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

Good morning, everyone. My name is P.J. Juvekar. And again, welcome to our day 1 of the conference. Our next presenter is Michael McMurray, Executive Vice President and CFO at LyondellBasell. Michael has been CFO since November 2019, joining after an 11-year career at Owens Corning, where he was CFO for 7 years. And prior to that, he spent 21 years in various positions with Royal Dutch Shell. And clearly, what a start at LyondellBasell. In these 2 years, we have gone through the depth of the pandemic and an incredible recovery since then. So to tell us more about LyondellBasell, please welcome Michael McMurray. Good morning, Michael.

Good morning, P.J. Good morning, everyone. And my sincere thanks to you and the entire Citi team for having us back at the conference. And as you said, no doubt, the last 2 years have been pretty interesting, so an interesting time to change companies. So before I get to the questions, I wanted to frame our conversation with a few slides. I'm sure this first slide here, everyone has memorized. So I'm just going to move on. All right. So LyondellBasell's portfolio of businesses performed very well during the pandemic, and we are now poised to emerge stronger as the global economy moves forward. Over the past 2 years, demand for most of our products exceeded expectations and historic trends. While transportation fuels and automotive production have lagged, these markets are now in recovery and much pent-up demand remains ahead. LyondellBasell stayed the course with our disciplined financial strategy during the pandemic. We leveraged our investment-grade balance sheet to pursue accretive M&A at the bottom of the cycle. We also paid our dividend last year with cash from operations and increased our dividend by 8% this year. In September, we resumed our share repurchases while continuing our progress toward paying down $4 billion of debt in 2021. With our growth investments reaching completion, LYB is maximizing the cash flows from our larger asset base and sharing the benefits with our investors. Moving on to Slide 4. Slide 4 provides a snapshot of our last 12 months' performance. Our 2 Olefins and Polyolefins segments alone delivered over $6.5 billion of EBITDA. In our Intermediates and Derivatives segment, strong demand and tight markets are driving exceptional margins for our propylene oxide and acetyls products used in furniture, building and construction and other durable goods markets. Our sizable oxyfuels business in this segment should return to more typical profitability during 2022 with improving mobility and lower butane prices. Our Advanced Polymer Solutions segment adapted to pandemic-related shutdowns of automotive production and chip-related production constraints in 2020 and 2021. We expect demand in this segment will return to pre-pandemic levels during 2022 and 2023. After struggling with unprecedented declines in demand for transportation fuels, our refinery returned to profitability in the third quarter and is expected to post another profitable quarter in the fourth quarter as we finish 2021. Finally, our Technology division appears to be on track to set another record year, with strong sales of catalysts and polyolefin technology licensing. Now moving on to Slide 5. On Slide 5, it is very clear that our cash generation in 2021 has rebounded from last year's headwinds and we are on track to post record free operating cash flow results for the full year. In early November, cash flows were further bolstered by the receipt of nearly $900 million from a tax refund of more than $1 billion related to our 2020 U.S. tax filings. Our goal is to pay down $4 billion of debt in 2021. And at the end of the third quarter, we had paid down $2.4 billion of debt. And during October, we repaid another $650 million of callable debt. And on November 17, we commenced a tender offer for up to $1 billion of outstanding notes. And the tender will get done here relatively short term, and we will have reduced gross debt by $4 billion this year. In addition to bolstering our balance sheet, we are also putting our cash flows to work by repurchasing our shares. As of last Friday, we have repurchased 3.3 million LYB shares since resuming buybacks in September of this year. Our cash flows are strong and more than sufficient to support a safe and growing dividend, a stronger balance sheet and a lower share count. Moving on to Slide 6. In late September, we announced our increased commitments to help address the global challenges of climate change. Our goal is to achieve a 30% absolute reduction in Scope 1 and Scope 2 CO2 emissions by 2030 and reach a net 0 for these emissions by 2050. Our commitments are based on substantive planning across the company to identify the product -- projects, the technologies and investments required to achieve our ambitious targets. Our aim is to be a leader in the area of circular plastics by reducing the usage of fossil fuels as a feedstock for our products by increasing the utilization of plastic waste through mechanical and molecular recycling. We are building new business models for circular plastics with our Circulen products made through mechanical recycling, advanced recycling and renewable feedstocks. Our company is unlikely to invent new technologies for low-carbon energy. Instead, we will be a fast follower in partnering, licensing and procuring sustainable energy solutions from technology leaders in this space. On Slide 7, you can see the additional sources of earnings that we have added to our portfolio through reinvestment over the past several years. The estimated EBITDA from these investments do not assume a continuation of today's elevated margins, but instead are based on each of these assets operating at full capacity using historical margins seen from 2017 through 2019. We believe these years are representative of typical mid-cycle margins for our businesses. By the end of next year, when the new PO/TBA facility in Houston is fully operational, these investments will have the capability to add up to $1.5 billion of additional EBITDA to our mid-cycle earnings, a significant step change for LyondellBasell. On Slide 8, you can see that from 2011 through 2019, our EBITDA averaged approximately $6.5 billion. With our growth projects completed, we think our mid-cycle earnings will see a step change to an average potential of approximately $8 billion over the coming years. 2021 will clearly be higher than this mid-cycle average. In summary, P.J., we have a lot of momentum with growth underway and a substantive strategy for increasing sustainability across our businesses. We remain true to our core values as a safe, reliable and cost-efficient operator. These attributes provide advantage during all phases of economic cycles. Our growth investments are producing a step change in LYB's earning power. We are efficiently converting EBITDA into cash and deploying that cash according to a disciplined capital allocation strategy. We have a dual commitment to our investment-grade credit rating and ensuring the security of our strong and growing dividend. And finally, we are bolstering shareholder equity by paying down debt and reducing our outstanding share count. With that, P.J., I would be glad to take your questions.

Michael, that was a good overview, short and sweet. Since you're the CFO, let me start with a couple of questions on financials and then we'll dive into segments. But as you talked about raising your normalized EBITDA from, let's say, $6.5 billion to $8 billion, what sort of normalized expectation of free cash flow should we expect and your CapEx spending? And you've done some buybacks, but how should we think about capital allocation going forward. Once these expansions are completed, do you expect more aggressive buybacks?

Now really good question, P.J. The company historically has a very strong track record of cash generation. So that's an important point to make. And maybe just doing some simple math might be kind of interesting and helpful to kind of think a little bit about the future. So consensus estimates for next year are at about $8 billion of EBITDA. If you look kind of historically, on average, typically we've converted about 80% of our EBITDA into cash. Expectation for next year and the next couple of years is around $2 billion of capital expenditures, less our dividend, which is about $1.5 billion. And that leaves you $2.9 billion, almost $3 billion of discretionary free cash flow. We'll be done delevering the balance sheet here in the next couple of weeks, so we'll be down to $12 billion of gross debt. Our existing portfolio adequately supports that level of debt through a variety of cycles and scenarios, so no need to further delever. So what that does is it creates additional capacity for buybacks as we move into 2022 and the potential for additional M&A as well. But clearly, kind of -- clearly, given where our valuation is today, given our outlook for strong free cash flow and that our delevering activities are now done, buybacks are back in the mix for sure.

Great. And that's a good segue, Michael, into my next question on M&A. When you did the compounding acquisition with A. Schulman, did a good acquisition of the Sasol asset. Now we have refinery for sale. What kind of acquisition would you look for in the future? And what kind of size expectation would you have on that?

Yes. I mean, here's what I can share with you, P.J. So we're always looking to optimize the portfolio, whether it's pruning, like we're doing with the refinery. And clearly, there's a better owner of that asset versus LYB. But we're also continuing to look on the acquisition front as well. And I think we've proven on the deal that we got done with Sasol that we're value-minded, and we're very, very disciplined in carrying out acquisition activity. At the end of the day, we're looking for businesses where we can be a better owner and capture synergies to make it accretive to shareholder value. I think from a more material perspective, it would be kind of in and around our existing portfolio, so no big step-outs. Further consolidation makes an awful lot of sense. Clearly, buying the second half of the Sasol joint venture when we can contractually do it and in the right environment makes a ton of sense. And then we're also looking at smaller bolt-on acquisitions within our APS business as well. Again, we are -- we will be -- we will continue to be disciplined allocators of capital and disciplined in how we approach M&A. And buybacks are back in the mix, I think, in a meaningful way as we move into 2022.

Great. Now let's dive into some of the segments, starting with Olefins and Polyolefins. The polyethylene and ethylene markets have experienced tremendous volatility, price increases, we saw, I think, 12 price increases in a row that was unheard of and 3Q demand was strong. So how much of this strong volume growth was inventory build after the hurricanes and our inventory getting back to normal at least domestically?

Yes. So I mean, a couple of things I'd say there, P.J. So I think, first and foremost, that demand growth kind of going back to 2020 and in this year have been underestimated. So ultimate demand growth for 2020 was a good bit higher than what the original expectation was. And the same thing has proven out for 2021 as well. And our expectation for growth in 2022 is quite healthy. And so we think there have been secular changes due to the pandemic, whether it's increased work from home, flexible office working or remote schooling, and this has resulted in almost kind of a full 2 percentage point change for packaging above kind of the typical 4% to 5% growth rates. Now that said, supply is increasing here in North America in the fourth quarter as the ExxonMobil SABIC cracker starts up in Corpus Christi. That said, inventories for polyethylene today are, I think, ample. So from a days sales perspective, it's in the low 40s. And then for polypropylene, actually, day sales is in the mid-30s and is still actually relatively tight. We actually have about 30% of our grades still on allocation. And then kind of moving into '22, we see strong consumer and pent-up demand for durables kind of continuing. So that's going to be, I think, a tailwind as we move into the new year. So hopefully, I addressed your questions.

Yes. Yes, Michael. And you mentioned that inventories are somewhat coming back to normal. We've seen some early indications that polyethylene prices were down somewhere around $0.05 to $0.10 in October. Consultants are saying maybe they'll be down as much as $0.15 more by end of 4Q. What are you seeing in the marketplace in terms of pricing? And is that pricing decline sort of from the highs driven by sort of this normalization of inventory that you talked about?

Yes. So a couple of things, P.J. So I mean, the consultants both on pricing and demand, have been pretty pessimistic. For our portfolio of PE, contracts fell about $0.05 in October. IHS is estimating on a net transaction basis that prices fell $0.10 to $0.12 per pound. We didn't experience that. And again, I think, strong demand continues to be underestimated. We expect to see kind of normal seasonality as we kind of continue to move through the fourth quarter. But again, not on the level that the consultants are projecting. And again, demand is good. Demand is good next year. We think as we move into the new year, margins will no longer be at peak, but they'll still be very healthy.

Right. Great. And then ethane prices have gone up recently. What's your outlook on ethane? And how is your feedstock slate changing into the crackers, given sort of what we have seen is a significant volatility in the energy markets that's changing almost every day. And how is your feedstock slate changing as a result of that?

Yes. So I mean -- and so there's a kind of a U.S. versus Europe story, right? And co-product prices, as you know, have come down quite a bit recently. And so with lower co-product prices and with ethane kind of in the high 30s, it is the most economical feed as we sit here today for our U.S. assets. And so therefore, we're running mostly ethane in the U.S. And then as we look forward, we think that butane, which has had quite a run, and propane will get more affordable kind of later in the year and as we move into the new year. And then in Europe where historically we've maximized running a good bit of LPG, and our European portfolio can run about 40% LPG, but LPGs have gotten very, very expensive and so on -- we're now running essentially all naphtha in Europe as we sit here today.

And then I want to move on to your Bora joint venture in China. How did that perform in 2021? And what kind of insights it has given you into the Chinese polyethylene markets? And what are you expecting there?

No. So again, great question, P.J. So the Bora asset started up in September of last year. And in the first 4 months, the asset performed ahead of expectations, generating almost $40 million of equity income in its first 4 months. No doubt that 2021 for the joint venture has been much more difficult with lower China PE and PP prices and then high Asian LPG cost. And if you -- and just as a reminder, our Bora asset is fed with roughly half naphtha from the refinery which it sits next to and the other half comes from imported LPGs. And so kind of the lower China pricing and then higher LPG cost has kind of crimped margins for the Bora asset this year. Now because of that new joint venture and that we do a majority of the marketing for that joint venture, it's enabled us to double the size of LYB China's technical and commercial teams, which gives us great insight into the world's fastest-growing market. So we think having a presence on the ground, being able to market on behalf of the joint venture gives us great insight into the market, which is good for our global trade flows because polyethylene, in particular, as you know, moves around globally quite a bit. Obviously, polypropylene is more regional.

Right. And that's a good segue into my next question on polypropylene. We talked a lot about polyethylene. Are you seeing better fundamentals in polypropylene market compared to polyethylene?

Yes. I mean it's interesting. So I mean even though there's been parts of the polypropylene market that are facing into headwinds, automotive in particular, and over half of the APS business bases into automotive. So polypropylene has historically grown at kind of 4% to -- 4% to kind of 5%. It has different performance characteristics versus polyethylene. So it can perform much better at different temperature ranges, so colder or hotter. Also, as we look to next year, with supply constraints starting to open back up, with things like automotive and appliances starting to have more builds, that only bodes well for our polypropylene business into '22 and into '23.

Great.

So demand has been good, but there should be some tailwinds coming from areas where there had been challenges last year and this year.

Great. I do want to remind investors who are listening that please click on the showcase link on the bottom right-hand corner. If you have any questions for Michael, please send them to me and I'll read them out. Just moving on to I&D business. Can you talk about your time line for the new PO investment in China and the U.S.? And what are your expectations from those 2 assets when they fully ramp up?

Yes. So on -- one thing I'd say, just to maybe start off, is that global PO markets remain tight, which, quite frankly, means it's good timing for new capacity, right? So that Sinopec PO/SM joint venture should be starting in early 2022. And then our Houston PO/TBA asset will start up at the end of next year, which is delayed by 1 year. But as you heard me say, the market surely needs new volumes right now. So we think it's a pretty ideal time for both of these assets to be coming up. We're in the process, in particular for the Houston asset, and contracting volumes ahead of the start-up. And those plans are ahead of -- what we've done thus far is ahead of what our original plans are. And therefore, also there's going to be less of a need for exports.

Great. Great. And then talking about oxyfuels and related products. How are the higher butane costs impacting? And then also you have higher gasoline prices, which should be positive on the flip side. So just talk about how do you think about oxyfuels.

Yes. I mean what's interesting, I'd like to refer to that business as the mailman. Prior to the pandemic, over many, many years, that business would kind of consistently deliver around $400 million of EBITDA. But that's because gasoline demand is relatively stable throughout a variety of kind of economic cycles. And so we haven't experienced anything like we did last year during the pandemic. That business was -- didn't make a lot of money last year. There were some months that it was actually loss making. The second quarter of this year improved quite a bit as gasoline demand continued to improve and gasoline prices went up. But in the third quarter, we were hit pretty hard with butane cost increases. And we think of butane costs as kind of a percent of Brent. In October, it was 84% of Brent. Good news is that it's moved down to about 70% of Brent. For the third quarter, the oxyfuels business really didn't deliver very much EBITDA to speak of. The good news is that because of higher gasoline prices and butane prices coming down, Northwest European MTBE raw material margins are now a little over $100 a metric ton, which is kind of at the low end of kind of our historic range, which is from $120 to $400 a metric ton. So it's improved, but we've got a ways to go still. And we don't think that we're going to see a significant reduction in kind of the butane to crude ratio until the first half of next year and when we're kind of beyond the winter season. So -- but we have high confidence that, that business can kind of get back to its historical earning power.

Great. And then moving on to the refining sector. The Maya 2-1-1 spread is now up to $23 in 3Q, has been up significantly since the depth of the pandemic. You've announced the sale or strategic optionality for the refinery. Do you think, given the rise in the spread, this is the right time to do this transaction? And any views there?

Yes. So listen, I mean what I'd say kind of first and foremost, we're not the best operator of that asset. There is a better owner who's out there. I mean that refinery makes a lot of sense to not be stand-alone, but to be part of a larger system. So an operator that has multiple refineries, has blending operations and also has retail operations. And so it's a difficult time to launch the sale process, but we had some -- we had conviction that the market was going to start to improve, and it has. And so hopefully, with a more favorable outlook, the fact that the refinery delivered positive EBITDA in the third quarter, and our expectation is that the refinery will deliver positive EBITDA in the fourth quarter, is encouraging, and we think this is a good time to bring the asset to market.

Are you seeing any good interest from buyers?

Yes. I mean, obviously, I can't say too much about the process, P.J. What I can tell you, the process is underway. There has been pretty good interest. We focused predominantly on strategic players versus private equity. And I'm hopeful that we'll have something to share here in the not-too-distant future, probably hopefully at some point in the first quarter. But knock on wood.

And again, I want to remind everyone, if you have any questions, please send them soon. We have about 5 minutes left. Let me come back to your sustainability goals. And one of the things there is you want to produce and market 2 million tons of recycled or renewable polymers by 2030. You have the mechanical recycling joint venture with SUEZ. You have the molecular recycling in Italy. So can you expand on sort of this mechanical and advanced recycling? What are the renewable feedstocks you're looking at? And what are the next big steps? How much CapEx do you need to achieve these goals?

Yes. Great. Great question. So listen, I think, first and foremost, LyondellBasell is seeking to be a leader in circular plastics. If you kind of look from a historical perspective, PE and PP has grown at kind of GDP plus. And so kind of perhaps about 3% to 4% on average over a fairly long period of time. Circular plastics are growing at double-digit CAGRs. And that's expected to go into the future for quite some time. We're active in mechanical recycling now. And then more advanced or molecular recycling is going to be something that's in the future. Our advanced recycling of mixed plastic waste is more scalable. So molecular recycling is more scalable than mechanical recycling. And so that's kind of the big hope, because with molecular recycling, not only can you do it at scale, but you can also utilize your existing cracker fleet to crack those feedstocks. We're looking toward a commercial scale FID on our MoReTec technology within the next 2 years, with an anticipated start-up, assuming the technology proves out, by the middle of the decade. And again, we think that this could be a game changer for LYB and the industry. From a renewable feedstock perspective, a, the quantity available needs to improve, and you don't want to compete with food. And it needs to become more affordable to sustain profits. I think that the renewable feedstocks are probably going to be #3 out of all those opportunities just because of availability and cost of feedstock. There was a really interesting article in the Wall Street Journal last week around people stealing used cooking oil from the back of fast food places. It's become a valuable commodity.

Great, great. I think we are almost out of time here, but I would give you a chance to, if you have any final thoughts that you want to share with investors.

No. Listen, P.J., I want to thank you and Citi again for the opportunity to speak. From my perspective, kind of key takeaways would be that we continue to capture value and deliver resilient results through the cycle. We think that with continued strong economic activity and improvements in mobility, that should help us sustain our strong volumes. As you heard me say, what we've seen, and we're expecting strong PE growth, which should help absorption of new capacity. And then our earnings power has only been enhanced by our new -- our growth investments that we've made over the past several years. Deleveraging is done. We should have lots of cash flow and buybacks are back in the mix. So many thanks.

Great. Well, Michael, that was a great overview. Thank you for your time, and I wish you a happy holiday season.

You too, P.J. Great to see you.

Thank you.