利安德巴塞爾 (LYB) 2007 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to your Basell third quarter release conference call, hosted by Tom Boall. (OPERATOR INSTRUCTIONS). And now I would like to turn the conference over to your host, Tom. Thank you Tom.

Thank you, Carla. Hello everyone. It is my pleasure to welcome you to today's conference call with bondholders and analysts to discuss Basell's third quarter 2007 results. I am Tom Boall, Head of Investor Relations for Basell. With me on today's call is Volker Trautz, President and Chief Executive Officer and Alan Bigman, Chief Financial Officer. The three of us represent the Basell Group of Companies.

Before we begin, I would like to give you some information concerning the third quarter release. The presentation prepared for today's call is available on our website at www.basell.com in the investor relations section. A link of the replay to this call will be available on the Basell website on Thursday.

During this call, we will be restricting our discussion to Basell's third quarter results from operations. We are specifically not allowed to comment on the pending merger between Basell and Lyondell Chemicals. And as such, we will not be addressing this in the call or taking questions on this topic. We would ask you to respect this position and please focus your questions at the end of the call accordingly. I would like to thank you in advance for your cooperation.

The presentation today may include forward-looking statements as that term is defined in securities law, including, but not limited to anticipated plans, litigation and environmental matters, currency effects, profitability and other commitments or goals. Such statements are subject to a number of risks and uncertainties, many of which are listed in the Nell AF Sarl offering memorandum.

Volker Trautz will be commenting on the state of the polyolefins industry during the third quarter of 2007 and he will also review the performance of Basell's three businesses. Following this, Alan Bigman will provide a review of Basell's financial performance. A question and answer session will conclude our call.

Well, thank you Tom and good afternoon or good morning, ladies and gentlemen. So let me start with a few comments about Basell's achievements in the third quarter of 2007. Our safety performance as measured by total recordable rate for employees and contractors is slightly above what we achieved in 2006 and continues at a level that places Basell among the best in the industry in terms of workplace safety.

Basell's third quarter results on a pro forma basis are similar to the results of the first two quarters of 2007, meaning we did not experience the usual summer slowdown. This continuation of our record-setting performance included a recorded EBITDA of EUR486m for the quarter with inclusion of the Huntsman breakage fee. On a pro forma basis an EBITDA value of EUR364m was driven by continued strong contributions from all three of our businesses.

Now I will provide a few comments on our industry. The favorable growth supply-demand balance for polyolefins that became evident in 2006 and the first half of 2007 has continued through the third quarter of 2007. Overall growth in the domestic markets in Europe and combined with a tight supply situation has led to strong results. Asian demand created a strong export market for production from outside the region.

In North America their strong export demand continued to offset a stagnant domestic market. Operating rates, as reported by the American Chemical -- Chemistry Council has averaged 92% for the first three quarters of 2007. Volatile feedstock cost and a business environment that continues to be volatile despite a generally improved demand situation has resulted in pressure on margins in North America.

As you will see in the following slides, naphtha pricing stabilized somewhat in the second and third quarters, allowing improved cracker margins in Europe. Moving to the next slide, we see in blue the naphtha price development over time and in red, the naphtha quarterly average price. We believe this is a useful way to view naphtha price development when analyzing cracker margins in Europe, where monomer prices are set on a quarterly basis. As you can see, the average third quarter price for naphtha stabilized somewhat at levels that continue past the peak pricing seen in 2006.

With this naphtha pricing panel in mind, let's look at how European cracker margins have evolved. The next slide has the naphtha price colored in red and the European quarterly ethylene price displayed in black. Of course, the cracker margin calculation is [sort of] trade forward one-to-one ratio but what I'm illustrating here are the price trends of ethylene feedstock and ethylene during the quarter. The third quarter ethylene price settlement was up EUR35 per ton from the third quarter of 2007. The propylene increase was about EUR28 per ton.

Cracker margins recovered early in the third quarter with naphtha pricing falling somewhat, but came under pressure again as naphtha pricing rose in the second half of the quarter. The resulting margins were ahead of the same period of the previous year on both a quarterly and a year-to-date basis.

Now I will review the performance of Basell's three businesses, starting with our Technology business. Our Technology business, which licenses Basell's industry-leading polypropylene and polyethylene process technologies has licensed 1.9m tons of additional polyolefin capacity in the first three quarters of this year. This is equal to the total capacity licensed by Basell in the year of 2006. The excellent performance of the catalyst business also continued in the third quarter, with sales volume, 6% above those achieved when compared to last year at this time. The third quarter 2007 pro forma EBITDA of the Technology business was 11% ahead of the extraordinary performance obtained in the same period of 2006 due to continuing strong licensing and catalyst income.

The third quarter Advanced Polyolefins business results were 8% of the same period in 2006. This business performance in the quarter was underpinned by strong volumes which grew by approximately 10% over the third quarter of 2006 and by approximately 9% versus year-to-date 2006. Our polypropylene-based composites and alloys business continues to deliver excellent results. Sales volumes for our proprietary [cataloid] process also continued to show excellent improvement against the previous year on both a quarter and year-to-date basis.

Our Polyolefins business continued to deliver very strong results. Polyolefins Europe third quarter 2007 sales volumes and polymer spreads were well ahead of the same period in 2006, contributing to an exceptionally profitable year.

Polyolefins Europe EBITDA results was 57% ahead of 2006 on a year-to-date basis. In North America, the domestic polypropylene market volume growth was essentially flat. Export volumes continued their strong performance, helping to absorb excess capacity and maintaining average year-to-date operating rates at 92%. Basell sales volumes for the quarter were up significantly over the third quarter of 2006 but spreads were lower as Basell continued to increase its market share. Polyolefins International's result in the third quarter were ahead of the same period of 2006, mainly due to higher spreads.

The third quarter pro forma EBITDA for the total Polyolefins business was EUR264m, which was EUR86m ahead of the result for the same period last year. On a year-to-date basis, pro forma EBITA was 63% above the results for the first nine months of 2006.

Next slide please. Basell's net results from associates and joint ventures were EUR84m for the first nine months of 2007 when compared to EUR77m over the same period in 2006. Distributions from our joint ventures are well ahead of last year, basically equal to our year-to-date equity income.

In summary, Basell's record performance in 2007 continued in the third quarter. Our people continue to focus on working safely, watching out for not only fellow Basell employees, but also for contractors working on our sites, visitors to our places of work and for our neighbors in our community. And all of our businesses delivered excellent financial results.

Thank you, Volker. Now Alan Bigman will review Basell's financial performance in the third quarter.

Thank you, Tom. As you've heard from Volker, our business performance in the third quarter continued at a very strong pace. Our third quarter pro forma EBITDA was EUR364m, which was EUR99m or 37% higher than the same period last year. This was the best ever third quarter for Basell. Pro forma last 12 months' EBITDA now stands at EUR1.323b.

In developing the pro forma EBITDA, we've excluded the extraordinary gain of EUR146m from the Huntsman breakage fee. We've also excluded an increase in tension provisions of EUR17m, EUR13m of M&A costs and a EUR7m provision that's due to the previously announced cessation of production at our site in [Sarnia], Canada. Including these items, our reported EBITDA was EUR486 for the quarter and stands at EUR1.432b for the last 12 months. Those figures do not include EUR88m of dividends received from associates.

Third quarter operating cash flow before investing cash flow in debt service was EUR406m, driven once again by our strong operating profit. Despite the volatility in feedstock and polymer prices, I believe we continue to manage our working capital very well. Projected spending for capital expenditure is also tracking well against plan.

As a result of continued strong cash flow, our net debt position was at the end of the third quarter, EUR1.133b lower than at acquisition closing in August 2005. After payment of a EUR75m dividend to our shareholders, our net debt to EBITDA ratio at the end of Q3 stood at 1.5 times compared to 4.6 times at the August 2005 acquisition of Basell.

Basell's achievements continue to make the headlines in many leading chemical industry publications. Our continuing technology licensing leadership in the industry was highlighted following the sale of our 50th license for our Lupotech T low-density polyethylene process for a 250 kilo-ton per annum plant in Qatar. We also achieved a milestone of 20m tons of capacity licensed for our Spheripol polypropylene technology with a license for a 700 KT per year facility, also in Qatar. Recently, PetroChina selected our Hostalen technology for two HDPE plants with a total capacity of 650 KTPA.

In North America we will be ceasing production of polypropylene at our plant in Varrenes, Canada in 2008. We also recently announced we had extended our exclusive polypropylene marketing agreement in North America with ConocoPhillips to market and sell the output of their polypropylene plant in Bayway, New Jersey.

And in order to meet growing demand for our Advanced Polyolefins products, Basell is expanding the capacity of our polybutylene-1 plant in [Mordyke] in the Netherlands.

I'd like to provide you with an update on operational performance of the first few weeks of the fourth quarter. Our safety performance year-to-date continues to be outstanding. Technology continues its good performance with strong catalyst sales and our licensing business has made good progress in many licensing projects. Strong demand continues for our APO products across all three product lines. And in our Polyolefins business, our business model combined with a good global demand continues to produce strong earnings across all product lines.

Thank you, Alan. This is the end of the presentation and we will now open up the lines for questions. Please remember that we will not be answering any questions on topics related to the merger of Basell and Lyondell. Thank you. Carla, if you could open the line please.

Thank you. (OPERATOR INSTRUCTIONS) Yur first question comes from Bo Hunt with your question.

Hi guys, how are you? Just briefly, why do you suppose that you didn't see a typical seasonal slowdown in the third quarter this year?

Well, we already have the incoming orders for the month of November, October is over, and even what we see for December looks very good. Now of course you can speculate about recent and I would have to start with the different product lines. But if you look to Polyolefins of course, which is a big part of our business, then what probably plays a very important role, that the pipeline is basically empty. We don't have as a manufacturer major inventories. Our customers don't have a lot of inventories because many of us speculated falling oil prices. What's happening is opposite so everybody is buying hand-to-mouth. That's the reason why we believe or why we are convinced that the fourth quarter will be strong.

I see. Actually I'm referring to the typical summer slowdown you tend to see, especially in August. So in other words, the third quarter, it looks like it was pretty strong on a seasonal basis.

Yes, it was very strong, specifically in Europe and it was normally strong in Asia. And due to the fact that out of North America exports they are possible, it was also not bad in North America.

I see. So you'd say it was the seasonal strength you saw, particularly in -- well I guess in North America, despite the margin crunch was, related to the export markets, not any sort of pre-buying or anything like that.

I would agree with this statement, yes. I think it was most likely to the spreads.

Alright. And then sort of touching on that, your quarterly financial statement mentioned that North American polypropylene margins were lower on a year-over-year basis, due obviously to volatile feedstocks, but also customer buying behavior, which maybe touches down upon -- you're saying that people are speculating on lower energy prices. But I believe the quote you had was that you saw, 'careful customer buying behavior', and I was just hoping you could elaborate a little more on that.

Well the fact is that the volatility in feedstock in North America has been unprecedented. And due to the fact that the mechanism in pricing in North America is quite different from most of the rest of the world, that means if you have [up-lying] or fast [up-lying] prices, usually the industry is behind schedule, if you want to call it, with the price increase and that's the reason why you get the margin squeeze. So we are better than last year in North America but we are by far not as good as we would like to be -- as the industry would have to be, and as industries, for instance, in Asia or Europe.

I see. So you're saying that then, knowing that polyolefin price increases were coming, customers were pre-buying ahead of that spike in prices, so therefore, your margins were squeezed but the volumes were driven up by that. Because you said the market was relatively flat domestically, right?

The squeeze really came from the export part.

Of course, of course. Alright. I'll just get on that offline. For your fourth quarter guidance for your [MG&A] where you talked about the strong export environment for North American polypropylene in October, I think you touched on it briefly, but could you tell us, did that export strength continue in November or was that opportunity beginning to dry up?

This opportunity of course, we've announced increases in propylene price will dry up and is drying up, that's correct.

Okay. And let's see, on the Advanced Polyolefins inside, you mentioned that volumes were able to offset the run-up in raw materials. More than offset actually, you're having a very strong year. But I was wondering, had margins contracted appreciably, is it more than just a modest increase at any of your product lines due to the run-up in feedstock cost?

And maybe you can give us a little bit of detail on what percentage of the raw material increase or feedstock increase you've seen passed through your APO product lines.

Well I'm not sure that I got your question correctly. But in general terms, what we would like to answer is the following. You should consider that the pricing mechanism in Europe has been changed quite substantially over the last couple of years. That means there is a disconnect between industry pricing. You basically have to negotiate your price every month in such a volatile environment or at least every quarter. And in a tight supply-demand pattern, in a tight supply-demand market, you have the power to increase your price and that's what happened in the industry in Europe. And we depend more on Europe so that's the reason why we probably disproportionately profited from this situation.

With regard specifically to the Advanced Polyolefins, this was something that again over the last few years we have moved away from fixed pricing and gone much more to a margin-based pricing. That is correct. Which does enable us to pass on the feedstock costs much more quickly and more effectively. Which is why you do see continued good results in APO, even with the increasing feedstock prices, that's correct.

Got you. That's what I was asking about. Thank you. And then, sorry, I'll just ask you one last quick question here. It looks like you received a pretty big dividend from the -- from your Polish JV in the third quarter. Was that sort of a one-time thing? What should we expect going forward from Basell Orlen Polyolefins?

You should expect continuing dividends from that joint venture. That was the first dividend once the project financing came off. The usual life cycle of these joint ventures is that there's project finance in place. Then the JVs start up. And once they have a few months of solid operating performance and are really generating cash and profits, you can refinance and pay out the first dividend. And that's really the impact you see.

I wouldn't say that you would have -- and there is actually more to come from Poland. I wouldn't say that you would see, would necessarily come in at absolutely that level every year. But something on that order of magnitude we would see on an annual basis going forward, that's correct.

Alright, great. That's very helpful. Thanks.

Thank you. Our next question comes from [Sergei Westenstoff]. Please go ahead with your question.

Well that's the best pronunciation of my name I've seen for awhile. Volker, good afternoon.

Good afternoon to you.

I wanted to ask you a question about European performance. Europe was stronger than expected generally in '07. And your results in Europe were even better than some of the competition, such as Borealis. I was just wondering what are your views on possible reasons for that nice surprise in '07?

Well Sergei, that is a very delicate question, but the answer is relatively simple. We changed about three years ago four things, or four things changed three years ago. In our case a team, some market focused market approach, societal, and probably a little bit what you mentioned, that one or the other competitors did not always perform as well as used to be. Now which part of the four contributed more, I don't know. But frankly speaking, I recognize that we got a little bit tailwind and probably were more heavy also. But not a single element made the difference, the four elements I mentioned. The team, the market-focused market approach, societal, and probably a little bit the competition, as well.

Okay. And so Alan, you'd done some restructuring of your joint ventures in '05 and '06. And maybe if you speak generally to the Group without specific names, are you comfortable with where you stand on your joint ventures or you have some further work on this next year?

I don't think there's anything that material that needs to be worked on there. We've taken out a lot of the cross-shareholdings in Asia which makes the governance structure easier and the financial structure easier. We have two joint ventures in Saudi Arabia that are fully paid for and construction is nearing completion. So that's very exciting for us. But in terms of anything beyond that, I don't think you would expect to see anything too serious in terms of a major reshuffling of that portfolio in the near-term.

Okay. And lastly a question maybe to either of you or to both of you, you've done some steps to improve your vertical integration, both on ethylene/propylene and also refinery side in Europe. And my question specifically to Europe, again, do you think that you'll arrive to the position you feel comfortable for the foreseeable future, let's say for the next three years, or there is more work to do to increase that self-sufficiency ratio?

Well in general terms, if I may take up again the joint ventures, first of all, the joint venture portfolio with nine polyolefin joint ventures we are in is always work in progress. So as Alan mentioned, you simplify gross shareholding but you also change ownership because, as you know, our industry is moving eastwards. So there are some places where you would not like to be producing polyolefins or petrochemicals in five, six years from now, then you get out. And the other place what you would like to be in, there you would like to increase or at least get a foothold.

So we went out of Taiwan because in our opinion Taiwan is not a place to produce polyolefins or petrochemicals in the future. And we strengthened our portfolio in the Middle East and specifically in Saudi Arabia. We were -- sometimes you are lucky, sometimes you are not so lucky. With our timing in the Middle East, where we are extremely lucky so we didn't get the wave of cost increases, which is coming now or which is underway now in the Middle East. So far, this part on the Middle East.

Now with respect to Europe, you know we increased our backward integration in two places. On the one hand, in [Bern] where we not only are backward integrated now in the cracker, we will be also backward integrated tomorrow in the oil chemical industries. And in Munster. Munster looks not very exciting but the specific configuration made Munster for us a very interesting backward integration.

So are we where we want to be? We are about 80%-plus in ethylene. That's where we want to be. We are by far lower in propylene. That's where we would like to increase. If there are possibilities, we'll go for it. But at the moment we are not working in any one.

Understood. Thank you for your help and congratulations on your results.

Thanks.

Thank you. We have one more question and that comes from [Richard Salem]. Please go ahead with your question.

Good afternoon. Continuing on discussion of the line of dividends, I guess in part due to the good polyolefins environment and the maturity of the joint ventures relative to the project finance step, you've just -- you've seen in the results the good performance of dividend. I'm just wondering is that reasonable to expect at the kind of year-to-date levels going forward? Is that you were intending to imply before where we stood in 2007 because obviously there's been an increasing level of the dividends coming out?

And if you can, in addition to that, provide us an update on the EBITDA generation from those joint ventures on a consolidated basis.

And the leverage at those entities. I know there's many different entities which comprise that, but one of the strengths of those joint ventures I think in the past has been the relatively low leverage compared to the consolidated Group. And obviously, you've done a great job in reducing leverage on Basell and to the -- I'm just wondering if the joint ventures still compare favorably relative to that in terms of leverage.

Those are good questions. I think when you look at the dividend results that you're seeing, they're really driven primarily -- although all of the joint ventures are now producing better dividend flow with the strong market conditions. But especially the joint ventures, SPC in Saudi which is now passed the project finance phase and is now in normal operating phase and generating nice cash flow and dividends, and also our Polish joint venture. We will then have two more Saudi joint ventures coming online in the coming months and sort of in the 12 months after that producing strong dividend flow as well.

So I wouldn't say that this year's dividend flow is exactly what we'd be getting next year, although it might not be that different. Going forward, as those new joint ventures come online, and of course the Saudi joint ventures in terms of cash generation are very, very strong or expected to be very strong. You would see a dividend flow that would even increase going forward.

In terms of leverage, I think that as we look at it now, when you compare it to Basell in 2005 at 4.6 times EBITDA, they were relatively less levered. At 1.5 times EBITDA, which is where Basell is today, I think you're probably looking at similar amounts of leverage in our joint venture portfolio.

Now that being said, obviously it's not meaningful to talk about net debt to EBITDA at a joint venture like SEPC in Saudi Arabia, which hasn't started operations yet. You have debt but you don't have any profitability yet. So it's a little bit of a mixed bag when you look at that. But leverage is in fact going down at the joint ventures as they leave the project finance phase.

We don't have any new joint ventures starting up. So we have a maturing joint venture portfolio and again, with Poland now firmly on-stream and with the two Saudi JVs that will be coming on-stream, I think that you would expect to see that trend further de-levering and increased dividend flow.

Okay. And roughly speaking, even excluding the new Saudi joint ventures, where do you stand in terms of [LP] and EBITDA generation out of those joint ventures?

We really don't measure and report it that way. Obviously, we have the numbers someplace. It's probably a little bit more meaningful to look at equity income from those JVs because there is a different mixed bag of debt and EBITDA there. But we can talk a little bit more about that offline.

Okay, great. And sorry, one last question if I might, if you can just update us with some guidance for 2008 CapEx. And coming into the last quarter of the year are there any expectations for further dividends to the owner?

In terms of 2008 CapEx, it will be higher than 2007, primarily because we have the main part of our rebuild of the Munchmunster high-density polyethylene plant. The reason that we have higher CapEx is because a lot of that rebuild is paid for out of the proceeds of property damage insurance resulting from the 2005 loss of that plant in Munchmunster. So it's a very nice project economically, but it does generate some higher CapEx in 2008.

There may be some more dividends to the shareholder in the last quarter as a result of the third quarter results, perhaps on a similar level to what we've been seeing.

Okay, great. Thank you very much.

Thank you for your questions. We have one question on the web and that is from [Terry Hoi]. And he says, 'why is it you won't answer any questions about the acquisition and its financing?'

Fair enough. The reason is simply that because of SEC requirements, what has been disclosed publicly is what has been disclosed publicly. This is a public call so we are not permitted to make further comments on that transaction.

Okay. Thank you for that. And we have one more question on the audio. [Cathy Luisa] go ahead with your question.

Hi there. I was wondering if you can give us a bit more color on this structured [EUR1b] transaction that now we can see on the balance sheet. And I'm more interested, actually, to find out what are the uses that you can -- what's the purpose that you can use the cash for, or is it just going to sit on the balance sheet forever?

The cash is not available for us. It is trapped cash. It is purely structured financing arrangement that is designed to lower our financing costs by a few million euros per annum. That's all it is. The cash flow will remain on our balance sheet until we unwind the transaction, which we can do at any time.

Okay. I'm just thinking just out loud here that given the other financial transactions that are in the pipeline following the Lyondell acquisition, this transaction doesn't make very much sense to me given that it's only for a couple of million of euros or dollars, given that that's what the impact is. So I'm just trying to get a little bit more of a rationale like -- or maybe even a timing from your perspective about when does it go away or it doesn't go away, or are we just basically going to see it there sitting for the foreseeable future?

We have no definite plans to take it out. But all I would say is this, yes, there are obviously some big things that are planned. But as far as we're concerned, a few million euros is a few million euros no matter how big the company is and it's always good to capture whatever you can. So we -- I wouldn't -- I don't think that the transaction is very important from a finance structure point of view. The impact on net debt is zero. And also, again, the cash is not available for us to use, so that is not a liquidity issue either.

Okay, thanks.

Thank you. We have no further questions.

Okay. Thank you very much. We'd like to thank you for your participation and wish you all a good day.

Thank you.

Thanks, all of you. Bye.

Thank you. That concludes your call for today. You may now disconnect.