Greetings. Welcome to Huntsman Corporation's first quarter 2019 earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. Please note that this conference is being recorded. I would like to turn the conference over to your host, Ivan Marcuse, Vice President of Investor Relations. You may begin.

Thank you Brad and good morning everyone. I am Ivan Marcuse, Huntsman Corporation's Vice President of Investor Relations. Welcome to Huntsman's first quarter 2019 earnings call. Joining us on the call today are Peter Huntsman, Chairman, President and CEO and Sean Douglas, Executive Vice President and CFO. This morning before the market opened, we released our earnings for the first quarter 2019 via press release and posted it to our website, huntsman.com. We also posted a set of slides on our website, which we will use on the call this morning while presenting our results. During this call, we may make statements about our projections or expectations for the future. All such statements are forward-looking statements and while they reflect our current expectations, they involve risks and uncertainties and are not guarantees of future performance. You should review our filings with the 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. You can find reconciliations to the most directly comparable GAAP financial measures in our earnings release, which has been posted to our website at huntsman.com. I will now turn the call over to Peter Huntsman, our Chairman, President and CEO.

Thank you very much Ivan. Good morning everyone. Thank you for joining us. Let's turn to slide number three. Adjusted EBITDA for our polyurethanes division for the first quarter was $140 million versus $261 million of a year ago. Our MDI urethanes business, which includes our MDI, polyols, propylene oxide and formulated systems business recorded adjusted EBITDA of $149 million. This compares with $245 million of a year ago, a $175 million for the previous quarter. As a reminder and as we called out throughout all last year, in the first quarter of 2018, we were still experiencing exceptionally high margins in the component end of our MDI portfolio. These spiked margins, including above normal operating rate conditions in the prior year period, accounted for approximately $70 million to 75 million of the year-over-year variance. Even in this softer operating environment that we experienced across all of our core regions, we grew our overall MDI volumes by 6%. Our downstream differentiated strategy is performing as we have intended as we saw continued stable margins in the predominant differentiated end of our portfolio. We accomplished this because of our continued drive downstream, bolt-on acquisitions, expanded operations and regional diversification. Let's turn to slide number four. In the first quarter, our total differentiated systems volumes increased 2% compared to last year and our overall differentiated margins remained fairly stable. Our global component MDI grew 15% year-over-year, primarily due to our new capacity addition in China. On our previous earnings call, we indicated difficulty in visibility, given the softer markets and destocking conditions that remained and the few months either side of year-end. We shared that a significant portion of our first quarter 2019 earnings were expected in the month of March. As both expected and communicated, we saw results improved meaningfully as…

Thank you Peter. Turning now to slide nine. This quarter adjusted EBITDA declined year-over-year by $148 million. Our polyurethanes division accounts for over 80% or $121 million of this decline. Within the polyurethanes, adjusted EBITDA, approximately $70 million of the decline is due to the loss of spike and tight margins within polymeric MDI and $25 million from MTBE, largely due to a lower C-Factor than a year ago. In addition, our polyurethanes division experienced additional negative variance, due to FX. As Peter commented, business-by-business, our overall margins and volumes were moderately lower year-over-year. We were unfavorably impacted by $22 million in currency, largely driven by the weakness of the Euro versus the U.S. dollar, which was down 7% year-over-year. Indirect costs were up a bit largely because of new business operations in China and our bolt-on acquisition in our polyurethanes division. Turning to slide 10. Free cash flow for the first quarter of 2019 was a use of $101 million. Notwithstanding this first quarter usage of free cash flow, we confirm our target free cash flow conversion of near 40% for the full year 2019. While the first quarter is typically a seasonally weaker quarter for free cash flow because of inventory build, this year we ended the quarter with a higher than targeted networking capital. Our days inventory was higher than we had expected by over five days. We believe the net negative temporary impact to working capital was over $100 million during this quarter. Our performance products and textile effects divisions were the most impacted by higher than targeted inventory levels. Plans are well in place within divisions to quickly improve this and we expect to revert back to near-target metrics over the next few quarters. As we look into 2019, assuming the current raw material environment…

Thanks Sean. Continuing from Sean comments, we have worked long and hard to be awarded an investment-grade rating from both Moody and Fitch this past quarter. We remain committed to maintaining this investment-grade balance sheet. Our net leverage ratio ticked up a bit in the first quarter due to a softer global economic backdrop impacting EBITDA. We continue our rigorous focus on generating free cash flow and expect that 2019 full year will be near 40% of EBITDA. Our financial strength will allow us to invest organically in high return internal projects as well as bolt-on acquisitions to expand our downstream portfolio. Additionally, we continue with our balanced and opportunistic approach to share repurchase and maintaining a competitive dividend as a high priority. As with every company, what is not in our control are global economic conditions as well as major weather or other macro events which can impact our underlying demand for our products. So far this year, overall, our Asian business is slightly ahead of our initial expectations. We believe inventories in this region remain low from destocking and the general sentiment with our customers in this region has improved as compared to the end of last year. Our overall business in the Americas is slightly off our initial expectations due a few specific conditions, including adverse weather that impacted our construction in ag related markets as well as lower overall automotive demand. Although economists have adjusted growth modestly downward, the fundamentals remain intact and we expect the Americas will get back to plan as the year progresses. Like others, we are seeing softness throughout Europe. With the result of a few exceptions, our European businesses are generally performing below our initial expectations. We have experienced headwinds in markets such as construction, automotive and several other areas that…

[Operator Instructions]. Our first question today comes from Kevin McCarthy of Vertical Research Partners. Please go ahead.

Yes. Good morning, Peter, I just wanted to understand the trends in your polyurethanes EBITDA a little bit better. I think in your prepared remarks you called out the $70 million to $75 million from the prior spike and tight market conditions that been unwound and I heard another $25 million as an MTBE variance. So if we adjust for those two things, it looks like the balance of your segment was down somewhere in the low-20s, $21 million to $26 million. Should we attribute that to what is going on in systems as well as PO and polyols? Any additional color on those other moving parts would be helpful.

Yes. Kevin, first of all, thanks for the question. I hope you are doing well. Let's also remember, there was a $10 million FX as part of that number as well, part of that remaining delta that you made reference to. And look, when we talk about the loss of spike margins, as we pointed out in our previous calls, we also would say in the chart that you look at, there is a color that represents our spike margins, color that it represents what I consider to be tight market conditions that would be when the industry is operating at around 90%-ish capacity utilization or better and then what I would consider to be our core business as well. So I think that as you look at the compression that's taking place, I believe that our core business, our downstream business, our core MDI business has remained intact and what we have seen is the loss of the spike margins, which I would say, we fully saw that end in the fourth quarter and we have seen, what I would call the tight market conditions. We saw that throughout the fourth and certainly throughout the first quarter as well.

Okay. And then as a clarification on slide five, what is in the blue line on those four charts? It's labeled as all other margins? I am just kind of curious as to how you are disaggregating the segment between the red and the blue there?

Well, I would say that the other margins that we have and they really are everything that this is related to locked-in formula pricing all the way down to our downstream businesses. And you do get into something a little bit of a gray zone there, right. I mean not every ounce or every kilo of MDI that you are selling is going to be in one or the other. But I think that when we look at the stable end of the businesses, certainly our downstream end of the business and at the end of the business where we also have the ability to put through raw materials and take that volatility out of the business. Again, really where we want to make sure that we are focusing on that blue line which makes up the majority of our business, it's stability, it's growth and in taking some of the certainty out of the markets.

Great. Thank you very much.

The next question comes from Robert Koort of Goldman Sachs. Please go ahead.

Thank you Peter. Good morning.

Good morning.

A couple more [indiscernible], if I could. In advanced materials, you guys cited raw material pressure. And I guess if I look through the epoxy chain, things like benzene, propylene, phenol, are all down year-on-year. So is this just selling inventory that have been produced back in the fall? Or is there some other raw materials or some other reasons you might be still seeing raw material pressure?

Mostly, it's all of our raw materials in China really across the board. I would say, it's a regional effect that we are seeing on the business and also BPA in the quarter is up over where we were in previous quarters. And as you know, we have got a lot of contractual businesses there. Sometimes our raw materials will take us a quarter or so to drag through those raw material increases. But for the most part, that headwind is in China and I would expect in the second quarter that headwind ought to be flat. Just again, where I am looking at the business today, barring any explosions or government closures or anything, we ought to be pretty safe in the second quarter, I think, as far as raw material volatility.

And then if I could follow-up. You mentioned the weak ag season. Is there at some point a risk of missing sales there? And then I thought I heard you say your auto sales were flat. Can you give us a little more regional color on that? That seems pretty remarkable in light of build rates.

Yes. When we look at comparison to the prior year, our Asian business we see and again most all of this is MDI, there is some other business in there. In MDI, we are seeing flat in Asia. And I would say, in our advanced materials business, which is really one of the only businesses that has a high degree of automotive. Well, I wouldn't say high degree, but a degree of automotive exposure. That was down low to mid single digits in Asia. Americas was largely flat, down 1% over the prior year on polyurethanes. And Europe was down about 5% or 6%. And so overall automotive was down 3% globally, but virtually all of that was due in Europe. Yes. And I think that we are seeing a lot of displacement there of other products. And we are seeing, even within the polyurethanes segment shift over from TDI into MDI into seedings and so forth. So automotive continues to be in a good market for us and as I look at it overall, it's something that we are going to continue to focus on.

And at the risk of missing ag sales? When does that --?

Yes. I would say that I would like to think that that all comes back later in the year. But I don't think that it will, I think that as I look at our performance products business, I think that we looked at that. And again, it's early in the year and I hesitate to adjusting. So if I look at it throughout the year, I think it earlier in the year that we gave our 2019 numbers would be slightly better than they were and 2018 in our performance products, because of ah and may be a little bit of that intermediates end of the business, olefins and ethylene oxide. But they probably are going to be slightly down would be my guess as you look at 2019. Again, if that all comes back in the second half, great. I would love to be able to correct myself and call that out. But I think that a lot of what we are seeing in ag is probably lost business.

Got it. Thanks very much.

Thank you.

The next question is from Aleksey Yefremov of Nomura Instinet. Please go ahead.

Thank you. Good morning everyone. Peter, how does March typically compare to second quarter average run rate in your polyurethanes business? Because you mentioned that you saw improving trends in March. Should we expect those trends to continue into second quarter?

Yes. I think that we were continuing to see positive pricing taking place in Asia. We have got a lot of facilities in Asia, a big chunk of the capacity in Asia, probably in excess of a million tons of capacity that's down over the next couple of months for scheduled T&I or turnarounds, where they shut the plant down up to three months, depending on the maintenance needs of the facility. Those will come up early in the third quarter of this year, latter part of the second quarter this year. And the impact of all of those facilities starting, assuming they all start on schedule, roughly within a month or so of each other, I think that will be the real test as to the strength of pricing and the traction that we are seeing in Asia. But right now in the second quarter, I think that we are feeling pretty good momentum. I would like to think that that will last all year but I think we will know a lot more here early part of the third quarter, the ending part of the second quarter.

Got it. Thank you Peter. And maybe as just a follow-up. On slide four, you are showing that March was 47% of $149 million of EBITDA in MDI polyurethanes. So it's about $70 million in March. So if we just extend that run rate, that's about $210 million for the second quarter, just sustaining it. What are the offset, because it sounds like you are guiding to somewhat lower number in Q2? I am guessing somewhere around $170 million, $175 million in EBITDA?

No. In my remarks, I said that we would be up about at least 20%. So, you know, I would think it would be very close to $200 million in the second quarter. As I look at pricing now, as I look at momentum now, given that may change in the quarter, but relative to the pricing, the volume and everything, you are probably looking at $190 million to $200 million. And if the pricing momentum continues that we are seeing, it might be closer to that $200 million.

Understood. Thank you.

The next question is from Frank Mitsch of Fermium Research. Please go ahead.

Good morning folks. How are you doing today?

Doing well, Frank. How are you?

Very good. Thank you. Very good. If I parse out some of the guidance on the free cash flow, it looks like you are looking at just over $0.5 billion or so in free cash flow. After dividend, you are somewhere around $350 million or so. How should we think about where you are going to spend? Obviously you talked about share buybacks. But how do we account for the use of that $350 million or so?

Well, I think obviously that's going to be a moving number. If I am candid with people on the call, I was rather disappointed with our performance in the first quarter on free cash flow. I think we could done a better job in matching our production with our sales, but that's something within our control and it's something that we will be see fixed in the second quarter and as we look at our working capital adjustments and so forth. But as we look at our overall number throughout the year, I think that that's going to be, a chunk of that will be spent on CapEx on the expansion that we have taking place in Geismar, Louisiana with our splitting capacity. I would like to try to move that project forward as much as possible and bring that project online as much as possible. And then we will look at an allocation of some share buybacks. We will look at an allocation of possible bolt-on acquisitions. And then we have always got plenty of internal projects as well that have a very strong return. I am reticent to spend money on new capacities and so forth unless there is just a crying need for it. And frankly right now with growth where it is in Europe and if you are looking at about 1.5% to 2% GDP growth in North America, I am hoping it will be better than that, I am not sure that there is a whole lot of need for new capacities. It will be a combination of those things, Frank.

Got you. And speaking of new capacity, I think you indicated that MDI operating rates, you found they were in the mid-80s. You expect that trend to be stabilizing. Just to put a finer point on it with your commentary about turnaround in 2Q into 3Q, on an effective basis, should we see that number moving up in 2Q? And can you broadly outline where you think that number is going to be as we progress through the year?

Yes. I think that that number will tighten in the second quarter. It will probably loosen in the third quarter. But fundamentally, I think that MDI is going to continue to grow at 5% or 6% growth rate. And then you are going to see about 4% to 5% growth rate in new capacity coming on. And that's not all going to be in perfect sync with each other. You are not going to see growth come exactly as the capacity comes on. But in first quarter rates are typically your lowest capacity utilization throughout the year. As demand picks up in second and third quarter, you typically run tighter, you run tighter markets in the second and third quarter and therefore you are putting more strain on your plants and so forth. You typically have more mishaps and what have you in the summer, fall of the year. So as I look, Kevin, that mid-80s, mid to upper-80s throughout the year, I think the Americas if going to continue to be tight operating in the upper-90s. Europe is probably going to be somewhere right around 90%, high-80s, 90%. And Asia is probably going to be around 80%.

Very helpful. Thanks Peter.

The next question comes from Laurence Alexander of Jefferies. Please go ahead.

Good morning. Could you remind us just how much volume uplift remains from ramping up the Caojing JV over the next few quarters?

Yes. Laurence, hope you are doing well. We are running that facility today, probably between 80% and 85% capacity utilization. I am not sure you are going to see a great deal of volume improvement coming from that. I think our real opportunity from a business point of view is taking that polymeric business, we have great splitting capacity in China and our focus there isn't really selling more volumes, it's uplifting volume that we have to get higher margins. Moving further downstream, we have got a great polyols joint venture there and we have got a real opportunity to expand our Demilec technology in China and working our downstream business in China. So as you think about that overall capacity of what's left between now and the end of the year, I think you will see some incremental growth coming from that. But our focus is mostly going to be improving quality and not necessarily quantity.

And what's your current thinking around how U.S. margins evolve as the new capacity that's in the pipeline comes on stream over the next, call it, three, four years?

Well, the Americas continue to be a very strong market. I think if you look around the world right now and as you look at the growth rates, the GDP, given the size of our overall economy, we will probably be adding more demand into North American markets. And as you look at the amount that is coming on to the market, I think again, it's never going to be demand will go gradually throughout the year, capacity when it comes into the market doesn't coming gradually throughout the year. It usually comes in one big block. And so it can be messy for a quarter or two. But by and large, I would see stable to perhaps gradually improving margins in the Americas. And our focus in the Americas is going to be on improving the tonnage that we have. It's not going to be bringing more tons into the market, but rather bringing more value on those tons that we have.

Thank you.

The next question is from Jeff Zekauskas of JPMorgan. Please go ahead.

Thanks very much. I think your operating expenses were up 4% in the quarter from $242 million to $251 million, but your revenues were down 11%. And probably with the weakening of the Euro, there was an expense benefit to the operating expense line. Why were operating expenses so high?

I think that operating expenses, when you look at the impact of Demilec, adding in the expenses of running Demilec and the expenses of China, bringing China on year-over-year, obviously those expenses are with us on an annualized basis, quarter-after-quarter. You look at our sales in the first quarter, typically just on a seasonal basis, sales were sluggish at the beginning of the quarter. I think they had nice recovery at the back of the quarter. We had a little bit of FX headwinds as well in there. So I wouldn't be overly concerned about that.

Okay. And then in your other non-current liabilities, they went from $1.369 billion to $1.736 billion. What accounted for that roughly $370 million increase in non-current liabilities? Other non-current liabilities.

Jeff, this is Sean. I am just going off the top of my head, happy to circle back with you. I think the change materially there is the new change in accounting for lease accounting. And we have brought on balance sheet all of those operating leases which everybody is having to do now under U.S. accounting standards. So you are going to find that we increased it by about $490 million in terms of operating leases and we created an asset that matches that. But it's not, it's another long term asset. There is a current piece as well.

Okay. Great. Thank you so much.

The next question is from John Roberts of UBS. Please go ahead. Mr. Robert, your line is open. Our next question is from Mike Harrison of Seaport Global Securities. Please go ahead.

Hi. Good morning.

Hi Mike.

Peter, wondering if you can give us a little more color on how you are seeing things play out in China? Do you feel like the recovery there is something that you have confidence in or strong visibility in? Or do you still feel like there is a little bit of a cautious undertone or maybe a sense a sustainable recovery may require some government stimulus or some kind of a trade resolution in order to really stick?

Well, I think that I would say that I am guardedly optimistic right now but I do believe that, for me to really optimistic about what's happening in China, two things need to take place. And I think that you are already seeing both of those things start to take traction, if you will. The first one is the resolution of a trade agreement. I can't express. I think when you look at an economy that for the last 25 years now has seen very solid single digit growth year-over-year, when all of a sudden you throw something in there like a trade war and the uncertainty that that brings to the consumer level, the brokers, the distributors, the freight forwarders and so forth, that's a large segment of the Chinese chemical industry. You have a lot more firms and people that are handling each step of that sales process for many chemical companies. And when they don't have confidence in the future and they don't have confidence in the next quarter, typically they are going to be de-inventorying and there is going to be a very negative sentiment. And I think what I just sensed in my trips there and those of our senior officers that have spent a considerable amount of time in China, that sentiment is changing and there is a lot of optimism about a trade deal getting done. And I think that when that deal does get down, I think that there will be, I am not sure there will be a massive uplift in margin and profitability, but more a sustaining of the higher prices that we are already seeing put into place. The second area is at around government stimulus packages and a lot of lending that is going to smaller institutions, not the big SOEs, but to smaller institutions and the smaller customers, we are seeing getting the funding and are investing in. And we are seeing a lot of our end-use applications that are going into infrastructure projects like insulation on hot water facilities and so forth that are supplying communities and what have you across China, a lot in the energy industry producing electricity and so forth. So as I think of those two things, a trade agreement and the stimulus that's coming from the government, I think both of those, the foundation is set for both of them. The stimulus is already starting to go into the Chinese economy. And I remain quite optimistic. It will be nice to see both of those, particularly the trade agreement get done here in the coming weeks, if not month or two. I believe that when that is done, it will provide us with greater certainty throughout between now and the rest of the year.

All right. Thanks for the color there. And then just curious on the share repurchase outlook. Understanding you want to be opportunistic going forward, but it would have seemed like there was a really nice opportunity during the first quarter. Why did we not see more repurchase activity during Q1? And can you maybe give us any better sense on the outlook for share repurchases in the rest of the year? Thank you.

Well, I think that again we are going to continue to look at this very optimistically. I think the shares we did purchased in Q1 were at a favorable price. But my biggest concern is making sure that we have a balance sheet that will get us through the best of times and the worst of times, truly the worst of times. And I want to make sure that we have got cash on the balance sheet. And that means that we have got to make sure that we are disciplined on our working capital. We keep that balanced. And frankly, before I go and spend a lot of money on share repurchase, I want to make sure that we remain in a strong cash generating position to do so. Again, I think we could have done better in the first quarter in that particular area. And every quarter is not going to be the same for us.

All right. Thanks very much.

Thank you.

The next question comes from Jim Sheehan of SunTrust Robinson Humphrey. Please go ahead.

Thank you. Good morning. Regarding Venator, could you talk about plans for monetizing that asset, either in the near term or long term?

Sure. When the price gets substantially higher than it is today, we will love make a decision to sell. I don't mean to be glib on that. But obviously, at these levels today, TiO2 in my opinion, as I have said in the past, I think it's pretty much has hit it's past. The industry is seeing consolidation. And I think it will gradually see improving fundamentals here. And we will judiciously look at our shares and we will sell them at a time it makes sense for us.

Terrific. And on the dividend, I think this has been unchanged for the past five quarters or so. What is your thinking on when it might be appropriate to raise the dividend?

I think that, again, we want to make sure that we balance that with where we are with our needs as a company, our growth opportunities that are before us, our share buybacks. And as I look at our dividend rate today at around 2.3%, 2.4%, I think versus our peers, we remain very competitive.

Thank you.

Thank you.

The next question comes from Mike Sison of KeyBanc. Please go ahead.

Hi guys. In terms of polyurethanes, heading into the second half the year you are going to need some improvement sequentially from 2Q. So when you think about the improvement you need to see in the second half, how much of that do you think you can drive in the differentiated businesses and how much help do you need kind of in that operating rate outlook for MDI?

Well, I think we need it to have a combination of both of those, right. It's not just all downstream. I think that downstream, I am not sure we need better margins as much as we need better volumes. And that is going to be a driver. Again, when you look at our downstream business, about 40% of that, 35% of that is in Europe. And so we gave you guidance at the beginning of the year that we thought that polyurethanes would be down about 8% to 12% from last year's very strong performance to this year. If we say Europe continue to languish around a 0% sort of growth and Europe making up as much of the MDI business as it is, we are probably going to be much closer that 12% down year-over-year. So it's not the margin, I would like to say. I would like to, obviously, see better margin, but it's the volume that comes through the GDP growth of Europe, that would be, a single thing that I look at on the second half performance. Now again, Asia is performing better. When we are here three months ago on our fourth quarter conference call, I think the biggest concern of everybody was Asia at that time. And as Asia was going to recover and I think that I don't want to say fully, but we were seeing signs at that time that Asia was coming around and that Asia was starting to pick up. What we didn't know if that was just restocking or if there was actual growth that was coming back. I think as we look at Asia today, I think the combination of restocking. So I think that's coming to an end. And then it's real, it's genuine growth and tightness in the market. So I feel much better about Asia. U.S. is pretty much where we thought it would be. Though I would like to see that pickup in the second half. And the biggest concern I have got right now is Europe. And that's because of volume, not because of loss of margin.

Okay. And then, just a real quick one on your 2020 outlook. You have expressed confidence to some degree in being on plan for that. Any updated thoughts on your outlook for 2020 or your goals for 2020?

No. I think that as we look at that, we have got an opportunity, I think, in China not to sell out our capacity, but to sell up our capacity and to further move that downstream into further businesses. I think we have that same opportunity in Europe and the Americas. As we look at Demilec and being able to grow our spray foam business, our downstream businesses are taking our systems houses and the best of our technologies on a global basis. I remain very optimistic about our 2020. Again, barring an economic something that's completely out of our control, I remain optimistic as we look at our 2020 objectives. Our performance products, I think we are making some real headway there. Well, obviously we will see some headwinds this year with some of the ag I mentioned earlier in our intermediates businesses as we see a lot of new capacity coming on. But I think through 2020, some of that is going to be absorbed and little of that will come back. But most of that we are going to see in 2020 an improvement in our surfactants, amines and maleic businesses and textile effects and particularly advanced materials. As we start to see the product pipeline that we have in place today coming into the market and so forth, I think that we are going to be on track to meet those objectives.

Great. Thank you.

The next question comes from Neel Kumar of Morgan Stanley. Please go ahead.

Hi. Good morning.

Good morning Neel.

It looks like FX was a $22 million year-over-year headwind for EBITDA in the first quarter. What are you incorporating in your guidance for the full year FX impact? And how should we think about that flowing through on a quarterly basis?

I think that that's probably, we look at it, well first of all, if I knew where FX is going to be for the entire year, I wouldn't be doing the job I am doing right now, that's for sure. But as I look at the second quarter, probably if things stayed pretty stable, you will probably see a similar number in the second quarter that we saw in the first quarter. And then I think through third and fourth quarter, that ought to be cut in half in the third quarter and probably half again in the fourth quarter. But again, by the time you get out that far, I have got no idea what monetary policy is going to be in the U.S. and we are a tweet away from massive disruptions, one way of the other. But right now, as I look at our internal assumptions and planning, kind of a repeat in Q2, cut it in half in Q3 and cut it in half again in Q4.

That's helpful. And then in terms of the new MDI splitter in Geismar, can you quantify for us what type of impact that should have in terms of the split of your U.S. revenues between differentiated and commodity?

I think that we will see a business in the U.S. that it looks a lot like our European business. And probably in our European business, you have about you 65% to 75% is differentiated. And you will probably see that 70% to 75% movement. Eventually that, we would hope over a few years after that is up and running, you are probably closer to 80%. And again, I want to be obviously clear here, not all differentiated business is good or bad and not all of the downstream or the upstream is good and bad. So in the U.S., we have a lot of volume. We have some very strong customer relationships in our OSB and some of our areas that aren't, I would consider to be differentiated. But those are relationship that we really value and we want to keep them going for many years to come.

Great. Thank you very much.

The next question is from Matthew Blair of Tudor, Pickering, Holt & Co. Please go ahead.

Hi. Good morning, Peter and John.

Good morning.

On slide three, you show polyurethanes volumes down 9% quarter-over-quarter. Could you provide any more color on that? Was there an MTBE impacts flowing through there?

Yes. This is Sean speaking. There was. A lot of times, there is a little bit of lumpiness in terms of the large MTBE shipments that go out at quarter-end. And because of a dock issue and some seasonality in MTBE, we had a delay in shipment that went out at the end of the quarter, which effected volumes. And they are such large volumes that it weighs heavily on the skewing of the overall weighted average.

Makes sense. And then, Peter, you talked to about your expectations of a favorable resolution to the trade war. If that does not happen for whatever reason, what kind of downside would you expect to see on your down 7% to down 10% EBITDA guidance?

Well, Matthew, as I just look at this anecdotally, I would say that I kind of think of the world in three large quadrants that make up 90%-plus of our business. The Americas, plural, that's not just the United States, Europe and China. And if Europe continue to be down through the year, I kind see us down 10% over 2018. If we see another drop of one of those other regions, if China were to slow or if the Americas were to slow appreciably, you will probably see that 10% drop to around 12%. Now again, that's really anecdotally. It could be a percentage point or two on either side of that. But I think that if you kind of think of China slowing down and going back to where it was, again I don't know the severity when I say back to where it was, I am not really sure that that takes it to what level I have in mind. But I think it could impact our overall earnings impact by another 2%, 3% or so.

Very helpful. Thank you.

The next question comes from Arun Viswanathan of RBC Capital Markets. Please go ahead.

Good morning. Thank you. I just have two questions. One kind of medium term, one longer term. So first on the near term, medium term. I guess, have you seen this kind of bifurcation behavior in Asia and Europe and North American pricing and polyurethanes activity? And if you do you see a pickup in China from an automotive standpoint, would that also help your European business? Thanks.

Yes on both accounts. I think that you will see seasonal times, probably polyurethanes or MDI does not ship easily nor cheaply. And so if regions get tight, you will occasionally see certain regions where you will see pricing and margins will move up. And it's not that ethylene glycol or polyethylene will just fill up tankers or shiploads of it and ship it out in a weeks time. A lot of that requires cryogenic storage and shipping, again, can be expensive and can cause discoloration depending on the amount of time that takes to ship it. So typically, if you see a spike in a particular region, usually within a month or two, it either starts to settle down, if you will or it starts to spread into the other regions. And I think in my prepared market I talked about that Europe, oftentimes, will lag a month or two. And again, there is no scientific timing behind that. But typically it will lag a couple months behind what Asia does, assuming that the price increases we have seen in Asia in polymeric MDI is sustainable. It should. Again, if there is any sort of economic impetus to support it, it should mean higher prices and potentially in Europe in the second half. Again, that's a tall condition on a number of different things. So I think that as we see that, we would rather see that regional pricing up than down. There is another part of that question, I forgot.

No. I was just wondering if you do see continued improvement in Asia that would ultimately help your European business or will it be separate?

I would be really shocked if you did see that. And also I forgot automotive. And typically, if you see the automotive markets come back to Asia, I think Europe has shot itself in the foot. Europe is seeing a decrease in automotive demand because the export markets, particularly in Asia, are drying up for high-end European cars. And then they have also shot themselves by over regulating what once was a great industry in Europe. And you look at the downtimes now that it's taking between models and so forth going from days to weeks in some cases not to months in transitioning that. And the uncertainty of those regulations will bring on consumers in Europe. I think that there is probably going to be, continue to be a great deal of, well, some degree of uncertainty in the European markets around automotive. But I think if you see Asia picking up, you are also going to see European exports pick up on automotive demand.

Right. Great. Thanks. And then from longer-term perspective, you had noted 6% demand growth and kind of 4% supply growth over the next little while at your last Analyst Day. How do you see supply/demand over the next couple of years or so, now following some announcements on capacity and the demand picture as well? Thanks.

I see it as continue to be balanced. I don't see anything that has been announced that we haven't taken into our own consideration and the reality of some of those announcements. Again, it is not going to be, you get 4% growth in capacity and obviously 4% growth in demand. It never matches out. There will some lumpiness in it. But by and large, it will be fairly balanced.

Thank you.

Thank you.

The next question is from Hassan Ahmed of Alembic Global. Please go ahead.

Morning Peter.

Good morning Hassan.

Peter, one of the themes obviously in Q4 was destocking across a variety of product chains. So as I take a look at the MDI side of things, spot MDI prices continue to be under pressure through the course of, well, most of 2018, but seem to have rebounded in Q1. Now as I sort of, clearly no one would want to build inventory in a declining pricing environment. So my question to you is two-fold. One is, where are inventory levels? And is the destocking behind us? And the second question is, if it is behind us, in that 5% MDI year-over-year demand growth figure that you cited for 2019, are you baking in an element restocking as well?

Yes. I think that the destocking, particularly in Asia and I think I would feel fairly comfortable saying the U.S. as well, is behind us. And the restocking, I think, is underway. And again, I think that by the time we get fully into the second quarter, how much of that is restocking and how much that is growth, I am feeling more and more that it is growth oriented rather than just destocking. So I think that as I look at Asia and to a lesser degree the U.S., we are back to those mid single digit sort of growth levels. And we will see a little bit better than that in Asia because of the destocking.

Understood. Helpful. And as a follow-up, a couple of cross currents on the epoxy side of things. Through the course of the quarter we saw benzene going up, we saw propylene coming down. How did epoxy margins fare in Q1? And what's your outlook for the balance of the year.

I think, again when we look at epoxy, I kind of struggle with that because it's not with our segment, but with us. I think we have gone so far downstream, traditionally epoxy, for us, a bulk liquid resin epoxy applications going into wind and sports equipment and so forth. I look at it far more now in aerospace, transportation, adhesives, coatings, down into those areas. And again, a lot of those have very sticky pricing. So when you see a spike, an unplanned spike in raw materials, as we saw in the fourth quarter, we will pass those price increases through but it's going to be over a quarter or two. It's not going to be instantaneous. And those contracts will continue to be honored. And so we will get the prices up. We will offset the raw material increases. But it's not necessarily going to be on a quarter-per-quarter basis.

Understood.

And operator, I think we have gone over our one hour. Why don't we take one more question here?

Yes, sir. Our last question today will come from P.J. Juvekar of Citi. Please go ahead.

Thank you for taking my question. Peter, on slide three and six, you break down your EBITDA within commodity and differentiated products. I guess my question is what assumptions do you make to split EBITDA that way? Are you using cost based transfer price? Or are you using market based transfer price for that split?

We always transfer products on a market related basis when we look at that and on an internal basis. We want to make sure that as we make investment decisions that we have, if you transfer everything over to costs, I think that you are probably fooling yourself as far as where you are making your money. And so we have always tried to do it on somewhat of on a market related basis on pricing.

Great. Thank you. And secondly, quickly on MTBE. What kind of seasonal bounce back do you expect in 2Q and 3Q?

I think that, again, in the second quarter we are probably going to be slightly profitable. And I think in the third quarter, you are probably going to be slightly profitable in the third quarter. Again, if crude prices, benzene prices, natural gas prices stay where they are, you are going to be somewhere between breakeven and slightly profitable in the third quarter.

Thank you.

Thank you. Thanks P.J.

This concludes today's question-and-answer period. I will now turn the call over to Ivan Marcuse for closing remarks.

Thanks Brad. And if you have any follow-up questions, feel free to reach out to Investor Relations. Thank you. And we will see you next quarter.

This concludes today's conference and you may now disconnect your lines. Thank you for your participation.