利安德巴塞爾 (LYB) 2010 Q3 法說會逐字稿

Hello and welcome to the LyondellBasell teleconference. At the request of LyondellBasell, this conference is being recorded for instant replay purposes. Following today's presentation, we will conduct a question and answer session. (Operator Instructions). I would now like to turn the conference over to Mr. Doug Pike, Vice President of Investor Relations.

Sir, you may begin.

Thank you, Marianne, and hello and welcome to LyondellBasell's third-quarter teleconference. I'm joined today by Jim Gallogly, our CEO; Kent Potter, our CFO; and Sergey Vasnetsov, our Senior Vice President of Strategic Planning and Transactions.

Before we begin the business discussion, I would like to point out that a slide presentation accompanies today's call and is available on our website, www.lyondellbasell.com.

I would also like for you to note that statements made in this call relating to matters that are not historical facts are forward-looking statements, and these forward-looking statements are based upon assumptions of management which are believed to be reasonable at the time made and are subject to significant risks and uncertainties. Actual results could differ materially from those forward-looking statements. For more detailed information about the factors that could cause our actual results to differ materially, please refer to the disclaimer and notice of the presentation slides in our financial reports, which are available at www.LyondellBasell.com/investor relations. And reconciliations of non-GAAP financial measures to GAAP financial measures, together with any other applicable disclosures, including the earnings release, are currently available on our website at www.lyondellbasell.com.

And finally, I would like to point out that recording of this call will be available by telephone beginning at 2.00 PM Eastern time today until 8.00 AM Eastern time on November 29 by calling 866-510-4832 in the United States and 203-369-1941 outside of the United States. And the passcode for both numbers is 6352.

Now, during today's call, we will focus on third-quarter performance of each of our five business segments and the trends that we are seeing for our businesses.

With that being said, I turn the call over to Jim.

Thanks, Doug. We appreciate that you have joined us today for our third-quarter earnings call. As Doug mentioned, a set of presentation slides accompany this call and are available on our website. Let's begin by turning to page three to review a few highlights from the quarter.

I'm very pleased to report that our third-quarter net income was $467 million. Based on our fully diluted share count, this equates to $0.84 per share. However, I want to point out that various items listed in our earnings release negatively impacted net income by $172 million or $0.30 per share.

EBITDA for the quarter was approximately $1.2 billion, bringing our cumulative EBITDA for the last 12 months to $3.8 billion, excluding lower cost or market charges of $365 million. Underlying business results during the third quarter, though very strong, were slightly less than our second-quarter results. The decline versus the second quarter was primarily attributed to lower Olefins and Polyolefins Americas results. However, I want to point out that this decline was offset by stronger results in Olefins and Polyolefins Europe, Asia and international. Thus, the overall result for the olefins chain was essentially unchanged from the two quarters.

In other business areas, the Intermediates and Derivatives segment continued to post steady robust results. Refining and Oxyfuels experienced an expected seasonal decline. Our technology segment results surpassed the prior quarter due to increased licensing income.

In general, we had reliable third-quarter operations. The primary exception was an issue at one of the Houston refinery cokers, but we were largely able to overcome its financial impact through operational adjustments and the purchase and sale of various intermediate streams.

Turning to page four, it is our custom to touch on our safety record, which continues to be one of the best in the industry. This story is unchanged from the past quarter. Our employee safety record is excellent and has continued to improve. However, our contractor safety performance is not up to our standards, although their statistics are near the industry norm. We would like this performance to improve and have engaged our contractors in an active dialogue sharing best practices.

I'm now going to turn the call over to Kent to provide an overview of our results and some of our key financial metrics. I will later return for a brief review of each business segment. We will finish with a question and answer session. Kent?

Thanks, Jim. Thank you all for joining us today. I will be brief. I can generally summarize by saying that our strong business results have put the Company in excellent financial shape. As Jim mentioned, and you can see on page five, third-quarter EBITDA was $1.2 billion exclusive of a $32 million non-cash lower of cost or market inventory adjustment. But the $1.2 billion does include another significant non-cash charge of $64 million that I will discuss in a moment.

Across the portfolio, our business continued to perform well, and Jim will explain this on a segment by segment basis later in the call. The chart on the right-hand side of the page plots year-to-date results by combining our predecessor and successive periods. I believe this best represents our business results, absent any bankruptcy and accounting-related factors.

Through three quarters, EBITDAR is $3.3 billion, approximately $1 billion or 50% stronger than full-year results for 2009.

Let's turn to pages six and seven and take a look at third-quarter cash flow, working capital and liquidity. Our continued strong operating results have enabled us to increase our cash position. We finished the third quarter with a cash and cash equivalent balance of $4.8 billion. Third-quarter cash generation was $1.1 billion, bringing total cash generation during the five months since emergence to $2.1 billion.

During the quarter working capital increased by approximately $300 million, primarily as a result of increased receivables. Our third-quarter Accounts Payable increased approximately $50 million. However, for the year payables have increased by approximately $450 million. This improvement is primarily the result of us recovering our trade credit. I expect further gains during the fourth quarter as we implement new trade credit terms that were negotiated over the prior months. It is my expectation that by year-end we will have recovered a substantial majority of our trade credit either through increased terms, discounts, by shifting purchases to suppliers who will be more competitive and who recognize our strong financial position.

On the right-hand side of page seven, you can see the resulting liquidity position. We closed the quarter with approximately $6 billion of liquidity comprised of the $4.8 billion of cash and cash equivalents and $1.2 billion of availability on our asset-backed lending facility. As a result, our net debt declined to less than $2.5 billion, and the ratio of net debt to last 12 months EBITDA has fallen to 0.7.

I know you are all interested in how we are going to put this cash to work. We have stated in the past, plans are being developed and are being discussed with our board. Today I can report that we have taken an initial step towards improved cash utilization. We have renegotiated our European securitization to be structured more like our US asset-backed facility. As a result, earlier this month we used approximately $500 million of cash to pay down the facility to a zero balance. This action provides a net interest savings of approximately 2% on the undrawn facility and fully preserves our liquidity. Even after this pay down, our cash and cash equivalent balance was almost $5 billion last night.

To address another frequently raised subject, we are keenly aware of the many changes in our recent history that make comparisons to past periods and forecasting quite complex. So let me address a couple of factors to clarify. Page eight presents a comparison of pre- and post-emergence costs for net interest expense, depreciation and amortization and cash fixed costs. (inaudible) speaking, the average cost incurred during the past five months should provide a reasonable surrogate for these costs over the coming quarters.

I would also like to point out that our third-quarter book tax rate was 35%. However, our cash taxes were much lower as existing net operating losses and other tax attributes significantly reduced the tax burden. For 2011 we currently estimate the book tax rate to be approximately 30%. We expect that the reduction in our US tax attributes, which we mentioned in last quarter's call, will result in us becoming a cash tax payer in 2011. However, expected tax refunds in excess of $200 million should minimize our tax burden next year.

A couple of statements on capital spending. Year-to-date through September our capital spending for turnaround projects and major cap projects was $578 million, well below the $1 billion annual rate that we have discussed for average spending over the coming years. While we continue to expect the latter to be in a future spending pace, our 2010 spending is expected to be somewhat less than $900 million.

Now I will touch on two final items. The first item worth noting is the $76 million charge that has been booked into other expense. This is a non-cash charge related to our outstanding warrants. The cause in warrants requires us to mark the warrants to market, and the substantial increase in our share price has resulted in this third-quarter charge. Frankly, I hope that we will see further charges of this nature over the coming quarters.

Additionally we have taken another $64 million pretax charge. This charge relates to a dispute that rose in the third quarter over an indemnity obligation known to us for environmental remediation costs.

Overall the impact of these two charges, plus the LCM adjustment and some reorganization expenses, was $172 million, or $0.30 per share negative.

I will summarize briefly. Through three quarters, year-to-date EBITDAR is $3.3 billion, and our last 12-month EBITDAR is $3.8 billion both exclusive of the lower cost to market charges. Our liquidity position finished in the third quarter at approximately $6 billion with $4.8 billion in cash and cash equivalents. Our past five months' depreciation interest charges should provide a reasonable proxy for near-term forecasting. We expect our cash tax -- we expect to be a cash taxpayer next year due to the reduction of our US tax attributes. However, we also expect to receive a significant dividend.

Next, our financial ratios are very strong with net debt to last 12 months EBITDAR of 0.7. And finally, 2010 capital spending is expected to be approximately $900 million.

I hope that this information, combined with our earnings release, provides the information and color that will enable you to appreciate the strength of our financial position.

Now I will turn the call back to Jim for a discussion of our business performance.

Thanks, Kent. Let's step through a summary of third-quarter results for each of our businesses. Pages nine and 10 address the key results for the Olefins and Polyolefins Americas segment. Third-quarter results in this segment continue to be strong. EBITDA of $518 million, exclusive of LCM charges, was approximately $65 million less than our exceptional second quarter, still an outstanding result.

Within this segment, lower olefin results were partially offset by stronger polyethylene results. Versus the second quarter, olefin results declined by approximately $140 million. This decline was driven by a $0.10 per pound decline in average ethylene price, which was partially offset by a $0.02 per pound decline in the cost of ethylene production metric. As a result, our ethylene origin declined by approximately $0.08 per pound.

The impact of lower margins was partially offset by 130 million pound volume increase as we ran well and had less turnaround activity. The combination of increased spreads and volumes lead our polyethylene results to a sequential improvement of approximately $75 million. Polyethylene results benefited from the previously mentioned $0.10 per pound ethylene price decline as polyethylene prices declined only $0.05 during the quarter. Polyethylene sales volumes increased by approximately 250 million pounds during the quarter due to both strong demand and less turnaround activity.

Polypropylene results increased by $10 million, primarily due to stronger margins.

Looking to the fourth quarter, industry consultants report that key industry spreads in October are fairly consistent with September levels. Results for the quarter will be somewhat dependent on the strength of industry conditions and raw material price volatility over the balance of the quarter. We have experienced approximately 30 days of downtime at one of our olefin plants in Channelview, Texas. This plant is now operating, but we do expect the downtime to impact fourth-quarter results by approximately $15 million to $20 million.

Please shift your attention to pages 11 and 12 in our Europe, Asia and international Olefins and Polyolefins segment. Results in this segment continue to improve, and third-quarter EBITDA of $294 million, exclusive of an LCM charge, was approximately $35 million higher than the second quarter. The improvement was generally driven by olefins results, which improved by $95 million. Moderate ethylene and propylene price declines of $0.01 and $0.025 per pound respectively were more than offset by higher volumes, lower raw material costs and strong butadiene results.

Polyethylene results experienced a moderate decline. Lower polyethylene margins were partially offset by stronger volumes. Having said that, I remind you that second-quarter volumes were negatively impacted by schedule maintenance and downtime at our French low density polyethylene plant.

Polypropylene results improved by approximately $15 million as European results benefited from both stronger volumes and margins. Partially offsetting the European improvement was a decline in international margins.

Polypropylene compounding results continue to be good, improving by approximately $20 million. Volumes were unchanged versus strong second-quarter levels, while margins improved partially as a result of lower polypropylene raw material costs.

Looking to the fourth quarter, thus far the market has remained reasonably well-balanced, while naptha raw material costs have increased consistent with increased crude oil prices. Local port and national strikes have forced us to reduce operating rates at our Olefins and Polyolefins facilities in France. The union issues have not been directed toward us, and generally our workforce has cooperated with the Company and operated our facility safely. We understand that the port workers have just voted to return to work, and we expect to return to normal operations soon.

Please turn to page 13. The Intermediates and Derivatives segment continue to post strong steady results during the third quarter. EBITDA of $243 million was approximately $35 million higher than the second quarter with the principle driver being the propylene oxide chain. Propylene oxide derivatives benefited from increased prices and strong market conditions, while propylene raw material costs declined.

Intermediate results declined primarily due to unplanned maintenance at our ethylene glycol facility and lower ethylene glycol prices. As to [TIL] and TBA, intermediate product results continue to be quite good.

As you know, this segment has generally been steady and is expected to remain so in the near future. However, the fourth quarter will be impacted by a turnaround at one of the Bayport, Texas facilities. There is expected to be a modest impact on both propylene oxide and TBA intermediate results.

Moving forward to pages 14 and 15, I would like to discuss the Refining and Oxyfuels segment. Third-quarter EBITDA was $141 million, an $88 million decline versus the second quarter. The decline was primarily related to lower margins at the Houston refinery where results declined by approximately $50 million. The benchmark Maya 211 spread declined by $4 per barrel to average approximately $16 per barrel for the quarter. The margin decline was partially offset by increased crude throughput as we processed 261,000 barrels per day. This was an increase of 72,000 barrels per day and put us close to our published capacity of 268,000 barrels per day.

During the third quarter and into the fourth quarter, operations were partially disrupted by an upset at one of our cokers. However, by altering the crude mix and trading intermediate products, our staff has mitigated the bulk of the impact.

Results at the Berre refinery declined slightly as a result of lower margins. The benchmark Urals 4-1-2-1 spread declined by $1.00 per barrel. Oxyfuels results are relatively unchanged as an improved mix consisting of a greater percentage of European ETBE sales offset an approximate $0.15 per gallon decline in margins.

Looking to the fourth quarter, we expect to experience normal seasonal margin declines, although this has not been the case through October. During October the Maya 211 spread has averaged approximately $18 per barrel, and oxyfuels margins have declined slightly versus September. Current estimates are that coker issues at the Houston refinery could impact the fourth quarter by $15 million to $20 million.

In oxyfuels we still expect to experience a seasonal margin decline, and volumes will be negatively impacted by the previously mentioned Bayport, Texas propylene oxide plant turnaround. Production at the Berre refinery has been impacted by the French port strike. The refinery ran at reduced rates during October, prior to ultimately being shut down to a lack of crude oil. Given the economics of the facility, this is not expected to significantly impact Company results. The impact could be in the $15 million range. The refinery is now expected to start up in the next couple of days as the port strike ends.

On page 16 you will find the fifth segment in the portfolio, our Technology business, which posted its best quarter of the year. Catalyst results remain strong and were supplemented by licensing income.

Let me summarize on page 17. In short, we experienced another excellent quarter. Our people did a tremendous job taking advantage of the opportunities presented. Markets were generally favorable, and we operated reasonably well. Our cash and liquidity positions grew by $1.1 billion as a result of our earnings. Importantly, we demonstrated that the second quarter was not a one-time event.

Looking to the fourth quarter, we currently continue to experience favorable business conditions. Having said that, normal seasonal trends, coupled with some planned and unplanned events, will temper our earnings.

The future of the new LyondellBasell is bright. We are strong believers in our capabilities and are quite gratified to post these results. We are now a New York Stock Exchange listed company and appreciate the vote of confidence you have recently shown us.

Marianne, we are now prepared to take questions.

(Operator Instructions). P.J. Juvekar, CIPI.

Jim, ethane propane prices have been going up recently with ethane approaching $0.60. How do you see olefins margins spreading in 4Q? And then looking into 2011, what will -- what do you think your expectations are for average [COE] margins?

Well, we generally don't report our full expectations on margins. What we do is look at what industry forecasts are, what some of the consultants say. As I mentioned --

Directionally what do you expect?

I'm sorry. I did not hear -- (multiple speakers). Oh, directionally. Directionally the margins should reduce next year. It has been a very, very strong year.

Reduced margins for next year, is that because of new capacity, or is that because you think this was a unique year-end and we had some inventory build this year that we could see slightly lower margins next year?

One of the advantages that our Company enjoys is the relatively cheap ethane that we experience this year. We expect that trend to continue into next year and perhaps future years. There have been operating issues amongst some of our competitors earlier in the year that gave us some very, very strong margins in the second quarter primarily, a bit into the third quarter. That has been an aid. We don't expect that to be the case next year, although one never knows. We do expect some additional Middle East and Asian capacity to come online that pressure margins somewhat, more so in Europe than in the United States.

Brian McGuire, Goldman Sachs.

You have really strong operating rates and volumes in North America and in Europe. I was wondering if you could comment how much of a factor you thought that was from just demand growth being really strong and continued restocking versus some delays and outages in new industry capacity that might keep those -- might actually take those rates down in coming quarters?

We have operated well in the third quarter. You saw that in our results. We have been able to move to this point in time all of the volumes that we want to move. We have been selling domestically our volumes of polyethylene, for instance, instead of exporting. So the markets remain strong enough that we have not needed to export.

We will just have to see how next year shapes out. Some of the early part of this year was supply-driven price increases, but we have been having good strong demand. I think inventory levels in the latest ACC report are basically flat, down maybe a day worth of inventory across, but otherwise things are looking okay.

And you mentioned the export mix shift, and it sounds like you got a little bit of a benefit from that. Can you quantify what the mix was domestic versus export in the quarter and how that compared to a year ago?

Yes, last year we were exporting, say, 30% of our domestic production. This year it is about half of that. At the present moment, we are exporting almost nothing to China because we are able to get a better margin in the United States. I'm pleased to report that our sales team has repatriated a lot of that volume to higher margin business, and that is something we are pretty proud of.

Okay. Great and then one more if I might. It looks like you were running maybe a little bit of a lighter feed slate in the quarter, I think 70% versus I think you previously said 65%. Maybe looking longer-term than just the next quarter or two, but is there an opportunity to get that even higher and capture more of the feedstock advantage? I'm talking specifically for your North American plant.

Yes. We try to run our crackers at this point on pretty light feeds because ethane has been favored. One of the things you recognize in period to period is that we have Morris down, which is an ethane purity cracker, and so that influenced last quarter's average.

But any plans to maybe make some CapEx investments to convert some or either do some debottlenecking or do some conversion to get that even higher?

Yes, we are making some minor investments. I think we've previously reported to everyone that at Corpus Christi, as a result of the turnaround, we are able to run lighter feeds. That is showing up in the results. But we are also looking at some re-tubing and all, particularly in the turnaround at Channelview in the second cracker there next year to improve the amount of that thing that we can crack. These are not going to be substantial investments, but they are allowing us to run lighter and lighter feeds.

Frank Mitsch, BB&T Capital Markets.

Congratulations, gentlemen, on all that has gone on in the past few months here. You did a good job of outlining the order of magnitude of some of the negatives for the various issues, but I did not catch in the intermediates area the ethylene oxide glycol outage. What was the negative impact of that? Is that roughly going to be the same order of magnitude as the Bayport turnaround?

This is Doug Pike. I mean the magnitude of that was less than 10; it was probably around 5 million or so as it was down. That is kind of the range to think about there.

You know, the Bayport turnaround, of course, turnarounds are standard activity for us. So you will usually work and manage to mitigate that. For example, you take a turnaround like that this time of the year when you have seasonally lower TBA margins, etc., so I don't think you will see a real substantial impact from that.

Terrific. And then you also mentioned regarding the outlook in terms of margins directionally down and the potential impacts of Middle East and Asian capacity impacting your European business. What is your thesis on timing that we might actually see that? Because this obviously has been talked about for quite some time, and we really have not seen dramatic changes yet. When do you think we will actually see the timing on that?

Well, that has been so hard to predict for everyone. We know that various facilities have had startup issues; various facilities have been late. The facilities will run. We always expect them the next quarter. As you say, everybody has been confused by that, and we have as well.

The good news is that obviously our European operations experienced a very strong quarter, so it has not influenced us yet. Our plans to mitigate that additional capacity revolve around our ability to run higher quality products, noncommodity polyethylene products, polypropylene products, and that is our strategy.

The volumes will show up. Will it be next quarter or the quarter after? I cannot tell you, but they will come.

I sure wish -- (multiple speakers)

I guess I would only add that every quarter of delay means there is a little more growth in demand.

Yes, I just wish Lehman had an analyst, so I could ask that person as to what was going to happen now.

Lastly, I apologize, I know you spoke at length at the very strong cash position, but I think I missed it in terms of what specifically your plans were there. I apologize but it did not sound to me like you clarified where you were going to go with that.

Well, I think you should not apologize to start with. Let me be clear. These are discussions that need to take place with our board. I think as you know we have only had one board meeting.

Okay. Alright.

And we are currently -- we will be in discussion with the board about actions that we will be taking.

Jeff Zekauskas, JPMorgan.

When we look out, it looks like the spread between ethane and natural gas was likely to narrow over time, and it looks like natural gas liquids production over a longer period of time is rising in North America. So when you do your strategic planning, do you contemplate any building of new capacity in North America on your part?

When you say building on new capacity, are you talking cracker capacity or (multiple speakers) capacity?

Yes, cracker capacity.

There has been a little bit of discussion about some cracker capacity additions, but it is so early on that it is hard to call that discussion credible. We do think that there is an ongoing ethane advantage, but at this point in time, the market does not need the new capacity. Operating rates are low enough, and so we are not expecting a new cracker announcement anytime soon. But there have been people who are at least running some early economics.

Just to clarify, I think Jim is referring to the industry side, not our actions.

Absolutely.

And that is because you have not contemplated -- you have not fully formed your own plan yet or (multiple speakers)

Well, we are not planning to build a new cracker, right. I can assure you of that.

Okay, good. Secondly, in the financials, the depreciation number in the US operations was $42 million, down from $92 million the previous quarter and I guess about half of what it is in Europe. Is that an eccentric number, or is that a normal number?

I think what you are seeing is, of course, second quarter is impacted by our emergence from bankruptcy such as the April depreciation and post emergence are very different. That is why Kent referred you to (multiple speakers) to look to the five months as a good proxy going forward.

You will appreciate that on emergence and fresh start accounting, we wrote down our success considerably. So our depreciation numbers pre- and post-emergence are vastly different.

Right, I will not belabor it. But isn't your number now $42 million for the quarter and your number in Europe is $60 million. So is that the right balance over time that Europe will be that much higher than your US depreciation number?

Yes, I think you're looking at a pretty stable situation now as we have gotten a few months under our belt and moving forward here.

Okay. And then lastly, there was a discussion about the book tax rate next year being 30%. I think Kent said that there was a $200 million possible positive item. So should I infer from his comments that the cash tax rate is 30% next year roughly with a $200 million benefit? Is that the way to think about cash taxes next year?

No, no. Remember, we are a Company subject to various tax rates throughout the world, in some cases with significant NOLs still to be used outside the United States.

I think you have to look at the United States as that group that has gone through bankruptcy and will lose all its tax attributes on January 1 of 2011. So for profits in the US, it will be very close to statutory rates on a cash basis.

In other parts of the world, we still have significant NOLs, some of which we do not have tax assets for. In other words, there are full valuation allowances against them. So, in those areas, especially where there are low tax areas to start with, our taxes are very, very low.

And so are the low taxes offshore inclusive of this $200 million number that you provided (multiple speakers) or exclusive?

When I referred to the $200 million number, this is just an expected tax refund relating to us being able to carry losses back this year in -- from 2009 back to 2008 back into prior years and again expected a tax refund largely in the US of in excess of $200 million. And we also expect refunds in other parts of the world. (multiple speakers)

Just to try to summarize, Jeff, we said 30% is a blended tax rate taking into account US at 35%, other jurisdictions lower. And then what we are also saying is any of that can be offset next year by this refund because we do have the refund available to us. So that's the way you want to think about it.

Good. Thank you very much.

And, of course, that refund will not affect our tax rate since we have got that established as a receivable.

Bill Hoffmann, RBC Capital Markets.

Jim, I wonder if you could talk a little bit about the European operations. It looks like results there were a little better than we thought they might be, and I wonder if you could give some color, one, on the feedstock slate there as you go forward and as we expect to see margins get squeezed a bit from some of this Mideast capacity really to follow on to the asset base that you have over there. And if you could just talk about the cost positioning there and whether there are some projects that you might want to do to address the cost structure.

Well, Bill, we did have a good third quarter in EAI olefins and polyolefins division, largely driven by olefins. We did have good sales volumes. Things have held up reasonably well to this point. We do expect Europe to be under pressure from Middle East volumes. It is naptha-based chemistry there. There is very little that we can do to change that that would be cost effective. So our strategy remains to, I use the words sell up, to differentiate products based on quality, not so much the commodities, but some more of these specialty type polymers.

Europe will be under pressure. We will not be making significant capital investments there, although we are looking at a couple of modest things that will have a slight impact on profitability.

And when you talk about selling up, you indicated you would not spend a lot of capital over there. Like how do you get from Point A to Point B without capital?

Well, we are a technology leader in the world. As you probably know, in polypropylene we are by far the largest licensing party of the technology. Polyethylene also extremely strong. We have already made investments in high quality plants, multiple reactor type plants, and they can make a lot of the specialty grades that the commodity plants in the Middle East can't do. A lot of the Middle East capacity is large single reactors with a target market of China in the simplest grades. Our Europe market is extremely sophisticated, and so our job there is to sell more of the high quality products to the sophisticated customers that we have.

Thanks. And then just with guards to the Berre, France refinery, obviously it continues to struggle plus some of the other issues here in October. Can you just talk a little bit about your thoughts on the refinery going forward?

Yes, we have been very clear that that asset is a troubled asset. We have talked closely with our works council, with our employees and shared with them the need for significant cost reductions, shared the need for improved reliability. We have developed a plan. We are in the process of executing that plan to improve the financials. We call that a work-in-progress, and we have also said, though, that we must have success to continue to operate that longer-term. Absent that success, we will have to go to a different plan.

Hamed Khorsand, BWS Financial.

I wanted to ask you, you guys are talking about how you have not seen much in seasonal drop so far. What could happen that there is a seasonal drop?

It is very difficult in the fourth quarter to see sales decline in almost all of our product ranges as we approach the holidays. I cannot remember a year when that did not happen, so it is just something that we naturally expect.

And our portfolio also in the fuels area you will typically see margins come off again. It is the normal very seasonal thing. We have not seen it really come off as you might. So the degree is something we will just watch and see. We probably benefited I think some from low natural gas prices relative to crude right now.

Alright. And talking about crude, I mean what are estimating crude oil to trade at over the next six to 12 months? If crude was to stay flat near, let's say, $80, would there be any margin benefit?

Well, I wish I had that crystal ball. We have seen quite a bit of volatility in crude price. Obviously WTI is in the $82 range today. If it goes higher, it causes us to have some extra cash requirements. Ultimately it is the volatility that we watch very closely. Margins have a tendency to go up slower and come down faster. So it is something we don't have a crystal ball on, but we watch every day and especially in terms of what we crack in the United States.

Okay. And then my last question, just given your cash balance is increasing at such a nice rate, is there an acquisition that you think you would be able to make where it would benefit you from an efficiency standpoint or margin basis? Where do you think you lack that efficiency right now?

Well, I would like to say we need to earn the right to grow. Our focus remains operational excellence. I always talk about top safety performance, reliability. We are working our costs extremely hard. You will see that our cost efforts are bearing fruit. We talk about improving our operating margins. Overall it is a back to basics strategy, earn the right to grow strategy. And, as Kent has mentioned, we are going to discuss that reduction with our board.

Kevin McCarthy, Bank of America.

Jim, now that Petrologistics has their PDH unit up and running, would you anticipate any impact on propylene volumes and/or prices into the fourth quarter here?

Kevin, I think that is about 1.2 billion pound a year unit, something about 4% of the market. I understand that that plant is now making unspec product. Having started up a few of those ourselves, those are very difficult to run. We have not seen the impact yet, but we will watch and see. It could pull down the margins slightly on propylene, but we will just have to watch and see. We don't expect it to have a significant result. That propylene molecule remains very tight. In large part because everybody's cracking ethane as light as they can across the United States.

Right, okay. And I guess on that latter subject, what is your outlook for ethane fractionation capacity increases over the next year or so? We understand Enterprise, [Targon] and others have some plans to increase. Maybe you could talk a little bit about the timelines there and whether or not they are in locations where you might expect to benefit from some increase in supply of feedstock.

Yes, we do expect some additional fractionation capacity to come on next year, and that should help us ultimately. That continues to be the gas play here in the United States and abundant liquids. Because the fractionation margins have been strong, people are investing in new capacity, and obviously there's gas wells behind those plants. So that's all positive for us.

Okay. And then last question if I may relates to your polyethylene business in the Americas. Volumes there increased more than I would have anticipated, I guess over 250 million pounds sequentially. Can you talk about what kind of operating rate would be associated with that third-quarter number and whether or not there might have been any pre-buying activity ahead of the September price hike?

Well, I don't think there is that much pre-buying. Actually the inventories are down slightly in the ACC numbers. We did have Morris down in the previous quarter that had an impact. So it is more of an absence of turnaround story. We have been able to move our volumes and run very well.

We have a pretty long queue of questions. So I would like to ask people if they could limit their questions to just one or two please.

Andy Cash, UBS.

I've got just a couple of quick questions. The first one is concerning potential for a dividend. I realize it is a board decision, but you are influential on the board. I was just wondering what your druthers might be as to when you might want to pay shareholders a dividend, including yourself?

Let me take that. First of all, we have certain restrictions under our debt instruments for the next couple of years limiting dividends to about $50 million. And we are at this time reluctant to recommend anything beyond that until we've talked to the board. I think that will be -- that is also a work in progress in the discussions there with the board.

But, of course, covenants can be renegotiated, correct?

Of course.

Okay. The second question really for Jim, if you look across the chemical industry, there's a bunch of companies who have been buying specialty, selling commodities or some kind of combination of the two because they have grown fond of these specialty chemical assets. I'm just looking at Lyondell's supersized cash flows and just wondering if it is time for you guys to step up and take big advantage of some of these unwanted commodities.

So my question here is, where do you want to take the Company's product mix longer term? More commodities? Do you want some specialties? Where does refining set in all this?

Well, let me first say, as I mentioned before, our current focus is earning the right to grow. We like the commodities business. Obviously we have shown the earnings power, the cash generation power over the last couple of quarters. Hopefully surprise people to the positive. It is always about the quality of the assets. We think across the cycle, commodity businesses perform at or sometimes in certain people's analysis better than some of the specialty businesses. So we like our portfolio.

On the refining side, again, that gets down to asset quality. Our Houston refinery is an excellent asset. I have run a big refining system before, and this asset compares with the best of the US refineries. We just have to run it better, and we are making investments to improve that. We have changed some personnel. Our job there is reliability.

The French refinery is a troubled asset because of the configuration, the lighter, sweeter crudes that it runs, and we are trying to improve our cost structure. But we're not looking to expand in refining at this point.

So, in summary, more of the same. More commodities, more refining going forward once you have earned that right to grow?

Yes, well, our focus is becoming the best competitor in the commodity business, a back to basics strategy. And if we earned a right to grow, demonstrate that we are the most capable operator, then we will be in discussions with our board and others about what the future holds.

We have only been out of bankruptcy a couple of quarters basically. Really this is our first full quarter out of bankruptcy. So, despite our cash generation, we still know what our focus needs to be.

Yes, I know you did not hire Sergei to sit around on his hands, though. I know you guys will be busy down the road. Thanks, Jim.

Don Carson, Susquehanna.

Just to follow up on the feedstock slate, obviously you are running as late as you can and others are as well, which just tightens propylene. I am just wondering what the impact is on your propylene balances and whether you're considering any additional investments to make propylene on purpose or whether you are comfortable with your current merchant position?

One of the things that we have done is change our contractual position as a result of the bankruptcy. We had contracted too much volume in propylene to suit where we needed to run in terms of lighter feedstocks. Through Chapter 11 we were able to reduce that. I think we are at the right level now. We feel pretty good about our balance overall. We are not going to make any US investments in PDH units or anything like that, but we are okay with where we are at.

We have a pretty good balance. We are pretty balanced, and also remember we are also pretty flexible with some of the things we have with sources out of the olefins plants from the refinery fluid unit, the [tapsis] units, etc.

And just to follow-up, I know in the midcontinent you are seeing even more of a discount now on ethane/propane mixes versus the Gulf Coast. Any thought to maybe debottlenecking there because that must be pretty low-cost capacity these days?

Yes, the Middle East -- excuse me, the Midwest ethane advantage is very, very positive, and it makes up for the fact that our crackers and our polyethylene units there are smaller and undersized. We will do a bit of investment around reliability in those sites. As you know, we just completed a major turnaround at Morris. In my mind that was overdue, and that has been accomplished effectively. But we're not at this moment looking at any investments other than minor debottlenecking furnace improvement type things.

Laurence Alexander, Jefferies.

Two quick questions. First, as you look at the fixed cost reductions you have achieved so far, where do you think you are in the process as you look across your asset base? I mean is there a lot more to be done? Is it -- I know your board has not decided, has not addressed it yet. But how are you thinking about the cost-cutting opportunity going forward?

Well, we have a new culture in our Company surrounding costs. We are in the budget cycle today, and I have a basic rule. Our costs always go down. We tried to absorb inflationary cost. There are certain market times when that may not be possible, but it is certainly a strong objective for us. You will see that our costs -- last year obviously we had some significant one-time costs related to matching 401(k), a variety of other things like that that we now have put in place new cost reduction measures that more than offset that, that are ongoing. We are looking at additional cost reductions in a variety of staff functions. We have some focus on our European cost structure, expecting that to be a challenged region as a result of new Middle East capacity. So you will find us always talking about costs and always trying to reduce cost.

And secondly, just a bookkeeping question, the $1.23 billion of EBITDA, that includes some of the charges, or does it exclude all of the charges broken out in Table 2?

It excludes the number -- the number that you are looking at excludes the lowest cost to market inventory write-downs, and it excludes the warrant charge. The mark-to-market cost of warrants was excluded from EBITDA as well. So, frankly, that would normally be treated as equity, but we look at it as sort of financing costs.

And are the other two items viewed as recurring or nonrecurring?

Nonrecurring. Just to clarify, as we looked at the items in Table 2, we really look at those as being separate and beyond our operations. So we look at our earnings-per-share really with the $0.30.

Excluded?

I say nonrecurring, but as long as we are compelled under the accounting rules for these warrants and our stock moves, those warrants will be mark-to-market. So there will be potential, I hope, further losses. That is a heck of a thing to say, but that is what we are hoping for.

Understood. And a $200 million tax refund, that would flow through the income statement, or you are just going to carry it on the --?

No, we have got this set up as a receivable --

Perfect.

That is expected, and I think we are in pretty good shape.

Paul Mann, Morgan Stanley.

Yes, bringing your light feedstocks used in the Gulf Coast, what portion is propane versus ethane? And the second question, what do you expect operating rates to be in the fourth quarter if you had to take a stab at it or guess at it?

Let me just repeat because I think your connection is a little bit fuzzy for us. What you're asking is, in our NGL mix, what portion is ethane versus propane? And then also your second question was, what type of operating rates are we anticipating in Q4?

That is correct, yes.

I don't have an exact percentage ethane versus propane in my head. As we mentioned, the NGL mix is about 75%. The vast majority of that is ethane. In the midwest it is very strong ethane. In the Gulf Coast, a little more propane and EP mixed. So I don't have the exact number to quote to you, and it does move around.

Let me just add to that, Paul. What we do is we optimize basically weekly on these crackers and things. And typically what you have found is of our 75% or so NGLs, our ethane level would be in the mid-60s or so, 60%-some, and propane and butane will come into the mix as the balance dictates.

Okay.

And the operating rates, I'm not going to forecast that at this moment in time, but I will tell you that, as I mentioned in the original comments, that we are continuing to run well, and the markets have been reasonably strong at this point.

Bob Cornell, Barclays Capital.

You guys talked frequently about earning the right to grow, and I wonder if you could just give me some of the target metrics that you are aiming at that would define success in your mind in terms of earning the right? Are you looking at gross profit margins or return on equity? What sort of metrics are you targeting there?

Bob, we in this company measure everything --

All of the above.

All of the above. Obviously the cash position has increased significantly, and that is a unique issue, a nice benefit to have after just having emerged from Chapter 11 obviously unexpected but very positive.

We have gone through dramatic change in our Company. Almost the entire top management team is new. We are in the process of going to a single SAP system, new HR practices, just across the board dramatic change within this Company. We would like to have a stable platform. I think we are getting closer to that. Obviously our results are reflecting that we are running better and some things. But we want to demonstrate that we have some consistency. Obviously we have put a couple of nice quarters together. We are not just looking at a single data point.

Have you framed for people a view of mid-cycle earnings power at this point?

We have not.

Do you want to take a crack at it?

Not on this call. No, as Jim mentioned, we are in our planning cycles. We have been really in our planning cycle all this year and trying to get a very good feeling of what drives the results and performance of this Company. And we have got some internal views, of course, and we are working towards those. But we're just not prepared at this time to talk about those publicly. We have not shared those views with the board yet even.

Bill Young, ChemSpeak.

You mentioned there were good volumes in the intermediate area. I think you mentioned propylene oxide. Since the bulk of it, not all of it, is used in durable goods, where is this product ending up, and what does it tell you about the economic activity?

This is Doug. I will respond first and let other people add on. We have seen very good PO across the derivative chain. So we have seen it in butanediol. Butanediol is a product that goes into PBT in automotive, so you have seen it in vehicle builds there around the globe. We have seen it in the solvents area. The solvents area has been quite strong for us. There you are into electronic solvents to a large degree and into some paints and coatings and things. So those have been areas of strength for us. It really picked up in March and has continued on through for a very strong third quarter for us.

I would add that we have seen some demand strength, but also on the supply side, a couple of our competitors had some modest operating issues that has allowed us to take advantage. So it is both supply and demand in terms of our results.

Great and one more question. You mentioned that you're not considering a new cracker, but others may be thinking about it. What is the likelihood in your view, how attractive would it be to put a cracker, say, in the Appalachian near the Marcellus shale deposits?

Well, I hate to speculate on that. You know it is too early to forecast that, and so I really have no comment on it.

You have not heard any noise about it?

I have not really. You know and what I said before, there is always more consultant talk about a new cracker versus industry talk.

Hassan Ahmed, Alembic Global.

Obviously another strong $1 billion plus EBITDA quarter in an environment where at least on the main plate side of things, global utilization rates for, say, ethylene are still relatively low.

Now, as we marched towards call it more midcycle levels and eventually peak levels of utilization rates, whenever they happen, do you see a meaningful uptick in cash margins for ethylene from current levels? (multiple speakers)

Let me point out that obviously the ethylene cash margin came down considerably in the United States from the last quarter. But it still remains at nice elevated levels, and Europe has been pretty strong in large part driven by the butadiene. I think it has been a very good year in O&P in Europe and in the United States. Generally there is a 7%, something like that, delta and operating rate between trough to peak. But the profit margins with that 7% delta that I'm talking about, that can range more than 2 times in trough to peak. But, again, we have had good margins this year. It has been a very, very positive year in the olefins chain.

Right. Now another quick question, I know there is a high degree of paranoia in, say, around the startup of new facilities, particularly in the Middle East. How do you see the Iran factor playing? I know you have recently exited that market. But with the sanctions being relatively new, there is charter that Iranian product is not really hitting the export markets. So how do you see that playing out through the course of next year?

Well, I think most of the Middle East product is targeted to Asia. In my prior life, I built a large number of those plants with a competitor company, and Asia was always the target market. Very commodity oriented. You know, long supply lanes and, thus, simple blow molding grades, simple film grades, that kind of thing.

I think in Iran, in particular, there have been some reliability issues. I'm not sure what all the other issues have been. But over time the product will come on. Generally most of that product -- (technical difficulty) Asia, but there will be some of that that shows up in Europe, primarily in commodity grades.

But more in terms of looking towards 2011 and the Obama sanction sort of kicking in, and we've been hearing things about letters of credit being an issue and the like and the Chinese modeling business with Iran, and call it reliant industries not sort of exporting gasoline to Iran anymore. You know, I mean would that potentially tighten up effective utilization rates or maybe have a potential positive impact on margins in your view?

You know, Iran is a very unique situation. You probably saw that we announced that we were ceasing doing business with Iran. (multiple speakers) -- and we expect that that will have some worldwide impact. Obviously various governments around the world are trying to have that impact. But it is hard for us to predict with any degree of certainty what that will ultimately be next year and the year after.

Ed Mally, Imperial Capital.

Just getting back to the topic of the excess cash, are you viewing the excess cash that you are considering putting to work the difference between your cash balance and a minimum of, what, $3 billion?

No, we have been public on this. I think it is clear that until we achieve investment grade ratings and so on, we have to maintain our liquidity at least in part, a significant part through our cash balances. So we said coming out of bankruptcy we felt that we needed an absolute minimum liquidity in this company of $3 billion. And if we had only $1 billion of that in an asset-backed or revolving line of credit, we need another couple of billion on the balance sheet. As we develop other sources of capital and so on, those will be evolving numbers. But I think right now I would tell you that we have planned for and targeted having at least $2 billion in cash to maintain the liquidity that we want.

So guessing then that the excess cash that you are contemplating putting to work is as much as $2.8 billion at this point?

It is difficult to say because we have got -- as I said, we pay down our asset-backed lending facilities. We still had the same liquidity, but we don't have the cash now. So I think it would be speculative to say how much we are going to use in any one area certainly until we have had these dialogues with our board.

And in terms of the board discussion, do you see that as being a process that is concluded during the fourth quarter, or is it a more extended process than that?

I think it is going to be ongoing, and it will center -- it has to be talked about in the context of long-term strategic direction of the Company. These are issues that cannot be talked about in isolation. We have got to talk about our long-term dividend policy, our long-term growth strategies and where and how it is going to be funded. It is all integral.

Michael Shrekgast, Longacre.

Yes, could you just -- going back to the beginning of the call, I just wanted to clarify what you said about the cash balance. Did you say that as of last night you were at $5 billion and post -- and that was post the $500 million paydown of the euro securitization?

That is correct.

Okay. And then with regards to working capital, I think on the last call you guys had talked about realizing was it about $1 billion of working capital benefits from returning to normal terms with your vendors. Any update on how far along you are on that and how much more is still to come?

Yes, as I mentioned in my comments, for the year we are up about $0.5 billion in actually our accounts payable balances. Now, of course, some of that may be price related, too. But we have targeted an improvement in trade credit from the time we exited bankruptcy of somewhere in the range of $800 million, and we have largely achieved that at least through negotiation. It has yet to all appear on the balance sheet through increased payables, but that is happening over time. I think over the course of the remainder of this year we are going to get another couple of hundred million somewhere in there. That will evolve, too. In fact, we have been pleased to see that in some cases our trade credit is maybe as we should have expected but were pleasantly surprised to see our trade credit has been better now than it was pre-bankruptcy.

And then just from the standpoint of working capital as we just think about how the balance sheet will develop in the next maybe -- over the next quarter to two quarters, is the fourth quarter generally a working capital inflow for you guys?

Well, we certainly draw down -- it fits some price volatility in some cases. But with the reduced sales, we generally collect -- first quarter was generally a cash draw period because of either insurance premiums, bonus payments, rebate payments and a lot of that, first quarter tends to be cash negative. There are certain cash outflows that are not seen in the rest of the year.

I would say in the fourth quarter, Mike, the most significant event, things are pretty regular, and it is going to be how the payables develop and move forward as Kent said.

Gregg Goodnight, UBS.

I was curious where you guys think you are with respect to catching up on your deferred maintenance prior to the bankruptcy. You cited improved reliability of targets. So where are you with respect to the catch-up on deferred maintenance, and also could you call out any major outages in 2011?

Sure, I would be happy to do that. We did make some significant progress on turnarounds this year. You saw that our capital spending is less than we forecast. I'm pleased to report that that is in large part because we are spending our capital more efficiently, getting more bang for the buck. That is one of our key objectives, and we are seeing some positives in that direction.

We are done basically with the significant turnarounds for this year. Next year we do have a couple of significant turnarounds at the Houston refinery. We have our cat cracker down. Channelview plant #2 will have a significant turnaround. Botlek PO, our TBA unit, will be down in the fall, and Channelview East, which is basically our [Alki] unit, MTBE, a few things like that will be staged throughout the year. So we have some more work to do next year. We are catching up and getting our system to be reliable.

I think I stated clearly that the third-quarter results were pretty good in terms of reliability, and we will continue to put the money into the existing assets and improve our reliability as time goes on with a key focus on the Houston refinery.

Excellent. Last question if I could, could you give us a brief update of your operational status of your JVs in the Middle East, specifically Al-Waha and Saudi Olefins and Polyolefins, and are you expecting any significant dividends in 2011, or are we going to have to wait until 2012 and 2013 to see dividends?

Well, we are already paying some dividends from our SEPC unit, the polyethylene unit. The Al-Waha unit just passed its polypropylene final grade test. We have had some PDH operational issues that have been ongoing. We are working those, improving the reliability, and remember that in the Middle East investments, the two latest ones we just started up, most of the cash goes to pay down debt in the early days versus dividends. And so they will start to pay dividends as time goes on. I think we have shown in our plan some forecast for that dividend stream.

We have had some record volumes on our polypropylene units, so we're pretty pleased with that.

Okay. Thanks for the update.

Alright. Well, I appreciate all of the questions. Obviously we had another exceptional quarter. We are happy to demonstrate that the second quarter was not a one-time event. We have also demonstrated the significant cash generation power of our commodity business. We do want you to recognize nice that this is a new LyondellBasell. We are hoping that the results reflect that. Thank you for your interest in our Company.

This does conclude today's conference call. Participants may disconnect your phones at this time.