Huntsman Corporation. Q3 2009 Earnings Call Transcript

Nov. 4.09 | About: Huntsman Corporation (HUN)

Huntsman Corporation (NYSE:HUN)

Q3 2009 Earnings Call

November 04, 2009; 10:00 am ET

Executives

John Huntsman - Executive Chairman

Peter Huntsman - President

Kimo Esplin - Executive Vice President and Chief Financial Officer

Kurt Ogden - Vice President of Investor Relations

Analysts

P.J. Juvekar - Citigroup

Laurence Alexander - Jefferies & Co

Roger Spitz - Banc of America/Merrill Lynch

Laurence Jollon - Barclays Capital

Jeffrey Zekauskas - J.P. Morgan

Michael Boam - BlueBay Asset Management

Tony - Unidentified Company

Sabina Chatterjee - BB&T Capital

Rajul Aggarwal - Marathon Asset Management

Sam Epibonia - Columbia Management

Adril Esque - Hartford Investment Management

Operator

Good day ladies and gentlemen, and welcome to the third quarter 2009 Huntsman Corporation earnings conference call. My name is Dan, and I’ll be your coordinator for today. At this time all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions)

I would now like to turn the presentation over to your host for today’s conference, Mr. Kurt Ogden. Please proceed sir.

Kurt Ogden

Thank you Dan, and good morning everyone. I am Kurt Ogden, Huntsman Corporation’s Vice President of Investor Relations. Welcome to Huntsman’s investor conference call for the third quarter 2009. Joining us on the call today are, John Huntsman, our founder and Executive Chairman; Peter Huntsman, President and CEO; and Kimo Esplin, Executive Vice President and CFO.

A recorded playback of this call will be available until midnight, November 11, 2009. The recorded playback maybe accessed from within the U.S. by dialing 1-888-286-8010, and internationally by dialing 1-617-801-6888. The access code for both dial-in numbers is 65149082. A recording of this call may also be accessed through our website.

This morning before the market opened, we released our earnings for the third 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 a reconciliation to the most directly comparable GAAP financial measures in our earnings release posted on our website at www.huntsman.com.

I’d like to outline the format for today’s call. Following my comments, Peter Huntsman will review the recent performance of our business, after which Kimo Esplin will address certain aspects of our business, including our taxes, 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, which is EBITDA adjusted to exclude the impact of discontinued operations, restructuring, impairment and plant closing costs, income and expense associated with the terminated merger and related litigation, acquisition related expenses, losses on the sale of accounts receivable to our securitization program, unallocated foreign exchange gains and losses, losses from early extinguishment of debt, extraordinary gains and losses on the acquisition of a business and losses and gains on disposition of businesses and assets.

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 feedbacks 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 loss/income can be found in the appendix of our slides and in our third quarter earnings release.

Let’s turn to slide three. In our earnings release this morning, we reported third quarter 2009 revenue of $2.108 billion; adjusted EBITDA of $200 million and adjusted earnings per share of $0.24 loss per diluted share. Our adjusted EBITDA increased to $200 million in the third quarter 2009, compared to $194 million in the prior year, and $96 million in the prior quarter.

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

Peter Huntsman

Kurt, thank you very much and thank you everybody for taking the time to join us this morning. Let’s turn to slide number four. Our Polyurethanes business posted strong adjusted EBITDA results in the third quarter. Demand improved from the second quarter volumes, as volumes increased 19%.

Equally important, we saw increased contribution margin as average selling prices increased by 5%. While global MDI demand was down 2% compared to the prior year third quarter, we believe overall global demand continues to recover, as we saw higher sales volume in September this year than in the same month last year.

Asia continued to lead the demand recovery, with both China, and the rest of Asia posting strong gains. Demand is also improving in Europe and the Americas, albeit more slowly with the products such as rigid foam used in installation applications, as well as composite wood products in other segments, where MDI replaces less efficient alternative, all driving new growth.

Our three strategically located global manufacturing sites in China, Europe and North America are among the most cost efficient MDI manufacturing sites in the world. Combined with MDI finishing capability, and our range of specialty Polyol, allows us to provide attractive service offerings to our customers around the world.

Propylene oxide and its co-product MTBE performed very well this quarter. Propylene oxide is the key raw material for our Polyol, that when combined with MDI, forms a polyurethane system. MTBE delivered another quarter of solid earnings as favorable supply demand fundamentals contributed to strong margins. Demand remained healthy outside United States.

Looking forward, we intend to temporarily idle our Port Neches, Texas facility in early January of 2010 for a turn around and inspection that will last until the end of the first quarter. I would remind you that it has been six years since this facility was last shut down for this duration of time.

Any down time is subject to construction and weather delays. Although market conditions and margins on MTB will undoubtedly move on out, based on historical margins, we expect the EBITDA impact in the first quarter to be approximately $25 million to $30 million, including unobserved fixed cost.

Turning to slide five; within our advanced materials division, demand for our core businesses of the formulated systems and specialty components combined, increased 12% over the second quarter of this year. We are encouraged by the sequential demand growth in our codings, electronics, construction and general industry sectors.

We are also seeing improved results in our electronic sector where our market shares increased in large part due to a halogen free product that has been very well received in the market place. We have made considerable restructuring efforts within the business as we’ve reorganized capitalized on market changes. The benefits of these efforts are reflected in our results, and contributed to the increase in quarter over quarter earnings.

Turning to slide six. Candidly, third quarter earnings for our textile effects division were disappointing. During the third quarter, earnings were negatively impacted by $4 million of charges associated with our SAP implementation. Average selling prices decreased compared to the second quarter due to unusual competitive pressure, which we expect will remain through the fourth quarter.

In the quarter we saw DyStar, one of our major global competitors in textile dyes, filed for bankruptcy in Germany. Longer term, this may lead to further consolidation in the textile dyes industry, reduced manufacturing capacity and possibly help stabilized pricing. Short term, typically moves such as that it creates market confusions and erratic behavior.

Total demand improved on a quarter-over-quarter basis despite the effect of seasonal mills shut down in Europe during the summer holiday month, indicating a positive trend for the economic recovery. We are seeing signs of recovery in Asia where there is improved domestic demand that is replacing weekend export sales. We also note inventory builds in automotive and specialty textile segments. Our textile effects business continues to have the highest contribution margin within our company.

We are progressing well with the fixed cost reduction programs within our division and are on progress, and expect to reach our goals which we announced last December of reducing fixed costs of $60 million by the end of the year. We have successfully relocated the entire senior leadership of this division from Europe to Singapore, where they will be better able to focus on our growing customer base and future opportunities within the textile industry.

Turning to slide seven; our performance products division earnings increased substantially compared to the second quarter. Our performance specialties business which represents around 50% of our divisional earnings saw an overall improvement of uptake during the third quarter with strong demand in the main product.

Volume growth in the means was particularly strong in the codings, polymers and resins market and the water treatment, oil field chemical fuels and loose additive markets as well. We also expect the construction of our ethylene amines manufacturing facility in Jubail, Saudi Arabia, a 50-50 joint venture with the Al-Zamil to be mechanically complete later this year with planned operation commencing in early 2010.

The plant will have an annual capacity of 60 million pounds. Huntsman’s 50% share of the venture net income should benefit our EBITDA by $8 million in the first year of operations. Sales performance for our performance intermediate business increased 11% compared to the second quarter driven by improved demand for household personnel care and other surfactants, as well as restocking that is taking place with some of our customers.

Maleic and hydride sales volumes increased in the third quarter compared to the second, as we won additional volume in the marketplace. Successive price increases in September and October recovered third quarter increased raw material costs. Our Geismar plant began operations in the third quarter and we incurred an addition $6 million of commissioning costs associated with start up, which reduced our earnings in the quarter that we do not adjust for in our reported adjusted EDITDA.

On slide eight; within our pigments divisions, earnings increased substantially from the second quarter. We have publicly stated our pigments division has been one of the hardest hit divisions over the last two years. Well I am encouraged by these early signs of improvement. We remain cautious given continued sluggishness in housing and automotive markets.

At this time we are seeing early signs of improvement within this industry. In the beginning of the year we believe industry inventory levels were as high as 90 days. We believe inventories fell to approximately 50 days at the end of the second quarter, and approximately 45 days at the end of the third quarter, both of which are borne in line with seasonal historical averages. In addition we believe global demand has returned to historical averages.

Asian demand appears to be above its historical averages as demand in the critical North American market improves slowly. We are seeing improving demand in Europe as well. We have announced a number of price increases in all major markets. At this time most of the improvements we are seeing in this division, have come about by initiatives we have taken earlier this year. We will pursue these types of sell top measures in the future as necessary.

Before sharing 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. In the third quarter 2009, our adjusted EBIDTA increased $200 million from $194 million in the prior year. The primary reasons for the year-over-year increase in adjusted EBIDTA was a favorable decrease in direct costs, which is primarily raw materials costs, more than offsetting the corresponding decrease in average selling prices.

Product pricing fell $49 million less than raw materials increasing our contribution margins. In addition, the prior year period was impacted by $49 million of costs and loss profit margins from the 2008 U.S. Gulf Coast storms. As compared to results from the prior quarter, our third quarter 2009 adjusted EBITDA increased from $96 million to $200 million. This increase was primarily attributable to an increase in demand experienced in our business, as well as a favorable decrease in direct and fixed costs.

On to slide 10; our year-over-year sales revenue was down 23%, as our products pricing fell with our raw materials, which is consistent with the results we have seen reported from our industry peers. As we consider the quarter-over-quarter sales trends, we saw an increased 13% which was almost entirely volume driven. As you can see, this sequential recovery in sales is in all regions and across all divisions, except for textile effects, where as Peter mentioned, pricing declined outpaced volume increases.

Slide 11, looking at our quarterly year-over-year sales volume, having removed the effects of our Australian styrenics business which we have announced will be shut down at year end, and our APA old business sold July 31 of this year, volumes were up 3%. However, year-over-year volumes generated a negative $27 million volume variance for EBITDA, primarily due to mix, as key MDI volumes were lower than in third quarter 2008.

We think that this analysis is a good presentation of the overall underlying demand, as it compensates procedural fluctuations. Demand clearly bottomed in the fourth quarter last year at negative 21%, as a result of dramatic destocking from the global economic recession, and has seen a dramatic improvement in the third quarter which saw positive 2% growth. It is worth noting however, that in the third quarter of 2008 our volumes were impacted by U.S. Gulf Coast storms. We estimate that adjusted third quarter volume contraction was negative 5% when adjusted for those storms.

Turning to slide 12, our adjusted effective tax rate has bounced all over the place recently. Let me try to explain what is happening. As mentioned in our press release this morning, although we have adjusted positive pre tax earnings during the quarter of $27 million, it was more than offset by an unusually high adjusted effective tax rate of more than 300%, creating an adjusted net loss of $55 million.

If we use our normalized tax rate of approximately 35%, our adjusted earnings per share would have been $0.30 per share higher or $0.06 per share. The primary reason for the unusually high tax rate is that we are required to book tax valuation allowances in countries such as, Switzerland and the U.K., where we have generated pretax losses over the past two year, which in short, has the effect of removing any NOL or other tax attributes from our balance sheet.

As a result of these tax valuation allowances, when we incur ongoing pretax losses in these countries, we cannot recognize a corresponding tax benefit. When combined with non valuation allowance country such as China and the U.S. where we have pretax profits, it has the effect of inflating our effective tax rate.

Correspondingly, when these valuation allowance countries turn around and begin once again to become profitable, which for the most part of textile effects and pigments concentrated countries, the effective tax rate will swing the other way and be lower than our normalized rate of approximately 35%.

From a cash tax perspective, we expect in 2009 to pay approximately $21 million, primarily related to foreign taxable income and approximately $129 million primarily related to U.S. taxable income. As of the end of the third quarter, we have paid a total of $145 million in cash taxes, of which approximately $127 million was associated with the settlement of our litigation in Texas with Credit Suisse and Deutsche Bank.

Let’s turn to slide 13. We’ve had a lot of success this year controlling our working capital investments. During the quarter we achieved a favorable cash benefit in our primary working capital, including the change in receivables associated with our off balance sheet accounts receivable program up $92 million.

During the year we have generated $416 million in cash as a result of our increased detention on to working capital. Certainly some of the benefit has come from a corresponding decrease in the value of raw materials and finished product, as inventories decreased in value 26%. However, much of the benefit was driven by aggressive management as shown by the decrease in our total inventory pounds of 25% on a volumetric basis.

It is worth noting, by selling more than we produced in the quarter, there was less fixed cost absorption capitalized into inventory. As a result, during the quarter adjusted EBITDA was negatively impacted by approximately $31 million.

The global economic recession has forced us to operate our business with leaner fixed costs and tighter supply chain. At the end of 2008 we put a plan in place to reduce costs by $150 million. As of the end of the third quarter, we have achieved these savings on an annualized run rate. We expect to continue our aggressive controls through the end of the year, and exceed our original target.

Slide 14. As of September 30, 2009 we had $1.6 billion of cash and $0.8 billion of unused borrowing capacity, summing to a total of $2.4 billion of liquidity on hand at the end of the third quarter. This compares to $3 billion at the end of the second quarter. In the quarter we paid $509 million for the redemption of notes and call premiums, and made $127 million tax payment on the bank settlement. Net of these items, liquidity actually increased $91 million.

Although, much of our current cash came from our favorable settlement with the banks in June, our underlying business, including the significant working capital benefit has generated positive free cash flow in the third quarter. Excluding the benefit of the favorable settlement money’s and related expenses, liquidity during the year has remained relatively flat.

On October 16, 2009 we refinanced our existing short term, 364 day accounts receivable securitization program, that was scheduled to mature November 2009, with two new multi-year securitization programs; a U.S. program and a European program. These new programs enable continued low cost borrowing for an extended period of time. We have no meaningful debt maturities until 2013, other than these new accounts receivable securitization programs.

As it relates to our outstanding insurance claims for the year, at our previously owned Port Arthur, Texas facility, we’ve claimed an additional $242 million plus interest as due and unpaid. We began binding arbitration proceedings to settle these claims on Monday of this week. As a reminder, any additional net proceeds are expected to be used to repay secured debt. We currently intend to substantially reduce and extend the committed amount of our $650 million revolving credit facility that matures August 2010.

On November 2, we announced that the waiting period under the Hart-Scott-Rodino Antitrust Act, had expired on the review of our purchase of certain Tronox assets. We are pleased with the favorable outcome of the SECs review and look forward to a quick closing upon the successful conclusion of the auction process and other jurisdictional reviews.

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

Peter Huntsman

Thank you Kimo. In summary, during the third quarter we saw improved demand in our businesses, and remain encouraged by our year-over-year order patterns. As we see every year at this time, customer demand flows and companies take inventories down to manage year end stock values. This year will be no different as demand flows during the fourth quarter.

We continue to see the positive results of decisions made over the past three years to expand our Asian operation, and focus on more differentiated chemistry, while divesting of our commodity plastics and chemical division. This geographic expansion has allowed us to take advantage of markets less affected by the ongoing global recession.

I’m not sure that the market has fully appreciated what we’ve building in Asia. In 2006, 15% of our sales were in the Asia-Pacific region. This year that number is about 22% of our sales. We are also seeing growing sales in South and Central America.

As Kimo mentioned earlier, we have generated over $400 million in cash by better working capital management this year. We stated at the beginning of the year that we would eliminate a $150 million in fixed costs in 2009. We’ve already met that objective, and believe that with the recent announcement to close the last of our polymers business in Australia, we should exceed this target.

I am pleased to see our demand picking up globally, particularly in Asia, where we see the strongest growth taking place. I think it will be some time before the U.S. and Europe are seeing the same sort of demand we experienced 18 months ago. As encouraged as I am by our adjusted EBITDA, I think we still have some real upside to get back to what I would consider to be a normalized EBITDA.

I believe we are making the right decisions today to build long term value. Our balance sheet is strong and we have growing markets around the world. Despite of the market’s variability, Huntsman is well positioned today to continue to create shareholder value going forward.

With that, I’ll turn the call back over to Kurt.

Kurt Odgen

Thank you Peter and that concludes our prepared remarks. Would you explain the procedure for questions and answers and then open the line for questions please.

Question-And-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of P.J. Juvekar from Citigroup; please proceed.

P.J. Juvekar - Citigroup

Yes, good morning. Peter when I look at your results and compare them to your competitors like Dow, your volumes held up much better but pricing was weaker. Can you talk about the specifics of your portfolio that leads to better volumes?

Peter Huntsman

P.J. thank you very much for the question. I think that as we look at our volumes, I’m not sure what I can say about Dow’s pricing and their products and so forth, they do have different products and different markets they compete in.

I believe that where we compete head to head with Dow around the world on a product-by-product basis, I do believe, I can’t comment on Dow’s pricing policy. I would say that I believe that we are very aggressive with our pricing that is aggressively holding up our pricing. I consider us to be a leader in the market as far as being able to sell value and sell quality and not just price.

I would say that as you look at the statistics that I gave at the end of my prepared remarks, talking about nearly a quarter of our business being in the Asia-Pacific area, I would consider that area to be between Singapore, China and India, being nearly 25% of our overall sales.

I believe that this is higher than most of our competitors, European and U.S. competitors, and we’ve taken some bold steps to expand our business in these areas and I believe that as you look at our tonnage, I hope that the market doesn’t get too bogged down looking at revenues in the chemical industry when you see raw materials drop as much as they dropped.

I don’t think that just tracking revenues is important as tracking the tonnage that we are selling as an industry, and as I look at the tonnage I think that we continue to do very well particularly in Asia, and we continue to see a recovery, but I can’t comment on a product-by-product, price-by-price between us and Dow. I would say that this is a much stronger portfolio and company. I’m a bit biased aren’t I? I’m just kidding.

P.J. Juvekar - Citigroup

Okay, that’s helpful. My second question is on Tronox. Tronox went bankrupt in this recession. So I mean, what’s so attractive about Tronox’s portfolio or is it just that you can buy these assets cheap and you get some synergies? What’s so attractive about Tronox acquisition?

Peter Huntsman

I think I’ve said publicly that we believe that this would be a very good fit between these businesses, and I would just mention that we are in the middle of a public auction at this point. We are operating under a secrecy agreement with Tronox, and I look forward if we are the winning bid, to having a conference call that would be dedicated to the merits that we see and the combination of these assets, but at this time P.J., I don’t think that legally or ethically that I could comment on aspects of the Tronox business, sort of the bidding process and where we are right now.

Kimo Esplin

P.J., let me just add that your familiar with Tronox and you know that the underlying business wasn’t the primary reason for the bankruptcy filing. There were significant environmental issues in the company that related to sort of non TiO2 businesses. They were legacy Kerr-McGee liabilities. So there are other reasons that clearly will be cleaned up in the bankruptcy and these assets which continue to be very competitive will be a value to whoever buys them.

P.J. Juvekar - Citigroup

Thank you.

Peter Huntsman

Thank you.

Operator

Your next question comes from the line of Laurence Alexander from Jefferies. Please proceed.

Laurence Alexander - Jefferies & Co

Good morning. I guess first question what are you seeing in your end markets in terms of winter shutdowns compared to last year, are they more extended or shorter?

Peter Huntsman

I’m sorry Laurence you said; I just missed the first few words of your question.

Laurence Alexander - Jefferies & Co

What are you seeing in your end markets in terms of holiday shutdowns going into the December or seasonally low period, is that worse or better than last year?

Peter Huntsman

I would say that it certainly and again there is going to be certain segments that are up and down. I would say that across the board, it appears as we go into fourth quarter the demand is stronger than last year. I would remind you that at about the middle to the end of November last year, we saw a drop off of 30% to 40% in about a three week period in the latter part of November as prices were falling in raw materials, and people literally just stopped buying, and massive destocking was taking place.

So, we are all a bit gun shy, having been hit so suddenly this past year, but this year I think that our customers by and large will be managing their stocks very carefully going into the end of the year. I don’t think people want to be tying up a lot of cash at the end of year.

Having said that, as we look at the supply chain, I think that inventories are very low across the board, just if I look anecdotally around the world and my communication with customers, it appears that inventories are very low right now, and I don’t think that the supply chains for the industry in general are in a position today to really stop buying, sort of a major shut down on the consumer end.

If prices were to suddenly drop on the raw materials side, there is not a bucket full of inventory sitting around that the people can just stop buying raw materials and kind of coach with what they have got in inventory. So I think it’s pretty tight right now, and I don’t expect a substantial drop off, more than what you would seasonally see going into the typical fourth quarter.

Laurence Alexander - Jefferies & Co

And then just as a follow up, you’ve seen some of your end markets improve sequentially quite a bit, have you seen any early signs of pricing competition sort of become more aggressive as volumes recover or do you think that for holding the line on price fairly well?

Peter Huntsman

I think again, it will vary product-by-product, division-by-division, but I think that across the board, there has been plenty of price battles and so forth going on in the market, but by and large margins still remains fairly constant. People have been fairly disciplined in not giving away products, and I think that there have been price force that would have started for people going after the volume that’s out there.

Personally I think that for the most part it would have started by now, just in the cycle. We have been about a year now in this awful downturn, we’ve seen a nice recovery and again we’ve seen prices come down, but we really haven’t seen margins collapse as you typically do when operating rates drop.

Kimo Esplin

Laurence as we mentioned, year-over-year our contribution margins increased, price versus direct cost by about $50 million. Sequentially it was pretty flat; prices moved about the same as our raw materials.

Laurence Alexander - Jefferies & Co

And then just lastly, you have done quite a bit of work on productivity over the last few years. What you see as sort of a good annual target, I mean not just for 2010, but just as a good annual run rate.

Kimo Esplin

As far as capacity utilization or cost?

Laurence Alexander - Jefferies & Co

No, in terms of productivity or cost take out and just sort of incremental productivity initiatives?

Peter Huntsman

I think this is the basic rule of thumb. You have a company that buys roughly $20 million to $30 million a year of inflation that comes about through salary increases, and you cannot year-after-year increase your margins by that rate of inflation. So you have to see between a combination of productivity gains, six sigma, a number of manufacturing initiatives that we have. I believe that every year you have to offset those sort of costs by better efficiencies throughout the system. So, I would say that should be able to continue.

I do not believe that the company is fat enough that you are going to see a $150 million of costs taken out of the business, should we see another economic collapse which I don’t foresee happening, but should we see something like that happen sometime in the next year or so, then we would be prepared to shut down further capacities and take further steps.

With the market growing the way that it is, with Asia growing with new applications coming online and so forth, I think that we will be very well focused to maintain the cost that we have taken out of our business and to offset inflation going forward.

Laurence Alexander - Jefferies & Co

Thank you.

Operator

Your next question comes from the line of Rogers Spitz from Banc of America/Merrill Lynch. Please proceed.

Roger Spitz - Banc of America/Merrill Lynch

Thank you. Why is plastic based resin possibly down versus Q2 and I guess I had understood that you had significantly reduced your merchant base resin in sales to something closer to perhaps 5% or 25% when Vantila [ph] ran the business?

Peter Huntsman

I am sorry. You said it was down versus Q2; I’ve got EBITDA increasing sequentially.

Roger Spitz - Banc of America/Merrill Lynch

On the base resin side?

Peter Huntsman

Well, base resins, I don’t know if we commented on base resins. Base resin hasn’t been very profitable over the last 12 months and frankly it’s pretty well flat, with the second quarter.

Roger Spitz - Banc of America/Merrill Lynch

Okay got it, and secondly, what did Q3 ‘09 MDI volumes and margins do compared to Q2, ‘09?

Peter Huntsman

If we look at the MDI EBITDA from Q2 to Q3 sequentially, margins or EBITDA more than doubled in that business, and as you look at MTBE, they increased less than about 20%. So the vast majority of the improvement that we saw in the business, in our Polyurethane’s business took place because of stronger polyurethane’s performance of stronger MDI pricing and volume.

As it relates to MDI volumes, sequentially MDI was up 13% relative to the second quarter. Really in all the regions; of course when you look at it on a year-over-year basis, Asia was up the strongest and significantly when you look at it sequentially, Europe was very strong in the third quarter versus second quarter.

Roger Spitz - Banc of America/Merrill Lynch

Right, thank you guys.

Operator

Your next question comes from the line of Laurence Jollon from Barclays Capital. Please proceed.

Laurence Jollon - Barclays Capital

Good morning. Kimo, I wanted to follow up on the $180 million call it IRS tax payment related to the June settlement. I know in the second quarter -- well I should say no, I think in the second quarter your book taxes reflected that settlement and then you had an increase in income taxes payable. I guess my first question is that correct and then secondly, what happened in the third quarter, did you in fact actually pay out a portion of that?

Kimo Esplin

Yes, I think you have it just right, that it hit the books in the second quarter when we received a payment. We made the payment in the third quarter, the payment was roughly $127 million and we think that’s all we will pay relative to that settlement, the $127.

Laurence Jollon - Barclays Capital

Okay, so in the third quarter when you referenced that you had roughly a $90 million source of cash from primary working capital, we should expect once we receive the Q, that also in working capital, there would be a $127 million outflow as income taxes payable declined by that amount.

Kimo Esplin

That’s correct, when we talk about primary working capital, we are talking about receivables inventory and trade payables. So when we measure primary working capital, we would exclude that tax payable.

Laurence Jollon - Barclays Capital

Of course, I just wanted to confirm that there was another outflow. Okay, thanks a lot.

Operator

Your next question comes from the line of Jeff Zekauskas with J.P. Morgan, please proceed.

Jeffrey Zekauskas - J.P. Morgan

Hi, good morning.

Kimo Esplin

Hello Jeff.

Jeffrey Zekauskas - J.P. Morgan

Can you detail the elements of the $62 million in restructuring costs?

Kimo Esplin

Yes, we give a lot of sort of detail in the Q, which will be filed here in few minutes. So it’ll probably save us a little bit of time. Just take a look at the profile and you’ll see quite a bit of detail in the notes.

Jeffrey Zekauskas - J.P. Morgan

I can read the Q when it comes out.

Kimo Esplin

The bottom line is, it’s almost all Australia. You remember, we indicated when we announced the closure, that there would be a chunk of it that would go to severance and then we have not identified what the environmental remediation cost would be, the $55 million of Australian restructuring charges includes $30 million of environmental remediation estimates.

Jeffrey Zekauskas - J.P. Morgan

Okay, and what was cash flow from operations in the quarter?

Kimo Esplin

This 10-Q is way too long, so give me one second. So net cash flows from operations in Huntsman Corporation, nine months is $907 million.

Jeffrey Zekauskas - J.P. Morgan

Okay, and then lastly, can you just talk about the positive pricing dynamic on a sequential basis in urethanes generally, and in MDI. In other words, what was the economic reason for it, given that we are operating at such low utilization rates, and was there a difference in the price changes by region, were some up or some down?

Kimo Esplin

The answer is yes, to the latter and we are seeing an Asian region that is virtually sold out of its capacity and so, you would expect and we’ve seen sequentially, prices increase higher in Asia. I will say that prices fell, may be further in Asia in the down turn, as Peter described, sort of November, December, January softness, but generally, prices rose globally 5% sequentially, the strongest region was Asia.

Peter Huntsman

Let’s remember as well, on products like MDI, this isn’t a product like polyethylene or ethylene glycol, where you can just put it in a bag or put it in a container and ship it around the world and develop those at the same price. You have literally 100s of different price points, different grades, different formulations, different systems and so forth that take place in MDI.

A lot of our product if you ship it overseas, it has to be shipped pressurized and cryogenic and it has the shelf life to it; meaning that, if we are short in Asia and we can’t supply all of our need out of our couching facility, you can’t just necessarily export products from Europe and America to satisfy all of the end used application. So there is regional pricing and there is a great deal of pricing that takes place product-by-product and end use application by application.

Jeffrey Zekauskas - J.P. Morgan

That’s helpful. What was pricing like in the US on a sequential basis?

Kimo Esplin

It was, let’s see, 2% or 3%.

Jeffrey Zekauskas - J.P. Morgan

2% or 3%. Okay. Thank you very much.

Operator

Your next question comes from the line of Michael Boam from BlueBay. Please proceed.

Michael Boam - BlueBay Asset Management

Hi, just in terms of the insurance settlement, I wondered if you could maybe give a little bit more color or how that’s progressing, what you see that shaking out, and whether or not you expect to receive the proceeds before year end.

Kimo Esplin

I would hope that we would have a settlement by year end, certainly a ruling by year end. We are actually going to be collecting the funds by year end. I would be very hopeful that that would be the case as well. So I think that anything beyond that I would just be speculating.

We obviously feel very strong about our case that we are going to collect, the 242 that we have, and I am sure if somebody from the other side of the table were here; they would tell you that they feel just as strong on their side. So I certainly do not think that we are in a position today to speculate how much we are going to be given or exactly when the payment of any sort of a binding settlement would be made.

Michael Boam - BlueBay Asset Management

Okay. Thank you.

Operator

Your next question comes from the line of Tony [Inaudible]. Please proceed.

Tony – Unidentified Company

Good morning gentlemen.

Peter Huntsman

Hello Tony.

Tony – Unidentified Company

Kimo, you made reference to $150 million of run rate cost cuts having been achieved by this point in time. Obviously, not all of those have run for all of calendar year 2009. Could you give us an idea of a delta or the hangover if you will, in 2010 of that run rate, the incremental amount that will be gained in 2010 by a full year of that run rate?

Kimo Esplin

My guess is that in -- I don’t have the exact number Tony, but roughly my guess is that in 2009, we saw when you look at the full calendar 2009 you will probably see three quarters of that 150. So you will get another 25% in 2010 as we hit out stride. I think you are going to see as we mentioned, more cost savings because we recently announced Australian closure and that will benefit us as well. So there will be more opportunities on top of that 150.

Tony – Unidentified Company

Thanks, I was just really looking at that 150 program in isolation. Thank you.

Kimo Esplin

Thank you.

Operator

Your next question comes from the line of Sabina Chatterjee from BB&T Capital. Please proceed.

Sabina Chatterjee - BB&T Capital

Good morning. Your textile effects business I realize that’s been an area of focus with respect to restructuring and the EBITDA loss that we saw in Q3 was a little greater than what we had expected. So, I am wondering when we can anticipate some positive results from the segment, which I imagine would be a function of pricing.

Kimo Esplin

Well, Sabina it’s got to be a function of pricing, it’s also going to be a function as to when we are completed with an SAP transition, and when we are completed with our cost cutting.

I think that when you look at the amount of noise from SAP and the lot of the restructuring that took place in the third quarter in spite of the fourth quarter sluggishness that we see, I would expect our textile effects to look better in the fourth quarter than it did in the third quarter.

I think that by Spring of 2010 that we ought to see a positive EBITDA contribution coming from this business. That’s again, that’s just my personal observation here. But I think we have invested a lot, we have had a very supportive board of directors with our textile effects division and we have, I think that we are going to show results in 2010 because of that and I think those results would be coming sooner rather than later.

Sabina Chatterjee - BB&T Capital

Okay, that segues perfectly into my next question because are there any other product areas or business lines where you anticipate maybe a strong enough recovery in Q4 that would offset seasonality, and we would see probably even more growth?

Kimo Esplin

I think that you are going to be with these economic conditions and operating rates where they are. I think it’s going to be fairly limited on getting pricing momentum going and I think that demand in the fourth quarter, it will be seasonal.

I think it will be better than it was last year, but just the nature I mean, we are going to do the same thing, we will have our inventories, you will maximize working capital, you will burn down your inventories and our customers will do the same thing that we will be doing as a company. So I think at this point it’s probably just too early to speculate on anything more than that taking place in the fourth quarter.

Sabina Chatterjee - BB&T Capital

Okay. Thank you.

Kimo Esplin

Thank you.

Operator

Your next question comes from the line of Rajul Aggarwal from Marathon Asset Management. Please proceed.

Rajul Aggarwal - Marathon Asset Management

Hi, thanks for taking my questions. In the press release you mentioned the different dynamics of volumes between the different products in the polyurethane segment between MTB, EPO and MDI, could you give us some more granularity around it as to and some numbers on it as which went up and which went down and how much?

Peter Huntsman

Well, Kimo is getting is that. I would just note that as we look at propylene oxide and you look at the margins, a lot of these are byproducts, although they are products. So as you look at the value and the cost of something like MTBE that comes off of our propylene oxide and you look at your propylene oxide as you are maximizing the sales, the polyols is going into MDI, you want to in order to maximize your MTBE volume you want to sell more PO and you want to sell more systems in MDI that takes the PO. So it’s a difficult question to kind of segregate out each one of those, but Kimo, what do we have as far as color in that area?

Kimo Esplin

Sure, just to give you again a sense for year-over-year volumes, we mentioned that MDI was down 2%. MTBE was up significantly, and it was up nearly 30%. There is lots of different businesses in polyurethane, polyols and so forth. But generally everything was up 5% to 10%, MDI again I have said is down just a bit, but Peter I think importantly said in his remarks that for September it’s really the first month we have seen in 12 months where we had year-over-year increase in MDI volumes globally, which gives you a sense for the trends we have been seeing over the last 9 months.

Peter Huntsman

Let’s remember too, when we talked about volumes on something like MTBE, MTBE ships out its volumes, well it’s shipping out on ships and because of the large volumes and the loading time you may have a ship that will leave a day or two before the end of the month, or will scull over and leave the first day of the following month and you can see volume fluctuations of 5% to 10% month-on-month.

When the plant is running at the same rate, it’s a question of what sort of volumes you are able to move out of the plant physically, are you able to bill your customer and so forth. So on MTBE you do have some noise there on your timing of shipments, because of the large volume of those shipments. So I wouldn’t get too lost on the month or even quarterly changes on that.

Rajul Aggarwal - Marathon Asset Management

Okay. So, I mean, could you give us some metrics by which we can predict the profitability impact just from MTBE on this quarter, and just trying to predict where it will be for the next quarter given that’s it’s a seasonal weaker quarter frame to be?

Kimo Esplin

Well, MTBE is a global commodity, that you can track sea factors, which is a, you know, a rough margin relative margin for MTBE. So its’ not something that I think like MDI was difficult to sort of gauge profitability. So, who knows where sea factors would go in the fourth quarter frankly that is a function of the supply and demand.

Peter Huntsman

And sea factors of course is a factor of gasoline blends, gasoline values and Octane values and so it has to deal with crude oils and the gasoline pools, something two variables that are completely unrelated to the chemical industry, and so you can actually see MTBE pricing quite stable and volumes quite stable, but margins can go all over the place because of the gasoline and crude oil variability.

So, it’s a tough one to try to speculate and that margin, unlike most of our chemical products, that margin literally moves day in and day out, it moves a lot, day in and day out. For example, year-over-year MTBE pricing fell by a third, it’s down over 30%, but the profitability was fairly stable, positive.

Operator

Your next question comes from the line of Sam Epibonia [ph] from Columbia Management, please proceed.

Sam Epibonia - Columbia Management

Good morning gentlemen, thanks for taking my question. Just some housekeeping item on, I would say a decent liquidity position. I understand the stocking house did for Tronox, is there any use of cash down the road? Should we expect another Boltom acquisition or large acquisition or will the company focus on debt reduction.

Kimo Esplin

Our company at this point obviously, we’re going through the board of very closely scrutinize acquisition opportunities, but while we are in these sort of market conditions, the volatile market conditions that we see globally, cash is king right now, and we want to make sure that we preserve that liquidity, the cash liquidities that we have in this company is best we can, and I think that that will continue to be a top priority with this board.

How much cash and so forth would inevitably go into something like a Tronox, that would be determined obviously, at the time of financing should we be successful, but at this point, our number one priority in the company is to make sure that we keep strong liquidity positions, we’ve protected our dividend, we have made sure that we are a in a position to weather any cyclicality, and I think that we are one of the few chemical companies in the world that can say that our balance sheet today is stronger than it’s ever been in our history.

Sam Epibonia - Columbia Management

Thank you, appreciated. If I may second question, regarding sort of your mid cycle EBITDA now, given you have repositioned your portfolio in Asia and your doing additional work on the cost saving, where do you see as your, I would say, mid cycle EBITDA now, given your positioning in Asia and on the products?

Kimo Esplin

I think that you have got to factor in Asian segments and since you have kind of looked over the last two years, we have added a capacity that now is sold out in Singapore, in our means, in Saudi Arabia a new plant coming on, we have a as Maleican high dry facility that came on earlier this year, we have cut out a $150 to $200 million of cost over the last two, two and a half years from our business and really positioned, fully operating in the last two years now, our MDI facility in China and so, I look at it.

I think that if you look at our average mid cycle EBITDA from where we were, two or three years ago to where we are today, personally I would increase that EBITDA by probably a $150 to $200 million.

Sam Epibonia - Columbia Management

Thank you.

Peter Huntsman

If you look at the third quarter 2008 prior to the real down turn, we would have done roughly $250 million without a hurricane, you look at the third quarter 2009, of course we are $200 million but we pointed out a couple of things, that were important, one was from a volumetric variant standpoint, we were down roughly $30 million, and also we have because we are reducing physical inventories, had about a $30 million inventory adjustment relative to absorbed fixed cost.

So you get back to that $250, $206 EBITDA third quarter, and that’s not a bad number to think about, at least on a third quarter basis. And seasonally that’s probably our second strongest quarter, second quarter is typically our strongest.

Sam Epibonia - Columbia Management

Thank you gentlemen.

Operator

Your next question comes from the line of Chris Nolus [ph] from Impala. Please proceed.

Kimo Esplin

Operator I think that given the time constraints and so forth, we will take this as our last question. So well go ahead Chris.

Operator

Please unmute your line.

Kimo Esplin

Well it might have been too early for Chris, can we go to the next one?

Operator

Your next question comes from the line of Adril Esque [ph] from Hartford Investment Management. Please proceed.

Adril Esque - Hartford Investment Management

Thanks got in just on the wire, I guess most of my questions have been answered guys, but appreciate the call and great quarter, very happy with the results here. My question is on working capital, I guess in the current raw material price in volume and environment that we are in, any sense of where the working capital will be a source of use of funds in the next two quarters?

Kimo Esplin

Well, we have, as Peter mentioned a big turn around in specifically in offsite business in the first quarter and so we really need to build inventories in advance of that 65 day turn around in the fourth quarter, we would expect inventories to build and working capital to build modestly in the fourth quarter. And first quarter tends to be a building quarter in seasonal businesses like titanium dioxide in advance of a paint season for the second and third quarter. So, my guess is over the next six months we will have modest builds in working capital.

Peter Huntsman

Operator before we sign off here, I just ask our chairman and my father if he has any closing comments here.

John Huntsman

Well thank you Peter, this is John Huntsman, the Executive Chairman and it’s hard to believe that 40 years ago, we started this business as young and almost in one room and witnessed a lots of peaks and valleys and challenges evolve over this period of time.

I have to say that today is really a great day for Huntsman Corporation. We have a strong balance sheet, we have an incredibly talented management team. When one looks around the world at the chemical companies that are left, and I say that are left, because over the years people has always said, “Well Huntsman won’t be around, Huntsman won’t be around,” we have got Union Carbide, we’ve got Texico we have got all these Great Arco [ph], they are all gone. We are here, we are stronger than ever, we have a tremendous leadership team, Peter is by far the finest CEO in the world in the chemical industry.

Last few weeks ago, I went partially around the world visited a lot of our sites, visited with many of our competitors, visited with a lot of the leaders of governments around the country, and I just have to say that Huntsman is really excited about what happens now in our 40th year. We lived through it of 72, we have withstood all of the recessions, depressions and oil scarce over the years and we never had a time that looked better, we never had to manage the team with more professional and committed and we are moving really aggressively.

We have a tremendous board of directors, and I guess and many people today would be saying “These are the worst of times, these are the tough challenges, we are in the middle of a recession.” I guess we would say we are really looking forward to great growth in the future, and to the sound management that we have at the present time, and moving as fast as we can possibly move in certain parts of Asia and some of the Gulf areas, a very solid company, very solid financing and a very big experienced team of people and a great product mix.

We really thank those analyst out there who some of you I look at those names, some of you were just on a call when you start tracking and as you were just young analysts and kind of retired. So congratulations, thank you very, very much for your interest in our company.

Peter Huntsman

Operator, thank you very much.

Operator

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

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