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Huntsman Corp. (NYSE:HUN)

Q4 2009 Earnings Call

February 19, 2010 10:00 am ET

Executives

Jon Huntsman - Executive Chairman & Director

Peter Huntsman - President & Chief Executive Officer

Kimo Esplin - Executive Vice President & Chief Financial Officer

Kurt Ogden - Vice President of Investor Relations

Analysts

Lucy Watson - Jefferies

Frank Mitsch - BB&T Capital Markets

P.J. Juvekar - Citi

Jeff Zekauskas - JP Morgan

Bill Hoffman - RBC Capital Markets

Roger Spitz - Bank of America

Operator

Good day, ladies and gentlemen. Welcome to the Q4 2009, Huntsman Corp. earnings conference call. My name is Kaitlin, and I’ll be your operator for today. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions)

I would now like to turn the conference over to your host for today’s call, Mr. Kurt Ogden; please proceed.

Kurt Ogden

Thank you Kaitlin 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 fourth quarter of 2009. Joining us on the call today are Jon Huntsman the Founder of our company and Executive Chairman and Director; along with Peter Huntsman, President and CEO; and Kimo Esplin, Executive Vice President and CFO.

A recorded playback of this call will be available until midnight, February 26, 2010. 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 772-181-55. A recording of this call may also be accessed through our website.

This morning before the market opened, we released our earnings for the fourth 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 reconciliations 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. Following my comments, Peter Huntsman will review the recent performance for each of our divisions, after which Kimo Esplin will address certain business trends and financial related items and then Peter will provide some concluding thoughts. 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 through our securitization program, unallocated foreign exchange gains and losses, losses from early extinguishment of debt, extraordinary gains and losses on the acquisition of the 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 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 loss and income can be found in the appendix of our slides and in our fourth quarter earnings release.

Let’s turn to slide three. In our earnings release this morning, we recorded fourth quarter 2009 revenue of $2.96 billion, adjusted EBITDA of $165 million, and adjusted earnings per share at $0.27 per diluted share. Our adjusted EBITDA increased to $165 million in the fourth quarter 2009, compared to $51 million in the prior year and decreased consistent with normal seasonal pattern from $200 million in the prior quarter.

We have seen some swings in income tax expense and income benefit within our income statement recently. As we discussed last quarter, the primary reason for this is that we are required to book tax valuation allowances in countries such as, Switzerland and the U.K., for the most part of textile effects and pigments concentrated countries, where we had generated pre-tax losses over the past few years. As a result of these tax valuation allowances, when we incur ongoing pre-tax losses in these countries, we generally cannot recognize a corresponding tax benefit.

In the fourth quarter of 2009, as a result of year end pension accounting and gains on pension assets in countries where we have valuation allowances, U.S. GAAP provides that we recognized a cash benefit of some of our operating losses otherwise not allowable, because of valuation allowances.

In addition, we recorded some tax benefits from losses in countries where we don’t have valuation allowances. We believe our normalized tax rate is approximately 30% to 35% however, until we become profitable within the valuation allowance countries such as Switzerland and U.K., we will continue to have an unusual tax rate. This unique circumstance only impacts our GAAP reported tax line and has no impact on our cash tax rate, which we believe is approximately 20%.

With that I will turn the call over to Peter Huntsman our CEO, who will discuss our results in more detail.

Peter Huntsman

Kurt, thank you very much. If you’d join me in turning to slide number four. Our Polyurethanes business posted strong adjusted EBITDA results in the fourth quarter. Compared to the prior year, we saw improved demand across all regions as well as increased contribution margins.

Global demand for MDI increase 12% in the fourth quarter compared to the prior year. Asia continues to lead the global recovery, fueled in part by the Chinese stimulus programs are automotive, appliance, coatings in the last number of sectors have seen a strong increase in demand. We also saw significant improvement in demand in the Americas with growth and increased market penetration into composite wood products is a major driver.

In Europe, our largest market, we saw demand recovery to a lesser degree due to colder than normal weather. However, there were notable increases across sectors not yet affected by weather such as automotive, adhesives, coatings, appliances and furniture.

I want to emphasize, we are not just seeing strengthening from underlying market demand, but additional market penetration if MDI continues to replace less competitive alternatives. Looking forward, I expect rising benzene cost to constrain contribution margins in the near term. To put that in perspective, it takes about 90 days to work cost through the value chain and on to our customers.

Earnings in the fourth quarter this year for propylene oxide and its co-product MTBE were very similar to the third. Propylene oxide is a key the raw material for our polyols, which combined with MDI form a polyurethane system. Strong contribution margins for MTBE were driven by favorable supply demand fundamentals. We continue to see healthy demand outside the United States. We produce propylene oxide in MTBE at our Port Neches, Texas facility.

In January this year, we idle this facility for a turnaround in inspection that is planned to last until the end of the first quarter. It has been six years since this facility was last shut down for this type of maintenance, any down time is subject to construction and weather delays, but so far we are on schedule.

Market conditions and margins on MTBE will undoubtedly fluctuate during the time that our facility is idle. However based on historical margins we now estimate the EBITDA impact in the first quarter to be approximately $30 million to $35 million including unabsorbed fixed cost.

Turning to slide number five, let’s talk about our advanced materials division. Just as demand for products more advanced material division was slower to drop a year ago we have seen a slow recovery compared to other divisions. Fourth quarter increased in year-over-year demand in our core businesses, formulated systems and specialty components.

When combined rose 3% while EBITDA for this division was flat compared to a year ago, EBITDA for the formulated and components, the specialty and growth side of this division was up in the fourth quarter to $14 million compared to last year and $8 million compared to the third quarter of this year. We’ve seen improved demand for our carbon fiber reinforcement resins used within the aerospace sector.

Additionally our proxy resins used in composites for wind materials have seen favorable demand. In our electronic sector we have captured additional market share in large part due to halogen free product used in circuit boards has been very well received in the market place.

Our more commodities based liquid resins market, which represents approximately 15% of advanced materials revenues have seen a more severe delay in demand correction within the worldwide economic turn down as volumes decreased 10%. This downturn has been most acute in Europe.

Our fourth quarter results improved from a year earlier and from our most recent third quarter do in large parts of falling raw material cost. During the first quarter we have seen prices from many of our raw materials increased and we expect this to result in the near term margin compression.

Turning the slide six, we are encouraged with the improvement of our textile effects division earnings. In the fourth quarter we cut our losses by $7 million compared to a year early and $9 million as compared to previous quarter. We expect this division to continue to improve and return to profitability in 2010 although demand recovery and consumer oriented markets is been somewhat muted, we saw increased year-over-year sales volumes of 25% in our Asian and Middle East region, which is our larger market as well as 4% growth in the Americas.

We’ve seen a restocking of supply chain for automotive demand and improve demand for a certain specialties synthetics, as it go into sports, apparel and swimwear. Due to improved demand we’ve seen positive quarter-over-quarter improvements on selling prices, which have had a positive impact on earnings.

One of our major global competitors in textile dyes; DyStar declared bankruptcy and was recently acquired by Indian based Kiri Dyes & Chemicals Ltd. As a result of the market confusion created by the disruption, we believe we’ve been able to win competitive market share.

In December of 2008, we announced our intense to reduce fixed costs for this division by $60 million by the end of 2009. I’m pleased to say that we have captured all of those savings and a bit more. We continue to be focus on the top line and our very optimistic about a number of new product launches that will happen later this year.

Turning to slide number seven; as we signaled in our last quarter, the increase in raw material cost had an effective of compressing margins within our performance products division and as a result our earnings decreased. That said we saw an underlying improvement in demand of 15% during the quarter compared to last year.

Our performance specialties business, which represents around 50% of our divisional earnings, saw an overall improvement in demand during the fourth quarter primarily driven by strong demand in the Asia Pacific region for our amines product. This business also generated an adjusted EBITDA of $9 million better than the previous year.

Volume growth in amines was particularly strong in the coatings, fuels, lubricants and agrochemical markets. Construction of our new ethyleneamines facility in Jubail, Saudi Arabia is complete and we will have a commissioning ceremony with our 50/50 joint venture partner Al-Zamil Group later this month.

Huntsman’s 50% of this venture should benefit our EBITDA by approximately $8 million in 2010 compared to a year ago sales volumes increased in both our performance intermediate and maleic anhydride businesses. These business groups are observing higher raw material cost in natural gas and crude oil. We’re pushing to price increases, we are tempt offset these rising costs.

On slide eight, in the fourth quarter, our pigments division earned $23 million of adjusted EBITDA, this is the best quarters since early 2007. We’ve seen our earnings improved over $35 million from the year earlier and over $7 million from the previous quarter’s earnings.

We are seeing a robust recovering demand in Asia Pacific and Latin American markets, while the recovery in Europe, which is our largest market, is more modest. In the North American market appears, we finally reach the demand level that is growing as opposed to contracting.

Due to improved demand, we’ve seen positive quarter-over-quarter traction on the price increases announced earlier, which have had a positive impact on our bottom line. We’re benefiting from the structural cost improvements implemented during 2009 as well. As this division is still far from reinvestment economics, we are anticipating further improvements throughout 2010 as global economics improve.

I would now like to turn a few minutes over to Kimo Esplin, our Chief Financial Officer before share some concluding thoughts

Kimo Esplin

Thanks Peter. Lets all turn to slide nine. From 2002 through 2008, we saw a pretty dramatic increase in direct costs, which primarily are raw material and utility costs, on a per-pound sold basis. Direct cost per-pound peaked in 2008 before the pressure of rising raw material costs receipted in 2009. Despite this volatility in underlying raw material costs, our contribution margin per pound sold remain constant through the energy volatility of the past several years and during the challenging economic environment of 2009 recession.

This really underscores the point that I previously tried to make that the greatest challenge for us in 2009 was underlined demand and not price. This also validates our decision to exit our commodity businesses a few years ago as our experience with commodity business has showed that in periods of over supplier recession similar to 2009, unit margins fall in addition to falling volumes. This of course is not been the case with our business in 2009.

On to slide 10, we think quarterly sales volume on a year-over-year basis is an appropriate measure of underlying demand as it adjusts for seasonal fluctuations. Demand bottomed in the fourth quarter last year at negative 21% as a result of dramatically stocking from the global economic recession. We are encouraged by the trend in recent quarters as demand increased 3% and 13% in the third and fourth quarters of 2009.

Slide 11, bridges the fourth quarter 2008 adjusted EBITDA of $51 million to the fourth quarter 2009 adjusted EBITDA of $165 million. An increase in volumes was the primary reason for the year-over-year increase in adjusted EBITDA. We also benefited from increased margins as prices lagged in raw material costs.

In 2009, our adjusted EBITDA decreased to $511 million from $643 million in 2008. Our average selling prices decreased less than the decrease of direct costs, which include raw material costs. Again, the most significant reason for the decrease in earnings was the decrease in the sales volume, which created an approximate $350 million headwind in 2009.

As underlying demand returns, plus a full year’s benefit of our cost cutting and improved manufacturing efficiencies we can see a clear path back to normalized EBITDA of more than $1 billion.

On slide 12; our year-over-year sales revenue for the fourth quarter was up 2% primarily as a result of improved recovery in global demand. Sales recovery was most dramatic in the Asia Pacific region with a year-over-year increase of 27% and in our Pigment segment with the year-over-year increase of 33%.

Product pricing fells $75 million less than raw materials thereby increasing contribution margins. We saw small decrease of 1% in our quarter-over-quarter sales trends primarily as a result of seasonal volume declines. Contribution margins expanded as fourth quarter price increases, outpaced raw material increases.

Let’s turn to slide 13. During 2009 we were quite successful in managing our working capital. In the fourth quarter we achieved a favorable cash benefit in our primary working capital of $74 million, which include the change in receivables associated with our off- balance sheet accounts receivable securitization program.

During the year we have generated approximately $490 million in cash. The majority of this benefit was derived through aggressive management of our inventories. During 2009 our inventory pounds have decreased 20% as inventory values decreased 21%.

On the slide 14, at the end of the year we had approximately $1.8 billion of cash and approximately $800 million of unused borrowing capacity summing up to a total of $2.5 billion of liquidity on hand. This compares to $2.4 billion at the end of the third quarter an increase of $98 million.

Despite the impact of the worldwide economic recession on earnings in 2009 and adjusting for cash receipt from the Texas Bank Litigation Settlement in certain bond redemptions, our liquidity increased approximately $135 million during the year. This was largely due to effective working capital management, reduced capital expenditures and minimal scheduled debt maturities.

In 2009 capital expenditures were $189 million; we expect to spend between $250 million and $275 million on capital expenditures in 2010. We are currently seeking to amend our existing revolving credit facility and reduce the available borrowing limit to an amount of approximately $300 million and extend the maturity from August 2010 to February 2014. We have no cash borrowings outstanding into this facility and expect to use it primarily to facilitate the issuance of letters of credit and bank guarantees.

During the fourth quarter of 2009, we replaced our existing short term 364 day, accounts receivable securitization program that was scheduled to mature November, 2009. We’ve replaced it with two new multiyear securitization programs, a U.S. program and a European program. The U.S. program provides for financing up to $250 million, the European program provides for financing up to $225 million euros.

In connection with our ongoing insurance claim related the April 29, 2006 Port Arthur, Texas fire we have received partial insurance proceeds to date of $365 million. We are currently in binding arbitration with the insurers while final ruling is not expected until after additional oral arguments scheduled from March 2010 based on preliminary ruling, we do not expect additional recoveries to exceed $200 million, additional anticipated recoveries will be used to repay secured debt.

On January 11, 2010 we repurchased all of our outstanding 7% convertible notes to 2018. The convertible notes were issued to [Inaudible] in connection with the terminated Merger Agreement with Hexion. The total purchase amount was approximately $382 million. At the time of this repurchase the notes were convertible into approximately $31.8 million shares of Huntsman common stock.

This early extinguishments of convertible notes will result in a loss on early extinguishments of debt of approximately $146 million in the first quarter of 2010. In the future depending on market conditions we made from time-to-time seek to repurchase or redeem additional debt securities in open market purchases privately negotiated transactions, tender offers or otherwise.

Any such repurchase or redemptions and the timing in the amount thereof will depend on prevailing market condition, liquidity requirements, contractual rectifications and other factors. No assurance can be given that we will engage in or complete any such transactions.

The bottom line is that we’ve got more than sufficient liquidity, no meaningful debt maturities until 2013 other than the $400 million of cash receivable securitization and an attractive weighted average borrowing cost of 5%. We think this will provide financial flexibility in the future for us to further differentiate Huntsman as an attractive investment option.

I’ll turn the call back over to Peter for some concluding remarks.

Peter Huntsman

Thank you, Kimo. A year ago this time, we recorded the worst quarter since becoming a public company; the very future and direction of our economy in industry were in question. In the past four quarters, there is little doubt that we have passed through one of the most volatile times and generations. We committed to you, that it was our objective to not just survive, but to emerge from this recession a stronger company.

Today we reported an EBITDA that is better than three times what we reported a year ago. Our cost is $150 million is lower our liquidity is vastly improve thanks to legal segments, improved earnings and aggressive working capital management. Despite all of the market fluctuations, we’ve been able to maintain a constant contribution margin on a per unit basis. This speaks well for the products that we have kept in our company as being less cyclical than our formally owned commodity businesses.

Lastly, I believe that we are well positioned to capitalize on the fact that we are evenly weighed between the Americas, Europe and Asia. We’ve been able to take advantage of our strong Asian business and we will see improvements in our business in the U.S. and Europe as they continue their recovery.

While the global economy still has the way to go to get back on a speed, our position and view other future as much better today than it was a year ago. We look forward to an improving 2010. Thank you for your support during this past year.

With that I'll turn the call back over to Kurt Ogden.

Kurt Ogden

Thanks Peter. Let me take a minute to remind everyone that we will be hosting an Investor Day on May 12 in New York City. Presenters will include, Jon Huntsman, Peter Huntsman and Kimo Esplin as well as the Presidents of each of our divisions. This event will provide a unique opportunity to learn more about our business in an in depth manner. We invite anyone interested in participating to email us at www.ir@huntsman.com to register for the event.

Kaitlin that concludes our prepared remarks, would you explain the procedure for Q-and-A, and then open the line for questions?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Lucy Watson - Jefferies.

Lucy Watson - Jefferies

This is Lucy Watson on for Laurence today. You mentioned your $1 billion EBITDA target, would you might updating the timeline that you could get there?

Peter Huntsman

We don’t refer to it as a target, this business is capable of certainly doing better than $1 billion of EBITDA, really is what we would considered to be normalized taking 2005, ‘06, ‘07 and really most of three quarter of 2008 before the recession hit us as to what we are operating the business at.

As we look at volume variances, half of our current earnings for 2009 and even in the fourth quarter, when you add volume variances you sort of get to those numbers. So it really is a macro economic question around volumes. When, we think volumes will return back to where they were say in ’07 or impact most of ’08 for our business, we would get back to that $1 billion or more.

Lucy Watson - Jefferies

I may have missed it, but what was your net debt at year-end?

Kimo Esplin

Net debt, I think is included in our earnings release and it should be on page eight of the earnings release is $2.462 billion for 12/31/09 and that excludes the off balance sheet AR securitization program of another $254 million.

Lucy Watson - Jefferies

What should we expect for the gap between raw materials and pricing in 2010, do you expect to maintain your contribution margins?

Kimo Esplin

Yes, I would hope that we would be able to maintain a contribution margin. Again that is obviously dependant on economic, macro economic conditions and crude oil being somewhat stable. I think that most people would assume that if we were in an economic recovery that you are going to see higher raw material cost.

I would remind listeners that as we see higher raw materials coming to our business, it typically takes us 30 to 90 days to be able to take those costs and pass us through our customers. We might see a little bit of lag, if we’re seeing higher raw material cost coming into the system during that timeframe.

But on average we would hope that the contribution margins would remain constant throughout 2010 and therefore you are looking at, as recovery will continue through 2010, you will see volume increasing, and obviously that will be the main impetus we’re having stronger earnings throughout the year.

Overtime, I would expect that, that contribution margin for the unit will continue to improve, as it has over the last several years as we continue to invest in the mix of businesses that have higher margins including the means polyurethanes, maleic anhydride and our advanced materials formulation businesses.

Operator

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

Frank Mitsch - BB&T Capital Markets

Peter, I’ve found the slide 10 fairly interesting in terms of showing the recovery. Obviously you had a very easy year-over-year comp and did quite well. I’m curious as to how would you surmise the first quarter right now, we are about half way through or a little bit more than that. With the first quarter, you have a relatively easy comp year-over-year. Are we looking at the same low teens types of volume growth here?

Peter Huntsman

It’s obviously, certainly to really speculate as to where we’ll be, what we’re see or where we’ll end up by the end of the first quarter Frank, but what we’ve seen thus far in January, I would say that we continue to see that sort of improvement. Asia continues to be very strong for us, I would note that we’re going through the Asian, Chinese New Year right now, that celebrates through our most of Southeast Asia and of course we had that at this time last year.

The U.S. we are starting to see certainly more glimmers of light then we saw three months ago, and just from my personal view Europe is it’s probably a little more lackluster than I would have thought three months ago when I kind of gave last analysts.

We are continue to see Asia being the real engine for growth here, as I review and have an opportunity meet with customers and speak with our marketing and sales folks in Asia; we’re not seeing large inventory builds. It really is quite a diverse market and in consumption in China and Southeast Asia, where we continue to see really broad growth across the entire spectrum of all of our products.

So I remain quite optimistic about the Asian markets and the U.S., I don’t want to say the U.S. whoring back, but certainly the U.S. is growing better today than I would have anticipated a quarter ago.

Kimo Esplin

Back to slide 10, I do think that’s an interesting one, I look at the hurricane adjusted numbers, because that’s more of a normalized I think 2008, but down 19% ’08 fourth quarter up ’11. That would suggest we have 7%, 8% down volumes relative to normalized 2007; it’s a good normalized year, but that does feel kind of like what we are in. We’ve come a long way; we’re still a little shy from what would be more normalized.

Frank Mitsch - BB&T Capital Markets

Given the fact that you are also strong on a global basis, how did 2009 end up with your geographic spread and what impact did foreign exchange have in the fourth quarter, and any thoughts on the first quarter would be very helpful?

Kimo Esplin

On a geographic spread, we are looking at about 23% of our business is Asia Pacific, 30% in Europe, 31% in U.S. and Canada, and as you look at that on a year-on-year basis, 7% will be the rest of the world, most of that taking place in Latin America, which I might note, Latin America for us which dominates that 16% has been a growing market. That’s up 7% year-on-year; Asia Pacific is up 27% year-on-year; U.S. is down 8% and Europe is down 4%. So as you look at it, it is kind of about roughly a third, a third and a third with the rest of the world kind of fluctuating in the low teens there.

What was your question on foreign currency?

Frank Mitsch - BB&T Capital Markets

Foreign exchange impacted the fourth quarter and given where the dollar has appreciably strengthened relative to the euro, what might be the expectation of a foreign exchange impact on your first quarter?

Kimo Esplin

Let me take sort of the fourth quarter number that we can speak to sort of the first quarter. Foreign exchange had the effect of increasing price by 4%. So mix and price were down year-over-year 12%, FX up 4% for the net 8%, but in EBITDA terms it had the effect of reducing EBITDA for transaction and translation FX purposes by nearly $20 million, and that maybe a little counterintuitive.

With European currencies as they are, we watched the euro at least in this time period strengthen fourth quarter ’08 to fourth quarter ’09, but the swings, really we saw the Swiss and the sterling sort of move in different directions and that’s where we have costs in the U.K. and in Switzerland, but we’re selling in euros, so it tended to whipsaw a little bit, and have heard it’s notwithstanding the stronger euro.

Frank Mitsch - BB&T Capital Markets

Okay and a preliminary peak on Q1?

Kimo Esplin

Well generally, I mean this is a real generalization, typically because we have a large European business, as the euro weakens that would hurt us in dollar terms, but a lot of it has to do with what we think the sterling and the Swiss are going to do relative to the euro, because for the most part in Europe we’re selling in euros, but are fostering those relative currencies, and as you know the Swissy and the Sterling have really not correlated very well with the euro in the last couple of years.

Operator

Your next question comes from P.J. Juvekar - Citi.

P.J. Juvekar - Citi

I got a couple of questions; one on MDI and one of TiO2. On MDI, what’s happening in the biggest end market which is installation, that’s correlated to construction and housing. That end market still seems to be weak, so can you just talk about where the demand is coming from?

Peter Huntsman

In the fourth quarter on installation, we have seen those markets cool, both on a quarterly basis and year-on-year basis. Installation is down. What we are seeing and are projecting that through 2010, that will be recovering. As we look at the other sectors within MDI, appliance, footwear, auto, furniture all of those are up. It’s a mixed bag and obviously MDI is a very diverse product that goes into several 100 end use applications.

Kimo Esplin

So MDI was up year-over-year 10% not withstanding installation being down pretty big.

P.J. Juvekar - Citi

On TiO2, there have been some price increases announced, can you tell us if they’re sticking and what kind of volume growth do you expect in 2010?

Peter Huntsman

I think that as we look at 2010 we would look at volume growth as being modest, but that modest volume growth is also going to be helped out by a restocking of inventories. As we talked about in the last conference call, inventories particularly going into the winter months were very, very low in comparison to the seasonal times that we typically see, but we are seeing a restocking taking place and we are seeing demand taking places.

As you look in our pigment’s business, on a year-on-year basis in the Americas we were up 6%, and Europe we’re up 29%, and then Asia year-over-year we’re up 100%. Overall this business is up year-on-year 36%. Now those are very impressive numbers. I would just note though that in all of our businesses, this business was hit the hardest.

When you saw the recession in housing and automotive, it really started a few years ago, and so when we talk about coming out of the trough for TiO2 in particular, that’s a trough that has been in the marking for the last 2.5 to 3 years. As we look at that business and the opportunity for improvement in that business, we continue to be optimistic.

Kimo Esplin

As you look at the release, you can see that year-over-year prices were flat in TiO2 and volume was up big. I think when you think about that flat price direct cost spell, nearly $50 million. So I mean the benefit you’ve seen in the titanium dioxide is not only some volumes, but more importantly we were able to hold price as raw materials fell.

P.J. Juvekar - Citi

Now the Tronox is off the table, are you looking actively for other M&A opportunities and can you tell us in which product areas?

Peter Huntsman

I think P. J., we want to maintain the strength of the balance sheet that we have today and obviously we would be interested in smaller bolt-on acquisitions. If we saw something like Tronox, an opportunity like that come on the market, we would seriously consider it just like we did for Tronox. We want to obviously shoot for something that would be accretive on day one, but at this point I think that our largest focus continues to be with the organic growth that we have internally and recovering in the business unhand.

P.J. Juvekar - Citi

Kimo just said that your interest rates are pretty attractive; are you just going to hold the cash or you actually going to pay down debt?

Kimo Esplin

Well we have been opportunistic and we just used nearly $400 million to buy in the convertible notes, and I think we will continue to do that sort of thing if we find attractive opportunities to purchase bonds in the open market or tender; we will do that overtime.

Peter Huntsman

I think we need to just also bear in mind that as optimistic as we are about some of the improvements or signs of improvements that we see, as we look around the world there are still some real pitfalls out there, and we want to make sure that we maintain a strong balance sheet and able to pay our dividend, and able to invest in our business and be strong.

Operator

Your next question comes from Jeff Zekauskas - JP Morgan.

Jeff Zekauskas - JP Morgan

A couple of things; so I guess to start off in pigments, on a sequential basis your revenues were down about $14 million, but your adjusted EBITDA went from about $4 million to $23 million. So what really was the sequential determining factor that listed your profitability so much, and are we now at some kind of sustainable run rate in the low 20s or is there something anomalous about the result?

Kimo Esplin

Yes, I think it’s a seasonal business, so it’s not going to be in a 20, 25 every quarter, but I think we are at a point where we are going to see consistency in those levels. When you look at sequential numbers, I think you’re right. Price was up roughly $10 million, volumes were down seasonally by about the same amount, and we enjoyed lower direct costs. They’ve done a lot of work in terms of cost cutting, so we’re seeing on a sequential basis improved SG&A and indirect costs by about $10 million. So there’s some help in there.

Jeff Zekauskas - JP Morgan

Secondly, in taxables you talked about the progress that you are making, but you are still loosing a lot of money on an EBITDA basis? When does that begin to come to an end; that is, can you see something occurring over a three or a six month period, or will it just take a little bit longer than that?

Peter Huntsman

I think that we’re looking for a couple of things there. We’re obviously being aggressive in prizing; we’re also being very aggressive in picking up volume. If you look at the textile industry the overall demand in volumes, particularly in discretionary textiles or clothing and apparel that people have a discretion to spend money on, that really was one of the first areas to drop off aside from the pigments area in our business, and that people going out and spending discretionary income on clothing and textiles will probably be one of the latter parts to fully recover.

That being said, I think that we’ve done a lot of self help. I mentioned the amount of costs that we cut in that business. We are moving our manufacturing to Asia. We are qualifying; we have moved most of our manufacturing in textiles to Asia. It does take us time to re-qualify that product into our customers, and as we do that we’ll continue to see our costs lower. I would be very hopeful that by the middle of this year, that we will see a profitable textile FX division.

Kimo Esplin

Jeff we bought that business in 2006 you remember. We did $75 million to $80 million of EBITDA, and continue to see that sort of number before our cost cutting in ’06, ’07, and things really started to soften up in’08, ’09, but amazingly we believe apparel consumption globally was down in 2009 nearly 20% compared to 2008, so that’s global apparel.

Volumes have really come out of this business. If you go back over five years and look at contribution margins per unit, they have been solid. They have not moved. So this is again a business that’s not anything about price. There’s not been price deterioration or inability to get prices up because of higher raw materials and so forth. It is all about volumes and we are down from the time we bought this business, probably a third in terms of volumes, that’s clearly effected our bottom line, and we believe we have not loss market share.

Jeff Zekauskas - JP Morgan

So in other words, it’s really volumes that effort the business, so may be when you begin you got a cyclical recovery later in the year that would change things.

Kimo Esplin

I think that’s the story.

Jeff Zekauskas - JP Morgan

So lastly, just a general drift of your comments, so you spoke of having, as I understood it was $35 million ahead in the first quarter from the turnaround in MTBE. You’ve got a raw material squeeze throughout your businesses.

So I take it that on a sequential basis, EBITDA should go down in the first quarter relative to the fourth quarter by some amount, and then as you increase your prices and as you benefit from volumes, what you’d see is the recovery as you go through the year. Is that the general trust of your remarks?

Kimo Esplin

Yes generally, first quarter fourth quarter are similar, all things being equal, and as you’ve said, we have the turnaround that will hit us by roughly $30 million and we’re seeing higher raw material prices, which will have the effect of limiting our expansion of contribution margins.

I don’t think it’s going to be a huge squeeze on a per unit basis, but you’re right, I think with the turnaround and given all things been equal, first and fourth quarter typically similar, you’re likely to see a lower first quarter.

Operator

Your next question comes from Bill Hoffman - RBC Capital Markets.

Bill Hoffman - RBC Capital Markets

Peter, I wonder if you could help us a little bit. It’s just somewhat of a hypothetical question here. If you took the second half 2009 volumes and annualize them in to 2010. I’d like to get a sense of what you think the year-over-year difference might be? Just taking it one step further, if you took some of the more differentiated product lines like the urethanes, advance materials and performance products, where are you more heavily weighted, to Asia and/or other higher growth regions?

Peter Huntsman

Let’s take the first part of that question. Now the annualized volumes in the third and fourth quarter, ask that again.

Bill Hoffman - RBC Capital Markets

Yes, if we thought that the business kind of stabilized in the second half of 2009 to a more steady state level with volumes, what would 2010 look like year-over-year, and then the second part is just, if we thought about some of these business segments, where are you more heavily weighted in higher growth regions?

Peter Huntsman

I think if you take the last six months of 2009, and you were to look at that on an going basis, I would say that those two quarters while there’s some flexibility and there’s some noise, I think that those two quarters represents certainly of a stable market condition.

Again there is upside in that, because you still have very anemic European and in U.S. growth in there, and market conditions in there, but I think that if you were to take that and as Kimo just said, you look at the first and fourth quarters kind of being somewhat similar, I’m not going to say that the second and third quarters are always the same, but typically those are quarters where you’re building earnings and you’re building momentum in both of those quarters, one before the summer rush and one before kind of the holiday Christmas rush, and typically those two quarters are your strongest quarters.

So if you kind of look at the third and fourth quarter and look at that in a reverse way of looking at the first and second quarters, I think that you’ll be looking at something of an annualized number around 700 or so. I’m not saying that as a forecast for 2010, but that certainly would represent the ballpark of a stable return.

Now as you look at our products on a regional basis, certainly your products that is most represented in the Asian market would be your MDI, your textile effects and growing quite rapidly will be your performance products. We have any data here then that would show. We’ll get back to you on a….

As you look at our production footprint and our sales footprint, MDI certainly would be the most even product on a global basis and the textile effects would have its largest footprint, but the three regions would be in Asia.

Bill Hoffman - RBC Capital Markets

Kimo, just sort of a more generic question for you too; I guess taking about $500 million of cash out of working capital in 2009, any thoughts on how much of that comes back in as the business recovers here in 2010?

Kimo Esplin

Well, that’s a good question. I mean in terms of volume we were able to reduce pounds by 20% which is tremendous. We hope as a management team, we’re going to be able to keep volumes down, not withstanding demand coming back. Obviously we’re going to have to build some in terms of pounds.

The real swing factors is dollars, price and that’s a function of crude and natural gas, and all of the derivatives. So you should expect even if we are able to keep our volumes at their current levels, and be able to supply our customers globally with the inventories we’ve got. If crude goes up, you’re going to see working capital move up.

Peter Huntsman

Operator, I think we got time one more question here.

Operator

Your final question comes from Roger Spitz - Bank of America.

Roger Spitz - Bank of America

Excluding the PO/MTBE economics, can we infer that there was raw material margin compression in MDI, and if so can you give us a sense of how much that margin compression was year-over-year?

Kimo Esplin

One more time Roger, I’m sorry.

Roger Spitz - Bank of America

Sure. Reading between the lines, by excluding the PO/MTBE economics, it looks like there was raw material margin compression in MDI and if so, can you give a sense of how much that margin compression was?

Kimo Esplin

Contribution margins through ’08 and ’09 were relatively constant. So it really was more volume, again consistent with sort of the theme we’ve seen everywhere that impacted us in MDI.

Roger Spitz - Bank of America

Was there margin expansion in PO/MTBE polyurethanes year-over-year, and if so was it more in the MTBE rather than the PO or was it a mix of both?

Kimo Esplin

Yes, the MTBE is where you’re seeing most of the margin expansion taking place. Propylene oxide, a lot of that is filled on a tolling basis and that’s fairly consistent. Obviously it will move with market variability, but not nearly as much as MTBE and the C factor that you would see with MTBE.

Roger Spitz - Bank of America

Lastly, can you identify some of the new MTBE plans that you inferred on the presentation slides?

Peter Huntsman

Let’s see, I think the enterprise facility in the Gulf Coast has started up here recently, you’re talking about the new start ups, yes, and the Middle East is brought on some capacity, but over the last two years we’ve also lost about 20,000 barrels of MTBE capacity that’s been shifted over to ETBE. So there’s quite a bit of noise in that about what’s coming in and what’s gone out.

We did see demand for MTBE increase faster than GDP, so there are more countries at this time, certainly that are shifting over to consume MTBE and obviously if North America had a rational energy policy, we’d be doing the same thing here, but I won’t get into that. So, we continue to see it to be a strong demand product for us

Roger Spitz - Bank of America

You’re going to stay with MTBE rather than shifting over to ETBE?

Peter Huntsman

At this time we see no reason to make that shift and continue to make good money. I think our facility is one of the low cost producers in the world.

Kimo Esplin

Operator, we’re sensitive, we’re encroaching on the Tiger Woods' Press Conference and we’ll let you all go listen to that. So that will conclude our remarks.

Peter Huntsman

Thank you all very much and feel free to contact Kurt Ogden if you have any further follow-up questions. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.

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Source: Huntsman Corp. Q4 2009 Earnings Call Transcript
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