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Huntsman Corp. (NYSE:HUN)

Q1 2009 Earnings Call

May 8, 2009; 11:00 am ET

Executives

Peter Huntsman - President and Chief Executive Officer

Kimo Esplin - Executive Vice President and Chief Financial Officer

Kurt Ogden - Vice President of Investor Relations

Analysts

Erick Hanson - Citigroup

Laurence Alexander - Jefferies

Frank Mitsch - BB&T Capital Markets

Roger Wade - Bank of America

Jeff Zekauskas - JP Morgan

Laurence Jollon - Barclays Capital

Michael Boam - BlueBay Asset

Greg Goodnight - Kim & Allison Consulting

Operator

Thank you, everyone for joining us for the first quarter 2009 Huntsman Corporation earnings conference call. My name is Erica and I’ll be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this conference. (Operator Instructions)

I’d now like to turn the presentation over to your host for today’s call, Mr. Kurt Ogden, VP of Investor Relations.

Kurt Ogden

Thank you, operator and good morning everyone. My name is Kurt Ogden, Huntsman Corporation’s Vice President of Investor Relations. Welcome the Huntsman’s investor conference call for the first quarter of 2009.

Joining us on the call today are Peter Huntsman, President and CEO; and Kimo Esplin, Executive Vice President and CFO. A recorded playback of this call will be available until midnight, May 15, 2009. The recorded playback maybe accessed from U.S. by dialing 1-888-286-8010 and from outside the US by dialing 1-617-801-6888. The access code for both dial-in numbers is 16299215. A recording of this call may also be accessed through our website.

This morning before the market opened we released our earnings for the first quarter 2009 via press release and posted it on our website, www.huntsman.com. We also posted a set of slides on our website, which we intend to use on the call this morning in the discussion of our results.

Before we begin a discussion of our earnings, I would like to say a few words about forward-looking statements. 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 Securities and Exchange Commission 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.

In addition, we may also refer to non-GAAP financial measures. You can find reconciliation to the most directly comparable GAAP financial measures in our earnings release posted on our website at www.huntsman.com.

I would like to outline the format for today’s call. I will summarize a few highlights on the quarter and then turn the call over to Peter Huntsman, who will review the performance of our business in the quarter. Finally, Kimo Esplin will address certain aspects of our business, including our debt structure, liquidity and working capital. At the conclusion of our prepared remarks, we look forward to taking questions from you.

As we refer to earnings, we will be referring to adjusted EBITDA from continuing operations, which is EBITDA adjusted to exclude the impact of discontinued operations, restructuring, impairment and plant closing costs, net merger associated gain, the sale of accounts receivable, unallocated foreign exchange gains and losses and extraordinary gains and losses related to the purchase of the business.

We focus on adjusted EBITDA from a management standpoint as we believe it is the best measure of the underlying performance of operations, and we have received feedback from many of you in the investment community that this is how you prefer to look at our business. A reconciliation of EBITDA, adjusted EBITDA and adjusted net income from continuing operations attributable to Huntsman Corporation can be found in the appendix of our slides and in our fourth quarter earnings release.

Let’s begin the comments on slide three. In our earnings release this morning, we reported revenue of $1,693 million, Adjusted EBITDA from continuing operations of $50 million and adjusted earnings per share from continuing operations excluding a onetime tax valuation allowance of $0.55 loss per diluted share.

As compared to results from the prior year, our first quarter 2009 adjusted EBITDA from continuing operations decreased from a $188 million to $50 million. The most significant reason for the decrease in adjusted EBITDA was a decrease in volume primarily attributable to the worldwide economic slowdown. The favorable decrease in direct costs, which include raw material costs more than offset the decrease in average selling prices. The net effect of foreign currency reflected positively in our results primarily due to the strengthening of the U.S. dollar.

With that, I will turn the call over to Peter Huntsman, our CEO.

Peter Huntsman

Kurt, thank you very much. Thank you all very much for joining us. Let’s turn to slide number four and talk about our Polyurethanes division. Like the rest of our industry, the first quarter earnings for our Polyurethanes division were negatively impacted by the worldwide economic slowdown.

First quarter MDI volumes decreased 24% compared to the prior year, similar to what we believe our competitors experienced. In fact first quarter volumes were the lowest we’ve experienced since 1999 and we’re 11% lower than the fourth quarter, which were down 13% compared to the prior year. MDI demand fell sharply in November, bottomed out in December and has progressively improved on a monthly basis since.

Similar to many of our other divisions, March was a stronger month than January or February. The industry appears to stabilize and we’re beginning to see some signs of recovery particularly in China, as customers appear to have completed their destocking. We are moving into a season of greater industrial activity as projects funded by recent government stimulus action begin to get underway.

In Asia for example, we have seen some initial signs of growth as local demand was notably stronger in March and April. This increase has been fueled somewhat by government stimulus initiatives including producer and consumer incentives for new appliances, as well as subsidies for smaller fuel efficient automobiles. This is significant, as China is now the world’s largest producer of automobiles.

We have taken aggressive steps to manage fixed cost within this business without sacrificing our long term prospects. We have implemented a temporary hiring freeze, reduced discretionary capital spending and taken early action to reduce cost through active management of our production capacity and inventory levels.

We have throttled back our operations in a disciplined manner, including idling certain lines and operating others that reduce rates to balance our production in customer demands. We remain convinced that our three strategically located global manufacturing sites in North America, Europe and China are among the most cost efficient MDI manufacturing sites in the world.

This competitive position will continue to enhance our profitability as we go forward. Our propylene oxide and co-product MTBE business margins increased during the quarter, due to continued strong demand for export of MTBE and a decrease in cost of raw material. Propylene oxide volumes in the Polyurethanes markets were slower, which required reducing overall PO/MTBE production rates to match demand. We expect demand for propylene oxide to continue to be inline with Polyurethanes products, while MTBE demand remains strong outside the U.S.

Turning to slide number five; with regards to our Advanced Materials Division, we believe the majority of customer destocking has ended with the remaining destocking to be completed during the second quarter. During the quarter, we saw improvements in Do-It-Yourself applications, which include our Araldite brand products, which are well known in Europe and Asia and we believe that other applications will follow.

We have taken aggressive actions with our discretionary spending, which resulted in a $9 million savings in fixed cost compared to the prior year. As a result of the decrease in demand we have rationalized our production capacity to maintain supply demand equilibrium. Further, we have successfully secured a number of agreements with local government to offset a portion of labor costs as we temporally ideal capacity.

Turning to slide six, as you can see due to the following demand, our textile affects contribution margins contracted, compared to the prior year in Apparel and Home Textile products, as well Specialty Textile in all regions of the world. We’ve believe, we are at a significant turning point in this business. Demand at the end of the quarter was greater than at the beginning and they orderly signs that our customer destocking is near completions, as we see an improvement in mill production.

We continue to address the fixed cost of this business and by the end of 2009 between site closures and planned headcount reductions of more than 400 this division will achieve $60 million in annualized savings. When we are finished with our cost reduction plans, we will hope to reduce our cumulative headcount by nearly 1000 positions, since the acquisition in July of 2006 or roughly 25%.

We expect that the increase in demand, coupled with the benefits from our restructuring efforts will enable this division to have positive earnings during the remaining quarters of this year. We already seeing signs of improvement as this massive change take place. For instance, we started the quarter losing nearly $5 million of EBITDA in the month of January, but had a small positive number in March.

During the second quarter, we expect to complete our acquisition of a large Indian, textile chemical manufacturer know as Metrochem. We estimate the purchase price to be approximately $29 million. The financing will largely come from local banks and as a result, it will have a little impact on our overall liquidity.

This acquisition plays a key role in the restructuring plan of this business as we relocated our manufacturing closure to our customers in Asia and India and reduce our European fixed cost. We expect equivalent manufacturing capacity cost to be approximately 75% to 80% lower as the result of this acquisition.

Turning to slide number seven, our performance product division performed well in the first quarter of 2009 primarily due to higher contribution margin as reductions in raw material cost outpaced the pressure on our selling prices. Our intermediates business realized higher year-over-year earnings in large parts due to the manufacturing reliability of the Port Neches, Texas facility and contribution margins were higher in the first quarter of 2008 due to the recent drop of raw material prices.

During the first quarter of this year, we saw demand for our products, selling into personal care household and institutional applications for detergents fall15% compared to the first quarter of 2009, but earnings have been stable due to lower raw material cost and relatively stable demand for detergents and personal care items.

Our Performance and Specialty business, which represents about 50% of our divisional earnings recorded positive year-over-year earnings. This is partially due to our agrochemicals products, which continue to see robust demand and strong pricing dynamics. Looking forward within our Performances products division, we expect further contraction of our selling prices as our sales contracts catch up with a decrease in raw material costs, thus returning margins to their more normalized level.

We also expect to complete the construction during the second quarter of this year of our new 100 million pounds maleic anhydride facility at our Geismar, Louisiana location. This facility will be among the lowest cost in most efficient maleic anhydride facilities worldwide. We are anticipating that the construction of our ethyleneamines manufacturing facility in Jubail, Saudi Arabia, a joint venture with the Al-Zamil Group to be completed later this year and is expected it to be operational in early 2010 with an annual capacity of 60 million pound. The global market for ethyleneamines remains tight despite the global recession.

Turning to slide number eight, earnings in our first quarter of 2009 within our Pigments division were lower compared to the previous year, primarily as a result of decrease in sales volume. While Europe and North America remains slow, signs of improvements we’re seen in Asia towards the end of the quarter and aggressive response plan was implemented to mitigate the impact of the demand slowdown. Actions to restructure our cost include the closer of our Grimsby, UK Ti02 facility.

Annual operating cost savings from the Grimsby, U.K. closure will be approximately $28 million. The plant continued to operate through late March, so most of these savings will start in the second quarter of this year. The production demand from Grimsby has been absorbed by our Greatham, UK facility, which we believe is the lower cost TiO2 chloride facility in Europe.

Additional cost controls were implemented to lower fixed cost and reduce inventory. We plan to reduce inventory in fixed cost further by idling our Ti02 facility in Huelva, Spain at the end of the second quarter, while running other assets at full capacity. Although raw material costs for the quarter were greater than the prior year. The trend within the quarter was very positive positive, as March costs were well below at the first quarter of 2008 assisted by the effects of the stronger U.S. dollar.

We have seen positive volume growth compared to the fourth quarter and expect this to continue. With the reducing direct cost trend and the anticipated savings from our aggressive costs cutting restructuring, we believe firs quarter earnings represent a significant turning point and expect that this business will generate positive earnings for the remainder of the year.

Before showing some concluding thoughts, I’d like to turn a few minutes over to Kimo Esplin, our Chief Financial Officer.

Kimo Esplin

Thanks Peter. Let’s turn to slide nine. Similar to the rest of our industry, our revenues decreased in all regions and across all segments of our company as volume and average selling prices decreased 19% compared to the previous year, primarily as a result of the economic slowdown. The global impact is visible as you consider, sales decreased 37% in Europe, 36% in Asia Pacific, 31% in the rest of the world and for the United States and Canada it was down 28%.

Foreign sales decreased at a greater rate and out of the United States and Canada primarily due to the strength of the US dollar, compared to other relevant foreign currencies. Continued destocking impacted our results as it did the entire industry in the first quarter. However, as Peter mentioned, we have seen certain encouraging signs recently relative to monthly demand trends.

Slide 10, in April we entered into a credit agreement waiver with the lenders of our $650 million revolving credit facility. We have one financial maintenance covenants under our credit agreement, which is a senior secured leverage ratio. The waiver among other things relaxes our senior secured leverage ratio covenant from 3.75 to 5.00 for the measurement periods between June 30, 2009 and June 30, 2010.

Although, we were compiling with all our covenants at the end of the first quarter, we felt it prudent to take action now to obtain greater flexibility as we consider the possibility of protracted recession. The maturity profile of our debt remains attractive. We have no significant near term maturities until 2010, when our revolving credit facility expires in August and our senior secured notes matured in October.

We expect to begin the dialogue with our banks to renew our revolver in the coming months. We also have a 364 day off-balance sheet receivable securitization that we expect to extend prior to its maturity. Even though this program does not matured until November of this year, we have already begun discussions regard in its extension.

Slide 11; as of March 31, 2009, we have $473 million of cash and $642 million of unused borrowing capacity, summing to a total of $1.1 billion of liquidity on hand at the quarter end. We continue to pursue our multibillion dollar fraud and tortious interference claims against Credit Suisse and Deutsche Bank. The court in Montgomery County, Texas has ordered non-binding mediation to begin next Wednesday on May 13, 2009 and trial to commence on June 8, 2009.

Separately, we remain in discussions with insurers of our outstanding insurance claims related to fire at our previously owned Port Arthur, Texas facility. As of the quarter end, our outstanding claims were $243 million. We expect to have this resolved through binding arbitration later this year.

Slide 12, we put in place plans to aggressively manage our working capital investments, including targeted inventory reductions. During the quarter, we’ve received favorable cash benefit in our primary working capital of $58 million. Including the decrease in receivables associated with our off balance sheet accounts receivable securitization program, the favorable cash benefit was $159 million.

Inventories have decreased in value over 19% compared to the prior year. Through the remainder of 2009, we expect a free up additional liquidity through reductions in our working capital, particularly as higher valued costs approach during the inventory evaluations on balance sheet. The active steps we took during the quarter to manage our working capital, help reduce our total net debt, including our off balance sheet accounts receivable securitization program by $37 million.

I will now turn the call back over to Peter, for some concluding remarks.

Peter Huntsman

Thank you, Kimo. In conclusion, I’d like to just comment about our company and industry. The global economy remains in a very challenging state. However, we are optimistic that the worst of this market is behind us. During this past quarter, most of the indicators within our business saw gradual improvement. The Chinese stimulus programs seem to be having a positive effect. That gives me optimism that we will see similar signs in the U.S. economy later in the year as our own stimulus spending starts to kick in.

Customers have mostly completed their destocking. Raw material prices have leveled out and we’re seeing quarter patterns improve as we move into the second quarter of this year. So we are encouraged by many of the signs we are seeing, we are not waiting for the economy to improve to strengthen our earnings. We are ahead of planned $150 million cost reduction program and I believe we show to seeing our projections.

We are aggressively cutting inventory and managing cash. Despite a lower EBITDA and than I would like to abstain, we’ve improved primary working capital by $159 million in the first quarter. I remain optimistic that we will further strengthen our balance sheet after to our trial in June with Deutsche Bank and Credit Suisse. In short we intend to emerge from this economy, in this economic storm better than we ended this recession in the fourth quarter of last year.

Thank you very much. With that, I’ll turn the time back over to Kurt.

Kurt Ogden

Thank you, Peter. Operator that concludes our prepared remarks, would you explain the procedure for Q-and-A and then open line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Erick Hanson from Citigroup.

Erick Hanson - Citigroup

I was wondering if you could discuss the fundamentals in Polyurethanes business globally, including how much capacity is coming online this year, especially in Asia?

Peter Huntsman

I think with the capacity that’s coming on in Asia, much of that is a single largest facility to come on stream is the buyer facility, which is hit down the road from us in Kuching. So that is already come into the market and I know there’s been some minor devolve in that project, so far coming in as well.

I think more significant that what’s come in is the discipline of the players and the producers in the Chinese and the Asian markets. I think that I have been quite surprised that the resiliency and the strength and pricing, and the overall capacity utilization. So, I think that the producers there are I think quite discipline with plant closures and so forth, but in front of me I don’t have exactly, which capacities are expected to come on at what time.

Erick Hanson - Citigroup

Can you comments on, what operating rates are for your plants in that region?

Peter Huntsman

Right now in China, because our facility has been shutdown, most of the fourth quarter and the early part of the first quarter, our inventories are at very, very low levels and our plants are running today better that 90% capacity utilization because of demand today. We are seeing very strong demand today in China. Again, as I said in my comments during the call, I think a lot of this is restocking. I think a lot of it is fundamental demand on downstream product from insulation to automotive.

In China, in particular, we’re seeing demand in everything from products that are going into curing, wind blades to the automotive sector, to the construction sector, to the textile sector. So, it’s not just really one area. I think that we’re seeing quite a solid, across the board in improvement in demand over what we saw the early part of the first quarter of this year.

Operator

Your next question comes from Laurence Alexander - Jefferies.

Laurence Alexander - Jefferies

Could you give a little bit more detail on the different end markets that advanced martial sell into? What the trends have been and in particularly how you see that those markets playing outs in April, May?

Peter Huntsman

Well, I think as we look at advanced materials, most of our end markets thee would be going into the coatings, which should be reliant on the constructions markets and so forth, power, electrical, the infrastructure. You think about transformers and power grids all the way down to consumer electronics.

I think that when you think about the consumer electronics and you think about coatings in the construction area, those are the areas that obviously have slowdown. When we look at the power and the infrastructure of the construction of the power grid system, particularly with the stimulus bills and so forth that are going around the world, we are not seeing a falloff as drastic there as you would in the construction area.

The Aerospace Industries for us continues to be a strong end use application, that’s not just going into commercial aviation, but also in the spending as well. Again, as we think about the Aerospace Industry, you’re down first quarter volume, down about 30%. I think that a lot of that is due to the shutdowns which you saw in Boeing and Airbus. During the first quarter, they tried it to get the orders inline with the cancellations and so forth that they are seeing.

Longer term, I think that aerospace is going to continue to be a fine growing product force. [Inaudible] Do-It-Yourself, we’ve continued to see demand growth in this area and we continued to be very optimistic, particularly in Europe and in Asia, India, China in particular and wind turbines continues to in the area that would be -- again we’ve seen a falloff in demand, but nowhere as drastic as we have in the construction area.

Laurence Alexander - Jefferies

And then on polyurethane; when you think about order trends in April and whatever visibility you might have on May. Is it sequential increase that you are seeing more than your usual seasonal increase, or is it roughly inline with historical seasonality?

Peter Huntsman

I think it’s roughly inline with the seasonality. If I look at the orders from April and March in comparison, it’s up marginally from April to March. I do not think that we’re going to be seeing a large bounce back on the global front, I think that we’re going to seeing a gradual recovery, that will be taking place throughout 2009, hopefully picking-up stream in 2010, but again we do expect in May, that we’ll see a gradual improvement over April and that should really continue across the line.

Laurence Alexander - Jefferies

And lastly, given the sharp improvement that you expect for a couple of the segments, do you think you can get back to EPS profitability in Q2?

Peter Huntsman

I’m not sure. We’re not going to be giving that sort of guidance, the volatility that we’re seeing in the markets and that’s not something that we done in the past.

Operator

Your next question comes from Frank Mitsch - BB&T Capital Markets.

Frank Mitsch - BB&T Capital Markets

Can you give us an as to the impact of foreign exchange and raw materials were for the first quarter and what your expectation is in terms of second quarter for those two issues?

Kimo Esplin

Frank, I think we may help you. If you look at the slide three, that the bridge from first quarter ’08 to first quarter ’09, you can see that FX revaluation, the transaction is $17 million benefit in the bridge?

Frank Mitsch - BB&T Capital Markets

Yes. How about on a sequential basis?

Kimo Esplin

I have it, let me just grab it, just a second.

Frank Mitsch - BB&T Capital Markets

Would your expectation be that with respect to raw materials, you expect a continued benefit?

Kimo Esplin

Yes, as we are an average cost inventory company and so that really, the benefits of lower raw materials that we started to experience late year really are slowly flowing through our balance sheet and into the P&L. So, as we look at each of our businesses, the cost per unit flowing to the P&L continues to go down. Sequentially, we were flat currency wise.

Frank Mitsch - BB&T Capital Markets

Okay, alright and then Peter, you talked a little bit about operating rates in the prior things in China. Can you talk a bit broadly about operating rates for the overall firm or maybe highlight some of the individual units like Pigments and your expectations for the second quarter?

Peter Huntsman

Frank, I don’t want to get into the granularity on a product-by-product basis, but I think that is save to say that, across the board I think industry wide, if we look at the entire industry. Its save to say that demand in most areas where down probably 25% to 35% depending on end use applications and during that time period, obviously Huntsman was trying to get rid of as much of higher cost inventory in our system as we could.

So, our operating rates where probably 10% to 15% lower than that. Our operating rates probably, I’m looking Polyurethanes operating rates today around 60% globally and so when you think that we’re running very aggressively in Asia, we’re probably operating around 50% in rest of the world, that’s not to say that’s were the demand is, it is to say that where demand is today and our efforts to lower inventory further and free up cash, that we are going to see a lower capacity rate, which bring us to kind of a broader question of judging the performance overall the company.

If you were to look at the EBITDA versus the managing for cash, we obviously could have had a higher EBITDA and generated less cash. I think if these times you want to make sure that we’re managing our cash as prudently as we can, that we getting right of as much as the higher price inventory and so forth as we can.

So, as we reduced our operating rate, as we did in the first quarter and as we well in some of our businesses at a beginning of the second quarter, and I’m hopeful by the end of the second that our operating rates were really be matching the overall demand that we see in the industry, we’ll be taking that am EBITDA if you will because we’ll have those fixed cost spread out of our fewer pounds of production.

Kimo Esplin

I guess we have two of our division, Frank our utilization rate sensitive that would MDI, we talked about that and then in Pigments Ti02 in the quarter, we probably operated our plants just a little over 50% utilization rates, if we are operating based on market demand that would be probably closure to 70%.

Frank Mitsch - BB&T Capital Markets

I agree, Peter we have been hearing about MDI coming back in terms of pricing and so forth, unfortunately can’t really say all that much on the Pigment side. Can you help me understand, the volume numbers on Performance products? Volumes were down 3%, now it says that it’s adjusted to include totaling. I believe you said detergent is your largest business. You were down 15% on a volume basis for your largest business, so it obviously improved in other parts. Can you just spend a moment to point out where that occurred?

Kimo Esplin

One of the strongest businesses we had in the quarter was Ethyleneamines and Ethyleneamines goes into things like curing agents.

Peter Huntsman

Yes, that will be a part of the curing agent, so forth, the wind turbines will be an example of that and quarter-to-quarter that was up about almost 20%.

Kimo Esplin

So, obviously new plant in Saudi Arabia is needed and will be good for us. When you look at other businesses, we had pretty good European sales in our SABIC businesses. Linear alkylbenzene was strong and we had a pretty good Diglycolamine demand in our businesses. Some of our partners ran ethylene to our glycol unit.

Frank Mitsch - BB&T Capital Markets

Okay, sort of the combination of the specialty means, the surfactants and in some of the glycol totaling were positives.

Operator

Your next question comes from Roger Wade - Bank of America.

Roger Wade - Bank of America

In Advanced Materials, can you say how much your business in liquid epoxy resins and it’s been small now and if my assumption is correct that liquid epoxy resins have been doing worst than the down stream epoxies and can you discuss, how the downstream epoxies have been doing. Have they been falling liquid epoxy resin down in volumes etc.?

Peter Huntsman

Yes, as we look at our overall volumes and liquid epoxy resin, they’re down about 25% year-on-year for first quarter. The earnings in that particular division, it swung from a positive million plus to a negative million plus. So, to answer your first question, has it been negatively impacted? Yes, it has.

The downstream business is certainly where you are able to sell with fewer competitors and more specialty oriented grade, where more of your prices made up new technology and can application rather than two or three major raw materials that would certainly be the case. The BLR that the Liquid Epoxy Resins use to be 40 plus percent of this business and today, I don’t have exact numbers. I would say that it’s probably just under 20% of the business.

Kimo Esplin

To give you a sense for pricing and that maybe part of your question Roger, basic Liquid Epoxy Resin pricing sort of year-over-year probably was down between 25% and 30%, when you look at formulated systems and specially components they fell maybe 5%.

Roger Wade - Bank of America

Great and the other thing is, in Q1 ’09, if you want to get into this granularity. Can you sort of breakdown the Polyurethanes EBITDA between MDI and PO/MTBE?

Kimo Esplin

Yes. For the first quarter of the year, EBITDA was generated large to propylene oxide, MTBE and in the Polyurethanes business was close to breakeven.

Roger Wade - Bank of America

I’m assuming that change materially year-over-year?

Kimo Esplin

Well absolutely, I think last year up roughly $130 million of EBITDA generated in Polyurethanes it was almost up. All Polyurethanes, propylene oxide generally in the first quarter generates $10 million to $20 million of EBITDA and that was the case last year.

Operator

Your next question comes from Jeff Zekauskas - JP Morgan.

Jeff Zekauskas - JP Morgan

A few questions, your D&A for the quarter was 126, I guess up from about 108 in fourth quarter in 94 and a year ago. Was there something unusual in that number or is that a good number to use going forward on a quarterly basis?

Kimo Esplin

You should think about it as a little under $100 million per quarter, it was up higher as we accelerated depreciation on our Grimsby facility.

Jeff Zekauskas - JP Morgan

Second, there is been a lot of volatility in software prices? So can you talk about how the changes in software prices are or are not reflected in titanium dioxide prices and can you talk about your titanium dioxide prices going forward?

Peter Huntsman

I would say that the software is a component of our overall cost of Ti02. We don’t buy sulfur directly, but we’re buying sulfuric acid and both are derivative. You’re probably looking at less than 5% of our cost of Ti02 is sulfur based on sulfur derivative product and certainly it helps, but I’d like to see flow prices fall as much as sulfur prices, but it’s been a remarkable drop in sulfur and your second part of your question was around Ti02 pricing.

We have initiatives underway particularly in Asia. Some of our competitors have also announced pricing initiatives. We obviously are quite optimistic. They’ve been a number of facilities that have shutdown on a global basis and more capacity has come out in the last quarter, I think than probably any two to three years combined in Ti02. I think the Ti02 may well be one of the more radically changed divisions that we have a year from now.

I see more of the industry rather than just our division, as you look at the bankruptcy of a very large competitor so forth, but I think when we look at pricing, pricing has been quite flat on a euro basis, which is the way that we look at most of our sales. About 60% of our sales are in the European markets. First quarter has been quite flat and again we’re shooting for those increases in the second quarter, it just too early to early tell.

Kimo Esplin

What we found and its unique relative to the last number of years, is it in dollar terms. European pricing is lower than all the other regions. Asia, North America and the rest of the world, as you recall a year ago we were faced with the opposite problem where European prices in dollar terms were $300, $400 ahead of North America, which encouraged a lot of importing into our backyard at the European market. We see the opposite today.

Peter Huntsman

So what was in the dynamics around Pigment? That will continue to be a changing industry.

Jeff Zekauskas - JP Morgan

Thanks really helpful, just a few other short questions. Your annualized cost savings is $150 million that forecasting. How much did you capture this quarter and how much might you capture next quarter?

Kimo Esplin

For the most part, we are just starting to see our headcount reduction. So it’s really beginning in the second quarter. The big chunk you’ll see beginning in the second quarter will be this $28 million benefit from Grimsby closure. So, you will see that $5 million or $6 million pretty quick from that and then textile, actually you’ll start to see those really beginning in the second and throughout the year and by the fourth quarter you’ll see that annualize 150.

Jeff Zekauskas - JP Morgan

Then lastly, can you tell me what your receivables and inventories were in the quarter?

Kimo Esplin

Yes, let me grab that. We will be filing our Q here towards the end of the day and you’ll be able to get those, but our accounts receivable at the end of the quarter was $820 million compared to December 31, 2008 of $905 million and inventories were $1,333 million compared to $1.5 billion at year end. That excludes our accounts receivables.

When you look at our accounts receivables securitization, it was $446 million at the end of the year and at the end of the quarter was $328 million.

Operator

Your next question comes from Laurence Jollon - Barclays Capital.

Laurence Jollon - Barclays Capital

You given in your earlier comments around expected decline in pricing and Performance products, and consequently a fall in margin in the sequential basis. Can you help us kind of get some comfort around maybe second and third quarter EBITDA, maybe give some comfort as to why it might improve in a sequential basis?

Is it really improvements in Pigments given the Grimsby benefit flowing through as well as cost savings or where else can you point that could help us think through kind of an improvement in EBITDA on a sequential basis?

Peter Huntsman

I think most of the improvement, which you’re going to see in Ti02. Again, we’re not getting the specifics on a quarter-by-quarter basis. I would imagine that probably two-thirds of the improvements that’s you’ll see will be coming about through things that we have done our sales within the company, managing the company.

We are hopeful that we’ll see an improvement in volume, that is what virtually every company in this industry is relying on between now and the end of the year. I think that, that’s obviously a factor but I think the biggest improvement that we’ll see in the bottom line of our Pigments business will come about to self help steps.

Kimo Esplin

Your earlier question, I believe it was around Performance Products and Performance Products, we’ve seen some really great quarters, the fourth quarter and first quarter, we really benefited from lower raw materials and we’re able to hold on to those a little bit longer and we see those margins coming down a little bit to more normalized levels and similar to what we’ve seen in prior years.

Laurence Jollon - Barclays Capital

Do you have any fear, given your current outlook that you’re net senior secured leverage ratio may potentially be slightly higher than the amended five times covenant at the end of the third quarter, such that you wouldn’t have access to that revolver this subsequent quarter per the recent amendments?

Peter Huntsman

We think we’ve set the covenants at levels that will provide us a cushion in those out quarters. As we’ve said, we’re going to go out and start a discussion with our banks around extending that revolver here in the middle of the year anyway.

Operator

Your next question comes from Michael Boam - BlueBay Asset.

Michael Boam - BlueBay Asset

You had a fairly impressive reduction in operating expense year-over-year. I just wondered how much of that is likely to be retained going forward. It came down from about $280 million last year to $225 million this year.

Peter Huntsman

Michael, you’re referring to the corporate costs?

Michael Boam - BlueBay Asset

Yes.

Peter Huntsman

Yes, that is sort of corporate and we had some foreign exchange unallocated losses that flow through there in 2008 that we’re not realizing today and we are bringing down our corporate cost. We would expect with this $150 million of cost reduction, a chunk of that will be in fact a net corporate unallocated as we continue to reduce it. So, the short answer is, yes, we would expect to maintain that and hopefully improve upon it.

Michael Boam - BlueBay Asset

Finally, one more question. Could you just tell me, the cash balance Huntsman International at the end of the quarter and whether or not anymore payments have been made into Huntsman International from Huntsman Corporation during the quarter?

Peter Huntsman

Sure, the cash position of Huntsman International at March 31, 2009 was $470 million.

Michael Boam - BlueBay Asset

And have anymore inter company payments been made during the quarter?

Peter Huntsman

Well the cash got to Huntsman International through inter company loan.

Operator

Your final question comes from Greg Goodnight – [Kim & Allison Consulting].

Greg Goodnight - Kim & Allison Consulting

Benzene cost and chlorine prices maybe moving up; how are you planning on offsetting these increased costs per MDI?

Peter Huntsman

First, I know that there is a big push to put benzene prices up. Personally, I don’t think that they are going to hold. We obviously have some contracts where we are able to put through price increases automatically; that’s with about a quarter of our business, a third of our business here in the U.S., but I’ll be very surprised if you see benzene prices and chlorine prices increase and stay up from more than a few weeks.

Our buying patterns right now with benzene, where we don’t intend to be buying any benzene here, probably that’s give away buying strategy and I don’t intend to be buying benzene at these higher prices and let’s say highly adopted they will be sustainable.

The chlorine prices, I’ve just given the lack of demand in PVC markets and so forth. I don’t think that those prices will be sustainable either, but again we will be working to the degree that we have to take in higher prices. To some degree it does give us ample justification to raise prices on MDI and eventually, we will start seeing some of these raw material prices kind of bounce off the bottom.

I think that there’s going to be a couple of false bounces here. As we’ve already seen in benzene, a few weeks ago, we saw prices go up regionally, globally for a few weeks and then they came back down. I think those were mostly just regional North American changes that we were seeing in the market.

I don’t think fundamentally that the demand is such in our industry to sustain those price increases and frankly, when those price increases do stick, I think that you probably will start seeing customers coming back in the market and restocking their inventories to some degree. So, yes we’ll manage these price-by-price, product-by-product and really customer-by-customer.

Kimo Esplin

Just so you understand again, in our Polyurethanes P&L it’s an average costing system. So even in say March, you never really saw the benefit in the P&L of say $1.25 a gallon benzene. You’re seeing probably something closer to above $2 a gallon benzene, even though prices fell that far, because average costing systems slowly give you that benefit. So, I think today benzene prices are below $2, but we bottom out closer to $1.25.

Greg Goodnight - Kim & Allison Consulting

MDI additions in Asia, I think the previous caller had mentioned, one of the Bayer addition, but there are a couple more that have been reported as recent like Polyurethanes at 200,000 tons, [Inaudible] is 70,000 tons that were suppose to startup in Q1. Can you comment if those start-ups actually happened and what effect are they having in the market in Asia?

Kimo Esplin

Right now, as I said earlier in Asia, we’re really running at near capacity in Asia and again, that’s due to both demand and it’s also due to some of our competitors that are either struggling with operations or just have had plants down to reduce their own inventory.

We took a very early approached inventory reduction, a very drastic approached inventory reduction, but so far the two facilities that you mentioned, those are both component operators. I don’t think they produce the product as what we do, but I think they are both confident operators. I think those products, those capacity expansions will probably be coming online in the latter part of the first quarter, early part of the second quarter, but I have not yet seen a quarters worth of full impact from those competitors.

I’ll say that those facilities may come on. That’s not to say though, but they are letting their other facilities fallout. As far as we understood the Polyurethane and Yanti and all of the Asian producers had idled significant capacity through the first quarter as everyone was throttling back.

Peter Huntsman

All of those you mention to, with the exception of Yanti also have some older and higher cost capacities that I imagine will be taken out permanently as part of this, so what the net effect of all this will be is really yet to the seen.

Greg Goodnight - Kim & Allison Consulting

MDI demand growth; are you expecting any global MDI demand growth this year with negative global GDP expectations and the follow-up to that question is, what is your expectation for global operating rates for MDI this year?

Peter Huntsman

Global operating rates for MDI, I think technically are right around 70%. I think that the effective rate today is right in the mid 80s. The difference between those two, if I subtract the publicly announced capacities that have been shuttered, the higher cost capacities have been permanently shuttered, are those that have been announced that they’ll be shutdown for a quarter or two.

When I subtract that capacity out of the industry today, it appears to be in the mid 80s, but if you just look at it numerically, you know how much capacity is out there and what the demand is, it would appear to be right around 70%. What I’m seeing in pricing and what I’m seeing in product moment would lead me to believe that the industry is operating somewhere in the mid 80s.

As far as the global demand for MDI, really it’s just too early. I think that a lot of the stimulus spending that we’re seeing in China, a lot of that we’re see in the U.S. will be around energy conservation, around green constructions and so forth. Spray on foam, a lot of these applications that MDI is unique in selling, I think that we’ll be a market leader in that. We’ll be very aggressive in our efforts to make sure that we get our piece of the action if you will and the stimulus spending going forward.

I think that lot of the Chinese activity, when you talk about taking existing buildings and bringing those buildings up to environmental standards, we’re uniquely positioned to be able to benefit from that. Our investment very early on in China, particularly in the automotive industry, where we are applying out product not only in the seats, but also the steering columns and the insulation and so forth within the automobile itself, I think it’s just too early to tell.

I think we were surprised at the falloff that we saw in the first quarter. I think nobody really knows the effect that destocking has had and how much temporary shutdown or permanent shutdown there’s been around construction and so forth. Obviously we’re more optimistic as we look into the third and fourth quarter of this year, that a quite a bit of that growth and destocking will be coming back.

Peter Huntsman

Operator, I think that concludes our availability today and we strongly would encourage anybody else that do have questions to please call Kurt Ogden and Kimo Esplin and we certainly would like to speak with many people as we can.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a wonderful day.

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Source: Huntsman Corp. Q1 2009 Earnings Call Transcript
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