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Executives

Kurt Ogden - VP Investor Relations

Jon Huntsman - Founder and Executive Chairman

Peter Huntsman - President and CEO

Kimo Esplin - Executive Vice President and CFO

Analysts

Robert Koort - Goldman Sachs

P.J. Juvekar - Citi

Kevin McCarthy - Bank of America

Mike Ritzenthaler - Piper Jaffray

James Sheehan - SunTrust

Frank Mitsch - Wells Fargo Securities

Ivan Marcuse - KeyBanc Capital Markets

Hassan Ahmed - Alembic Global

Edlain Rodriguez - UBS

Robert Walker - Jefferies

Jeff Zekauskas - JP Morgan

Huntsman Corporation (HUN) Q4 2013 Results Earnings Conference Call February 11, 2014 10:00 AM ET

Operator

Good day, ladies and gentlemen and welcome to the Fourth Quarter 2013 Huntsman Corporation Earnings Conference Call. My name is Mark and I will be your operator for today’s call. At this time all participants are in a listen-only mode. And we will conduct a question-and-answer session later in the conference. (Operator Instructions). As a reminder, this call is recorded for replay purposes. I’d now like to hand the call over to Mr. Kurt Ogden, Vice President of Investor Relations. Please proceed.

Kurt Ogden

Thank you, Mark, and good morning, everyone. Welcome to Huntsman’s fourth quarter 2013 earnings call. Joining us on the call today are Jon Huntsman, our Founder and Executive Chairman; Peter Huntsman, President and CEO; and Kimo Esplin, Executive Vice President and CFO.

This morning before the market opened, we released our earnings for the fourth quarter 2013 via press release and posted it on our website, 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.

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 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 will also refer to non-GAAP financial measures such as EBITDA, adjusted EBITDA and adjusted net income or loss. You can find reconciliations to the most directly comparable GAAP financial measures in our earnings release, which has been posted on our website at huntsman.com.

Let's turn to some highlights on slide number 2. In our earnings release this morning, we reported fourth quarter 2013 revenue of $2,705,000,000, adjusted EBITDA of $313 million and adjusted earnings per share of $0.48 per diluted share.

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

Peter Huntsman

Thank you, Kurt. Good morning, everyone. Thank you for taking the time to join us this morning.

Let's turn to slide number 3. Adjusted EBITDA for our polyurethanes division in the fourth quarter of 2013 was $173 million compared to the prior year period, we saw favorable earnings growth from our MDI urethanes business. However, this was more than offset by lower earnings from our PO MTBE. We continue to see strong demand for MDI. Our sales volume grew 7% in the fourth quarter compared to the prior year period. In Europe, we saw double-digit growth in two of our largest markets insulation and composite wood products. In the Asia Pacific region, growth was well balanced across the insulation, appliance, automotive and furniture markets. An improvement in North American housing demand drove double-digit growth for composite wood products, in the Americas region where we also saw attractive growth in the insulation, adhesive and furniture markets.

The cost of benzene which is a key raw material for MDI increased approximately 16% during January compared to the average cost in the fourth quarter. We have announced price increases to offset this impact. However there is generally a lag effective 60 to 90 days. We combined propylene oxide to based polyols with MDI to create specific polyurethane system solutions for our customers. In the U.S., we manufactured our own propylene oxide. MTBE is a co-product of our manufacturing process. PO/MTBE earnings in the fourth quarter decreased $22 million compared to the prior year, primarily due to lower margins. The price of premium unleaded gasoline to which the price of MTBE has a strong correlation decreased more than 10% compared to the prior year.

During 2014 we expect the lower selling price for PO/MTBE to continue along with higher raw material costs. However we believe strong demand and improving MDI urethane margins will more than offset pressure on PO/MTBE margins. In the first quarter 2014 we expect the higher cost of benzene to offset the benefit of MDI volume growth as a result the lower selling price of PO/MTBE we expect EBITDA for the polyurethanes division in the first quarter 2014 to be less than the first quarter of 2013.

Let’s turn to slide number 4. In the fourth quarter our performance products division earned $116 million of adjusted EBITDA an increase of $35 million compared to the prior year period of $81 million. This represents a fourth quarter record in earnings. Within our amines business we saw an improvement in sales volume and margin. This is an important and encouraging trend but we believe amines has the largest potential for increasing future earnings of this division.

In January of this year we announced our intent to expand our global polyether amines capacity by 15% through debottlenecking projects at three of our existing manufacturing facilities. Demand for [polyethylene] has been growing at approximately 8%. We continue to see strong demand and pricing for maleic anhydride and we have seen improved production yields as a result of advantaged U.S. Gulf Coast manufacturing costs for our upstream intermediate chemicals following the successful first quarter maintenance of our facility in Port Neches, Texas.

Let’s to the slide number five. Adjusted EBITDA in the fourth quarter in our advanced materials division was $33 million, an improvement of $25 million compared to the prior year of $8 million. Our restructuring efforts are clearly having an impact on the bottom line. In addition to taking action on our fixed cost we have preferentially walked away for the certain of low margin basic liquid epoxy business which improved our overall customer product mix.

In response and in order to rebalance our internal material needs we closed our Spanish and Indian basic liquid epoxy resin producing units. This more than offset sales volume growth in formulated systems and multi functional resins resulting in a 15% sales volume decrease for the division compared to the prior year. During 2014 we do expect growth in volumes in both our formulations and specialty component products.

Let’s turn to slide number six, our textile effects division reported adjusted EBITDA of $8 million in the fourth quarter an improvement of $7 million compared to the prior year of $1 million. Our restructuring efforts in this division have been focused on sales growth through increased market share improving margins and lowering our fixed cost. We have seen strong double-digit sales volume growth in the key markets we have been targeting. In addition, improving consumer confidence in large end markets such as North America and Europe are having an improved pull through affect on demand.

During the quarter, we successfully completed our restructuring in Switzerland and decommissioned our Swiss manufacturing facilities. We have successfully completed all product transfers to lower cost locations and are pleased that throughout the transition we maintained excellent environmental and safety performance.

Slide number seven. Our pigments division earned $33 million of adjusted EBITDA in the fourth quarter 2013 compared to $14 million in the prior year. Our global sales volume improved 15% compared to the prior year. The most significant increase in volume came from Europe which is our largest region.

We are encouraged by the recent demand trends we have seen and don’t believe there is any excess inventory on the customer level. Unfortunately inventories at the producer level remain elevated at approximately 75 days. Our inventory days were approximately 65, at the end of the year which is more in line with historical averages for this time of year.

We believe this excess supply at the producer level had delayed our ability to raise selling prices. We expect to close on the acquisition of the Rockwood Holdings performance additives and titanium dioxide businesses during the first half of 2014 and remain confident in our ability to deliver synergies of $113 million.

Anti-trust review in the U.S. is complete. And we are making positive strides as it relates to the European Union review. We believe this acquisition will add significant shareholder value.

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

Kimo Esplin

Thanks Peter. Let’s turn to slide 8. In the fourth quarter of 2013 our adjusted EBITDA increased $68 million to $313 million from $245 million in the prior year. The improvement is primarily attributable to two main factors. First, we saw meaningful growth in sales volumes, which accounted for $30 million of the improvement. Sales volumes grew in all of our divisions with the exception of advance materials, which preferentially walked away from certain low margin businesses. The second main factor in EBITDA improvement came from the benefits of our self-help, fixed cost restructuring, which accounted for approximately $33 million of the improvement.

Our full year adjusted EBITDA in 2013 decreased $226 million to $1,213 million from $1,439 million in 2012. The decrease was primarily attributable to $264 million in lower earnings from our Pigments division, which has been going through an industry wide business cycle. Our PO/MTBE earnings, which benefited from industry supply outages in 2012 decreased $66 million. We were also negatively impacted by approximately $55 million as a result of planned maintenance outage of our Port Neches, Texas facility in the first quarter of 2013.

These were partially offset by lower fixed cost from our restructuring efforts, which accounted for approximately $124 million of EBITDA improvement to a lesser degree increased sales volumes. We expect our restructuring efforts to contribute an additional approximately $16 million of future EBITDA.

Slide 9, our year-over-year consolidated sales revenue for the fourth quarter increased 3%. This was primarily due to an improvement in our sales volumes of 5%, partially offset by a decrease in sales mix effect of 2%.

Regionally, our largest category North America, which makes up 31% of our total revenues, increased 7%. Our second largest region Europe increased 6%, whereas Asia-Pacific saw sales revenue increase 1%. This all was partially offset by a 3% decrease from Rest of World category, which is comprised of Latin America, the Middle East and Africa.

Our Polyurethanes business is our largest; it made up 44% of our total revenue in the fourth quarter and grew at 4%. MDI urethane revenue increased 9% and more than offset lower PO/MTBE prices. Performance Products and Pigments both saw attractive growth of 2% and 3% respectively, led primarily by increased sales volumes. In Advanced Materials, again we walked away from certain low-margin business resulting in a 3% decrease in sales revenue.

Our total sales revenue decreased 1% in the full year 2013 compared to 2012. An improvement in sales volumes of 1% was more than offset by a 2% decrease in average selling prices primarily attributable to our Pigments businesses.

Sales revenues increased in our Polyurethane and Textile businesses driven by improved sales volumes. Sales revenues decreased in Performance Products due to the impact of the first quarter maintenance of Port Neches Texas facility. And sales revenues decreased in Advanced Materials due to lower sales volumes again as we reduced our basic liquid epoxy resin sales.

In our Pigments businesses, attractive sales volumes growth of 10% was more than offset by lower average selling prices resulting in a 12% decrease in sales revenue.

On the slide 10, at the end of the quarter we had a little more than $1 billion of cash and unused borrowing capacity. We continue to focus on working capital investment. During the quarter our primary working capital decreased providing a source of $100 million in cash. Primary working capital for the full year 2013 is a source of $54 million of cash.

During the quarter we spent $176 million in capital expenditures. For the full year 2013 we spent $471 million in capital expenditures. We expect to spend approximately $500 million on CapEx in 2014 net of reimbursements. And excluding any amounts associated with the planned acquisition of the Rockwood Holdings businesses.

Our adjusted effective income tax rate for the fourth quarter and full year 2013 was 21% and 32% respectively. As a result of pension accounting rules we will require to record $15 million decrease to tax expense. Excluding this pension impact our 2013 full year tax rate would have been 35%. And so we expect our 2014 adjusted effective tax rate to be very similar approximately 35% excluding the impact again of the acquisition of the Performance Additives and Titanium Dioxide businesses of Rockwood. We expect our longer term adjusted effective tax rate to be about 30%.

In December of 2013 we issued EUR 300 million senior notes of carrying interest rate of 5 and an 8 and will mature on April 15, 2021. Net proceeds were used to repay all of the principle amount outstanding or substantially all of the principle amount outstanding under our term loan fee to pay related fees and expenses for general corporate purposes.

In October 2013, we entered into an amendment to our senior credit facilities that provides for a new seven year term loan of $1.2 billion, as well as an increase in our existing revolving credit facility by $200 million for a total revolver of $600 million.

We have secured commitments from a group of financial institutions to provide the term loan and expanded the revolver. This new financing will be funded when we complete the acquisition of the Rockwood businesses. Peter?

Peter Huntsman

Thank you, Kimo. A year ago this time we committed to deliver approximately $100 million in cost savings in 2013. We delivered $150 million of savings as all of our participating divisions contributed more restructuring benefits than expected. By the end of 2015, we expect to deliver an additional $60 million of EBITDA improvement.

Last year, we committed that our non-TiO2 divisions would improve within the year. In 2013, we not only finished the year with the record fourth quarter, but our non-TiO2 divisions earned a record adjusted EBITDA. We said at last year, our intent to participate in TiO2 industry consolidation. With our announced acquisition of the Rockwood Holdings’ Performance Additives and TiO2 business, we will broaden our product offering, take advantage of synergies and increase our optionality to improve shareholder value.

As I mentioned earlier, we expect to close on this acquisition in the first half of this year and start achieving our $130 million in planned synergies before the end of the year. We believe this combined Pigments business will be an industry leader in color and white pigment. We intend to take it public within two years of closing strengthening our balance sheet and evaluation of our stock multiple.

As we look at the first quarter performance, having not yet received a complete picture of January, I believe our first quarter 2014 adjusted EBITDA will be better than first quarter 2013 of $275 million after factoring in last year’s $55 million negative impact from maintenance and in Performance Products division.

We expect this first quarter year-on-year improvement notwithstanding significant increases in some of our large volume raw materials; we purchased more than 200 million gallons a year of [benzene] and more than 300 million gallons a year of butane. Compared to fourth quarter averages, we have been hit with nearly $0.70 a gallon increase in benzene cost and $0.15 a gallon increase in butane cost.

We believe these prices will come down by the end of the first quarter. Nonetheless, we will have these headwinds in the first quarter. While it is too early to tell the full impact of these higher prices, we are raising our selling prices across the board to offset these increases.

Despite the first quarter headwinds this year in the raw materials and the colder than expected winter in North America and before any impact from the Rockwood deal, we expect the earnings in all of our divisions to improve in 2014 compared to 2013. We are seeing signs of slight economic improvement in Europe and continue to see more growth in North America. To [twine] the improvements we expect in our existing business further restructuring benefit and the benefit of the Rockwood acquisition, we believe there is continued opportunity to further increase shareholder value.

With that I will turn the call back over to Kurt.

Kurt Ogden

Thank you, Peter. I would like to remind everyone that we will be hosting an Investor Day event on March 6th in Midtown, New York. The agenda for the meeting will include a review of the company’s business strategy and an in-depth discussion of each of our businesses. If you would like to attend, please send an email to ir@huntsman.com. Mark that concludes our prepared remarks, will you explain the procedure Q&A and then open the line for questions?

Question-and-Answer Session

Operator

Thank you, Kurt. (Operator Instructions). The first question comes from the line of Robert Koort of Goldman Sachs. Please proceed.

Robert Koort - Goldman Sachs

Thank you. Good morning. Peter, you mentioned on the pigment side, the inventory is climbing a little bit. And I guess I am just hoping you could provide some comfort that maybe this isn’t a replay of a year ago when the industry maybe got a little more optimistic, built the inventories, ran at higher rates and then had had some pretty nasty adjustments through the year. So can you just sort of view why it might be different this time and why you might -- why the industry might be building inventories a little bit too aggressively?

Peter Huntsman

Well last year at this time, the industry had an inventory that was sitting on about 95 plus days of inventory, this year we are saving at about 75 days of inventory. Last year, Huntsman was sitting at about 80 days of inventory and this year we are about 65 days of inventory. So, I would say that that’s the first time primary factor and that we’ve got about two weeks of less inventory built in already than we did a year ago. And while it’s probably a bit too early to make full for first quarter forecast on the sales demand that we have seen to see the rest of the quarter clearly, what we've seen in January it would appear that volume is holding up and does appear to be stronger than it was a year ago this time.

So, I would say that while inventory levels are higher than I personally would like to see them, they are quite a bit lower than they were a year ago this time. And as we look at the preliminary sales figures for January, again, I would say that they are extraordinary high, I'd say they are more in line with really where they should be on a more stable market footing. I'd also remind you that this is time you typically see seasonal built for the same season. And so it's not unusual and frankly it's more seasonally normal to see a week or two of build from the end of the third quarter, the end of the fourth quarter.

Robert Koort - Goldman Sachs

Okay, that's helpful. And If I may follow up in the performance products division, you really had a pretty good ascent on margins here. I think maybe this quarter was the best you've seen in three or four years and for the year pretty strong. Peter, I think you intimated there is room for more to come, so can you give us some sense maybe without stealing your thunder from next month but what sort of opportunity you have on a margin basis in this division?

Peter Huntsman

Well, I kind of look at in our fourth quarter for performance products, that was the best fourth quarter we've ever had in that business. And so, as I look across the board, I mean the question I would have when I put on my investor [habit] all of these businesses, all of those major divisions within this running full margin capacity. And so I kind of break the business down in to four quadrants, if you will. I'd look at our maleic anhydride, I'd look at our amines, I'd look at our surfactants and I'd our U.S. what I’d call the base chemicals in U.S. This is the only division where we do purchase ethane, we convert it into ethylene, we consume a 100% of that ethylene internally. So we are in a position to take advantage of ethane economics.

If I look at the ethane economics, I think that that’s been running pretty consistent and I think that’s -- there is probably not a great deal of upside there. If I look at the maleic anhydride business, that certainly is an improved business over a year ago. And I think that there continues to be room for improvement in maleic anhydride as housing improves.

If I look at the surfactants business, that’s the business that’s going to be growing at about the rate of GDP. And I would remind you that on our last conference call about a month ago or three months ago, we announced a restructuring that will be taking place in Europe that will be improving the EBITDA of that business. We’ll be giving more detail of that during our Investor Day. But certainly during this year, we will see an improvement in our surfactants business even if margins and demand stays the same just because of the restructuring is taking place in Europe.

Then lastly as I look at our amines, amines is doing quite well but I certainly wouldn’t say that our amines business is running at record rates compared to its historical. There certainly is room for improvement in our global amines and in our various amines businesses. And so if I look at the business, it feels like it’s doing very well, but I certainly would want to give the impression that it’s peaking out that it’s running at absolute best margin. So, a strong division, a consistent division as I look this year will also this last year which was a record year for this division not just a record quarter but a record year, we also had a $55 million expense early in the year when we took our largest facility down in North America. Obviously that won’t be happening this year. We will have some maintenance projects that will be going on throughout the year. In the first quarter, we’re taking down our ethylene facility that will cost us $8 million, $9 million in the first quarter but nothing of the magnitude that we saw this last year. So again, better market conditions, restructuring benefits and less downtime on maintenance for that division, I am sorry, I probably be the business question to depth. Rob, I think it’s just a great division, it’s going to continue to improve.

Kimo Esplin

And if I can just add one more thing Bob, if you sort of step away and look at it from a longer-term perspective with amines growing at sort of 6% to 8% a year and surfactants growing at 2%, 3% a year, you’re really seeing over time this mix change to a higher margin business in amines and that you can see that over 4, 5 year period and you’ll continue to see that mix change.

Robert Koort - Goldman Sachs

Great, thank you.

Operator

And the next question comes from the line of P.J. Juvekar of Citi. Please proceed.

P.J. Juvekar - Citi

Yes. Hi, good morning.

Peter Huntsman

Hello P.J.

P.J. Juvekar - Citi

One of your large competitors mentioned that their ore cost is going up and I think all of your legacy contracts have expired already, so does ore pricing become a tailwind for you at some point in 2014?

Peter Huntsman

I think that as we look throughout 2014, we think the ilmenite prices today in kind of a sub 200 around $200 a ton basis. Ilmenite is obviously the largest ore that we purchase. And as I look at the capacity utilization, the amount of tonnage that’s coming into the market, I just don’t see a lot of momentum in the ilmenite ore area, ilmenite slag that’s kind of in the 500ish sort of range, chloride slag kind of in the 800, rutiles kind of in the 900ish sort of range. And I would say that with the slag in the rutile prices, there is probably going to be some gradual upward pricing pressure. How much that will be successful will -- that's probably a battle to get to be waged. But there certainly will be more upward pressure on the slags and the rutile ore than on the ilmenite ores, which I would say should remain pretty flat throughout the year.

P.J. Juvekar - Citi

Thank you. And in epoxy, you shut down two plants I think in Spain and India, what the positive impact of those closures? And have you seen any increased competition in epoxies from China and are they moving into any of the specialty epoxies? Thank you.

Peter Huntsman

I mean most of that closure took place in the third and fourth quarter. So I’m not sure that there is a really much of a material impact on those closures. But I’ll let Kimo, he’s probably got some more specific numbers than I on the impact of those closures. But I would say that we rapidly are moving in this business or we’re a net buyer of DLR basic liquid raisins. And as I look at the manufacturing cost coming out of Asia and the Middle East longer term, I think that we’re going to be greatly advantaged being a buyer of these products rather than a manufacturer of these products.

Kimo Esplin

Yes. And P.J., we shutdown roughly half of our basic liquid epoxy resin capacity globally in those plants, Spain and in India. We are much more balanced producer now consuming most of those resins internally in formulation. And yes, it did benefit us at the bottom-line and it really facilitated a reduction in our fixed costs.

P.J. Juvekar - Citi

Thank you.

Peter Huntsman

Thank you.

Operator

The next question comes from the line of Kevin McCarthy of Bank of America. Please proceed.

Kevin McCarthy - Bank of America

Yes good morning. If I look at your slide nine, it’s very helpful you carve up the sales trends between MDI and PO/MTBE in the polyurethanes segment. Can you comment on the sales decline in PO/MTBE what drove that minus 9 and also your operating rate for those processes please?

Peter Huntsman

Most of that minus 9 would just be operating reliability at the facility itself. I mean we consumed all the PO that we make internally or on some long-term contracts we sell of the MTBE. So whenever there is a decrease that’s usually because of an operating upset or planned maintenance that we had at the facility it’s not that demand has gone so we are cutting back on utilization.

Kevin McCarthy - Bank of America

Okay and then elsewhere in this segment on the MDI side you referenced some of the benzene cost inflation I think you said $0.70 a gallon or so, do you have any contracts whereby you can pass that through automatically or is all of the business looking at the 60 to 90 day lag that you referenced?

Peter Huntsman

We have in North America we have some contracts that allow us to pass through natural gas and benzene escalators.

Kimo Esplin

That’s about one-third of our North American business.

Peter Huntsman

The rest of it in North America and rest globally we would be on a benzene basis. The price goes up of benzene we would be calling for price increases and as the price goes down on benzene, hopefully we get to keep some of that up margin.

Kevin McCarthy - Bank of America

Great. And then final question if I may for Kimo, would you comment on how your pension funding status would have changed at year end and also what your outlook is for cash contributions in 2014?

Kimo Esplin

Sure. Let me take the latter question first. Cash contributions in 2013 were about $170 million in 2014 given the funding status that will drop to about $130 million. You know that we adjusted EBITDA purposes in the P&L, we add back the amortization of actuarial gains and losses. So the P&L impact for adjusted EBITDA isn't going to be all that significant.

I think in terms of underfunding on the balance-sheet side, it reduced by about half. We were I think about $800 million under funded. I'm going to use around number that I have my balance-sheet in front of me. And I think we're going to end up at year end about half of that, about $400 million, $500 million underfunded and roughly $4 billion of liability, so $3.8 billion I think is the number.

Kevin McCarthy - Bank of America

Great. Thank you so much.

Operator

The next question comes from the line of Mike Ritzenthaler of Piper Jaffray. Please proceed.

Mike Ritzenthaler - Piper Jaffray

Yeah, good morning. Was there a meaningful oxid contribution in the fourth quarter?

Kimo Esplin

Yeah. I think year-over-year it was probably $5 million.

Mike Ritzenthaler - Piper Jaffray

Okay. So, is like a $20 million EBITDA run rate for 2014 a good estimate?

Kimo Esplin

Yeah, that's a good number.

Mike Ritzenthaler - Piper Jaffray

Okay. And just in advanced materials as a follow up, the pruning of the lower margin businesses didn't really seem to hurt the top line. Is that a fair way to look at business it didn’t really see I’ve heard the top-line, is that a fair way to look at the next maybe 12 months to see volume pressure because of the exiting of the business, (inaudible) offset, this is more than offset by pricing and mix?

Peter Huntsman

Yes, I would think so. I wouldn’t be too transfixed in advanced materials on sales tonnage but rather on margin and profitability. There would be noise there as we reduce some of the sales in the more commoditized side of the business. As I said in my comments as we look at our specialty components and our formulations businesses which is obviously the answer, the businesses that are profitable. We will see growth this year but on the BOR side that would be questionable at vast.

Mike Ritzenthaler - Piper Jaffray

And then the restructuring benefits you have to come in advanced materials, clearly that’s not going to come from facility closures, that’s more just operational front-end back-end types of improvements?

Peter Huntsman

Yes. That will come through improved pricing and a number of really (inaudible) issue. But yes, the vast majority of closures and so forth have already taken place.

Mike Ritzenthaler - Piper Jaffray

Thank you.

Jon Huntsman

The point you’ll see some top-line impact in terms of our restructuring if this European surfactants restructuring that we’re going to be moving through year in 2014, you will see a top-line impact there.

Mike Ritzenthaler - Piper Jaffray

Got you. All right, guys, thanks very much.

Operator

So our next call comes from the line of James Sheehan of SunTrust. Please proceed.

James Sheehan - SunTrust

Good morning. I was wondering if you could give us your thoughts on MDI operating rates. Is there room for those to increase over the course of 2014 and also what do you think of in terms of 2015?

Peter Huntsman

I look at 2014 and I think that the operating rate again is going to be lumpy on a global basis but I would say that it’s right around that 90% operating utilization rate. In North America we have a $0.05 increase, it’s effective February 1. We have a March increase of another $0.05 we’ve announced on MDI and $0.08 increase in polyols on February 1. And that will take effect during the course of the first quarter going into the second quarter.

Just to give you an idea, $1 movement in benzene price you need about $0.085 per pound MDI pricing to improve offset that benzene. So we obviously have enough pricing out there to offset the benzene increases that we’ve seen. The question of being able to capture all of that price increase that we have out there in the marketplace. And we continue to look at the international markets as well.

So as we look at the capacity utilization going into the next year, we continue to believe that capacity utilization will if anything tightens throughout 2014 and 2015 it’s not until 2016 that you start to see some of this Asian wave of new capacity coming on. And again given what we were saying two years ago about capacity that we thought would be coming on this year, it’s questionable in ‘16, how much of that will be pushed into ‘17 and so forth.

So a year ago this time we were saying that we thought we were pretty closer to our own MDI project in China and here we are a year later still trying to get final clearance on that project. And I would say that that’s the way [isn't] just remained to Huntsman. So, as we look at capacity utilization this year, I believe that it's operating around that 90% level. I think it's going to tighten throughout ‘14, throughout ‘15 and perhaps into ‘16.

Kimo Esplin

If I can just add, so if you follow Peter’s sort of trans trajectory sort of 90% now tightening to the mid 90s by 2015. And if all the capacity comes on as it has been announced, we will drop utilization rates back to about where we are today sort of in that 90% range. So, we're not talking about any more than sort of utilization rates that we're seeing today in the 2016, ‘17 timeframe.

James Sheehan - SunTrust

Very helpful. Thank you. And also on TiO2, you mentioned producer inventories and I imagine the paint season how strong it is that's going to really affect this. But do you expect the inventories and the producer level to be completely normalized by year-end?

Peter Huntsman

Actually we certainly hope so. I mean I obviously don't have any control what the competition does, but I would certainly hope that by the beginning of the second half of the year that demand is normalized and that inventories have more normalized. I can only speak for our own inventories, which we continue to be very disciplined with that amount.

James Sheehan - SunTrust

Thank you very much.

Operator

The next question comes from the line of Frank Mitsch of Wells Fargo Securities.

Frank Mitsch - Wells Fargo Securities

Hi, good morning gentlemen. And just to follow-up on that Peter, how is your crystal ball look with respect to that scenario on TiO2 inventories in terms of potential pricing power for the product by the middle of the year into the latter part of the year?

Peter Huntsman

Well Frank, we're going to fight very aggressively here for any price increase we can get. But I would just remind listeners on this call that when we talk about the Rockwood acquisition last September I believe it was we were talking about price increases taking place in the second half of this year. That’s not to say that we are writing off anything that may happen before then. But I feel continue to be confident that we will see price movement for the second half of this. We start to see the U.S. housing markets, the recovery that’s taking place in Europe and so forth. I continue to be optimistic and believe that during the second half of the year the business, our business will be running at a $200 million annualized sort of run rate. And I would go a step further and say that I believe that the Rockwood business in its entirety business that we are buying will be very similar to that.

Frank Mitsch - Wells Fargo Securities

Terrific and that backs a question. What’s left to be done in terms of closing that deal? Is it just the European Union approvals and what’s your expected timing on that?

Peter Huntsman

It is European Union filing. There have been a couple of public releases that have come from the EU commission. But at this point given the sensitivity around the review that’s taking place and so forth, I wouldn’t want to try to hazard a guess as far as when that may or may not come. I think that we will be sticking to our comments around the first half of this year.

Frank Mitsch - Wells Fargo Securities

Wow, you’re tough to move off that. Alright that’s fine. Hey lastly Peter, you would originally thought that fourth quarter would probably come in sequential decline in adjusted EBITDA by 25%, it came in around 17%. So, what went right for you and is that going to continue in Q1 here?

Peter Huntsman

In Pigments?

Frank Mitsch - Wells Fargo Securities

No, I apologize for the company overall. I think you had initially -- in the last conference call, in the last quarterly conference call you had suggested that you typically see a seasonal decline of about 25% and that kind of the sell right to you in terms of the decline in EBITDA for Q4 sequentially from Q3 obviously came in at 17% you reported this morning. So, I am just curious between now and three months ago what went right in terms of the numbers for you coming in a bit better? And is that going to continue here in Q1 or is that continuing here in Q1?

Peter Huntsman

So, I think that there are two divisions I think that surprise me in the fourth quarter. And I’m typically not surprised with this business, but I would say that the Advanced Materials, we were at $8 million a year ago. And if you look at our fourth quarter in that business for the last three or four years, fourth quarter in that business is just been a [gizmo] and it seems like we’ve build all this manufacturing inventory and everything and then we always get smashed at the end of the year. This year we did a much better job managing inventories we did better job with our cost, we did a better job with pricing and so forth.

And the improvement that we saw year-over-year in Advanced Materials I think that was really a pleasant surprise and speaks about the restructuring that's been successfully taking place there. And I believe that if we look into this next year, I think that there are -- we expect that business to do better in ‘14 than it did in ‘13.

And I think that the secondary -- in the fourth quarter that perhaps hit me a little bit by surprise was the Performance Products, just seeing strength across the entire board, but particularly in our amines businesses. And again, that's several hundred different price points and product blends and so forth. But just across the board that division performed exceptionally well. And even midway through the quarter we kept expecting the usual fourth quarter slowdown to occur. And December was a strong quarter on demand and so forth. And it wasn’t any one particular product or any one particular geography. So, it was -- I see both of those businesses continuing into ‘14 on stronger footing in ‘13.

Frank Mitsch - Wells Fargo Securities

Thank you so much.

Operator

The next question comes from the line of Ivan Marcuse of KeyBanc Capital Market. Please proceed.

Ivan Marcuse - KeyBanc Capital Markets

Thanks for taking my questions. So just first one on the cash flow, how much, if you look out in 2014 how much will be spent on your cost saving initiatives? And then if you look at your CapEx guidance about $500 million, how much is related to maintenance versus your growth projects that you’ve laid out in past?

Peter Huntsman

Yes. Let me take the last question first. In terms of maintenance CapEx it’s probably in 2014 close to $180 million so the rest is discretionary capital. And your first question on cost of restructuring, we have -- we’ll spend right around $100 million in cash, almost all of that is completely reserved and we’re taking the charge on the P&L, but roughly $100 million of cash restructuring payments.

Ivan Marcuse - KeyBanc Capital Markets

Got you. So, with the lower pension expense and presumably higher earnings if we look out the next year, would you expect your free cash flow to continue to show a nice increase on a year-over-year basis in 2014? Do you have any other [million] or cash flows to consider that maybe a use or source?

Peter Huntsman

No, I think operating cash flows should continue to increase. Again, we wouldn’t expect restructuring; it will significantly increase in 2015 as pensions will be largely funded and that will continue to fall and restructuring will reduce to nearly zero. The only restructuring that we’ve announced that we’d still be probably spending money on in 2015 would be that European surfactants restructuring as a $20 million benefit.

I guess the only other thing that I’d point out in 2014 versus 2013 in terms of cash flow is cash taxes. Our cash taxes were low in 2015, excuse me in 2013 and in 2014, you should see cash tax rate of right around 30%, which is a significant increase.

Ivan Marcuse - KeyBanc Capital Markets

Great. And then your year-over-year EBITDA bridge, how much was your direct cost of that $34 million? How much of that was in the polyurethanes business as a result of benzene [probably] sort of the raw material I guess headwind on a year-over-year basis in the fourth quarter?

Kimo Esplin

Yes. Direct costs in polyurethanes, it didn’t -- the polyurethanes direct costs year-over-year dropped $10 million, $11 million.

Ivan Marcuse - KeyBanc Capital Markets

Okay. And then the volume, would that be about $10 million as well up?

Peter Huntsman

Polyurethanes, again I pulled up propylene oxide, but we in EBITDA terms $25 million improvement in volumes in our urethanes business from volume.

Ivan Marcuse - KeyBanc Capital Markets

Got you. Excluding the PO/MTBE or is that including it?

Peter Huntsman

Yes. As you know volumes -- so that is roughly $10 million hit in EBITDA terms on volumes, but the MDI side almost $25 million improvement because of volumes in EBITDA terms.

Ivan Marcuse - KeyBanc Capital Markets

Great, thanks for taking my questions.

Kimo Esplin

Okay.

Operator

And the next question comes from the line of Hassan Ahmed of Alembic Global. Please proceed.

Hassan Ahmed - Alembic Global

Good morning Peter. Just wanted to revisit the TiO2 side of things, just wanted to understand better the sort of play between TiO2 pricing and the ore cost side of things. I mean obviously 2013 very strong year in terms of volumes, but I would imagine one of the things that resulted in downward pricing pressure was rutile over cost in particular bringing down the cost curve. Now I mean, from your commentary, is it fair to assume that rutile ore costs have already peaked out and are beginning to sort of show an uptick?

Peter Huntsman

I would -- I’m not sure that I wholeheartedly agree with that comment, but I wouldn’t disagree with that. I know it sounds like a I’m playing both sides of that, but we’re just not dwelled that heavily in the rutile side of the ore demand. And just from what we’re hearing in the industry, I think that there is probably more truth to that than that.

Hassan Ahmed - Alembic Global

Fair enough. And so basically, even through the course of the fourth quarter, probably you started seeing some signs of I guess stabilization in pricing, TiO2 pricing?

Peter Huntsman

Yes, our prices really been fairly stable for the last three quarters, and we would expect in the next quarter fairly stable in all regions.

Hassan Ahmed - Alembic Global

Very good. And on a separate note, you would mentioned that you would expect polyurethane EBITDA to be lower in the first quarter of ‘14 than the first quarter of ‘13, now as I look at my sort of model, you guys made around $178 million in EBITDA in Q1 ‘13, a $173 million in the fourth quarter, so bit of a diet range right? Just trying to understand by what sort of magnitude should we expect this decline to be call it on a year-over-year basis, 10%, 20% some sort of order of magnitude?

Kimo Esplin

Well that’s really a question around benzene and Peter has outlined sort of what we’ve seen and we’re not exactly sure where benzene is going but he has outlined $0.70 increase per gallon on roughly 200 million gallons. Could it be -- if it stays that high and our pricing activity lag by 60 days, could you see $20 million of headwind there temporarily in the first quarter, I think you could.

Hassan Ahmed - Alembic Global

Fair enough. Thank you so much guys.

Kimo Esplin

Thank you.

Operator

The next question comes from the line of Edlain Rodriguez of UBS. Please proceed.

Edlain Rodriguez - UBS

Thank you, good morning guys. Just two questions on polyurethanes. Peter, you talked about like the prices, like the lag of 60 to 90 days you have in getting prices. Does it work the same way when prices have to go down because you do expect benzene prices to move down by the end of the first quarter?

Peter Huntsman

I would say that pricing coming down has more to do with capacity utilization than raw material movement. So when markets are at 90 and above on capacity utilization typically prices will fall much slower than raw materials will fall and prices will rise much quicker in response to rising price increases. So, I would say that in today’s market environment, we would hope that as Kimo just said, we’ll see a 60 to 90 day lag in getting prices up to counter the benzene increases but I believe that as benzene prices come off, we’ll be able to recover that loss EBITDA later throughout the year.

Edlain Rodriguez - UBS

Okay. And the other question is when you look at the EBITDA for polyurethane in both 2012 and 2013, like how much, like what's the split between MDI and PO MTBE?

Peter Huntsman

What we've done as a practice is given you a net change in the propylene oxide MTBE business, but we haven’t been disclosed the absolute amount.

Edlain Rodriguez - UBS

Okay. I was just trying to see like how important PO MTBE is in that segment. And quickly just geographically, like are you seeing any softness in like the emerging markets, given all the concerns we have there and also in Asia?

Peter Huntsman

You are talking geographically across all of our businesses?

Edlain Rodriguez - UBS

Yes.

Peter Huntsman

I’d say that for us, you are looking at 80% of our business, as we look at our fourth quarter growth, I would say that we’re seeing pockets of slowness that are taking place in certain of these developing markets. On the Aussian area perhaps and in India in some of our products, but I am not seeing as much as you are reading about in the newspapers.

Edlain Rodriguez - UBS

Okay. Thank you.

Peter Huntsman

Thank you.

Operator

The next question comes from the line of Robert Walker of Jefferies. Please proceed.

Robert Walker - Jefferies

Hey, good morning. This is Rob Walker on for Laurence. So I guess given your expectation for (inaudible) segment, any expectation around whether corporate cost should be higher before restructurings?

Kimo Esplin

It should be fairly flat, maybe up just a little bit with some inflation but pretty flat. That corporate line includes some sort of non-fixed cost areas including LIFO, there is a little bit of other stuff in there, some FX, unallocated FX. But if foreign exchange rates stay the same and we don’t have a lot of LIFO change, your corporate line shouldn’t change.

Peter Huntsman

I do want to just comment. When we look at a lot of the benefits that have come through our cost restructuring, a lot of that -- those benefits have been because of cost controlling containment that’s taken place on that corporate line. If you look at that over the last couple of years, that line has grown much, much slower than the overall business has. And so that’s an area we’re always focusing on, cost within the divisions themselves. But when we look at costs within the divisions, we’re also cutting costs that appear on that corporate segment as well. So, I just want to make note of that.

Robert Walker - Jefferies

And then just, I guess bigger picture question, you managed to increase your EBITDA pretty significantly this year in Advanced Materials and Performance, I guess even on lower sales. Can you talk about where do you think incremental margins are in those businesses?

Peter Huntsman

In Advanced Materials, we publicly have talked about some of our end-use applications in the coatings and the electronics area, that’s just not like consumer electronics, that would be in the electronics that are infrastructure hot pieces are replacing porcelain, you see more and more carbon fiber that’s going into the automotive industry than ever before, the aerospace industry continues to grow very rapidly at double-digit sort of growth rates for us. And a lot of -- it’s particularly in the developing markets around the world, the DIY markets in India, and the Aussian areas of the Middle East. The DIY market continues to be with the arrow by brand diagram continues to be something that grows significantly better than GDP.

If you look at in the performance products area, again we can see them to see strong demand in anything that’s related to housing that would be on a global, particularly in North America. Oil field services, we are producing a lot of the components that are going into and have oil recovery, fracing a lot of the herbicides and in the agro chemicals, agricultural industry. We've seen strong growth in that area. So again, it’s really across the board. And we continue to be believer in a couple of these fundamental issues that energy prices are going to be relatively high and those are going to continue to be an area of growth and opportunity for Huntsman. Carbon fiber, strength in automotive and aerospace and in the electronics industry, the amines growth will continue. I would kind of take in these some of these fundamental issues that we believe in, we've got a strong pipeline of products that are coming out of over the course of next two or three years and so. It’s tough to point anyone product or anyone area where we see that growth.

Kimo Esplin

Just to remind you, in performance products we have two fairly sizable capital projects that were in the middle of the 2014 that will be complete in ‘15 and that is this expansion of our ethylene oxide business in Port Neches, Texas that's we’ll be spending nearly $100 million this year or that project. And that will be an incremental $20 million to $30 million of EBITDA on an annualized basis probably second half of 2015.

And then we are expanding doubling the size of our Jurong Island polyetheramine facility and that's a sizeable project that will be complete in 2015. So two fairly meaningful capital projects.

Robert Walker - Jefferies

Great, thank you.

Kurt Ogden

Mark, this is Kurt Ogden. I believe we are at the top of the hour, why don’t we try and squeeze one more question in if we can.

Operator

The next question comes from the line of Jeff Zekauskas of JP Morgan. Please proceed.

Jeff Zekauskas - JP Morgan

Thanks very much. Thanks for squeezing me in. In your restructuring table, your restructuring savings are up $150 million year-over-year. Is that what was actually captured, or is that a run rate number, or what's the difference between the run rate and the captured number?

Kimo Esplin

Let me get to the page you’re looking at, so...

Jeff Zekauskas - JP Morgan

Slide eight.

Kimo Esplin

Thank you, so yes that is $180 million of benefit in 2013 and obviously that's different in the $124 million of fixed cost savings, in the waterfall slide obviously the difference is in inflation and some growth including some M&A that we've done.

Jeff Zekauskas - JP Morgan

Okay, great. And then in answer to a previous question, you said that your cash restructuring in ‘14 would be about $100 million, does that mean that all of the cash restructuring of Rockwood will get done in 2014?

Kimo Esplin

No, I’m sorry Jeff, we don’t -- we haven’t included any of the restructuring costs or benefits in these numbers for Rockwood. Now it would come -- in addition and if you remember this, $130 million of benefits and the costs are about the same, it’s about $130 million.

Jeff Zekauskas - JP Morgan

Okay, great. And then lastly, are your MDI utilization rates or for the industry as the whole, are they different in the United States versus Europe versus China, because you spoke of them being 90% utilization?

Peter Huntsman

I’d say that they are all fairly close to each other. I think that when we get out to 2016, that next wave of capacity, virtually all of that capacity will be in Asia and Kimo talked about capacity utilization rates. Assuming everything gets dealt and assuming that it all comes on time, which I am skeptical of those things happening, but if it does happen, you will see global capacity rates go down to about 89% utilization rate. And it will probably be in the mid-80s in Asia and it will probably in the low 90s, if not higher in Europe and North America, which is a good balance because the vast majority of global growth in MDI taking place in China, should be taking place in China over the next decade and Huntsman will position in China. But we're even better position in North America where we're the largest producer in North America. So it's not going to remain exactly the same but I quite like the trends that are shaping up.

Jeff Zekauskas - JP Morgan

Great, thank you so much.

Peter Huntsman

Thank you.

Kurt Ogden

Mark, I believe that concludes our call today. We want to thank everybody for joining us and we’ll look forward to engaging with you here over the next several weeks and months. And again we look forward to seeing many of you at our Investor Day on March ‘06. So send us an email if you would like to participate in that. Thanks again.

Operator

Thank you for your participation in today’s conference call, everyone. This concludes the presentation. And you may now disconnect. Have a good day.

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