Huntsman - Earnings Call - Q3 2016

Transcript

Speaker 0

Good day, ladies and gentlemen, and welcome to the Huntsman Corporation Third Quarter twenty sixteen Earnings Conference Call. My name is Janeda, and I will be your operator for today. At this time, all participants are in listen only mode. Later, we will be conducting a question and answer session. As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to Curt Ogden, Vice President, Investor Relations and Finance. Please proceed.

Speaker 1

Thank you, Janata, and good morning, everyone. Welcome to our third quarter twenty sixteen earnings call. Joining us on the call today are John Huntsman, our Founder and Executive Chairman Peter Huntsman, President and CEO and Kimo Esplin, Executive Vice President and CFO. This morning before the market opened, we released our earnings for the third quarter twenty sixteen via press release and posted it on our website huntsman.com. We also posted a set of slides on our website which we will 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 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 will also refer to non GAAP financial measures such as adjusted EBITDA, adjusted net income or loss and free cash flow. You can find reconciliations to the most directly comparable GAAP financial measures in our earnings release, which has been posted on our website. In our earnings release this morning, we reported second quarter twenty sixteen revenue of $2,363,000,000 adjusted EBITDA of $272,000,000 and adjusted earnings per share of $0.38 per diluted share. I will now turn the call over to Peter Huntsman, our President and CEO.

Speaker 2

Thank you, Kurt. Good morning, everyone. Thanks for taking the time to join us. Let's turn to slide number three. Adjusted EBITDA for our Polyurethanes division in the third quarter was 137,000,000 MDI Urethanes delivered impressive earnings growth with a third quarter EBITDA of $138,000,000 This represents an improvement of $17,000,000 compared to the prior year period.

MDI volume growth was strong for the quarter at 5% globally, driven by strong growth in Europe and North America. Growth in Europe was across the board. In particular, we saw a strong double digit growth within our downstream specialty MDI product range into our adhesives, composites, elastomers as well as automotive and furniture business units. North American growth was driven by commercial insulation as we continue to see a recovery in this large market combined with the ongoing trend of MDI system substitution of alternative insulating materials. Asian growth was relatively flat.

However, we grew our differentiated portfolio by 10% while deselecting our lower margin component business. Overall, Asian profitability increased substantially compared to the prior year period as tightness in the Chinese market led to significantly improved margins. Our MTBE business recorded an EBITDA loss of $1,000,000 in the third quarter. The average C factor, which is an industry proxy for MTBE contribution margins declined by 50% compared to the prior year period from $1.45 per gallon to $0.73 per gallon. The decrease in C factors was primarily attributable to higher gasoline inventories and lower refined margins.

The C factors remain low today and we expect this to have an adverse impact on MTV earnings in the fourth quarter. During the third quarter, we experienced a negative EBITDA impact of approximately $15,000,000 to polyurethanes earnings from weather related and other production outages that we expect and we expect a $10,000,000 negative EBITDA impact during the fourth quarter. All the affected facilities are now back operating. We continue to strengthen our innovation capabilities as we drive for higher differentiated growth in downstream markets. These efforts were recognized earlier this month when our Polyurethanes division won a prestigious Supplier Innovation Award from BMW for developing a technology which dramatically reduces emissions from high performance polyurethane seeding foam used in its vehicles.

The innovative chemistry developed by Huntsman enables BMW to reduce total emissions from its seating foams by a factor of 10 without compromising comfort or quality. Huntsman is the only supplier able to meet BMW's ambitious requirements and the award reinforces the importance of collaborative partnerships with key customers to develop innovative solutions that enhance product performance and ultimately business competitiveness. Let's turn to slide number four. In the third quarter, our Performance Products division recorded adjusted EBITDA of $70,000,000 During the quarter, we saw soft demand in China, particularly in the wind market and soft demand globally for oilfield products. In addition, volume in this business were impacted by weather related and other production outages during the quarter, which had a $10,000,000 negative impact.

We expect to see another $10,000,000 negative impact from these production outages during the fourth quarter. Similar to our polyurethane operations located along The U. S. Gulf Coast, the impacted facilities are also now operational. During the quarter, we announced that Innospec had committed to purchase our European Surfactants business at an enterprise value of $225,000,000 This business represents approximately $24,000,000 of annual EBITDA and we expect closing to occur by the end of this year.

As a reminder, we have postponed our planned maintenance of our ethylene oxide and ethylene glycol units in Port Neches, Texas until the second half of twenty seventeen. This maintenance occurs once every four years and will last approximately two months with a cash cost of less than $50,000,000 The EBITDA impact will depend on economics at that time, but we currently estimate it to be approximately $15,000,000 We continue to make progress with the self help measures we are undertaking in this business to improve earnings. We expect minimal restructuring costs as we are focused on business optimization, not capacity rationalization. While these measures won't be fully implemented until the end of twenty seventeen, we are already seeing a benefit. While this business will be affected in the fourth quarter by typical seasonality and the production outages which extended into the quarter, we expect that their impacts will be offset by the benefit of the self help measures that have been put into place.

As a result, we expect to see similar sequential earnings in this division in the fourth quarter. Let's turn to slide number five. In the third quarter, our Advanced Materials division recorded adjusted EBITDA of $55,000,000 with an EBITDA margin of 22%. Sales volumes decreased primarily due to soft demand for lower value resins in our coatings and construction markets. In addition, slowing demand for wind in China and competitive pressures in North America resulted in lower sales in our wind market.

This was partially offset by continued strong growth in our high value aerospace and electrical markets. EBITDA was lower in our coatings and construction and wind markets, but improved in our aerospace and electrical markets. Continued focus on our higher value markets such as aerospace resulted in overall improvement of 200 basis points in EBITDA margin. In the fourth quarter, we expect to see a normal seasonal slowdown in demand, however, improved earnings compared to the prior year. Turning to slide number six.

Our Textile Effects division recorded adjusted EBITDA of $17,000,000 in the third quarter, an increase of $7,000,000 over the prior year period. Sales volumes grew 5% compared to the prior year period. We target key markets such as China, India and Bangladesh to grow our business. These efforts continue to be successful for us as sales volumes in key markets grew 11% compared to the third quarter of the prior year, primarily due to strong demand in Bangladesh and India, while demand was nearly unchanged in China. The combination of our continued focus on higher value product ranges, lower raw material costs and lower selling, general and administrative costs led to increased EBITDA margins of 9% compared to 5% in the prior year's period.

The return on net assets for the last twelve months for this business is 13%, a significant improvement from where this business was not long ago. We expect the fourth quarter adjusted EBITDA in textile effects to be similar to what it was what it has been in the third quarter. Let's turn to slide number seven. In our Pigments and Additives division, we earned $38,000,000 of adjusted EBITDA in the third quarter, an improvement of $33,000,000 versus the prior year period, predominantly in our TiO2 business. Our TiO2 business earned $22,000,000 of adjusted EBITDA during the quarter, while the additives portion of our business earned $16,000,000 Average selling prices for the division were up 3% sequentially on a local currency basis.

We were particularly encouraged to see the average selling price for functional TiO2 improve 5% compared to the second quarter. We've implemented two price increases through the end of the third quarter of this year and are implementing a third increase during the fourth quarter. In addition, earlier this week, we announced another price increase for implementation in the first quarter of twenty seventeen. These necessary price increases along with the benefits from our restructuring efforts position this division for success in delivering a long term sustainable and profitable business. Compared to the third quarter of last year, sales volumes were essentially flat for the division.

However, TiO2 sales volumes increased 5% compared to the prior year period with notable growth in Europe. In the fourth quarter, we expect to see the typical seasonal slowdown in demand and would therefore expect earnings to decrease on a sequential basis. Before sharing some concluding thoughts, I'd like to turn a few minutes over to Kimo Esplin, our

Speaker 1

Chief Financial Officer. Thanks, Peter. Let's go to slide eight. Our adjusted EBITDA decreased to $272,000,000 in the 2016 from $311,000,000 in the prior year period. During the quarter adjusted EBITDA was impacted approximately 25,000,000 from weather related and other production outages in our Performance Products and Polyurethane businesses.

Sales volumes were essentially flat excluding the effect of the outages. Overall margins decreased by $36,000,000 primarily in MTBE where the C factor was approximately half of what it was in the prior year and due to competitive market conditions in our Performance Products division. However, we continue to see strong EBITDA growth in our MDI business and margin expansion in TiO2 as a result of the previously announced price increases. Compared to the prior quarter, our adjusted EBITDA decreased to $272,000,000 from $325,000,000 in the second quarter. Overall sales prices increased by 2% sequentially, primarily due to higher MDI and TiO2 prices.

However, sales volume and contribution margins combined decreased $52,000,000 Slide nine. This year, we set a goal to generate more than $350,000,000 of free cash flow. As of the end of the third quarter, we have exceeded that goal by producing $569,000,000 of free cash flow year to date. It's worth noting that in the fourth quarter, we expect inventory build in some of our businesses such as in European MDI in preparation for a first quarter scheduled maintenance of our Rotterdam facility and as we replenish inventories from our unplanned outages in Performance Products and Polyurethanes. As we look forward to 2017, we expect to continue our strong free cash flow generation, most notably through growth in EBITDA, stable working capital as well as lower capital expenditure and restructuring payments.

We expect pension payments to increase in 2017 due to changes in the discount rates primarily in Europe. At the end of the quarter, we had liquidity of $1,000,000,000.02 $4 This is an increase of $224,000,000 from the end of twenty fifteen. On July 22 and again on September 30, we made early debt payments of $100,000,000 reducing our Term Loan B by 200,000,000 during the third quarter. Through the third quarter year to date, we have spent $290,000,000 on capital expenditures and we have received approximately $28,000,000 of capital reimbursements from our customers and joint venture partners. In 2016, we expect to spend approximately $450,000,000 on capital expenditures before capital reimbursements from business partners, which are expected to be about $30,000,000 We currently we recently completed a capital planning review with senior managers of our business and have reduced our planned capital expenditures approximately $400,000,000 in 2017 and expect capital reimbursements of approximately $20,000,000 Our maintenance capital will be similar to that of 2016 or approximately $250,000,000 However, given the global economic backdrop, we have elected to trim certain discretionary growth projects.

We expect our annual depreciation and amortization rate to be approximately $435,000,000 in 2016 and approximately $450,000,000 in 2017. During the third quarter this year, we recorded an income tax benefit of $1,000,000 and paid $8,000,000 in cash for income taxes. Our MTBE earnings are taxed at The U. S. Statutory rate of 35%.

Variability in our MTBE earnings has a meaningful impact on our adjusted effective tax rate. The combination of significantly lower MTBE earnings, weather related and other production outages in The U. S. And higher earnings in countries with valuation allowances resulted in an unusually low effective tax rate of 14% in the third quarter of twenty sixteen. We expect our 2016 and 2017 adjusted effective tax rate to be in the range of 25% to 30%.

We expect our long term adjusted effective tax rate to be approximately 30%. Peter?

Speaker 2

Thank you, Timo. Earlier this year, I outlined three objectives for our company. The first was to build on our core differentiated businesses. I'd summarize our third quarter operational performance as follows. We're seeing attractive earnings growth in MDI, margins for key business lines and Performance Products have stabilized.

Advanced Materials and Textile effects continue to operate at a steady and modestly improving pace. And TiO2 prices are improving. We've had some headwinds such as lower MTBE margins as well as weather related and other one time production outages. Our second objective was the delivery of more than $350,000,000 of pre dividend free cash flow for the entire year of 2016. To this end, we're generating substantial amounts of free cash flow and are putting it to use by prepaying our debt.

To date, we've generated over $550,000,000 of free cash flow, made debt payments of more than $250,000,000 including $200,000,000 which were early prepayments and strengthened our balance sheet. Our third objective is the separation of our Pigments and Additives division. Let's turn to slide number 10. Earlier today, we filed an initial Form 10 registration statement with the U. S.

Securities and Exchange Commission. The filing represents an important step in the progression towards the separation. The filing contains useful information and answers many questions that you've been asking. Additional information such as the company name, capitalization, additional pro form a information, other matters will be provided in subsequent amendments to the Form 10. Within the filing this morning, we indicated that we intend to spin the combination of our pigments and additives and textile effects businesses, which we refer to as SpinCo.

An overview of these businesses is provided in the filing along with industry and market information, strengths of the business and an outline of strategy. Historical carve out financials are provided. And although these are compliant with accounting requirements, to be candid, they don't provide the full insightful view of the business. In certain cases, our pigments and additives and textile effects businesses operated within legal entities, which include businesses that will not be part of SpinCo. While we have made an attempt to pro form a these legal entities adjustments within the filing, there are additional pro form a adjustments that will be made in future amendments such as corporate overhead costs and interest expense.

SpinCo is incorporated in The U. S. And its principal executive offices are expected to be in The U. K. We plan to have SpinCo shares listed on the New York Stock Exchange.

We have previously indicated our intent to retain as much as 40% of the economic interest in Spinco in large part to capture the appreciation in value associated with an improving titanium dioxide cycle. We intend to use the monetization of our economic interest to repay debt. In order for this spin off to be tax free, we will not retain more than 19.9% of the voting power. We will determine our retained ownership following receipt of a private letter ruling sanctioning the tax free nature of the spin off. Certain board members and executive managers are also identified in the Form 10.

Subject to market conditions, we plan to separate in the first half of twenty seventeen. Let's turn to Slide number 11. We provided an update profile of what SpinCo and pro form a Huntsman will look like. Both companies will be industry leaders in their respective areas of operation with a diversified geographic business footprint. I think we'll have two great companies that shareholders can invest in.

Slide number 12. It's our belief that the cyclicality of titanium dioxide caused an undervaluation of Huntsman Corporation shares. We think the separation will allow equity markets to value our businesses more fairly and lead to higher independent valuation multiples of the different businesses. The separation creates two separate industry leading businesses that will enable enhanced focus, resource allocation and flexibility to pursue separate strategies and talent alignment. Our goal with the spin off is to create a Huntsman type company.

We won't overburden it with debt or abnormal environmental liabilities or other items that may jeopardize shareholder value. Ultimately, we think both companies will represent attractive investments and the separation will unlock shareholder value. With that, I'll turn the call back over to Kurt.

Speaker 1

Thanks, Peter. Janeda, will you explain the procedure for Q and A and then open the line for questions please.

Speaker 0

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

Speaker 3

Good morning. Good morning. I guess two questions. One, can you flesh out a little bit on how much how you see the pension costs possibly shifting in 2017, 2018? And it sounds as if the pension will be retained at the Huntsman level.

Is that correct?

Speaker 1

Well, you mean Lawrence in terms of the spin? Spin Yes. Company carry with them their the pensions associated with the businesses that are being spun. So and to your first question around where we think pension contributions will go, of course, we haven't got through the actuary process yet. So we don't have specific numbers.

But obviously interest rates have fallen in the last year in Europe where most of our liabilities sit. And so we would expect that the required contribution would go up. This year, I think our pension contribution is about $90,000,000 My guess is that it'll be up significantly. Mean it could be 30%, 40% increase.

Speaker 3

Okay. And then for the volume swing in polyurethanes, can you disaggregate that somewhat between the MDI component and the balance of the business?

Speaker 2

When you say MDI components and the balance of the

Speaker 3

business The polyurethanes component within the poly the pure polyurethanes business within polyurethanes as opposed to MTB volumes or any other swings.

Speaker 2

Well, okay, we'll have to look at that. But if I just look at the MTBE in general, we did see a 5% growth over the prior year. And again, 8% of that growth was in The Americas, 6% of that was in Europe and Asia was essentially flat. And so as we look within that number, we did see a slowdown in the appliances, but that was mostly because that's typically a lower margin for us. Our automotive composite wood and our construction insulation were all very strong year over year.

That was MDI, Peter was quoting.

Speaker 3

Yes. Okay. Perfect. Okay. Thank you.

Speaker 0

Your next question comes from the line of Robert Koort with Goldman Sachs. Please proceed.

Speaker 4

Thanks. Good morning.

Speaker 1

Good morning, Bob.

Speaker 4

I wanted to talk maybe sort of the strategy on the spinouts. I guess I recognize the massive volatility in TiO2 maybe distracts from shareholders looking at the value of the core business, but you're still going to have the ethylene and MTB components in there. Is there something you can do to moderate the cyclicality of those businesses so that it doesn't impair the valuation you might get on your higher performing businesses?

Speaker 2

I think on the ethylene part, we're consuming over 1,000,000,000 pounds of ethylene as a company in ethylene oxide and other ethylene derivatives. And of course, we consume a great deal of propylene as well, Bob. So we are going to be subject to the cyclicality of those raw material costs one way or the other. The ethylene production that we have internally is about 400,000,000 pounds of that 1,000,000,000 plus pounds of consumption that we have. It's low cost production, ethane fed production.

And I think should that ever not be profitable to us, we certainly can shut that smaller unit down as we have in years past. But while it continues to generate margin uplift and improvement for us, we'll continue to operate that facility. I don't see that really as a massive flywheel on the overall cyclicality and profitability of the company. On the MTBE side, is there some way that you could look at MTBE as just a standalone facility that was out from the rest of our portfolio? I think that we probably would have some more options there.

But Bob, as you know, that's a facility that produces MTB as a byproduct of propylene oxide. And I think we've tried to be, particularly starting about a year ago, as transparent as we could educating investors as to what are the components of volatility there and what drives the MTBE markets. As tough as MTBE looks, as we look at this on a combined propylene oxide MTBE sort of a basis, I expect this year that our EBITDA margins in that POMTBE combined business is going to be around somewhere in the mid teens of an EBITDA to sales. So as we look at that, I would remind you that when you look at MTBE, if you take that and you put it in with the propylene oxide, the downstream advantage that propylene oxide adds to the polyurethanes business, I think it probably doesn't provide quite the volatility that it would appear when you break it out. But nevertheless, as you compare it to where we were a year ago, it is a volatile component of our earnings.

Speaker 4

And then Peter, if I might follow-up. I don't believe I heard on MDI you talk about the opportunistic margins you might be making in the short run from some competitor problems. Is that just being diplomatic? Or is that something you guys won't realize from a short term basis?

Speaker 2

I think that we've realized some short term basis on particularly on the Asian side of the business. But as we said, most of our growth in earnings in Asia have come about through our downstream specialty side of the business. We're trying to take as much as a component, the more commoditized end of our Asian MDI business and shifting that over to the more specialty side of the business. So I'm not sure that we've seen a huge uplift because of various outages that have occurred in the industry. And I would expect some of those benefits to moderate perhaps in the fourth and first quarter over the course of the next couple of months

Speaker 1

here? Bob, as it relates to an outage in Asia by one of our competitors, you remember that our Asian facility is running full out. And so when we look at year over year volumes in Asia, we were actually down a little bit. So we weren't grabbing market share because of that outage. Certainly polymeric MDI margins did rise year over year because of that outage and some other reasons.

But it wasn't a volume drill in Asia for us. We didn't grab market share.

Speaker 4

Got it. Thanks very much.

Speaker 2

Thank you, Bob.

Speaker 0

Your next question comes from the line of John Roberts with UBS. Please proceed.

Speaker 5

Thanks and congrats Kurt on the new CFO role.

Speaker 1

Thanks John. I look forward to working with the talented people at Pigments and Additives and TextileFX He's already harder to live with.

Speaker 5

And Peter you're named on the Board. Are you Chairman of the SpinCo?

Speaker 2

Subject to some final decisions and so forth. At this point that will be that is our plan going forward.

Speaker 5

Okay. And then there's some language about being able to exchange the retained SpinCo stock for debt. Could you maybe elaborate a little bit on that?

Speaker 1

That is just the I think you've seen it where there is a equity for debt exchange structure that can be used on a tax free basis within a certain time period of the spin. And we will have the option to avail ourselves of that opportunity.

Speaker 6

Okay. Thank you. Your

Speaker 0

next question comes from the line of Frank Mitsch with Wells Fargo Securities. Please proceed.

Speaker 6

Good morning, And let me also echo my congrats to Mr. Ogden. But also in his new role, let me go ahead and ask a question. In the slides, you're looking at a normalized EBITDA level, think, of $500,000,000 of which 80% is going to be pigments and additives, so $400,000,000 What would be your estimation as to when you could reach normalized levels in that business? Obviously, TiO2 is trending upwards.

So I was just curious as to what sort of timeframe folks might want to think about there?

Speaker 1

First of all, thanks Frank for the kind words. I think that as you have heard from us in the past, we won't put a timeline on when we expect to reach that normalization. Of course, are a number of variables that will feed into our ability to hit that historical normalized profitability. That said, with the rise in TiO2 prices that is going to be the primary driver which lifts this business to that. And so it will be conditioned on the market environment that we find for particularly titanium dioxide.

So to the extent that that continues to be strong as we have seen here over the last few quarters then we would expect to get there sooner rather than later, but no specific time horizon. I can just add the old CFO to those comments. What's interesting Frank and we've pointed it out over the quarters that that normalized EBITDA that we're showing is really based on an industry utilization rate of the mid-80s, which we're at right now. So it isn't predicated on getting back to some sort of utilization rate threshold. We are already at that normalized utilization rate level today.

It is really a question of how quickly will prices rebound over the

Speaker 2

next few years. And as the old CEO and perhaps the incoming Chairman, again, I think that when we talk about that bridge as to where we are today and where we're going, if you just look at it on a functional TiO2 basis, kind of if you assume that we're kind of running today on this annualized run rate of around $160,000,000 If you look at that uplift, you need about $500 a ton. And I would just remind you that if we went back to first quarter of last year, which were pretty bad prices for TiO2 on average globally. If we go back to where we were the first quarter of last year, you're halfway there from where we are today. So I mean, don't think we're trying to be very

We're not saying that we need to go back to where we were a few years ago, anything close to what record peaks were. I do think that it's quite realistic. And when you look at the pricing momentum that we've seen on average across the company over the last couple of quarters, we've seen a better than $200 per ton increase that we've realized just in the last two quarters.

Speaker 6

All right. Terrific. That's very helpful. And I know that Kurt is going to say a lot more when he's just reporting to Simon. So look forward And to if I could just follow-up on the MDI outage question.

Peter, you mentioned that you're not seeing a ton of benefit in Q4. But is there a chance that as contracts reset in Q1 that, that could be a source of upside for you or based on expectations of how long the outages will last on MDI?

Speaker 2

You're talking about particularly in Asia?

Speaker 6

Yes, Asia and Europe, yes.

Speaker 2

Yes. I would think that it might, but I'm not really counting on it. I'm counting more on the continued growth of our downstream differentiated, the 70% of our business that drives on improvement of economics and margins because of the value that delivers to the customers. That's not to say that we're not going to push as aggressively as we can for margin expansion in the component side of the business. It is a smaller volumetrically, it is a much smaller end of our business on the MDI side.

But yes, we'll try to take as much as we possibly can.

Speaker 6

All right. Terrific. Thank you.

Speaker 2

Thanks, Ryan. Your

Speaker 0

next question comes from the line of James Sheehan with SunTrust Robinson Humphrey. Please proceed.

Speaker 7

Good morning. I want to talk about your very positive working capital performance. That's very impressive here. I'm just wondering if you could break that out between TiO2 versus polyurethanes or performance products. How much of that is repeatable with that sort of execution especially after TiO2 is separated?

Speaker 1

Well we continue to have initiatives in all areas of our business to reduce the supply chain. So we will see incremental benefits I think over the next few years. I think we've made a pretty big step change here. And I wouldn't expect that in 2017 you'd see this sort of working capital improvement unless you see raw materials continue to fall. I would expect that we will have a fairly flat working capital view for 2017, again assuming that energy prices stay at the levels they are today.

Speaker 7

Okay, great. And Peter, given your comments on polyurethane benefits you're seeing from outages maybe falling off over the next couple of months, Is there what chance do you see of full year 2016 EBITDA getting back to 2015 levels if any?

Speaker 2

For MDI?

Speaker 7

No, the entire business.

Speaker 2

For the entire polyurethanes business.

Speaker 7

On your total Huntsman EBITDA, it looks like it may be falling short of twenty fifteen levels at this rate. What is your view as to how much lower 2016 EBITDA will be versus twenty fifteen right now?

Speaker 2

I'd be giving a very specific number in the fourth quarter on guidance. And given the volatility particularly around MTBE, I'd be reluctant to do that. But I think that as we look at our fourth quarter, MTBE is the variable there. I think that we're expecting as I tried to give division by division guidance of flat to perhaps seasonally down in some of the divisions and so forth. I think that on a relative basis on the typical seasonality of our MDI business, I think it's going to be stronger than we seasonally would see.

But nevertheless, we will see a seasonal impact on most of our businesses.

Speaker 7

Terrific. And on TiO2 pricing, it looks like you're continuing to push for more here. Given some of the comments of your downstream coatings producers, it looks like demand is fairly muted there. What are the prospects for getting a higher price in that type of environment?

Speaker 2

I think again, I think we went over some of these same sort of concerns the last conference call when people were questioning if we'd be able to get any price increase when some of the largest TiO2 consumers were saying that they weren't seeing price increases nor were they accepting any price increases. And I think we said last conference that every one of our customers were going to be going up. And I think that as we see the needed economics in the TiO2 industry, the needed improvement of margins and cash flow generation, we also see the pressures of raw materials and ores that have gone up in the third, fourth quarter time period. I think that the environment is such that we are going to continue to push very hard to have margin recovery take place. I'm quite pleased with what we've seen in the last two quarters of price increases.

But as I look at our average selling price globally in the third quarter, it's exactly where we were in the third quarter of last year, which were pretty tough very tough market conditions for us. Now our business has improved on an annualized basis by nearly 130,000,100 and 40,000,000 third quarter last year versus third quarter this year. A little bit of that's growth, little bit of that's mix. But mostly all of that is due to the cost cutting that we've implemented. So when we look at the selling price of TiO2, the margin of TiO2, it still has quite a ways to go until we see any sort of margin that I think we would call anything close to normalized or even justifiable for reinvestment back in that industry.

So again, happy with where we've been, but we've still

Speaker 1

got quite a ways to go. Jim, maybe I can give you some near term guidance relative to TiO2 pricing. I think the coverage of coatings tends to be a little bit U. S.-centric. And the TiO2 price increases have been pushed off to the first quarter in The U.

S. But non U. S. Prices will rise in the fourth quarter and they will be substantial. And of course with our mix of business with a big European business expect prices to rise sequentially third quarter to fourth quarter without a U.

S. Price increase.

Speaker 7

Appreciate the help guys. Thanks. Thanks.

Speaker 0

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

Speaker 8

Hi, good morning. This is Eric Petrie on for P. J.

Speaker 1

Hello.

Speaker 8

First question is on TiO2. Could you give us an update on Huntsman's inventory days? And then second, you commented that raw material ore pricing pressure is occurring in third quarter and fourth quarter. Is that across the spectrum? Or are you seeing more price inflation in chloride versus sulfate ore?

Speaker 2

Our inventories right now for Huntsman are I would say that they're in the mid-40s the number of days. The industry is probably in the mid-50s. When I say probably, there is no exact published data on that. And frankly, we don't track competitor inventories. So I'm just assuming that that's pretty typical with demand and so forth.

We are seeing across the board pressure taking place on the ore side. Largest volumetrically largest ore we buy ilmenite, we've seen that go from $100 a ton and upwards of $120 to $140 a ton. On a contained basis that ilmenite ore still is substantially more cost competitive to us than rutile or chloride slag or even sulfate slag. So and I would also remind you that when we agree on a price, there's typically about a quarter, if not two quarters of time until that price we've accepted that price at the time that cost actually hits our bottom line. So I think that we've got a pretty good supply chain of raw materials.

I think we've got a very competitive supply chain of raw material. And we have time to be able to, I believe, implement price increases to offset those rising raw material pressures.

Speaker 1

Just to put a dollar amount on that ilmenite increase, So that $100 to whatever you said Peter, 130 to $140 a ton ilmenite price, that's roughly a $10,000,000 annualized increase in our ore costs.

Speaker 8

Helpful. For my follow-up, do you expect overall MDI demand growth to slow following weakness noted by auto OEMs and appliance manufacturers? Or are you tilting your portfolio to more specialty and consumer end markets to offset that?

Speaker 2

Well, as I look at our year on year improvement, a lot of what we're doing is the biggest area of growth that we're actually seeing globally in the automotive area for MDI is the biggest area of growth on a percentage basis is Asia. So as you think of the Asian consumer buying a more quality oriented car, a higher valued car, typically you're going to see a higher valued automobile, a better automobile, if you will, MDI rather than TDI applications. And so we've seen double digit demand growth in our Asian auto sector over the prior year. We've seen strong single digit growth in Europe and we've seen a decrease in The Americas. So you're right, in The U.

S, we are seeing a decline in demand from a year earlier in the automotive area. But I think when you take the global picture of year over year automotive demand for MDI, we're up about 8% or so.

Speaker 8

Thank you.

Speaker 0

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

Speaker 9

Hi, good morning, Peter.

Speaker 2

Good morning.

Speaker 9

Peter, wanted to revisit the ilmenite ore sort of pricing dynamics. You obviously talked about pricing moving up to $130 $140 a ton from 100 Now as I sit there and look at some of the announcements coming out of China, in particular, the Chinese have come out and said that they're looking for aggressive sort of steel production cuts. In line with that, obviously, iron ore production is going to go down, which means magnetite production is going to go down. So in theory, that should imply that one could see significant ilmenite production cuts as well. Now is there a fair on your part that despite a $30.40 dollars a ton price hike, if these production cuts do take hold, ilmenite could move significantly up above and beyond the $30 to $40 we've already seen?

Speaker 2

I would think that there could be more upward pressure on ilmenite. Again, you think about ilmenite, has about half the contained TiO2 raw material in it as some of the other slags in raw material. So when I talk about when you talk about $130 per ton, you're talking like a $260 a ton competitive ore comparison to a $400 $450 sort of an ore. But you're absolutely right. As you see demand for iron ore and the steel industry go down, you are going to see the amount of ilmenite ore, which is a byproduct of the iron ore, you'll see that tighten as well.

But I would remind you that we source our ilmenite from Africa, from multiple continents and so forth. And I think in comparison to the other ores, ilmenite is going to continue to have a very much of a cost advantage to the other ores. And as I look at the inventory that is on hand, I look at the number of suppliers around the world of ilmenite ores versus chloride and various flags and so forth, I think that ilmenite is going to be the cost leader in the preferred raw material for some time to come.

Speaker 1

I think Saund, just if I could add, I think ilmenite producers have been producing at a below their marginal cost. It's been pretty tough market for them. And so they're getting really back to kind of a breakeven level. There is some I don't think that this price pressure on ore is going to be unique to sulfate ilmenite ores. I think there is an expectation out there in the marketplace that higher grade ores for chloride will likely move up with TiO2 pricing.

Speaker 9

Understood. Now sort of moving on to the TiO2 pricing side of things, you guys mentioned sequentially Q3 to Q4, you will see decent sort of price gains in the non U. S. Markets. But what should we expect as far as The U.

S. Market goes? Should we expect sort of sequentially flattish pricing in The U. S? Yes.

Perfect. Perfect. Thank you so much guys.

Speaker 2

Thank you.

Speaker 0

Your next question comes from the line of Kevin McCarthy with Vertical Research Partners. Please proceed.

Speaker 10

Yes. Good morning gentlemen. Kimo, would you comment on any expected tax related synergies or dis synergies as you proceed with the spin domiciled in The U. K, please?

Speaker 1

Sure. And welcome to the name Kevin. It's good to have you back.

Speaker 11

Good to be back.

Speaker 1

think from a spin standpoint notwithstanding a domicile that will be UK based, we wouldn't expect any sort of inversion type benefits with that transaction from a tax standpoint. The taxes in aggregate for the two businesses will look an awful lot like they do on a consolidated basis. Now of course there are NOLs associated with the countries that the TiO2 manufactures in. But and they will enjoy those benefits going forward just like they do today.

Speaker 10

Very good. And then second question

Speaker 11

if I

Speaker 10

may on cash flow. Looks like your CapEx is coming down, maybe pension comes up a bit. I recognize it's early to comment on 2017. But as you look into the crystal ball, do you have reason to believe free cash flow would be materially better or worse, were it not for the spin off, if I look at Huntsman standalone?

Speaker 1

Well, if you look at sort of Huntsman together as a consolidated entity relative to 2016, I think we're not going to have the same working capital benefits in 'seventeen that we had in 'sixteen. But I think generally you pick your EBITDA at $400,000,000 of CapEx. I think we're going have a lot less restructuring and a little bit more pension. I think we're still going to have substantial free cash flow, but it won't be at the mid-five $100,000,000 level that we're at today because of working

Speaker 10

Understood. Thank you very much.

Speaker 0

Your next question comes from the line of Ivan Marcus with KeyBanc Capital Markets. Please proceed.

Speaker 11

Hi. Most of my questions have been answered. Just have a couple of quick ones. And if I missed this, I apologize. But where MTBE stands today, what is in the fourth quarter, what would be the year over year headwind?

Speaker 2

I think that the we'd see MTBE on a year over year basis would be south of where it was in the fourth quarter. I think on a sequential basis, it's again, if C factors remain where they are today, it would be a few million singular million dollars worse in the fourth quarter than in the third quarter. I have in

Speaker 1

the comparison period. So fourth quarter twenty fifteen MTBE made $5,000,000 And of course Peter is referencing that negative $1,000,000 in the third quarter.

Speaker 11

Okay, great. And then if you look at the performance of the business, say you sold the $24,000,000 in EBITDA. Is there any sort of seasonality to that? Or would that be pretty much flow through at a pretty equal level through the quarters? Will that be in discontinued operations in the fourth quarter?

Speaker 1

No, it won't be discontinued. And it's a fairly stable business, not lots of seasonality other than the typical European December we usually see, August and December.

Speaker 6

Right. Yes.

Speaker 11

And then at the $225,000,000 is there any tax leakage?

Speaker 1

A little bit. We should net $200,000,000 after taxes and transaction costs.

Speaker 8

Okay. Great. Thanks for taking

Speaker 11

my questions.

Speaker 2

Operator, why don't we take one more question? I think we're coming at the top of the hour.

Speaker 0

Your next question comes from the line of Roger Spitz with Bank of America. Please proceed.

Speaker 12

Thank you very much and good morning. I know it's early days, but would SpinCo likely give a raise debt and give a dividend back to Huntsman Corp. Upon the spin? And what might you think SpinCo leverage and ratings might be?

Speaker 1

We're just going through that process now, Roger. And so in the Form 10, we really didn't discuss the capital structure. That will come in the coming weeks from an amendment to that Form 10. But what we have said is that it will be modestly capitalized. And maybe the right way to think about it is roughly what Huntsman Corporation is today.

So for a 3.5 times leverage, maybe that's the way you ought to think about SpinCo. So there will be some modest amount of debt, bonds and bank and Huntsman Corporation will receive that dividend back. In addition, as we've mentioned, Roger, we will have a retained interest and we are asking the IRS for the opportunity to have a greater than a 20% retained interest in SpinCo upwards as Peter said of 40%. And the use of proceeds as we divest of that retained interest will be used to continue to pay down debt at Huntsman Corporation. So there's really two means by which we will receive proceeds from SpinCo, both debt incurrence at SpinCo at the time of the spin and then subsequent sell down of our retained interest.

Speaker 12

Thank you for that. And lastly, just the missing MTBE for Q2 twenty sixteen EBITDA?

Speaker 1

Q2 twenty sixteen MTBE EBITDA is 19,000,000

Speaker 12

Perfect. Thank you very much.

Speaker 2

Talking to you, Roger.

Speaker 1

Janata, this is Kurt. We want to thank everybody for joining us on the call this morning. And to the extent that you have additional questions, please feel free to reach out to the Investor Relations team. Thanks again.

Speaker 0

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.