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Huntsman Corp (NYSE:HUN)
Q2 2019 Earnings Call
Jul 30, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Huntsman Corporation's Second Quarter 2019 Earnings Conference Call. [Operator Instructions].

It is now my pleasure to introduce your host, Ivan Marcuse, Vice President of Investor Relations. Thank you, sir. You may begin.

Ivan Marcuse

Thank you. Good morning, everyone. I'm Ivan Marcuse, Huntsman Corporation's Vice President of Investor Relations. Welcome to Huntsman's Second 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, we further marked at open, we released our earnings for the second quarter 2019 via press release and posted 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 EBITDA, adjusted net income and free cash flow. You can find reconciliations to the most directly comparable GAAP financial measures in our earnings release, which had been posted to our website, huntsman.com.

I will now turn the call over to Peter Huntsman, our Chairman, President and CEO.

Peter Huntsman -- Chairman, President and Chief Executive Officer

Thank you, Ivan. Good morning, everyone, and thank you for taking time to join us this morning. I'll turn to slide three and 4. Adjusted EBITDA for our polyurethanes position second quarter was $201 million versus $269 million, a year ago. Our MDI urethanes business, which includes our MDI, polyols, propylene oxide and formulated systems businesses recorded adjusted EBITDA of $186 million. This compares with $246 million a year ago and $149 million for the previous quarter. As a reminder, and as we have called out in the past, the second quarter 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 $60 million of the year-over-year variance. MDI volumes in the quarter were up 11% as the business continued to benefit from the expansion of our China facility that began to come online in the third quarter of 2018. Even with the backdrop of a tough operating environment, many of our key markets, our global volumes would have been about flat with the prior year when excluding the new capacity in China. Our downstream strategy is performing well and our margins remain relatively stable in the differentiated end of our portfolio.

This stability is a result of our continued drive downstream, innovation, bolt-on acquisitions, expanded operations and regional diversification. In the second quarter, our total differentiated systems volumes increased 7% compared to last year, and our global component MDI grew 18% year-over-year. This growth was particular -- was primarily due to our new capacity added at our China facility and favorable comparisons in Europe. The second quarter was a tale of 2 house for our MDI urethanes business. We began the quarter with guarded optimism as order patterns improved significantly in March and continued into April as well as a good part of May. Also, in China, we were seeing high prices in the component end of the business.

Customer confidence was improving and there was an increased willingness by our customers to build inventories. However, as trade talks with the U.S. and China began to break down, a high degree of uncertainty and the lack of visibility once again entered the market and order patterns slowed significantly in late May and into June. Component MDI prices particularly in China also fell back to the levels we experienced in the beginning of the year. In addition to the volatility associated with the U.S.-China trade talks, our European region remains weak. We are seeing limited growth in our Americas region. Putting this altogether, the second half of 2019 for our Polyurethanes division is starting off weaker than we would have expected at this time of our last earnings call, and visibility remains challenging. Looking at polyurethanes regionally for the second quarter, our Americas volumes were flat with the prior year.

The integration of our Demilec acquisition that was completed last April remain on track, and we are now in the process of taking this technology to international markets to accelerate the growth of this business over the coming years. We had a positive EBITDA contribution in the quarter from Demilec's new international efforts. Markets where in we experienced modest volume growth in the Americas include insulation, automotive and the composite wood board market. These were offset by volume declines in our furniture, adhesives and coating markets. While competitive, the margins in this region remain relatively stable. Our investment in a new splitter in our Geismar facility is core to our strategy to expand margins and broaden our product range, to accelerate growth in our downstream businesses in the Americas.

We are still targeting 2021 for this investment to be operational. Turning to the Asian region of polyurethanes. Our China expansion fueled our growth in the region. However, it should be noted that our differentiated volumes were up even when excluding the impact of the recent expansion. This region continues to benefit from insulation growth into large-scale infrastructure projects and applications. The adhesives, coatings and elastomers and footwear markets in Asia are also contributors to our growth as we continue to gradually shift our China portfolio and the newly added capacity to be more differentiated. Our automotive business in China declined roughly 8% with the prior year despite a mid-teens decline in the overall market as we continue to benefit from product substitution and gain new customers. We believe that customer inventories are at very low levels in this region.

Overall, demand in China is soft, which we believe is likely to remain unchanged until customer confidence and visibility improve. While component prices are now back to about where they were the start of the year, there does seem to be some stability at current levels. In Europe, our downstream margins are stable despite lower underlying demand versus the prior year. Our volumes in the region were up but that was primarily a result of favorable comparisons due to an extended outage that impacted our results in the same period a year ago. The overall macroeconomic environment remain soft. We do not expect it to improve in the near term. Additionally, at the end of the second quarter, as we were bringing our Rotterdam facility back online from a planned maintenance program, our outage was extended due to issues from a third-party supplier. That outage is now behind us but it will impact EBITDA in the third quarter by roughly $20 million, a negligible impact on the second quarter.

The margins in our core-based differentiated business continue to remain stable. The graph lines in the upper left-hand quadrant reflect the margins experienced globally in our component differentiated urethane portfolios. The majority of our business is differentiated and was not material impacted by the volatility of component MDI prices. As shown here, our downstream margins remain resilient despite of continued -- volatile MDI component market conditions. Our MDI -- our EBITDA in the Americas continue to be less volatile than other regions globally. On the other hand, Europe and Asia primarily China, are down sharply reflecting the challenging macroeconomic and the environment and its impact on component margins. The good news is that we believe customer inventories in Asia are at very low levels and with any potential clarity and visibility on the horizon that could lead to a sharp improvement and results similar to what we saw in April in the first part of May. For Europe, the region remains soft, however, it is not getting materially worse, and we continue to make strides in markets such as insulation and elastomers.

I am pleased to see how our urethane portfolio is performing in these challenging macroeconomic conditions. Our long-standing strategy to drive this business more downstream through internal investment, bolt-on acquisitions is paying off and remains unchanged. We continue to move forward with our high-return projects such as our Geismar splitter investment and building new system houses in certain regions as well as aggressively looking for bolt-on acquisitions that will enhance our portfolio. We expect the third quarter of our MDI urethanes business would be comparable to the second quarter. Our MTBE business reported an EBITDA of $15 million in the second quarter, and we expect a similar result in the third quarter. Let's turn to slide number four. Performance Products segment reported EBITDA of $71 million. Total volumes were slightly up versus the prior year largely because of favorable comparisons due to a planned turnaround that impacted last year's second quarter.

This business is seeing similar market pressures that our other divisions are experiencing around the world. Additionally, a more competitive environment in glycols in certain domain markets specifically ethyleneamines has put pressure on margins in that segment. Despite the short-term challenges, we are focused on extending -- on executing our strategy to push forward in our derivatives downstream into more differentiated businesses and applications. We did continue to see growth in our downstream targeted markets such as gas treating, oilfield services and urethane additives. Our maleic anhydride business remains relatively stable in North America and Europe. We announced this last Friday that we agreed to purchase a 50% of our maleic anhydride joint venture in Germany that we did not own from Sasol. This is in line with our strategy to invest in businesses with stable earnings and attractive margins. We expect this acquisition to be immediately accretive to our earnings and free cash flow after we close, which is expected to happen in the fourth quarter of this year. The multiple paid for this business is less than 5x EBITDA.

For the third quarter, we expect lower fixed costs and continued growth in certain differentiated markets to result in modestly better quarter-on-quarter earnings. Let's turn to slide number six. Our Advanced Materials business reported adjusted EBITDA of $55 million, a decrease compared to last year's record EBITDA of $62 million but improved versus the previous quarter of $53 million. Higher sales in our aerospace markets were offset by lower sales and other markets such as power, automotive and construction driven by weak macroeconomic fundamentals in Asia and Europe. EBITDA in the quarter was impacted by lower volumes, unfavorable currency translations and higher fixed costs due to recent investments to support future growth in our R&D and manufacturing capabilities. We will continue to invest in this business so that it may capture both short-term and long-term opportunities. We consider Advanced Materials a core platform for both organic and inorganic growth.

Like our other businesses, customer order patterns in Asia remain very cautious. Demand in nearly all of our European markets except for aerospace is also tepid. Full year growth in this economic environment will be difficult to achieve although we do expect results in the second half to be marginally better than last year. I want to emphasize that Advanced Materials remains one of our most resilient businesses despite the challenging economic environment in the Europe and Asia, more than $15 million invested to date in future growth in foreign currency headwinds, full year EBITDA in this business should be close to 28 -- or should be close to 2018. Let's move to slide number seven. Our Textile Effects division record EBITDA of $28 million, slightly down versus last year's record second quarter. This decline was driven by lower volumes due in part to uncertainty surrounding trade across many of our Asian markets causing softer customer demand and supply chain disruption. Adding to the volume pressure, we saw raw material shortages for some of our products due to increased environmental regulation in China impacting certain suppliers. Total volumes were down 11%, but net sales were down only 5% because of the improved mix of higher specialty sales and pricing alignment that have helped to offset the higher raw material costs and currency headwinds.

We believe that the total industry is down mid-teens. However, it is important to note that while our non-specialty volumes were down in line with the overall market, our specialty volumes were up 3% in the quarter as customers continue to move toward more sustainable and environmentally friendly solutions that we offer and can supply on a global basis. We believe the long-term fundamentals for the business are unchanged and remain positive looking out over the next several years. Though in the near term, we expect the current headwinds in the industry to continue, we will likely keep next quarters EBITDA modestly below the prior year. Before sharing some concluding thoughts,

I'd like to turn a few minutes over to Sean Douglas, our Chief Financial Officer.

Sean Douglas -- Chief Financial Officer, Executive Vice President

Thank you, Peter. Turning now to slide eight. Second quarter adjusted EBITDA declined year-over-year by $97 million. Our Polyurethanes division accounts for approximately 70% or $68 million of this decline. Within the polyurethanes adjusted EBITDA variance, approximately $60 million of the decline is due to the loss of spike and tight margins within polymer MDI and $8 million from MTBE. Largely due to lower MTBE margins from our PO/MTBE China joint venture. Our Performance Product segment was down year-over-year largely due to lower upstream intermediates profitability and lower profitability in certain amines. We were also negatively impacted by approximately $17 million year-over-year due to foreign exchange translation as the euro and yen were weaker against the U.S. dollar by about 7%. Turning to slide nine.

During the quarter, we improved on our working capital by bringing inventory levels back in line with prior year metrics. Despite a 23% decline in our EBITDA year-over-year, we improved our free cash flow by approximately 38% versus the prior year's second quarter. Our improved free cash flow also benefited from reduced maintenance spend as we had a significant planned multiyear maintenance turnaround at our Port Neches facility in the first half of 2018. As we look into the second half of 2019, we will remain focused on our working capital management and we remain confident in our ability to deliver a free cash flow conversion of EBITDA of near 40%. For the full year 2019, we now expect to spend between $350 million to $360 million in capital expenditures. In the current economic environment, we will be diligent in evaluating our discretionary spend. Turning to taxes. In the second quarter, our adjusted effective tax rate was 25%. For the full year 2019 and looking forward, we now expect our adjusted effective tax rate to be between 22% and 24%.

This is a bit higher than our previous projected rate due primarily to a change in the regional distribution of our earnings. Our cash tax rate remains approximately 300 to 500 basis points below our adjusted effective tax rate. We ended the quarter with about $1.5 billion of combined cash and unused borrowing capacity and a net debt leverage of 1.7x. As we announced last Friday, we acquired the remaining 50% interest in our maleic anhydride joint venture in Germany from Sasol Chemical Holdings. We already consolidated this joint venture within our consolidated earnings. However, upon closing of this acquisition, which is expected within the fourth quarter of this year, we will receive the benefit of 100% of its cash flow going forward and no longer reflect a minority income deduction from our earnings. Within our financial statements for 2018, the minority income attributed to the joint venture partner was approximately $11 million. This business generate a strong free cash flow, which in 2018 is estimated to be around 80% of EBITDA. The agreed purchase price is $92.5 million adjusted for our share of cash net of debt. Using 2018 EBITDA, we estimate a multiple pay of less than 5x for our partner share of EBITDA. During the first quarter, we repurchased roughly 4 million shares for approximately $81 million.

At the end of March, we have approximately $608 million remaining under our $1 billion Board authorized amount for multiyear share repurchase program. We expect to continue to repurchase shares in a balanced and opportunistic manner. We continue to hold our 49% interest in Venator, which represents approximately 52 million shares. In conclusion, we are confident we will deliver on our annual free cash flow conversion target of near 40%. We remain focused on a balanced approach to capital allocation and growing our downstream differentiated businesses, and we remain committed to our investment-grade balance sheet. Peter, back to you.

Peter Huntsman -- Chairman, President and Chief Executive Officer

Thanks, Sean. The beginning of the year, we gave a total year forecast based on our best assumptions that we saw at the time. As we look to the second half of this year, we see a number of variables that will affect our second half earnings performance. While we are always seemingly a single tweet away from economic or political change and market conditions, I think it is worth sharing with you our latest view. Should we see a more positive market environment over the next 6 months, we believe that our adjusted EBITDA results will be down around 15% or better from last year. Events that we could see impacting our results positively would include a beneficial outcome on a handful of trade deals, lower energy prices, improved Chinese GDP, a stabilization of the auto and construction industry and falling interest rates. However, the present time, we are seeing more negatives than positives as trade disputes sap consumer and customer confidence, the Chinese and European economies continue to slow, energy prices remain volatile, housing and automobiles markets continue to be lethargic.

Should these trends continue, we see our adjusted EBITDA down about 20%-plus or minus debt from last year. In spite of where we are in the economic cycle, aggressive steps have been taken to create further shareholder value. These steps are in our control. These steps include: one, we remain committed to an investment-grade balance sheet generating a targeted ratio of 40% free cash flow to EBITDA. During this past quarter, we generated $240 million of free cash flow. Number two, this past quarter, we purchased $81 million of our own stock, and we continue to do so in an opportunistic basis. Number three, we continue to invest in our organic growth so we have a number of investments in both manufacturing and research including our Geismar, Louisiana MDI splitter expansion that will allow us to upgrade 70 tons of commodity MDI to more profitable and specialty grades of MDI. I repeat, that I'm particularly pleased to see how our strategic downstream focus on polyurethanes has resulted in a much more resilient and high-quality urethanes business.

Number four, we continue to take advantage of our strong balance sheet to acquire assets that further enhance value. We announced this past Friday the acquisition of 50% of our German maleic anhydride joint venture from our partner, Sasol. Over the past few years, this business has earned over 20% EBITDA margins and 75% free cash flow to EBITDA ratio. We are acquiring this valuable asset at less than 5x EBITDA. Despite some of the economic headwinds that we see around the world, we feel that we're building a stronger and more valuable business that will continue to create shareholder value.

With that, operator, will you please open the lines for any questions and comments.

Questions and Answers:

Operator

[Operator Instructions]. Our first question comes from the line of Bob Koort with Goldman Sachs. Please proceed with your question.

Don Campbell -- Goldman Sachs. -- Analyst

Good morning. This is Don Campbell on for Bob. Can you kind of go through the cadence of earnings into the second half of the year breaking out between third quarter and fourth quarter. It seems like you talked about inventory return in normal levels in terms of your own inventory and then talking about pretty low inventory levels in Asia for your customers. Can you just kind of talk about how that maybe could impact the cadence of earnings into the third and fourth quarter?

Peter Huntsman -- Chairman, President and Chief Executive Officer

Well, I'll let Sean comment on the numerical side of that. On the business trend side that we see, I think that we're seeing a lower demand on products right now what GDP numbers are performing. Or say, in times when people are deinventorying as they are right now, times of uncertainty, they're carrying less inventory because of the uncertainty going to the future. I think that in many regards, we're seeing a very similar scenario that we saw at the beginning of the year where inventories came down faster than normal and subsequently, any good news has the tendency to turn those steps, sort of sentiment around. I would say that in my personal opinion that is certainly more the case in Asia than the rest of the world. And if there's a bounce back, I think that you'll see that in Asia versus Europe or I think Europe is probably suffering more from true GDP sort of 0% growth, perhaps even negative in many parts of the EU.

I'm less optimistic about a turnaround in pricing and demand whereas in Asia, I certainly would be more optimistic about a positive results coming from trade negotiations in any number of things: stimulus spending that's taking place in China, the economic vitality of the Southeast Asia markets and so forth. If we start to see a restocking of that inventory, we most likely will see prices and margins improve with that. Sean, do you want to add some numerical point of view?

Sean Douglas -- Chief Financial Officer, Executive Vice President

No. Peter, you've covered it well. I would just say you pointed out well that we received a significant benefit in quarter 2 for the inventory reductions. There was an impact offsetting that on the P&L. And as you look at the second quarter, you had a big impact on Performance Products. Largely about $15 million of impact on fixed costs moving to stocks because of that. As we look forward, I would expect that not to reoccur. So I think from a cadence perspective relating to inventory, I think we've taken that impact in the second quarter.

Don Campbell -- Goldman Sachs. -- Analyst

Got it. That's helpful. And I guess on last quarter you guys talked about global effective average for MDI kind of in the mid-80s. Can you kind of provide an update where you see operating rates today and how you expect that to trend in the second half of the year?

Peter Huntsman -- Chairman, President and Chief Executive Officer

Yes. I would say that the second half we'll continue to see where we are today. Europe is operating in my estimate, Europe's probably operating around 90% capacity utilization. The U.S. at 100%. I say that because U.S. is importing in product right now, so it's capable of consuming all the MDI produced in North America and it's further supplementing that with imports coming in from Asia. And Asia is probably operating somewhere in the mid-70 percentile.

Always tough to get the visibility to what's happening in Asia because you have some very large facilities, single-line facilities over there. Any one of those lines coming in or out of the market are down for maintenance and so forth can take anywhere from 1% to 5% of the Asian market down on a single line. So I'd say globally, we're probably somewhere in the mid-to high 80% capacity utilization and again I would see that, that probably as I look across particularly Asia, I'm not seeing demand and I'm not seeing prices deteriorate further. Have they hit a bottom? I'd like to think so. I think polymeric prices and more commodity grades, if anything, ticking up slightly in those areas but I think it's going to take something more than just GDP growth to get prices up. I think you've got to see some resolution to some of the trade negotiations.

Don Campbell -- Goldman Sachs. -- Analyst

Thank you.

Operator

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

Kevin McCarthy -- Vertical research partners -- research

Good morning Peter. Peter, question for you on capital deployment. You bought back shares in the quarter and it sounds like you got a pretty good deal on the JV buyout with Sasol. Can you comment on your expected balance of future repurchases against the $608 million you still have to authorize relative to what you're seeing in the M&A pipeline today?

Peter Huntsman -- Chairman, President and Chief Executive Officer

Yes. I think particularly at these prices that we're going to continue to be buying as we move forward but I would say, Kevin, as I hope I've been consistent in the past saying that we are going to continue to look at a global economic dynamics and so forth. If we have a low stock price and that has brought about because of massive global uncertainty unrest. I think it's tempting as I would be to go out and I'd be very aggressive in share buybacks. First and foremost, it's going to be the strength and the vitality of our balance sheet to making sure that we've got plenty of dry powder first and foremost for our organic growth in our internal operations, and then we'll be looking at share buybacks. And we'll continue to be doing that on a go-forward basis and assessing that almost on a daily basis.

Kevin McCarthy -- Vertical research partners -- research

Thank you for that. And then second question if I may on the capital budget and opportunity for any incremental cost cuts. It looks like you did ratchet down the capex for 2019. Can you talk a little bit about kind of where you are versus maintenance levels at this point and what the possible trajectory could be into 2020? And I guess, related to that, if the world does remain quite uncertain and demand continues to languish. Are there additional costs that you might be able to take out of the equation?

Peter Huntsman -- Chairman, President and Chief Executive Officer

Well, if you think about what I would consider to be our core capex maintenance cost, it's about $175 million a year, and anything much beyond that $175 million to $200 million kind of range is discretionary. Now you don't stop that spending on a dime if you're halfway into a project and you want to try to save cash. You've already preordered a lot of materials, you're under contract and so forth. That discretionary spending while it doesn't stop on the dime, it certainly can be slowed if you were to make an announcement today, for instance, you certainly can pull back tens of millions of dollars in the fourth quarter.

It's not always the right thing to do because you'll get cancellation fees and so forth but yes, I would just say that if you really were very bearish about 2020, and you saw an economic calamity taking place, which I don't see, but if you were to see that, you would be looking at a budget that you probably could, yes, you could probably cut $50 million to $75 million, maybe upwards of $100 million of that for next year.

Kevin McCarthy -- Vertical research partners -- research

And on the cost side, Peter?

Peter Huntsman -- Chairman, President and Chief Executive Officer

You mean on the personnel side?

Kevin McCarthy -- Vertical research partners -- research

Well, could be any sort of restructuring initiatives that you might have in terms of optionality.

Peter Huntsman -- Chairman, President and Chief Executive Officer

I think that again, I think in a business like this, we're always trying to offset the rise of inflation that comes into the business. That's not being clearly offset by growth than we expect the businesses to be able to control their costs, is we don't automatically see our margins expand on an inflation adjusted basis. So I think that you've always got an opportunity to tweak your cost basis by a couple of percentage points but as I look through the company today, Kevin, I struggle to see that there's 250 individuals that we have that don't have anything to do, and we're just going to go cut those individuals.

But if you get into a major recession, if you get into an economic calamity, as I said earlier, where you're looking back at 2008 sort of economics, we'll certainly assess the needs then and assess the business ability to pay for those expenses and the customer's ability to pay for those services.

Kevin McCarthy -- Vertical research partners -- research

Great thanks so much for the color.

Operator

The next question is from Aleksey Yefremov with Nomura. Please proceed with your question.

Aleksey Yefremov -- Nomura -- Analyst

Thank you. Good morning everyone. Peter, I believe you've said you'd stock MDI polyurethane's EBITDA to be flat sequentially. Does this include the negative $20 million from Rotterdam outage? And if so, does this mean that underlying business is actually improving sequentially?

Peter Huntsman -- Chairman, President and Chief Executive Officer

Yes, it does mean that. And so, yes, we'd see that sequentially and that's worth the adjustment.

Aleksey Yefremov -- Nomura -- Analyst

And if I may follow up on those. What is the source of improvement in polyurethanes?

Peter Huntsman -- Chairman, President and Chief Executive Officer

Typically, I think we saw a pretty sluggish deinventorying of product during the second quarter. I don't think that you're going to continue to see that deinventorying, I'm not sure if that's a word or not, but deinventorying of product take place in the third quarter the way it did in the second quarter typically to June, July and August outside of Europe, typically a pretty strong months, and so typically, a third quarter is a strong month for us. We'll also see further expansions in our elastomers business. We continue to be very bullish on that. And our Demilec business as we grow that internationally, I'll just remind you a little over a year ago we bought that business, we had virtually no international sales on that. We're now gradually expanding that into Europe and into Asia.

And that's going to continue to grow. And I would just say that as we look at automotive, there's some very bearish sentiments I know coming out of Asia and so forth but as we look at the replacement of competing materials, new applications and so forth, we continue to be quite bullish on that.

Aleksey Yefremov -- Nomura -- Analyst

Thank you.

Operator

Our next question is from Jeff Zekauskas with JPMorgan. Please proceed with your question.

Jeff Zekauskas -- JPMorgan -- Analyst

Thanks very much. I have a question on slide four. Is the meaning of graph that you have that your component MDI margins dropped in half year-over-year roughly? You stressed the stability of the differentiated margins as the meaning of this that your component margins dropped in half?

Sean Douglas -- Chief Financial Officer, Executive Vice President

Jeff, this is Sean. That's a good approximation. As you look at the percentage of our portfolio, which we know is not a lion's share, the lion's share is downstream differentiated but the upstream for component end did see that as you probably have seen announced in some of the public views of competitors.

Jeff Zekauskas -- JPMorgan -- Analyst

Okay. And then I was looking in the lower right-hand quadrant of that slide and is the meaning of the volume piece that differentiated volumes year-over-year fell sharply, and component volumes grows sharply. Is that the meaning of that or that's not the meaning of this lower quadrant?

Sean Douglas -- Chief Financial Officer, Executive Vice President

No. The lower right-hand quadrant, it's a literal statement there that year-over-year, you're seeing growth rates. So as you look at the differentiated volume growth, the downstream growth, you're actually literally seeing a 7% growth versus last year, and you're seeing on the gray bar, you're seeing a growth in the more commoditized upstream part. And that's largely driven by the expanding capacity that's come on in China.

Jeff Zekauskas -- JPMorgan -- Analyst

So what I mean is...

Peter Huntsman -- Chairman, President and Chief Executive Officer

Jeff, just to remind that as we bring on China, we're first selling that product into the component market and where the demand is largest in that particular market. And then we're going to continue to take that product and move it into the downstream differentiated growth within China and within Southeast Asia. So you'll continue to see that shift of expansion taking place across-the-board because it's a new facility, but I would hope that over time we will continue to see that component volume in China moving further and further into differentiated. And as we look at where we've been investing in our systems out and expanding that in Taiwan and so forth, we will continue to see that. We have the infrastructure and we're building out the platform to be able to accomplish that.

Jeff Zekauskas -- JPMorgan -- Analyst

So why does the blue bar fall a lot and the gray bar rise a lot? What's the meaning of that in the second quarter of '18 versus the second quarter of '19?

Peter Huntsman -- Chairman, President and Chief Executive Officer

Yes. Again, I would think that a lot of that has to do with the growth that we're seeing in the component end of the market versus the differentiated side of the market. And part of that also remember that during a chunk of that time period, we were also able to see the Rotterdam expansion that took place in the latter part of '17 and '18, and also Demilec. And so you'll see, and then hugewide, I wouldn't expect to see differentiated growth around 16%, 17% on a quarterly basis.

And so with the expansion we saw on Rotterdam coming out of the end of '17 with the Demilec acquisition and so forth, we did see differentiated growth quite aggressive during that time period. And that's going to fluctuate a little bit as it will be overshadowed by the growth that we've seen in component with the start-up that you see from this chart starting in the third quarter of '18, fourth quarter of '18 and going into

early '19 as well in China.

Jeff Zekauskas -- JPMorgan -- Analyst

Okay great. Thanks so much.

Operator

Thank you.Our next question is from Jim Sheehan with SunTrust. Please proceed with your question.

Jim Sheehan -- HUN

Thanks. So good performance on free cash flow this quarter and you're still targeting that 40% conversion rate. Can you just talk about where your outlook is for net working capital in the second half and also maybe what pension and some of the other items might look like?

Sean Douglas -- Chief Financial Officer, Executive Vice President

Sure. Jim, this is Sean. You'll always see in our business in the fourth quarter a benefit on working capital just from seasonality. So as you look to the rest of the year, you're still going to see additional benefit coming from working capital in addition, just the ongoing efforts to continue to improve on inventory and receivables. As it relates to pension, I think we've mentioned before and on an annual basis, our cash spend on pension is about $100 million. And so I wouldn't expect that really to be anything different than you've seen in prior years. I think the rest of the components of the cash flow, Jim, shouldn't be all that surprising.

Cash interest should be what we've always indicated that would be from a cash tax perspective as we look for the full year, I would expect that number to be somewhere around $150 million for a full year on cash taxes, and that fits in with the percentages we've stated. So I think from a perspective of maintenance and so forth in that category, I don't expect a lot of gyration coming into the second half of the year. We do have a little bit of spending ahead of our PO/MTBE turnaround that we have scheduled for 2020. That will happen as we finish out this year, but I wouldn't expect a lot of surprise on that maintenance line between now and the end of the year either.

Jim Sheehan -- HUN

And in terms of MDI spot prices in Asia, looks like some consultants are calling for prices to move higher in the fourth quarter and -- but one of your competitors expressed some skepticism to that. What's your view on the potential for higher pricing into the fourth quarter?

Peter Huntsman -- Chairman, President and Chief Executive Officer

Well, again, all manufacturers will have different end use applications, combination of customers and so forth. And so I'm not surprised that there wouldn't be some variations and differences of what people are seeing with different customer basis and so forth. I think that what we -- as I've said in my comments, we're convinced that we've seen the bottom of prices, third quarter and fourth quarter. And if anything, prices are starting to edge up and I would think that we would see a gradual improvement in the fourth quarter on component pricing.

Operator

Thank you. Our next question is coming from the line of Frank Mitsch with Fermium Research. Please proceed with your question.

Frank Mitsch -- Fermium Research -- Analyst

Good morning folks. Peter, I really appreciated the commentary when you're discussing polyurethanes on how the second quarter started out and then stated kind of in the mid-May time frame. And I was wondering how you might apply that taste of business commentary to the company overall? And more importantly, here we are at the end of July, how was July overall in terms of pace of business?

Peter Huntsman -- Chairman, President and Chief Executive Officer

Well, Frank, I have not seen any numbers from July just some sales data and so forth. But as we look at it, it feels pretty flat. I think to be honest with you, June was a pretty tough month from volumes and overall sentiment in July was likewise at the beginning. And I think we feel like we have bottomed out, if you will, particularly in Asia in demand. And the question is just how quickly does that turn around? Again, when I talk to my prepared remarks about negative sentiment through the second half, I'm assuming that there are no trade deals that are going to materially change the business. I'm assuming that there's no GDP growth turnaround China.

I would just say that China and Asia, in particular, or I should say Asia, in particular, in China are I think very susceptible to the trade sentiment and so forth that's taking place. And I think that as you see a resolution and some visibility, you'll see consumer and customer confidence return. And right now, we look at the number of distributors and freight forwarders and third-party handlers and particularly in China. Inventory at those levels is very low at this point. I don't see that getting worse and if anything, there might be a bit of a shock in the industry should there be any sort of positive sentiment that would cost them to start buying and replenishing that.

Frank Mitsch -- Fermium Research -- Analyst

All right. That's certainly helpful. And then if I could ask a question on the Sasol JV acquisition. My first reaction is you're buying maleic anhydride at under 5x EBITDA. It seems like an attractive transaction. I'm curious as to how the performance of that business has been in terms of stability of EBITDA growth, declines, etc.. Can you kind of paint us a picture of how that business has been trending over the past couple of years and expectations for 2020?

Peter Huntsman -- Chairman, President and Chief Executive Officer

Well, I think that as we look at the revenues over the last 4 years here, they've gone from about $100 million up to about $150 million over the last couple of years. And EBITDA, I think 2014, '15, '16, we kind of saw a lot of new capacity coming on during that time period and EBITDA margins back to 2016 were just right around 20%, 21% and more recently, they've been in the mid- to upper-20 percentile. So it is a joint venture. Joint ventures, I'd just say on -- I'm not trying to defend Sasol or Huntsman purchase price on either side, joint ventures are always a tough thing to sell especially when there's a right of first refusal on -- that one party has over the other.

And if we were Huntsman selling, I'm not sure that we would have been able to get much of a different price than what we experienced. So from a joint venture point of view, again we already booked the EBITDA, but we'll be able to book and consolidate the cash side of that business, and more importantly, we'll be able to absorb some of the synergies or create some of the synergies couple million, low millions of dollars and have the control of the marketing and the sales within the European market. So it's a business in an industry that we feel very comfortable with. We like the technology, we like the catalyst, we make high margins on those products in that technology, and it's been a great relationship with Sasol over the years and -- but I think it's a great move. It'd be a good move for this company.

Frank Mitsch -- Fermium Research -- Analyst

Thanks so much Peter. And I think the people at Sasol appreciate your answer to the question.

Operator

Thank you. Our next question is from Matthew Blair with Tudor, Pickering and Holt. Please proceed with your question.

Matthew Blair -- Tudor, Pickering and Holt. -- Analyst

Hey Peter , I think in the past you talked about normalized global MDI demand growth and kind of like the 5% to 6% range. Did you have a number -- what does that look like today? And then perhaps simplistically, could you just force rank the end markets from best to worst like insulation, furniture, autos. If you just have to force rank it, what would it look like from best to worst?

Peter Huntsman -- Chairman, President and Chief Executive Officer

Well, first of all, as we will get MDI, I think the long-term number that you saw on MDI is realistically somewhere between 6% to 8%, right around 7% or so. And at any given time, if you're going to see deinventory taking place or restocking taking place, you'll see short-term volatility. If you look at it on a month-to-month or even a quarter-on-quarter basis. I would say today that MDI growth is you take a snapshot right now, it's probably in the 2 to 3 percentage range of growth. But I think again as you look at on an overall basis, on average, it's a product that has grown not just last couple of years but last decade or so, it ride around a 7% growth. As I look -- and I'm speaking about Huntsman here. I'm not speaking about the industry. As I look at areas where we've seen the greatest amount of growth for Huntsman on a global basis, I'd have to probably point out insulation; the composite wood material; ACE, which is our adhesives, coatings and elastomer, footwear. We continue to see growth in those areas.

Furniture for us continue to be quite lethargic and for us, I'm not saying that we're not dedicated to that end use but it's -- there's not a lot of high-tech growth that's involved in that and I'm not sure that you're going to see Huntsman really ever-growing at 10% or something in furniture. I would say that as we look at automotive globally is we compare automotive in the second quarter to last year, it's flat. I would say that if you look at the massive step down and demand that we've seen particularly in China, I think that we performed remarkably well in the growth that we've seen in automotive and that too, it's going to continue to be an area that we are quite bullish on.

Matthew Blair -- Tudor, Pickering and Holt. -- Analyst

Sounds good. And then with the China component MDI volumes ramping up, what is your current systems MDI share. I think in the past it's been roughly 70% to 75%. And I guess where do you see that share, that system share in say, like 3 to 5 years from now?

Peter Huntsman -- Chairman, President and Chief Executive Officer

I think that it will probably remain fairly close to where we are right now, overall, within the company. And that's not to say -- I think there might be a little bit of a perception that the component MDI is bad and the system MDI is good. And I would remind you that a lot of our component business is very high margin business, it's very stable business and it's business that we're going to be in for many years to come. So I think that when we look at those macro percentages. That kind of that 70%, 75% to 30%, 25% sort of split between the 2, that's not to say that we're standing still. It's to say that within that differentiation, within that separation of chemistry, that we're always upgrading our formulations business and we're always upgrading our component business.

And we got different marketing and sales approaches in each of those areas, but I would hope that year-on-year that we'll always going to see the quality of the customers, the margins that we're able to achieve focusing on smaller -- perhaps smaller applications and higher margin applications. As we look at the overall split for the next couple of years, we're going to continue to see -- we have a 60-40 split in Asia between component and formulation, and overall, we'll be moving China to be that same sort of balance that we've seen in the rest of the company of around 75-25 split.

Matthew Blair -- Tudor, Pickering and Holt. -- Analyst

Great thank you.

Peter Huntsman -- Chairman, President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Laurence Alexander with Jefferies. Please proceed with your question.

Laurence Alexander -- Jefferies. -- Analyst

Could you flash out a little bit of volatility in amines. How unusual is it? And how much was it?

Peter Huntsman -- Chairman, President and Chief Executive Officer

Well, Laurence, as we look at our amines, that's probably one area of the business that -- well, it's kind of like a kid, you're never disappointed in any one of them but you love them equally. I think the amines business is probably -- I've been a little bit surprised to see how much overcapacity has come in the amines market in the last quarter or so, but it is shown in the past, that the amines family of chemistry that we have there is very resilient. I think longer term, that's going to continue to be a strong performer for us but short-term, we're down with our ethyleneamines, and we're seeing some of the new facilities that have started up around the world that have come into the market.

I think a little more aggressively with more tonnage than maybe we had expected, but that's competition. But I don't see that being a long-term trend, that's something that we'll bounce back from and like I said, amines, by and large over time, has been a great contributor for this company.

Laurence Alexander -- Jefferies. -- Analyst

And then, I guess, I'm getting out is how much of the EBITDA hits in the quarter was the amines business?

Peter Huntsman -- Chairman, President and Chief Executive Officer

It's about $15 million, the hit on that. And so, it's -- yes, right around that area.

Laurence Alexander -- Jefferies. -- Analyst

And what sort of assumption, as you're thinking about the full year outlook, what kind of assumptions are you using for extended shutdowns in either the summer or in either August or in December?

Peter Huntsman -- Chairman, President and Chief Executive Officer

Well, I don't see us having any large shutdowns that we have planned for the fourth quarter of this year. So I'd say that we ought to be able to see pretty consistent earnings during that time as it pertains to impacts of shutdowns. Our biggest problem to be honest with you this year in 2019 has not been the shutdown as much as it's been third-party suppliers to our facility such as in Rotterdam and so forth where we've seen rather unreliability or rather unreliable supplies coming out of raw materials.

Laurence Alexander -- Jefferies. -- Analyst

Well, I guess I have to ask the running question in terms of your sense of vulnerability this year?

Peter Huntsman -- Chairman, President and Chief Executive Officer

Sense of vulnerability on?

Laurence Alexander -- Jefferies. -- Analyst

That we have more disruptions along the Rhine this time around?

Peter Huntsman -- Chairman, President and Chief Executive Officer

No, I think -- I am not expecting to see that would materially impact the business.

Laurence Alexander -- Jefferies. -- Analyst

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Josh Spector with UBS. Please proceed with your question.

Josh Spector -- UBS -- CFA

Hey guys. So just a question on polyurethanes volumes. So if you had differentiated up 7%, MDI up around 18%, the segment as a whole is around 7% with that Rotterdam included. What was down year-over-year to bring the segment to 7% overall?

Peter Huntsman -- Chairman, President and Chief Executive Officer

You mean from a finished application in finished products?

Josh Spector -- UBS -- CFA

So just overall, I mean, overall polyurethanes reported 7% and I mean I know that the biggest piece would be differentiated part of that but MDI component was up so much, I would think it would have drag the segment up more. I don't know if it's polyols that were down or something else in that range.

Peter Huntsman -- Chairman, President and Chief Executive Officer

I think when you look at the biggest flywheel in volumes quarter-on-quarter, you'd be looking at MTBE, which we include as part of that overall volume is polyurethanes.

Josh Spector -- UBS -- CFA

Okay. All right. That's helpful. Thanks guys.

Operator

Thank you. Our next question comes from the line of Hassan Ahmed with Alembic Global. Please proceed with your question.

Peter Huntsman -- Chairman, President and Chief Executive Officer

Good morning, how are you.

Hassan Ahmed -- Alembic Global -- Analyst

Very well Peter, you addressed some of these things on the call, but just want to dig a bit deeper into the evolution of sort of business condition through the course of Q2 in MDI. This year was a bit of a quirky quarter because you had several maintenance turnarounds in China, in particular, in April, right? So it seems pricing went up a bit on the back of affected utilization rates tightening, then that capacity came back online, pricing went down. So it seems that ahead of those turnarounds, there was a restock exercise, then a destock exercise. So 2 questions on that.

Where do you see effective utilization rates in Q3 relative to Q2? And the second part is you mentioned inventory is rarely lean, and it seems that way. So if at all business conditions do normalize and I think you alluded to this, could we actually see a pretty big risk in terms of restocking?

Peter Huntsman -- Chairman, President and Chief Executive Officer

So yes. If you see business conditions can normalize again, I think you definitely would see something like that take place as far as an improvement in margins. The prices where they are today, where they were a few weeks ago, it's very similar to what they were earlier in the year when we kind of saw a low multiyear low point in component prices in China, and I'd see those prices gradually edging up during the third quarter and the fourth quarter. I would say that again, just anecdotally, my gut feel is that customer sentiment probably has more to do than capacity utilization. And as we look at the sentiment and that what I was referring to earlier about how much confidence do I have in the next quarter, how much inventory might going to be carrying, how much pricing direction do I want to take a hedge on that.

I think that has more to do than capacity utilization. So yes, during the shutdown phases that we saw earlier this year, a lot of those people when they shut down have inventories that are built up. They're swapping pounds from other facilities and other producers and so forth. I'm not sure that, that really drives margins and demand sentiment nearly as much as pessimism around a trade deal that seemingly is just going on now for a 1.5 year, 2 years. And there's a bunch of false rumors and false starts that something is coming to a conclusion. We never seem to get there. I think that's probably weighing as much on sentiment in margins in Asia as anything right now.

Hassan Ahmed -- Alembic Global -- Analyst

Understood. Understood. And as a follow-up, I mean, you talked about obviously, customer sentiment that the other part of it is producer sentiment. Couple of companies not in MDI, but in other sort of chemical product areas seem to be announcing project deferrals. Are you seeing any sort of semblance of that or any indication of that within the MDI side of things?

Peter Huntsman -- Chairman, President and Chief Executive Officer

I'm really not. There are not a lot of MDI projects right now or announced in the pipeline that are actively, I mean, there's been some announcements of late, but I'm talking about projects where there's actually construction and huge spend that are taking place right now. I'm not sure that there's a lot of that in polyurethanes that's taking place.

Hassan Ahmed -- Alembic Global -- Analyst

Thank you so much Peter.

Operator

Our next question comes from the line of Mike Sison with KeyBanc Capital Markets. Please proceed with your question.

Mike Sison -- KeyBanc Capital Markets -- Analyst

Hey guys. Peter, just your current thoughts on your 2020 goals, a lot of companies given a tougher 2019 have kind of delayed some of those goals but just say any thoughts there.

Peter Huntsman -- Chairman, President and Chief Executive Officer

Well, again, tell me what the macro environment will look like and I'll kind of tell you where we're going to be. I think that goals are always a tough thing. When we look at the growth, we look at our objectives around cash flow generation. We look at those things that we can control, and there's always 2 variables in business that I think that we tried to focus on. We tried to mention that at the end of all of our prepared remarks. So what are we doing that we can control, and what's happening in the macro? One of -- I write down my sentiments for the end of this prepared text, and I think about, "Are we able to execute on the acquisitions and the organic expansions we've outlined to investors? Are we able to achieve the 40% free cash flow to EBITDA? Are we able to manage our working capital?

Are we able to push products further downstream and improve margins and so forth?" And those things that we can control, I'd like to think that we're on course to hit those 2020 objectives that we've laid out to our customers. As we look at the macroeconomy, I certainly can't, and this company certainly can't offset what 1% growth in China is going to do versus a projected 5% or 6% growth when we actually get to 2020. I continue to be an optimist. I think that moving into an election year, you're probably going to see a resolution to the trade deals in Asia. And I think that you're going to see some volatility or lack of volatility in the Middle East as issues that are resolved there. And you typically see more stability going into an election year, and I hope that's the case this next year. And if that's the case, I think 2020 is going to be a very good year.

Mike Sison -- KeyBanc Capital Markets -- Analyst

Got it. Thank you.

Operator

Thank you. Our final question comes from the line of Mike Leithead with Barclays. Please proceed with your question.

Mike Leithead -- Barclays. -- Analyst

Thanks. I appreciate you squeezing me in here. Question for Sean. If I look at your new EBITDA guidance, you're calling for roughly similar EBITDA second half versus first half now depending on how the macro shakes out, but free cash flow generation in the second half is expected to be more than double the first half? What's driving that?

Sean Douglas -- Chief Financial Officer, Executive Vice President

Yes. Sure. What you've got is truly you've got a pretty good benefit still coming on, on working capital in third quarter and fourth quarter. You still see that move. And you're not going to have perhaps as much T&I type expenses that we had in the first half as you see into the second half on maintenance. So I think you're going to see the benefit on working capital. That should help offset some of the perhaps changed year you've got on EBITDA on the top line, but confidence is high on being able to hit that near 40%.

Peter Huntsman -- Chairman, President and Chief Executive Officer

I would just note in the first quarter I think we called this out in the first quarter. We're a little bit disappointed as to the suddenness of the slowdown that we saw toward the beginning or part of the first quarter and the inventory that was built up because of that. I mean, if demand -- you'd typically you're producing product anywhere from a week in some products like MTBE a week before it shipped to some of our means, for instance, and some of our downstream urethanes.

You're producing those products 1 to 2 months before their ship. And so if you see a falloff in demand that can be sudden such as destocking, you're going to see a working capital for that quarter. I think I hope we try to spell that out clearly in the first quarter results of our last conference call. You're going to be hit rather suddenly, which we were in the first quarter on working capital change. So let's -- I think it's best probably to remain focused on where you're going to be on a yearly basis rather than the volatility and the sound that you get from a quarter-to-quarter basis.

Mike Leithead -- Barclays. -- Analyst

Got it. That's helpful. And if I could just return to slide four. Component margins are down, I think you said, call it, roughly 50% year-over-year, but your component volumes are up, call it, 15, 17-ish percent year-over-year. So I guess, is there any concern that as your ramping up the expansion of your Chinese facility, that somewhat exacerbating the situation that you have there in Asia? Or is the goal really to just kind of feel that facility out as quick as possible and get unit margins positive there?

Peter Huntsman -- Chairman, President and Chief Executive Officer

No. I think that, that -- I personally and I mean -- I'm sure there might be some different views on this. As we look at our product, I think that we put it into the market responsibly. I look at when the biggest volumes improvements that we saw of Huntsman moving that component materials particularly into the Chinese market, it was during the first quarter moving into the second quarter, which is actually time we felt prices -- component prices going up. So I think that we've done a very good job in putting that product into the market as our customers grow and as we have an opportunity to expand. But no, we are not going to be a manufacturer capable of running it 100% -- of running at 100% and just flagging the market. Operator, thank you very much for fielding the questions.

Mike Leithead -- Barclays. -- Analyst

Thank you.

Peter Huntsman -- Chairman, President and Chief Executive Officer

Operator. Thank you very much for fielding the questions.

Operator

Thank you. Since we have reached the end of our question-and-answer session, I would like to pass the floor back over to Mr. Huntsman for any additional concluding comments.

Peter Huntsman -- Chairman, President and Chief Executive Officer

No. Everybody, thank you very much for taking your time joining us today, and this should conclude our call.

Operator

[Operator Closing Remarks].

Duration: 67 minutes

Call participants:

Ivan Marcuse

Peter Huntsman -- Chairman, President and Chief Executive Officer

Sean Douglas -- Chief Financial Officer, Executive Vice President

Don Campbell -- Goldman Sachs. -- Analyst

Kevin McCarthy -- Vertical research partners -- research

Aleksey Yefremov -- Nomura -- Analyst

Jeff Zekauskas -- JPMorgan -- Analyst

Jim Sheehan -- HUN

Frank Mitsch -- Fermium Research -- Analyst

Matthew Blair -- Tudor, Pickering and Holt. -- Analyst

Laurence Alexander -- Jefferies. -- Analyst

Josh Spector -- UBS -- CFA

Hassan Ahmed -- Alembic Global -- Analyst

Mike Sison -- KeyBanc Capital Markets -- Analyst

Mike Leithead -- Barclays. -- Analyst

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