Huntsman Corp (HUN) 2005 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Q3 2005 Huntsman Corporation earnings conference call. My name is Maria and I will be your coordinator for today. At this time, all participants are in a listen-only mode. And we will be facilitating a question and answer session toward the end of this conference. If at anytime during the call you require assistance, please press star followed by 0 and a coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Mr. John Heskett, Vice President of Corporate Development and Investor Relations. Please proceed.

Thank you, Operator, and good morning. My name is John Heskett. I am the Vice President of Corporate Development and Investor Relations for Huntsman Corporation. Welcome to our investor call for the third quarter of 2005. Joining us on the call today are John Huntsman, our Chairman, Peter Huntsman, our President and CEO, Kimo Esplin, our Executive Vice President and CFO, and Sean Douglas, our Vice President and Treasurer.

As a reminder, a recorded playback of this call will be available until midnight November 9, 2005. The recorded playback may be accessed in the US by dialing 1-888-286-8010 and from outside the US by dialing 1-617-801-6888. The access code for both dial-in numbers is 59489056. A recording of this call may also be accessed through our website.

Before we begin a discussion of our earnings, I would like to say a few words about forward-looking statements. Statements made during this conference call that are not historical facts are forward-looking statements. Such statements are predictions or expectations and are subject to a number of risks and uncertainties. Our actual results could differ materially based on a number of factors including, but not limited to, future global economic conditions, changes in the prices of our raw materials and the energy we consume in our production processes, access to capital markets, industry production capacity and operating rates, the supply demand balance for our products and that of competing products, pricing pressures, technological developments, changes in government regulations, geopolitical events and other risk factors. Please refer to our Form 10-K for more complete discussion of risk factors applicable to our business and our Company.

Turning to earnings, I would like to point out that as I summarize earnings, I will be referring to adjusted EBITDA, which is EBITDA adjusted to exclude the impact of discontinued operations, restructuring impairment and plant closing costs, loss on the sale of accounts receivable, net gains and losses arising from the early extinguishment of debt, and nonrecurring legally contracted settlements. In the third quarter of 2005, we recorded a net total of 116.6 million of such costs and expenses and in the third quarter of 2004, we recorded 36.4 million of such costs and expenses. We focus on adjusted EBITDA from a management standpoint as we believe it is the best measure of the underlying performance of operations and we have received feedback from many of you in the investment community that this is how you prefer to look at our business. A reconciliation of both EBITDA and adjusted EBITDA to net income can be found in our third quarter earnings release, which has been posted to our website.

Today Huntsman Corporation and subsidiaries announced third quarter earnings as follows. Huntsman recorded adjusted EBITDA from continuing operations of 319 million. This compares to adjusted EBITDA from continuing operations of 329.6 million in the third quarter of 2004. Net loss available to common stockholders for the third quarter of 2005 was 29.8 million or a loss of $0.14 per diluted share. This compares to net income available to common stockholders for the third quarter of 2004 of 21.8 million or $0.10 per diluted share. Excluding the after-tax impact of 46.6 million in asset impairment charges related to our -- certain of our Australian assets, 24.7 million in restructuring and plant-closing charges, and 41.4 million related to the early retirement of debt, net income was 80.6 million or $0.35 per share on a diluted basis. This compares to 76.8 million of adjusted net income from continuing operations or $0.33 per share for the comparable period in 2004.

Lower sequential results on an adjusted EBITDA basis were primarily triggered by the unplanned maintenance outage at our Texas unit which we announced in late August. In addition, earnings were negatively impacted by approximately 32 million related to this event. Also consistent with the guidance we provided in late September, we experienced lower margins in our European olefins business which negatively impacted adjusted EBITDA by approximately 57 million as well as the combined direct impacts of Hurricane Katrina and Hurricane Rita which negatively impacted results in the third quarter by approximately 27 million.

I'd like to now briefly outline the performance of each of our six segments. Polyurethanes recorded adjusted EBITDA of 195.2 million for the third quarter of 2005. Adjusted EBITDA decreased by 2.8 million as compared to the second quarter of 2005 but was 84.6 million higher than the third quarter of 2004. We continue to see solid market conditions for MDI [inaudible]. However, volumes in the third quarter were down approximately 9% as compared to the second quarter due to seasonal factors and customer destocking activities and loss production due to downtime related to both hurricanes as well as problems with a key supplier in Europe in the month of July. MDI pricing in the quarter was essentially flat when excluding the impact of movements in exchange rates. As I previously mentioned the unplanned outage at our facility negatively impacted polyurethane's results by approximately 32 million.

Advanced Materials recorded adjusted EBITDA of 41.3 million for the third quarter of 2005. This was down from 44.6 million in the second quarter of 2005 but up from 38.1 million achieved in the third quarter of last year. In Advanced Materials, sequential results were a bit lower in part because we experienced an unfavorable mix of some of our higher margin products experienced soft demand particularly in the month of July. Woe also experienced a very competitive pricing environment in some of our more commodity like products, particularly in Asia and Europe.

Performance Products recorded adjusted EBITDA of 30.8 million in the third quarter of 2005, as compared to adjusted EBITDA of 65.9 million in the second quarter of 2005 and adjusted EBITDA of 51.8 million in the third quarter of 2004. Results were negatively impacted by a number of factors in the quarter, including the continued deterioration of the ethylene glycol market, reduced production related to the maintenance outage at the PO/MTB unit, the impact of Hurricanes Katrina and Rita and also impaired supply of certain crucial raw materials. Also, we generally saw higher raw material and energy costs, particularly in the month of September.

Pigments recorded adjusted EBITDA of 32.2 million in the third quarter of 2005, which was down from 39 million in the second quarter of 2005 but up as compared to 25.8 million in the third quarter of 2004. Although sales volumes in the third quarter were 3% higher than in the second quarter, average selling prices in dollar terms softened by 6% due to the strength of the U.S. dollar versus the major European currencies, as well as continued weak demand for pigments, particularly in Europe.

Polymers recorded adjusted EBITDA of 42.6 million in the third quarter, an increase of 9.1 million as compared to the second quarter and an increase of 13.7 million as compared to the third quarter of last year. The improvement was due to higher sales volumes in polypropylene and polyethylene and lower manufacturing and SG&A costs. Results also improved at our Australian [inaudible].

Base Chemicals recorded adjusted EBITDA of 16 million in the third quarter of 2005, a decrease of 67 million as compared to the second quarter. The majority of the decline was attributable to lower margins in our European olefins business where ethylene and propylene contract prices set lower in the quarter while our primary raw material, Napta, increased dramatically. Results in North America were negatively impacted by the hurricanes. With that, I would like to turn things over to Kimo Esplin, our CFO, for his comments on our financial highlights.

Thanks, John. The third quarter proved to be challenging for us, primarily due to a number of isolated events that we would characterize as nonrecurring. We took our PO/MTB unit off line in late August for unplanned maintenance which unfortunately coincided with what proved to a record period for MTB profitability. As John indicated, we estimate that the EBITDA impact of this was approximately 32 million or roughly $0.12 per diluted share. Hurricane Katrina swept through the Gulf Coast on August 28th, and although we largely avoided any significant damage to our facilities, the storm resulted in feed stock limitations to some of our facilities as well as logistics constraints in the Louisiana corridor. Finally, Hurricane Katrina, Hurricane Rita came ashore just east of our Port Arthur facilities on September 24. Again, we largely avoided significant physical damage to our facilities, but most of our major Gulf Coast operations were offline for the last 10 days of September. We estimate that the direct impact of the storms was approximately 27 million in the third quarter, or about $0.10 per diluted share. Approximately 10 million was related to our Performance Products division, 12 million was related to Base Chemicals, while 4 million was related to Polyurethanes and 1 million related to Pigments in the third quarter. Of course, independent of the direct impact of the storms, the most significant impact we experienced was record raw material costs, particularly in the month of September.

Finally, as we indicated on our second quarter call, we had a horrible contract price settlement for ethylene and propylene in Europe in the third quarter. The price of ethylene settled down by 15%. Then we saw the price of our primary raw material, Napta, run up by almost 30%. We estimate that this cost was approximately 57 million in lost margin for UK Base Chemicals.

In the quarter, our differentiated businesses continue to perform well and exhibited much more stable profitability as compared to our commodity businesses. In the quarter the differentiated businesses contributed approximately 75% of our adjusted EBITDA.

As it relates to our capital structure, we continue to make very good progress toward our goal of reducing our debt levels by 2 billion by the end of 2007. Since the end of 20004, we have paid off approximately 475 million of bank and bond debt from free cash flow, including approximately 125 million in the third quarter. We will continue to reduce our debt as rapidly as our levels of free cash flow allow.

Consistent with our goal of simplifying and streamlining our legal and financial and borrowing structure, on August 16 we merged our Huntsman International and Huntsman LLC operating subsidiaries and completed the refinancing of the respective credit facilities of Huntsman International and Huntsman LLC. These new credit facilities consisted of approximately 650 million in revolving commitments due 2010 and approximately 1.85 billion in term loans due 2012. Substantially all of this new debt is priced at LIBOR plus 175. Subsequent to the merger and refinancing, we made a volunteer repayment of approximately 50 million on the term loans. The new financing will reduce our interest expense by approximately $20 million per year. In the quarter, we booked approximately 41.4 million in primarily non-cash expenses related to the early retirement of debt, primarily related to this refinancing. The impact of our deleveraging program was clearly evident on our bottom line this quarter as interest expense was approximately 101 million as compared to the pre-IPO levels of 155 million in the third quarter of 2004. This represent a 35% reduction. This was achieved despite underlying LIBOR rates which were almost 2% higher, and which impact approximately 50% of our -- of our debt.

Also during the quarter, we took a $46.6 million non-cash charge to reflect the impairment of our Australia Styrenix assets. As we have indicated on past calls, we continue to be disappointed with the performance of this business and the outlook for styrene generally is bleak. Year to date, this business has lost approximately 10 million on an EBITDA basis. We are currently exploring a number of options related to this business.

Now I would like to take a minute to discuss our capital spending. Capital expenditures for the first nine months of 2005 were approximately 202 million, as compared to 145 million for the comparable period in 2004. We expect to spend approximately 350 million in 2005. This is expected to include approximately 40 million for the construction of our UK low-density polyethylene plant. his will also include amounts spent by our consolidated Chinese polyurethane JV on CapEx of approximately 60 million, of which we have funded approximately 8 million with our JV partners and local borrowing making up the difference.

We have recently completed our capital budgeting process by 2006. Next year you should expect total capital spending to be approximately 550 million. Of this total, approximately 200 million relates to the ongoing construction of our Wilton, UK polyethylene facility.

Finally, a few thoughts on the fourth quarter directional earnings guidance. As we sit today in early November, we believe that our fourth quarter results will be negatively impacted by the outages we have experienced related to Hurricane Rita. Most of our plants in the affected region were offline for a substantial portion of the month of October, and our large ethylene cracker in Port Arthur is in start-up mode today. We estimate that fourth quarter EBITDA will be negatively impacted by approximately 130 million. This includes approximately $53 million for repairs, and other hurricane-related expenses, and approximately 77 million related to loss production at units that were offline. The majority of the impact will be felt in our North American Base Chemicals business, about $58 million, and our Performance Products division, about $44 million. Our PO/MTBE business, which as you know is contained within our polyurethane's division, was negatively impacted as its restart was delayed well into October. We estimate the impact of this at 23 million in the fourth quarter. We are currently in the process of compiling estimates of repairs for physical damage sustained, and anticipate filing claims against our insurance. We expect that we will reduce our estimated losses due to physical damage by up to $20 million, although final settlement and recovery isn't likely until 2006.

Moving beyond the impact of the hurricane, we are very encouraged by the price increases that have been nominated for many of our commodity products. Ethylene and propylene contract prices in Europe increased by 185 million -- 185 Euro and 170 Euro per metric ton. U.S. ethylene producers have secured a $0.09 per pound increase in ethylene for October and have nominated another $0.07 for November. In all major titanium dioxide producers have announced pigment price increases on the order of $150 per metric ton. Certainly some of these increases are attributable to near term tightness caused by industry outages and higher raw materials. The degree to which this momentum continues in 2006 remains to be seen.

In our differentiated businesses, demand has generally remained stable. Excuse me. But higher raw material prices are likely to result in compressed profit margins in the near term. As we have described to you in the past, prices for many of our products in Advanced Materials, polyurethanes and performance products tend to be sticky. That is, they are not reset in the marketplace every month and tend to lag movements underlying -- excuse me -- and tend to lag movements underlying raw materials by up to 3 to 6 months. This is likely to result in a significant headwind in the fourth quarter.

For 2006, Differentiated Chemicals will have another solid year with Advanced Materials and Performance Products being stronger in 2006. Polyurethanes will have another good year but likely to be down relative to 2005 due to additional industry capacity coming on mid-year. Pigments will have a better year as we begin 2006 with lower inventories. Base Chemicals and Polymers are poised for peak economics as we exit 2005 and enter 2006, largely subject to global macro economic conditions. If we see global economic softness, we will likely experience similar profitability as compared to 2005. Now, I'd like to turn things over to Peter Huntsman, our President and CEO.

Kimo, thank you very much. Good morning everybody and thank you for joining us. Let me start by providing an overview of the operating -- operational status of our U.S. Gulf Coast plant during the quarter. On August 23, we took our propylene oxide MTB plant in Fort Neches,Texas offline for unscheduled repair and maintenance. This plant was down for the balance of the quarter, mostly due to maintenance activities, but its restart was delayed following Hurricane Rita. On August 28th, Hurricane Katrina came ashore near New Orleans. Fortunately, this is well east of where most of our facilities are located. We did not experience any damage to our facilities and suffered minimal production that was lost. Only a few days at our MDI facility at Louisiana and our PLOT facility at Lake Charles, Louisiana, saw some reduced for a few weeks at our maleic and high dry facility in Pensacola, Florida. All in all, very little direct impact.

Of much more significance was Hurricane Rita. We took all of our Texas Gulf Coast facilities down in advance of the storm and as a precaution on or about September 21. This impacted approximately 75% of our total U.S. production. As you know, Rita came ashore very near Port Arthur Texas on September 24. The Port Arthur area represents Huntsman's largest single concentration of facilities in the world. We have four major sites where we produce all of our North American based petrochemicals as well as our propylene oxide, MTBE, ethylene oxide and glycols, several of our Amines products and certain surfactants. Basically all of our employees were able to evacuate safely. We suffered no serious physical damage to our facilities. However, we spent the balance of September and most of the month of October repairing minor damage to these facilities, restoring utilities, and re-establishing food stock and utility supply. I'm glad to report that our propylene oxide MTB facility was restarted on October 15th and is now operating at full rate. Our butadiene facility was restarted on October 9, at reduced rates which has steadily increased since that time as our customers have come on line. Our smaller 400 million pound ethylene unit was restarted on October 23, which allowed us to resume full production in late October. Finally, our large 1.4 billion pound ethylene cracker in in restart mode and should be fully operational within the next week. The only facilities that we're still working on are our ethylene oxide units and small glycol plants, and these probably won't be back on line until mid-December.

As Kimo indicated, these outages, along with the related repairs and other expenses will have a significant impact on our fourth quarter results, which are currently estimated at approximately $130 million on an EBITDA basis. Although less significant, we were also negatively impacted in the third quarter to the tune of approximately $27 million. Needless to say, it's been a challenging couple of months for us from an operating perspective, but it seems to be behind us for the most part as we enter November.

The most significant indirect impact from the storm has been that as an industry, we continue to suffer through some of the highest and most volatile raw material prices we have ever experienced. During the third quarter, crude oil averaged $63 per barrel. That peaked at over $70 per barrel. Natural gas averaged $8 per MM BTU but spiked close to $15 for MM BTU. These prices represent increases of up to 20 to 50% compared with levels in the second quarter and 40 to 50% compared to last year. This placed tremendous cost pressure on our business in the third quarter, and are likely to impact results in the fourth quarter. But as of this time, most all of our major raw materials in the last few days have dropped to pre-Katrina levels. Generally, I believe our industry has responded well. Prices for many of our commodities have moved up sharply in the last month, a reaction to not only higher raw materials but also tight market conditions for many of these products. Should raw material prices continue to fall, this certainly bodes well for the commodity portion of our business in the near term. I would remind you that while we have seen raw materials fall in recent days, it will be some weeks before these lower prices work their way through the system to our bottom line.

Let me now spend a few minutes on some of our businesses. In our Base Chemicals operations in Europe, we experienced a horrible contract price reset in the third quarter. As we mentioned in our last conference call in late June, prices for ethylene and propylene settled down 110 Euros per ton and 65 Euros per ton,respectively. Of course, this was at a time when supply and demand had shown some signs of softness and raw materials had recently dropped. Of course as everyone is aware, supply and demand improved dramatically, and raw material prices went through the roof to all-time record-high levels. From $438 per metric ton in June to an all-time high of $571 per metric ton in September. The lower contract prices for olefins, together with higher raw materials, resulted in approximately $57 million in margin compression in this quarter. Now let me be clear. Huntsman doesn't choose to set these prices for the quarter in advance. It is a convention of the industry in Europe. We're opposed to it, and have lobbied hard over the past several years to change it to the U.S. model. Aromatics such as benzene have recently moved to pricing. We're hopeful that ethylene and propylene will move in this direction, but we're now stuck with it. The good news is that olefin prices settled up substantially in the fourth quarter, ethylene was up 185 Euros per metric ton and kopelyn was up 170 Euros per metric ton. These are both record settlements for the European market. Of course raw materials are also higher but are falling at this time. Absent large changes in crude oil prices, we expect margins to improve in Europe in the fourth quarter, but we wouldn't at this time expect to achieve the levels of profitability we saw in the first half of this year. Also we're very encouraged by the rapid rebound of margins we have seen in the U.S. olefin markets in the past several weeks. Ethylene prices settled up $0.09 in October to $0.54 per pound, which essentially resulted in cash margins approaching the levels we experienced in the first quarter of this year. Of course, we won't benefit from this as our plants were down in October, but the markets are certainly moving in the right direction, and we will benefit from this as our plants do some of sling. Stock prices continue to be in excess of $0.70 per pound, and producers have nominated another $0.07 per pound increase in November.

In our titanium dioxide and pigments business, our adjusted EBITDA decreased to $32.2 million in the third quarter. This was up from last year, but down 18% compared to the second quarter. Of course, third quarter tends to be a seasonally softer quarter and we would expect earnings in this business to decline, all things being equal. During the quarter, prices declined by about 6% on the dollar basis and 3% in local currencies. This is offset by a 3% improvement in sales volumes mostly in September as we picked up some of the accounts as a result of DuPont's outage. Underlying demand continued to be soft relative to last year and we estimate that year to date global pigment demand is down about 6% as compared to 2004, which if you recall was a very strong year with demand over 7%, versus 2003. The good news is that -- is that -- DuPont's outage has really tightened up the industry. We estimated that effective operating rates today are above 95% capacity utilization and industry stock levels have dropped from over 60 days in the summer to less than 50 days currently. As a result, all major producers have announced price increases in the range of $150 per metric ton effective November 1, or as soon as contracts allow. This along with additional volumes from the DuPont outage should help us in the fourth quarter -- in the first quarter of 2006.

As we look into the next year, conditions should remain tight well into the paint season next spring. However, at some point, DuPont's plant will become operational and additional supply will come back in the market. At that point, profitably will be a function of underlying demand in the marketplace. We had a great paint season in 2004. It was very disappointing in 2005. We remain optimistic for 2006. But obviously it's too early to tell at this point.

Our Performance Product segments which include our surfactants, our lineal alphabenzene or LAB business, Amines, high dried and licensing and glycols business grew -- recorded an adjusted EBITDA of 30.8, down 65.9 million on the second quarter and 51.8 million of a year ago. A number of items impacted third quarter results in Performance Products. First off, we felt the the direct impact of the hurricanes here. Lost production cost us an estimated $10 million in the quarter and this number will likely jump close to $44 million in the fourth quarter, which include some repair costs. Also we felt the impact of higher raw materials in this segment. Remember, we move about 1 billion pounds of ethylene into our Performance Products on an annual basis. If ethylene prices move up, our raw material costs increase. Given the price movement I just described, this will continue into the fourth quarter.

Finally, we had unusually large shipments of malayic catalyst in the second quarter. This is a very profitable product for us, but sales are uneven as they are dependent on our customers maintenance activities and recategorization activities at their respective plants. The impact of this was approximately $6 million on the quarter. Our intermediate business, particularly part of our surfactants, LAB and glycol, continue to face a challenging business environment. We continue to exit low margin business and have had recent success in pushing through price increases in these product lines. As we have indicated on previous calls, one of the features of our Performance Products business is that as ethylene markets tighten, the cost of raw materials for certain of these products in this segment increase, which certainly accounts for a portion of the margin compression that we experienced in the third quarter. As we look into the fourth quarter, we see base petrochemical prices strengthening that will result in headwind for our Performance Products business. We have announced a number of price increases across the board in this business and will be passing through ethylene costs as conditions warrant.

Our Advanced Materials segments, which includes our coatings, construction and adhesive applications, composites and power and electrical groups, had an adjusted EBITDA for the third quarter of $41.3 million which was down from 44.6 million in the second quarter. Overall volumes were stable as compared to the second quarter as softness in certain of our construction and automotive end markets, particularly in Europe and select electronics products in Asia, were largely offset by continued growth in wind power and coatings resin.

On the pricing side, we did see increased competition in certain of our more commodity like product lines, particularly in Europe and Asia. As we look over the past several quarters, the third quarter of this year represents the first quarter in over a year where we didn't see strong sequential pricing improvements. Although prices are up about 10% relative to the third quarter of last year, which when considering the formulation nature of this business, we're very pleased with. We have announced price increase initiatives in North America for the fourth quarter. These include a 10% increase procuring agent, 5% for most adhesive accounts, and $0.05 per pound on base resin. Having successfully completed the majority of the business, the process of reshaping our portfolio continues away from certain commodity lines in favor of growing our downstream formulation business, building on our strong presence in high value growth markets, such as aerospace, power transmission, and linked power generation. We're also developing new applications into new markets. Our polyurethane segment, which includes our MDI, propylene oxide, polymers, TCU, PO byproducts, MTBE, amylene and nitrobenzene have an adjusted EBITDA for the third quarter of $195.2 million. This represents a 76% increase relative to the third quarter of 2004 but a 2% decrease over the second quarter of this year. As Kimo indicated, you average about propylene oxide and MTBE plant negatively impacted results by an estimated $32 million for the quarter. Obviously, we were disappointed to have had this unit down during the period of record MTBE margins but the unit is now back and operating at full rates. In our MDI business, volumes were down about 9% as compared to the second quarter and about 14% relative to the third quarter of last year. Certainly, some of the expected as the third quarter historically is slower than the second quarter due to the seasonal effect of European summer holidays. However, the customers and end markets, notably furniture, appliances, and automotive, took the opportunity to delay purchases during the quarter ahead of anticipated price decreases which have not occurred. In Asia, due to the significant price differential between MDI and Key DI, we've seen some minor product substitutions in lower value application areas. Finally, although we sustained no physical damage to our guidemark facilities from the hurricane, we did experience some production outage in the third quarter due to limited availability and lack of utilities following storms. Also, we were somewhat limited in our European plant due to issues related to one of our major suppliers. As we make up a 9% decline, we estimate that 2% was attributed to seasonality, 3% was due to customer restocking, and 4% was due to plant outages. Our average prices for MDI were essentially flat for the second quarter excluding the impact of exchange rate, we are 26% higher than the same quarter of last year. We experienced strong demand in our core work and have announced further price increases in North America on the order of 7 to 10% higher energy costs. We believe these will be successfully implemented. As we look at MDI volumes in the month of October, they appear to be running about 5% above September and October of last year and this is still with two large Louisiana Pacific OFB mill in Texas offline.

I also wanted to touch briefly on our propylene oxide business which is another major product line in the polyurethane segment. Clearly,less significant than MDI but still a major contributor to our profitability in this segment. As we noted, the plant was down for about half of the third quarter. Restart was delayed by Hurricane Rita but the facility is now up and running at full rate. MTBE C factors were at record levels for most of the third quarter. They had declined since September and in fact in the past week we have seen them fall by almost 65% to about $0.40 per gallon. This is not unexpected as the fourth quarter is typically the softest quarter from a seasonal perspective. We expect C factors to continue to fall as the quarter progresses. This is still a very profitable product but down from the record levels we saw in the third quarter.

Despite many distractions during the past several months, we remain focused on our commitment to reduce our cost as measured on a constant currency basis. This cost reduction which we refer to as Project Coronado has a goal of lowering our fixed cost as measured against 2002 costs on a fixed currency basis by $200 million. These savings are in addition to the ongoing annual cost inflation we have experienced since 2002 which we estimate to be in excess of the $100 million. The $200 million target represents roughly a 10% reduction in our fixed costs of approximately $2 billion of 2002. We continue to make very good progress on this program. As we sit today, I'm highly confident that we'll meet this $200 million target and feel that there are still opportunities to reduce our costs even further.

In summary, the third quarter was challenging in many respects. Profitability declined from the second quarter, but was about the same as last year. Our operational problems appear to be largely behind us, and there's good momentum in all of our commodity lines. However, we continue to be concerned about the impact of high oil and energy costs, and that impact -- how that affects the overall economy. We continue to push through price increases in product lines where market conditions allow and continue to focus on things we can control. Our outlook for 2006 is very strong and there is very little new supply scheduled to come online in product lines where capacity utilizations is the primary driver of our profitability. Despite high energy costs, demand appears to be stable across most product lines and geographical regions. If this continues into 2006, we believe that we're well positioned to take advantage of opportunities to expand our margin. With that, I would like to turn the discussion back over to John Heskett, our Vice President of Corporate Development Investor Relations.

Thank you, Peter. Operator, I think we're now ready to turn the call open to questions.

Ladies and gentlemen, at this time if you wish to ask a question, press star followed by 1 on your touchtone telephone. If your question has been answered or you wish to withdraw your question, press star followed by 2. Press star 1 to begin. Your first question comes from the line of Mike Judd with Greenwich Consultants. Please proceed.

Yes, good morning.

Hi, Michael.

A question about MDI. Is your sense that there's some inventory building going on in the chain there? Or how does that look? And also, what -- to what extent is it possible to import MDI into North America?

Well it -- it's would be very difficult to import MDI to North America as North American has recently been an exporter of MDI, and I -- I think our bigger concern would be that as Chinese capacity comes on line, there will be less exports to the Asian markets from North America, and thus you'll see more U.S. North American production staying in North America rather than being exported. So I'm not overly concerned about imports of MDI coming into the market. So far as margin compression in the month of October, and going into November, we -- we have seen -- about a 5% improvement month on month from the previous month in orders so -- and that's with prices going up. I don't believe that there's that much supply in the supply chain between us and the end use applications. And I don't think there are any indications of that. Otherwise, we would see the increase that we have seen in orders.

Thank you.

Thank you.

Operator?

Your next question comes from the line of Don Carson with Merrill Lynch. Please proceed.

Yes. First a housekeeping item on FX. You talked about just under 17 million in unallocated I just wondering what the allocated FX losses were. And a question on Base Chemicals. Do you see the improvements in pricing and fall in Napta as you should get a nice sequential, that you should more than offset the 57 million loss that you had in the third quarter?

I'll try to address the Base Chemicals and then we'll go to the FX issues. We are seeing -- you know, Don, I'm just -- I'm hesitant to answer that just because of the severe volatility as many of you that have been following natural gas and crude prices just over the last three or four days, you have seen natural gas on the NYNEX come down 2 to $3 per MM BTU. On the Houston ship channel were we buy our gas, prices over the last four or five days have fallen by over $4 per MM BTU for the cash price. We've seen ethane prices in the last couple of weeks go from the mid-80s down to the low 70s and obviously if these trends continue, Don,fourth quarter and going into the first quarter of next year, we are poised to be very strong for Base Chemicals. As I mentioned, we don't -- we don't see these price decreases in real time. We are sitting on very, very low inventories on our raw materials right now waiting for such a move like this to have occurred. But I think that as these lower prices move through the supply chain, we will certainly see a significant improvement. Certainly more so than what I would thought just a week ago of earnings coming out of our Base Chemicals. Now, again -- I don't mean to pour water on what I just said. We have seen very sharp declines here and there might be a rebound. But I think if you look at overall inventories of crude oil, inventories of MGL, inventories of natural gas products, even with the outages taking place from the hurricanes, we are still sitting on the second largest inventory of natural gas for this time of year than we ever have had. And so there's plenty of production coming into the overall market. I think that -- personally my opinion is I believe they'll continue to be downward pricing on raw material which should bode very well for our Base Chemicals. However, that would correspond with a $57 million, I personally think it's too early to tell, but I'm quite optimistic.

Don, on F X. We had for the third quarter $4.1 million of FX unallocated losses and the comparative quarter in '04 we had 12.5 million of FX unallocated gains. We don't have any allocated to the division. It's all unallocated.

Just to follow up on the food stocks. With these unprecedented declines over the last week, are you moving to lock in some of your feed-stock needs for the balance of the quarter or are you still more or less going naked?

For those that we can, we will be locking in. We have an option the last 3 days of the month to lock in our gas price for the following month, and we elected a few days ago not to lock in our gas prices. It just so happened that the NYNEX pushed our price up $2 per MM BTU in one day. We thought that had nothing to do with supply and demand and we chose not to lock in. And as we have seen gas prices -- now cash prices start falling on this -- in the Houston ship channel to the tune of around $8 per MM BTU, that's down from 12 or 13 just a week or two ago, we are starting to lock in on those lower prices. I think that gas prices around that price have an equal correspondence with what we're seeing heating fuel, crude oil and coal. We have locked in about 20% of our UK Napta, and as prices continue to fall in -- with Napta prices in Europe continuing to fall, we will hope to continue to take advantage of that.

Thank you.

Thanks, Don.

Your next question comes from the line of Cali Robichautron with State Street Global Advisors. Please proceed.

Hi, thank you. Just a quick question on a clarification on your 2 billion debt target reduction by 2007. Can you give us any sort of guidance as to how much of that do you expect is going to fall? What percentage is going to fall in 2006 versus 2007?

A lot of that is going to be driven by your view of this -- this base chemical and polymer cycle. Obviously, if we experience peak economics in '06 like many believe, we'll be paying off a whole bunch of that in 2006. If -- if it doesn't materialize and we continue in the sort of profitability that we have in 2005, it will be more evenly split between 2006 and 2007.

Okay. Thank you.

Yes.

Your next question comes from the line of David Begleiter with Deutsche Bank. Please proceed.

Thank you. Good morning.

Hello, David.

Peter and Kimo, just on Q4 outlook, are you guys saying that Q4 EBITDA should be -- should be down sequentially versus Q3 EBITDA?

We haven't given that specific of guidance, David. What we are saying is -- is that -- just reminding you of seasonality, and then this -- that this hurricane impact that we have tried to quantify for you. But, you know, Peter has sort of given you directional guidance by product as to where we're seeing margin expansion, sort of in the back half of the quarter as our plants come on line.

Okay. And just, Peter, on MDI in China, given the substitution for some TDI applications, does that change your view on how long it will take to sell out your new capacity in Shanghai?

Well, the capacity that we have coming on stream in the middle part of '06, that facility will be sold out in China. We do envision that 100% of that product will be consumed within China at the time of start up. The inner part of competition that we've seen has really been quite minimal, and I don't see that having a long term effect. I think that some of the price increases, I'm not sure those are going to stick in TDI, but I'll follow that closely because we're no longer producing TDI. Some of the price increases that have been -- been put out there on TDI will certainly -- dissuade people from switching from MDI to TDI.

And last on CIO2. Would you expect to retain any of the European business once DuPont's plant comes back on line?

I would be very disappointed if we didn't. That is our home base. It's the place where we have, we believe, the greatest pricing ability to hold margins and -- and to supply our customers, and I think that it is -- DuPont obviously retrenches to their strongest markets in North America. We certainly would like to do the same in Europe, and we intend to keep what we gained at this time.

Thank you very much.

Thanks, Dave.

Your next question comes from the line of David Silver of J.P. Morgan. Please proceed.

Yes, hi. I was wondering if you could discuss the effect of inventories on your reported results in the third quarter. I guess a number of companies that were affected by the hurricane had some inventory effects in their results as a result of reduced production rates and having to be customer commitments out of inventories.

Dave, we didn't have significant inventory impacts relative to reduced production.

Most of our facilities that -- that were taken down, these are facilities that are connected via pipeline, and you know we -- we typically don't operate with a lot of inventory in these areas. If we were a large polyethylene producer in the Gulf Coast and you had a couple hundred rail cars sitting around, I could see how that could be the effect. But we -- we weren't impaired from -- from a logistical point of view with those very products that I -- I talked about just because of the nature of what we're producing in Jefferson County.

David, that was sort of an P&L sort of comment. Obviously we have seen working capital significantly change as we -- we reduced our inventories and now we're going build them up again. But that will all take place within the fourth quarter. So quarter to quarter you really won't see much effect from a cash flow standpoint in terms of inventory levels.

If I could just kind of build on Kimo's last comment, so it will be a cash flow question about your fourth quarter. But you -- you have mentioned some accelerated or increased levels of capital spending. You talked about hurricane-related repair costs, and disruptions, and -- and I do believe you are saying there will be some working capital effects. So what is -- would -- would the fourth quarter be -- should we think of that as a quarter where there's going to be a significant use of cash as opposed to a source of cash?

Well, the fourth quarter we'll see certainly a -- a source of cash as inventories came down and then a use of cash towards the end of the quarter as we build those inventories and receivables back up again. I think for the fourth quarter you should not expect to see debt reduction from cash flow, nor should you see real building of borrowings at all. It's pretty cash neutral as I see it.

Okay. Thank you.

Your next question comes from the line of Bill Young with Credit Suisse First Boston. Please proceed.

Hi, good morning. Couple things related to the urethanes -- urethane's business. We've heard, Linedel has shut down its operation, the hurricanes had an impact, and we hear there are shortages of -- of TDI. As opposed to the situation -- the arbitrage has said -- I believe it was in China,has this helped at all MDI demand? Is it likely to fall off once those TDI plants are back on stream?

Yes, Bill, nice to hear from you. I -- I don't -- I just don't see that as being a big issue. There just isn't that much overlap between TDI and MDI. I continue to believe fundamentally when you look at TDI global operating rates, you are looking at a product that's operating in the 80% capacity utilization on a global basis. True, there might be some tightnesses that occur on regional basis, but I don't see this really having much of an impact on MDI demand on a global basis. I think that where we're focusing our marketing and product development, these are areas that by and large 90-plus percent do not compete with TDI applications and we remain very bullish on MDI both in the short and the long term.

Okay. Because I was thinking a little bit of say using a higher grade foam just to have some foam out there rather than shorting your furniture industry customers or auto customers or something like that.

Right.

Secondly, to what do you attribute the -- the 6% drop, I think you said in -- in TI 02 year to date? Is it changing inventories through the customer -- downstream customer change or -- or weather or just what? You think weather would kind of even out on a global basis, or I was just wondering what your take on that was.

Yes. I wanted you to, Bill, have a 6% -- That TI 02 on a global basis --

Right.

If you look at this from a macro basis, the weather does have a tendency to even things out. I think if you look at it over a two-year basis, the previous year we had growth of about 6%. We -- we have seen a decline of almost that amount this year. I think that this fundamentally is a 2% sort of growth business per year, growing about GDP on a global basis, and I think when we saw 6% we certainly didn't think all of a sudden the industry has taken a fundamental change and was now growing at three times GDP. Last year we did see a very late start in the paint season. I think when you guys reported, rightfully so, on the performance of a number -- especially European paint companies. They reported very sluggish sales early in the year. The Easter season when most of the home do-it-yourselfers were doing a lot of these projects it was snowing in Europe. By and large, it was a seasonal problem that we hope will correct itself this next year.

Okay. Great thanks -- thanks Peter.

Thank you, Bill.

Your next question comes from the line of Gregg Goodnight with UBS. Please proceed.

Good morning, all. I would like to discuss something you eluded to about MDI in the new Chinese capacity. I would like you to walk me through a little bit of the supply and demand situation in China. My understanding is the domestic market is like half million tons, and if you add up your expansion, the Yantee Wuan Wau expansion of 160,000 tons at the beginning of the year and the DASF anticipated expansion, doesn't China become self-sufficient in MDI and what does that do to profitability?

Well, I think that by and large as you look at China, we're seeing strong double digit growth taking place in the Chinese markets. We are expecting China to over the course of the next three years, four years, will go from being a net importer to a regional exporter. And that should be expected. I think that this product coming on to the market will really be coming on to the market over a two-year period. It would be questionable to have these facilities will be able to start up and really go into the market. And bear in mind that -- that a lot of these end use applications -- what we are targeting and where we're putting our MDI versus where a Yantee or versus where a BASF, some will be growing and focused on installation, some in the OFB market, some will be in appliances, some will be in synthetic leather. These aren't necessarily pounds that just chase after all of these end use applications liberally. So, yes, there is quite a bit of tonnage coming on in China, but I think that China over the course of the next three to four years will be able to more than absorb that and we continue to see, you know, a number of -- of very large applications still really in their infancy in the Chinese market.

China right now is only about 20% sufficient -- self-sufficient in MDI and they are going to go to 100% plus is what I understand in the next two years?

Right, and -- and most of that is our capacity that we'll really currently exporting to the region. And we're tying our European an and North America markets and feel like we have a home for those pounds.

How do you see profitability of MDI in the next 12 to 24 months?

Well, I think the directional guidance we gave you, Greg, for 2006, was that it would be down, relative to 2005, but still, a very strong, very, very good year, relative to the historical earnings of this division. So we -- we're very optimistic for '06, '07. It will be very, very profitable, but not at the '05 level.

Okay. Second question, in terms of the monthly contract pricing that you're pushing for in Europe, do you think that you'll have any success in that effort this year?

I would like to think that we -- we will, Greg, but we make up less than 10% of the merchant market, and -- and -- in Europe, and yes, I'd like to think we have a loud voice but we certainly don't have a dominant voice in that market. And I'm optimistic there's a number of large producers that are pushing for monthly price settlements in Europe. We'll see. It's just too early to tell at this point.

I had heard that one of your competitors had invoiced a mid-quarter price increase and was successful in that effort. Had you gotten any information on that?

I have not heard that, but that would be encouraging.

Thank you, gentlemen.

Thank you, Greg.

Your next question comes from the line of Alok Chopra with Oppenheimer.

Good morning. Thanks for taking my questions. I have three questions. The first one regarding your EBITDA guidance, I think David touched on this earlier. Are you guiding EBITDA year-over-year down 130 million or sequentially down?

Neither. We're saying that -- that --

What is my reference point then?

It -- it will be impacted by $130 million. We were not giving that relative to year-over-year or sequential.

Okay. So it's just an absolute number.

That's right. That's the cost that we have incurred to date, and we think will be the total impact of the hurricane damage and being out of the market.

All right. Second question on your debt retirement charge. It looks like you paid down 125 million of debt in the quarter and the charge was 41 million. Why is this charge so high relative to the level of debt that you are paying down?

Most of that is capitalized loan fees for the prior bank facility that's non-cash. Those are not bond premiums. I think there was -- I think 4 million of that amount was cash.

Okay. Okay. That's helpful. And third, regarding plant closures -- now I know you were impacted by the hurricanes, et cetera, and it was a very difficult quarter for everyone, but are you all comfortable with the level of maintenance CapEx that you are doing at your plants right now? Hurricanes notwithstanding, of course, and what is the scheduled plant outages that you expect in '06?

I don't have our maintenance schedule in front of me here. I'll try to pull that up here. But I -- personally I think that if you look at our capital spend throughout even the most bleak days of 2002, we continued to spend at a -- at a maintenance rate of about $200 million, 175 to $200 million per year in our facilities, and we will continue to do this and if, there is nothing more important than the safety of our associates and the proper maintenance of our facilities. So no, I believe that we're spending exactly what we should be spending to maintain and to keep our facilities not just compliant but making sure that we're better than compliant with the law.

Okay.

Alok, as we think about turn arounds in '06, we have U.S. and European MDI turnarounds scheduled for the second and third quarter of '06, but those units usually have an annual turnaround anyway. So it's not a significant sort of year to year comparison yet.

And aside from that we -- we don't have any of our major ethylene facilities that are coming down, our PO facility is coming up, MTV facility, our larger facilities, our aromatics facility. You know, we have got these smaller annual, typically the most specialized your processes are, the more often you have to take them down, but we find that in '06 we really don't have anything major that's scheduled.

Okay. Thank you very much.

Your next question comes from the line of Marianna Karshner with Nomura Asset Management. Please proceed.

Hi, I have a few questions regarding the polyurethane business. First of all, could you break out the EBITDA contribution in the polyurethane segment by main products in third quarter just -- you know, at least MDI, MTB, PO, some of the main ones.

We haven't broken that out in the past in terms of MDI, poly O's and so forth.

Okay. All right. Then regarding MDI outlook, could you give us a few more facts, where the effective operating rates are currently, what you expect them to be in '06, '07; and capacity growth, what -- versus demand growth that you are expecting?

Well if you take a typical -- if you take a typical growth rate that we have seen on average over the course of the last 10 to 12 years, which is an about an 8 -- 7 to 8% per annum growth rate, and if you assume that everybody that is supposed to start up has a flawless start up, which again is very, very rare in MDI, you are looking at operating rates this past year -- we're operating at about 103 to 104%. Today we're operating probably in the high 90% capacity utilization, assuming that everybody comes up at the -- assuming everybody comes up when they are supposed to, we'll probably be down about 91, 92% capacity utilization as an industry on a global basis. Again, if everybody starts up at exactly the right time. The capacity they have outlined. We do not see this on a global basis going below 90%. Typically your threshold in this industry is around 90%, as to where pricing power -- being either on the buyer or the seller side.

So your guidance for the lower profitability from -- I guess MDI, is -- is it because pricing power will be softer?

We're not guiding you to significantly lower earnings. We're just saying it will be lower largely because we won't be in a sold-out mode, as Peter indicated, over 100% or near 100%. It will come back down into the -- the 90s, in the mid-90s, and we think that will mean that margins will be just up a bit.

Okay.

Now bear in mind when you talk about, you know, when the industries get hit on lower prices, typically in petrochemicals, it's not the start-up of the facility that hurts you. It's the pre-marketing. Today people are out pre-marketing that material that will be coming on line in the middle of '06. So typically, when we talk about pricing pressure, we're seeing that today. And we talked about the lower MDI margins. To some degree, that has been, that's already being factored into our pricing today. So you know, I don't see in the middle of '06 when we start up all of a sudden you see a big fall off in pricing and margins at that time because a new plant entered the market. The deals are being cut today for those -- for those pounds.

I'm sorry. Did you mention that you actually were raising your prices in MDI?

That's right.

So how does that go along with pricing pressure that you are seeing?

Well it's telling you that raw material prices are going up, demand continues to go up, and you know, this -- this continues to be a very strong product so, yes, we are seeing people out there trying to market and -- including us, trying to market and place those new pounds that will be coming on later in the year. Yet demand seems to continue to be very strong. So as I look at it right now today, we're very optimistic of the pricing announcements that we have in the market. MDI, I think is in October is under very strong demand, and we're -- we remain on the short-term and long term very bullish on this product.

Okay. Thank you.

Your next question comes from the line of Paul Arvooin with Lehman Brothers. Please proceed.

Yes, hi. With respect to the EBITDA losses in Q3 and what you are expecting in Q4, as a result of the hurricanes, are these covered by business interruption insurance?

We have 60 days of business interruption deductible. So we're not going to hit any of those business interruption. It's the property damage that we think we have claims under, which we said is probably going to be around $20 million.

Okay. Thanks.

Yes.

Your next question comes from the line of P.J. Juvekar with Citigroup. Please proceed.

Hi, this is actually Laura Mancinelli in for PJ.

Hello.

Just a quick question on Advanced Materials. You talked about portfolio realignment going on over the course of the quarter, and just wondered if you could elaborate a little bit on this and whether you expect it to contribute to any additional volume declines in the fourth quarter?

As we look at our overall marketing, when we talked about restructuring that business, we believe that we are not a competitive producer for many of the base rates of epoxy products. Thus, we have elected to put our capital and our talent behind more specialty oriented applications in our epoxy businesses. So as you look at our sales growth, it's somewhat lumpy because you don't see the sales -- you see a decline in demand because we have exited certain base epoxy products -- basic epoxy product applications, and yet at the same time we have expanded more aggressively than the previous owners did in the business on many of the downstream applications. So I'm not sure that looking at the sales growth right now in that business is a real indicator as to what the core of that business is doing. We believe that this business should be growing at anywhere from 5 to 8% per annum on -- its overall demand and we will continue to diversify the customer base and our portfolio in that business.

Okay. And then is there any sense of timing on when you expect to have that kind of stable levels as far as the product mix?

Oh, I think that those product mixes, we would hope within the next six to nine months. I think that we have the marketing team, sales teams and so forth, in place today. We feel that we're done on that standpoint, but as far as the penetration into the markets that we would like to see, it will be taking place in the coming quarter too.

Okay. Thank you.

Your next question comes from the line of Duncan Late with ABN Bromwell.

Yes, hi, there. Just a very quick question. With regard to the polyethylene plant you guys are building in the UK, just wanting to get an idea, of you know, the capacity, the percentage of capacity, that will be generating in -- in the UK or Europe, really the size of that?

That's a 400,000 metric ton facility, 880 million pound facility for those of you in North America. This will be the largest single low density polyethylene plant in the world. The lowest cost polyethylene plant in the world. And as a percentage of the overall European market, what that represents, I'm not sure. I don't have that number in front of me.

Finally on the olefins business just sticking to Europe, were you saying -- can you just try to spit it out in sort of monthly terms? You know, how the margins were? I think to remember you said they might have been a little bit weak in the third quarter and just maybe improving in the fourth quarter. Any more color on that?

I wouldn't say that they were weak in the third quarter. I would say they were disastrous in the third quarter. We had record high Napta prices in the third quarter and we had one of the largest fall-offs in ethylene from second to third quarter. So the combination obviously are not repeating themselves in the fourth quarter where we have seen Napta prices fall and where we have seen ethylene settlement prices the highest they have ever been. I just think it's too early to tell. We've locked in about 20% of our Napta t pricing for the European market. If Napta prices continue to fall, obviously I would get more and more bullish on the performance for the quarter. We think that they'll continue to be downward pressure on Napta prices, and we'll probably be locking in a little bit more as prices continue to fall, but certainly fourth quarter will be an improvement over third quarter.

Okay. Great. Thanks. Cheers.

Operator, we'll take one more question here.

Your last question comes from the line of Bill Young with Credit Suisse First Boston. Please proceed.

Thanks. This is a real quick one. In looking over your press release, I think you gave price and volume data for all of the segments except the polyurethanes where just data on MDI. Do you have the price and volume for the segment as a whole?

You know, Bill, I think the driver here in terms of profitability is MDI. I think I gave you polyols and everything else it would just be.

It would just be what?

The outage. Those volume numbers for the balance of the business are likely to be down but again that's related to the outages.

Right. Right.

But if you throw polyols in and everything else, I think that's just noise, Bill.

Okay. Thanks.

Operator, thank you very much. And all of you that are listening in on the call, thank you very much for taking the time to join us at this time.

Ladies and gentlemen, this ends your presentation for today. You may now all disconnect. Enjoy your day.