Good day, ladies and gentlemen, and welcome to the Q2 2014 Huntsman Corporation Earnings Conference Call. My name is Stephanie, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. And now, I would like to turn the call over to Kurt Ogden, Vice President of Investor Relations. Please proceed.

Thank you, Stephanie, and good morning, everyone. Welcome to Huntsman's Second Quarter 2014 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 second quarter 2014 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 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 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, huntsman.com. Let's turn to some highlights on Slide #2. In our earnings release this morning, we reported second quarter 2014 revenue of $2,988,000,000; adjusted EBITDA of $363 million; and adjusted earnings per share of $0.59 per diluted share. I will now turn the call over to Peter Huntsman, our President and CEO.

Thank you, Kurt. Good morning, everyone. Thank you for joining us. Let's turn to Slide #3. Adjusted EBITDA for our polyurethanes division in the second quarter 2014 was $197 million. Compared to the prior year, we saw favorable earnings growth from our MDI urethanes business of $24 million, whereas PO/MTBE earnings decreased $1 million as a result of a manufacturing disruption at our Ft. Neches, Texas facility negatively impacted our EBITDA by approximately $10 million in the quarter. Demand for our MDI remains strong. Global sales volumes grew 7% compared to the prior year, with excellent growth in our insulation, automotive and adhesives, coatings and footwear businesses. The majority of this growth came from the Asia Pacific region, where all markets grew at double-digit rates. In July, we formally announced and held groundbreaking ceremonies with our joint venture partners to expand our MDI capacity in Caojing, China. When completed in 2017, our offtake from this new capacity will be approximately 200,000 tons and yield approximately $85 million of annual EBITDA at full run rates. Second quarter demand in the Americas was strong and accelerated at the end of the quarter as commercial construction conditions [Audio Gap] our European demand was stable [Audio Gap] year-on-year improvements in our differentiated automotive, adhesives and coatings demand. Most of the [Audio Gap] came from Eastern Europe, partially offset by slower sales in Russia, as a result of the ongoing political turmoil. The costs have been [Audio Gap] based on the second quarter compared to the prior year and global contract prices declined further in late June, with prices in the U.S. settling in at all-time records for July. We've been out selling price increases to try to offset the high cost of raw materials. Demand for PO/MTBE remains strong, and in recent weeks, have…

Thanks, Peter. Let's turn to Slide 8. In the second quarter of 2014, compared to the prior year, our adjusted EBITDA increased 19% to $363 million from $304 million. Most of the improvement came from higher average selling prices, however, we've also seen improvement in sales volumes as well. Compared to the prior quarter, our EBITDA improved $34 million. A seasonal uptick in demand lifted sales volumes dramatically. Average selling prices improved across all our divisions with the exception of pigments, where pricing was flat. Contribution margins improved by approximately $10 million, as we were able to stay ahead of higher raw material costs. Partially offsetting these positive trends among other things was an increase in costs related to lower inventories and higher costs associated with maintenance. We've been delivering on the restructuring savings plans we've laid out, the benefits from which are clearly manifest in the improvement of our earnings. Most of the restructuring savings are included in our results this quarter, with the exception of approximately $20 million from our Performance Products division, which we'll see in 2015. Let's turn to Slide 9. Our year-over-year consolidated sales revenue for the second quarter increased 6%. This was due to higher average selling prices of 3% and an improvement in sales volumes of 2%. From a regional perspective, Europe improved 8%, whereas Asia Pacific and our Rest of World category, which is comprised of Latin America, the Middle East and Africa, each grew 9%. North America was impacted by the planned maintenance and manufacturing disruption and decreased 1%. Second quarter revenue increased across all of our divisions compared to the prior year. Polyurethanes is our largest division. It made up 33% of our total revenue in the second quarter and grew 5%. MDI urethanes revenue increased 8% and more than…

Thank you, Kimo. This [Audio Gap] Strong quarter moves us closer to our forecast EBITDA run rate of $2 billion in 2 to 3 [Audio Gap] with our shareholders this past March at our Investor Day. In fact, some of our non-pigment divisions equaled our best quarter ever, and we still have plenty of upside coming in the next 2 to 3 years. I would like to note that our restructuring is essentially complete within our Textile Effects and Advanced Materials division. Long-term, we will benefit further from our focus on aerospace, transportation, industrial applications and our Advanced Materials, and sustainable textile dyes and chemicals. However, we expect near-term earnings to be more in line with current levels and seasonal trends. Our Performance Products continues to grow at attractive rates, specifically in our amines and maleic product lines. And we are well-positioned to take advantage of cheap North American raw materials. In the next year, we will see the benefits of our expanded ethylene oxide and amines production, as well as improvements due to our European surfactants restructuring. While recently in China, we broke ground on our MDI polyurethanes facility, as well as reviewed the ongoing construction of our propylene oxide/MTBE joint venture with Sinopec. We continue to see strong demand for MDI in China and other Asian markets, as well as our urethanes North American markets. We believe that as some of the announced global MDI capacity expansions are further delayed, utilization rates will remain in the range of 90% for the next few years and market conditions will be favorable. While I am not happy with the market conditions of our TiO2 business, we are seeing gradually improving market conditions, and we'll continue to push for price increases in the second half of this year. This is certainly a division that has room for improvement. Regarding our proposed acquisition of the Rockwood Holding Performance Additives and Titanium Dioxide businesses, as Kimo mentioned in his comments, we are right where we thought we would be with the Rockwood earnings for this year. We continue to work closely with the European Commission in its review. We have proposed certain remedies we believe [Audio Gap] the Commission's concern and are confident that final approval will be secured in the next -- by the end of the third quarter. We are in the process of extending the termination date of the agreement with Rockwood and related financing to accommodate any possible delays that may arise from the European Commission review. I believe this is a great acquisition, at the right time and at the right value. In short, we had a very strong quarter. But I see plenty of room for growth in earnings. We're on track to deliver our plan to the market and we're off to a great year, and we still have plenty more to come. With that, I'll turn the call back over to Kurt.

Thank you, Peter. Stephanie, will you please go ahead and explain the procedure for questions-and-answers and then open the lines?

[Operator Instructions] The first question comes from the line of Bob Koort from Goldman Sachs.

I was wondering if you could help out, I think, you talked to some of the points, but it seemed that your cash from operations was relatively anemic compared to your EBITDA? And looks like a big increase in receivables. Can you talk about what the factors are that led to some leakage down in the cash generation line? And then, what you might see in the second half?

Sure. Actually, second quarter cash generation was spot on what we thought it would be. Again, it's roughly $100 million build in working capital in the second quarter. I think, when I look at our budgets, I think, we were just a little higher than that. CapEx is on track and cash taxes were a little higher relative to the rate because we pushed some cash taxes from 2013 into the first quarter. But when you think about other cash payments in the quarter, $19 million of cash restructuring payments were made. Pension was $28 million. And then, of course, the dividend, but those were the items, so that from an operating cash standpoint, pretty well breakeven, but that was expected. Again, second half, you'll see that working capital line reverse and our expectation is, for the year, that working capital will be flat, notwithstanding having built working capital by, what, almost $300 million, a little over $300 million in the first half.

And so my follow-up, could you talk a little bit about, obviously, you're not giving guidance for next year, but sort of more of a range of where you might expect cash generation to be? And then, can you talk a little bit about the scale of the businesses requiring the remedies in the Rockwood transaction? Is it 5%, 10%, 15% of the acquired assets? And I'm in an airport so I'll put it on mute.

Sure. Sure. I think, in our Investor Day, we sort of outlined what we think the next couple of years will be relative to cash generation, assuming a certain EBITDA level. But I think, the important items are cash restructuring. This year, we'll spend over $100 million. I think, you can expect in the next few years that, that will fall to, say, $25 million. We've been spending in terms of cash on pension $140 million to $150 million. My expectation that will be cut in half certainly as most of our European-defined benefit plans are fully funded, and with the lower interest rate environment, our liabilities have come down relative to our funding. The capital expenditure line item, I think, will stay right around depreciation, but at $500 million, I think we can accommodate the Rockwood businesses and still spend right around that level adjusting for the Augusta new plant that will be completed here in the first part of 2015. And I think the last component of cash, Bob, is interest expense. We have $900 million of high-coupon bonds that become callable early in 2015. We just issued some bonds at roughly 4.5%, and the bonds that we would be calling are -- have an interest rate of about 8.5%. So I think we can reduce our cash interest expense by a significant amount as we call those bonds in 2015. So all in all, I think what we outlined was that our target level of $2 billion of EBITDA in the next couple of years, we can generate right around $700 million worth of free cash before distribution back to shareholders in terms of share buybacks and dividends. To your second question relative to the size of the remedies that we're talking about, they are insignificant. I would think about them in the neighborhood of $5 million to $10 million of EBITDA impact on the entire -- in the entire Pigments business.

Your next question comes from the line of P.J. Juvekar From Citi.

Pete, you talked about $2 billion of EBITDA in the next few years. Is that a 2017 target? And then, what has to go right? Or which segments have to contribute the most to get to that number?

I think, P.J, if you look at this, I would ask that you go back to our Investor Day slides where we broke out where we were in 2013 and where we expect to be over the course of the next 2 to 3 years. So I'm not sure that I'd necessarily stated that $2 billion result will occur in any one specific calendar year but rather we believe that the business will be running at that $2 billion run rate over the course of the next 2 to 3 years. As we look at that, some of the divisions, we believe, are able to reach a very specific target that we've outlined, and that we have on our Investor Day slides. And as you look at the improvement in each of those divisions, they're all associated with a specific project that's been attached to that division. So we see our polyurethanes going to $875 million, which is an improvement from where it is today of about $100 million. We see our poly -- our Performance Products going to $500 million, which is only about a 10% improvement over the run rate of where we are today. We see our Advanced Materials going to $175 million annualized run rate, which is about where we are today. Our Textile Effects going to $75 million, which is about -- a little bit further than from where we are today. Our pigments, and I think that this is the area where we would be expecting perhaps the greatest step forward from where we are today, we see that number going to $225 million, which is really getting the business back to a kind of a minimal, nominal margin, positive margin for the [Audio Gap] And then we see the Rockwood acquisition adding about $350 million of EBITDA on top of that, which is simply the present run rate today plus second [ph] synergies. So as we look at that $2 billion run rate, I don't see any pie-in-the-sky. We've got to go out and double margins in any one product or have some ridiculous unrealistic price increase or anything. These are all projects that have been announced, they've been approved by our Board of Directors, and it's just a question of executing on those. And I think, when you look at our past quarter earnings, from where we were in 2013, to where we are today, we continue to see that sort of trajectory and that improvement in earnings to get up to that $2 billion. So I feel, today, even more confident in that number than I was -- when in March when we gave that number to our investors.

That's very helpful. And just in pigments, you mentioned in your slides that inventory levels are high. Have you seen a change in strategy for some of your competitors in terms of prices or volume?

No, I'm not really seeing any change in strategy that would be material. I'd be very hesitant to talk about any of our competitors' strategies, just simply because I simply don't know what goes on. I can't even begin to guess what goes on in some of our competitors' thinking and so forth when it comes to inventory and so forth. But anyway, as I look at our TiO2 in the first quarter, we had inventories of around 62, 63 days. Today, we have inventories in about the mid-50s. And typically, in this industry, if you have inventories in the mid-50s, that's usually a pretty good area for -- to be able to achieve pricing. But obviously, there are other variables aside from inventory, raw material costs and demand trends and seasonality and so forth. But certainly, I would see the pigments industry in better condition today to push pricing through than I would have in the last couple of. [Audio Gap]

P.J, I'll add, we no longer have the transparency we once had with the industry reporting inventories. And that was part of a legal settlement where we no longer have that mechanism. So it's hard to know exactly where inventories are, so these are sort of our estimates on industry days.

Your next question comes from the line of Kevin McCarthy from Bank of America.

Peter, you expressed some confidence that MDA -- MDI operating rates would remain at 90% plus. Can you talk about the changes that you've witnessed on the supply side of the equation? And perhaps give us some color on where you see operating rates today on a regional basis?

I would say that operating rates on a regional basis, it's -- certainly would be a fairly tight North America demand, particularly in the end of June. Seeing the pickup, I think that we saw, at the end of the second quarter, demand pickup that we typically see in the beginning of the first quarter around housing and construction demand. So I think that, obviously, it's no secret that we had a pretty late winter, pretty late spring, and I think that we've seen kind of a bounce in housing in North American demand across all of our businesses at the end of the second quarter. I think as we look at Asia, there's been some recent capacity that's come on in the Asian market, particularly in China. I'd say that we're operating somewhere in the high-80s, and Europe demand has been -- growth in the last year has been pretty flat. We've seen some stronger segments in kind of the higher-end automotive end in Eastern Europe and so forth, but it's been pretty flat in Europe. I'd say, globally, that you're looking at capacity utilization rates probably around 90-ish percent rate globally. But that's going to vary a couple of percentage points depending on what region you're in around the world. And as we look more and more at our business, I think that our objective is to have our business less dependent on operating rates. As we go further and further downstream, you're going to have a business that's less dependent on operating rates than we would have had 1 year or 2 ago, and I would imagine, the next year or 2, as we continue to move further downstream, we're going to be less sensitive to operating rates across-the-board. So I would say, again, globally, today, you're probably give or take a few points around that 90% utilization rate.

Great. And then, as a second question, if I may, going back to your Investor Day, you provided a helpful slide outlining your various growth projects. MDI in the U.S. and Europe; I think you've got a PO JV in China, EO expansion, et cetera. And so my question would be, if you think about the last 4 or 5 months, has there been any change in those projects with regard to cost, timeline or expected EBITDA that you would consider to be meaningful?

I'd say, on the costing side and on the EBITDA side, I would say no. I would say that on the EO expansion in North America. I would -- I think in the Investor Day, we were talking about more of a first or second quarter 2015. I would imagine that, that's going to be closer to a third to fourth quarter, probably fourth quarter 2015, I'm sorry, so a delay of probably 2 quarters. Now again, I want to emphasize, I don't see the price of the project going up. We're -- just engineering -- third-party engineering that should've taken a quarter or 2, has taken 2 to 3 quarters. This is not just pertaining to Huntsman. I think, it's more of an industry issue around a slowdown in construction. As we look at our pigments projects and so forth, I see those on stream, coming on stream about what we told people on the Investor Day; Textile Effects should be about what we told people. The MDI expansion taking place in the U.S. and North America, these are smaller debottlenecks. That might be pushed back a quarter or so. But again, the annualized EBITDA impact of these might be pushed back a quarter or 2. But I don't see the EBITDA once those projects are up and going being impacted at all. Matter of fact, again, as I talked about some of the slowdown in my comments that we're seeing around the world, I'm -- I would certainly think that it's safe to assume that our competitors and competing MDI projects around the world, if anything, kind of collectively are being pushed back quarters or even a year or so. And so, I think, that, that is going to push out the added capacity by another year or so. And I think it's going to keep operating rates from going lower than I would've thought a year ago.

Kevin, maybe I can just add one thing. The very first project you mentioned, it was the MDI investment in the Netherlands and the U.S. I think you can think about half of that coming on early in 2015, the U.S. piece. The European piece would be the other half and that comes on the first part of 2016.

Your next question comes from the line of James Sheehan from SunTrust.

I was just wondering if you could discuss the sensitivity of your downstream MDI businesses to benzene prices? Are they less sensitive to raw materials as a result of them being more specialized? And how does that play into your overall expectations for the Polyurethanes segment in the second half?

I think that if we look at it from the second half, first half, I think that the markets are tight enough. We feel quite confident that we'll be able to offset these higher benzene prices with price increases. We've got, in the second quarter, an $0.08 price increase per pound that was effective July 1. Another $0.08 that's been announced for August 1, and I believe, from what we're seeing in the market, that we feel very confident at this point, that we'll be able to offset the benzene -- the higher benzene prices that we saw coming out at the end of the second quarter. Now if you look at the downstream businesses, obviously, when you differentiate your product, the advantage that we have when you look further downstream is that benzene becomes less of a percentage of your overall cost. You're mixing more raw materials, you're mixing more components into your MDI, and so instead of benzene being 20%, 30%, 40% of your cost, it's going to be obviously quite a bit less than that. And therefore, I think that our pricing -- our need to increase prices to offset benzene price increases will be easier because it will -- it's a simpler -- it's a smaller percentage of increase we'll be looking for. So I think, in the short-term, for the second half, I believe that we do have price increases in place today to offset the benzene prices that we have seen thus far. I would remind you that benzene moves on a daily basis. So I don't think we can look at prices today and say that's what it's going to be 3 months from now. But I think the market is tight enough that we can offset those prices in the second half.

And also, on the Rockwood acquisition part of the business, you gave some good color on color pigments and some of the various pieces there. I was just wondering if you could elaborate a little bit more on the actual TiO2 portion of Rockwood? How is that doing, especially in the more specialized applications?

Well, there's the more specialized applications that are maintaining good demand or maintaining their margins and that's an area where we're seeing better opportunity for price improvement than we are on the more commoditized coatings end of the business. And I think that the Pigments business in Rockwood is playing out a little bit less than we had anticipated. The other non-TiO2 ends of the Rockwood business are playing out better than anticipated. And obviously, as we improve pricing in our own TiO2 business, we'll see an impact -- we'll see an improvement in the Rockwood business as well. So I think that as we anticipate further price increases taking place in the pigments end, we'll see that on both sides.

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

Just wanted to get more commentary around the comments that you made around TiO2 pricing in the second half possibly not being able to get it despite inventory levels being, say, close to the mid-50s. I mean, is this more a function, like you said, I mean, inventory seems to have been rightsized now, but is this more of a function of sort of trying to find some stability in ore prices? And as and when those stabilize, you can probably go ahead with these price hikes sticking?

I'm not sure that ore price movements have a great deal of impact on TiO2 prices. This is a question of producers being able to hold the line with customers and that's where the battle is being fought. I don't see a great deal of influence being pushed on TiO2 finished pricing because of what's happening in ore. I do see ore prices stable if not having a bit of a downward pressure across-the-board. And this may very marginally help pigments but the pigments industries is going to be out there and raise prices and that's a tough thing for any product to do and you need to see a material improvement in the business, that's what needs to happen.

Fair enough. Now moving on to the polyurethane side of things. Obviously, you have a sort of 2 to 3 forecast of $2 billion in EBITDA out there. Just trying to get a sense of -- I don't have the numbers exactly in front of me, but I do remember that you guys did around 20% EBITDA margins back in '05 in polyurethanes. Since that period, obviously, I would imagine MTBE has become a far greater contributor to the Polyurethanes segment. So just trying to get a sense of what is baked into that $2 billion EBITDA sort of estimate that you have in terms of polyurethane EBITDA margins, particularly keeping in mind the higher contribution of MTBE now?

I would say that of the $2 billion relative to today's MTBE price, so if I look at our last year's 2013 EBITDA, polyurethane around $750 million, and we're saying that of the $2 billion where we see ourselves in the next 2 or 3 years, $875 million of that is going to be polyurethane. I don't believe that there's any -- we're not anticipating any material change in the PO/MTBE business as part of that $135 million improvement. What we are seeing is an improvement in margins on the MDI side further downstream, and we see continued growth of 7% to 8% over the next 2 to 3 years. So that's really the improvement needs to take place on that, and I don't think that it would be, I don't know, maybe right for us to sit here and say that we believe the MTBE margins are going to be materially higher in a year or so.

Fair enough. But I mean, just for the segment, overall, I mean, the segment this quarter reported 15% EBITDA margins. I mean, is it fair to assume that as conditions, particularly within MDI, tighten from here, you could get to north of 20% EBITDA margins in that segment?

I think, yes, you point to 2005 when we had 20 [ph] EBITDA margins, and we had a higher percentage of our business in components. And obviously, in very tight conditions which we had in 2005, those components achieved higher margins than what I would say our systems will do in an extremely tight market. So our estimate is that if we had the 2005 conditions all over again with the current portfolio of polyurethanes, systems and components businesses we have today, we wouldn't do 22% margins. But I think, we would be approaching 20%. So I think, high-teens, up to 20% is probably a good way to think about it.

The $875 million that we have in our $2 billion number, Hassan, that's probably around a 17% margin. And we're not sitting here and saying that we're going to get back to 20%. I think that there's a strong likelihood that we will. I think that the market could very well get back to those sort of levels, but when you look at the $2 billion number, again, I want to be realistic, we're looking at something in the upper teens of that number. If we get back into the same operating rates that we saw back in '05, you'll see a number well north of $1 billion, not an $875 million of EBITDA.

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

Gentlemen, I want to come back to the Rockwood deal, Peter. Back in March, you guys were able to modify the transaction such that you lowered the cash portion by $50 million, and I know that you're proposing certain remedies to try and get this deal closed by the end of the quarter, and I was just curious, how should we think about those certain remedies impacting either the purchase price or the asset base of what you're going to be acquiring or would like to acquire?

I'll make a couple of points. First of all, I think that we cannot give details at this point as far as what we're doing with the EC. But we are confident that the remedies address the EC's major concerns. I'd also add that the remedies are immaterial to the overall business. And it's consistent with what we've said in the past, and they will not include a divestiture of a facility. And I think that's an important part. We've been very consistent in that. And I think that we've given some light around the EBITDA impact as being immaterial to the business and so forth. So I don't think that there's anything different to report at this time, than perhaps what we were saying last time, only that perhaps we're more confident today that something is going to get done by the end of the third quarter.

All right. That's helpful. So if you get the Commission approval by the end of the third quarter, how should we think about the inclusion of those businesses flowing into Huntsman? What sort of timeframe should we think about?

Fourth quarter event. Obviously, once we get the EU approval, we'll be closing the business in a matter of days, and from that point on, we'll be including those earnings.

All right. Great. And you've mentioned during the -- the discussion on Performance Products business something about one-off sales and then that was part of something that was negatively impacting EBITDA. I guess, I sometimes think about one-off sales as a positive event. Any kind of color that you could provide as to what occurred there?

My apologies if that was at all confusing. What I was trying to say is we had a maintenance shutdown or maintenance work that was approximately $10 million in expenses. We had up sales that were a positive $4 million, and so -- and the one-off sales, these were catalyst materials and the reason I say they're one-off, we have catalyst sales throughout the year, but I can't sit here and say, third quarter next year, I can basically tell you how much amines we're going to be selling next year. As far as catalyst sales, those sales come in somewhat haphazardly as catalyst wears down and so forth in our maleic late business and other sales dealing with technologies. So we have this $10 million hit in maintenance work. We had a positive number on the one-off sale, which kind of is a net 6. And so again, yes, any time a one-off sale would be a negative, I'd question why.

Your next question comes from the line of Mike Ritzenthaler from Piper Jaffray.

A follow-up on raw materials and polyurethanes. To what extent did raw material escalation impact profitability in 2Q given that the price increases came relatively late in the quarter? And I'd be interested in commentary on the effects geographically, given that benzene is -- the benzene escalation is mainly a North American phenomenon?

Sure. Raw materials were about -- we're talking year-over-year in polyurethanes, there was headwind of about $10 million almost entirely in benzene. We've been talking about third quarter headwind with benzene continuing to go up. If it stays at about $5 a gallon, that's another, I think, $20 million of benzene headwind by the way.

The pricing initiatives in the second quarter offset that almost dollar-to-dollar. So we do have a little bit of a luxury in that when benzene prices go up, we've got inventory, and so by the time we run through that inventory of, if you will, the lower price benzene, hopefully, we've got our prices up by the time we're taking it in the chops on the benzene prices, so.

Okay. That makes sense. And then, I guess, just as a follow-up on the component MDI sales in China, and I'm just curious as to how long that market is. And I guess, the spirit of the question is around how transient those component sales, I mean, calling them out as a bit weaker, how transient that is?

We think that those are pretty solid sales in China. We have -- we do very little third-party sales in China. We're going through brokers and distributors. The vast majority of our products there is going directly to the automotive, directly into the construction materials and so forth. And so I wouldn't characterize our sales there as transient. I think, as we look at those downstream sales, we see those continuing to grow and we see it as a very solid base.

Your next question comes from the line of Robert Walker from Jefferies.

I just wanted to follow up on polyurethanes and some of the bridge items looking into Q3 and Q4. When you layer everything together, I guess, can you walk us through Q2 to Q3, and then, Q3 to Q4? And then, on that, I guess, just a follow-up to the previous question, to what degree could lower component pricing in China impact the downstream systems pricing?

I think, the last question I'll take, and that is systems prices tend not to move much. And so we should, as MDI prices fall, if they were to fall, usually are able to retain the system margin. And therein lies the upside and if you're -- given a real fly-up scenario, we have less upside in the system business but much more stable. I mentioned that we have a third quarter headwind relative to the second quarter of about $20 million of benzene, if you believe in $5 a gallon benzene. And so, obviously, prices need to come up, and Peter mentioned sort of the price initiatives. We have seen some softness in China -- Chinese polymeric MDI pricing. And that is a result of new capacity coming on in China from our competitors. But we expect that to come back as that volume is placed in the market. And we also expect to see prices in other regions rising. And we expect to offset that pricing in the third quarter, where MDI pricing on sequential basis -- excuse me, MDI, urethanes EBITDA will improve second quarter to third quarter and year-over-year.

That's helpful. And just briefly, in pigments, previously you mentioned the floor in that business being $100 million on an annualized EBITDA basis. Do you need pricing in the second half to get to that this year?

So to get $30 million [ph] for the year?

Yes.

No, we're on a run rate now of about $100 million.

And I would just say that as we look at pricing, I did mention that we see prices in the fourth quarter slightly improving between now and the end of the year. Obviously, demand slows in the fourth quarter in TiO2, so you see a small improvement in pricing, a diminishment in demand as it seasonally happens. And I would think that as we look at the pigments pricing today, the net effect on all that is, I think, you're looking at a pretty flat third and fourth quarter in comparison to the second quarter.

Your next question comes from the line of Edlain Rodriguez from UBS.

Just a follow-up on pigments, Peter. I mean, in the last call, you said you thought the deal back in April was a better deal than it was when it was announced in September. I mean, given the unimpressive results of the Pigments business, both yours and somewhat in Rockwood, do you still feel the same way, that the deal is a better deal? And why is that?

Well, absolutely I feel it's a better deal. I do on 2 reasons. If you'd give me some more time, I think, I can come up with a lot more reasons than that. But just of the shoot [ph] -- look, TiO2 is a great product. Longer-term, the price of this is going to improve. And we may be off 1 quarter or 2 on when prices go up and so forth but inventory rates aren't [ph] coming down in the industry, demand is building. Our principal market in Europe, demand continues to improve in Europe, better CDP [ph] . And longer-term, TiO2, I think, is going to be a great product. But I guess, what I'm more enthusiastic about with the Rockwood acquisition is the non-TiO2 piece. And what we're trying to do here with our pigments is not just trying to get sale of TiO2 but we're also trying to get diversity. We're trying to, other than expand vertically and get into a business where we're digging for rocks, we're looking at getting a business that is more horizontal in nature, where we've got colored pigments, water treatment, wood treatment, and when I look at the diversity of our technology and the diversity of applications and pricing and customers and so forth, that's what we want at the end of the day. So here, you've got a pigments, not just TiO2, but a pigments business that while pigment pricing is flat, the other side, the other end of the business, is more than making up for it. So yes, while I'm disappointed in TiO2 pricing, I'm very impressed that the non-TiO2 segments of the Rockwood business are performing as well as they are today. And I think that, that's better what I had expected. So again, TiO2 will come back. If it's not this quarter, it's going to be in the coming quarters. It's a great industry. But the non-TiO2 business, the more I get my hands around that, the more I see that, the more opportunity I see in that business. It's big business, doing better than we thought it would be.

Well, and again, let's just do the numbers for you and remind you, we talked about $1 billion cash purchase price, $200 million of what we're going to say is trough EBITDA for these businesses, is certainly trough TiO2-economic. So we're buying a business at 5x trough with upside, and post synergy, we have a 3x EBITDA business at trough. What's not to get excited about that?

That makes sense. And one last question on Advanced Materials. You noted that you walked away from some low-margin businesses. So when you look at the portfolio, like how much of that type of business is still left, that type of a low-margin business, how much is still left in the portfolio?

I think, it's probably 10% or perhaps even less than 10%. We might be -- if I look over the next quarter or 2, we might be exiting a few more of those applications and accounts depending on pricing. And look, we've done 2 areas in that business. And I hope that the market doesn't focus so much on price cutting but rather where we're positioning ourselves in aerospace and transportation and automotive and industrial applications and so forth with our Advanced Materials group. And so, yes, we're going to see sales down. And as we reported this last quarter, we might even see that in the next quarter or 2, see that continuing. But when we look at the -- as we look at the aerospace industry and all these other areas of applications, if you strip out and monetize the nonprofitable end of the business, we're seeing 2x to 3x GDP sort of growth taking place in the other ends of the business and that's where earnings growth is going to take place and that's where the future of the business is. So I think, as we look at that business, probably in coming quarters, we're a little less focused on cost and much more focused on growth margin expansion and opportunities to further improve that business.

The next question comes from the line of Herb Hart [ph] from Monus [ph]

The question is regarding the operating and expense line. I noticed you've been holding it flat to down a little last couple of quarters. Is that going to be able to continue? Can you actually drive costs down a little more in that part of the business?

Well, the announced restructurings relative to fixed costs are really sort of coming to an end. As we mentioned, we have performance products that has another $20 million to go with the shutdown of the Patrica Italian facility, and with the sale of our Lavera, France facility and European surfactants. The direct costs are going to be largely raw materials, and so they will move with energy prices generally. So again, what we're focused on is growth in this business. And with that growth, I think, we're going to be able to improve our profitability as we grow without increasing our fixed cost portion of our business.

We'll take -- operator, we've gone a little bit over time than what we had planned for. We'll take one more question here.

Okay. This is the last question and this comes from the line of Jeff Zekauskas from JPMorgan. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: So 2 things. I think, Chinese TiO2 exports are up something like 50% to 60% this year to about 275,000 tons from 175,000. Does that have an influence on the market? And how do you see Chinese exports through the year in TiO2? And secondly, you talked about additions in MDI capacity in China in 2014. How much capacity do you think was added?

If we look at the TiO2, I see that as being fairly flat from here on out. As we look at the exports into U.S. and exports into North America, and I should say, in the European market, that's really not growing all that much from the Chinese export point of view. Where you see the Chinese really growing their product is in further APAC, Africa, Middle East and a little bit in Latin America and so forth. Look, eventually those tons that are displaced there will come back and means that we've got to compete in those market areas and so forth. But I personally, and I mean absolutely no disrespect to Chinese producers -- their technology is getting better and better, and I look at them as being formidable competitors. I just don't see Chinese exports as having a great deal of impact on pricing and margin. There's plenty of capacity. There's plenty of supply and demand in North America and Europe. If the producers there want to get serious, they can improve margins. So I wouldn't read too much into the Chinese exports and the impact that the Chinese are having in the market. In China, with the announced additions of capacities coming on in 2014, I'm reticent to start naming competitors and capacities and so forth. So I would just say that we believe that the volume that's been added thus far this year with the present growth rate that we see in China, we think that the vast majority of that capacity would be absorbed in the Chinese market. And that operating [indiscernible] will stay relatively consistent in that market and the operating rates will improve in North America and in Europe. So globally, you'll probably see an improvement of a couple of percentage points throughout the year because you're going to see tighter markets in Europe and North America, and it's going to be lumpy. When you get a new facility come on at 200,000 or 300,000 tons coming on in China, you're not going to absorb all that in 1 month or even 1 quarter. But I think that these plants don't come up just overnight. When somebody adds about [ph] 300,000 tons into the market, it used to take a couple of quarters for an MDI facility to come up and run at capacity and run at design rate and run on spec material. So it's kind of -- I mean, statistically, you say 400,000 tons is added into the market in the second quarter, but I don't believe that much capacity comes in, on spec, in the second quarter all at once. It's a gradual impact that hits the market.

This is Kurt Ogden. I believe that concludes our call today. We want to thank everybody for joining us, and of course, if you have additional questions, don't hesitate to reach out to us. Thanks, everybody.

Thank you, ladies and gentlemen, that concludes your conference call for today. You may now disconnect. Thank you for joining and enjoy the rest of your day.