LyondellBasell Industries N.V. (LYB) Earnings Call Transcript & Summary

Good morning, everybody. This is Bob Koort from the Goldman Sachs chemicals team. I cover the chemicals sector here at Goldman along with Mike Harris, who's joining me today and helps me cover the commodities in Lyondell. We're excited to have the team from Lyondell. We've got Bob Patel, CEO; Michael McMurray, the CFO; and Dave Kinney, the Director of IR. The format this morning will be -- Bob is going to have a few slides to present, and then we'll go into a Q&A session. Mike and I have teed up a bunch of questions we'd like to ask. But you can also submit your questions on the webcast or you could e-mail them to us. And of course, we'd be happy to prioritize our client questions first. So with that, let me turn it over to Bob.

Good morning, Bob. Thanks for having us. In my prepared remarks, I'd like to go through 4 themes, and then we can jump into the Q&A. The 4 themes are really talking about our views on supply/demand in the near-term and over the rest of this year. Second, talk about the PE cycle. Third, I wanted to say a few words about our efforts around circularity. And then fourth, I want to talk about the step-up in earnings power that, I think, LyondellBasell now has, based on the growth that we've been through over the past 3 to 4 years. So let's get right into it. First, speaking of sort of the demand trends that we're seeing out there. Certainly, we're emerging stronger as a company, and certainly, the economy is emerging stronger as well. As you'll recall, through the pandemic, we saw nondurable goods demand remain very strong for packaging, for medical applications, PPE and so on. We see that strength continuing into this year. And as we sit here today, we still see very strong demand in the packaging area and for medical PPE and so on. And we don't see that slowing down as we progress through the year. In terms of durable goods, you saw that demand last year declined during the height of the pandemic. But since then, starting in Q3 last year, we saw, for example, automotive demand improve. Today, we really don't know the extent of automotive demand because of the chip shortage. We're running our assets full in our polypropylene compounding business, which is probably the best proxy for what we're seeing in the automotive segment. And still, I think more demand improvement is ahead of us as the chip shortage alleviates itself. In addition to that, and as we get into the second half of this year, we think mobility will improve significantly, especially in Europe and U.S. In the U.S., that should benefit our refining segment. And both Europe, U.S. and globally, when we see mobility improve, especially people driving more, that should benefit our Oxyfuels business. So as I think about demand going forward, I think there are 3 really important sort of themes that will drive strong demand. First of all, there's a lot of pent-up demand and a lot of savings from -- during the pandemic. So we think that consumers are ready to spend more as we get into the summer season. Still a lot of backlogs in auto and furniture. We really don't know where real demand is because of the shortages of various raw materials. And lastly, we should get a onetime benefit from restocking. So all of that, I think, bodes very well for a very strong demand setup for most of this year. Let's move to the polyethylene and polypropylene cycle. So this is another big topic that we often discuss with investors. And I think the central point here is that IHS, we think, underestimates the level of demand growth and how that will affect the cycle going forward. So in our earnings materials, we had proposed that with slightly elevated demand, you could see a much flatter operating rate curve and perhaps really no cycle at all going forward. So first of all, I would submit to you that if you look at 2019 first quarter demand for polyolefins globally. When you compare that to first quarter '21, we've seen growth of about 14% in polyolefin demand from '19 to '21. That's significant given that typically we see 4% per year sort of growth rates. And again, reopening is still in front of us, restocking is in still in front of us. So we think that with 7% this year, 5% next year of global demand growth, you could end up with virtually a flat operating rate curve at very high levels. And that's shown by the orange dotted line on the graph in front of you. So I think the demand setup is very strong. And the debate about whether Q2 this year is a peak or not. Where we sit on that is that we think, given the strong demand setup, we think Q2 and Q3 will remain strong, and we'll probably see some typical seasonality in Q4. Seasonality like we see every year. We don't see a significant reset in demand or prices, given the outlook for reopening backlogs and restocking. Now let's move to circularity. I just wanted to highlight very briefly our continued focus and work around circularity. First, we launched our new brand Circulen. And there are 3 products there, as you can see on the slide. Our focus remains in mechanical recycling, advanced recycling and bio-based feedstocks. So on mechanical recycling, we continue to build out our QCP joint venture. We made another acquisition towards the end of last year. We continue to look for more acquisition opportunities in Europe, perhaps even build a facility for mechanical recycling. I'd really like to see us now expand globally, create some presence in the U.S. in mechanical recycling and certainly in China in mechanical recycling. On advanced recycling, we have our MarTech technology. We have a pilot plant in Italy, which we hope to scale up by 2025 to semi-industrial scale. And over the course of this decade, we will aim to have a world-scale advanced recycling. So the advantage of advanced recycling is that you take mixed plastic waste. It doesn't require as much sorting, and you convert that back to feedstock that goes into a naphtha cracker and you make new virgin polyethylene or polypropylene, which meets all of the FDA requirements for food-grade applications. So we're quite excited about that, and we think that this will be kind of a game-changing technology as things progress. Next, I wanted to close by just talking about why I believe that LyondellBasell has stepped up in its earnings power, especially in 2021. So first of all, 2021 is the first year where we see most of our recent growth projects in the P&L. And on this slide, you see the earnings at mid-cycle, which we would characterize as 2017 to 2019 margins. You can see the earnings contribution or potential from the various investments; the Sasol JV, the Bora JV, our acquisition of A. Schulman, which you'll recall we acquired $200 million of EBITDA, and we realized $200 million of synergies. So in total, pre-Schulman acquisition, we've added $400 million in new earnings or EBITDA from the Schulman acquisition. Then, of course, our Hyperzone Polyethylene plant. So all total, if you think about the investments that are in the P&L in 2021 compared to 2017, we've had a step-up in EBITDA of $1 billion to $1.2 billion annually at mid-cycle margins. Now clearly, today, we're well above mid-cycle margins. So the contribution from these growth projects is much higher in Q2. But at mid-cycle, we've added $1 billion to $1.2 billion. And then in 2023, when we complete our PO/TBA project, we'll add another $400 million to $500 million of additional EBITDA. So all total, by 2023, LyondellBasell's mid-cycle earnings power will have increased by $1.5 billion to $1.7 billion. Now if you look on the last slide of our presentation, or on the recent earnings, you'll see that we believe the prior mid-cycle for us back before '17 was something like $6.5 billion to $7 billion. So clearly, after 2023, the mid-cycle EBITDA for LyondellBasell will be more than $8 billion. And we think that's a significant step-up and something that the market is frankly yet to recognize. Let me close with a few closing thoughts, and then we can get into the Q&A, Bob. First of all, in terms of the demand outlook, we think very strong backlog and demand on many durable goods, reopening still in front of us, onetime restocking benefits across the value chain. We think that all bodes well for a stronger-for-longer setup in terms of the current margin environment. On the supply side, there are still many planned outages globally this year. Many companies deferred outages last year because of the pandemic that they now have to take care of this year. In Q2, LyondellBasell does not have any planned outages, so we're really positioned to run our assets at full rates during this very strong margin environment. The cycle, we think as the cycle plays out -- there's not much of a cycle, frankly, because of the step-up in demand, we think operating rates will likely go sideways. Our focus on circularity continues. And really, I think the most important thought that I'll leave you all with is that the larger LyondellBasell today in 2021 has $1 billion to $1.2 billion of additional EBITDA earnings power and by 2023 will have an additional $500 million leaving us with mid-cycle earnings power of $8-plus billion in EBITDA. So with that, Bob, we can move into the Q&A.

Terrific. Thanks very much, Bob. I guess, starting first in the polyolefins market. Give us a sense of what you're seeing. Obviously, the freeze on the back of hurricanes and good demand trends really depleted the inventories through the channel. I think you've suggested before it may take until well into the third quarter to start being able to replenish those inventories. So can you give us some sense where we are today? Already seen a couple of client questions come in about very near-term pricing, what you're seeing out there? And it sure does seem like the forecast of the rollover of pricing keep getting deferred and pushed out by the consultants. So maybe just a quick pulse check on what's going on in the markets?

Sure. So inventories, in our view, still remain low. For us, certainly as a company, we're still on allocation. We've lifted force majeure or will lift force majeure over the coming 4 weeks in some of our products, but we're still on allocation. So lifting force majeure doesn't mean that we now have unconstrained sales. Essentially, that means that we're allocating to customers based on the prior 90, 120 days of purchases. I think we're going to be in this mode for a little while. And frankly, any small unplanned downtime puts us back in the mode of we're tight, do we have to go back into force majeure. And again, seasonally, you tend to see stronger demand in the summer months. So I think this tight setup will continue. And doing exports in larger quantities of polyethylene, I don't see that in the near future. I think our priorities are to meet the demand of our domestic customers, meet contract demand for exports. So we have contracted longer-term for polyethylene sales in China and Latin America. We want to continue to meet that demand. But in terms of spot export sales, I still see that as being a few months off. And so therefore, I think pricing rollover or continuing to move higher through the summer is very likely.

Yes. It was interesting where talking to a private plastics distributor very recently who said that they're starting to have even some products airfreighted in. They've had double and triple ordering because of the scarcity. So there's maybe a little bit of concern about the integrity of some of those orders. But earlier in this conference, we had a company that has a plastic distribution company who said that things started to seem like they might ease a little bit in April, but now more recently, there's been another renewed tightening. Is that a function of some operational issues out there? Or do you think that's the demand pickup that's maybe led to that?

I think it's more about demand, Bob. I think as more product becomes available, we see more demand present itself as well. Because we've been in this constrained environment, as I mentioned even during the earnings call a couple of weeks ago, we really don't know where the real level of demand is because we're so supply constrained. And my sense is that's what we're going to continue to see as the summer progresses is that as more supply is available more demand locally here in the U.S. will present itself. Even we're airfreighting a little bit to Europe for critical applications because things are tight.

I think, Bob, we tend to focus on polyethylene, but obviously, you guys are very large amongst the largest, maybe the largest in polypropylene. Is there anything different dynamically there either from demand trends, supply trends or new capacity coming in? What does that market look like relative to the polyethylene markets?

Polypropylene is equally strong, but maybe for different reasons. So we're starting to see more pull from durable goods, as the early stage of the recovery takes hold and also end use into mask and medical PPE favors polypropylene more. And I think that's going to continue for a while. I don't see mask usage significantly declining. And as that does and the economy gains momentum, I think the demand reduction from fewer masks will be replaced with more durable goods demand, whether it's auto or appliances. I mean, you name it today, so many things are -- so many end products like appliances even are in backlog. People are just waiting to buy because things just aren't available. And so I think we have a great demand setup as we go through the recovery over the next 2, 3, 4 quarters.

And I wanted to ask you about your investment spending in the ethylene chain, in particular, you -- Lyondell has not built one of these gigantic new crackers. Now you've bought half of 1 or 2 halves of one. So you've done it very prudently your investments there. But with the cash flow you're generating now, it seems like you're going to have plenty of opportunity for reinvestment. So where would you expect your next wave of polyethylene investment took? I know Hyperzone just started up and you just bought in the Bora and Sasol, so you've got plenty that you've done, but where would you think the next incremental investment for you in that space would be?

Well, first of all, from the cash flow we're going to generate, which is going to be very strong this year. Our focus is on deleveraging. So we'll continue to pay down debt, and we're going to make significant progress. In fact, by year-end, I think we'll achieve our targets, whether it's on an absolute basis or based on the ratio of kind of debt to EBITDA. So next projects, still no cracker that we're thinking about building, potentially another Hyperzone plant, but not until the middle of the decade. So we don't have anything today in the works. I mean, we need to finish our PO/TBA project, which is in flight now. That will complete in the second half of '22, and our aim is to have a full year of operation in '23. And then potentially Bora Phase II, but that won't require a lot of equity. So in terms of CapEx, Bob, our plan is to continue to be in this $2 billion range over the next 3 to 4 years. And as the PO/TBA project rolls off, we'll have more investment in circularity, CO2 reduction, kind of netting to a similar place, which is about $2 billion of CapEx, I think, in the first half of this decade.

Bob, this is Mike. And if we could -- looking at some of the, I guess, nonpolymer businesses, perhaps talk about the refinery, considering the complex nature of business and it's kind of geared toward that heavy crude slate. And I know we expected IMO 2020 to benefit that meaningfully, but hadn't really materialized yet. What do you think about the future of that business?

Well, first of all, our refinery, I think the complexity, I think the location and the scale will continue to benefit over time, relatively speaking. So I think it's one of the better refineries on the Gulf Coast, given those attributes. In terms of its contribution, certainly, we've been in the loss-making position in the past quarters. We think that, that will transit to breakeven sometime as we get into Q3 and positive EBITDA into Q4. Longer term, we think that the product spreads will normalize, and we'll see contribution from gasoline, diesel, jet normalizing as we get into '22, '23. Light-heavy differential may be slower to return. We think there could be some benefit from IMO, but nothing to the degree that we had originally anticipated. So what I think about is that under normal conditions that refinery should be able to produce EBITDA of about $400 million annually. And our aim is to move towards that. And if you think about, $200 million of that is from product spreads, $200 million from light-heavy differential. The light-heavy differential part will take longer to recover. I think the product side, we'll start to see that recovery sooner and certainly into '22.

And then I guess also on the Advanced Polymers Solutions business. Can you perhaps speak to the impact you're seeing from the slowdown in auto production and kind of what you see going forward?

So overall, in our APS segment, we're essentially running at full rates. We are not slowing down our production because of the slowdown in automotive production. In fact, as automotive production resumes, we may have to shift more of our production mix to automotive to meet the higher level of demand. But today, that's not really impacting us in terms of lower output in APS. We're running at full rates.

Okay. And then just one more here. If we look at the intermediate derivatives business, right now, I guess, if I zero in on acetyls, I mean that business seems to be hitting on all cylinders, given the elevated pricing in both acetic acid and VAM. I mean how should we think about the sustainability of that current momentum? And perhaps you could speak to some key business drivers and any notable puts and takes in that business, or I guess, internal improvement efforts that you had underway or underway that would perhaps will generate margins better than the last peak in that type of business?

Sure. Well, first of all, I think the acetyls chain has lagged in terms of margins going forward. The home improvement segment continues to be a driver, and generally housing and as auto picks up, that should help as well. What's unique for us is that we also capture the ethylene part of the margin. So I think for us being integrated, we benefit differentially in owning that chain because we go from ethane to acetyls essentially here in the U.S., which is where our production is located. So I see good strength continuing. We're trying to figure out how we can produce incrementally more. Our focus, frankly, in Q2 is really just about reliable operation. We want to run at very high rates, but predictably and not take chances by pushing rates too far. And so, so far so good. We're running at very good rates across the company in Q2.

Bob, I wanted to -- you mentioned debt reduction. I wanted to ask about your acquisition aspirations. You guys have bought into JVs, is there some opportunity to pick up other assets? I can recall a few years ago you gave the presentation that you wanted to stay down your fairway in terms of what would be attractive. Maybe you could just reiterate for us what would be a good fit? Or what do you -- what would be the strategy on acquisitions?

Yes. So Bob, when I think about our playing field, where I think our strengths match with markets is in kind of the C1 to C4 sort of chain. Essentially, think about the cracker as being the backbone. I don't see that changing. I don't see us moving to aromatics, for example. So it's more about going downstream in certain value chains like we did with Schulman. There may be opportunities to do more of that, but not into conversion. So unlikely that we would move into, for example, plastic pipe or something like that. We don't have interest in doing that. We frankly think that the APS platform, now that we have a single instance of SAP in place, it's now ready to be scaled. So if we can find opportunistic kind of ideas in that space for roll-ups, we're very interested in that. And for the rest of the business, Bob, as we've shown over the past 5, 6 years, we're patient, we're disciplined, we're value-minded. So look for us to continue to do the same. We're not really interested in real specialties, for example. We think that our strengths match up well with where we play, and we want to continue to get stronger along the value chains where we participate today globally.

Got you. I'd like to transition maybe for the last time we have here to talk about circular economy issues. And maybe as a starting point, what is your sense broadly for the industry and how it would affect Lyondell in terms of these single-use plastic bans and the pressure from groups on reducing plastics consumption broadly, maybe before we get to the recycling and other natures. But generally, how do you see that affecting your demand outlook over the next 3, 5, 10 years?

Yes. So I think over the next 3 to 5 years maybe some marginal impact, but there really aren't ready substitutes for the functionality that polyethylene and polypropylene provide. So I think while none of us like the situation with waste, I think the functionality that we provide in food packaging and so on, it's economical, it's sustainable. You get lightweight packaging, for example, glass versus plastic. I mean certainly, plastics are much lighter, easier to transport, safer, keep food fresh, all of that. So above, I think the longer-term answer is we've got to close the loop. We've got to create circularity, prevent waste from getting into the environment recycle and reuse. And that's, as I mentioned earlier in my prepared remarks, if you think about sustainability, that's our focus, mechanical recycling, advanced recycling. And I think that's the answer because plastics are really a very sustainable material. Waste is the issue, and we've got to attack that.

I've often thought that the pressure from this topic probably has less damage to your earnings path than maybe it does to the multiple or to the perception of a plastics company being jeopardized from these trends. So clearly, it behooves you to work towards embracing that circular economy and maybe helping investors understand what you're doing. I wonder if you could tell us -- we see a lot of start-up companies that seem to be getting a lot of attention and yet you guys have done a ton of work. I know some of your peers in the industry as well. Maybe talk about the efforts you've made and the opportunity in front of you. Particularly, you mentioned the mechanical and the pyrolysis that you're working on. Just give us an overview of the specific actions you're taking and how soon that might realize an actual earnings stream and a commercial value for the company?

Sure, Bob. So first of all, mechanical recycling, if you go back 10 years, mechanical recycling really didn't do well because there wasn't good collection infrastructure. And brand owners weren't willing to pay what it took to bring those kind of products to market. I think today, that's changed. Brand owners are making their own commitments for recycled content and packaging. I think they realize as well that plastics are really the most functional and the most logical way to package food or package deodorant or shampoo or what have you. So I think that's 1 of the fundamental shifts we've seen is that consumer brands are willing to pay what it takes to incent investment in mechanical recycling. And when you and I go to the store and we buy a shampoo bottle, and if it costs $0.05 more, we're not going to notice that, right, or soap or whatever that is. So I think that trend will continue. I do think that the commitments that brands are making we're making in turn 2 million tons of recycled product by 2030 that we'll be selling, and that's significant. So mechanical recycling will be a part of that. And to your point about actions we're taking, we're continuing to grow our joint venture in Europe. We have some early work going on in the U.S., in Asia. I'd really like to see a global network of mechanical recycling plants because I think that will always have a place in the circularity model. On pyrolysis, it's still -- everything that's out there today still a very small scale. And that's what we're trying to change with our technology is really boost to scale. And one of the uniqueness of what we're trying to develop is that we're going to try to also apply catalysis so that we can get more yield of pyrolysis oil and less yield of ash from the waste. So my hope is that by '22, '23, we're in a position where we feel confident to build a medium-sized plant somewhere next to a naphtha cracker. My guess today is likely in Europe, but could be in the U.S. We have feedstock flexibility, a channel view here, so -- but what we're going to need is help from local municipalities and waste handlers to make sure that we can get enough waste to feed maybe 200,000-ton input sort of facility. And then maybe we scale that up as we get into the second half of the decade. So if you think about earnings power, Bob, by the middle of the decade, the pyrolysis oil and the related polymers should have their own kind of margin profile. And I think adding to that licensing of our technology could really be a big boost to earnings. And we would intend to license once we prove out the technology because we think it benefits the entire industry. So it's not something that we would just keep to ourselves.

And Bob, would you -- how do you ensure that the product is just from the pyrolysis oil, is it -- would you have a campaign or run through a cracker? Would you blend it with the existing naphtha feeds? Does the customer care as long as there's some level of recycled content there? Can you give us a sense of how you handle that commercially?

Yes. So for now, likely blend it, maybe in the second half of the decade, as the volumes grow, it could be just by itself. But I think, Bob, the key -- and yes, in brands, as long as they know that there is some pyrolysis oil, then it's kind of this mass balance method. If we put a ton of pyrolysis oil on the front end, then we should take credit for a ton of products in yield, right? Not a ton blended into 100,000 tons, means we have 100,000 tons of recycled. We don't intend to do it that way. Think it should be a ton for a ton sort of. And as the volumes grow, I think there will be enough. And I think the ultimate benefit, Bob, is that we take the waste out of the environment. And we recycle it, we reuse it in whatever quantities. And that's really the heart of the issue because when you think about why there's this kind of negative perception about plastics, it's the waste. It's not the functionality that the plastics provide. And so as you know, we have the alliance to end plastic waste. I'm Vice Chairman of that. It's a cross value chain alliance. That's our focus, is to catalyze investment in how to close the loop. So advanced recycling, waste handling technology, sorting technology, things like that. And there's more coming as the year progresses.

And you mentioned your advanced recycling will have a catalytic component that makes it advantageous, reduces the byproduct. Is that something unique to Lyondell? And then what do you think about from a return standpoint? Can you earn a similar return to your existing traditional technology here? And how much will it cost to build some of these plants?

Yes. So first of all, it is unique. We believe and our specific approach around how we're improving yields. Returns, yes, over time. I think given the commitments across the value chain to increase circularity and recycled content, we think that we should be able to earn a fair return for the investment. And similar to what we've had. In terms of costs, it's very preliminary, Bob. I did an interview recently with an industry magazine, and I talked about kind of a high level estimate, for a mid-scale plant $300 million, something like that, I don't know. But over time, you could -- when we get to full scale, it could be $500 million, $600 million, but not the same investment like a cracker. We don't think -- it's not that complex. And we don't -- you don't have as large of equipment. And likely, we'll size these such that they'll be sized for the amount of waste that we can collect regularly, not so much about the size of the cracker that it's going to feed.

Yes. Makes sense. Unfortunately, the clock tells us we have run out of our time. Bob, Dave, really appreciate it, and we look forward to watching these developments. Thanks so much.

Thank you for having us, Bob.