利安德巴塞爾 (LYB) 2004 Q3 法說會逐字稿

Hello and welcome to the Lyondell Chemical third quarter 2004 earnings teleconference. At the request of Lyondell Chemical, this conference is being recorded for instant replay purposes. [Operator Instructions]. And I would like to turn the conference over to Mr. Doug Pike, Director of Investor Relations. sir, you may begin.

Thank you, good morning and welcome to the Lyondell's third quarter 2004 teleconference and webcast, this is Doug Pike Lyondell's Director of Investor Relations and it is customary I'm joined today by Dan Smith, our President and Chief Executive Officer, Morris Gelb, our Chief Operating Officer and Kevin DeNicola, Lyondell's Chief Financial Officer. And the agenda for today's call will be as follows. I will review our third quarter performance. Kevin will then review some financial metrics. And Morris will summarize the past year from an operating perspective. Finally, before we open the call up to your questions, Dan will discuss the millennium acquisition. And the call is scheduled to last 60 minutes.

Before we begin I would like you to note that statements made in this teleconference relating to matters that are not historical facts or forward-looking statements that are subject to risks and uncertainties. Actual risk results could differ materially from those forward-looking statements and for more detailed information about the factors that could cause our actual results to differ materially, please refer to our earnings release issued this morning and please also refer to Lyondell's annual report on form 10-k for the year ended December 31, 2003. Which was filed with the SEC on March 12, 2004. And also Lyondell's quarterly report on form 10-q for the quarter ended September 30, 2004. Which will be filed with the SEC in November 2004. In addition, as provided in our earnings release, issued this morning, please note that Lyondell filed a definitive joint proxy statement prospectus with the SEC on October 15, 2004, in connection with the proposed transaction with millennium. Investors and security holders are urged to read that document and any other relevant documents filed with the SEC as they become available. Because they contain or they will contain important information. And the earnings release also contains information regarding how you can obtain a free copy of the documents that we file with the SEC. I would also like to point out that a replay of today's call will be available from 1:30 p.m. Eastern time today until 5:00 P.M. eastern time on November 5.

The replay can be accessed by calling 1-800-839-8797 or 1-402-998-1603. And the access code for both numbers is 5549. The replay can also be accessed beginning at 2:30 p.m. eastern time today at the investor relation's page of our web site. www.Lyondell.com/earnings. In reconciliation to non-GAAP financial measures to GAAP financial measures together with any other applicable disclosures, including the earnings release, are currently available on our web site, again at www.lyondell.com/earnings. During the third quarter of 2004, Lyondell had net income of $50 million or $0.28 per share. And this compares to a net income of $3 million in the second quarter of 2004. Compared to the second quarter, each operating company's results showed strong growth.

And versus the third quarter of 2003, net income improved by $94 million. And the improvement was driven by strength in results at each of the operating companies, particularly Equistar, which improved by more than $100 million pretax. And the nine -month trends are quite similar as net income increased by $263 million as compared to the first nine months of 2003. Again, Equistar was the most significant contributor, 100% basis, pretax income increased by $355 million. And improvements at the other companies were also substantial. LCR's pretax income increased by $186 million. And IC&D's operating income increased by $96 million. Combined these improvements have driven a turnaround in Lyondell's earnings of $1.61 per share for the first three quarters of 2004 versus the same period in 2003. Regarding our tax rate, we continue to estimate that Lyondell's 2004 effective book tax rate will be 35%.

While the federal cash tax is estimated to be essentially zero in 2004. Keeping these financial results in mind, I now would like to briefly summarize the performance of the various products that support these results. I'll begin with the intermediate chemical and derivative segment includes propylene oxide, derivatives of propylene oxide, thiamine (inaudible), MCBE and styrene. During the third quarter of 2004, EBITDA for this segment was $100 million. And this is an $18 million increase over second quarter 2004 results. And as IC&D's best quarterly performance since 2002. And versus the second quarter, the improvement in IC&D's performance came primarily from a $15 to $20 million increase in propylene oxide and PO derivative product margins.

During the first half of the year margins this niece products have been negatively impacted by significant price increases in PO's major raw material propylene. During the third quarter, continued strong demand and high operating rates created the environment to recover these costs increases and realize margin improvements. For the first nine months, versus the corresponding period in 2003, results in PO and PO derivatives have increased by close to $ 70 million. This is based on a combination of higher margins and volumes. Styrene contributed about approximately $10 million to the quarterly improvement as increased prices for international sales more than offset substantial raw material costs increases. Additionally, total sales volumes increased versus the second quarter. And the volume improvement is primarily related to the absence of down time caused by scheduled second quarter maintenance turnaround at one of the RUS propylene oxide styrene monument plants. Results in MTBE continued to be relatively strong at approximately second quarter levels and TDI continued to be weak. As results were relatively unchanged versus the second quarter. And finally, I would like to point out that third quarter results include $6 million of costs related to the early retirement of $100 million of Lyondell's debt. Thus far in the fourth quarter, market conditions for the chemical products including propylene oxide and derivatives styrene and TDI are relatively unchanged from the third quarter. Most of these products have significant pricing activity under way in response to tight market conditions and increased raw material costs. And the MTB in de-icer businesses are demonstrating typical seasonal trends with MTB margins generally weakening in the winter months and the de-icer volumes strengthening. In aggregate this is historically lowered for the quarter earnings, and a final point regarding IC&D is that the Lake Charles Louisiana TDI plant is undergoing a scheduled fourth quarter maintenance turnaround. Inventory management effort should minimize the impact of this activity on fourth quarter earnings. Now lets turn our attention to Equistar's performance.

Equistar has third quarter net income of $72 million versus $43 million in the second quarter. And this translates to an EBITDA of $208 million during the third quarter versus $175 million in the second quarter. For the first nine months of 2004, EBITDA has increased by $371 million and a total of $519 million. This represents the best January through September performance since 2000. And the key contributor to the quarterly improvement was increased ethylene derivative product price. Equistar's averaged third quarter propylene price was slightly more than $0.03 per pound higher than the average price in the second quarter. And the similar comparison for the ethylene oxygenates indicates that Equistar realized higher average prices of approximately $1.5 to $3.5 per pound. During the quarter, ethylene realized its first price increase since January. Increase in a total of $0.03 per pound during the quarter. However, since the increases occurred late in the quarter they only raised third quarter average price by approximately $1.50 per pound. Partially offsetting the ethylene chain price increases, was an increase in the cost of ethylene production. Raw material costs for both crude oil and natural gas based raw materials increased significantly during the third quarter. These increases were largely off-set by corresponding increases in CO product prices, the most significant of which was a large increase in benzine price which rose from $2.60 per gallon in June to $3.95 per gallon in September. The net impact of these offsetting, factors was that Equistar's cost of ethylene production metric increased by approximately $1.05 per pound of ethylene.

Increased sales volumes also contributed to the quarterly results as combined sales volumes of ethylene, ethylene derivative products increased by 65 million pounds or 2.5% versus the second quarter. And a comparison of volumes through September versus the corresponding period of 2003, indicates that sales for these products have increased by more than 750 million pounds or 11%. October sales volumes have remained quite strong. Approximately a third quarter levels. And during October, price increases were realized in many products. Including ethylene, propylene, ethadione, ethylene glycol and polyethylene. The benzine price has settled approximately $0.20 per gallon below the record September price. However, raw material prices continue to be very high and volatile presenting an uncertainty that makes it difficult to forecast near-term results. And we should also mention that during the fourth quarter, Equistar has no major scheduled maintenance turnaround.

Now let me turn your focus to LCR. LCR's third quarter net income reached a record $147 million. And this equates to EBITDA of $182 million. $43 million increase versus the second quarter. And the cumulative EBITDA for the first three quarters of $452 million surpasses the previous best full-year results. And during the third quarter, the refinery operated at record rates processing $278,000 barrels per day. DSA volume from Padavesa (ph) was also very strong averaging 243,000 barrels per day. And in addition to benefiting from high production volumes, margins were strong in aromatic and spot crude and continued excellent operations enabling the refinery to benefit from a strong product mix.

Distributions to the owners continue to be very strong during the third quarter. And Lyondell received a net distribution of $138 million. For the first three quarters of the year, cumulative net distributions to Lyondell have totaled $280 million. Looking forward to the fourth quarter, results are expected to be less than the record high third quarter income. And primarily due to a magniforma catalyst change which will reduce aromatic and premium product production for approximately one month of the quarter. And results are also expected to be negatively impacted by increased natural gas costs from typically lower winter gasoline margins. Despite these pressures we expect results to be strong although not at the record level enjoyed in the third quarter. This concludes my prepared remarks. I would like to turn the call over to Kevin to discuss some of the elements of our cash management efforts.

OK Thanks, Doug. During the past two years I typically started my comments by discussing liquidity and cash management given the improved business conditions, I'm happy that I can now begin by discussing debt reductions and in terms of financing activity, this was a very good quarter. The most significant events were that Lyondell called $200 million of debt during the third quarter. And $100 million of that debt was repaid during the third quarter, the payment or the balance of that payment is going to be or was paid really as of fourth quarter event. And Equistar made its first cash distribution since late - in late 2000, $100 million was distributed to the owners during the third quarter with Lyondell receiving 70.5% of this amount and millennium receiving the balance.

In addition to these accomplishments, LCRre-priced its term loan, lowering the interest rate by 50 basis points. Lyondell expanded its accounts receivable sales facility by $50 million bringing the total capacity to $150 million. And this represents low cost financing as a logical action given increasing industry prices. And through the year we have maintained a $75 million balance on this facility. And liquidity is also a good story. In addition to reducing outstanding debt during the quarter Lyondell increased its liquidity by $76 million, finishing the quarter with $531 million of cash, and access to a $350 million revolver with no outstanding borrowings. And models for available under this revolver should be reduced by $66 million of letters of credit. And Equistar slightly increased its total liquidity with cash positions during the quarter. And Equistar finished the quarter with $147 million of cash. And the Equistar accounts receivable sales and inventory based revolving credit facilities were being utilized to the extent of $120 million. And at the end of the third quarter after taking into account $30 million of letters of credit the remaining availability under the combined Equistar facility was $475 million. Overall liquidity increased by $14 million after making the $100 million distribution to Equistar's owners. And it's customary for us to discuss working capital -- customary for us to discuss working capital. Given an increase in raw materials, the dollars committed to capital both Lyondell and Equistar.

On a dollar basis overall working capital committed to inventory, receivables and payables increased by $84 million at IC&D and $56 million at Equistar. And all the dollars committed to working capital increased or employees have continued to control working capital operating metrics very closely. And as presented in our press release, the metrics that we follow finished the quarter with two days of last quarter -- or less than last quarter's statistics. Lyondell's third quarter metric was 36 days while Equistar's was 32 days. And to complete the cash story, the final financial item that I wanted to summarize is capital spending. And during the quarter, capital spending was $16 million at IC&D, $28 million at Equistar, and $13 million at LCR And spending for the first nine months to $4 million at IC&D, $69 million at Equistar, $42 million at LCR For modeling purpose, I would suggest that you utilize full-year budget figures for IC&D. And Equistar and LCR, we expect spending to be below budgeted levels and he would suggest that you use actual spending for the first nine months and then assume a budget level spending for the fourth quarter. And regarding fourth quarter Lyondell debt reduction and Equistar distribution, based on recent market conditions, we expect that during the quarter, Equistar will distribute cash to the owners and that Lyondell will call additional debt. And that's a quick summary of our financing activities and cash position and I would like to turn the call over to Morris for operating review of the past year.

Thanks, Kevin. Since we generally discuss quarter-to-quarter results during these calls, I thought it might be worthwhile to step back and consider the progress we've made over the last year or so. It's been about a year since the first signs of recovery in our industry began to appear. And back then no one was sure it would be a sustained turnaround. Today we're more confident. So let's take a quick look at some of the changes we've seen. As you might expect, I'll start by listing a few of the positives. First in terms of volume growth in our core products, the ethylene chain has grown 11% year-to-date; While PO and its derivatives have grown 16%. I should point out that the American Plastics Council data confirmed this level of growth showing year-to-date polyethylene demand up by more than 9%. And importantly exports have grown by 20%. Pricing is also been a positive story. In the ethylene and PO product chains, Lyondell and Equistar's average third quarter 2004 prices were $6.5 to $8.5 per pound higher than the third quarter of 2003.

And benzene price averaged $2.15 per gallon higher in Q3 as compared to the year earlier quarter. Keep in mind that the Lyondell enterprise produces approximately 300 million gallons of benzine annually. Gasoline markets have also been strong. And each of our operating entities has benefited from this strength. A common measure of profitability in the refining industry is the 3-2-1-crack spread. This industry metric has gone from $5.10 a barrel in the first nine months of 2003 to $7.80 per barrel for the corresponding period in 2004. More specific to Lyondell, for the first nine months of 2004, M.T.B. results have improved by approximately $40 million.

Now in order to take advantage of market opportunities, we need to have strong operations. I would now like to describe some of our operating highlights. As Kevin said earlier, minimizing working capital has long been a focus for us. Since the late 1990's we have reduced days of working capital by more than 50%. And we've accomplished this with what I believe is probably the lowest overhead cost in the industry. When it comes to manufacturing, we had a strong belief that a safe and reliable plant is also an economically efficient one. For the last two years, each of the Lyondell entities, Equistar, L.C.R., and IC&D have had Osha recordable rates well below one. This puts us among the safety leaders in the industry. At our relevants plants where reliability is generally been outstanding, we further improved performance by 1.5 percentage points this year making approximately $150 million pounds of additional capacity available for sales. Improving reliability also generates savings and maintenance costs. We estimate that maintenance spending at Lyondell and Equistar is $50 million lower this year than it was four years ago. And LCR has made great progress in reliability over the last few years allowing it to take full advantage of the very strong refining margins I mentioned a moment ago.

One measure of reliability used at LCR is the meantime between pump failures. This metric is more than doubled since 2000. And again, improving reliability not only allows higher throughput. It also reduces maintenance costs. At L.C.R., maintenance spending is $20 million lower this year than it was four years ago. In all of them energy consumption per pound of ethylene produced is down by 7% this year. Polymers, our key measure of operating quality is called first pass prime. And since last year, we have made more than 50 million pounds of additional product available for sale. And put all this in perspective, the reliability and energy improvements I just mentioned, can add $50 million to pre-tax results, assuming cycle average margins. Last but certainly not least, we have also continue to advance strategically. Last December, production started at our new plant in the Netherlands. And this December, we are scheduled to complete the millennium acquisition, which Dan will talk about in a moment.

Now, we think of all this as a fairly significant list of positives. And on the other hand, a list of negatives is quite short and can essentially be summarized in a single item, the cost of raw materials. One year ago, the price of crude oil was $30 per barrel. And the price of ethylene was $0.38 per gallon. Last week crude oil prices crossed $55 per barrel. And ethane this week crossed $0.70 per gallon. As a result, the combined Lyondell and Equistar raw material costs looks likely to increase by over $1 billion for the second year in a row. But thus far the business has been able to pass these cost increases on to the market. And overall, the positives clearly outweigh the negatives. Prices, volumes, operating and capital efficiencies, and most importantly our financial results are all moving in the right direction. On a 100% basis, operating income of our three entities, IC&D, Equistar, and LCR, has improved by a combined $614 million for the first nine months of 2004, versus the same period in 2003. And with that, I would now like to turn the call over to Dan.

Thanks for that summary, Morris. I would like to use just a few minutes to discuss the millennium acquisition and ask for your support in voting your proxy. As Morris mentioned we plan to complete this transaction on December 1 at a shareholder meeting scheduled for November 30. At this time, all of our shareholders should be receiving the proxy. And I encourage you to read it and vote. However, I also realize that the document is more than 250 pages long and that our last discussion specifically devoted to the acquisition was in late March. Therefore is worth a few minutes to review the merits and attributes of this transaction. One of the key points is that this transaction brings the full ownership of Equistar under the Lyondell name. And enables Lyondell shareholders to benefit from the full value of earnings improvements at the chemical industry moves out of its trough into stronger industry conditions. As you know, Equistar's leverage to recovery is substantial. And we are in the early stages of benefiting from this leverage. I want to emphasize that we have structured the transaction in a manner that maintains leverage to the cyclical improvement for both the current Lyondell and millennium shareholders. Another point that I want to highlight is that upon the completion of the transaction, the size and breadth of the Lyondell group of companies will become more apparent in our consolidated financials. Over the past seven years we with the sum of the excels, experience and assets to manage and thrive in the chemical industry in the last seven years. The millennium acquisition will add to this by enhancing our product portfolio breadth and geographic reach.

The Millenium products fit the portfolio in multiple ways. We add to our portfolio through our number two global positions and broad geographic presence. It will enhance our presence in the coatings markets. And is a process in which manufacturing reliability is a key success factor. Our history of achieving results through manufacturing excellence and best practices has been quite clear at IC&D, Equistar and LCR over the past five years. I look forward to what our existing operations will learn from the TO-2 operation and what we will offer to it. And millennium's products are a part of the ethylene chain. The plant resides on Equistar's site and the products are sold to many existing Lyondell customers. In addition to the operating synergies, shareholders will also benefit from savings through the merger of our corporate staffs. In summary, we believe that this transaction will be accretive to earnings, maintain cyclical leverage, and preserves a framework consistent with our goal to deal over the balance sheet. A final point I would like to reinforce is that, those through this combination, and the other transactions we have completed over the years, we have built a significant chemical company, one with sufficient market capitalization and trading volume to provide investment flexibility to U.S. shareholders. I believe that Lyondell offers a unique investment in terms of our product mix and geographic breadth. Combined with product and financial leverage. And our financial strategy and commitment to our investors is direct and very simple. The first priority for our excess cash is to deal over the balance sheet. Please consider these points when you evaluate the transaction and vote your proxy. Thank you for your support. And I appreciate your consideration of each of the items on the proxy. I would now like to turn the call over to the operator for your questions.

Thank you. [Operator Instructions] Our first question comes from PJ Juvekar with Smith Barney.

Good morning.

Good morning, PJ.

Morris, you talked about the margins and the crack spread. Now, what are the sour crude refining margins relative to a year ago and relative to sweet crude margins?

Well, as you know, the spread between sweet crude and heavy sour crude has opened up dramatically in the last year. But I don't have those margins right at my fingertips. The spread between sweet and sour having accrued today is approaching $12 to $15 a barrel.

About $13 here.

Yeah.

So is it a big difference in, and is that why LCR is reporting such good results?

I think LCR is terrifically positioned in this kind of market situation that is a refinery that is designed to run the heaviest and sourest of crude. So we are definitely benefiting from that spread.

Right, and then going into this year, when you expected MTBE to decline dramatically, but with higher gasoline prices, MTBE has held up quite well. Now, let's say if energy prices remain high, what is your outlook for MTBE for next year?

Yeah, PJ this is Doug and maybe I'll start off and let Morris or Dan jump in later. But I don't think we really expected M.T.B.E to decline so much this year. Last year was a transition year where we were going through the California and New York and Canada could phase-outs. And you really saw that largely last year into the fourth quarter. And so this year, we have benefited as you said from strong gasoline markets and butane prices relative to gasoline. So, it has been a good and stable business. We felt for a while that we've seen most of the impact of the phased down in terms of the financial impact. That's not to say that the market is not going to continue to go through transition. There will be. But we felt that last year, represented most of the impact that we would see. Morris?

I think you're right. As demand fell away, as fortunately supply fell away as well. And we have seen quite a bit of shutdown activity in that industry. And so where we stand today, obviously, is supply and demand are closer in balance. And that's what leads to the improved performance. It's very difficult to predict where all that is going to go in the future. And we have obviously to consider whatever government action is going to be taken in Washington.

Right. But it seems like you are not expecting a big fall off next year.

I think we've said we have already seen it, P.J.

Great OK and now these results, does that delay your capital spending to convert your M.T.B.E plant into making other products?

I think what we've said about that is we will continue to evaluate the market conditions. We're certainly poised and ready to go if we need to make a conversion. But as long as we're making money in the business, and there is a market there, it is really not a reason to eliminate the product from our portfolio. And it's also important to remember that in the time that we have looked at these things, we're moving toward a different approach, and this dial butane is much smaller capital requirement as well if we have to make that change.

Great thank you.

Thank you.

Our next question from Sergey Vasnetsov with Lehman brothers.

Hi, Sergei.

And to ask you about your debt reduction priority, clearly you have been very clear on that for a while and that you talk a while ago. And do you think that the internal cash generation would be sufficient for that? Or would you consider issuing a primary stock as a complementary tool for the diligent?

I think, Sergei, the point where we are in the cycle now, issuing equity in order to repay debt does not look very attractive to us. First of all it would take a large slug to make a meaningful difference in the debt. And second point is I think more people are becoming more comfortable with the fact that there will be an up cycle and that the leverage that we have to that is huge, so I think -- no. We're not interested in issuing equity at this point.

OK. Very clear and secondly, once you integrate millennium, sometime early next year, would you roll in as it is into the Equistar important segments or would it be a separate line?

Remember, that there is high yield debt in all three locations. And we will maintain the legal entities. And we will run it basically as part of the other operation but on a shared service contract basis to make sure the profits are properly split up to reflect the ownership of the bonds in the three different entities.

OK.

Sergi, just hold in. We haven't finalized everything as yet on the reporting. Exactly how we will report things. But we will keep visibility for equity holders and all the bondholders. I think that's the key that's driving the decisions there.

That makes sense. And last question about LCR I'm sorry if you covered it already. About the contract allocation of crude from Venezuela 243, is it a one-time event or we should think about base level as consistent for next, let's say one year?

No. I think what you see is from month-to-month, quarter- to quarter; they provide above sometimes but balanced on the course of the year. So you shouldn't expect that that is anything different over the longer haul. More importantly, I think the excess crude that we run above the contract was making as much or more as the contract crude was during this quarter. So the important thing was we ran 278,000 barrels of crude and although it was very profitable.

Thank you very much.

Thank you.

Our next question comes from Kevin McCarthy with Bank of America Securities.

Hi, Kevin.

Good morning, Dan. Following up on L.C.R., can you comment on the dollar impact of the catalyst change that you expect here in the fourth quarter?

No, we really haven't dollarized that and tried to split that out. But I would say this, if you look at third quarter, aromatics were very strong. They contributed probably on the order of $15 million or so versus second quarter. Improvements, so you know for one month, we will have aromatics production curtailed somewhat.

And looking ahead to fourth quarter, there seems to be countervailing trends. Cash spreads seem to have come off the peak. And you mentioned the widespread between sweet and sour. And you have this catalyst outage. So can you help us with the fourth quarter at L.C.R.? Is it reasonable to expect it could come down a little bit comparable to the second quarter this year?

I guess back - we don't expect third quarter results. But we continue to expected strong results from LCR in the fourth quarter, Kevin.

OK

We've set records, LCR has set records each quarter operations have continued to be extremely strong. And even though we'll have aromatics area down a little bit, it's still going to be we think a strong quarter for us.

A final question on Equistar, if I may. It seems like downstream polyethylene margins have improved more rapidly than upstream monomer margins. Can you comment on that? And will you expect ethylene profitability to improve further in the fourth quarter?

Yes. I think what you are starting to see is supply-demand balances are driving pricing -- it's difficult for people after four years, five years of downturn to think in terms of anything other than passing costs along. But the industry is running very tight. We would estimate the ethylene industry in North America is above 95% in the fourth quarter and really pricing now goes into commodity pricing. Which is price allocation and starts to be independent of cost. And indeed price movements were very strong during the fourth quarter the price units is out in the fourth quarter were very strong. Unfortunately, the volatility and stock prices was also very strong in September and continued in October. And you got counter veiling trends there. You have the feedstock went very high. Which you had pricing moving up as continuing to move up and I think we'll more than offset the increases we've seen in raw materials. So we are still in the early stages of recovery. But we're clearly in recovery. There is not a lot more capacity out there that can run. And of course I think you will continue to see the margins move up.

Thank very much

Thank you.

Thank you. Our next question comes from Bob Court with Goldman Sachs.

Good morning, Bob.

Good morning.

Dan, if we could extend that just completed answer a bit further. If you looked out into the first quarter of next year, where we are facing a pretty ominous Nymex strip price, can you -- are you in a phase of the cycle now where you can get proactive price hikes ahead of that raw material escalation or is there still going to be a lag and you think maybe there is a chance that margins can soften up a bit should those prices hold accurate into the first quarter?

Let me repeat what I was trying to say there. We have very strong price initiatives out. Prices are moving up throughout the chain. They're moving higher on a per month basis than we've seen in, many years, if ever. But it's now driven more by supply-demand. I think you will continue to see prices move up because frankly when you don't have enough supply to go around, the only way to ration the product is through price. So, I think that's going to be increasingly what you see. You w ill subtract from that whatever cost of production is, which unfortunately runs on a different basis. And we tend to sell monthly, with monthly pricing, on most products here. And the raw material is you almost buy on a daily basis. And with the volatility there, it can be almost anything. So it's not so simple as taking the strip and saying that's what you are going to pay because you are not going to pay the strip. You are going to pay whatever the price is on that daily basis as you go through there. And this market, if you haven't checked, is not one that you can go out and hedge feed stocks, which really means speculate on and come out ahead because the instruments are hard too expensive and the volatility is far too great for that to make sense. So we're in this zone we will push pricing, which is really allocating the product. And we will do the best job we can to acquire the best feed stocks at the cheapest price and I think when you net that out, you are going to see margins continue to improve. But it will not be day-by-day, week-by-week. It will be choppy until we see some calming down in the feed stock markets.

Sure. As a follow up, and I will painfully use a baseball analogy here in Houston lately, but if you could help characterize where you think we are in the cycle on whatever method you want to use. I like baseball. But where would we be in ethylene, styrene and propylene oxide do you think relative from trough to peak?

We're maybe top of the first or at most bottom of the first.

OK. Thanks very much.

Thank you.

Thank you. Our next question comes from Kunal Banerjee with Morgan Stanley.

Good morning Kunal

Good afternoon. I guess it's afternoon now.

Afternoon for you, yes.

Just had a couple of questions, one on MTBE and the other, Equistar. On MTBE, have you taken a stab at what the European gasoline mandate might mean? Because I hear they are trying to reduce aromatics by about 7%. Points and that apparently is going to go to MTBE. Do you expect a boost from that? Or is there going to be a Middle Eastern share in that volume as well?

I think we'll benefit from that. Absolutely and if you moved in that direction, MTBE should benefit. I might also point out that in Europe, we've been very active, promoting ETBE and have recently completed a production run of ETBE and have a few more planned. That is also a product that may benefit greatly here as the gasoline exchange over there.

So you are planning to produce ETBE out of your branch plant there?

If there is a market for it, we can do it.

OK. And do you have any sense for what the size of the gasoline market there is? Is it seven million barrels per day?

I'm sure Doug can get you that number. I don't have it off the top of my head.

OK. And then on Equistar, maybe this is a little bit irrelevant with ethane at $0.70 per gallon. But I was just wondering, you know as you think about your feet fled mix, when does a gap that opens up typically would you want to go light. But in this case, you are also mindful of your co-products and you positioned that, benzene, propylene etc., maybe you don't want to increase your exposure to the merchant market in terms of, you know acquire propylene and benzene from the outside. So the question is if the gap were to open up again, if ethane sold off to a point where you found it attractive, would you prefer to run a sub optimal feed slate and keep your exposure of benzene and propylene minimized in terms, you know happy to buy it from outside?

Let me help you. During no point in this year as the advantage switched to ethane as opposed to our liquid feed stocks, now that may be misunderstood by many people but believe me we follow this on an almost hourly basis. And the gap was very large to an advantage for liquid cracking earlier. It closed. But never crossed over. But let me assure you, if it did cross over, we would have no hesitance to cross over ourselves and started consuming the ethane in a much greater amount. We optimize our plants full-time on a cash basis, not on a product basis.

And how does that impact your IC&D positions and propylene and benzene? Would you still be OK?

We make lots of benzene; we make a lots of propylene we don't have to worry about having enough to go around.

OK

Remember, financially cost was long particularly after the transaction, millennium we are long both propylene and benzene.

OK, al right thank you .

Thank you.

Thank you. Our next question comes from Jeffrey Zekauskas with J.P. Morgan.

Hi, good morning.

Good morning.

Has export demand made a difference to your volumes this quarter and do you expect it to make a difference to your North American volumes in the fourth quarter?

Well, we don't participate very heavily in the export market. But exports demand has made a huge difference to the industry. We have increased our shipments to Asia. We are normally mostly involved in Mexico and South America. But the important point here is that the export markets have been very attractive. And net to Asia out the U.S. have been very competitive with what we can do domestically.

I think if you all have been watching our presentations, we have a supply-demand chart that we use almost in very every presentation that shows North American supply demand overlaid with the global supply demand operating rate. And that chart makes it very clear that the slot capacity in the world is really North American capacity. So as we move into the up cycle, it's rational to expect that not only will we benefit from North American demand but growing world demand has no place to turn for effective turns other than North America for any great extent. This is a trend you should expect and with everybody panicking about China raising their interest rates, I think it's important to remember that what China is really trying to do is stop some of the structural investment and plant and equipment which has made no sense over the past couple of years and led to the hyper growth that's not sustainable. So this is part of the soft landing and frankly, I don't expect that we're going to see any significant impact in the consumable end, which is largely where our materials go.

And Dan, if I can rephrase an answer that you gave to a previous question so I can determine whether I understood what you said.

You seemed to say that ethylene, polyethylene prices are now beginning to move more because of supply and demand rather than raw material price inflation. But raw material price inflation as it were has obscured the benefits and profitability that an ethylene- polyethylene producer would gain or reap. And it sounded like from your point of view that sort of that petrochemical pricing up cycle based on supply and demand has begun now and just that it's not apparent because of the raw material price inflation. I think you pretty accurately got it. I think had we not seen the September and October up surge, the trend would have been much more clear.

OK. Thank you very much.

We actually show you how much additional cash went into working capital. Where did that go? It went into prices and materials going out. I think you got the story exactly right.

Al right. Thank you.

Thank you.

Thank you. Our next question comes from Andrew Rosenfeld with Prudential.

Hi, Andrew.

Hi Dan. Regarding working capital, if prices are causing it to increase, can you sort of comment on what customers are doing and how this affects their ability to build inventory? Sure and then a follow-up.

The story is the same. Let me start by saying we see no signs of inventory building, either our own or downstream, of ourselves. And I continue with the rationale is that why you should not see that. That I think by and large, the consuming public is more inclined to think that the prices of raw materials don't go up a lot from here but are more likely to go down. And indeed, that could be more meaningful than how much margin opens up. So our customers continue to believe that we it will be cheaper for them to restock inventories in the future and therefore the only thing they are doing is as their business grows, the volume has to grow to run through their operations. But we don't see any signs of volume metric increases. They're suffering the same thing we are suffering; we are tying up more money in same amount of inventory because prices are higher.

Thank you, and follow-up on the ETBE, the U.S. passed a tax bill and part of that will allow ethanol subsidy to be used for ETBE production. Can you comment on what you are looking at in terms of the U.S. in terms of going from MTBE to ETBE if the market opens up?

We obviously were very interested in that being part of the tax incentives. So it would allow ETBE to compete. But I think reasonably the issue comes down to whether or not given the poisoning that many of the opponents have done on this issue of whether or not there is a viable ether market in the United States. Clearly with this, and I have to go back and remind that you ethanol does not make environmental or economic sense. But if you insist on subsidizing ethanol and getting it into gasoline, the most efficient way to get it into gasoline would be as ETBE It has more air quality benefits. And more octane benefit even than MTBE. So if you ignore the fact that you need that subsidy in order to make it work economically, it's a great product. And one that we should use in this country but I think we're not terribly encouraged that we're going to get around the bias against ethers and get it into the U.S. market. We think it is a viable alternative for Western Europe, though.

Thank you.

Thank you.

Thank you. Our next question comes from Nancy Trol (ph) from Credit Suisse First Boston.

Hi, Nancy.

I know you did mention a little bit about volumes in one of the last questions. But if you look at what Morris was saying, ethylene volumes were up 11% year-to-date, PO and derivatives up 16%. These products generally grow with GDP. And how can we say that this is -- there is no inventory building here? And what should we think of as far as volumes going forward?

I think you have -- you have different situations there. Both certainly in P.O., we have a new plant facility, which we have sold out since then, so our volumes are up. But we're seeing the growth around the world and you typically see this when you've been through a downturn for a few years. You typically do see some catch-up in growth when you come out of that downturn. And we're certainly think was we're experiencing that all over. And we watch the inventories pretty carefully. Certainly ethylene is published. Only about six or seven days. We watch the customers; our real customers and we haven't seen increases there. And if you watch the behaviors of buying and --in and out of the markets for customers, there is certainly no indication that they are holding a lot of inventory relative to their demands.

The other point Nancy is that's off of a relatively low base. If you remember, at this point a year ago, things were pretty tough and especially in North America. And I would further comment that you can't look at this growth in isolation. What's really happening is if you look at the demand outside of this region, plants running at 95% already, they don't have capacity of pickup. So, the growth in other parts of the world is really being supplied by North America differentially. So we have rapid growth here but your measures are about right. You're just adding to that the export growth and the export growth is likely going to be there because the earning price for those pounds to come from until new capacity comes on there is no substantial new capacity coming on in the next several years.

So we continue for strong growth like this.

I don't know about like this but I think we should continue with strong growth.

OK. Thank you.

Thank you.

Thank you. Our next question from Don Carson with Merrill Lynch.

Hi, Don.

Hi. A couple of Equistar questions. Dan, you mentioned that you know things were getting pretty right. And that's obvious from some of the public data and there is not much new capacity coming on line. Is it time to think of bringing Lake Charles up? Would that be economical to run that plant because it would seem that the market should be able to absorb that soon?

We continue to monitor the situation. And when we think that the time is right and remember, we need probably close to a year lead time, then we will make that decision. But as of yet, we are not tapped out totally. And we would like to see the margins and volumes continue to move up and make sure that when we do start it up, it has a decent run and is worthwhile to do so. And it's not totally clear at this point in time that we are ready to start that process.

So, Dan did you say a one-year lead-time? I thought it was more like three months.

It's 9 to 12 to get it re-staffed and totally ready to operate.

OK.

So three months would be nice if there were three months. But our folks have gone back and looked at it afresh. And confirmed that minimum is nine and more reasonable is probably 12. Because we have to line up need stocks, remember, we transferred the people who worked in that facility throughout the system. So we would have to reconstitute a work force. It's no small endeavor to do that. And, therefore, you want to make sure that you have a meaningful run before you do that.

OK. And then Doug, you mentioned that there were no schedule turnarounds. I thought you had a glycol unit down at Equistar for a week or two and that you were doing some work on laporte this month as well. Is there no real significant impact from those issues?

No, and there is nothing out before as impact and no major turnarounds at all.

OK. And final, Equistar question, I know that you seem to have prices up a little more than some of your competitors. Your polymer prices were up about $3.6 per pound. Is that -- is there something you did in your mix or was it just your base was a little lower than your competitors who were generally up over the year around $0.03 or so?

That's hard to comment really about the -- not knowing the details of the competitors. But we are seem pretty strong pricing. High density. It has done pretty well and of course our mix is you know went badly a little bit leans that way.

Let me explain it more than anything else -- we haven't really analyzed anybody else as yet.

OK, thank you.

Thank you.

Thank you. Our next question comes from Greg Goodnight from UBS.

Hi, Greg

Good morning, gentlemen. A couple of questions with respect to the LCR operation. I assume that the extra crude that was processed was all heavy crude?

Dan Smith Yes.

OK. And next, is there a benchmark, which we should be using like mining coking or some other benchmark do you think would be particularly useful in following this incremental processing?

That's a good question.

you mentioned this 3-2-1 or 1-2-3.

3-2-1 is kind of the base industry.

But that's more west Texas sour.

I mean you can watch them. I would do it like most of these things. If you watch the quarter-to-quarter change, we're going to pick up quarter-to-quarter movements. And that may be your best way.

The deltas in any of those, give you the direction. If you start off a base and then take the deltas, you probably come as close as anything.

Sure. And speaking of that, what was the delta in this 3-2-1 second quarter to third quarter?

Second quarter to third quarter, I don't think I have that on my fingertips in numerical form. I'll have to give you a call back on that or we do have a plot on our website, Greg, that has the 3-2-1 over the past two years. Some thing I have it in numerical form and on my fingertips.

Not certainly, not quarter to quarter?

Yeah, I don't have the quarter-to-quarter.

We just have the year-to-year and the month machine. We have the monthly spread here. So I would make that available to you.

And next question, with the noticing the sales volume to refinery run ratios, if you track that number over the quarters, this quarter was particularly high, which -- 1.24 in the previous quarters have been sort of in the 1.2 range. I would assume with the matching principle, there is no sort of accounting thing going on that would help explain some of the high level of EBITDA seen in LCR in the third quarter. I mean, you didn't empty the tanks and sell more material.

No. No. Some of that is better operation in the refinery. We have definitely seen improvements in most of the major processing units there. But no, we didn't empty the tanks.

Yeah, there is no de-inventory phenomena or anything like that going on?

No. But do you transfer a large volume to CITGO. And if you cross over one day of a month, you can have some skewing. But it's because you are pipeline moving. So you do move a large amount at one point in time. So if they took on the 31st one-quarter and they didn't on the next quarter until the first, and you could have some skewing.

Would that result in a temporarily high EBITDA for specific quarters?

I will think it's that miserable quite frankly.

It can make some movement quarter to quarter. And I would always say the range of this is big volumes in a refinery like this and a $10 million or something, quickly one way or the other.

And at that point in your model you are too far down into the detail. There you go.

SG&A for Lyondell was $55 million versus $45 million long-term run rate. I would assume that has to do with the MCH deal or Millennium deal?

No it has to do with the fact that our employees throughout the operation earned zero bonus last year. And happily they will earn some bonus this year. Although still below target level. So that's the approval for bonuses. Its predominantly that number.

OK. And it should perhaps then drop back to more historic run rates in the fourth quarter?

No, we hope not.

Well, I hope for your sake also.

I think what you have been looked at is you have gone for a period of time when we were earning no bonus. And, therefore, accruing no bonus. And we think the normal position is that we will be earning bonuses. It's being considered part of the pay package. And so it's simply that the period you are using for comparison we had good operations and we were doing everything else right but we also were not getting paid. And this is down to our hourly workers through our salary brink's etc and that's not a position that I think is sustainable over the long hall. It would make an uncompetitive in compensation. So very seriously, we expect the number to be more in this range and hopefully go up from here on that basis.

Sure.

We do hope to find some other offsets as we continue to get better at costs. But I wouldn't want to take it back to that no bonus level.

OK. I guess you have to pay people for that spectacular safety record then.

Well, safety, environmental, reliability, the whole nine yards. I think throughout our operations, people have done a stellar job. They've continued to improve year by year through the worst downturn in the industry in my career and I think that performance does need to be rewarded.

OK. Thanks a lot, guys.

Thank you.

Thank you. Our next question comes from John Falm (ph) with Bank of America Securities. Good morning John.

Good morning. I just have a few questions, actually, about aromatics. Specifically benzene. Just wondering how you see that shaping up lately? You know what's going on with toluene into the gasoline pool and MTB. getting phased out, what do you see at least directionally in the fourth quarter or further out?

Well, I think this is Doug's (inaudible) And we're looking at benzene, as you know fundamentally its tight and toluene has been sold, it has been selling at premiums to a glending value. So as we look at benzene, it went down through a period where it was down, it is grown like in demand like other products and we see a fundamental tightness there. What's high difference than you have seen in the past periods, benzene's kind of choice for moving up and down. There is not really trimming capacity in the industry. Before, there were units that converted taurine to benzene on purpose and tended to trim when the pricing in margins when Benzene early ran up like it has been. Net capacities already been utilized and is in bare right now, so we think benzene looks pretty good. Don't take that as it will be $3.95 forever for a gallon but we think it looks like a pretty good fundamental market right now. And its representative of what you've seen a lot of the products are going through that kind of tightening and in some cases like benzene all are sneaking up on people.

No the other thing that happened over the last several years is there are limitations on benzene and gasoline and refiners trimmed their re-former operations and returned them to actually produce less benzene and that was driven by gasoline specifications. So it is not easy to go back and retune them to make benzene and separate the benzene for commercial use. So it has been a part of an overall trend that I think frankly sort snuck up on people. And the result is that it is not easily fixed in the short term. So I do think you are see benzene more valuable than it has been in the recent years.

OK. And on a related question, just assuming say third quarter co-products credits. What kind of crude to gas ratio would necessary to get you guys -- which they move your heavy.

I know what your trying to do, but don't think we can answer the question that way because what we do is we actually calculate, given the current pricing and bear in mind when you say third quarter, you have things moving in a lot of different directions. Some moving up more rapidly than others. So you can't take any period and say that's typical for co-products because co-products go to so many different places but the pricing mechanisms move at different rates. But we calculate making an incremental pound of ethylene from 12 different feed stocks. Which one you do the best on, given the co-products rate and the current pricing, and what I said earlier is we've seen that advantage be close to $0.06 a pound over ethane during substantial part of the year. We have also seen it close to within as much as $0.01 to $0.02 a pound. But we have not seen it cross over where it made sense to crack ethene as opposed to crack condensate or other liquids. Go ahead on the ethane crack spread.

Yeah, I think in the ethane you have to keep in mind is that in this situation where ethylene demand is really quite strong, ethane values have separated from natural gas. The fractionation spread is at historically high levels right now. You can't just look at crude oil and natural gas price. You really have to look at ethane.

OK. Yeah. I was trying to get at really what the quantifiable advantage is. But it seems as though there,

It's more complex unfortunately. And what's happening, if you had gone back two years ago and said you had $55 crude oil and $7 or something for gas, you say you can't possibly have a liquid advantage. But it just shows the complexity has grown and you got to go through a more rigorous calculation to get to the answer.

I think a lot of it shows in some of the statistics as Morris gave. Ethane moved from 0.38% a year ago to over $0.70 last week. So it is certainly running up with us.

OK and then the last question, just financial question. Just looking at the cash balance at Lyondell, I'm wondering if the current levels if we should just go ahead and assume that you will have balance?

Well, yes. I think we've been - you know for a good while again focusing on liquidity again. We were just watching it. What we want to do is be sure we have the free cash flow coming in and we're paying down debt with that. At some point again as we've said before, we will decide what cash balance we think is necessary to leave it -- leave at Lyondell. We have got plenty of liquidity in un-drawn revolvers and facilities and things like that. So we have a lot of confidence and we see the business is improving. We like to continue to see free cash flow coming in and paying the debt down.

I think if I picked up from that, we have cash coming from Equistar, we have cash coming from LCR, we have good performance in IC&D, although it still has a lot of room to get better. And we have not yet touched the liquidity that we have maintained on the balance sheets. I think as the situation improves at some point it is going to become somewhat foolish hold that much liquidity. As you look forward that's another source of cash to repay debt. For the end of the third quarter we have not touched the liquidity that we were maintaining on the balance sheet.

OK. Thanks a lot.

Thank you.

Thank you. Our next question comes from John Roberts with Buckingham Research.

Hi, John.

Good afternoon, guys. Two strategic questions, One, is Celanese's acquisition of asset yields change the outlook the implied to the millennium assets yield business and second question is nova chemicals announced a project that they are participating in Mexico. Once you get your balance sheet restored sooner rather than later and get more control of Equistar, do you start shifting toward strategic actions rather than just tactical things with Equistar?

Well, John I think we've been on strategic actions for nonstop the last decade. I don't think we've ever stopped. I don't think we will stop in the future. I presume you are talking about the Celanese's acquisition of asset tax in the asset yield business, is that correct?

That's correct.

They think that's a great deal for them and more power to them. It didn't have a compelling look to us and was not something that we wanted to jump into at this point in time. And very bluntly, I have no interest in building grassroots ethylene facilities in North America or Mexico. I don't see where the feed stock advantage is. I don't see a technological advantage. And if we had cash rolling out of our ears, I'm not sure that that would be something we would want to do. But that's our take on it. Obviously other people have other points of view.

Thanks, that's all.

Thank you.

Thank you [Operator Instructions] Our next question comes from Bob Goldberg with Scopus Asset Management.

Hi, guys. How are you?

Good.

Good.

Dan, you mentioned that you think the ethylene chain is at a sufficiently tight state here to pass along -- more than pass along raw materials and get some margin expansion. Where are we in the PO chain? Are we at that point where we can get the propylene increases passed through in a more real time basis? Or are we still going to see a lagged effect of where we get squeezed for a quarter and then have to get the price increases in place to recover the propylene costs?

Overall, I think between the numbers I gave you and Doug gave you; we have made it pretty clear that margins in the PO chain have expanded, despite tremendous run up in propylene. But in a very short-term kind of way, propylene prices move up dramatically, it does take us a little bit longer to get it back. But if we look over 9 months or 12 months, we've gotten all of it back and then some. I think you see the same thing happening there that I was describing in the ethylene chain that, you have the tightness of supply demand that is driving the price allocation of propylene oxide and its derivatives. And that is almost independent of anything else going on. And then you have the volatility in the feed stocks, which in this case is propylene, ethylene, etc. That are doing the same thing there that they're exaggerating the situation in the short-term, but we have grown margin and expect to continue to grow margin in that chain.

And same thing on styrene. Benzene seems to have flattened out for the time being. Is there a point where styrene can -- I you got some margin expansion in the third quarter. Do you see more margin expansion?

I think styrene is the most advanced case of all of what we've been talking about, Styrene, the low $0.60 per pound, in mid 60's. And anytime in the past we would have seen gargantuan margins off of that kind of price. So I think the thing you have to bear in mind is we've seen unprecedented benzene pricing. We've seen rapidly growing ethylene pricing. And styrene has stayed in front of that, now not nearly as much in front of this as we would like, but again the same thing that's occurring there. Styrene is relatively tight around the world. And I think you will continue to see it tighten and I think you will see the margins expand whether from feed stocks falling somewhat or price going up or a beginnings of the two--- or a combination of the two. Demand for styrene, is still very strong.

And lastly, polyethylene, where are the operating rates? Where do you have them pegged for the industry and where is Equistar operating is polyethylene plants?

According -- operating its polyethylene plants? According to the A.P.C., the industry is in the high 90's and we are essentially in the same place, essentially at full rates. The industry figure I think is 96 for high density and low density.

Is that a nameplate capacity or on effective basis?

That's effective.

Effective.

OK, and do you have given that, do you have your customers on any sort of order control, allocation, however you want to phrase it?

Not in the polyethylene area. But in some of our other product areas, we do have some sales controls programs under way.

In the PO chain you mean?

Right.

OK, thanks.

Thank you.

Thank you. Our next question comes from Christopher Miller with JP Morgan.

Hello, how are you?

Very good, thank you. My question was actually just answered. Thanks so much.

Thank you.

Thank you. Our next question comes from Greg Goodnight (ph) with UBS.

Hi. Assuming that the millennium transaction is closed from an accounting standpoint, are you going to report a one-month consolidated Equistar and how will the fourth quarter reporting be handled?

You guys are going to have fun.

Exactly.

Yeah. We do have to report the year-end balance sheet as a consolidated entity. But it went through this a long time ago with Equistar as well we had a similar situation where it closed with one month. So there will be one month of operations included in the year-end numbers. So I suspect we will have to help you about -- so I expect we will have to help you a lot about what happened in the fourth quarter.

And the Equistar prices will be reported on a consolidated basis both on revenue and earnings?

Yes.

All of it will be consolidated.

And Millenium at one month also?

Yes.

OK, it sounds like Kevin. Thank you Kevin.

You are right, thank you.

Thank you. I show no further questions at this time.

All right. Well, on behalf of the company we thank everybody for your interest and your participation today. And we look forward to visiting with you again soon, thank you.

Thank you for participating in today's conference call. You may disconnect at this time.