利安德巴塞爾 (LYB) 2002 Q1 法說會逐字稿

At this time I would like to welcome everyone to the Millennium Chemical First Quarter 2002 Earnings Release Conference call. All lines have been placed on mute to prevent any background noise and after the speakers remarks there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Mr. Foster, you may begin your conference.

Good morning and thank you for participating in Millennium Chemical's Analyst Conference Call and welcome to all those participants on the Internet. Today we will cover results from the first quarter and our outlook.

Speakers include Jack Lushefski, our Senior Vice President and Chief Financial Officer and myself, Mickey Foster, Vice President of Corporate Investor Relations.

As we announced in the invitation to this conference call, you an view the slides and listen to our presentation live by accessing our website, www.MilleniumChem.Com, and clicking on the investor relations icon. The slides available to our Internet participants are meant as enhancement tool and they contain information which is either in our press release or which we will discuss during this presentation.

Here are two instructions for our Internet participants. First, in addition to asking questions on the conference call as you have traditionally done, you can ask questions by click on the thin question button located on the left hand portion of your screen and we will respond to them live during the question and answer portion of this conference call.

Second, the slides will automatically move forward during the presentation on your screen.

Before we start, our lawyers asked me to preface with a safe harbor legal statement. The statements made on this conference call relating to matters that are not historical facts, are forward looking statements. Are forward looking statements are present expectations and actual events and results may different materially due to the impact of factors such as industry cyclicality, general economic conditions, production capacity, competitive products and prices and other risks and uncertainties detailed in the company's SEC filing.

Please note we disclaim any obligation to update our forward looking statements.

Jack will begin and cover the financials. Next I will cover Titanium Dioxide, Acetyls, specialty chemicals and then Equistar. Then we will be glad to answer your questions. Jack.

Thanks, Mickey. I would like to review some details of Millennium's reported results for the first quarter and our financial position at the end of March. Millennium reported pro forma EBITDA of $34 million for the first quarter of 2002, which was $43 million less than the $77 million reported for the first quarter of 2001 and $3 million less than reported for the fourth quarter of 2001. EBITDA was equal to or lower than first quarter levels last year for all of our business segments, including Equistar. Comparisons of the first quarter of 2002 EBITDA to fourth quarter 2001 levels were slightly favorable for all our wholly owned segments, but lower for our share of Equistar. For our wholly owned business segments in the aggregate, this was the first quarterly sequential improvement in EBITDA since the last quarter of 2000. Mickey will discuss individual business segment performance when I complete my comments. Moving to Millennium's financial summary for the quarter, the financial summary slide provides abbreviated income statements to arrive at normalized earnings, which exclude certain unusual items. Operating income was $11 million, down considerably from the first quarter of last year when $30 million was earned, but better than the fourth quarter of 2001 when we broke even at the operating income line. First quarter net interest expense was $21 million, equal to the first quarter of 2001 and down $1 million from the expense level for the fourth quarter of 2001. Average net debt levels during the first quarter this year were the same as average net debt levels during the first quarter of last year. Equistar's operations on an after interest basis generated a loss of $39 million for Millennium in the first quarter of 2002 compared to a loss of $18 million in the first quarter of 2001 and $29 million for the fourth quarter of last year. The net loss for the quarter was $31 million or 49 cents per share versus a net loss of $7 million or 11 cents per share for the first quarter of last year.

The net loss for the first quarter of 2002 on this slide excludes our write off of goodwill reported as the cumulative effect of an accounting change.

The net loss in quarter one last year of $7 million excludes reorganization and plant closure charges recorded in the first quarter of last year of $8 million net of tax benefit.

Moving to slide 5, this slide provides you with a reconciliation from our reported net loss to the normalized figures I have provided and discussed on the previous slide. You can see that our goodwill write off is the only unusual item in the first quarter of this year. Moving to a discussion of our balance sheet and cash flow, net debt at the end of the quarter as shown on slide 6 is $1.12 billion, a balance that is $49 million higher than our net debt balance at the beginning of the quarter.

Equity had been reduced during the quarter, due to our net loss and one time write off of goodwill. Our net debt total capital percentage is 67% at the end of the quarter, up about 12 percentage points from the end of 2001, due primarily to the change in accounting for goodwill.

We were in compliance with the covenants in our credit agreement at the end of the first quarter. Turning to our cash flow summary on slide 7, cash used for capital spending remained at a very low rate as we continued to defer all but the most critical or short payback discretionary projects. Operating working capital defined as accounts receivable plus inventory less accounts payable increased during the quarter and was a use of $55 million in cash. Accounts receivable decreased during the quarter, as we completed a European accounts receivables securitization program near the end of the quarter which provided $43 million used to repay borrowings under revolving credit facility. Absent that transaction, accounts receivable would have increased by about $40 million as volumes improved in all businesses and the very depressed sales levels in the latter part of last year. We were successful with our efforts to reduce inventory and that reduction provided cash. Trade payables declined due to our inventory reduction, low levels of capital spending and seasonal purchasing patterns. The use of cash for other assets and liabilities also relates to the timing of payments for such items as insurance, payroll related costs and raw materials. We did not receive a distribution from Equistar during the quarter and net debt increased overall by $49 million. Distributions from Equistar are not expected in 2002.

Turning to slide 8, we are very pleased with our employees efforts to control SDNA costs. These costs in quarter one at 47% lower than the first quarter of 2001, and as you can see from the graph, our spending levels for the first quarter of this year are considerably less than spending levels for the two year history presented.

In closing, with this challenging business environment persisting, our employees are focusing on cost control and capital efficiency as a high priority. All of our intense efforts will continue and are part of our business plan through the remainder of this year. Now, I will turn it over to Mickey, who will discuss some details about performance in our business segments and at Equistar. Mickey.

Thanks, Jack. The Titanium Dioxide segments reported first quarter EBITDA of $30 million compared to $49 million in the first quarter last year and similar to the $28 million reported in the fourth quarter of 2001.

Turning to the next slide, it shows our global index 2002 prices in volumes. In U.S. dollar terms, the worldwide average first quarter price shown in the red line was down 16% from the same quarter of last year and down 6% from last year's fourth quarter. In local currencies, average first quarter prices were 14% lower than last year's first quarter and down 6% from the prior quarter

Price increases have been announced by Millennium and most major producers effective March 1, 2002. Millennium's global price increases which range from 5 to 8% were announced in order to begin the restoration of margins that have become unacceptably poor after more than a year of excessive price decreases in all global market regions. Successful implementation of these increases is depending upon the continuation of the pattern of increases in customer demand experienced in the first quarter.

Contracts with Millennium's large volume Titanium Dioxide customers include periods of price protection. Therefore, the benefits of such price increases may not be fully realized by Millennium until the third quarter. First quarter Ti02 sales volumes, the yellow line, of 151,000 metric tons was down 3% from the first quarter of last year and up 15% from last year's depressed fourth quarter levels. First quarter sales volume declined 3% from the first quarter of last year, primarily due to more selective sales of U.S. paper markets following the indefinite idling of the sulfate process manufacturing facility at Hawkins Point, Maryland at the end of the third quarter last year.

Volumes were up sequentially in the three months of the first quarter of 2002, partially due to customer restocking and buying ahead of the price increases. In addition, April sales volumes continued strong with liquidation of inventories.

Now, looking at operating rates, the first quarter's Ti01 operating rate was 80% of the annual nameplate capacity of 690,000 metric tons compared to 88% of annual nameplate capacity of 712,000 metric tons in last year's first quarter and 82% of annual nameplate capacity of 690,000 metric tons in last year's fourth quarter.

Looking at manufacturing costs, manufacturing costs per ton in the first quarter of 2002 was down 10% from last year's first quarter and down 2% from last year's fourth quarter. Now, looking at our outlook for Titanium Dioxide, earnings should improve slightly in the second quarter over the first quarter, as sales volume should increases seasonally due to North American and European's coatings season and global Ti02 price increases should be gradual realized.

Now turning to our Acetyls. The Acetyls segment reported first quarter EBITDA of $4 million loss compared to $2 million in the first quarter last year and $7 million loss in last year's fourth quarter. The fist quarter results were negatively impacted by 47 million due to unfavorable fixed price natural gas purchase positions. These positions expired in March of 2002.

VAM prices in the first quarter were down 35 percent compared to the first quarter last year and down 8 percent from last year's fourth quarter due to cost based price reductions and weak global economic conditions. Acetic acid prices in the first quarter decreased 31 percent from the comparable period last year and were down 8 percent from last year's fourth quarter, for similar reasons.

Now, looking at our outlook for Acetyls. Acetyls profitability should improve in the second quarter over the first quarter with the absence of higher cost fixed price natural gas purchase positions and expected moderate improvement in sales volume. In mid-March, all major Acetyls producers announced price increases for both VAM and acetic acids, effective April 1, 2002, citing rising feedstock costs and unacceptable margins. In North America, price increases of 2 cents per pound for VAM and acetic acid were announced. In Europe 50 Euros per metric ton for VAM and in Asia 50 dollars per metric ton for VAM were announced. In addition to these April 1 price increases, yesterday Acetyls announced another price increase for VAM of 60 Euros per metric ton in Europe, $50 per metric ton in Asia and in Latin America, effective May 1. Now, turning to the special chemical segment. The specialty chemical segment reported first quarter EBITDA of $6 million, which was flat with the first quarter of last year, and an improvement over the $3 million reported in last year's fourth quarter. Sales volume was down 22% from last year's first quarter and up seasonally 4% from last year's fourth quarter. Average selling prices increased 19% compared to last year's first quarter and increased 18% from last year's fourth quarter. The improved overall product mix in the first quarter of 2002 contributed to the higher average sales price. The price of crude sulfate turpentine, the key raw material, remained unchanged from last year's first quarter and fourth quarter.

Now, looking at our specialty chemical's outlook, the second quarter of 2002 results should be comparable to the first quarter of 2002. The market for fragrance chemicals has improved but remains competitive. New product development efforts continue, with a new coolant and new flavor chemical launched in the first quarter.

Now looking at Equistar. Millennium's 29½% stake in Equistar generated a first quarter post interest equity loss of $39 million compared to $24 million of equity loss in the first quarter of last year and a $29 million equity loss in last year's fourth quarter. Compared to the fourth quarter of 2001, sales volumes for olefins increased 7 percent in the first quarter of 2002 due to improved demand following aggressive industry inventory reductions that characterized the fourth quarter of 2001. However, the benefits of increased demand were offset by a significant reduction in ethylene margins. During the first quarter of 2002, ethylene prices declined in an environment of rising feedstock and energy costs. In addition, certain fixed price natural gas and natural gas liquid supply contracts, which were entered into in early 2001, resulted in costs that were approximately $33 million higher than market based contracts would have been for the same period. Compared to the fourth quarter of 2001, the polymers business benefited from improved margins and falling ethylene prices more than offset lowered polyethylene prices. The polymers also benefited from volume improvements of 3% in the quarter.

Looking at Equistar's outlook, most of the fixed price natural gas contracts expired in the first quarter of 2002. Prices for most of Equistar's products are expected to improve in the second quarter but feedstock costs remained volatile.

April orders suggest U.S. demand is running ahead of the historical seasonal increase usually expected for these markets. It is too early to determine whether the increased volume is resulting from fundamental demand or inventory rebuilding ahead of price market increases.

So, with that, we will now open it up for questions.

At this time I would like to remind everyone in order to ask a question please press star and then the number one on your telephone keypad. We will pause just a moment to compile the Q&A roster.

The first question comes from the lien of Sergey Vasnetzof of Lehman Bros.

Good morning. Mickey, I want you to comment on the specialty chemicals outlook beyond second quarter, how do you see this market recovering in 01 - 03? I understand the overcapacity, when do you expect this to be over?

Well, I think, you know, it clearly hit bottom probably last year. We actually have increased prices and the volumes are looking pretty good too.

As you know, seasonally in this business the first and second quarters tend to be probably a little bit better than the latter part of the year, but things really look good. We introduced some new products there and everything and you saw that we have some pretty good numbers in the first quarter. So, I think that trend will probably continue this year and next.

And on Ti01, I want to ask you if you have seen some delays in incremental capacity additions given the current level of Ti02 prices.

Yes, if anything, people have closed or shut down some production. I mean, we have definitely idled, you know, Hawkins Point last year. Herb McGee has shut down for capacity. At these price levels, you know, thee is no one adding really anything substantial to capacity at all. And, you know, so it is looking pretty good as far as no major capacity additions in this environment.

Okay, thank you.

The next question comes from the line of P. J. Hoovercar of Solomon Smith Barney.

Good morning. You know, your sales volume went up sequentially in Ti02, but operating rates went down. It looks like you brought your inventories down, which I remember were quite high at the end of the fourth quarter. Now, can you talk qualitatively about where the inventories are in terms of days of sales?

Just if I may interrupt you. At the end of fourth quarter, those inventories were close to 60 days if I remember it right.

Actually, in December they were closer to 80 for the industry, for the month of December. And that, of course, has to do with the projections of sales and so forth. But I think the main point is, you know, inventories have come down, you know, substantially in both the U.S. and Europe, you know, during the course of the first quarter.

Additionally, I think our expectation is that that should continue. Our finished good inventories in the first quarter were down by 11% and we sold quite a bit more than we produced in April. So, we are going to have another drop, you know, at the end of this month and our expectation is that we are probably in line with industry trends.

So, we think the producer inventory issue has certainly turned and changed quite a bit over the last few months or so.

And that's what has really pushed out the pricing cycle, because inventories are coming down?

Well, the inventories were high, you know, high historically and it is difficult to get price increases when the inventories are high. But we think again that environment has changed and we have a better environment today than we did two months ago for price increases.

And, lastly, can you give us an update on your nano particle technology that you have talked about earlier, are you seeing any progress there?

I can tell you a little bit. We've got, you know, many start up projects in, you know, growth and development and our performance chemicals where we will use, you know, acquired or developed technology in a number of areas, small particle nano technology, capacity optical areas. You know, we are progressing these projects and will continue to do so over the next several months. But, you know, most of them are longer term projects and in a lot of cases involve, you know, alliances with other companies.

So, I believe the benefits there are primarily going to be in 2003 and beyond PJ, but I have to say we are progressing some things very nicely in that area.

Okay, thank you.

Your next question comes from the line of John Roberts of Buckingham Research.

Good morning, guys.

Hi, John.

I know you talked to Lyondell all the time about the operators of Equistar, but have you concluded all discussions around the Oxy transaction and any other options you might have with Lyondell?

John I can say a few things about that. You know as indicated LYO's, Lyondell's press release last week, you know, we did receive a letter from Oxy, you know, two weeks ago and, you know, that letter included, you know draft documents related to the transactions. And we are, you know, in the process of reviewing and evaluating the letter and the document, and our rights under the partnership agreement. And, unfortunately, that's all we can say about that issue at this time.

As a follow up, how sustainable is the $23 million SGNA that you had in the quarter, that's a new low, I think?

It is a new low and I would say a more sustainable, you know, run rate is in the $25 to $30 million range.

Thank you.

Because due to the low profitability, you know, we don't have, you know, incentive columns to have things in there.

Thank you.

Your next question comes from the line of Bob Rices of Bear Sterns.

Yes, hi. I got a couple lf questions, one the inventory question, I think has been answered, but it sounds to me you can comment on it real quickly, that inventories are definitely in better shape then they were at the end of the fourth quarter, is that correct?

That's correct.

And the second thing is that in terms of your fragrance business, strategically is that, how would you define your fragrance business strategically and you know what I am driving at?

Well, strategically, you know, we like the business. You know, the margins are very good, they are improving, they are higher than any other products we have. We are working on developing some new products in the flavor area and some coolants and some other things that we are doing. That percentage of the business is becoming greater as a percentage as a whole.

So, we feel that we can, you know, grow profits in that business from where they were at the end of last year, you know, considerably and we are working hard to do that.

And the last question is, Berman Hoss [phonetic], on their conference call was talking about VAM being pretty pricey, at least getting up there. Does that mean that we are going to start seeing some better returns - that portion of your business and that will turn to black in the second quarter?

Well, clearly in the second quarter we will benefit from, we had, you know, fixed positions for natural gas.

Right.

The first quarter which were as we indicated, you know $7 million unfavorably, you know, that goes away in quarter.

In Quarter 2, you know, we do have price increases out there where we expect to get, you know, the majority of the price increases. The industry is talking about, you know, further price increases, you know, what we are battling now, of course, is, you know, still natural gas costs are relatively high and, you know, ethylene costs are going up. So, the costs are going up and we need, the four cents on ethylene that was recently announced as a multi-month settlement, you know, costs us about a cent and a half, you know, a pound on VAM. So, we need to get a price increase.

But I mean, Berman Hoss [phonetic], claim they are getting a price increase, they are getting the gas thing off. Wouldn't you expect that would be in the back in the next quarter based on that?

Yes.

Okay, thanks.

Again, if anyone would like to ask a question, simply press star and the number one on your telephone keypad.

Your next question comes from the line of Greg Goodnight of UBS Warbird.

Good morning, gentlemen.

Hi, Greg.

A couple of questions. The Ti01 price increase I understood was announced for March 1st and the implication there is that you said that some of the price increases aren't going to be seen until the third quarter, and that appears to be at least a 90 day protection period. Is that typical?

Yes, our larger customers have 90 days of price protection.

Okay, would you comment on the price increase itself. I believe you announced a nickel a pound. Is it all going through or where does that stand?

Well, we have billed our smaller customers beginning in March and we will continue to do that. I mean, we will wait and see whether or not what happens with our larger customers, right now we are billing the smaller and medium sized customers.

So, so far the industry increase looks pretty firm?

Yes, I mean, we think we have a strong commitment from producers, you know prices are up in certain regions of the world where they generally go up first, you know, namely Asia, you know, in the Middle East.

We have billed certain smaller customers, the increases and we are continuing to do that. And we expect, you know, to gradually get the lion's share of the increases worldwide.

The next question on Ti02, the volumes have been reported by other companies in terms of coatings and pigment requirements is continuing to be pretty strong. What do you look for going forward in the next quarter and beyond?

Well, we are definitely having a coating season, you know, in the U.S. and in Asia. Europe is a little bit slow, but we think Europe is slightly behind the U.S. in terms of end use recovery, but we see that coming, you know, n the next couple of months. So, we think our coatings business will be, you know, very good over the next few months.

And, as a matter of fact, plastics is even better. We have had the best quarter we've ever had in plastics, the first quarter of this year. And we expect that to continue. Our downfall, of course, is the paper industry and, you know, we gave up some share in the paper industry after closing our Hawkins Point Sulfate facility last year, so our numbers are down in that area.

Any guess as to what your operating rate is going to be in the second quarter.

They will be between 80 and 85%. You know, we are going to essentially produce to demand in the last two months of the second quarter.

One final question if I can, the other income and other revenue that you are reporting now in your results. Can you typify that and also is that other income of what, I think it was $4 million is that going to be steady now?

No, it is not going to be steady. We have a few things in there. We have reclassified profit that we make from our Hilmenike mine in South America, profit that we make outside of the Ti02 business and we sell some other minerals there. We have now taken the gross margin from that mine and does not relate to Ti02 and recorded that margin in that line. We also have some pension income in there and we have pension income every year as opposed to expense and that income doesn't relate to our business units and some of it does not, we record it in that category.

We record our corporate expenses there and then we bill out the business units, some elements of those corporate expenses. So depending on the timing of those expenses, you know you may see some profit in that line item for those issues.

But essentially, no, I think that number is a little higher this quarter for a number of reasons, and I see it moving down more to the $1 million, $2 million a quarter, you know, level at this point, unless we have something special in there and we would let you know bout that.

Okay, thank you, very much.

Your next question comes from the line of Rosanna Lee of Claiborne Capital.

You mentioned that you were in compliance with your bank covenants at the end of the quarter. Could you give a little more detail as to whether or not there will be an issue going forward if you expect compliance to be an issue, essentially not be an issue and secondly, can you give an update on your availability on your (unintelligible).

Sure, I will take the first one. You know, we were in compliance with the covenants at the end of the first quarter. You know, given the covenant levels and the pace of our business recovery, you know, we think the covenants certainly at the end of the second quarter, probably the end of the third quarter are going to be challenging, but, you know, we have a business plan in place to make the numbers.

Our revolver, we were out $30 million of the $175 million revolver at the end of the quarter, and that's where we stand today.

When you say that meeting the covenants will be challenging, do you expect the need to renegotiate with your banks, or is that not an issue right now?

Well, as I said, we have a business plan that suggests we are going to make the covenants and, you know, we are working on executing the business plan and, you know, at the point and time we have reviewed this, you know, weekly, monthly and at the point in time that we don't see us being able to make the business plan, you know, we will go to th4 banks and we will make some announcement.

But, right now, we have a plan and we plan on executing it.

Thank you.

At this time, Mr. Foster, there are no further comments. Do you have any closing remarks?

No, but if you were unable to hear the entire call, playback will be available until Friday, May 3, by calling 706-645-9291, reservation number 3782913. And you can access the speech and slides on the Internet at MillenniumChem.Com. Thanks for listening. If you have any further questions, please call. Thank you.

This concludes this morning's conference call. Thank you for participating, you may now disconnect.