利安德巴塞爾 (LYB) 2003 Q2 法說會逐字稿

Good morning and welcome to the Millennium Chemicals second-quarter earnings and outlook discussion conference call. At this time, all participants have been placed on a listen only mode. Following the presentation, the floor will be opened for questions and comments. At this time, I'd like to turn the floor over to your host, Mr. Mickey Foster, VP of Corporate and Investor Relations. Sir, you may begin.

Good morning 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 second quarter of 2003 and our outlook. Speakers include Robert E. Lee, our President and CEO, Jack Lushefski, our Executive Vice President and CFO, and myself, Mickey Foster. As we announced in the invitation to this conference call, you can view the slides and listen to our presentation live by accessing our Web site, www.MillenniumChem.com and clicking on the Investor Relations icon. The slides available to our Internet participants are meant as an enhancement tool and they contain information which is either in our press release or which we will discuss during this presentation.

Here are two instructions for our Internet participants. First, in addition to asking questions on the conference call as you have traditionally done, you can ask questions by clicking on the Send Question button located on the left-hand portion of your screen and we will respond to them live during the Q&A portion of the call. Second, the slides will automatically move forward in the presentation on your screen.

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 that are 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 detailed 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 directly comparable GAAP measure either in this presentation itself or in information we posted within our presentation materials on our Web site.

Bob will begin. Jack will then cover the financials. Next, I will cover TIO2 and and Equistar and finally, Bob will end with our key changes. Then we will be glad to answer questions. Bob?

Thank you, Mickey, and good morning. I'm very pleased to speak to you for the first time as the CEO of Millennium. The first few weeks on the job have been very challenging, as we've had to make some very difficult decisions, but I believe we're heading in the right direction with a focus on the important priorities that will drive our success.

Over the near-term, we are directing our full energies on three key areas. The first relates to a continuing focus on our costs. We need to not only continue to tweak our costs and improve our efficiency year in and year out, but we need to also make step changes in our manufacturing and business processes to reduce our total costs, as well as the asset intensity of our business. We also need to get refocused on our customers. We have spent several years improving the performance characteristics of our titanium oxide products to bring them up to industry-leading or matching positions. Now that we've caught up with the industry, we will maintain that position and then prove our competitive positions at our customers. The entire organization understands that everything we do is about customers and our ability to profitably serve them. I will personally spent much of my time with customers. The third key priority is to maintain and improve our balance sheet to allow our management team the financial flexibility to make good business decisions without challenging our financial security. We have aligned our new organization around these objectives.

The decisions that we have made over the last few weeks relate directly to these priorities. The suspension of the dividend was required, as we were faced with a heavy debt burden and tight cash flows. Continuing to pay the dividend was not the right course of action. It is my belief that this half-step backwards will get us to a better value quicker than by continuing with these payments.

Just as we could not afford the dividend, we could also not afford to work on all the initiatives that we were working to deliver. We needed to get our activities focused around our core businesses and eliminate the overhead associated with everything else. We cannot afford the luxury of saying "Things will get better as the chemical cycle turns." Getting back to the basic fundamentals of the business allows us to reduce our costs by $20 million annually. We have reduced capital investment projects to primarily the basic items of safety, environmental and very fast cost reduction opportunities. We will maintain this approach for the foreseeable future.

Critical to the narrowed focus of our strategy was the decision to flatten the organization structure. At the top, we made the Chairman's role non-executive, as we believe it is better corporate governance but also allows the management of Millennium to focus on delivering results. We flattened the executive ranks to match our priorities and broaden spans of control. This resulted in a 33 percent reduction in senior management and a 40 percent reduction in other executives in the business. In total, we reduced our nondirect manufacturing employees by over 15 percent, eliminating 175 positions worldwide.

The decision to consolidate our corporate office in Hunt Valley, Maryland allows us not only to reduce costs but also better aligns corporate and operational decision-making. The same holds true for the elimination of a separate business unit structures around (sic) the coatings, plastic and paper markets. We are now functionally focused around the world to better and more cost effectively serve our customers. At the end of the day, that is why we are in business -- to sell products at an acceptable profit. Now, I will turn your over to Jack, who will discuss our financial results and restatement issues.

Thanks, Bob. I would now like to review some details of Millennium's reported results for the second quarter of 2003 and our financial position and end of June 30, 2003. Before I begin that review, I will discussed the effects on December 31, 2002 shareholders equity of the restatement items disclosed in our Form 10-Q, which was filed two days ago. As a result of errors discovered in the third quarter of 2003, the Company is restating its financial statements for the years 1998 through 2002 and for the first quarter of 2003 to correct this accounting for deferred taxes related to its Equistar investment and French subsidiary, the calculation of pension benefit obligations and its accounting for a multiyear gold transaction.

As we have detailed on slide six, the corrections of the errors relating to deferred taxes had the effect of reducing shareholders equity at December 31, 2002 by 435 million. The corrections related to the pension benefit obligations and the gold transaction reduced shareholders equity at December 31, 2002 by 34 million and five million, respectively. For a more detailed description of the aggregate effects of these restatements, see Note Two to the Company's financial statements included in the Form 10-Q filed on August 19th.

Our entire senior leadership team at Millennium is focusing on the priority of correcting the Company's financial statements. We are working with our independent auditors, PriceWaterhouseCoopers LLT, who must audit the corrections. We are also evaluating ways to improve our processes and controls so that issues like these are less likely to surface in the future. The Company intends to file an amendment to its annual report on Form 10-k for the year ended December 31, 2002, and an amendment to its quarterly report on Form 10-Q for the quarter ended March 31, 2003 to reflect the corrections. These amendments are being prepared and will be filed as soon as possible with, of course, the concurrence of PriceWaterhouseCoopers. These corrections do not affect the underlying fundamentals of our business operations, nor do they affect cash flow of Millennium in 2003.

Let's move on and discuss performance for the second quarter and year-to-date. Please note that these figures have all been adjusted for the accounting errors that I discussed. Let's start with Millennium's Profit and Loss summary slide, which provides abbreviated statements of operations to arrive at adjusted earnings after exclusion of certain items. Table Five in our press release provides a reconciliation from reported GAAP earnings to adjusted GAAP for the same items on an after-tax basis.

Operating income for the second quarter of 2003 was 25 million, up 10 million from the second quarter of last year but down 2 million from what was earned in the first quarter in 2003. Second-quarter net interest expense was 23 million, up 2 million from the expense level for the second quarter of last year and up one million from the first quarter of 2003. Average net debt levels during the second quarter of this year were about 60 million higher than average net debt levels during the second quarter of last year. Our share of Equistar's operations on an after-interest basis generated a loss of eight million in both the second quarter of 2003 and 2002. Income tax benefits were recognized during the second quarter of 2003 and year-to-date 2003. This is different than Millennium's original first-quarter 2003 tax provision included in our financial statements in the Form 10-Q for the quarter ended March 30, 2003 when tax benefits were not recognized for tax jurisdictions that reported losses. The change relates to our deferred tax accounting error corrections for prior years that add deferred tax liability to our balance sheet and therefore allow the accrual of deferred tax assets to continue. The adjusted net loss for the quarter was four million, or six cents per share, versus a net loss of one million, or two cents per share, for the second quarter of last year.

Moving to slide eight, this slide provides a reconciliation from our reported GAAP net loss to the adjusted GAAP loss I've provided and discussed on the previous slide. Reorganization expenses related to the cost reduction program outlined in our press release and our share of Equistar's debt prepayment cost are highlighted as reconciling items in the second quarter of 2003.

Slide nine provides the same reconciliation from reported GAAP to adjusted GAAP for the first six months of 2003. The cumulative effect of accounting change for asset retirement obligations and our share of Equistar's loss on sale of assets from the first quarter of 2003 are added as reconciling items.

Let's move to a discussion of our balance sheet and cash flow, slide ten. Net debt at the end of the quarter was 1.96 billion. The Balance is 51 million higher than our net debt balance at the beginning of the quarter and 79 million higher than our net debt balance at the beginning of the year.

Slide 11 details our change in net debt for both the second quarter of 2003 and year-to-date June 30, 2003. Our semi-annual interest payments on our senior Notes and senior debentures were made in this sector quarter and amounted to a $43 million use of cash. Cash used for capital spending remained at a very low rate, as we continue to conserve cash by limiting capital to important safety, environmental and 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 37 million in cash. The primary reason for that increase related to the increased TIO2 finished good inventory and, to a lesser extent, a reduced level of Accounts Payable at June when compared to March. Source and use of cash for other assets and liabilities relates to the seasonal timing of payments for such items as insurance, property tax, payroll related costs and long-term liabilities. Net debt increased during the quarter by 51 million. We did not receive a distribution from Equistar in the quarter and do not expect distributions for at least the next twelve months.

Turning to slide 12, EBITDA to net interest coverage as defined in our present agreement for the trailing twelve months to June was about 2.38 times, and our net debt to EBITDA leverage ratio was 5.64 times. Based on those debt statistics, Millennium is in compliance with the financial covenants in our credit agreement at June 30, 2003. We do not believe we will be in compliance at the end of the third quarter and will be seeking an amendment to the credit agreement before that date. Please refer to our recently filed Form 10-Q for a more complete discussion of our credit agreement and liquidity, particularly Note Eight to our financial statements and Liquidity and Capital Resource section of Management's Discussion and Analysis of financial condition and results of operation. Now, I'll turn it over to Mickey, who will discuss some details about performance and some of our business segments and Equistar.

Thanks, Jack. First, turning to the titanium dioxide segment, the TIO2 segment reported second-quarter operating income of $23 million, compared to 15 million in the second quarter of 2002 and 21 million in the first quarter of 2003. Turning some reasons for those numbers, first, looking at price, in local currencies, average second-quarter prices increased seven percent from the second quarter of 2002 and were comparable to the first quarter of 2003. In U.S. dollar terms, the second-quarter worldwide average selling prices increased 15 percent from the second quarter of 2002 and increased two percent from the first quarter of 2003.

Next, looking at sales volumes, second-quarter 2003 TIO2 sales volume of 145,000 metric tons represented a decrease of 15 percent from the second quarter of 2002 and was equal to the first quarter of 2003. Sales volume trended down each month during the quarter and was lower-than-expected due to the weak global economy, adverse weather -- primarily in North America -- and competitive pressures.

Next, looking at our operating rate, the second-quarter 2003 TIO2 operating rate was 96 percent of annual nameplate capacity of 690,000 metric tons, compared to 89 percent in the second quarter of 2002 and 88 percent in the first quarter of 2003. The Company's TIO2 finished goods inventories increased in the second quarter.

Now, turning to our outlook for TIO2, operating profit in the TIO2 business segment is expected to decline in the third quarter of 2003 compared to the second quarter of 2003, as production may slow to meet softer demand outlook due to continuing weakness resulting from uncertain worldwide economic conditions and competitive pressures. Weakening foreign currencies against the U.S. dollar and competitive pricing may result in downward pressure on average US dollars TIO2 selling prices in the third quarter of 2003.

Next, turning to our acetyl segment, the acetyl segment reported second-quarter operating income of $5 million, compared to 3 million in the second quarter of 2002 and 7 million in the first quarter of 2003. The extended acetic acid plant shutdown impacted profits by about $3 million in the second quarter of 2003. In the aggregate, the weighted average U.S. dollar price of VAM and acetic acid in the second quarter of 2003 increased 42 percent compared to the second quarter of 2002 and eight percent from the first quarter of 2003. Margins for the same periods have not increased similarly due to rising natural gas feedstock prices. Aggregate volume for VAM and acetic acid in the second quarter of 2003 decreased 13 percent from the second quarter of 2002 and decreased 10 percent from the first quarter of 2003.

Now, turning to our outlook, operating profit in the acetyl business segment for the third quarter of 2003 is expected to be similar to the second quarter of 2003, reflecting stable market conditions in Europe and the Americas. Higher natural gas costs in the second quarter of 2003, which flow through costs of goods sold in the third quarter of 2003, offset the benefit from the absence of the plant shutdown which occurred in the second quarter.

Now, turning to Equistar, Millennium's 29.5 percent stake in Equistar generated a post-interest lost on investment of $14 million in the second quarter of 2003, compared to the loss of 8 million in the second quarter of 2002 and a $43 million loss in the first quarter of 2003. Equistar is the Gulf Coast olefin plant that can consume liquid raw materials -- demonstrated their differential cost advantage despite crude oil prices remaining high, averaging close to $30 a barrel for the second quarter. This advantage was partially offset by depressed volumes for Equistar and for the chemical industry, caused by post-Iraq war inventory reduction, the impact of SARS and generally poor economic conditions.

Now, turning to our outlook, during the second quarter of 2003, Equistar is sales volume generally demonstrated slow but steady improvement, and this trend is continuing into the third quarter of 2003. Equistar expects to continue to benefit from its liquid raw material advantage, although this advantage may not be as strong as in the second quarter of 2003. The potential for continued raw material cost volatility represents an uncertainty that Equistar believes that market fundamentals will continue to favor its liquid-based olefins position. Performance in the third quarter of 2003 will be largely dependent upon the pace of the global economic recovery. Assuming moderate economic recovery and improved global stability, Equistar would expect to benefit from strengthening sales volume and moderating raw material prices. However, given current depressed industry operating rates, it will be difficult to achieve and sustain product margin improvements in the near term. Thanks. Now, I will turn it back to Bob.

Thanks again, Mickey. To wrap up our formal comments, I'd like to outline what the management teams going to be working on. We will be obsessive about costs. An operationally excellent model will drive all of our decision-making. We need to have a costs position that makes us profitable in any chemical cycle. That means we're looking at every item of cost with a different perspective than we've had in the past. Every cost item will be challenged as to whether it matches our priorities and our current state of affordability. We will grow our top line. We make our decisions regarding our customers to align with their growth plans, and we will be competitive. We are and will continue to review our assets for strategic fit around our priorities of cost, customers and financial flexibility. We will be much more active in the governance process relating to our largest single asset, our joint venture interest in Equistar. We will remain cautious about our spending and investment decisions and more importantly, we will hold ourselves accountable for delivering acceptable results. Key performance metrics are being established, including at the Board level, to align our team around successful execution. We still have much work to do, and I look forward to giving you regular updates. Now, we will open the lines for questions.

Thank you. The floor is now open for questions. (OPERATOR INSTRUCTIONS). Our first question is coming from Derek Sadowsky with Salomon Smith Barney.

Good afternoon. I was a bit surprised to see your operating rates in your 96 percent for the quarter, given the lack of (indiscernible) season. I was wondering if the rates came down through the quarter, month-by-month and what your expectations were for the second half in terms of operating rates and your inventories?

Our operating rates will probably be in the high 80s, maybe low 90s, probably the rest of the year. We are drawing them back just a little bit. On the inventories, we did say that they did go up in the second quarter. Obviously, we have some new initiatives in selling product, so we will just have to see how that goes. Of course, it all depends also on the economy, so if we have a strong -- continue to have -- or have a strong economy, then we will probably be able to increase sales. But I think, right now, we are looking, in the third quarter, at relatively stable sales volumes with what we had in the second quarter. Anything else on that, Jack?

I think, Derek, you're right. In hindsight, we were waiting for a coating season all through the quarter and the quarter ended without it.

Our production was lower in June than the other two months; it was the lowest month. We did make some correction but obviously, it was too late in the quarter.

Right. Also regarding TIO2, I know last year you talked about nanotechnology as a growth platform. I was wondering if you were still continuing with that, or if you moved away from that strategy?

Derek, we can't afford that strategy, so we've moved away from it with the exception of a few already in production and items that we already have revenue and profit margin from in the DNOX (ph) area, the catalyst area, but other areas are substantially reduced.

Okay, great. Thank you.

Your next question is coming from [Peter Butler] (ph) with Glenhill.

Good morning. Hey, Mickey. I'm wondering now, Mr. Lee, (indiscernible) a year from now -- going through a tough patch now. Things are going to get better? Millennium is still going to be independent a year from now? Is Equistar still going to be with you? How much FRB growth do you need to tighten polyethylene, ect.?

I can tell you, in terms of being independent, we plan on executing the strategy around those three simple priorities. I would hope, when you look back a year from now, you see a better cost structure, you see growth at the top line as we get back in the customer business, and I hope you see an improved balance sheet. We will be looking at all opportunities, Peter, to improve our balance sheet. We're looking at all our assets and all of our opportunities to improve our financial condition. So, I would hope you would see the makings of a better balance sheet, higher sales and better costs.

The outlook for polyethylene -- how much growth do you need in in-demand to tighten things?

It's relatively soft now. Certainly, we need -- for any business that's industrial/chemical right now. We're all trying to control the things we can control. What we can't control now is the pace of economic growth. For TIO2, polyethylene, ethylene, we need economic activity. As Mickey said in his comments, Equistar is seeing monthly improvements -- steady monthly improvements in volume. If those things continue, things will start to tighten up, but it won't be until the latter part of 2004.

Thanks for the help, guys.

Your next question is coming from Graham Copley with Sanford Bernstein.

Good morning, guys. What mandate did the Board give you, and how are you being compensated in terms of what are the key drivers of your compensation? Then I have a follow-up on TIO2.

the mandate of this Board was to get this company stabilized -- focused on a narrowed strategy and deliver results, and they would hold me accountable. In terms of the way I'm compensated, I've got a salary and the incentive plan for this year, which was largely share price and operating profit-driven, is pretty much a nonevent for me this year.

I'm assuming what I will be measured on next year will be the key metrics around delivering the results on profits and balance sheet. We will not use EVA, I will tell you that.

Fair enough. On the TIO2 issue, what Mickey said about operating rates in the second quarter and sales in the second quarter -- if you really wanted to bring that inventory back down in Q3, you've almost got to operate this business at about 75 percent of capacity. Does that sound about right, or am I missing something?

No. I think, Graham, we're anticipating -- if you look at the global statistics, it appears to us as if the first six months of the year, the industry dropped about five percent overall in terms of demand. We would expect the full year to end at less than that five percent decrease we saw in the six months. We're getting indications from our customers that are encouraging. Now, it's not going to be a gangbusters six months, but we would expect a little stronger activity than normal in the second half versus the first half.

What's the risk that we make the same mistake we did in the first couple of quarters and we end up with, again, higher-than-expected inventories and more working capital pressure at the end of September?

All I can tell you is that we meet formally every other week on the issue and are managing it tightly.

Okay, thanks.

Your next question is coming from [Rose (indiscernible) Smith] with [Dwight] Asset Management.

Good afternoon. I had a couple of quick questions. The first question is about the Accounts Receivable securitization. In the 10-Q for the second quarter, there's a mention of a ratings trigger. My question is whether that is a new provision instituted since the first quarter 10-Q was filed?

No, it is not.

Okay. The second question I have is about where the fund -- cumulative proceeds from the securitization appear on the cash-flow statement. Are they embedded in the Other line, or where exactly do they appear?

They primarily came through in prior years. We've continued the program started earlier (sic), so you would have seen them just coming through trade Accounts Receivable.

They are reflected in operating trade receivables.

So, the line that says either increase or decrease in trade receivables is where the proceeds would be?

That's right. From quarter to quarter, the change was minimal.

Okay, so the cumulative funds of 182 million through June of '03 -- I want to make sure I'm understanding what you're saying. That relates to receivables sold in prior periods?

It's really the same funds over and over again. Essentially, since we instituted the program, we went from a balance of 0 up to 60, $60 million today. So net/net, we've got $60 million out of the program that, if you look at the balance sheet, reduces the AR on the balance sheet and reduces debt on the other side of the balance sheet.

Okay. What was total cumulative proceeds for 2002?

I'd have to get that number; it's probably disclosed in our 10-k. We will look it up for you.

I didn't see it in the 10-k, so if you could get that, that would be great. My final question is about what plans you have in the event that the securitization is terminated due to rating (inaudible). Would you replace that, or somehow or just use your bank line or what?

We could use our bank line; we could use our overseas cash. We have quite a bit of cash overseas that we could use. We could try and replace the securitization program with another asset-backed lending type program. I think we have several options at this time, if that was ever terminated.

Okay, my last question is --.

We do have the number for you. The gross proceed in 2002 was 213 million, although again, the net was an awful lot different than that.

Okay. Thank you. My last question is just about when you are scheduled to meet with S&P and Moody's?

We are actually going to meet with them in about three weeks time.

Okay, thanks very much.

Thank you. Your next question is coming from Kunal Banerjee with Goldman Sachs.

Good morning. Three questions here -- first, Bob, you talked about a renewed focus on costs yet again, but you know, I think over the last couple of years, specifically in TIO2, there's been a fair bit of cost taken out. I'm just wondering, when you re-look at all these assets in the wholly-owned businesses, where is the opportunity for taking additional cost out? Is it in sulfate-based TIO2? Is it in acetyls? If you could just talk a little bit about that?

There's opportunities to tweak throughout -- what I'm talking about in terms of the next phase of cost reduction is step changes, both in sulfate and chloride production of TIO2. We've redirected our research efforts to the process side of our business. We spent literally five to seven years getting our products up to world-class standards and in some cases, market-leading standards. It took a long time. We're in the process now of fully implementing what we call product line renewal. That's done. We've reduced focus on that; we are going to maintain our position there, but we have caught up and we can reduce effort there and redirect that effort to the process side of our business, which -- while we were renewing our product line, probably got less than its fair share of attention. We think we have some significant opportunities to improve the asset intensity and the costs of both our chloride and sulfate production.

So beyond the (indiscernible) shutdown, are there European facilities that you could take a harder look at, sulfate facilities out there? I mean, I'm just trying to get a sense for is there a facility closure in the works (indiscernible), or is it just something that you haven't yet made a decision on?

We have not yet made a decision on (sic). We're looking at all possible answers I think is the fair answer there.

Okay. Then just on gas, now that you are on FIFO (ph), I just wanted to get some sense for what you're average gas cost was in the second quarter and what you expect it to be in the third quarter, just for modeling purposes.

Average gas cost in the second quarter is about 560-ish. I expect it to be lower than that in the third quarter, around 5, 5.25 or so.

All right. Lastly, I'm not an expert on accounting, but I just wanted to get your clarification on this; when you do increase the deferred tax liabilities, does that in any way reduce your operating loss carryforwards or (indiscernible) credits?

No, it doesn't change that at all.

Kunal Banerjee It doesn't change that? What is the offset then? Is it just deferred tax? What would be the asset that would come off, or is it just a charge to equity?

It's equity. (Indiscernible due to multiple speakers_ -- deferred tax charge, crediting the balance sheet (inaudible) deferred taxes.

Okay, terrific. Thank you.

Your next question is coming from Don Carson with Merrill Lynch. Mr. Carson, your line is live.

Sorry about that. Happy to be on. It's [Brian Lombardi] for Don. I've got a question first about TIO2. You said that production was lower in June. What was your June operating rate? What were the operating rates in July and August?

I know they -- we really don't get too much specific by month, Brian.

I can tell you, Brian, that production in July and August was lower than June and June was lower than May.

Okay, fair enough.

Directionally, it has come down since May in a line.

Okay. Roughly how many days inventory did you have at the end of the second quarter? You are on FIFO (ph) now in that business. How long does it take you to get to more expected product?

We've got over -- (inaudible) -- we've got around 80 days or so of inventory at the end of the quarter.

Okay. It sounds like -- you made some mention in the press release on competitive pressures in that business. It sounds like almost competitors have already started cutting prices. Is that the case there?

No, not necessarily. We're just trying to be cautious because prices are moving sideways; they are stable. You know, we have announced a price increase in the Middle East/Africa, but the rest of the world -- I mean, there are pockets of increases, pockets of decreases. They are relatively stable. It was a cautionary statement.

Those price increases from earlier in the year haven't been realistic from what I understand. Are they off the table by now?

They are not off the table; we're still trying.

Portions of them have been realized.

Portions of the price increases announced in first quarter have been realized?

A portion, yes.

Okay, great. Thanks a lot.

Your next question is coming from Gregg Goodnight with UBS.

I joined late. I apologize if I ask some repeat questions. What is your anticipated tax rate for this year with the new treatment of deferred taxes?

We have a year-to-date tax benefit rate of about 40 percent, and I would anticipate that should continue for the rest of the year.

Okay. You mentioned Equistar. There are a lot of cross currents there with volumes coming up and heavy cracker margins going down and the price increase for polyethylene that was anticipated. I haven't heard that that was much of a success. Do you expect the Equistar contribution, or just on an EBITDA basis, to be up or down in the third quarter versus the second?

Right now, probably down.

Okay, big down or slightly?

Just slightly down.

Capital spending for the rest of the year and next year, did you give a number on that? I'm sorry, I may have missed it.

I think we said it would be similar to this year.

No more than $50 million.

Fifty is in the press release for 2003 -- (indiscernible due to multiple speakers) -- similar to that next year. We don't have any major projects contemplated.

Okay. Last question, if I could? I've read that this crude sulfate turpentine prices (sic) have been higher -- significantly higher. I don't have much detail on that. Can you tell me what the impact for the higher prices was in the second quarter and is anticipated to be going into the future? Does it make a material difference in what you're reporting (indiscernible) segment results?

(indiscernible due to multiple speakers) -- turpentine prices are up about 30 percent from last year. It doesn't -- quite frankly, it's been helpful for us as we've negotiated some of our sales contracts. In Europe, the convention is those deals are negotiated every six months, and that happened for us in the May/June/July timeframe. Generally, because we had the information in our hand, that was helpful in putting together our sales packages for the second half.

So on a net/net basis, it really isn't very injurious to your business then?

We use about -- I think it's 11 to 12 million gallons a year and at the Lowpoint, that delivered price of that was 80 cents a gallon or so, so that's what runs through our P&L, and now it's come up from that level. You can do the math.

I appreciate the help, guys.

Thank you. Your next question is coming from [Nicolas Bruce] with Lloyd's TSB Bank.

Good morning, gentlemen. You mentioned that you expect not to be in compliance with your covenant ratios as of September. Do you envisage that being a one quarter only miss, or will you have to amend the levels going through into next year?

We will need to amend the levels going forward next year. What we're planning to do is amend -- we're starting an amendment process, and there's quite a bit of disclosure on it in the 10-Q.

Can you give us an idea of how many quarters forward you think will need to be amended?

We're looking at at least amending the quarters through the end of next year.

Through the end of next year, okay. Thanks.

Thank you. You have a follow-up question coming from Graham Copley with Sanford Bernstein.

Following on from that question, how much do you think it will cost you, both cash and increased interest rates?

We haven't got to that point yet, Graham, in discussing that with the lead banks, so I'd prefer not to throw out a number that will definitely be wrong (LAUGHTER) versus where we end up.

But we've been through some of the -- or is it likely that the same order of magnitude will apply?

I hope so, yes.

That might be a best case then?

That would be a best case.

Okay, thank you.

Gentlemen, we appear to have no further questions in queue at this time. I would like to turn the floor back over to you for any closing comments.

If you were unable to hear the entire call, playback will be available until Thursday, August 28 by calling 973-341-3080, reservation number 412-6032. You can also access the speech and slides later on today on the Internet at www.Millenniumchem.com. Thank you very much for listening. If you have further questions, please call. Thank you.

Thank you for for your participation. This does conclude today's teleconference. You may disconnect your lines at this time.