Hello, and welcome to the Huntsman Second Quarter 2023 Earnings Conference Call and webcast [Operator Instructions]. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Ivan Marcuse, Vice President, Investor Relations and Corporate Development. Please go ahead.

Thank you, Kevin, and good morning, everyone. Welcome to Huntsman's Second Quarter 2023 Earnings Call. Joining us on the call today are Peter Huntsman, Chairman, CEO and President; and Phil Lister, Executive Vice President and CFO. Yesterday, July 31, 2023, after the US equity markets closed, we released our earnings for the second quarter 2023 via press release posted to our Web site, huntsman.com. We also posted a set of slides and detailed commentary discussing the second quarter 2023 on our Web site. Peter Huntsman will provide some opening comments shortly and we will then move directly into a question and answer session for the remainder of the call. During this call, let me remind you that 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 SEC 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. We will also refer to non-GAAP financial measures such as adjusted EBITDA, adjusted net income or loss and free cash flow. And you can find a reconciliation to the most directly comparable GAAP financial measures in our earnings release, which has been posted to our Web site, huntsman.com. I'll now turn the call over to Peter Huntsman, our Chairman, CEO and President.

Thank you for joining us this morning. We hope that you like our new format that is designed to give our results to the market earlier and to provide more time for meaningful review questions and comments. Before opening the line for questions, I'd like to take a moment and summarize some of the broader observations that we see at this present time. As we have an early but still rather murky view of the third quarter, some fundamental trends are shaping up. Now North American markets, particularly around MDI and construction demand, I believe that we're seeing the end of prolonged inventory destocking. While this is not the case for all products and applications, we are seeing demand follow more seasonal trends. There are currently fewer homes and commercial real estate projects being built than we saw 12 or 18 months ago. However, order patterns would tell us that much of this destocking has ended and we are in the early recovery of building starts as we move into the next year. Commercial construction may take a bit longer to recover. We continue to see growth in our Asian and specifically our Chinese markets. This growth would be best characterized as modest, while pricing trends for MDI are also inching upward. Short of a major government initiative to spur faster economic growth, it appears that the second half of 2023 will continue to see modest seasonally adjusted improvements. A broader European recovery still feels as though it is yet to come. Pricing is very aggressive as companies fight for what demand is available. Energy prices are down from the recent historical highs, but still multiple times higher than energy costs in the Americas or Asia. Energy and economic policies and regulations in Europe do not seem to adequately address…

[Operator Instructions] Our first question is coming from David Begleiter from Deutsche Bank.

Peter, as recovery occurs in polyurethanes, I know it's early, but how do you think about the trajectory of earnings growth in 2024?

I think much of this is going to depend on the speed of the recovery. So I do believe that -- and again, I'm going to be particularly talking about North America here because I think that a recovery -- again, this is just my opinion. I think a recovery is going to happen sooner in North America and China than it will in Europe. But as I look at North America, in particular, I think that the supply chains and the inventory levels are getting precariously thin. Now this may be a new normal. But typically, when we see very thin supply chains of inventory, anything like a sudden spurt of demand or even a perceived spurt of demand outages that might occur in the industry, an MDI plant comes down or something like that or if there should be a sudden increase in the price of crude oil. You look at the price of crude oil and where we've kind of come from the lows of where we were just a quarter ago to where we are today, we've seen an increase of about $10 per barrel or so. If that starts to translate into where people are thinking, I've eventually got to refill or start to refill inventory and prices seemingly are going up, that might cause -- I don't want to -- well, I shouldn't use the word stampede. But it might cause a more aggressive buying than we would be used to, and you would see something rather more suddenly. Personally, I -- again, when we give the forecast for the second half and even looking to early '24, I don't -- we're not anticipating that but that wouldn't surprise me either. I mean, that kind of is more of the trend. As you know, Dave, as long as you've been in this industry it’s kind of more of the trend of the industry that they're very rarely or they're gradual declines and gradual improvements to take place over a year or two. It's usually sudden events that have a tendency to shock the industry. So yes, we do have a large percentage of our North American sales going into housing, construction, energy insulation and so forth. That's not a market that we're trying to shy away from and it's not something that we're ashamed of. I think that we continue to see an improvement in building materials and energy conservation and lightweighting and a whole number of opportunities, bioretardancy, better coatings and applications and so forth in the housing industry. It's going to continue to be an area of growth for many years to come. But I think that's where the biggest turnaround will come. And I believe that it will probably, again, in my opinion, happen sooner rather than later. But right now, the numbers would tell us we're looking for a gradual recovery throughout the second half.

And just on the Shanghai MDI JV, are there any benefits to Huntsman on the new configuration of the LD operations?

I'm going to let Phil comment on any of the financial side of that. We've had a great relationship with our Chinese partners and a very strong relationship with BASF. They've been an excellent operating partner with us and we can both go to the marketplace and fight like hell beating each other up over prices and applications and market share and so forth. But from a manufacturing point of view, it's been a great partnership, and I don't see any material change to the business. They'll be able to operate an MDI technology of their own and we'll be able to operate an MDI technology of our own on our side. So it's a natural separation and one that's been planned for, for many, many years. You can obviously tell this kind of an equal divide here of technologies and companies and so forth. Phil, anything you'd add to that from a financial point of view?

I think we said, David, in our prepared remarks, no material impacts on adjusted EBITDA, free cash flow and over time on liquidity. I think we may see some slight benefits to EBITDA and free cash flow next year as we move through the course of the year, we will get one crude MDI plant, as Peter said, we'll also get the strategically important hydrochloric acid recycle plant. So that's a good balance for us to have. And we will be able to improve some of the split ratios that we have coming off of that crude plant and therefore, target some more of the differentiated businesses and grow those. So look, it's a win-win for everyone. And essentially, it was a forced joint venture decades ago with BASF and three Chinese partners. But overall, from your perspective and modeling, no material impact.

Your next question is coming from Alex Yefremov from KeyBanc Capital Markets.

Peter, you talked about improvements in China and polyurethanes business, maybe [Technical Difficulty]. could you tell us what's going on there? There's talk about stimulus. Any signs that [Technical Difficulty] could be much stronger next year?

Well, I believe that when you have an economy of the size of China that's been in lockdown for as long as it has, I don't think that we've seen the full impact of China reopening. As I look at polymeric pricing where it stands right now being around 16.8, 16.9, that's about where it was a year ago. But it's also, I think, healthy to note that's as high as it's been in the last year as well. In the last year, it's been down from there. So we're seeing this -- and it's a gradual recovery, which I think is healthy to see. I always get [leery] when I see a spike that occurs in a week or two period because usually what goes up that quickly comes down that quickly. So it feels to me like there's just a slow, steady recovery. I did note in the Wall Street Journal this morning talking about the recovery is not happening as quickly and so forth. But what we're seeing around auto, around infrastructure, energy conservation, building materials and so forth, we continue to see a pretty good recovery there.

And then in your spray foam business, you're talking about volumes in North America being flat. How is profitability? Are you able to hold spray foam prices maybe to a better degree than underlying [Technical Difficulty]?

So you note, and I think it's a positive that volumes were flat year-on-year. Spray foam, as you'll recall, was the first really to go down from a demand perspective. And so in terms of any orange or green shoots, as we'll call them spray foam is indicating that on the volume front. Pricing has been under pressure and you can probably see that as you talk to contractors. So pricing on spray foam has undoubtedly been under pressure as the market has been depressed over time, we'd expect that to reverse out as you move forward one, two years and spray continues to replace fiberglass.

Our next question today is coming from Jeff Zekauskas from JPMorgan.

Can you talk about sequential pricing trends in MDI in your three major regions, the United States, Europe and China?

Well, I mean, as we look at this, we are able to, I think, see stronger margins. And as we look into urethanes into the US and into APAC I think that we're gradually making some recovery in those areas. Again, Europe continues to look pretty tough and it continues to -- I think pricing there is tracking raw materials and perhaps a bit more. And so I think there's -- again, there's a real struggle, I think, going on in Europe and a fight for market share there. I'm more optimistic about pricing gains or at least margin staying flat to maybe gradually improving in the US and I see it getting better in Asia.

When you assess the MDI market in 2023, how fast do you think global MDI demand will either grow or contract and how much incremental capacity do you think has been added because of Chinese expansion?

Well, the Chinese expansion, I'm going to let Phil answer that one because that -- he'll need a second just to look up the data. In the meantime, as we look at 2023 growth in MDI, we're really seeing about a flat market, zero growth. Last year, we saw a contraction of 3% which in the 25 years that I've been in the MDI business, we've never seen two consecutive years of negative growth. As a matter of fact, I'm not sure MDI seen two executive years in MDI growth in 30 or 40 years, that's during the recession and so forth. So again, I don't want to sound overly bullish on the second half. I have a tendency to be an optimist, which after this many years in this industry, you have to be or you'd probably be diagnosed with some form of insanity or mental illness. But I think that you've -- as you look at this -- the latter part of this year, MDI continues to be a great product. It's replacing materials, it's making in-roads and replacing applications in UPR and rubber and thermoplastic elastomers and so forth and it's going to continue to do so. I think the fundamental positive growth for MDI is going to continue on the longer term basis. And as you look out over the course of the next five years or so, we're still going to see -- if we see something around a 4%, 5% growth, that's still going to outstrip the projected capacity additions that will be coming on in that time period. I think the fundamental balances over the future, you're going to see more years that look like 2022 in MDI, the beginning part of than you do 2023.

Just to follow up, Jeff. So as Peter said, it is unusual to have two years where it's either negative to flat in MDI and typically, the history is that that snaps back and snacks back pretty quickly from a demand perspective. In terms of your question around supply, one what brought on the Fujian Province facility this year, that’s a 400-kilotonne facility overall. They've indicated that they will build over time, quite frankly, out some of the Fujian, some of the Yantai assets further. The history of Wanhua is their discipline, they have a 50%, 55% market share. We expect that to come in over time and probably matching a 5% demand growth increase over the coming year. MDI utilization rates are low right now and again, you'd expect those to snap back as demand recovers.

Our next question today is coming from Matthew DeYoe from Bank of America.

So on a consolidated basis, the decremental margin on volume has been like 40% for the first two quarters. Is there any reason why your incremental margins would be less or more than that as volumes come back into the business next year, or should they I guess?

So I want to sure make I understand the question. You said that the volumes have dropped down 40%. Should the margins drop that much?

No, I guess -- so if you look at the EBITDA headwind from volumes, your top line drop through is like 40% on volume decrements for the last two quarters. I'm just trying to think about next year, whatever, when volumes recover, as volumes recover. Is there any reason why it should be less or more than that kind of flowing back to the EBITDA line from volume contribution?

So Matt, this is Ivan real quick. The decremental margins were pretty high because the volume fell off sharply. If you did see a volume increase at the same rate as the decline, I would guess the operating leverage would sort of be the same on the upside. Typically, as you know, chemical company decremental margins are probably around 25% to 30%, but that tends to be an average over time, right? So it just depends on the volume recovery. But I would expect at the very least, I don't know, Phil, would you agree, 25% to 30% of each incremental dollar to flow to EBITDA, but it could be higher if volumes were to spike, it depends on the velocity, right?

And with new home construction data points have obviously kind of ticked up. Peter, you talked about that a bit. I think is there any reason why the mix of houses and who's building and maybe the price point would that lend to spray foam insulation underperforming or outperforming the rebound that we see in just data from new construction in the US?

No, I don't believe that that's going to have nearly the impact as the number of homes that are being built. The spray foam, we'll have about the same percentage of penetration, that percentage should continue to grow. Actually, if you look at smaller homes that are supposed to be more economical, I believe that there's more to be saved in utilities and so forth, and this would be a great selling point. What we need to see in housing, in my opinion, is to first get back to what I would considered to be an equilibrium. So we saw housing in 2021, 2022, kind of peak out at around that $1.7-ish sort of a, right, 1.7 million units on a housing start on an annualized basis. And that number dropped down at about 1.3%, is the run rate where we see it today, 1.3, maybe up a bit from that. And that's a decrease of around 10% to 12%, 13%. When I look at the volume drop off, the volume drop off was more like 30% in the housing construction, so 30%, 40%. That obviously fell far greater than the housing starts fell because of the inventory. And so what we need to do first and I think this is what the US -- what we're going to see in the second half is that we get back to what I would consider to be a new normal which perhaps is where we were back in '21, '22 minus that 12%, that sort of volume adjusted from 1.6 million, 1.7 million starts to 1.3 million to 1.4 million. Now last time, housing was at 1.3 million to 1.4 million, we were doing quite well. So I’d much rather see a higher number. But there is a tremendous amount of difference in pricing and demand. When you’re looking at 30% to 40% drop versus a 10% to 12% drop. So when we talk about new normal, I think that that’s what we’ll see and that will be impacted as well by typical seasonality is that when homes are being built and the time of year they’re being built. But I think that recovery is well underway. When we start looking at the demand for CWP quarter-on-quarter for us from first quarter to second quarter was up 16% on a global basis, insulation was up about the same amount. Our spray foam was up a little bit less than that but still up from quarter-to-quarter. So we're seeing that quarter-to-quarter buildup from the first quarter to second quarter, which is again starting to get back into a more normalized environment. We're also seeing the SPF spray foam, OSB prices starting to stabilize, if not going back up in a lot of applications through North America. So these are all positive signs, I would say, would continue to give me more optimism that the housing recovery is underway, more importantly than the housing recovery is the end of this massive de-inventorying.

And Matt, obviously, from our perspective on housing starts, single family homes matters, still well below the replacement level that is required. And therefore, we look forward to 2024.

Your next question is coming from Kevin McCarthy from Vertical Research Partners.

Peter, I was intrigued by your comments at the top of the call that you're exploring possible divestitures. I also think you indicated in the remarks released yesterday that you're evaluating inorganic growth opportunities as well. So maybe without getting into specific details, can you discuss what you would like to do with the portfolio conceptually over the next couple of years?

Well, first of all, I think that any management team has got to come into the office every morning and look at your portfolio, look at the present market conditions and the projected market conditions and make sure that your portfolio that your attention, your capital spend, your management and your focus is around the right asset base. And so we used to be in a lot of intermediates, we used to be in textile chemicals, we used to be in pigments and so forth. And time came when we looked at a lot of these products and we just felt we weren't the right owner for these assets. And there were also opportunities that we saw when we can expand further in MDI into spray foam energy conservation more greening portfolio, if you will, we could expand into hardeners and into adhesions and structural composites and so forth in our epoxy businesses and so forth. We continue to look very aggressively in some of these downstream applications, particularly in our performance products and even more particularly in our advanced materials as I think about lightweighting, I think about adhesion, I think about a lot of the green polymers and chemistry, I think about fire retardancy and construction, energy conservation and so forth. These are all going to be areas of the future that we want to be looking into. As we look at other areas of assets, particularly those that might be underperforming financially or may not be particular sciences that we add a great deal, then we've got to make some painful decisions at times and look at these assets from a financial point of view and look at a possible divestiture. But I've always been leery of somebody, particularly in an industry that changes as fast as our industry, if somebody says we've got the right mix, the right portfolio and there's no need for change. I mean there's always a need for improvement for change and so we're going to continue to stay focused on that.

As a reminder, Kevin, I mean, as Peter says, we're always looking at the portfolio. We have sold some smaller assets, right? We sold our DIY business in India, we exited out of our Southeast Asia businesses, our South American businesses. We've said very clearly that we're looking to exit the Russian market as well, and we'll continue to always look at financial performance around the world.

And then secondly, you had a nice quarter on your equity earnings line and from what I can tell MTBE was a nice tailwind in China. Can you speak to the trajectory there into 3Q and beyond, would you expect ongoing strength there or not?

Typically, if there's a good demand for clean quality gasoline. If crude oil prices are on the higher side and NGLs are on the lower side, that's usually a good combination for MTBE. So I think that as we look at those equity earnings probably ought to stay fairly close to where they are today.

Your next question today is coming from Frank Mitsch from Fermium Research.

And yes, props to Ivan on the new format. And Peter, for the record, I don't think you're insane. So I just wanted to make sure I got that out there based on your earlier comments. But what I do find insane is the 30% decline in volumes and performance products for each of the last three quarters, seems rather large. When does it end, what will it take for us to get back to positive volumes or at least less negative volumes?

And I unfortunately coming from you telling me that I'm of sound mind, I'm not sure that carries a lot of water. But nevertheless, I appreciate it, my friend. Yes, just for information purposes, it was my idea to change the format. Being dyslexic, I hate reading scripts. And so I had a desperation more than anything else. So yes, as we think about Performance Products, look, I think that business probably was the last one of our businesses to see any real impact from deinventorying. And we think about where it was that we saw the deinventory taking place, a lot of that was in unsaturated polyester resin, which I think was probably on the construction side, at least was a little bit behind what we saw in MDI. A lot of the fuel and lube additives business that, that sells into some of the energy oilfield services, gas treating, sulfur removal and so forth from gas, a lot of the ag business. If you think back a year ago, a lot of those businesses were growing pretty high when MDI and housing starts were starting to falter and we were starting to see this deinventorying taking place. So Performance Products, I think, defied gravity a little bit longer than some of the other divisions. But I think when you look at it on a sequential basis, if you look at Performance Products on the the volume side of that on a quarter-to-quarter basis, first going to second quarter, it's down essentially flat, down 2%. So I think, again, in this area, we've hit bottom. We've started to see improvements in the UPR business, which is where a lot of the maleic anhydride goes, polyurethanes, additives, the spray foam catalysts. We're starting to see a pickup in those areas in pricing and also in demand, gas treating. I think we definitely hit the bottom. A lot of the lube additives and so forth. So by the gasoline, by gas station, initial fill on cards and so forth, that will be a lot of our amine formulation that's going into that. And a more consistent oilfield gas treating area. So Frank, I'm going to try to make excuses, we were hit with a pretty hard deinventorying that took place in that business. And I think we certainly have seen the worst of it. And I think that as we go along there, we might see a recovery a quarter or so behind what we might see in MDI, but we will see a recovery there. And margins have continued to remain strong and it's a question of demand coming back.

And just to add, Frank, I mean, our EBITDA margins for the division were 18% in the second quarter as volumes come back. We’ll obviously leverage up and get back towards that 20% to 25% range that we've indicated, but those are still pretty strong margins that we have in a low operating environment.

And you also called out the competitive pricing dynamics with ethylene amines. How long will that last, what are -- what's the primary driver there and when we might we see relief in that area?

Yes, I think most of that is just volume that we're seeing in a lot of that earlier, and that's going to be wind application. I mean, it's as much as the world's being the drum on wind energy in Europe, it's actually just almost for a year now, been at a complete standstill. There are no major wind projects and you've seen a little bit of growth in North America and a little bit more than that. in Asia. So as some of these projects have been delayed, some have been canceled, I think you'll see a recovery in this area. A lot of this is also just the deinventorying and once people have gotten their stock levels that unnecessarily built up in 2021, 2022. I think a lot of people were having supply chain issues, they were seeing volatility in pricing and they kept more inventory, whether it’s MDI, whether it was a lot of the ethylene amines and a lot of various applications. They kept a lot of inventory and they now feel more confident about the supply of that inventory and the derisking, if you will, of those supply chains and that inventory is being reset.

Next question is coming from Vincent Andrews from Morgan Stanley.

Just given the weak macro conditions continuing, maybe you could give us an update on what you think the splitter contribution is going to be and maybe frame it a little bit?

Well, the splitter -- again, this is a project that I'm very glad that we put it in when we did. It's much better today that we're out trying to sell a differentiated product than we are more commodity MDI, if you will. And I think that there's -- the premium per pound that we represented to the market still holds, but there is definitely less volume out there, and I see that as a temporary issue that will be recovering -- that will be correcting itself here over the next couple of quarters. And that project, I think, will continue to be a success.

I mean we'd originally said $35 million, that was in a much stronger volume environment, we'll still get up to that $35 million as volumes come back, as Peter says, that premium of differentiated over the component side still holds. So it's a volume leverage and a recovery as we look forward to 2024.

And then I think you've done about $100 million a quarter in share buybacks year-to-date. Should we be anticipating a similar amount in the back half despite the lower outlook?

Yes, we do not see a change in that. And obviously, at the end of the year, the Board will assess where we are, they'll assess our outlook for and we'll act accordingly.

And if you do the calculations, that obviously gives us a greater than 10% return of capital yield dividend and share repurchases for the year. So consistent message from the start of the year.

Your next question is coming from Michael Sison from Wells Fargo.

Peter, on your Analyst Day, you talked about in polyurethanes kind of splitting that portfolio up in three different areas, commodities, formulary systems, especially solutions. And so when I think about where your margins are right now, any thoughts on how those three buckets have performed this year and what the potential is for those to get back to double digits over time?

So I think no. As we look at it, the upper end of that split, if you will, of those three areas, I think that the lower end of that split, we're seeing margin erosion that has taken place and we're struggling with margins in those areas. As we think about the upper end of that, the elastomers end and that would be the product that's going into your iPhone protector and cabling and so forth, the high end running shoes, what have you, the higher end of that, the elastomers end, we continue to see very strong margins. There's been no erosion in the margins and it's just a question of volume. So I think that in the middle part of that, that I would consider to be that which is going into the insulation, the spray foam and so forth, that certainly is under pressure but nothing like the commodity and polymeric down at the very bottom of that split. And so yes, I think that we're probably -- at this time, we're probably seeing an even greater bifurcation of margins and of the vitality and health of the three sections between that high end, the midrange and the low end than we did at the time of the Investor Day.

And then I guess when I did the math, it looks like your volumes this year and last year in total, maybe down $1 billion or so in sales. If you get that back are we back to that $800 million, $900 million EBITDA range longer term?

I'd like to think that that's -- yes, I'd like to think that's something that should be happening in the MDI business, and it's really on a longer term basis that ought to be the average of the business. Again, I'm not sure this is a question for Huntsman at least where we presently are at least, a question of volume as much as it is value. And I think that we've got a real opportunity here to take the molecules that we have and to upgrade those and reliably see a 15%, 16% to 18% business on normal times and we'd like to see that being pushed closer to 20%. And as we move further downstream as we get more and more and build up the elastomers into the business and so forth, this is an opportunity for us to create more reliable and consistent earnings.

Your next question is coming from Patrick Cunningham from Citi.

Last quarter, you indicated that in AM and Performance Products, destocking was likely to be relatively de minimis for the second half. But do you have any change to those expectations, is there a fresh destocking in markets like ag and industrial and how much of the margin outlook maybe bakes in some of that destocking?

I would say that destocking in Performance Products might go on a little bit longer into the third quarter. Ag is going to be small, it's going to be pretty seasonal, if you will. But I've been disappointed, I guess, as I look to Europe, and I look at the competitive nature there in pricing across the board. There's just a lack of demand and there's a lack of -- not in all products but in a lot of products of pricing discipline, that's indicative of the results of European segments of the business. For the Advanced Materials side of the business, yes, I think that we're largely through deinventorying. And on the performance products might go a little bit longer than Advanced Materials. And it might be a little bit impacted by region. But I think for the most part when you look at where we were from in Performance Products from first quarter to second quarter being essentially flat, there will be some seasonality across the board in the third quarter. Remember, much of Europe and frankly, a lot of the world, but particularly Europe, shuts down in the month of August. And we might see a little too early to say, we might see more closures because of the economic sluggishness right now in Europe. You might see more closures taking place in August for holidays than expected, that's yet to be seen. So there will be some seasonality in the third quarter.

And in the past, you've talked about getting AM margins back to 20%. Is there a path to get there in 2024, given the improved cost profile and some of the growth initiatives you have or is this largely outweighed by sort of a sluggish volume recovery?

No, I think that as we see -- I think it's been very well publicized the build rate that you've seen in the aerospace business in particular, we're going to continue to benefit from that. We continue to maintain the market share on existing platforms -- of airplane platforms. And I think that will continue as we look at the 777X and the wing design that's coming out of Boeing and some of the Airbus applications and so forth. I think that we'll continue to maintain a much better than 50% market share in these new applications as well. So if we can just maintain kind of our present course in ‘24 plus the continued recovery that we see in aerospace, yes, I think that we ought to be back up to 20%. Having said that, I think that advanced materials will recover more than just aerospace in 2024 as well. I think there's some great applications coming there and you'll start to see the pickup of our Miralon technology, you'll start to see greater investing in applications going into the power grid, industrial coatings and so forth. And again, it's just my gut feel of the area, but I think it's going to -- we have an excellent opportunity in 2024 to get back to 20%.

And look, we were at 18% in the second quarter, that's with aerospace recovering, but still not anywhere near back to where it was needed. So we're pretty close to that 20% even in the second quarter.

Your next question is coming from Hassan Ahmed from Alembic Global.

Appreciate the commentary, a lot of commentary around polyurethane demand and potentially destocking being behind us and how historically, the restock tends to be fairly sort of impressive. If we could just move away from the demand side, could you talk a bit about the supply picture? I mean, could we -- because obviously, we've come across sort of number of announcements around potential capacity addition delays and the like. So could we be in a situation where as the restock happens in the near to medium term, it's in the face of relatively sort of limited supply?

So Hassan, I think we said. So right now, relatively low utilization, unusual for MDI to go two years on the demand side where it's pretty low. So looking forward, we'd expect that demand profile to to tighten out with 5% plus growth per annum going forward. On the supply side, honestly, there's really only one way that you can point to, BSS on some small debottlenecking in North America. Covestro, obviously, announced the delay of any expansion in either North America or in China, which confirms your point, Dow has not announced anything and no Huntsman. So it's really down to one. And as we said, an tends to be relatively disciplined, they will bring on capacity over the next five years but they'll do it in a pretty disciplined manner, particularly with the 50% to 55% market share that they have in China. The fact that the other majors aren't really doing any expansions that can lead to some of the tightness that you described.

And just moving on a bit on the M&A side of things. I mean historically, you guys as well as a bunch of industry participants have talked about valuations being unrealistic. Now with several quarters of relatively tepid or negative demand, interest rates where they are and the like, I mean, what are you guys seeing in the M&A market? It certainly seems private equity has gotten more active. So have valuations become a little more realistic, are there more opportunities you guys are seeing on the inorganic growth side of things?

Not really. I'm not seeing a fundamental shift in the market. I think that you're seeing a little bit of -- valuations are coming down a bit. Obviously, capital cost something nowadays where a year ago, costs nothing. And I continue to just be befuddled as the companies that trade at 5 times, 6 times EBITDA, buying assets that are 15 times, 12 times, 10 times, not seeing any impact on their stock and then seemingly shareholders don't really care. So I think that we have to be -- remain disciplined. I know that, that sounds a bit of a cliche. But I think we've demonstrated that if we can't buy it, sometimes the multiple is going to be a little bit higher than we'd like to see. But in those rare instances, we will have a very quick and a very thorough plan of action to be able to grow the business, simultaneously to integrating and cutting costs and we'll justify that to the market with a very clear map going forward. If not, we will continue to invest in our own company and buy our own stock and make sure that we maintain and stay focused on a dividend. But we've got to remain disciplined because -- just because everybody else wants to pay these multiples doesn't mean it's the right thing to do.

Your next question today is coming from John Roberts from Credit Suisse.

I think of the MDI industry being relatively unintegrated back into oil and benzene. If Abu Dhabi is successful in their bid for Covestro, does that significantly change the structure of the industry in your opinion?

I'm not sure that it does. And again, I want to make sure my comments don't have anything to do with -- speaking on behalf of Abu Dhabi or Covestro, I have zero information on either of what's happening there. But I would just say that as you look at Yantai, I think that from their integration into coal, I would kind of consider them to be a little more integrated than other MDI producers. But look, at the end of the day, we're going to have the greatest value that will come to a molecule of MDI, it’s going to be being able to push that into a formulated mix downstream and get a premium price for the MDI. In my opinion, that will be far better than looking at it on an integrated basis going upstream up through benzene and nitrobenzene and crude oil and crude oil production and refining. Because all of those products, all of our basic raw materials have a market value to them, right? I mean just because you produce benzene and I don't produce benzene, we essentially have to value that benzene the same. You may be able to get an integrated cost on that benzene, integrated value on the benzene. But if you just subsidize your MDI because you've got benzene that you're making, I'm not sure that necessarily gives you an advantage unless you want to just move the benzene at a loss to market. So I've never thought of MDI in particular as being terribly advantaged or disadvantaged by lack of integration. I think MDI is going to -- the value of MDI is going to be far more of what you do downstream than what you do upstream.

And is the problem in epoxy more the delay in the wind turbine projects or is it more the raw material position that the Chinese producers have that they're lower than the Western producers, which is more of a problem for the industry right now?

I'm not sure -- when we think about epoxy for us, at Huntsman, that's just not a big end use market for us and it's not a market where we really compete on 10 years ago, that was the whole BLR. You'll remember that we used it 10 years ago, we used to talk all the time about wind and the impact of wind. And we largely traded those molecules up over the last decade into aerospace and into -- I'd much rather be investing in the grid system that's going to hook all these wind mills up in the electrical infrastructure that's going to try to make sense of all these wind projects than the wind projects themselves.

John, think about [AdMat] portfolio as being about 20% aerospace, 20% auto, about 20% into construction, and the remainder into infrastructure but excluding any wind, where we don't participate in those markets. Now we participate in things like the power grid, which ultimately is why we can deliver 18% margins even in a lower volume environment.

Your next question today is coming from Mike Harrison from Seaport Research Partners.

Peter, I was wondering if you could talk about how you're feeling about your cost structure in Europe at this point? It seems like you're kind of indicating a more extended period of softer demand and elevated energy costs.

Well, something that we look at all the time. I mean I think it was about a year ago at this time that we were announcing some pretty radical closures, restructurings and so forth, moving a lot of our back offices to crack out. Those projects are largely coming to conclusion here in the next couple of -- next quarter or so. And I think that we're benefiting from having made those decisions. Now if Europe continues to be industrialized and we see -- my bigger concern is that you start to see the customers, the OEMs and so forth start to leave Europe and they go to China, they go to North America, they go to the Middle East. And you continue to see this industrialization taking place in Europe, we may well have to reassess that market and the cost structure. I'm quite comfortable where we are today as I look out over the course of the next year or two to what we can see and what we're hearing from customers and so forth. I think that we took the right moves at the time I know we were being accused of being over reactionary in some of these decisions. I think, though, looking back on it, we moved with all haste at the first signs that we saw that there was this fundamental shift and I'm glad we did it. And we're better in Europe because of it. It's an area that we need to continue to, as I said earlier, we need to count every morning and just continue to look at the area and how do we adapt and how do we restructure around having the right people in the right locations and the right cost structure. I don't want to survive in Europe. We've got a prosper in Europe. We've got to have a good return in Europe and we've got to have a supply chain in Europe that makes sense, and I think there's still work to be done.

And then on Slide 8 of the presentation, you show a $23 million benefit from SG&A and R&D costs coming lower sequentially. Was that maybe some incentive accruals coming lower? I guess I'm just trying to get a sense of how much of that sequential improvement in SG&A costs was related to temporary factors and how much was part of the longer term cost optimization that you're doing?

So you can think about that being 50-50. I think we said in our prepared remarks, the combination of all we're doing on cost optimization clearly flowing through and then some reduction in incentive accruals for the year, all of that obviously offsetting an inflationary number, which continues to run through our P&L.

Next question is coming from Josh Spector from UBS.

Just two on Advanced Materials. So just first, the pricing in that segment has been notably better than the rest of the portfolio. Just curious how much of that is mix as you exit BLR and some higher pricing products maybe stay within the portfolio versus absolute holding or raising pricing? And just even though -- I guess, second, even though you're participation in DLR is relatively small today, you do note the exit of that as some of the negative on the volume side. I guess do you think about holding those volumes back or strategically plan having a different position in that market in the future versus today?

No, I think that as we continue to look, some of that is going to be product shift. But most of it is just going to be the overall health of the markets, the applications. The fact that we're still sourced in many of these areas and we're going to keep the portfolio largely as it is, I think that, again, we need to continuously look at the BLR market. I think that when you look at some of the profitability of BLR across the board, you look at it's a drop off that we've seen some of our competitors that are very heavily invested in BLR. Again, I think we made the right decision of getting out of it when we did and having the stability and focusing on value over volume in that end of the business.

I mean we're long BLR in North America short in Asia, to a degree in Europe but it's less than 10% now of our volumes, and I think we'll continue to deselect it. It's just not our focus strategically.

And I guess just on the pricing side, is that holding because of better mix or are you actually holding pricing in the downstream business better than other areas of the business?

I think that, again, it's holding the pricing. I think that we have the further downstream you go on the more unique provider you are a solution provider. We're not selling molecules, we’re selling a solution to a customer and that's a whole different dynamics than just selling molecules. So it's going to be -- some of that's going to be mixed, the vast majority of it's going to be just pricing and value discipline.

Next question is coming from Matthew Blair from TPH.

Peter, could you discuss MDI operates by region on just an overall industry basis? And in regards to Huntsman, how are things going at the Rotterdam MDI plant that you restarted earlier this year, and then is the Geismar line still down?

I think that, yes, globally, we're probably in, yes, the low 80s bouncing around that area. Geismar, we're around 70% and working, I would say, still under inventory control. Rotterdam, we've got all the lines running Rotterdam across the board about 80%. And Asia, well, we've been a shutdown in Asia, doing maintenance work there. But when we can, that plant will be running full out.

And then another company recently mentioned that China competitors in their space were benefiting from getting paid to take chlorine which clearly improved the cost position. Is the similar dynamic occurring in MDI and is that having any sort of material impact on global cost curves?

I'm not aware of that happening in MDI, but if you can give me the name of a supplier that will pay me to take chlorine, I will take as much as they will give me.

Yes, I mean in the price of the process of producing MDI, you produce byproduct HCL, right, and that goes downstream into the PVC market. It's quite normal as part of the overall process in China, we have an HCL recycle unit where you don't need to move that down into the PVC market, but it's quite a normal part of the overall MDI process.

Next question is coming from Arun Viswanathan from RBC Capital Markets.

I just have a more high level question, I guess. When you think about the earnings level and what you're seeing in your end markets and from your customers, I guess I'm just kind of getting -- I wanted to get your thoughts on how would you characterize this versus maybe a cyclical trough. I know that you started the call with noting that you do believe we're kind of nearing the end of the destocking. So what are some of the primary drivers that kind of leads you to that statement? And as you kind of climb out of this, what would you expect us to kind of keep a monitor on, would it be kind of weeks of inventory or maybe some better activity out of China? Automotive seems to be holding up pretty well. What are some kind of larger higher level thoughts you'd have on whether we're leaving this trough or not?

Well, I think that as we look at past inventories -- past cycles, if you will, I think we've been hit doubly hard this time because we've seen a fall off of economic activity and whether it be in construction, in GDP in Europe and it's still -- and even in places like aerospace still recovering from COVID and so forth. So we've seen a fall off of economic demand and activity, coupled with what I think has been one of the most aggressive deinventory basis, thinking back of when crude oil at one point, hit $140, $150 a barrel in crash from there. What we're seeing today globally around the world I think it's more severe than what we saw during the '07, '08 recession, the crash of crude oil and so forth. And so we're seeing, -- Arun, we're seeing a a double combination, not just of slow economic activity, but also of deinventory that's taking place, nothing that speaks more to that than what we're seeing in US housing. Housing starts to dropped 15% and the products going into that dropped 30%, 40%. Again, that's unsustainable on a long term basis for that to continue. As we think about the recovery as to how that looks, I think that is all around volumes. We first need to see the flat volumes where we've hit a bottom and I think we definitely are there we said earlier, performance products from first quarter to second quarter down 1% to 2%. We're starting to see double digit growth in composite wood, insulation, single digit growth in spray foam and so forth, flat in our ACE materials, and we look at it quarter-on-quarter. And as we just gradually see that volume come back, again, this is going to be more of a volume drill than a pricing drill. And that's the fact that we've got a lot of the margins are still in place, they're still intact, it leaves me to be a little more bullish than I otherwise would be. And that once volumes come back to a more normalized basis that we're going to see a return to what we've seen as more traditional earnings.

We reached the end of our question-and-answer session. And that does conclude today's teleconference and webcast. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.