利安德巴塞爾 (LYB) 2003 Q1 法說會逐字稿

Good morning , ladies and gentlemen, and welcome to the Millennium Chemicals first quarter 2003 earnings conference call. At this time all participants have been placed on a listen-only mode, and the floor will be open for questions following the presentation. I would now like to turn the floor over to your host , Mr. Mickey Foster. Sir, the floor is yours.

Thank you. Good morning and thank you for participating in Millennium Chemicals ' analyst conference call and welcome to those participants are the Internet.

Today we'll cover results for the first quarter of 2003 and our outlook. Speakers include Bill Landuyt, chairman and Chief Executive Officer, John Lushefski our senior VP and CFO, and myself, Mickey Foster, VP of corporate and IR. 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 , www.Millenniumchem.com and clicking on IR icon. The slides are available to our internet participants are meant as an enhancement tool and contain information that is either in our press release or which we will discuss during this presentation. There 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 clicking 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 portion of this conference call. Second , the slides will automatically move forward during the presentation on your screen. But before we start , our lawyers asked me to preface with our safe harbor legal statement. The statements made on this conference call relating to matters not historical facts are forward-looking statements. Our forward-looking statements are present expectations and actual events and results may differ 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 details in the company's SEC filings. Please note we disclaim any obligation to update our forward-looking statements. In addition, any non-GAAP financial measure discussed in this presentation will be reconciled to the most comparable GAAP measure either in this presentation itself or in information to be posted with our presentation materials on our Website. Jack will begin and cover the financials, I will cover TI 02 special chemicals and Equistar, next Bill will end with strategy then we'll be glad to answer questions. Jack?

Thanks, Mickey. I would like now to review some details of Millennium's reported results for the first quarter of 2003. And our financial position at the end of March. Starting with slide 3. Millennium reported consolidating operating income of $29 million for the first quarter of '03, which was $19 million more than the $10 million reported for the first quarter of 2002, and $3 million more than that reported for the fourth quarter of 2002. Operating income was better than first quarter levels last year for our titanium dioxide and acetyls segment business but slightly lower for specialty chemicals. As compared to the fourth quarter of 2002, titanium dioxide and specialty chemicals operating income improved and acetyls was down slightly. Mickey will discuss individual business segment performance in more detail 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 adjusted earnings which exclude certain unusual items. Operating income was $29 million up considerably from the first quarter of last year when $10 million was earned, and better than the fourth quarter of 2002 when we earned $26 million of operating income. First quarter net interest expense was $22 million. $1 million up from the expense level of the first quarter of 2002. And equal to the fourth quarter of 2002. Average debt levels during the first quarter of the year were slightly higher than average debt levels during the first quarter of last year. Equistar's operations on an after-interest basis generated a loss of $41 million for Millennium in the first quarter of 2003, excluding unusual items. Compared to a loss of $39 million in the first quarter of 2002. Income taxes provided for the first quarter of 2003 primarily represent an estimate of income tax expense in foreign jurisdictions where profit was

earned in the quarter. Tax benefits were not recognized for jurisdictions that reported losses. In the first quarter of 2002 , tax benefits associated with losses were recognized. The net loss for the quarter was $46 million, or 72 cents per share versus a net loss of $32 million , or 50 cents per share for the first quarter last year. The net loss for the first quarter of 2003 on this slide excludes the cumulative effect of the change in accounting for asset retirement obligations and the loss on sale of asset s at Equistar. The net loss for the first quarter of 2002 on this slide excludes our write-off of goodwill, reported as a cumulative effect of an accounting change.

Moving to slide 5, this slide provides a reconciliation from our reported net loss, to the adjusted figures I provided and discussed on slide 4. We highlighted the two items I mentioned for the quarter. You can see that our goodwill write-off was the only unusual item in the first quarter last year.

Let's move to a discussion of our balance sheet and cash flow. Net debt at the end of the quarter, as shown on slide 6, is $1.132 billion , a balance that is $29 million higher than our net debt balance at the beginning of the quarter. Equity has been reduced during the quarter due to our net loss. Our net debt to total capital percentage is 74% at the end of the quarter, up about 2 percentage points from the end of 2002 due primarily to the net loss recorded in the first quarter. Debt statistics. EBITDA to net interest coverage as defined in our credit agreement for the trailing 12 months to March was about 2.5 times. And our net debt to EBITDA leverage ratio was 5.27 times. These figures exclude our share of EBITDA and net interest at Equistar. Our restricted payments basket is $39 million, at the end of the quarter , when first quarter results are included and before the expected declaration of our dividend later this quarter. Last week, we completed an amendment of the financial covenants in our credit agreement. We also sold $100 million of senior unsecured notes at a premium to yield 7.13%. A portion of these proceeds were used to pay the entire outstanding balance of our revolving credit facility. Those transactions collectively increase our liquidity and improve our financial flexibility.

Turning to our cash flow summary on slide 8 , cash used for capital spending remained at a very low rate as we continue to defer all but the most critical or short payback discretionary projects. Trade working capital , defined as accounts receivable plus inventories, less accounts payable, increased during the quarter and was a use of $31 million in cash. Accounts receivable increased during the quarter as prices improved in all businesses in the last quarter of 2002. Trade payables declined due to a reduction in raw material inventories, low levels of capital spending and seasonal purchasing patterns. The use of cash for other assets and liabilities also relates to the seasonal timing of payments for such items as insurance and payroll related costs. We did not receive a distribution from Equistar during the quarter. And net debt increased by $29 million. Distributions from Equistar are not expected in 2003. I'll close with the slide showing the history of capital spending and an estimate of that figure for 2003. Our employees have worked very hard to control capital expenditures without sacrificing safety , environmental compliance or plant reliability. Our spending level of $71 million last year was down considerably from the previous three-year average of more than $100 million. In 2003 , we will continue to control capital spending and plan to spend about $60 million. Now I'll turn it over to Mickey who will discuss some details about performance in our business segments and at Equistar.

Thanks, Jack. The titanium dioxide segment reported first quarter operating income of $21 million , compared to $10 million in the first quarter of last year and $17 million in the fourth quarter of 2002. Looking at titanium dioxide prices, in local currency, average first quarter prices increased 10% from the first quarter of 2002 and 2% from the fourth quarter of 2002. In U.S. dollar terms, the worldwide average first quarter price increased 16% from the first quarter last year and 5% from the fourth quarter of 2002. Turning to sales volume , first quarter 2003 titanium dioxide sales volume of 145,000 metric tons represents a decrease of 5% from the first quarter of 2002 and an increase of 2% from the fourth quarter of 2002. Volume was up sequentially in each of the three months of the first quarter of 2003.

Now turning to operating rates. The first quarter 2003 TIO2 operating rate was 88% of our annual nameplate capacity of 690,000 metric tons compared to 81% in the first quarter of 2002 and 96% in the fourth quarter of 2002. Now looking at our outlook for titanium dioxide, earnings are expected to improve in the second quarter of 2003 over the first quarter as sales volumes should increase seasonally due to the North American and European coating season. Operating rates should remain in the low 90%. Manufacturing costs per metric ton are also expected to improve with higher operating rates, and global titanium dioxide price increases should continue to be gradually realized. Now turning to our acetyls segment, the segment reported first quarter operating income of $7 million compared to a loss of $7 million in the first quarter of 2002 , an income of $9 million in the fourth quarter of 2002. Natural gas and ethylene prices increased significantly in the first quarter of 2003 due to cold weather in certain regions of the United States and events in the Middle East. The higher costs helped to support the previously announced price increases for acetyls products, but the price increases have not been sufficient to fully offset rising natural gas prices. Accordingly, the profitability of the segment was adversely affected in the first quarter of 2003. The average U.S. dollar aggregate price for Vam and acidic acid in the first quarter of 2003 increased 34% compared to the first quarter of 2002 and 10% from the fourth quarter of 2002. Margins for the same periods of time have not similarly increased due to rising natural gas street stock prices. Aggregate volumes from vams and acidic acid the first quarter increased 17% in the first quarter of 2002 and decreased 7% from the fourth quarter of 2002. This next chart shows the acetyl price increases announced in 2003. A majority of these increases have been implemented. Now turning to our outlook for acetyls. acetyl’s profitability in the second quarter of 2003 is expected to be lower than the first quarter of -- as anticipated lower natural gas feed stock costs are offset by extended acidic plant shutdown. That plant is now back up and running well. Now turning to specialties. The specialty chemical segment reported first quarter operating income of $2 million , compared to $4 million in the first quarter of 2002 and a loss of $2 million in the fourth quarter of 2002. Sales volume increased 7% in the first quarter of 2002 was up 13% from the fourth quarter of 2002. Average selling prices decreased less than 1% compared to the first quarter of 2002 and increased 8% from the fourth quarter of 2002. Now turning to our outlook. Earnings in the second quarter of 2003 are expected to be comparable to the first quarter of 2003. New product sales growth continues. Crude sulfate Turpentine raw material costs are expected to slightly increase in the second quarter. Now turning to Equistar. Millennium's 29 and a half% stake generated a first quarter post interest equity loss of $41 million, excluding a loss on the sale of assets, compared to $39 million of equity loss in the first quarter of last year, and a $35 million equity loss in the fourth quarter of 2002. Rapidly escalating natural gas and crude oil prices in the first quarter of 2003 caused the cost of ethylene to increase dramatically from the fourth quarter of 2002. CMAA estimates that in the first quart of 2002 the cost of ethylene production increased more than 5 cents per pound from the fourth quarter of 2002 while Equistar's product sales prices increases in ethylene, polyethylene and ethylene glycol more than equal or higher than ethylene costs , the timing of the price increases were such that the average margin in the first quarter was lower than the average fourth quarter 2002 product margin. Now to our outlook at Equistar. While raw material and energy costs peaked in late February and early March, they've since moderated, this together with increased in Equistar's ethylene product chain and co-products has improved ethylene chain economics , particularly for production from crude oil based raw materials. However , the combination of increased product prices and global economic and political uncertainty is negatively impacting Equistar's sales volumes early in the second quarter. Thanks and now I'll turn it over to Bill.

Thanks , Mickey, and good morning, everyone. I will close out our formal remarks by commenting on some of the preliminary conclusions that we've come to as a result of an outside third-party independent review of our business plan, strategic options and competitive position. First , our larger majority-owned businesses , specifically titanium dioxide and acetyls are structurally attractive and offer an opportunity for above-average returns over the next several years. Second, the recent progress that we've made in improving our cost structure and enhancing our customer offerings must continue in order for us to realize further improvement in global manufacturing productivity , business process efficiency , our organization and our cost structure. Accordingly, for now, our resources will continue to be focused primarily on efforts to increase efficiency and improve profitability. Third, our interest in Equistar and the resultant tie to the ethylene polyethylene cycle provides considerable cash generation and debt reduction upside. Our long-term debt maturity schedule with no substantial maturities before 2006 dovetails nicely with industry projections surrounding the next peak. At the same time, we will continue to review our strategic options surrounding our Equistar stake. Fourth, our dividend provides an attractive reason for investors to support Millennium during the bottom of the chemical industry cycle while we improve the cost position of our company and industry conditions hopefully improve. Our incentive plans now include direct links to our continued ability to maintain our current dividend policy. Given the points I've made above and again with outside help , we are currently undertaking a fresh and independent review of our organizational structure to ensure alignment around these priorities. I'll end by reminding you what our top priority is. To optimize long-term cash flow from our businesses and our investment in Equistar so as to reduce debt and increase our financial flexibility. Thanks for your attention. And now Marie , we'd be happy to take questions.

Thank you. The floor is now open for questions. If you have a question , you may press the number 1 followed by 4 on your touch-tone phone at this time. If at any point your question is answered, you may remove yourself from the queue by pressing pound. We do ask that while you pose your question , that you pick up your handset to provide optimum sound quality.

Your first question is coming from Leslie Ravitz of Morgan Stanley. Please state your question.

Good morning. Bill , question is , having this outside study, did they come up with anything that you guys did not know or expect, and is there any real significant shifts in how you're going to be running the businesses or strategically using cash flow that have come out of the study versus what you would have done anyways?

Well , Les , I would have to say that just before the -- we engaged these people, you know, as you know, we've talked about it. We made a subtle shift away from sort of talking about a lot of profitable growth opportunities, et cetera , and realized that where we are in the cycle right now and where our leverage was and the importance of our dividend that, you know, we really needed to focus more on the operational side of the business, which is the core of the business. So we were moving in that direction. In terms of our portfolio, you know, a lot of the stuff that we've talked to the outside adviser is -- was -- you know, things that we've talked about for not just six months , but for, you know, years and years. So I would say that the -- one of the beneficial aspects of the study was not that they told us that we were absolutely right on everything we've ever done in our whole life, you know , that didn't happen. But I think that they affirmed and confirmed -- or the findings of the study that we did together with them affirmed and confirmed that the -- I will say probably more conservative direction that we've been taking over the last six months was not only what was best for the company, but what was probably consistent with investor expectations. But the best news of all, and probably the most important independent results of this study, Les, was that we had these consultants take a really hard look and stress test the business plan. You know , were we out of our mind to think the TIO2 was going to be a great business, were we crazy about thinking acetyls certainly had the ability to generate a lot of earnings, revenue, cash generation for us, and the result of the study was that no, basically those businesses are super businesses , that they're less volatile than some of the other parts of our portfolio and that they're things that if we execute well, and we continue to try to improve that execution, have the ability to provide exceptional returns for our business.

One other question. And that is, you mentioned the debt reduction is a key part of the going forward strategy. Do you have a dollar goal in mind for debt, and are you looking at just consolidated debt or proportionate debt?

Well, I'll turn it over to Jack in a second, Les. But basically, we have an interesting element in our bond covenants that says once we get back to investment grade with both Moody’s and Standard & Poor's that a lot of these covenants we have that work around fall away and they don't have to fall back. So what investment grade is more Moody's and Standard & Poor's and how long it takes to convince them that once you have the right ratios, you know , for how long do you have to have the right ratios to get them to change that rate and put you back in investment grade is something that varies, depending on where you are in the cycle. But that's opposed to saying today that would be X times EBITDA or Y times, you know, debt as defined in our bond covenant or Y, you know, debt over cap -- total capitalization. That changes with the cycle. But I don't know, Jack, if you have any more specific things.

Yeah, it's important for us to get back to, you know , investment grade. That's certainly, you know , one specific goal we have. Our leverage ratio is above 5 at the moment. You know , that's unacceptable. It needs to be lower. We would like to see that range from sort of the 2 to 4 range during the course of the cycle. And with that type of range, you know , we feel we can stay within investment grade at any part of the cycle. And certainly that -- you know, that did not happen during this last cycle , and our goal is to make sure that we stay in investment grade through all parts of the cycle. And today , you know, what would that take? You can run the numbers. We would have to have a few hundred million dollars less debt or up more EBITDA in order to meet those kind of targets.

So we're talking about a couple hundred million dollars of debt reduction, we're not talking about cutting it in half or anything like that ?

No. We feel you know versus the billion 1, we need to be in the 7 or $800 million range in he remembers -- terms of net debt and EBITDA in the $300 million range instead of the $200 million range where it is today.

Thank you.

Thank you. Your next question is coming from John Roberts of Buckingham Research. Please state your question.

Morning, guys.

Morning, John.

Did the consultants pressure test your book value carrying of Equistar?

We pressure test it with our auditors all the time, John, and basically , the certainly the objective of the consultants was not to perform a financial audit but in terms of the findings that came out of the study , there was nothing to indicate that the valuation of Equistar versus its book value was anything to be concerned about.

Okay. And your outlook on Equistar here, is there anything here substantially different than what we heard from lion Dell a week ago? I mean , you talk about volumes early in the quarter here, but I think there's a substantial improvement overall in the margins for Equistar in the second quarter expected over the first.

Right. Well, actually, I had a chat with Dan Smith , I guess it was last Friday or last Thursday, and I said, Dan, I hope you don't get too upset, but we're going to plagiarize your entire section on Equistar in terms of both results and outlook and just condense it a little bit. So we're speaking on the same page. Obviously , John, yesterday's movements in the crude oil market especially and to a lesser extent in the natural gas market only make any outlook anybody could think about for the second quarter in terms of the cost basis , you know , certainly better. And, you know, our job is to make sure that when we finally get to acceptable margins on the price side that we don't do anything silly and hopefully nobody else does in terms of protecting those margins.

Okay. I'll get back in the queue. Thanks.

Thanks, John.

Thank you. Your next question is coming from Bob Righteous of Bear Stearns. Please state your question.

Hi. I've got just a couple more away from the study. In your opinion, a couple things one , TIO2 prices, do you -- where do you see them realized in the next quarter in terms of do you see them higher where they are now, et cetera? And in your discussions with Equistar, are you seeing polyethylene prices sticking , et cetera, et cetera? What are you seeing just basic in the fundamentals?

I think TIO2 prices in the second quarter on average should be higher in the second quarter than the first quarter. The season, to be honest, the season in TIO2 in North America partly because we had, you know, some rough weather in the first quarter is a little slower than what we would have liked to see. But the fundamental momentum on pricing is certainly to go to higher, Bob. You know, how much higher, how much in the next increase that we've announced in the timing of that does depend on the overall underlying demand from certainly North America from the consumer. And so you know, we're looking at what people like [ Inaudible ] and Sherr Williams say about that. In terms of the polyethylene pricing, you know, right now where the pricing is, as I mentioned before, we've just barely gotten back to what would be, you know, considered even acceptable margins for producers. So you know, one would hope that you know, that we don't have that, you know, again, if there's any momentum, that it's flat to up.

Just one follow-up question. For the month of April, since it's pretty much behind us now , any sense on what the volumes? Did you see any pickup due to weather, or is it still too early or whatever?

I think it's still too early. In the polymer area, we talked about volumes being, you know, weak right now, early in the quarter , and I think inventories across the board, though , are low for everyone. And of course the export market is very poor, I think, mainly related to SARS. So right now we do have nice polyethylene price increases and feed stocks are low and we talked about the margin increasing, and that is happening, but , again, the demand is probably on the low side right now.

And that's for TIO2 also or just the polymers?

Those are maybe for polymers, but, again, on TIO2, inventory levels , I think, are seasonal sort of normal. And I think, again Bill talked about the effects of you know, the war and the weather and the economy. Right now. And right now we're just sort of waiting for things to begin to pick back up after the war finished.

One other thing that's interesting, Bob, you know, touch wood, but our results in Asia and in terms of both volume and pricing has been very encouraging , even through April. You know we hear a lot about the SARS stuff, but at the moment, and we do have a lot of business in China, that doesn't seem to be negatively affecting us at all.

Okay. Thanks a lot for your help.

Thank you. Your next question is coming from Gregg Goodnight of UBS Warburg. Please state your question.

Good morning, gentlemen.

Morning, Gregg.

The study, did it review the issue of acetyls having a structural problem with high natural gas prices projected in the future ? Is it possible you're going to have to restructure and outsource, for instance, methanol, or is that not something that was considered in this study?

No, that was definitely within the scope of the study. All those options around neither the timing of it in terms of outsourcing methanol versus producing methanol on the Gulf Coast, we're part of that whole review. The good news is that, again, the findings, you know , led us to the conclusion that the acetyls business is no imminent danger of falling off the cliff in the real future and in fact the real strengths of our business , one of the findings was the real strengths of the business is our technology position.

So there will be potentially, though, a day of reckoning in the future, and would it be better to start figuring out what the game plan is long term?

I believe that the option you talked about, if, in fact, you know, natural gas in the Gulf Coast to methanol gets to be uncompetitive versus other sources, you know, certainly we can take methanol into that plant and turn it into acid in tune with our technology.

I read the 10-K, and I thought I understood your tax treatment both in the first quarter and going forward, but apparently I've missed the boat a little bit. Could you please give a little in explanation or color to what you're looking at in tax treatment?

Sure. The taxes that we provided for the first quarter include tax expense for profitable foreign tax jurisdiction s and certain state and local taxes provided in the U.S. that have very little to do with overall income in the U.S. We did not record tax benefits or losses that were recorded, you know, primarily in the U.S. And the reason for those U.S. losses , again , was primarily Equistar. Because of the large loss in the first quarter, at Equistar, that put us into a loss position in the U.S. in the first quarter. And as we said in our 10-K , and we'll repeat in our 10-Q , we will not record any further, you know, deferred taxes related to overall losses. So I think if we stay in a cumulative loss position as the year progresses , you'll see the same kind of accounting. If , in fact, we become profitable cumulatively at any point during the year in 2003 , then you'll return to a more traditional 30 to 35% tax overall on that profitable pretax position.

Let me understand, then. I thought the excluding Equistar's losses going forward was -- if not permanent, going to be several quarters out, at least. But you're saying if, say , Equistar would return to a profit position, then -- there's some point where you would include the losses ?

No. What I'm saying is our U.S. tax position in the first quarter was a loss because of the large loss at Equistar. If Equistar produces a profit in the next three quarters , to affect the cumulative profitability , such as the cumulative pretax number in the U.S. and pretty much, then, worldwide, would be a profit we would be providing the more traditional tax expense on that number.

Okay. Hey , thanks a bunch. I'll keep trying to understand it, then.

Thank you. Your next question is coming from Bill Young of first Boston. Please state your question.

Good morning. Just a follow-up on another question. You know, you've said in the past that maybe your interest in Equistar might not be core longer term. And how do you feel about the acetyls business. You know, forgetting the raw materials situation, how do you feel about the, you know, strategy here? Do you want to stay in the business, or just where are you?

One of the things, Bill, you know, I grew up on the south side of Chicago which means I was a white Sox fan. When I was growing up there was a ballplayer who once was named MVP of the American league called Nelly fox. And he was a utility player. He was a second baseman, and he did everything real well. Nothing too spectacular.

I remember him, unfortunately.

On the team. So we look at asset he'll sort of like I grew up looking at Nelly Fox. Acetyls can bunt medium to bunt , hit a double , play defense can score, can drive in runs. That's the kind of business it is. It's a great utility player business for us right now. The cash generation is probably normally in excess of the actual operating profit. And the other thing that we've learned over the last probably 18 months is that in the acetyls business , there's a tremendous amount of price elasticity in terms of your raw material costs versus the selling price that you can charge. You know, there may be a little bit of a lag, but generally the customers , whether they're on a contract formula base or just based where the market is, to the extent that raw material costs go up or down , the margin that you can keep in the acetyls business is much less volatile than that that we've experienced in the Equistar business.

Roam an hos was pointing out the other day that all acrylic coating continued to gain share. I realize there are lots of other applications of vam besides vinyl acrylic coatings. But have you noticed a trend like that yourselves?

We've seen -- the vam business has been very good. But I'll tell you something , Bill. The business that seems to be tighter in terms of demand and supply right now is the acid business. And of course that's, you know, you need acid to make vam and Ethel to make vam. In some ways the strength of the acid business is -- has been even more remarkable than the vam business.

Okay. Thanks very much.

Okay.

Thank you. Your next question is coming from Don Carson of Merrill Lynch. Please state your question.

Yes. Thank you. Two questions. One just wanted to follow up on acetyls. Bill, you mentioned that, you know, this is a, you know, you seem to get steadier margins here. It seems in the acetyls business that you didn't do as good a job at getting your prices up as some of the polyethylene producers did and just wondering about the potential success of that 8 cent price increase. I thought part of that was positioned as a natural gas surcharge and that has come down a lot. Then from a strategic standpoint you know, if you are able to monetize Equistar , I mean, where would you envision putting the proceeds? Would it be in acetyls? You know, there's not too much you can left in TIO2, just wondering what your reinvestment plans might be.

Well, first of all, Don, from your mouth to God's ears on having that flexibility to make that kind of a move with proceeds from the sale of any of our approximate businesses at a good price for our shareholders, first of all on acetyls, I think actually the big surprise and of course we preannounce the operating profit news on all of our segments before we put the bond offering out. But the big surprise was how well the margins at acetyl had held up in the first quarter. You know, I mean, when you looked at kind of natural gas spikes that we had early in the quarter , at one point I think most people were -- would have been pleased to see us break even. In acetyls. So I would probably, you know, respectfully disagree that we haven't seen our ability to push prices up on asset teals , match our abilities to push prices up in some of our other -- and certainly at Equistar because the amount of margin we held is acetyls was much better than the amount of margin we held at Equistar.

We paid more than $2 per million BTU more for gas in the first quarter than we did in the fourth quarter of last year. And we buy, you know, four or five million BTUs a quarter, you know, in that business. So that was –

No , I'm aware of what the pressures are , but there were people who did better who obviously had that same pressure in ethylene and polyether line like Dow and Nova. You did a good job. But still, you know , there still was a gap.

Well, there was a gap at Equistar. We can talk about it offline. Unless there was a big a gap at acetyls. In terms of what we would do with proceeds from any transaction that we did, again, I think the first objective would be to get into solid investment grade, you know , not just to get to the sort of minimum level, but to get there solidly. And it would have to talk about the techniques to do that. Obviously in any large transaction that involved cash we don't have a whole lot of near-term debt that is -- that we could retire. So we might have to get creative trying to rebalance our capital structure in that way. But to the extent that there were, you know, proceeds beyond the scope of just getting back to investment grade, I think, again, we would be very, very careful about what we did with that excess liquidity. I will tell you it would be unlikely that we would invest further in a petrochemical business.

And just a follow-up on acetyls, how are volumes look being like in the month of April? Was that part of the strength you mentioned in Asia, Bill? And, again, to the question of what's the prospects looking like for this 8-cent March 15th price increase.

I think the volumes in April are going to be up. You know, with the plant outage we had at the acidic acid, we did make a lot of acid, so we did make as much vam as we needed. The business in our tolling arrangement with Dupont , Dupont is asking for a lot of acid to toll into vam there. So that's caused our existing plant to operate at lower levels than, you know, than maximum capacity. But, again, the underlying demand is very, very good. And if anything , this sort of extended shutdown that we had has only tightened up specifically the acidic acid market. So in terms of demand, Don, I would suggest that the demand would support the price increase especially in acidic acid . The elasticity in terms of pricing versus feed stock costs has been fairly remarkable. So now, natural glass is still over $5 last time I looked, suggest there's no real reason right now that we should come off of that price increase because still just regaining margin that we lost , you know, compared to the fourth quarter of 2002. But , you know, obviously if gas moved, you know, significantly below $4 , then that price increase would be at risk.

Okay. Thank you.

Thank you. Your next question is coming from P.J. Juvekar of Smith Barney. Please state your question.

Good morning.

Hi, P.J..

Jack , can we take a step back on the stacks issue ?

Sure.

Explain the dividend basket? Because you got a boost in the basket in the fourth quarter , you were hurt in this quarter on the basket. So at what point, you know, can you start using your NOLs?

We can use NOLs when we return to a cumulative pretax profit position in the U.S.

Okay. So until then this becomes a negative impact on your dividend basket like it did in first quarter?

I mean, it's not a negative. It essentially doesn't provide, you know, the benefit that you would ordinarily, you know, have. But, again , the big issue is Equistar and Equistar is removed from the computation on an after-tax basis.

Right. But your operating income and your business has went up. But the dividend basket went down. Comparing apples to apples what dividends paid out. So your dividend basket went down from 42 to 39 and you haven't paid out any dividends from that basket from the last conference call.

It's small. It's 3 million.

Right. That's despite profits going up.

Pardon?

That is despite profits going up.

Yes. So we're still not in a position such that in a profitable position that we're restoring the basket to the extent of dividends that we're paying. That's still where we are.

P.J., to do the math, if you take our businesses at Equistar and take that after interest -- And then you assume all the taxes that we provided don't relate to Equistar, which is true, then you're going to get to the math that says it was somewhere between 2.5 and 3.

Right.

Because you're still providing, you know, taxes overseas, essentially, on TIO2 profits.

Okay.

Okay. And I'll come back to you.

After tax charge for those operations.

Okay. I'll come back to you on that one offline. And then on your study I mean, you didn't talk about the fragrance business. Is that not attractive?

Well, you know, one of the things that we've talked about before, P.J., is that in terms of the difference that fragrance business makes to the future of

Millennium and its valuation is less obvious than the difference that asset teals and the titanium dioxide and the ultimate resolution of our Equistar position is. So in that sense , you know, we believe it's still a valuable business. But it's certainly not the sort of game maker in terms of what eventually , you know, Millennium looks like going forward.

So it is less strategic and could be sold if you find a buyer ?

Well, as you've heard me say before the accident you know , I'd sell Mickey Foster if somebody gave us the right price for it. So you know, but I can't respond until we get an offer like that.

Right. And the second -- one quick question on TIO2, from last year your volumes are down 5%, and operating rates are up 7%. So the 12% delta, is that going into inventory?

Well, remember , P.J. that we started the year with inventories much lower than normally we would carry going into the coding season , going into production in the coating season. And the first quarter, you know , to be honest, we probably would have liked to have operated higher rates than we did. So there's no -- there's no, you know , sort of major shift in terms of inventory levels there. We think that we're in pretty good shape for this coating season. We think that in the second quarter our operating rates, you know , touch Wood should be higher. That should help our cost production , actually. So the delta between the first quarter of this year and the first quarter of last year has more to do with the opening inventory position we started with than anything else.

Okay. And typically you build inventory in the first quarter for the coating season.

That's correct.

And have you built inventory in the first quarter this year? Could you give us levels of magnitude ? Thank you.

Yes. We had built inventory, but, again, we're still comfortable within the sort of days of inventory that are typical for a normal coating season. Now, let's just -- let's just hope that we have a normal coating season in north America.

It wasn't significant, the build in the first quarter, it was a few thousand tons.

Okay. Thank you.

Thank you. Your next question is coming from Graham Copley of Sanford Bernstein. Please state your question.

Morning, guys.

Morning, Graham.

Bill, I'm a little disappointed you've been advertising Mickey to sell. You still don't have a decent offer?

I think he likes the jersey shore.

Two questions , second one on your study. Historically Equistar didn't participate meaningfully in the equitable market of polyethylene. Has that changed or has the weakness at Equistar seeing therefore a weakness in the U.S. market rather than this issue we've been talking about?

Again , I think that Equistar, as most north -- well, I won't say North American because certainly our friends up in up north use the export market a lot. I think most U.S. producers use the export market as an opportunistic sort of sale. You know, to the extent that we had search, you know, turnaround on channel to you and other things that to the extent that we have be products available, Graham, the most profitable sale is normally within the U.S. Now , there is always some, you know, marginal effect on our operating rates as well as on the price that we can generate based on the export markets. But I will tell you that if you looked at it quarter by -- month by month , you'd see, you know, pretty significant fluctuations which just shows that it's a very opportunistic --

It's up 5% or something.

Probably less than 5% of Equistar's total business would be, you know, the export. And primarily the thesis mostly of that is probably to Mexico. So it's a pretty minor business. And I think , you know , Lyondell on their conference call last week talked about why, you know, their results were probably worse than Dow or Nova's because of our turnaround situation at Channelview in the last part of the quarter.

But what you're suggesting is the weakness you're seeing in April is actually part of the U.S. consumers?

Yes. I mean, I think clearly the war impact, people sitting around watching television and everything else, CNN. So hopefully thing wills get back to normal.

On the study you've had done , did these consultants address whether or not Millennium, you know, was appropriately structured to be a public company, whether it be better off as a private company, whether, you know, you might want to pursue some sort of larger strategic deal, scale, that sort of thing?

Certainly there was no constraint on what the -- on what the independent study was supposed to look at. So they looked at all of that kind of stuff. You know, and, again , as you know, Graham, internally we're -- we always have those kind of options as well. And the findings of the study said that, you know, you should always continue to have an open mind toward opportunistic transactions. Certainly I'm well aware of my fiduciary duties when it comes to responding to a legitimate offer to any or all of our businesses. But we can't speculate on theoretical transactions.

Bill , you can speculate because none of our-h us are allowed to engage in investment banking anymore as it is.

Okay. So anyway, I would say yes, it was part of the whole scope. And you know, what we focused on well , we have to focus on day to day is what we control uniquely. And I think in terms of anything else that might come around, you know , as I said before , we know what we would have to do in a situation. But there was no suggestion at least our read on the findings of this group, there was no suggestion that we needed to do anything in a panic.

Okay. Thank you.

Once again, ladies and gentlemen, if you do have a question, you may press the number 1 followed by 4 on your touch-tone phone at this time. Your next question is a follow-up question coming from John Roberts of Buckingham Research. Please state your question.

Thanks. There had previously existed a tax benefit from trying to sell acetyls along with Equistar in a bundled package versus selling Equistar alone. Have the losses that we've had at Equistar change the tax basis or nature of that argument? And if they haven't changed that

argument, did this study look at whether or not the benefit of keeping acetyls was bigger than any bundling up you might have with Equistar?

One thing you're talking about, John, is the cash versus a provision type versus book loss type, book vain calculation so those are two different things. With the NOLs that we have , the cash negative of moving acetyls out of the structure prior to doing any transaction with selling the stock of the holding company that owns Equistar is no longer a cash issue near term. Although it obviously, you know, depending on the valuation that it should get from acetyls. But from a book standpoint, it would still have to be considered because , as you know, we've capitalized those NOLs. And to the extent the present time that we use them that comes back to the calculation through the pretax -- of the after-tax gain a loss on any kind of a transaction. So that, in terms of strategy, was certainly something that, in looking at, you know, and we looked at a dozen different, you know, possible things that could happen with all parts of our portfolio businesses. And certainly when we look at that, in terms of this study, we looked at it both preened post tax.

But I assume you'd drive any strategic decisions off cash , so it's fair to say that bundling argument sort of a non-issue right now ?

I believe that we would drive our strategic decisions based on optimizing long-term cash.

And maybe I wasn't focusing close enough on the acetyls discussion earlier, but is it safe to assume it's not in a loss in the second quarter as a result of the, you know, coming out of this turnaround?

You know, again, at this point we said it was lower. We didn't say it was negative.

Yeah, the cost of the turnaround is several million dollars.

Right, but it's been in loss in previous quarters.

Well, mainly that was, as approximate you remember, John , that was some, in retrospect , some hedging we did that we probably didn't need to do. I think we've been in a profitable position since those hedges came off in the first quarter of 2002.

Thank you.

Thank you.

Your next question is a follow-up question from Mr. P.J. Juvekar of Smith Barney. Please state your question.

Yeah. Hi, Bill, you know, you had, what, $60 million of cost-cutting in TIO2 last year or last couple of years? And how much cost cutting can you do to catch up to Dupont? structurally ? Do you have a specific goal for 2003?

Yeah. That's a great question, P.J., because one of the things that -- it was funny because, you know , we looked at -- when the independent consultants came in, you know, the data that they started with was 2001 data. I'll tell you, it wasn't very pretty in our relative cost position versus the, you know , versus some of the competitors in the TIO2 business. And when we updated that for 2002 after the $60 million or so that you talked about, we found ourselves in a much more attractive position. We still have a -- you know, room to get closer to Dupont. And, again, one of the affirmations, the findings of the study was that the independent consultants agreed that -- or, you know, based on the review they did, we all agreed and came to the conclusion that there are still opportunities. The opportunities are a little different now. The -- some of the low-hanging fruit maybe is gone. But some of the work we've been doing and we do use six segment technique now. I think we have 140 green belts and something like 60 black belts now. Some of the stuff we've been doing in terms of reliability , quality and that sort of thing , are starting to pay some significant dividends. So we would hope that for this year , given the fact that there are other cost pressures on us. And when you look at our manufacturing costs per ton to the extent that the Euro has strengthened versus last year , that works against our dollar reported cost per ton. But absent FX, we would be looking for prosecuting against last year's manufacturing costs per ton. Would we want to quantify that right now for you ? It's still early days, but certainly the objective is to continue to make progress toward getting closer to Dupont and further away from the other TIO2 producers.

Okay. Thank you.

Thank you. Gentlemen, there appear to be no further questions at this time.

Okay. If you're unable to hear the entire call, playback will be available until Tuesday, May 6, by calling 973-341-3080. Reservation number 3839719. And you can access the speech and slides on the Internet later today at www.Millenniumchem.com. Thanks for listening. If you have any further questions, please call. Thank you.

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