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

So welcome back to those who have not yet made their way to the bar. We've got Jim Guilfoyle here from Lyondell. If you weren't in the lunch section and missed the introduction, Jim is the Executive Vice President of Advanced Polymer Solutions as well as the Global Supply Chain, Advanced Polymer Solutions being the compounding assets of Lyondell. And in my case, kind of one of the things that I'd like to explore is kind of APS as a growth mechanism for the company. And so thank you for joining us.

Yes.

But even just to kick it off in that direction, right? So the last Investor Day, this slide really stuck in my head. You've just done the Schulman deal, and you're saying, okay, we've rounded out our positions in polypropylene and polyethylene compounding, but we have this whole engineered polymers, right? Do you need the engineered polymers business? And how important is it to the strategy at Lyondell? Can you get there organically? Or is this something that has to come in inorganically?

Yes. I mean I think, as you mentioned, when we first did the Schulman acquisition, Lyondell still had a fairly substantial compounding position already primarily in the polypropylene compounding space, heavily tied to all the OEMs. We had a very big auto position. Some of the rationale behind the Schulman acquisition was a little bit of a diversification away from auto. Schulman never really participated much in auto because they ran across folks like ourselves who had much better cost positions. And they tended to focus more on appliances and electronics. So by bringing in them, we automatically diversified kind of our compounding portfolio. Now the engineered plastics we picked up with the Schulman acquisition, so we are in the engineering plastics space now. We think it's a nice adjunct to the polypropylene compounding. One of the things we really stressed was to try to cross-sell between the Schulman assets and the legacy LyondellBasell assets to be a more holistic provider to the automotive market as well as bring some of the polypropylene compounding from LyondellBasell into some of the Schulman markets. And so that was the broad strategy. We've been working hard for integration. Unfortunately, the results of our integration are hitting in a poor market driven by semiconductor disruption, OEM disruption. It's been a heck of a challenge with respect to raw materials, U.S. labor. So it's been a bit of an issue. But I think to answer your question around engineered plastics, it's an important part of our portfolio. It tends to be a higher-margin aspect of our portfolio and one that we're investing heavily into to kind of repopulate the innovation pipeline with OEMs but also other industries.

Yes. No, every time I talk to Dave, he's -- we're talking about APM and the prospects for profitability. It's always like the numbers you're giving me...

Trust us?

Yes, trust us, it's there. We've got the synergies. When auto comes back, we can double this profitability and move things in a way that's much more material as the way you look at Lyondell as a holistic operator.

Yes. I mean just as an example, back when we put the 2 companies together back in 2018 -- 2017 was probably one of the highest automotive production years on record. 2018, we started to see a decline in the second half. '19 was a bit mild. But then when 2020 hit, the second quarter of 2020 was by far our lowest volume month for obvious reasons, right? OEMs completely shut down for 2 or 3 months. But the interesting thing was at the end of 2021, the fourth quarter of 2021 was actually the next lowest volume month that we've had since we came together as APS. And it really was driven by primarily European assets and the impact that Omicron had on the OEMs in the region. I mean Europe actually produced less vehicles in '21 than they did in '20 at the onset of the pandemic. So the tail of the pandemic was pretty heavy in Europe, and we saw that in the business.

Have you seen anything -- I mean, look, it's early days. The supply chain is kind of -- I guess, everybody is trying to figure that out right now. And we can talk about autos in this case, but I'm going to broaden this to like everything with the Ukraine-Russia situation. VW announced just yesterday that they're kind of going to suspend production in some of the German factories because of the shortages out of Ukraine on supply.

Right.

Like Russia is a big producer of palladium. That goes into converters. There's people worried about autos and their ability to kind of meet some of the expectations that have started to build, thank you, IHS, into like the second half of this year. So what internally are you seeing at Lyondell? Have you seen anything yet or expect to see from this supposed ramp that we're going to get into the back half of the year on all this?

Yes. I mean I think we saw some positive activity with the OEMs. Semiconductor issues tend to be starting to ease a little. I wouldn't say completely resolved, but we started to see more semiconductor availability heading into the end of last year and coming into this year. The volume book for the first quarter has been fairly strong relative to what we experienced last year, so we were starting to see some recovery. But the challenges you just mentioned about, if it's not blockades on the border between Detroit and Canada, it's a Russian geopolitical invasion. And you're right, though, absolutely, the palladium is a huge impact on semiconductor production. There's neon gas that comes out of the region that also impacts semiconductor production. So the question really becomes now what is the impact of this geopolitical issue with the ongoing production of these semiconductors because it felt like we were making our way out. We were starting to see a better forecast for '22. We are actually anticipating European auto production to go up 20%. I mean that was the original call. The North American market was supposed to go up 15%. I can tell you that based on what it feels like, your comments around VW and what's going on in Germany, it doesn't feel like that's our trend, right? Now we could be heavily backloaded in our -- our forecast was that most of the recovery would happen in second half. But there's a lot of things up in the air right now that could impact that, which we'll have to see how it plays out. And in APS, we continue to work to expand our positions around auto. Our role is not to wait on auto. I mean we need to find ways to participate in the energy transition, whether it's charging stations, whether it's wind energy, whether it's solar energy, how do we take a better play and a bigger play in the battery technologies, not on the battery chemicals so much as maybe the boxes, the containment and a lot of the structures that go with it. So we're really focusing on building the portfolio around auto so that when auto does come back, we're even better positioned to enjoy the run.

So that brings me to like I&D, right? Outside of the realm of polyethylene, polypropylene, still kind of your upstream, maybe midstream, but basically upstream chemistries, acetyls, styrenics. PO/TBA is going to be a big growth driver for the company. As you look at other avenues to bring chemistries downstream into compounding, like do you find opportunities in acetyls? Like are there other assets that you can weave into to grow this midstream component for APM beyond just traditional polymers?

Yes. Well, you mentioned our PO/TBA project. That project will be wrapping up this year. We expect to reach mechanical completion sometime in the early third quarter. And with that mechanical completion, we expect to be commercial by the first quarter of next year. Right now, market conditions are fantastic. That particular project was -- has been advertised around $450 million in annual EBITDA. Market conditions today, I'd say, are even stronger than that. We've seen a huge recovery in gasoline. Ethers margins have opened up. Even with high butane relative to crude, which is one of the factors we watch, even at those high butane levels, we're able to move it into gasoline through ethers at a very high margin. So we're very excited about where the PO business is and where the ethers business is recovering to, and we're excited to get that asset up and running. I would say, downstream plays, I think when you look at the I&D space, we've always kind of looked at polyurethanes and is there some value going further downstream from the PO chain. I think there's opportunity potentially there into the future. Can we do things around the VAM molecule? Is there perhaps growth in EVAs, low-density EVAs are a bit more involved with, say, solar panels and coatings on solar panels and those kinds of things. Yes. And I think there's also some glycol businesses and things. These are fairly small derivatives, though, of the I&D business, but I think there could be interesting plays with some of the transition to EV. There could be some interesting demand profiles for some of those other products as well.

Yes. I mean I would imagine it's kind of a little bit of a push-pull between allocating capital to things that might not move the needle.

Right.

But seeing what Celanese, for example, has been able to do with VAM and some of these other markets, it seems like there is return-generative decisions that could be made all the while.

Yes.

So that was a kind of basis for that question. So to kind of pivot, I guess, a little bit back to this Russia-Ukraine thing, right, and if I think about your role on global supply chain and what we're seeing from energy markets, like from your perspective and the perspective in-house at Lyondell, like what -- how does this global energy backdrop play out for the next 12 to 24 months? And I mean is there an appetite for companies in the U.S. to start drilling again? Or do ESG metrics handicap companies like Shell or whoever from really getting out there and starting to fix the high prices with more supply?

Yes. I mean it's an interesting question. We saw high energy well before the geopolitical issues surrounding Ukraine. We were already on a path to $100 crude, in my view. I think that a lot of the pressures around ESG has disincentivized a lot of the public majors from drilling. I mean you look at some of the investment that Chevron recently made in renewable energy. You look at some of the investments that ExxonMobil is making in carbon capture. The direction of investment has shifted to more of a green forecast or future for some of these big public companies heavily influenced by ESG and activism. But what we are seeing is the privates are active. The privates are going back into the Permian. The privates are trying to get back in and drill. They're not as efficient, not nearly as efficient as the big public companies, the Exxons, the Chevrons. So we are going to see some capacity come back, I believe, and that will help. But I think we are in a high energy profile for some period of time to come. I really don't know what will cause oil to come off hard. I mean I don't know where the extra supply is coming from. The exploration in that aspect of the business has been underinvested now ever since all of the environmental pressures have started around ESG. I think the transition we're making is a bit too accelerated for the market to handle. I think that when you look at some of the European governments, they're dealing with $40, $50 gas now. We were in that range before the invasion of the Ukraine. So that's not a result of only this, right? Obviously, it creates some unique dynamics with the amount of gas coming from Russia into Europe. But I think the energy profile is going to be extremely strong for a period of time. And for LyondellBasell, we don't necessarily like crude over $100. When you start getting into $110, $120, you have to start worrying about consumer demand, the impacts of inflation, what's the gasoline going to cost your average consumer, does that impact their buying behaviors. That's usually when we start to get a little bit -- I think the market in general should get more nervous about inflation in those situations. But a strong energy profile is not bad for us especially when you have the backdrop of cheap gas and ethane in the U.S.

Yes. And I mean what do you think, internally, when you talk to the team ends up being the solution, is it eventually we have enough private drillers and maybe OPEC can ramp more? Or do you suspect that this just gets fixed with the -- we're just kind of in this new era of higher prices until electrification kind of reaches critical mass and there's enough solar and -- because it seems like Europe is playing chicken with that policy a bit and kind of pushing whole hog.

Yes.

And at some point, people there would soon get pretty upset with their electricity bills, but it's hard to say.

Yes. It's hard to say, sometimes it's hard to restart the engine. I mean without the majors actively exploring and looking for new fields, it's -- I don't know how we necessarily turn this quickly. I don't know whether an administration change helps that at all or whether this is truly being driven now through investors, ESG and the emphasis by activism to drive to a greener energy profile. But I think what we're going to find, though, is it's going to be hard to undo where we are now without some major drop again in gasoline demand or some significant recession that could potentially bring energy back down. But I think we're in a place now where Europe is really on a hard transition to -- from an energy standpoint to more sustainable wind, solar. You look at some of the moves that Germany is proposing to make around coal and nuclear and a transition away from those, they might be wise to slow down a little bit.

Slow down a little bit, yes.

Based on everything that's going on, I mean it's just one person's opinion, but I would just be very cautious about how quickly the transition happens and that whatever energy source they're banking on coming in to support the country, that they plan well about that transition and they don't move too quickly away from more traditional sources of energy.

And so when you look at your supply chain and your assets in Europe, whether that's O&P or others, I mean how -- imported LPG, right, that was always one avenue through which Lyondell kind of lowered the cost of its fleet in Europe. But how does the company kind of looking at the current energy backdrop and trying to be creative around solutions to improve margin there?

Yes. I mean I think you can always look at the importing of NGLs. Some of the assets we have are not really on the water, so it's a bit more challenging. Wesseling in Germany, we typically have to run railcars in and out of Wesseling. But there are ways to try to move as heavy away from naphtha as you can. We don't have a ton of flexibility in Europe, but I would say that I think our market positions with respect to polyethylene and polypropylene in the markets we serve are differential. I think that whether it's pipe or other type of high-value segments, they tend to be a little more resilient in terms of margin. And so we tend to focus on, okay, just make sure that our assets are energy efficient. You can't really control much on the feedstock side as leveraging, as you know it is, but can we also make sure that our products are positioned well in the right markets that tend to drive a little bit of a premium.

Got you. The conversation at lunchtime was lengthy, but believe it or not, I think I still have a couple of questions.

It's not about MoReTec efficiency, is it?

There is one in there about that, so we can talk a little bit about that. But -- so look, a lot of the discussion was around molecular and mechanical recycling, right?

Right.

You've got footholds in both. Like how -- we've reached -- reverse this topic a little bit, like how ready is the upstream waste supply? Like how far are we from a situation where we have a meaningful amount of supply coming from pyrolysis given perhaps the upstream and waste collection, waste distribution perspective like?

Yes. I think various regions around the globe or different places, Europe is by far the most advanced with respect to upstream collection. We have a pretty strong position in Europe with -- like I mentioned in the other discussion, around a quality circular plastics joint venture we have with a waste management company, SUEZ.

SUEZ, yes.

So it's those kind of partnerships that are going to be critical for this to be successful. But yes, I mean, we found that with time and the pull from the brand owners that, that business model has proven to be profitable, which historically hadn't, so I think we've already turned a new leaf with respect to mechanical recycling. But mechanical recycling, again, as I mentioned in the earlier conversation, it's tough because there's a lot of cleaning. There's a lot of challenging separation issues. The consistency of the material is always a bit of a challenge. If you swing heavy from -- we're 90% polypropylene and 10% polyethylene, and then you flip flop that while you're running, it creates challenges in terms of the product performance and how the product will look and the aesthetics. And so it does create -- you almost need closed-loop type recycling partnerships. Tom Salmon, we're talking about Berry and the relationship we have with him around plastic cups at Wendy's and creating a closed circle where the plastic cup is made entirely of polypropylene. It comes back to us after it's used. We reincorporate it back into the same cup, and they remold it into the company, and then you create this natural circularity. But that's a drop in the bucket when you think of global scale, right? And that's where mechanical recycling has its place, but it's going to be very regional and very, I think, specific to what is the consistency of the recycling that's available to you. And that's why we love the MoReTec technology so much more is that it takes away that specific characteristic upstream that you need. I mean you can put PET in. You can put high density in, polypropylene in. And any kind of association, whether it's got residual food in it or whatever might be in there, you put it into pyrolysis gasification, and on the backside, you get pyrolysis oil, and then you can put it right back into the front of the process. And there's no restrictions on food contact. There's no restrictions on where you can use the material. It acts and behaves exactly like virgin material, which is a huge advantage, even relative to mechanical, where if you're trying to incorporate PCR into a product that's going to be in contact with food, you have to be very careful about what some of the remaining contaminants might be in the product as it comes out the other side.

And so when you -- the JV with SUEZ you've had for years now, and so, I mean, when you think about the scaling of this whole process, how much will you rely on them in building out this network? Is this like -- as this progresses, will you kind of -- will they just handle that portion of it and you'll kind of give them a good offtake agreement? Or is this something where you'll build facilities together and invest together? Like what is the nature of this -- how is the nature of this venture going to mature from here?

I mean the venture itself is a joint venture, and our idea is that neither of us can be successful without the other, and we have to kind of move lockstep together. We've talked about places for potential expansion outside of Europe, is there a way that we could do something perhaps in Asia together, and so we just need to look at where the logistics, where the infrastructure on the front end of collection and then using their sorting technologies and their capabilities, our compounding capabilities, our commercial marketing capabilities in the plastics. That's the partnership that we think will work. And so the idea is to move together and see if we can find opportunities through that partnership. So -- and that's -- we talked a little bit about the front end. If we can create positive business models with front-end partners like a waste collection company like SUEZ, that's where we think the most successful model will reside especially in the mechanical space.

Yes, because I was going to say, I mean, it doesn't have to be SUEZ, but do you think that type of partnership is necessary for finding success in a recycling initiative in Europe? Or do you think the infrastructure is such that somebody can go in without that level of support?

I don't think it has to be that. I mean I think there are successful intermediates inside of Europe today. People that buy flake -- post-consumer flake, and then they convert that post-consumer flake into compounds downstream of the waste management company. So it's not a requirement. But if you want to get scale and you want to be involved with somebody who knows how to manage waste and how to sort, I think it's an important part of the portfolio. And I think that our relationship with SUEZ and what we've learned through QCP has been valuable for us to understand what is a potential business model that could be self-supporting.

On the MoReTec side, right, how does this impact or challenge your decisions or your ability to decarbonize, right? Because it's great from a circularity perspective but maybe less so from a carbon footprint perspective. So when you set goals for ESG, how do you balance that out? And how do you kind of tackle that priority between carbon and circularity?

Yes, I mean you're absolutely right. I mean we talked about the heat required for pyrolysis. We'll have to look at different ways, can we design it with hydrogen-based burners that eliminates the carbon from the fuel system, is electrification -- can we get -- can we use electrification to get us half of the way there on heat, potentially use your more typical carbon-based but then do carbon capture on the effluent of the reactor. I mean there's different things we can look at, but that's definitely a consideration because it is a pretty high energy intensive. But we'll have to -- as similar with our crackers and similar as our PO units, we're going to have to continue to evolve the technology around firing these things because a lot of these technologies are high energy intensive and it's going to require carbon capture, putting it back in the ground or a conversion to some other form of heating element, whether it's electrification or hydrogen.

Yes. And so I mean, that brings me to the last question here is -- well, maybe not the last, but like the efficiency side of MoReTec, right, you said right now, it's 2x the cost of naphtha.

Not our technology, I was saying in general gasification pyrolysis.

Okay. Pyrolysis is just a baseline. MoReTec...

Historically, without catalysis, yes.

So MoReTec's goals is to bring that down. How far have you gotten or how close are you now towards naphtha? Has MoReTec delivered that? And then as you look at the overlay on the decarbonization side using green hydrogen burners or gray hydrogen burners, blue hydrogen burners, I guess it would be, or sequestration, like how much does that then set you back on the efficiency gains that you would have gotten on the circular -- or on the MoReTec catalysis side?

Yes, I'm not so concerned about the firing mechanism setting us back. I mean we'll get the energy and the design temperatures we need through one way or another, through the evolution of technology. I think working with companies like John Zink and these other burner companies, I think we'll be able to figure out how to generate that same level of heat for the process. To answer your question about how close are we, I don't want to get into necessarily specifics of how the pilot plant is running. But let's just say we have a vision of how we're going to get there. You're probably talking conversions and inefficiencies that have to get upwards of probably 70%, 80%. We see a pathway to that. And if we can get there, we think we can get really close to kind of a naphtha economics. And that's -- so again, we're not there today, but I think we definitely see a pathway with our R&D team to truly find a way to get us closer and closer to that target.

Do you suspect that you'll be able to prove that out on the pilot scale? Or is this something where you're going to have to extrapolate and say, once we go commercial with this, we'll be able to -- just that amount of leverage to the system will probably just take us there?

When we talk about pilot scale, I just want to make sure everyone knows, this is not like a beaker in a lab. I mean this is a fairly sizable pilot plant. And so it is a continuous-flow pilot plant. It's built -- you can climb on it. You can go -- I mean so it's sizable. And so the scale-up is not as big as what it may sound to be, but I would say that if you can't get there in the pilot plant, I think it's going to be even harder to get there on a scaled-up asset, right? And so I think that we'll be able to demonstrate whether or not we can get there on this particular pilot plant. And at that point, if we can get there or we can even exceed expectations in the pilot plant, I feel pretty comfortable we'll be able to scale up to commercial scale. And we'll have to decide how big is that first asset, do we want to be conservative, go for 100 kt, 150 kt. Those are roughly the size that Brad from Eastman mentioned on their technology. Our ultimate intention is 200 kt. We want to be big. We want to be efficient. We want scale. And so that would be our ultimate goal. But we may decide to go a little bit smaller on the first couple just to prove in the technology, but -- and it will depend again on the sourcing too, I mean, how large is the sourcing, and where do we build it, and do we need to rightsize it for the amount of available waste.

Okay. And look, I know he isn't in seat yet, but when Mr. Vanacker comes in from Neste, right, like you've mentioned -- I think in the room, you mentioned you're starting to use some of those fuels from Neste like on your blend basis. But if you had initial conversations with him, I mean, how does he expect to come in or how do you expect him to come in to drive this initiative? Because a lot of people think, given his background, that's directionally going to be an increasingly big push, not that it wasn't already directionally. Like what level of support and what level of initiative do you think will kick in with him in the seat?

Yes. I mean we're excited for Peter to get here. I think he'll be in chair in June. He's already been, I guess, member of the Board. He won't officially be elected to the Board until May through proxy, but he's joined the Board, and we've had some meetings with him in the past week. I think he's coming in, honestly, with a very open mind. I don't think he's necessarily assuming that the Neste model will immediately roll over and apply to LyondellBasell. So our conversation has been very constructive. And I think he's just a proven CEO. He's proven that he can generate quite a bit of shareholder value in a lot of the businesses that he's touched. He actually has quite a bit of background in the polyurethane space from some prior roles that he had with Bayer and some of the predecessor companies versus where he is right now. I mean the experience he has in the circular space and what they did with Neste is obviously an advantage, we think, with him coming in. So he's really expressed a very open mindset coming in. We're going to spend some time together as an Executive Committee with him to kind of talk about strategy where we want to go. But I think not necessarily anything to expect any major pass shifts until we have some time to get together. But I think he's not necessarily coming in thinking that he's going to convert the whole company to green, right? I mean we have a fairly sizable O&P engine on the front of this thing. And I think we're really going to come in and talk about where we want to take the company. And right now, we're not -- until he arrives, it's kind of steady as we go. And -- but we're excited for his arrival and what different kind of thought processes and directions he might bring. So...

I appreciate the answer. I mean -- and just like that, actually, I guess we're out of time. And I don't know that we would be able to squeeze another 30 after the 80 minutes we put you in on plastic sustainability.

Yes.

But thank you for offering up your time, Jim. And give him a round of applause, and thank you for the -- your appearance with us today.

Yes.