利安德巴塞爾 (LYB) 2011 Q2 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. At that time (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. Welcome to the LyondellBasell second quarter 2011 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'd like to point out that a slide presentation accompanies today's call and is available on our website, at 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. 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. And the actual risks 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 our cautionary statements in the presentation slide and our financial reports, which are available at www.LyondellBasell.com/investorrelations. A reconciliation 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, www.LyondellBasell.com.

Finally I'd like to point out that a recording of this call will be available by telephone beginning at 1 PM Eastern time today until 1 PM Eastern time on August 29 by calling 800-510-9771 in the United States, and 402-334-6800 outside the United States, and the passcode for both numbers is 4765.

During today's call we'll focus on the second quarter of 2011's performance, the current environment and the near-term outlook. With that being said I'd like to turn the call over to Jim.

Thank you for joining our 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 4 to review a few financial highlights. The second quarter results were strong, in fact it was the best quarter that we've ever posted with earnings per share of $1.38. Our year-to-date earnings per share were $2.56, a very nice start to the year. Adjusted for various items noted in our earnings release, this increases to $2.74 per share. Our second quarter EBITDA surpassed $1.5 billion, ringing the first-half EBITDA to almost $3 billion.

Not only did we have a great first half and a record second quarter, we also had a nice balance across the period. Our portfolio performed well month-to-month. This was due in part to solid operations during the quarter.

We finished our largest turnaround in Company history at Channelview, a major activity during which we had more than 2000 contractors on site at the peak. The plant restarted in late June and is operating well. This scheduled down time negatively impacted our EBITDA by about $75 million.

We also had about two weeks of unscheduled down time at our Morris, Illinois site. The down time was caused by multiple lightning strikes at the facilities of a third-party power provider. This adversely impacted our quarter results by approximately $25 million.

Good, steady operations generally go hand-in-hand with good safety performance. On page 5 you can see that our safety performance continues to be excellent. However, within the quarter we experienced a number of isolated and generally minor injuries. To help bring focus to safety we held our second Company contractor and supplier global safety day. All of our 50-plus sites participated in this event. Our Company goal is safety perfection.

In summary, we had a great quarter. Through investments in our assets and our systematic approach to all aspects of our business, we've made great progress and established a solid foundation. The first half of the year was a good example and the performance that will build upon.

Let me now turn the call over to Kent to discuss our financial performance.

Thanks, Jim, and thank you all for joining us today. As Jim said, the second quarter was another strong quarter. On slide six we have chartered the EBITDA by segment for both the second quarter and our year-to-date results. I won't step through each segment as Jim will do so in significant detail, but I do want to stress a few points, some of which Jim has already mentioned.

Of course I first want to underline the strength in second quarter and our six-month results. EBITDA for the six-month period falls just shy of $3 billion. Consider that each of the four large segments were individually generating EBITDA, that when annualized would equal or surpass $1 billion. Olefins & Polyolefins Americas alone operated at an annualized pace of more than $2 billion.

Second, I want to emphasize the consistency of our results across the periods. Our results have been reasonably steady across most segments and the Refining & Oxyfuel businesses have followed normal seasonal trends.

I also need to point out we've recorded several charges and credits during the first half of the year. Among these were credits of $75 million for the cumulative impact of an insurance recovery and profit from the sale of silver and spent catalyst, offsetting charges of $190 million related to a combination of marking our outstanding warrants to market prices, reorganization and severance accruals, debt restructuring costs and environmental and legal accruals. The combined after-tax impact of these items was a charge of $43 million for the first quarter, and a charge of $62 million during the second quarter. The details can be found in our press release.

Finally, as Jim mentioned, we were also impacted by an estimated $150 million in pre-tax opportunity costs related to the down time associated with our major turnaround activity.

Moving forward to slides 7 and 8, I'll now cover some of the key elements of our cash flow. During the second quarter we generated $554 million of excess cash, building our cash balance to $4.9 billion. I'll touch on a few of the components of this cash flow.

First, exclusive of working capital changes, our operations generated $1.1 billion of cash. Included in this figure were a few significant payments, including $120 million for interest and $330 million of income tax payments. Working capital consumed approximately $50 million as Brent crude oil prices averaged $117 per barrel during the quarter versus $105 during the first quarter.

The next slide addresses the change in the key components of working capital, however there's nothing unusual in the results adjusted by special mention this quarter. During the quarter we continue to reduce our debt, paying down an additional $250 million of our 8% bonds. We also paid our first dividend, $0.10 per share, or approximately $55 million. Capital spending during the quarter was approximately $260 million, bringing our year-to-date total to approximately $480 million. This is somewhat below our targeted spending pace, but I anticipate that full-year spending will be between $1 billion to $1.2 billion depending on certain timing considerations.

On the right-hand side of the chart you can see our cash generation since emergence last May. Since then we've added $2.2 billion to our cash balance while reducing our debt by $1.4 billion and paying our first dividend. On June 30, our total cash balance was $4.9 billion, liquidity was $7.1 billion, and our net debt declined to approximately $900 million.

During the quarter we closed a couple of financings I'd like to explain. First we refinanced our asset-backed revolver facility. Through this refinancing we extended the term to 2016, expanded the facility size to $2 billion, reduced the fees and interest rates considerably, and amended and modified covenants to add flex ability as we advance our financing strategy. We also put in place a new agreement which reduces the cost of letters of credits.

You may have noticed that we've not included our balance sheet in our earnings release. We have identified certain areas associated with our bankruptcy-related tax positions and related accounting that will result in a revision to our April 30, 2010 emergence balance sheet deferred tax liabilities. However, the revisions will not change net income, either in the predecessor period or the period since emergence. Of course our balance sheets will be available on our upcoming 10-Q filing after revisions are finalized.

I want to emphasize that these revisions relate to our emergence balance sheet and will not affect income or cash flow. Our EBITDA, earnings, EPS and cash flow will not change from amounts previously reported.

Before I turn the call back to Jim I want to speak about our joint venture reporting. Joint ventures are a significant part of our Company, and I want to ensure that their value is fully appreciated. Please turn to slide 9 as I believe it will help me make my point.

On the left-hand side, of the chart, I have included information that provides a perspective of our individual joint ventures. Let's discuss the drivers of a few of the key joint ventures. First, our Saudi venture sells product in Asia -- from our Saudi ventures sell product in Asia, while benefiting from large-scale, the latest production technology and cost advantage raw materials, including ethane and propane. Similarly, in Asia one of our key ventures, HMC, enjoys many of the same benefits of the Saudi ventures, converting locally priced propane into polypropylene. In Mexico, our Indelpro joint venture enjoys a raw material advantage as it upgrades refinery-grade propylene to polymer-grade propylene and then polypropylene. Given the tightness in the North American propylene market this has been a significant advantage.

Finally, our joint venture in Poland operates with some of the newest polymer technology while benefiting from raw material supply from our partners' olefin production.

In summary, our ownership with these ventures represents 4 billion pounds of equivalent polyolefin capacity which typically operates with advantaged raw materials. They also serve as growing markets with the newest technologies available. Many of the ventures, such as the Saudi Arabian plants, are new while the others, such as Indelpro and HMC have recently been expanded. Hence, their future potential exceeds historic results.

In general, these ventures are structured to distribute excess cash to the owners and do so periodically during the year. Some typically pay dividends quarterly, while others pay annually. Through the first six months of 2011 our joint ventures have generated $131 million of equity income, our share, and paid $107 million of dividends.

We are aware that many of you use EBITDA multiples to value our Company. In our EBITDA presentation, we include cash dividends that we receive from our joint ventures rather than equity income. This approach is typical in high-yield financing as it represents immediate cash flow. However, I believe that it underestimates the value of these ventures. My basis for this belief is that dividends are paid out of net income, that is after all financing, tax expense. Therefore an EBIT multiple applied to dividends is not consistent. Rather, I would propose that the JV should be valued based on equity income and a typical price/earnings multiple.

On the upper-right-hand side of this chart, we've provided our 2010 and annualized year-to-date joint venture equity income and dividends. In the chart on the lower right, we have value the JVs based on three approaches. First, we plotted the book value of the JVs as defined last year in our emergence plan. This value was derived from the discounted cash flow of the then-current forecast, a forecast which is proving to have been quite conservative.

In the second column we apply a multiple of 5 to both our last 12 months of dividends and our annualized first half of 2011 dividends. This methodology results in a joint venture valuation between $600 million and $1.1 billion. Finally, in the column on the right, I applied a multiple of 11 to the last 12 months and annualized first half 2011 equity incomes. resulting joint venture valuation using this methodology is between $2.1 billion and $2.9 billion. The multiples I have chosen are representative general chemical industry multiples. I don't mean to suggest that you apply these multiples, I simply selected multiples that reflect recent trading levels. A point that I want to make is that the use of an EBITDA multiple significantly undervalues the shares of our ventures. Based on the example I've presented, I suggest that the EBITDA multiple approach undervalues the JVs by more than $1.5 billion, or $3 a share.

Thank you. Now I'll return the call to Jim.

Thanks, Kent. Let's step through a summary of second-quarter results for each of our businesses.

Page 10 addresses the key results for the Olefins & Polyolefins Americas segment. The second quarter continued a string of strong quarterly results. EBITDA of $578 million was approximately $95 million more than the corresponding first-quarter result. Within the segment, Olefins EBITDA improved by approximately $130 million. The key drivers of the improvement were increased prices and margins. Our production volumes declined versus the first quarter, primarily due to the scheduled turnaround of one of our Channelview Olefins plants and the Morris down time.

Our margin increased by approximately $0.07 a pound as ethylene price increased by $0.09 a pound. Partially offsetting this increase was a $0.02 per pound increase to our cost -- our ethylene cost of production metric. Raw material cost increased significantly as crude oil-based feedstock costs increased by $11 per barrel, and Gulf Coast ethane increased by $0.12 a gallon. The majority of these raw material increases were offset by increased co-product prices with the net result being the modest increase in the cost of production metric. Examples of the co-product price increases experienced this quarter include propylene up $0.11 a pound, butadiene up $0.36 a pound, and gasoline blending stocks up approximately $0.50 a gallon. As a result, the second quarter cost of ethylene production from crude oil-based feedstock declined versus the first quarter.

Additionally, we benefited from our advantaged position in the Midwest where ethane costs increased by only $0.07 per gallon rather than the $0.12 increase on the Gulf Coast where most industry capacity resides. Approximately 80% of our second quarter ethylene production was derived from natural gas liquids. Overall, olefin results were very strong, particularly when one considers that we operated for the majority of the period with one of the Channelview olefin plants in turnaround.

Our polyethylene results declined by approximately $50 million versus the first quarter as price increases did not keep pace with the ethylene increases. As a result, spreads declined by approximately $0.02 a pound. Volumes declined slightly in part due to our internal maintenance schedule, but also due to customer buying patterns.

Polypropylene results improved by approximately $10 million on sales volume, and sales volumes increased by about 5% while margins were unchanged. Late in the second quarter, certain product prices declined, most notably polyethylene. Despite this decline, thus far third quarter ethylene chain margins have been good. Our ethylene plants are running near-full rates. Current spot ethylene prices support our belief that we will benefit later in the year when several producers execute turnarounds.

Let's page forward to slide 11 and turn our attention to Olefins & Polyolefins Europe, Asia and International. This segment also had a strong quarter with EBITDA of $275 million. This was approximately $60 million less than the first-quarter EBITDA as increases in our underlying 100% owned operations were offset by an approximate $90 million decline in joint venture dividend receipts and approximately $60 million for accruals that Kent mentioned. Absent these items, our underlying second quarter EBITDA was approximately $336 million versus $240 million in the first quarter.

To build on Kent's previous discussion, I should mention that our second quarter equity income was $73 million versus $58 million during the first quarter. Similar to the Americas segment, olefins was a source of strength during the quarter. Olefins EBITDA increased by approximately $95 million as both cracker and butadiene recovery margins increased. The margin improvement resulted from increased ethylene chain margins and very strong butadiene prices. The crackers contributed slightly more than half of the sequential improvement. Butadiene recovery continued to represent approximately half of the olefins profit.

Olefin production volumes were relatively unchanged versus the first quarter while increasing by 20% versus the second quarter of 2010. Within polymers, our results improved by approximately $10 million. Polyethylene results remain generally steady across the quarter. Combined polypropylene and polypropylene compounding results improved moderately. Polypropylene volumes declines were in line with the industry. Of note, our polypropylene compound volumes were unchanged despite the uncertainty around automotive production following the Japanese earthquake.

Early in the third quarter, European trends are similar to those in the US market as industry chain margins have declined from the strong second-quarter levels. However, ethylene chain margins have been greater than first-quarter levels and we've seen positive price movements in the Asian markets. Over the coming weeks it will become clearer whether this signals an end to the recent soft patch.

Please turn to page 12 for a discussion of the Intermediates & Derivatives segment. Second quarter EBITDA was $313 million, $43 million greater than the first-quarter results. This improvement includes a $41 million gain in the sale of silver and spent catalyst. Within the segment, the propylene oxide and derivatives area results declined. Volumes declined with the end of the aircraft deicer season while margins were relatively unchanged. Our intermediates projects continued to post good results as increased margins led to improved acetyls and styrene results.

Independent of the gain from the silver sale, ethylene glycol and TBA intermediates continue to post strong results which are relatively unchanged versus the first quarter. The markets for these products and our operations in these areas have been very good. The Intermediates & Derivative segment has been a strong, steady performer and is expected to remain so in the near future.

Moving forward to page 13, I'd like to risk us the Refining & Oxyfuels segment. Second quarter EBITDA was $353 million, a $144 million increase versus the first quarter, which included the benefit from the $34 million insurance settlement. As Houston refinery EBITDA increased by approximately $135 million as it benefited from both increased industry margins and strong operating rates following the first quarter fluid catalytic cracker turnaround. Our cat cracker is running very well and is exceeding our design expectations.

Second quarter crude rates exceeded 260,000 barrels per day, reaching 280,000 barrels per day at times. Compared to the first quarter, the industry benchmark Maya 211 spread increased by approximately 2$ per barrel. The corresponding metric for our facility increased by several dollars more as we continued to secure advantaged crudes and benefited from our marking efforts and product mix.

I'd like to take a minute to speak about crude oil prices as there may be some confusion regarding the price of West Texas Intermediate, WTI crude, relative to other light crudes. WTI price has been depressed due to logistical limitations in the Midwest, coupled with increased crude production from the Dakotas, the Rockies and Canada. Essentially, crude oil is long in this region and thus price is depressed relative to global prices. In order to better understand and reflect the spread between heavy and light crudes on the Gulf Coast, we have graphed the 2011 data based on Light Louisiana Sweet, or LLS crude, as a better representation of the benefit derived from our Houston refinery assets.

The Berre refinery continued to post a loss as results declined by approximately $10 million versus the first quarter. Industry conditions continued to pressure results as naphtha prices lagged both crude and gasoline prices. Additionally, crude costs were elevated as a result of the Libyan political situation. During the quarter, we chose to limit crude runs due to economic conditions.

Oxyfuel results improved by approximately $50 million this quarter. This is consistent with seasonal trends and is attributed to both improved margins and volumes. The benchmark margin that we follow and report improved by approximately $0.35 per gallon. I would also mention that our shipments of ETBE to Japan continued throughout the quarter without interruption.

As you can see from the industry benchmarks on the slide, conditions in this segment have remained strong, essentially equivalent to second-quarter levels. The Houston refinery has been operating at full capacity. We are realizing the expected benefits from our FCC turnaround and believe that we are well positioned to take advantage of this environment.

Let's move to slide 14 and the Technology segment. This segment posted second quarter EBITDA of $42 million. Catalyst results remain excellent. Licensing results declined relative to first quarter when we benefited from ongoing payments related to earlier activities. Results include an approximate $15 million accrual related to the relocation of Our Newtown Square, Pennsylvania research center.

Let's step back from the details and summarize the environment on page 15. Our second-quarter results were the best we've ever recorded. As a result, during the first half of the year we generated EBITDA of almost $3 billion. Late in the quarter we saw some relaxing of polyethylene volumes and prices, however this followed very high margins realized early in the quarter. I don't see this as a longer-term concern, and for the most part believe that it was driven by inventory adjustments as energy prices began to fall. In fact, during the past few weeks we have seen the Asian market already begin to recover. This is typical of an inventory correction and the buying behavior that we have witnessed in the past within the Asian markets. Unfortunately it's impossible to define the duration or severity of these adjustments. The uncertainties around global events have made it that much more difficult to quantify.

Regardless of this volatility, the fundamentals that support our business have remained intact. Low natural gas costs relative to crude oil create a global advantage for our US olefin operations. Our US European business has performed well, driven by our strong technology and asset position, coupled with a global olefin co-product tightness. In the refining area, our Houston refinery is highly competitive and is clearly beginning to demonstrate its earnings power.

Across the Company our second-quarter operations were solid. We completed a large critical turnaround at our Channelview olefins complex. We continued to invest in reliability and efficiency improvement projects across the Company and, as always, cost management remains a key aspect of everything we do. We are working aggressively to restructure staffs within our European operations to further improve our competitiveness. We are consulting local works councils to finalize plans. We are also optimizing our US R&D efforts. We have taken accruals in the quarter related to these items.

I should also mention that our global employee headcount currently stands at 13,900, a reduction of 3300 since we initiated our efforts three years ago, and 600 below the year-ago level.

Our corporate governance efforts are also moving forward. During the quarter we added four new directors to our Supervisory Board. The Board now has a majority of independent members with six such directors out of a total of 11. With the Board now fully constituted, we are positioned to conduct the discussions and debates which will serve as a foundation for our longer-term strategic, investment and financial plans.

As Kent mentioned, we continue to move our capital structure forward. During the quarter we reduced our debt, restructured our revolving credit facility and paid our first dividend. We also advanced the projects that I discussed during our last call that is outlined in the final slide in this presentation. It's premature to report specific information on these efforts, but I will say that the engineering is progressing rapidly, and I'm very encouraged that we have wonderful growth opportunities with excellent returns. Our Channelview and La Porte crackers are already highly competitive. Following debottlenecks, they will truly be world-class.

I hope that it's apparent that we are beginning to operate on all cylinders. Our results are reflecting this fact and our successes to date are allowing us to turn more of our attention and resources toward the longer term. I stated a couple of years ago that we will have to earn the right to grow. We are now at that point.

Thank you for your past and future support. Sherry, we will be happy to take questions.

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

Good morning. A couple of questions. Can you talk first a little bit about polyethylene, how much are you exporting, and did you see any slowdown in those exports?

Yes, P.J., let me comment on that. We mentioned there was a little bit of softness at the end of the period. You'll recall that we previously indicated that we significantly changed our polyethylene portfolio. A couple of years ago we were exporting about 30%, of which about half was to Asia. Today, we export very little from the United States to Asia. Of course our Middle East production primarily goes to Asia. We export 10 to 15% generally to South America, and that continues. So some of that softness in Asia that we saw didn't impact us that much in the US simply because we repositioned our selling patterns.

Okay. And, secondly, you talk about the [right to grow], you mentioned on the cracker I was just wondering if either Ken or Sergey can talk about how you're looking at build versus buy decisions. And are acquisitions off-limit at this point, are you looking only to either brownfield or greenfield expansions?

First, I want to point out that our primary emphasis will be on debottlenecks that were existing assets. We've got some very large, very competitive crackers already at Channelview and at La Porte. And we are seeing opportunity to significantly debottleneck those plants. Those brownfield-type investments will have much better returns, we believe, than greenfield. So we are looking first and foremost to debottlenecks. When I say debottlenecks, potentially fairly significant debottlenecks. As I said, these could be absolutely world-class crackers in size. So that work is ongoing, we're doing that at a very fast pace. We are expecting to get some detailed engineering in soon, so that's moving ahead full speed.

We are also looking at potentially greenfield investments. After the announcement we made last quarter in the earnings call we've already been contacted by a couple of parties and said you'd make a great partner, maybe we ought to discuss this. We'll look at those opportunities, we'll see what the economics are and then decide from that point. But again, the priority is first and foremost on the highly leveraged debottlenecks.

Thank you.

Bob Koort, Goldman Sachs.

Jim, it looks like these ethane prices in the US continue to stay stubbornly high. I know in the past you've implied maybe you could put a little pressure on the suppliers by looking at building your own. You've got an awful lot of cash and it wouldn't be very expensive. So is there any potential that you could actually get closer to maybe building your own fractionator?

Bob, that's a good point. At this point in time, ethane prices are elevated. That's in part because most of the large crackers are running well. There are a couple, actually a few smaller crackers at this moment that have hiccups that are working through a few issues. But generally, because everybody is running pretty hard, that balance favors the folks that are fractionating.

Now when we get into the heavier turnaround season that we expect this fall, that is likely to change. Having said all of that, we remain open to the concept if necessary of building our own fractionation. We know that there is some capacity that's coming on, about 40,000 barrels a day from enterprise, we think comes on late in December. Targa has got another 40,000 per day barrels per day I think early in the second quarter, and there are some various things that are talked about in Marcellus, maybe in 2012 another 100,000 barrels per day. So we see quite a bit of capacity coming in. But we remain open to good financial opportunities for the Company.

If I might follow-up for Kent, you gave an interesting analysis of your JVs, and I believe I guess that you're getting shortchanged by the market. Is it possible you could also give us a sense of what the proportional EBITDA, proportional debt is so we can look at it on a pre-tax basis?

Well, some of that is changing too, Bob. One of the issues that we seen, as these joint ventures start up, pass all their completion tests all that, we generally have been successful in refinancing. And so some of that is changing. In the case of our Waha, we will be doing that, I think. So, no, I really can't give you those numbers today.

All right, thank you.

Duffy Fischer, Barclays Capital.

Good morning. If you could, I know it's early and there's a lot of planning yet. But roughly speaking, how much should we expect CapEx to be up for you guys in 2012?

We have been saying that we would generally spend about $1 billion a year in base capital and modest growth. As we start to work these other projects, that's going to increase. And I would expect that we ramp up maybe a couple hundred million dollars next year, and then we will see after that depending upon the size of these projects that we're looking at. There's various things that we are considering and overall scope for those cracker debottlenecks. We've talked about the propylene oxide expansion. Most of this heavy spending doesn't happen in the first or second year. It happens after you get the permits and a couple years after that. So for the next year or two you won't see a significant ramp up, but you will see a wrap up.

Okay. And what are the chances that a decent amount of your expansion will happen via your JVs? Is there room to expand those meaningfully, or most of it happened with wholly-owned assets?

The things we're looking at in the United States are wholly-owned assets. Other than a potential condo cracker, that of course would be in the partnership, by definition. In Asia and in the Middle East, several of those facilities, as Kent mentioned, have already been debottlenecked. They're well-positioned to go ahead, and as naphtha in Asia becomes more competitive as the cycle starts to turn in our favor, those are running higher capacities, and that's all upside.

We would like to debottleneck some in the Middle East, but it will depend on feedstock availability. The Middle East, as you know, is extremely competitive. There's opportunities for us to do things there, but we have to get a feedstock allocation. And I know we and our partners talk about that with the authorities on a regular basis.

Okay. Just the last one, right around the time of your last call there had been a number of announcements, you guys had your own, some of your competitors had some about stuff they wanted to do in the US based off the shale gas. You've kind of had three months now or so to analyze that. Can you just kind of handicap the whole of all the announcements and what you think is probable as we look out over the next four to five years as far as capacity coming online in the US?

That's going to be a tough thing to do, Duffy, but I'll tell you how I think about it. First, one of the reasons our Company is pursuing the debottlenecks is because those can be executed quicker. And the first [I've] done are going to be in the best position. And so we're working that very, very hard with full emphasis with our engineering team and our external contractors. We would like to be one of the very early movers. There's been some of the announcements, but if you look at kind of what's been done, what's been talked about, some of those are -- I call those lines in the sand. They are telling us they may come, but that's another way of saying we like to talk to people about product.

And so we'll just see. I really can't handicap it, but some of the projects would be so late in the cycle that by the time they got going they will probably miss some of the early benefit.

Great, thank you guys.

Don Carson, Susquehanna.

Thank you. Just a question on [O&P] Americas for the second quarter. You ran a pretty heavy NGL slate, and I know that US naphtha margins were very attractive from the quarter. Just wondering why you didn't run more naphtha -- was that because of OP-2 down, and the need to maximize production, hence your ran ethane?

And Jim, you mentioned about debottlenecking Channelview and Laporte. I wonder if you would have any plans to debottleneck your Midwest crackers to take advantage of what should be a sustained ethane advantage in that region?

Don, First, in terms of why we ran so light, at this moment in time there's reasonable balance between light and heavy because of the strong, strong value of the co-products. We did have OP-2 down, and that had a pretty significant influence. As you know, that's a very, very flexible cracker and will run quite a few of the furnaces on heavies to take advantage of that co-product pricing. So you correctly analyzed that.

In terms of the Midwest, we've done some turnaround work there last year, and we are -- at Morris -- and we're, other than the lightning strike, that hurt us this last quarter. That unit's running very, very well. We set new production records time after time after time to the point now where we are looking at debottlenecking the polyethylene. So the unit itself following the turnaround some of the things we've done really is helping us there. Now in Clinton we're doing some furnace work, improving efficiencies; that will help us on energy as well as yield structure. So again, those are the kinds of debottlenecks that do nothing but good for you. Very low capital, and really nice returns. And so modest things there, but still given the spreads, pretty impressive.

If I may, a quick follow-up on the finery. You mentioned you did briefly get to 280,000 barrels a day from time to time. Should we expect that as sort of a new potential run rate as we get into the second half of the year? Just what are your thoughts as to how you can run post the SEC turnaround?

I'm not going to call 280 at this point in time, but we have demonstrated the ability to do it. It depends on what crudes are running and a few other things and how we are configuring the back end. But I think the great news is that we are showing we really know how to be a company that refines again. You can see in the operations that we are lining things out, we're a lot smarter in the way that we are buying crudes and selling finished products, and the margins have improved significantly in that business. But we've outperformed the general industry, and you see it in our results. I'm extremely proud to be saying that. Last year, I kept making excuses for this refinery and said trust me, it'll get better. And now, I'm able to tell you you're demonstrating that.

Thank you.

Kevin McCarthy, Bank of America Merrill Lynch.

Good morning. Jim, in your prepared remarks you mentioned that your refining economics ran several dollars better than the benchmark Maya 211 spread. Was that delta above the Maya 211 better than it would have been in 1Q, and do you think it's sustainable moving into the third quarter?

Well, I think it's a little better this quarter than the first quarter. We have done a very nice job of buying crude oil. There is that significant disruption in WTI compared to other crudes that are coming in. If you look at WTI Maya, you'll see a negative spread. It never happens like that. But people have priced crudes off of WTI in oil and we've been out there in the market I think doing some very clever buying.

And also optimizing the feedstock that we bring into the refinery, the amount of heavy sulfur -- we've always been a little light with our hydro treaters in terms of total capacity, and so we've been smart in pre-selling some co-products and doing this and doing that. I call it refining 101, although the way it's been done by our team it's more like a senior class because they're really demonstrating the ability to move quickly and adjust to markets and bring in some nice cargoes.

Is it sustainable if the opportunities in the market remain? Yes. We've got to run very well, but we have now demonstrated we know how to do it. And in the past that stuff just was not happening in this Company.

A follow-up if I may, Jim, on a different subject related to the propylene chain. An awful lot of value has been created in propylene monomer I guess over the last year or two, less so at the polymer level based on some of the industry margins that we observe. Do you think that will change in coming years, and I'd welcome any thoughts you have on industry consolidation there with the Dow-Braskem deal?

Yes, well, first on the general propylene molecule in the polypropylene, we have to talk geographies there. And as you know, in the Middle East we have an advantaged feedstock situation. So those economics really remain very robust.

In Asia and in Europe, things remain about the same simply because people continue to crack naphtha. And so the balance between ethylene and propylene isn't that different. I would like to point out that we buy propylene fairly well in Europe. Because of the size that we have, we are so net short and some people get some stranded propylene. And so we have been pretty good at buying that molecule. Now in the United States, which is I think where your primary question is, because of light cracking, we have been -- the propylene molecule has been very short. It has caused polypropylene to be more expensive than polyethylene, and there has been some product substitution. That will normalize itself out over time. We've reacted it, the volumes have fallen some, but we've been able now to adjust and get some decent margins. You saw our margins went up a little bit this last quarter in polypropylene, but the value will be primarily in propylene I think versus polypropylene in the near term.

In terms of the consolidation in the industry, Braskem has been there in the past and they're a good competitor. And their very large, we're very large, and we enjoy competition. (multiple speakers)

This is Doug. I'd just add, remember, we also have a pretty nice business in our polypropylene compound in there, so we've got some places where we had some real value (multiple speakers) [back] to the probably chain.

One thing I want to say is we've only got about 12 or 15 minutes left. So we'll have to move pretty quick because we have a fairly long queue of questions. Be respectful of everybody's time.

Jeff Zekauskas, JP MC.

Good morning. Just two questions. Will there be a difference between your book taxes and your cash taxes this year? And then secondly, can you speak about the profitability of your Berre refinery year-over-year, and when you might expect difficulties there to end?

Let me take the tax question first, it sounds easier. In the US we remain largely where we were before, and (inaudible) mentioned before is really not going to change too much. We lost pretty much our attributes during the bankruptcy, so our cash taxes are pretty much book taxes in the US. In the rest -- parts of the world we do have -- first of all, we have lower statutory rates in some places and some of our profits are taxed, at least on our books as you see like I was talking about with the joint ventures. But in other places of the world, so we are not affected by bankruptcy, our European operations. We still have significant temporary differences between book and tax. So there will be still some differences.

One other thing, Jeff, I just mentioned, that we do have an interest carry-forward available.

Doug raised a good point. We do have what might be called another temporary difference in that we did not lose all of our interest deductions and bankruptcy. So -- but those will be reported through deferred tax accounting. So we'll be okay.

On the Berre refinery, we continue to have losses at that facility. The European refining industry is reasonably challenged in general at this moment in time. And our asset has run on purpose at lower volumes to minimize the losses. As we've announced in the past, that asset is for sale, that process is in the early days, and so we'll see how it continues on. I would like to point out that if we are unsuccessful in selling the asset, it is a possibility we could shut that refinery down and run our cracker or low-density unit and polypropylene units on a standalone basis.

Thank you very much.

Hamed Khorsand, BWS Financial.

Good morning. Just one question here. As far as maintenance scheduling goes in the second half of this year, how much market share do you think you can gain while the competitors are running?

I'm not sure if I would talk about market share, but I will say that there is a pretty heavy turnaround schedule expected in September and October of this year. We generally don't look at that as market share, because it's transitory. But we think it should make the market very, very firm at that point in time and we'll go ahead glad that we have OP-2 done already. Come spring, there's going to be an extremely heavy turnaround schedule, including OP-1, or other cracker at Channelview. So, things will get very tight then.

Just a follow-up. As far as -- gaining these customers from the -- even if it's temporary, how much of it can you maintain once the competitors are back online?

Well, generally, that's transitory. We don't really think about it in terms of gaining market share on a permanent basis. As you may know, we've contracted our long ethylene position to third parties. So while we are in the spot market, that's not a market we depend on, per se. So in these kind of opportunities, we'll consider where we can make the best money. You'll remember last year we quit making some polyethylene to sell some extremely valuable ethylene. And so we'll do those kinds of things in short periods of time to optimize the benefits our shareholders.

Okay, thank you.

Bill Hoffman, RBC Capital Markets.

Great, good morning. Jim, I just wondered if you could address -- you talked a lot about the greenfield and brownfield expansion, whether this organic growth -- I just wonder if you could address the thought of acquisition potential and within that context any thoughts about further integrating your business on the downstreams.

At this point in time, in terms of the ethylene component, we think we can build out existing assets we have to the point where, as I mentioned we'll have absolutely world-class size and cost structure type assets here in the US between those OP-1, OP-2 and Laporte, what's also a very nice facility down to Corpus Christi, and then two well-positioned Midwest crackers. If the right opportunity where there at the right price, maybe, in terms of an acquisition, but most people see the advantage that ethane has right now and I suspect that assets for say sale may carry a pretty steep price. We just have to see what comes along.

And what about the thought of downstream integrating further?

In terms of polyethylene and polypropylene, or --

Yes.

I'll just say that the last opportunity that was available, we decided not to pursue, if that helps. It's always about value for our shareholders, and we didn't see the opportunity as being accretive to the level that we thought we had other opportunities for.

Thank you.

Andy Cash, UBS.

Just a quick strategic one and a quick fundamental if I could. Jim, you're talking about enlarging your footprint in North America. I'm just curious, do you think that the increase outside the US, especially look at the Middle East or Asia, do you think the potential increase outside North America, especially Asia or Middle East, would be greater than or about equal to what you expect in North America?

You know, Andy, I think my impression is that things are really slowing down with the exception of this week's announcement by one of our competitors. The Middle East is much slower because, frankly, they don't have all the stranded ethane available and the newer projects don't have the same economics of the ones that were done previously, in my view. And I have personally been responsible for building a lot of those plants.

In Asia there's going to continue to be some expansion, but most of the forecasts we see, most of the announcements say that the pace is reasonably slow, and if everybody really cranked up right now, we are in very, very good shape for the next years. That's why we think we have such a bright future in part. We think it's going to ramp up very slowly. And the big growth in the Middle East is just not going to be what it used to be.

Okay, thanks, and then just quickly on fundamentals, I was wondering if you guys could size the silver catalyst sales in the tens of millions or hundreds of millions. And then, finally, just trying to reconcile the North American EBITDA, your big numbers in the quarter compared to little numbers in our estimate. I'm just wondering, was the Metathesis unit -- did it play a big role in improving EBITDA in the second quarter compared to first quarter?

Let me take that. (inaudible) when we said was a $41 million gain, it was about a $55 million, $60 million sale, so timing was very good for us. As far as the Metathesis unit, actually part of this whole major turnaround activity at Channelview involved the Metathesis unit and the C-4 -- some of the C-4 recovery areas. So we had a pretty big activity in turnaround and you saw the impact they are.

So it didn't help out in the second quarter, it was down most of the quarter. Is that right?

It was down of for a portion of it.

Okay, got it, thank you.

But it's a very important asset as you point out. It's capable of making a lot of money in this environment.

Right, thank you.

When it's running.

Laurence Alexander, Jefferies.

Two quick questions, most of mine have been answered. On the refining business, how much of the refining results was specifically due to buying (technical difficulty) in Q1 that you don't think you'd be able to repeat going forward?

And secondly, just a tactical question, when you think about reporting your segment EBITDA, a lot of companies consolidate the JV EBITDA into their segment EBITDA (inaudible) dividends. Would you consider making such a shift in your accounting?

In terms of the accounting, we do put the JV dividends into the segments that manage our interest in those joint ventures. Most of them primarily are in O&P, [OEAI].

(multiple speakers) (inaudible) changing from consolidating dividends to consolidating EBITDA.

Yes, we could. But (inaudible) actually, when Bob was asking his question on debt financing, we have to appreciate that some of the big ones, the ones that are materially impacting us, are -- that recent debt is being paid down, and things are changing. We could take their EBITDA, but we do a lot of -- we have to make sure that they are reporting is on a US GAAP basis, so there's a lot of complexities there. but it is something we thought about. This is the way we've done it because it represents cash and is equivalent to our cash. But that is a thought, and maybe we should take that under consideration.

In terms of what's repeatable in terms of the crude oil slate on [ole], I would say that the general conditions that we experienced in the first half of the year in terms of crude purchasing seem to be continuing on into this third quarter, and hopefully for a reasonable period of time. So we expect to do well in refining.

I'm looking at time, and I apologize, I think we'll try to take a couple more questions and I'm afraid we'll have to call it quits for today.

You wanted to take two more questions?

Yes, we'll take two more, please.

Hassan Ahmed, Alembic Global.

Hi there, guys. Just a quick question on the cash conversion side of things. Taking a look at the Q1 numbers, you guys obviously did around $1.4 billion in EBITDA. But cash from operations was slightly north of $200 million. And looking at this quarter, EBITDA obviously north of $1.5 billion, and cash from operations over $1 billion. So on the Q1 side of things, was that really an inventory build ahead of your planned maintenance that brought the cash from operations levels down?

No -- well, it's a number of things. It's a number of things. We have, in our business, we have significant first quarter cash payments related to accrued bonuses, rebates, very heavy rebate operations, our insurance premium. There's just a number of first quarter affects. And in our case we also paid a significant contribution to our pension plan. So I think it was more a function of the timing of our cash payments and our annual cycle.

Fair enough. So Q2 is more normal, is it?

Yes, I would say so. In fact one could argue that we are making accruals in two, three and four quarter that will have to be paid in the first quarter.

(inaudible), thanks so much.

Bill Young, ChemSpeak.

Thanks for taking my question. The inventory correction, you mentioned Asia looks like it's coming back a little bit. How would you characterize the North American market for polyethylene? With prices having gone up so steeply, there's probably been a lot of pre-buying. Where would you say that one is in the overall scheme of things, and how much longer you think it might last?

Bill, that's a bit difficult to predict. But the pattern that we saw was fairly typical. When oil prices start to fall, people wonder if the polymer prices will also fall, so they start to destock inventories. They did that, the volumes fell a bit. We've already seen intensified buying in Asia. It's ramping up, and typically that same kind of pattern happens in the United States and in Europe. And so it's starting to gain a bit of momentum. We are seeing a little picking up of the markets. But there was a soft patch, and we'll just see the duration of it. We are optimistic that this was inventory destocking influenced by a temporary reduction in oil price. But inventories are reasonably low.

Okay. And, lastly, on the condo cracker concept, you said you got some calls. Are you expecting other companies to announce plans besides what we've already seen, say in Marcellus, or were the calls mostly from people who already have made announcements?

People who've made announcements I would say are the general ones that called us. As everybody knows, you just don't build ethylene capacity; you have to have a derivative behind it. And we are a very, very good competitor in polypropylene and polyethylene, and world-leading technology. So people think about what they might want to do downstream with a cracker, and we come to their mind fairly quickly in many instances. So it's not things that aren't announced, it's things that have been talked about in the press already.

Okay, great, thanks a lot.

All right. As we wrap up, I'd like to reinforce a couple of points.

First, we truly are making progress on all fronts. The results have been very good, we just reported our best ever quarter. We think the recent soft patch is just that, kind of a temporary thing where inventories readjust. We are beginning to have growth plans, we are investing in our assets, getting our turnarounds done. We've also begun to return cash to our shareholders through the payment of our first dividend, and we are continuing to repay debt.

We're very happy to have a full Board in place, we are looking very much forward to the discussions on our financial plans, our growth projects with the new members of the Board and the existing members. We are able to turn our attention now to the future and to new opportunities.

I said a year ago that we had to earn the right to grow. We think we've done that. We think we are starting to operate like a very, very good company on the way to becoming the best in industry. We feel good about our results in the first half of the year, particularly good about this quarter. We very much thank you for your support and look forward to the next quarter. Thank you.

Thank you for joining today's conference, you may now disconnect.