Hello, and welcome to the Huntsman Second Quarter 2023 Earnings Conference Call and webcast. 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 website, huntsman.com. We also posted a set of slides and detailed commentary discussing the second quarter 2023 on our website. 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 website, 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 the growing uncompetitiveness and the industrialization that is taking place. Europe is losing its ability to export while also seeing more raw materials imported from abroad, particularly in products where new capacity has been added and demand in domestic markets are unable to absorb new production. As I look at our overall portfolio of products, unlike past recessions and downturns in the economy, we have maintained decent margins in many of our businesses. Our biggest problem today is simply demand. While we do not expect any sudden improvements in the second half of the year, we do see green shoots in many areas of North America and China, but less so in Europe. I believe that the worst of the de-inventorying, particularly in North America, is behind us and we're obviously much closer to a more fulsome recovery. We're in a unique position to take advantage of this coming recovery given our product portfolio, lower cost, global footprint and quality of customers and applications. So I think about a recovery and the steps that we need to get there, I can't help but think of Churchill's quote in '42, perhaps we are at the end of the beginning. To this end, we will continue to preserve our balance sheet and review our portfolio for both possible divestitures and acquisitions. We are ahead in our efforts to streamline our costs and we'll continue to not only look at cost but working capital as well. We are dedicated to returning value to shareholders in the form of earnings, dividends and share repurchases. Operator, with that, why don't we open the line for any questions?

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 believe much of this will depend on the speed of the recovery. Specifically, regarding North America, I think recovery is likely to happen sooner there and in China than in Europe. In North America, supply chains and inventory levels are becoming quite thin. This might represent a new normal, but typically, when supply chains are this thin, any sudden increase in demand or anticipated demand disruption, such as an MDI plant issue or a spike in crude oil prices, can have significant effects. The crude oil prices have risen about $10 per barrel from the lows just a quarter ago. If this leads people to think they need to start refilling inventory as prices rise, it could encourage more aggressive buying than usual. While we are not forecasting such an event in the second half of the year or early 2024, I wouldn't be surprised if it happens since the industry often experiences sudden shocks rather than gradual changes. A substantial portion of our North American sales is tied to housing, construction, energy insulation, and related sectors, which continue to show opportunities for growth in building materials, energy conservation, and other applications. I expect these areas will see the most significant turnaround, likely sooner rather than later. However, current data suggests we are looking at a gradual recovery throughout the second half of the year.

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 fiercely, 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, could you tell us what's going on there? There's talk about stimulus. Any signs that demand could be much stronger next year?

I believe that with an economy as large as China's being in lockdown for such a long time, we have not yet fully realized the effects of its reopening. Currently, polymeric pricing is around 16.8 to 16.9, similar to where it was last year, but it's also worth noting that this is the highest it's been in the past year. Over the last year, prices have been lower. We are witnessing a gradual recovery, which is encouraging. I tend to be cautious when there are sharp increases over a short period, as those can also drop quickly. It appears to me that we are experiencing a slow but steady recovery. I read in the Wall Street Journal this morning that the recovery isn't progressing as fast, but in sectors like automotive, infrastructure, energy conservation, and building materials, we're continuing to see a solid recovery.

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?

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?

As we assess the situation, it appears we are experiencing stronger margins. In the urethanes market in the US and APAC, there's a gradual recovery taking place. However, Europe remains challenging, with pricing there closely following raw material costs, if not exceeding them. There seems to be significant competition for market share in Europe. I'm more hopeful about maintaining pricing or at least having stable margins, with a possibility of gradual improvement in the US, and I foresee positive developments 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?

I will let Phil address the Chinese expansion because he needs a moment to gather the data. Meanwhile, regarding MDI growth in 2023, it looks like the market is flat with no growth. Last year, we experienced a 3% contraction, which is unusual as I have been in the MDI business for 25 years and have not seen two consecutive years of negative growth. In fact, I'm not sure MDI has seen two years of negative growth in 30 or 40 years, even during recessions. I don’t want to appear overly optimistic about the second half of the year. I tend to be an optimist, which is necessary after being in this industry for so long; otherwise, one might start to question their sanity. However, looking at the latter part of this year, MDI remains a strong product that is replacing other materials and making progress in applications such as UPR, rubber, and thermoplastic elastomers. This trend will likely continue. On a long-term basis, I believe that MDI will see fundamental positive growth. Over the next five years, we might anticipate around 4% to 5% growth, which should surpass the anticipated capacity additions during that period. Overall, I think the future will show more years resembling 2022 for MDI at the start rather than 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 snaps 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?

If we consider the EBITDA challenge from lower volumes, the impact on the top line has been about 40% over the past two quarters. I'm thinking ahead to next year when volumes are expected to recover. Is there any reason to believe that the contribution to EBITDA from volumes will differ from this 40% trend as volumes bounce back?

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 think that will have nearly as much impact as the number of homes being built. The percentage of spray foam usage will remain about the same, and that should continue to grow. In fact, with smaller homes expected to be more economical, there are likely more savings to be found in utilities, making this a key selling point. I believe what we need to see in housing is a return to equilibrium. In 2021 and 2022, housing peaked at around 1.7 million units annually. That figure has since fallen to about 1.3 million, a decrease of approximately 10% to 12%. However, the actual drop in housing construction volume was more like 30% to 40%, which is much greater than the decline in housing starts due to existing inventory. I think we will start to see a new normal, perhaps similar to the levels of 2021 and 2022, adjusted down by around 12%, which would put us around 1.3 million to 1.4 million starts. Previously, when housing was at that level, we were doing quite well. While I would prefer to see a higher number, it's crucial to recognize the significant differences in pricing and demand when comparing the 30% to 40% drop to the 10% to 12% drop. When discussing a new normal, it's important to consider how typical seasonal trends influence home construction timing. I believe the recovery is underway. Examining our demand for CWP globally, it increased by 16% from the first quarter to the second quarter, and insulation saw similar growth. Our spray foam also increased, though slightly less than that. We are experiencing a quarter-over-quarter buildup that reflects a return to a more normalized environment. Additionally, prices for SPF spray foam and OSB are stabilizing or even increasing in many applications across North America. These are all positive indicators that support my optimism for the housing recovery, and more importantly, the end of significant de-inventorying.

And Matt, obviously, from our perspective on housing starts, single-family homes matter, 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 the 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 adhesives 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 in 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 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?

I'm really glad we implemented the splitter project when we did. It's much more advantageous now that we're marketing a differentiated product rather than focusing on a more generic MDI. Although the premium per pound we communicated to the market still stands, there is currently less volume available. I believe this is a temporary situation that will resolve itself in the coming quarters. I am confident that this project will remain successful.

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.

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?

I think the situation is clear. On the high end of the spectrum, we are experiencing margin erosion in the lower end, which has resulted in challenges with our margins in those areas. In contrast, the high-end elastomers, which are used in products like iPhone protectors and high-performance running shoes, continue to maintain strong margins without any erosion, and the focus here is largely on volume. The mid-range, primarily related to insulation and spray foam, is certainly facing pressure, but it is not as severe as the challenges faced by the commodity and polymeric segments at the bottom of the spectrum. Overall, it appears that we are currently witnessing an even greater divergence in margins and the overall health between the high, mid, and low ends than we observed during our 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 believe that in the MDI business, we should be focusing on long-term growth, which should reflect the average performance of the business. Currently, it's not just about volume for us; it's also about value. We have a significant opportunity to enhance our existing products and aim for a business growth of 15% to 18% in typical situations, with the goal of pushing that closer to 20%. As we expand further into elastomers and related areas, we have the chance to generate more consistent and dependable 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 believe that destocking in Performance Products may continue a bit longer into the third quarter. The agricultural sector will be minor and quite seasonal. However, I am disappointed when I consider Europe and the competitive pricing situation there. There is a notable lack of demand and a lack of pricing discipline for many products, which reflects the performance of our European segments. In the Advanced Materials segment, I think we have mostly completed the process of reducing inventory. Destocking in Performance Products may last longer than in Advanced Materials and could vary by region. However, when comparing Performance Products from the first quarter to the second quarter, we have remained relatively flat, and some seasonality is expected in the third quarter. Keep in mind that much of Europe, along with many other areas around the world, particularly Europe, tends to slow down in August. It is also possible that we might witness more closures due to the current economic sluggishness in Europe, which could lead to more businesses closing in August for holidays than initially anticipated. Therefore, we should expect 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?

I believe we are well aware of the increased build rate in the aerospace sector, which will continue to benefit us. We are maintaining our market share on existing aircraft platforms, and I expect this to persist with the upcoming 777X and new wing designs from Boeing, along with some Airbus projects. We should continue to hold over 50% market share in these new applications as well. If we can stay on our current trajectory in 2024, combined with the ongoing recovery in aerospace, I believe we should be able to return to 20%. Additionally, I anticipate that advanced materials will see growth beyond just aerospace in 2024. There are promising applications emerging, including advancements in our Miralon technology and increased investments in sectors like the power grid and industrial coatings. I'm optimistic that we have a strong opportunity in 2024 to reach that 20% mark.

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.

Thank you for the insights regarding polyurethane demand and the potential end of destocking. Historically, restocking tends to be quite significant. Shifting focus from demand, can you elaborate on the supply situation? There have been several announcements about potential delays in capacity additions. Could we find ourselves in a scenario where, as restocking occurs in the near to medium term, it coincides with relatively 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 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, BASF 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 nor has Huntsman. So it's really down to one. And as we said, an Wanhua 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 observing a fundamental change in the market. Valuations seem to be decreasing a bit. Clearly, capital costs money now, whereas a year ago, it was nearly free. I'm still puzzled by companies trading at 5 to 6 times EBITDA purchasing assets valued at 10 to 15 times, with no noticeable effect on their stock, and shareholders appear indifferent. We need to remain disciplined. I know that sounds somewhat cliché, but we’ve shown that if we can’t make a purchase, the multiple might be higher than we’d prefer. In those rare situations, we will quickly implement a thorough plan to grow the business while integrating and reducing costs, and we will present this to the market with a clear strategy moving forward. If that isn’t feasible, we will keep investing in our own company, buy back our stock, and maintain our focus on dividends. However, we must stay disciplined because just because others are willing to pay these multiples doesn’t mean it’s the right choice for us.

Your next question 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. I want to clarify that my comments are not reflective of what is happening in Abu Dhabi or Covestro, as I have no information on either. Regarding Yantai, I believe they are somewhat more integrated into coal than other MDI producers. Ultimately, the greatest value for MDI will come from pushing it into a formulated mix downstream to achieve a premium price, rather than focusing on integration upstream through benzene, nitrobenzene, crude oil, and refining. All of our basic raw materials hold market value. Even if one company produces benzene and another does not, they must value that benzene similarly. While one may achieve integrated costs, simply subsidizing MDI through produced benzene doesn’t necessarily provide an advantage unless they are willing to sell it at a loss in the market. I’ve never seen MDI as being particularly advantaged or disadvantaged by a lack of integration. The value of MDI will depend much more on downstream activities than upstream processes.

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 certain about epoxy. At Huntsman, it's not a significant end-use market for us, and we don’t really compete in that space. A decade ago, that was a major focus for us, especially regarding wind energy. We consistently discussed the influence of wind, but over the past ten years, we've shifted those resources into aerospace. I would prefer to invest in the grid system that connects all these windmills to the electrical infrastructure rather than focusing on the wind projects themselves.

John, think about the Advanced Materials 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.

We constantly evaluate our situation. About a year ago, we announced significant closures and restructurings, relocating many of our back-office operations to Krakow. Those projects are wrapping up in the next quarter. I believe we've benefited from those decisions. However, I am concerned that if industrialization in Europe continues, we may see customers and OEMs moving to China, North America, or the Middle East. If that trend persists, we may need to reassess our market approach and cost structure. Currently, I feel secure about what lies ahead in the next year or two based on our customer feedback. At the time of those crucial decisions, we were criticized for being overly reactive, but looking back, I think we acted swiftly in response to early signs of a significant shift, and I'm pleased we did, as it has improved our position in Europe. It's essential that we continue to monitor this sector daily, adapting and restructuring to ensure we have the right people, locations, and cost structures in place. My goal is not just to survive in Europe but to thrive. We need to achieve good returns there and maintain a supply chain that is sensible, and I believe there's still more work to do.

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.

I have a question about Advanced Materials. First, the pricing in that segment has been significantly better than in the rest of the portfolio. I'm wondering how much of that improvement is due to the product mix as you exit BLR and retain some higher-priced products versus actual price increases? Secondly, even though your involvement in DLR is currently limited, you've mentioned the exit from that as a factor negatively impacting volume. Are you considering ways to either maintain those volumes or strategically position yourself differently in that market moving forward?

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.

Our 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.

Your next question is coming from Arun Viswanathan from RBC Capital Markets.

I have a high-level question. Considering the earnings levels and the observations in your end markets and from your customers, I'm curious about your thoughts on how to characterize this situation compared to a cyclical trough. You mentioned earlier that you believe we are nearing the end of destocking. What are the main drivers behind that perspective? As we emerge from this phase, what should we monitor? Should we focus on weeks of inventory or perhaps improved activity from China? Automotive seems to be performing well. What are your broader thoughts on whether we are leaving this trough?

I believe that when we examine previous inventory cycles, this time we've faced particularly significant challenges due to a decline in economic activity, including construction and GDP in Europe, alongside ongoing recovery issues in sectors like aerospace from COVID. This has resulted in decreased economic demand and activity, compounded by what I consider to be one of the most aggressive deinventory processes. Looking back at when crude oil prices soared to $140 or $150 a barrel and then plummeted, the current global situation appears to be more serious than what we experienced during the 2007-2008 recession and the oil crash. We are currently experiencing a combination of reduced economic activity and deinventoring, particularly evident in the U.S. housing market, where housing starts have declined by 15% and the materials associated with that have fallen by 30% to 40%, which is unsustainable in the long run. As we project the recovery, it will center around volumes. We first need to see stable volumes indicating that we’ve reached the bottom, and I believe we are there. Earlier, we noted that performance products dropped by 1% to 2% from the first quarter to the second quarter. We are starting to witness double-digit growth in composite wood and insulation, and single-digit growth in spray foam, with our ACE materials remaining flat when we review them on a quarter-to-quarter basis. As we gradually see volume levels increase, this will be more about volume recovery rather than pricing adjustments. Our margins are still intact, which makes me feel more optimistic than I might otherwise be. Once volumes return to a more normalized state, we can expect to see a rebound in earnings similar to what we have historically observed.

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.