third quarter and fourth quarter, and if anything, prices are starting to edge up and I would think that we would see a gradual improvement in the fourth quarter on component pricing..

Thank you..

Thank you. Our next question is coming from the line of Frank Mitsch with Fermium Research. Please proceed with your question..

Hey. Good morning, folks.

Peter, I really appreciated the commentary when you’re discussing polyurethanes on how the second quarter started out and then faded kind of in the mid-May timeframe, and I was wondering how you might apply that pace of business commentary to the company overall, and more importantly, here we are at the end of July, how was July overall in terms of pace of business?.

Well, Frank, good to hear from you. I have not seen any numbers from July just some sales data and so forth. But as we look at it, it feels pretty flat. I think to be honest with you, I think June was a pretty tough month from volumes and overall sentiment in July was likewise at the beginning.

And I think we've feel like we have bottomed out, if you will, particularly in Asia in demand. And the question is just how quickly does that turnaround? Again, when I talked in my prepared remarks about negative sentiment through the second half, I'm assuming that there are no trade deals that are going to materially change the business.

I'm assuming that there's no GDP growth that turnaround China. I would just say that China and Asia in particular, or I should say Asia in particular and China are I think very susceptible to the trade sentiment and so forth. It's taking place.

And I think that as you see a resolution and some visibility, you'll see consumer and customer confidence return. Right now we look at the number of distributors and freight forwarders and third party handlers particularly in China. Inventory at those levels is very low at this point. I don't see that getting worse.

And if anything, there might be a bit of a shock in the industry.

Should there be any sort of positive sentiment that would cause them to start buying and replenishing that?.

All right that that certainly is helpful. And if I could ask the question on the Sasol JV acquisition, my first reaction is you're buying maleic anhydride under five times. EBITDA seems like an attractive a transaction.

I'm curious as to how the performance of that business has been in terms of stability of EBITDA growth, declines, et cetera? Can you kind of paint us a picture of how that business has been trending over the past couple of years and expectations for 2020?.

Well, I think that as we look at the revenues over the last four years here, they've gone from about a $100 million up to about $150 million over the last couple of years. And EBITDA, I think 2014, 2015, 2016, we kind of saw a lot of new capacity coming on during that time period.

And EBITDA margins back in 2016 were just right around a 20%, 21% and more recently they've been in the mid, upper 20 percentile. So it is a joint venture. Joint ventures, I'd say just say on, I'm not trying to defend Sasol or Huntsman's purchase price on either side.

Joint ventures are always a tough thing to sell, especially when there's a writer first refusal on that one party has over the other. And if it were a Huntsman selling, I'm not sure that that we would have been able to get much of a different price in what we experienced.

So from a joint venture point of view, again, we already booked the EBITDA, but we'll be able to book consolidate the cash side of that business.

And more importantly, we'll be able to absorb some of the synergies or create some of the synergies, couple million, low millions of dollars, and have the control of the marketing and the sales within the European market. So business is an industry that we feel very comfortable with. We like the technology. We like the catalyst.

We make high margins on those products and that technology. And it's been a great relationship with Sasol over the years and – but it's – I think it's a great move. It'd be a good move for this company..

And I think the people at Sasol will appreciate your answer to the question. Thanks so much Peter..

Thank you..

Thank you. Our next question is from Matthew Blair with Tudor, Pickering, Holt. Please proceed with your question..

Hey, Peter. I think in the past, you talked about normalized global MDI demand growth in kind of like the 5% to 6% range.

Do you have a number and what does that look like today? And then perhaps simplistically, could you just force rank the end markets, from best to worst, like insulation, furniture, autos, if you just had to force rank it, what would it look like from best to worst?.

Well, first of all, as we look at MDI, I think a long-term number to use on MDI, is realistically somewhere between 6% to 8%, right around 7% or so. At any given time, if we're going to see the inventory taking place or restocking taking place, you'll see short-term volatility, if you look at it on a month-to-month or even quarter-to-quarter basis.

I would say today that MDI growth as you take a snapshot right now is probably in the two to three percentage range of growth. But I think again, as you look at an overall basis on averages, it's a product that has grown not just last couple of years, but the last decade or so.

It right around a 7% growth, as I look and I'm speaking about Huntsman here, I'm not speaking about the industry because I look at areas where we've seen the greatest amount of growth for Huntsman on a global basis.

I'd have to probably point out insulation, yes, as a composite wood material ACE, which is our adhesives coatings in the last summer footwear. We continue to see growth in those areas. Furniture for us continues to be quite lethargic.

And for us that we're I'm not saying they're not dedicated to that end use, but it's – there's not a lot of high-tech growth that's involved in that. And I'm not sure that you're going to see a Huntsman really ever growing at 10% or something in furniture.

I would say this, we look at automotive or globally is we compare automotive in the second quarter to last year. It's flat.

I would say that if you look at the massive step down in demand that we've seen, particularly in China, I think that we've performed remarkably well, in the growth that we've seen in automotive and that that too is going to continue to be an area that we are quite bullish on..

Sounds good. And then with the China component MDI volumes ramping up. What is your current systems MDI share? I think in the past that's been roughly 72% to 75%.

And I guess where do you see that share, that system share in say like three-years to five-years from now?.

I think it'll probably remain fairly close to where we are right now, it overall within the company. And that's not to say, I think there might be a little bit of a perception that that component MDI is bad and the system MDI is good.

And I would remind you that a lot of our component business it’s very high margin business, it’s very stable business, and it's business that we're going to be in for many years to come. So I think that when we look at those macro percentages, that kind of that 75 to 30, 25 sort of split between the two, that's not to say that we're standing still.

It's to say that within that differentiation, within that separation of chemistry that we're always upgrading; our formulations business and we're always upgrading our component business. And we're going to have different marketing and sales approaches in each of those areas.

But I would hope that, year-on-year that we're always going to see the quality of the customer, the margins that we're able to achieve focusing on smaller – perhaps smaller applications and higher margin applications.

As we look at the overall split for the next couple of years, we're going to continue to see, have a 60, 40 split in Asia between component and formulation. And overall we'll be moving China to be that same sort of balance that we see in the rest of the company of around a 75, 25 split..

Great. Thank you..

Thank you..

Thank you. Our next question comes from the line of Laurence Alexander with Jefferies. Please proceed with your question..

Could you a flesh out a little bit the volatility in a means? How unusual is it and how much was it?.

Well, Laurence, always good to hear from you. As we look at our amines that's probably one area of the business that I've – well it's kind like your kids. You never disappointed any one of them. But you love them all equally.

I think that the amines business is probably have been a little bit surprised to see how much over capacity has come into the amines market in the last quarter. So but it has shown in the past that there's the amines family of chemistry that we have there is very resilient. I think longer-term it's going to continue to be a strong performer for us.

But short-term we're down with our ethyleneamines and now we're seeing some of the new facilities that have started up around the world that have come into the market, I think a little more aggressively with more tonnage than maybe we expected. But that's competition. But I don't see that being a long-term trend.

That's something that we'll bounce back from and like I said amines by and large over time. It's been a great contributor to this company..

And then I guess I'm getting at is how much of the EBITDA hit in the quarter was the amines business?.

It's about $15 million..

Okay..

They hit on that and so it's, yes, right around that area..

And what sort of assumptions as you're thinking about the full-year outlook? What kind of assumptions are you using for extended shutdowns, in either the summer or in either August or in December?.

Well, I don't see us having any large shut downs that we have planned for the fourth quarter of this year. So I'd say that we have to be able to see pretty consistent earnings during that time as it pertains to impacts of shutdown.

Our biggest problem to be honest with you this year in 2019, there's not been the shutdown as much as it's been third-party suppliers due to our facilities such as in Rotterdam and so forth. Where we've seen rather unreliability or rather unreliable of supplies coming in for raw materials..

Yes. And I guess I have to ask the wrong question.

In terms of your sense of vulnerability this year?.

Sense of vulnerability on….

We have more disruptions along the Rhine this time round?.

Hi. I think – I'm not expecting anything that would materially impact the business..

Okay. Thank you. .

Thank you. Our next question comes from the line of Josh Spector with UBS. Please proceed with your question..

Yes. Hey, guys, so just a question on Polyurethanes volumes. So if you had differentiated up 7%, MDI up around 18%, the segment as a whole is around 7% with that Rotterdam included.

What was down year-over-year to bring the segment to 7% overall?.

You mean from a finished application and finished product?.

So just overall, I mean overall Polyurethanes reported 7%. And I mean I know that the biggest piece would be differentiated part of that. The MDI component was up so much.

I would think it would have dragged the segment up more with polyols that were down or something else in that?.

I think when you look at the biggest flywheel in volumes quarter-on-quarter, you'd be looking at MTBE, which we include as part of that overall volume is a Polyurethane..

Okay, all right. Thanks. That's helpful..

Thank you..

Thanks, guys..

Thank you. Our next question comes from the line of Hassan Ahmed with Alembic Global. Please proceed with your question..

Good morning, Peter..

Good morning, Tom.

How are you?.

Very well, thank you, Peter. Peter, you addressed some of these things on the goal, but just want you to dig a bit deeper into the evolution of sort of business condition to the goals of Q2 in MDI. Obviously was a bit of quirky water because, you had several maintenance turnaround in China in particular in April, right.

So it seems pricing went up a bit on the back of affective utilization rates tightening. Then that capacity came back online, pricing went down. So it seems that ahead of those turnaround there was a restock exercise, then a destock exercise. So sort of two questions on that.

Where do you see effective utilization rates in Q3 relative to Q2? And the second part is you mentioned inventory is rarely leading and it seems that way. So if it all business conditions do normalize and I think you alluded to this.

Could we actually see a pretty big risk in terms of restocking?.

So yes, if you see business conditions, kind of normalize again, I think you definitely would see something like that take place as far as an improvement in margins. The prices where they are today, where there were a few weeks ago.

It's very similar to where they were earlier in the year when we kind of saw a low multi-year, low point in component prices in China. And I see those prices gradually edging up, during the third quarter and the fourth quarter.

I would say that that again, just anecdotally, my gut feel is that, customer sentiment probably has more to do than capacity utilization.

And as we look at the, the sentiment and that what I was referring to earlier about how much confidence do I have in the next quarter, how much inventory am I going to be caring? How much in pricing a direction? Do I want to take a hedge on that? I think that has more to do than capacity utilization.

So yes, during the shutdown, phases that we saw earlier this year, a lot of those people, when they shut down, have inventories that are built up. They're swapping pounds from other facilities and other producers and so forth.

I'm not sure that that really drives margins in demand and sentiment nearly as much as his pessimism around a trade deal that seemingly has just gone on now for a year and a half, two years, and there's a bunch of false rumors and false starts and something is coming to a conclusion, we never seem to get there.

I think that's probably weighing as much on sentiment in margins in Asia is anything right now..

Understood, understood. And as a follow-up, I mean you talked about obviously your customer sentiment, but the other part of it is producer sentiment. In a couple of companies not in other MDI, but in other sort of clinical product areas, seem to be announcing project deferrals.

Are you seeing any sort of a semblance of that or any, any indication of that within the MDI side of things?.

I'm really not. There are not a lot of MDI projects right now that are announced in the pipeline that are actively, I mean there've been some announcements of late, but I'm talking about projects where there's actually construction and huge spend that are taking place right now.

I'm not sure that there's a lot of that in polyurethanes that’s taking place..

Understood. Thank you so much Peter..

Operator, why don't we take one or two more questions? I think we're nearing the top of the hour and as much as I'd like to do this for the next two hours or so, I'm not sure that the interest of our listeners would be equal to mine..

Absolutely. Our next question comes from the line of Mike Sison with KeyBanc Capital Markets. Please proceed with your question..

Hey guys. Peter, just your current thoughts on your 2020 goals.

A lot of companies given a tougher 2019 has kind of delayed some of those goals, but just say any thoughts there?.

Well, again, tell me what the macro environment will look like and I'll kind of tell you where we're going to be. I think that goals are always a tough thing. When we look at the growth, we look at our objectives around cash flow generation. We look at those things that we can control.

There's always two variables in business that I think that we try to focus on. We try to mention that at the end of all of our prepared remarks. So what are we doing that we can control and what's happening in the macro, whenever I write-down and my sentiments for the end of these prepared texts.

And I think about are we able to execute on the acquisitions and the organic expansions that we've outlined to investors? Are we able to achieve the 40% free cash flow to EBITDA? Are we able to manage our working capital? Are we able to push product further downstream and improve margins and so forth? And those things that we can control, I like to think that that we're on course to hit those 2020 objectives that we've laid out to our customers.

As we look at the macroeconomy, I certainly can't and this company, you certainly can't, offset what 1% growth in China is going to do versus a projected 5% or 6% growth when we actually get to 2020. I continue to be an optimist. I think that moving into an election year. You're probably going to see a resolution to the trade deals in Asia.

And I think that you're going to see some volatility or lack of volatility in the Middle East as issues are resolved there and typically you see more stability going into an election year. And I hope that that's the case this next year and if that's the case, I think 2020 is going to be a very good year..

Got it. Thank you..

Thank you. Our final question comes from the line of Mike Leithead with Barclays. Please proceed with your question..

Thanks and appreciate you squeezing me in here. Question for Sean. If I look at your new EBITDA guidance, you're calling for roughly similar EBITDA second half versus first half now depending on how the macro shakes out.

But free cash flow generation and second half is expected to be more than double the first? What's driving that?.

Yes, sure. What you've got is truly you got a pretty good benefit still coming on working capital in third quarter and fourth quarter. You still see that move. And you're not going to have perhaps as much T&I type expenses that we had in the first half as you see in the second half on maintenance.

So I think you're going to see the benefit on working capital that should help offset some of the perhaps changed view you've got on EBITDA on the topline. But confidence is high on being able to hit that near 40%..

I was just - in the first quarter I think we call this out in the first quarter. We were a little bit disappointed as to the suddenness of the slowdown that we saw up to at the beginning of part of the first quarter. And the inventory that was built-up because of that.

I mean if demand you typically you're producing product anywhere from a week in some products like MTBE we before it's shipped to some of our amines for instance and some of our downstream urethanes. You're producing those products one to two months before their shift. And so if you see a fall-off in demand, it can be sudden such as destocking.

You're going to see a working capital for that quarter. I think – I hope we tried to spell that out clearly in the first quarter results of our last conference call. You're going to be hit rather quick suddenly, which we were in the first quarter on working capital change.

So lets - I think it's best probably to remain focused on where you're going to be on a yearly basis rather than the volatility and the sound that you get from a quarter-to-quarter basis..

Got it. And that's helpful. And if I could just return to Slide 4, component margins are down, I think you said call it roughly 50% year-over-year, but your component volumes are up call 15%, 17%-ish year-over-year.

So I guess is there any concern that as you're ramping out the expansion in your Chinese facility that somewhat exacerbating the situation that you have there in Asia? Or is the goal really to just kind of fill that facility out as quick as possible and get unit margins positive there?.

No, I think that I personally, I'm sure there might be some different views on this. As we look at our product, I think that we put it into the market responsibly.

I look at when the biggest volumes improvements that we saw of Huntsman moving that component materials particularly into the Chinese market was during the first quarter moving into the second quarter, which is actually a time when we saw component prices going up.

So I think we've done a very good job and putting that product into the market as our customers grow and as we have an opportunity to expand. But now we are not going to be a manufacturer for capable of running at 100% - of running at 100% and just flogging the market..

Got it. Thank you..

Thank you. Operator, thank you very much for fielding the questions..

Thank you. Since we have reached the end of our question-and-answer session. I'd like to pass the floor back over to Mr. Huntsman for any additional concluding comments..

No. Everybody, thank you very much for taking your time joining us today. And this should conclude our call..

Ladies and gentlemen, again, this does conclude today's teleconference. We thank you for your participation. And you may disconnect your lines at this time..