利安德巴塞爾 (LYB) 2002 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to your Millennium Chemicals fourth quarter and year earnings teleconference. At this time, all parties have been placed in a listen only mode. The floor will be open for questions and comments follows presentation. I will now turn the floor over to Mickey Foster (ph). Sir the floor is yours.

Good afternoon and thank you for participating in Millennium Chemicals analyst conference call and welcome to those participants on the internet. Today, we will cover results for the fourth quarter and year end 2002 and our outlook. Speakers include Bill Landie, Chairman and Chief Executive Officer, Jack Lushefski (ph), our Senior Vice President and Chief Financial Officer and myself, Mickey Foster, Vice President of Corporate Investor Relations. As we announced in this invitation to this conference call, you can view the slides and listen to our presentation live by accessing our website at www.millenniumchem.com and clicking on the investor relations icon. Slides available are meant as an enhancement tool and they contain information either in our press release or that 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 on the send question button located in the left-hand portion of your screen and we will respond to them live during the Q&A pours of this conference call. Second, you will automatically move forward during the presentation on your screen. Before we start, our lawyer has asked me to preface with the Safe Harbor Provision. These statements made on this conference call relating to matters that are not historical facts are forward-looking statements. Our forward-looking statements are presented expectations and actual events and results may differ materially due to the impact of factors such as (inaudible), competitive products and prices and other risks and uncertainties detailed in the company's SEC filings. Please note we disclaim any obligations to update forward-looking statements. Jack will begin and cover the financials. I'll cover TR 2, Equistar. Next Bill in the strategy and outlook. Then we'll be glad to answer questions. Jack?

Thanks, Mickey. I will now like to briefly review the fourth quarter results, cash flow and debt profile at the end of the 2002. Let's begin with Millennium's financial summary for the fourth quarter and full year 2002. This slide provides abbreviated statements of operations to arrive at normalized earnings after adjustment for accounting methods or accounting principle changes and unusual nonrecurring items. Because those adjustments --because those adjustments to the figures on the slide do not agree to our statement of operation reported in table one of our press release, I will provide a reconciliation of earnings and EPS on the next two slides which also appear in table 5 of our press release. Starting with operating profit. Operating profit of 25 million for the fourth quarter of 2002 was significantly improved versus a loss of 1 million for the fourth quarter of 2001. Normalized operating prospects for the full year 2002 was about equal to 2001. Interest expense for the fourth quarter of 2002 was flat with the same quarter of 2001, slightly up for the full year due to higher rates on long-term debt. Average net debt levels during 2002 were roughly the same as 2001.

Our equity loss for our share of Equistar was higher for the first quarter of 2002 and also higher for the full year 2002 versus the same periods in 2001. The income tax benefit we provided for the full year was about 58 percent. 8 percent higher than the rate we projected at the end of the third quarter of 2002. Millennium's normalized net loss for the fourth quarter of 2002 was 14 million or roughly half of the 31 million dollar loss experienced in the fourth quarter of 2001. Our normalized net loss for all of 2002 was about 41 million versus a loss of about 38 million in 2001. Moving to slide 4, this slide provides reconciliation from our reported fourth quarter 2002 and 2001 figures to the normalized figures I provided and discussed on the previous slide. First adjustment here relates to our change in accounting for U.S. TI2 inventory from LIFO to FIFO which required a restatement of fourth quarter 2001 to present on the same basis. This change was made in part to achieve a better matching of revenues and expenses. Net income in quarter four of 2001 was reduced by $2 million for that change in inventory valuation method. Next we have factored out income tax accrual adjustments in both periods that do not relate to profits or losses in these periods since the accrual adjustments related to favorable developments for matters reserved in the past. We also eliminated the effect of good will amortization in quarter four of one as accounting principles in 2002 no longer require similar amortization. After these aggregate adjustments, our normalized loss is 14 million in the fourth quarter of 2002 versus a little more than double that in 2001 at 31 million. The next slide goes through the same exercise for full year 2002 and 2001, factoring out the effect of the accounting principle changes for LIFO and good will as well as tax accrual adjustments and plant closure charges in 2001.

Let's move to a discussion of our balance sheet and cash flow starting with an abbreviated cash flow summary for the fourth quarter and full year 2002. Our cash interest payments are weighted more heavily in the second and fourth quarters of the year. As you can see on the slide about half of our (inaudible) interest expense 44 million was paid during the fourth quarter of 2002. Capital spending was 28 million for the quarter and 71 million for the year. I will discuss these spending levels in more detail on the next slide. We did a good job with trade working capital during the year and it contributed 33 million cash to the quarter and 22 million for the year. Positive effect from the sale of accounts receivable during the year more than offset the use of working capital due to improved volumes and prices in our TO 2 and acetyl segments. Working capital includes trade receivables inventory and trade accounts payable. Dividends were about 9 million for the quarter and 35 million for the year. Long-term liability payments of 6 million in the quarter and 19 million for the year related to the payment of legal environmental insurance and other legacy type liabilities. Movement in other assets liabilities catches all the cash activity related to accrued expenses, prepaids, other assets et cetera. Increase in net debt for the quarter was 7 million and for the year 30 million. Moving to the next slide, we worked very hard in controlling capital expenditures during 2002 without courage -- safety and environmental issues and finish at a spending level of 71 million. Quite a bit lower than our trailing three year average at the beginning of 2002 which was more than 100 million annually. In 2003, we will continue to be very selective, proving projects and expect spending to be in the range of 60 to 70 million this year.

Turning to some of Millennium's debt statistics, EBITDA was 195 million for the year and net interest constituency was 6 million. EBITDA interest coverage was 3.3 times and our leverage ratio was 5.7 times both improved significantly in the last quarter. Ratios are well within the limit limits of the covenants included in our debt agreements. The restricted payment basket as discussed more technically and thoroughly in our press release is expected to be about 43 million after taking into consideration the 8.6 million dividend (ph) declared for payment in the first quarter of 2003 and the filing of the company's annual report on form 10K for 2002. This represents more than a full year of dividend payments at the current annual rate. Next slide. Net debt, at the end of the last three calendar years has been relatively stable even that company has report losses and business conditions have been extremely difficult. We had 125 million of cash on hand at the end of the 2002. And had only 10 million of borrowings outstanding under our 175 million revolving credit fast. As Bill will discuss further, it is an important goal of the management team to reduce debt and improve our credit statistics. We plan on working hard to achieve debt reduction in 2003 and expect that debt will decline in the second half of the year with or without distributions from Equistar. As you can see from the next slide, the maturities of our companies debt are minimal during the next three years and will allow us to operate comfortably without refinancing risk as both our wholly owned businesses and Equistar's profitability from cash flow improves. Now I'll turn it over to Mickey who will discuss some details about our business segments and Equistar. Thank you.

Thanks, Jack. The titanium - side segment reported fourth quarter 2002 EBITDA of 39 million compared to 26 million in the fourth quarter of the previous year in seasonally down from 42 million in the third quarter of 2002. Turning to the next slide, operating income for TIO 2 in 2002 was 63 million, down 9 million from 2001. Manufacturing and functional costs were cut by 62 million dollars in 2002 compared to 2001. Offsetting most of the TIO 2 price decline that occurred during the year of 83 million dollars. Turning to the next slide. Looking at prices, in local currencies, average fourth quarter TIO 2 prices were up 1 percent from the previous year's fourth quarter and up 4 percent from the third quarter of 2002. In U.S. dollar term, the world wide average fourth quarter price was up 4 percent from both the fourth quarter of the previous year and the third quarter of 2002. TIO 2 prices declined sharply and hit a low in the first quarter of 2002 partially do you to exchange rates. TIO 2 prices are recovering but current prices remain below reinvestment levels and pricing increase rebounds as you can see from the chart can be steep and a quick. A majority of the two TIO 2 price increase announcements have been implemented. Price increases were announced effective in the first quarter of 2003.

Now looking at volume, fourth quarter TIO 2 sales volume of 142,000 metric tons increased 8 percent from the fourth quarter of the previous year and seasonally decreased 12 percent from the third quarter of 2002. Full year 2002 sales volumes of 627,000 metric tons was 6 percent higher than sales volumes for the full year 2001. Now (inaudible) operating rates, the fourth quarter TIO 2 plant production operating rate was 96 percent of annual main plate capacity of 196,000 metric tons. This represented an increase of 83 percent over the previous year's fourth quarter and higher than the operating rate in the third quarter of 2002. Looking at our outlook for titanium dioxide. Sales volume in the first quarter of 2002 in TIO 2 is anticipated tab comparable to the fourth quarter of 2002 in line with seasonal demand trends. Previously announced price increases are gradually being obtain and are expected to result in better average pricing and profits ability. Pricing remains well below reinvestment levels and we continue to focus on cost control, finished good inventories began 2003 at 10 percent below January 1, 2002 levels. Operating rates are -- mid 90s and we're building inventory for the coating season. Now turn to acetyls. The acetyls segment reported fourth quarter 2002 EBITDA (ph) of 11 million up from a loss of 7 million in the fourth quarter of the previous year and slightly down from the 12 million earned in the third quarter of 2002. Acetyl prices in the fourth quarter of 2002 increased 26 percent up about 12 percent if you exclude methanol from the prices in the fourth quarter of the previous year and increased 5 percent from the third quarter of 2002. Acetyl's volume in the fourth quarter increased 23 percent from the comparable period of last year and increased 8 percent from the third quarter of 2002. These price and volume increases from the third to the fourth quarter of 2002 nearly offset cost increases related to increased natural gas prices during the quarter.

This next chart shows the acetyls price increase announced in 2002 and in January of 2003 and even yesterday are effective February 14, 2002. Of course the majority of these increase in the past have been already implemented. Now looking at our outlook. Similar results in acetyls are expected in the first quarter of 20032003 when compared to the fourth quarter of 2002 assuming higher natural gas and Ethelene costs are offset by favorable pricing. Price increase continue to be implemented while acetyls volumes remain strong. Now turning to the specialties, chemicals. The specialty chemicals segment report fourth quarter 2002 break even EBITDA compared to three min in the fourth quarter of the previous year and four million in the fourth quarter of 2002. The fourth quarter 2002 unfavorable results in part reflect down time due to planned and unplanned outages at the plants during December which amounted to almost 2 million dollars. The plants are now fully operational again. Sales volume decreased 2 percent from the previous year's fourth quarter and was 6 percent lower than the third quarter of 2002 as demand softened. Average selling prices increased 9 percent compared to the previous year's quarter declined 8 percent from the third quarter of 2002 primarily due to shifts in product mix. Now looking at our specialty chemicals outlook, the first quarter 2003 operating results are expected to improve from the fourth quarter of 2002 at sales volumes in January should increase from fourth quarter levels.

New product sales growth continues and the cost of crude sulfate (inaudible) tin our raw material remains unchanged. Now turning to Equistar. Millennium's 29 1/2 percent stake in Equistar resulted in the fourth quarter post interest equity loss of 35 million dollars compared to 29 million of equity loss in the fourth quarter of the previous year and 4 million equity income in the third quarter of 2002. The fourth quarter of 2002 was primarily impacted by increasing raw material costs as according to CEMI the cost of Ethelene production increased by 3 cents per pound compared to the third quarter of 2002. Equistar (inaudible) an additional cost increase of nearly 1 cent per pound attributable to the planned maintenance at (inaudible) manufacturing plant in chocolate bayou Texas. These cost increases were partially offset by a one cent per pound increase. Ethelene sailings were approximately 50 million bounds below third quarter sales -- most of the shortfall was concentrated in October and November. In the polymer segment, volumes were approximately 56 million pounds below third quarter sales. Equistar's average selling price was below the third quarter 2002 level as a result of slightly lower domestic market price and a lower margin product mix. Now looking at our outlook for Equistar. (inaudible) due to high feedstock costs are expected to continue into the 2003 however industry analysts believe Equistar will enjoy improved supply demand conditions beginning in March. Thanks. Now I'll turn it over to Bill.

Thanks, Mickey. And thank all of you for joining us. A whole lot of people who have worked in or observed the business of chemistry for a lot longer than me who describe the last two years as the worst for the chemical industry in over two decades. I'd like to spend the rest of the formal presentation describing how the women and men of Millennium have responded to those conditions as well as give you some feel for why we believe 2003 is shaping up as a much better year for our company. I'll begin by minding you what our priority is. Our investment in Equistar so as to reduce leverage and return to investment grade credit status. Our activities over the past 18 months have been directed to the achievement of disciplined and targeted growth, cost reduction and improved asset utilization. We are even (inaudible) our business plan with an independent third party to help drive optimal performance for our stakeholders. Let's go through some examples of our commitment to improve results even in these extremely difficult conditions. On the commercial side many of the actions we've taken are aimed as reducing costs but we've also introduced more new products in the past two years than we did over the past ten. Within two years, we are forecasting that over 50 percent of our global sales of titanium dioxide will be of products introduced since the year 2000. Past investments in ERP technology have allowed us to make significant reductions in costs and work capital and greatly improved the information available to all workers to make more informed decision. Our leading edge work in E commerce has allowed us to take costs out for Beth ourselves and our customers while improving service levels. It also creates a challenging barrier to entry for competitors. We have acquired (ph) that while reducing our overheads by about 74 million dollars or 367 percent from where we were in 2000. Increased pension expense, insurance and health care costs will present a challenge for next year but our focus on efficiency is now a permanent part of our culture. Manufacturing staffing including full-time contractors has been reduced by 20 percent over the last three years and yet I am proud to report that we set new records this we're for quality and reliability. TIO 2 production was the second highest in our history.

Productivity has been improved by reducing the number of organizational levels and by implementing self-directed teams at our (ph) manufacturing sites. Our TIO 2 manufacturing cost per metric ton were at a record low in 2002. While a stronger Euro has inflated that figure over the last two quarters when measured in U.S. dollars, our goal is continuous improvement on that metric. Similarly, in our settlements business, we have successfully reduced our controllable costs, essentially those not tied to the cost of natural gas or Ethelene by an impressive over 20 percent. Now let's look at what that means for trends in our two largest business segments. First acetyls. Profitability in this business -- in the first quarter of 2002 due in part to some unprofitable natural gas purchase commitments that had been entered into a year earlier. Ironically at lower than today's pricing. Since then you can sigh that our position entering into 2003 has improved dramatically. Mickey has already shown you the slide on our TIO 2 operating rate and with demand increases expected to outstrip very limited capacity conditions of the industry as a whole, again we enter 2003 very favorably positioned especially when compared to a year ago. Between January of 2001 and April of 2002, TIO 2 pricing fell an incredible 17 percent. Resulting in a negative effect on our 2002 results compared to 2001 of 83 million dollars in operating profit. To put that in perspective, that 83 million dollar hit was 8 million dollars more than our entire operating profit in 2001. The facts that Millennium survived that kind of blow and still increased overall EBITDA from wholly owned operations is a credit to our people all over the world. Looking forward helped in part buy a weaker dollar, TIO 2 prices have recouped almost two-thirds of that decline to date and continue to rise. We have our challenges on the our fragrance business in Equistar but overall we are poised to take advantage of the Seifers and hard work our people have made over the last two years. With our lowered cost base and improved prices for our major products, overall prospects for our wholly owned businesses are favorable as we enter 2003. Finally, Millennium has no current intention to change its long standing dividend policy. Thanks for your attention. And now, we would be happy to take your questions.

Ladies and gentlemen the floor is now open for questions. If you do have a question you may press one followed by four on your touch tone phones at this time. Questions will be taken in the order that they are received. We ask that while you pose your question, if you could please pick up your hand set for optimum sound quality. Our first question is coming from William Young (ph) of Credit Suisse First Boston. Your line is live.

Yes. Thank you, yes. Bill I think you mentioned higher health care costs and pensions that type of thing (ph). Could you expand a little bit on that and especially how much more your pension costs might --you might incur in '03 versus '02 and -- change in your underlying (ph) assumptions with regard to discount rate or expected rate of return, that type of thing?

We'll be putting that, of course, in our 10Q and I believe in our press release we talk about in the pension assets and equity section. We talk about the fact that our pension defense for 2003 is expected to increase by approximately 9 million. And I would say that all the other type things we talked about insurance and health care costs et cetera are probably another somewhere around 10 million would you say, Jack, of increased expense ratio?

Well, just looking at medical costs, Bill, we're primarily self-insured. Our medical costs will probably increase about two-and-a-half million dollars next year due to you know, inflation. So that with the pension is in the vicinity of 11 or 12 million dollars. And I have talked to our -- yes, we are planning on and have changed our pension assumptions. Our discount rate was reduced from 7 1/2 to 6 1/2 percent. And our return on asset assumption was reduced from 9 percent to eight 1/2 percent.

Thank you very much.

You're welcome.

Bill, just for the record, the insurance is going to go up by about 4 million.

Thank you. Our next question is coming from Don Roberts (ph) of Buckingham Research. Don, your line is live.

Afternoon, guys.

Hey, Don.

Was there any impairment test performed on your Equistar investment at year end? You're still carrying it over nine bucks a share on the balance sheet.

Absolutely. It's looked at quite often and there's quite a bit of disclosure in our 10K and I believe also in our 10Q that describes recent transactions if you're looking at the OXY transaction trying to compare that to what's on the balance sheet. Our disclosure indicates that accounting rules essentially look at cash flows in the future as we predict and if you look at those cash flows they're more than sufficient to support the value that we're carrying Equistar at on the balance sheet.

Secondly, Bill, the (inaudible) business is sounding more and more like Equistar. We're talking about unscheduled downtimes an the kinds of things you don't normally associated with specialty businesses here. Is it time maybe for something more radical in terms of restoring (ph)? Or discontinue it to try to recover that business? Or maybe just you know admit it to being a commodity and maybe merging with acetyls or something and run it for ...

I think that that's, as I mentioned -- we're having an independent third party come in and test our business model and that is certainly on the table.

Okay. Thank you.

Our next question comes from Leslie Ravitz (ph) of Morgan Stanley. Leslie, your line is live.

I'm sorry, good morning. Two questions, I think they're kind of interdefined, one is the move to FIFO from LIFO. How does that affect your tax payables this year, last year and what do you think going forward? And secondly did, that have any impact on your restricted (ph) basket for dividend payments?

less, I'll take that. I we disclosed in the press release that the difference in calendar 2002 was what a million 1/2 I think it says in the press release.

Was that pretax income?

Yes. Net income is even less than that. But not taxes.

No. (inaudible) is what we're saying.

Leslie Ravitz Okay.

And if you look back through historically, the differences the last few years between LIFO and FIFO are (inaudible). It's in my reconciliation that I went through and you can see there the effect for all of 2001 was only a few million dollars.

Okay.

4 million. So it hasn't been a big change one way orts other.

Did it have any impact on your restricted basket?

No. It increases our net asset on the balance sheet by about $35 million. But that does not effect the basket or any of our other covenants.

Just -- the last question. As you look at your 2003 forecast for whatever that may be, is there any impact from FIFO that's greater than what we've seen over the last couple of years?

No. No. I wouldn't say so.

Thank you.

You're welcome.

Thank you. Our next question is coming from PJ Havencar (ph), with Salomon Smith Barney.

Hi, good afternoon. Maybe you can help me. I thought the restricted payment basket started with 34 million and then came down from there during 2002. Was I mistake?

The restricted payment basket is a cumulative net income computation from June, the end of June '01 forward.

Right.

So it changes every quarter, you know, depending on the income we report and restricted payments that we make which have largely been dividends. There was a little bit of repurchase of stock from employee benefit programs but that's diminimous. So if you look at the payments from June of '01. It's almost all dividends.

My impression was and Mickey you can help me was that you started out with 34 million.

I think in the third quarter (inaudible) we said 34 I think the last 10Q was down to 18 and now it's up to 43.

How did that go up? What was it in the numbers? What did you add in there?

Well, as we disclosed in the press release, PK, you add 50 percent of our net income but the net income has to be adjusted for the after tax effect of Equistar. It's a basket (ph) for Equistar is not on a net income basis, it's on a cash distribution basis and there have been no cash distributions. So you simply factor out the Equistar results from the P&L and if that number is a profit 50 percent of that profit adds to the basket.

Now, I understand that. But maybe the reason it went up significantly, there was an unusual item in this quarter.

Right.

Was that factored into the payment basket?

The payment basket moves with GAAP net income.

Okay.

So it doesn't matter if an item is unusual or not unusual, there are a few items by definition that are excluded, things like change in accounting principles like the good will changes this year and extraordinary items. But we didn't have any of those items in the fourth quarter that met that definition. I think that explains T did the income tax accruals that you had in the quarter, that probably is in that basket, is that correct.

That is considered net income for the purposes of the computation.

Got you. And the second I are is on the TIO 2 price increases. The 6 percent price increase is looking pretty good. If you look at your customers in the industry, plastic, paints, paper, and I know paper is not a big customer for you, can you talk about where you have the most confidence of getting that and where have you the least and how is that proceeding in the industry.

I think we're pretty confident that we are going to get it across the board, PJ, there's no particular segment that appears to be more difficult than any other.

And we have achieved price increases in 2002 in all segment segments and you will in geographic regions.

Just on the paper issue, PJ, as you know, we have been moving away from the fine paper market where margins are not so good but we have a very nice (inaudible) business especially in Europe that's done well for us.

Okay. So you expect price increases across the board.

Yes.

Okay. Thank you.

Thank you. Our next question is coming from Sergey Vesnetsov (ph) from Lehman Brothers. Sir, your line is live.

Good afternoon.

Hi, Sergey.

Just want to mention that's just my opinion, of course, but I honestly don't understand why you're talking about the growth tiny business in TIO 2. I hope it goes along parallel with other really important items such as generating cost savings and improving technology the - ratio (ph) but just creates the impression that deviates (ph) from your full focus attention on other much more important things, kind of (inaudible). But my question was on TIO 2, if you could celebrate on this business your outlook for '03 given the (inaudible) much more stable what in terms of global demand/supply in s your inventory on the customer level?

In TIO 2?

Yes.

I think we're beginning the year with inventories for the entire industry and we talked about our inventories in particular (inaudible) of 2003 versus January of 2002 being down 10 percent in finished goods. So I think we're beginning the year off fairly well. I think we used the department of commerce data that came out other day also bodes well for the industry. And as you're well aware there's not been very much capacity additions announced and you know we think given continued growth in the global economies that we should have a fairly good year in titanium dioxide. We are looking at volumes in the first quarter being relatively flat with the fourth quarter, but we continue to see prices as they did in 2002 basically go up almost every month on average on a global basis. So we continue to see prices going up. So overall in TIO 2. I think even Sergey, if you take maybe compute a year end price for TIO 2 and use your assumption of what you think operating rates might be on our 690,000 metric tons, I think you'll come up with a very nice double digit number for profit increase even if prices don't go up from today's levels and we are estimating prices to go up from today's level. So you can come up with good numbers for the operating income for TIO 2 for 2003 over 2002.

I certainly hope so. Also if you're looking at the margins in the TIO 2 business even some relationship prices there was some margin erosion at Millennium compared to other producers Mcgee and NL, DuPont is in a different league. I'm not talking about that, but I understand that part of the moments was due to the fact that you're not vertical integrates on the raw material supply for ORE part. You've done step there is to cut cost, margins are improving. Do you think you would be able to come back to the structural margins you've seen in the late '90s and provided for TIO 2. Yes, we are working very hard on all of our strategic supply issues, Sergey, and we are believe that certainly our cost base today is much lower, much lower than it was back in that last peak period. I mean, you know, we went through that reconciliation with you. I think it pretty much stands to reckon that we're not going to give that 63 million dollars back soon.

Okay. Thank you so much.

Okay. Sergey.

Thank you. Our next question comes from Fred Seemer (ph) of Seemer Company (ph). Fred, your line is live.

This is really a minor to talk about the FIFO. The change to FIFO. But last year raw materials were going up and selling prices in TIO 2 were going down and by the second half 2003 and you benefit fitted from that under FIFO. Last half of 2003 the reverse should happen, raw materials might come down and selling prices clearly will be going up and I just wonder why you chose now to change and why you're adopting FIFO -- standard for most U.S. companies is LIFO.

Actually, I'll give you several reasons. Our belief is that FIFO is a much better balance sheet presentation than under LIFO. Given scrutiny now by analysts and rating agencies of balance sheet position, we think from a standpoint of really looking at what the inventory is worth, FIFO is much better than LIFO. We have plans to manage our inventory in a different way going forward and we have reduced finished goods and some other types of inventory this year and we're looking at raw material inventory. So our plans are to reduce our levels of inventory that we carry in the business and of course what would happen under LIFO, under that process we would be running costs of inventory through our P&L that as opposed to what inventories cost today. Our inventory world wide for Millennium is on LIFO -- or on FIFO in the world with the exception of the TIO 2 business segment in the U.S. So this puts all of our inventories on the same basis. And actually, there are several companies in the TIO 2 business that do report on FIFO, not LIFO.

Thanks so much.

Thank you our next question is coming from Greg Goodknight (ph) from UBS Warburg. Greg your line is live.

Hi.

Hi, Greg.

Questions on the price increase first quarter price increase. I would assume if it goes according to the normal customer price protection, you'll get half of that in February and another half in about May?

The bigger customers have roughly 90 days price protection and so that's the normal for our TIO 2 business.

Okay. Okay. I have all producers supported the increase? I saw DuPont out there was -- and NL and everyone else in there?

I don't know. You would have to contact them.

Okay. Next question. With the increase of natural gas prices some people are projecting long-term, what is your strategic position with respect to methanol production? At some point, would it make more sense to outsource methanol from perhaps offshore stranded gas locations? Or are you locked into long-term contracts and wouldn't consider that before a certain date?

We would -- we have a deal with one of the -- with our partner on methanol. But certainly the make or purchase from outside decision is something that we look at regularly.

What is the earliest date that you could potentially unwind your position and outsource methanol?

Well, we could do it with their consent any time we want.

We have a third party that produces our (inaudible) we use to make methanol and they own a very small part of our methanol business.

and Greg, we're always looking at the economics of you know, buying it on the spot market or something versus producing it ourselves and so far particularly at these price levels, we're running our methanol plant all out.

Indeed. Indeed. In terms of next question if I could, Does recent announcement of shutting down (inaudible), obviously they're going short Ethelene. Is there any opportunity here to unwind your position in Equistar?

I don't think that there's that that's a big factor in our ability to unwind our position with Equistar. Certainly for the industry, it's very good news.

Okay. But no long-term supply potential or something like this?

There's. There are discussions going on all the time and you know this is recent news that we heard from (inaudible) today of him accelerating the closure of those two facilities. And they are going to be, as I understand it, short Ethelene. So that's got to be good for the industry.

Okay. Thank you very much.

Good-bye, Greg.

Thank you. Our next question comes from Graham Coakley (ph) from Sanford Bernstein (ph). Graham, your line is live.

Thank you. Bill, you guys have a rich history of finance and business management sills. Was the rationale hiring someone to work out whether you're running the business near term and how much is that costing ?

Well, I think, Mickey, excuse me, Graham, lots of companies hire people to test their business model. As you know, we reorganized into this operational excellence model about 18 months or so ago and we are looking strategically at this new model with (inaudible) as you probably know I don't know where Sergey exactly got his information but in this day and age, our priority is to optimize long-term cash flow and get the debt down. We are not invested in lots of money in any of those smaller performance (inaudible) businesses other than those that are directly related to products we're already producing. And you know, there are been people out there who you know who have looked at whether or not this is a good strategy for us and we are spending an amount of money that is not material to have somebody test our business plan and I don't think that's necessarily unusual.

Could you give us some idea of what conclusions or what range of possible conclusions might come out of this? I mean could it result in another reorganization or in the divestment of businesses or you know is it that broad ranging?

It's broad ranging. It's just in process. It's not complete.

And completion is likely to be when?

We're looking at a couple of months out.

Okay. Thanks.

)) Thank you. Our next question comes from Rob Reetsus (ph) of Bear Stearns. Rob, your line is live.

It's Reetsus. I missed most of the conference call. I just wanted to ask one very easy question. You had a good. I saw on my sheet the year's cash flow analysis for the quarter were you guys cash flow positive if you take out borrow borrowings or were you cash flow negative?

If you look at the cash flow slide that we presented for the quarter, our net debt went up by 7 million dollars during the quarter and I'm not sure what you're referring to, but we made 44 million dollars in interest payments during the quarter. So if it's as simple as taking that out, yes, before we paid interest we were cash flow positive quite significantly in the fourth quarter.

Okay.

Thank you. Our next question comes from Scott Zhemki (ph) of Black Diamond Capital (ph). Your line is live.

I was just wondering what the balance is under your AR facility in Europe?

They're about 58 million dollars.

That--that's up from Q3, correct?

... the same.

Okay.

So it did not affect our cash flows in the quarter in any major way on that slide I just referred to with the previous gentleman.

Okay. Thank you very much.

Thank you. Our next question is a follow-up from PJ Havencar (ph) from Salomon Smith Barney. PJ, your line is live.

Thanks. I want to go back to this tax accrual issue. If you explained it in the early part of the call, I apologize and I will follow up offline. Can you explain where the tax core is coming from? Was it a reserved from prior years? What was the matters? Can you explain in simple English where are these coming from?

Yeah, as we started PJ, the adjustments relate to accruals that were established in previous years on our balance sheet for various, you know, tax exposure items. And they date back several years. There's nothing in the 2001 or 2 accounts that you're looking at here that have those type of accruals being made. And the reason for adjusting the accruals are favorable developments which include items like new case law as well as progress on various audits and issues that we're dealing with the internal revenue service in the U.S. So we have many audit periods that are open and as we progress through those audits with the IRS, there could be items that we thought was something we needed to have a reserve for in the balance sheet. As it turns out, that's not the case. It's unnecessary. So we annually review that situation very carefully.

Well, you still have accrued taxes on the balance sheets, so if you could unwind some of those, could you extend your payment basket by some more.

We still have tax accruals on our balance sheet, you're right. But of course we would have to justify that. You have to justify, you know, the change in the accrual by facts that happened in the year of question. We justified the change in accrual by what facts changed in the year 2002.

Well, you have a good tax department and I think the majority of people in red bank are working in the tax department. That's what Mickey tells me. So I mean, you know, if you can justify that, you could extend your payment basket. I mean that's a real positive.

Well, again, what has to happen, there are accruals that remain on our balance sheet and you have to have circumstances, events that take place in 2003 that would justify that.

Or the other way.

Or the opposite. I mean if something turned against us, we would in fact have it (inaudible) accrual and increase it. But I (ph) think (ph) it (ph) works both ways. It's an increase/decrease depending on what transpires in the year in question.

And PJ in the last press release that we issued today. We put in the last paragraph, we put a very detailed explanation of how you calculate the restricted payments basket ...

No I understand that. I did not understand this tax accruals.

OK

OK.

Our next question is a follow up from Don Roberts of Buckingham Research.

Thank you. It sounds unlikely that any cash was going in Equistar this year. I just wanted to check that with you as well.

I think on,, know with price and with crude prices and -- stock costs and everything else. But there's no plans for us to add any capital at all, no.

And then secondly, if you didn't mention this already. What was the average natural gas price that your acetyls business had in the fourth quarter and how are you hedged for the first quarter here?

Hang on. I don't know these numbers by heart but we have them. Our average price in the fourth quarter was about $4 per million. And we have very few forward purchases at the moment.

But, Don, keep in mind if you look at roughly 30 percent of our volumes in acetyls have contracts whereby the C stock prices get passed through.

Okay, but on the -- on the other 70 percent gas price are up more than your announced price increases, right.

Yes and today on the conference call and in the press release we talked about you know for example acetyls announced la price increase late last night. And as long as we cannot to get those price increase there and markets continue to be strong, you know, I think we're looking at profitability. We said should be comparable to the fourth quarter in the first quarter.

That's right. I'm just trying to get some comfort with that.

Right, right. And of course, John, we look at that all the time in terms of what we should be doing in terms of buying gas forward. But we've decide for a number of reasons that now is not the time to do a lot of that.

Okay. Thank you.

Thank you our next question comes from Paul MaGorra (ph) of Deutsche Asset Management. Your line is live.

Hello gentlemen. Two questions. One was it looked like there a tick up of SG&A in the fourth quarter and I'm not sure you covered that.

We didn't cover it. But it's, if you look at the SG&A, it would probably make more sense to take the annual figures and divide by four and that's more of a quarterly running rate and the reason for that is we have quite a bit of variable compensation and it's not a (inaudible)of the year and the way the programs work we have to achieve certain profit hurdles in order for people 0 get the awards and the cost of those programs are loaded back end boot fourth quarter.

Okay. Of the $10 million difference say between the third and the fourth quarter, how much is for the compensation? Is that the bulk of it? Is there ten million dollars between what two periods?

It looked like SG&A was 36 in the third quarter and 36 in the fourth quarter so it increased about 10 million dollars.

... have to go back and -- that. I'm not sure we know, do we?

I'll call you on the side. And second question was a 96 percent operating rate in the fourth quarter, if you maintain that in 2003 you're going to build inventory unless your sales go up. Yet you're forecasting first quarter 2003 to basically be, you know, kind of in that 140,000 range. Am I, should I assume that you're expecting a real tick up in volumes in the second and third quarter? Kind of like we saw in 2002?

yes, usually the coating season beginnings in March and extends through July, August time frame. So normally, our volumes and profits are lower, our volumes tend to be lower in the fourth and first quarters and higher seasonally in the second and third.

Right. I was just looking back to 2001 where it was fairly flat through the year. Okay. Thank you very much.

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Thank you. There are no further questions in our queue.

Okay. Thank you. If you were unable to hear the entire call playback would be available until Thursday February 6 by calling 973-341-3080. Reservation number 3683721. And you can access the speech and slides on the internet later today at www.millenniumchem.com. Thanks for listening and if you have further questions please give us a call. Thank you. Good-bye.

Thank you, ladies and gentlemen. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.