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

Good afternoon, everyone. Somehow my -- Mike Sison again, I cover chemicals for Wells Fargo. I want to introduce LyondellBasell, ticker symbol LYB, one of the largest plastics and chemical companies in the world. Company has reported great results in 2021. First quarter was another record quarter. We've also seen consensus estimates continue to move up for Lyondell over the last week or so. Stock hit a 52-week high of $118 in July of '21, the sluggish second half of the year, but we've gained a little bit of momentum this year up. Well, I wrote this yesterday. So 15% year-to-date yesterday and sluggish a little bit today, but they have outperformed the likes of Netflix and Amazon. So yay, right? Chemicals are back. With that said, I want to introduce the team from Lyondell: Mike McCurry, EVP, CFO; Dave Kinney, he's out there somewhere hiding, IR; and Anna Cheng, IR over there. So -- well, thanks for coming. We appreciate seeing you live. And if you wanted to kick it off with a couple of comments, we can start with that.

Thanks, Mike. So good afternoon, everyone. I'm Michael McMurray, the CFO of LyondellBasell. I've been with the company since November of 2019. So an interesting time to join the company, no doubt. The last couple of years have been very, very interesting. It's good to be in New York City and with you all in person. Before I get into my prepared comments, I did want to talk about our cautionary statements. So -- okay. So you will -- in a moment, please review our customary language around our usage of forward-looking statements on Page 2, which will be up in a moment, and non-GAAP financial measures on Page 9 in the deck. Let's see here. And then we also provide some reconciliations of the non-GAAP financial measures in the appendix to the slide deck. So I'm talking now from Slide 3, which the headline is stepping -- there we go, stepping up. So for those of you not familiar with LyondellBasell, you will find that we are stepping up performance over recent history by growing the company, advancing our sustainability agenda of our businesses, and more importantly, stepping up cash generation by maximizing returns from strong markets and our larger asset base. So our asset base over the last few years has expanded in a pretty meaningful way. And I hope you come away from today's session with at least 3 takeaway messages, which are described on Slide 3. First, LyondellBasell has leading and advantaged positions within the petrochemical industry based upon our core principles of safe and efficient operations, cost discipline and market leadership. Our company has been pursuing a consistent financial strategy rooted in growing our leading dividend, returning discretionary cash to shareholders through dividends and share repurchases, prudent reinvestment in our businesses to drive accretive organic and inorganic growth and then maintaining an investment-grade credit rating with a strong balance sheet that provides optionality for opportunistic moves during downturns. And then three, management -- a management team that is aligned with stakeholders and focused on maximizing free cash flow and driving shareholder returns. So a little bit of a performance snapshot on the company. So last Friday, we reported first quarter results for our 6 segments. This slide provides some additional details of our recent performance. We've seen strong demand and tight markets and our growing asset base all contributed to record results. Trailing 12-month EBITDA hit an all-time high of nearly $10 billion, and then we efficiently converted $9.7 billion of EBITDA into $8.6 billion of cash from operations and $6.6 billion in free cash flow over the last 12 months. Resiliency of LYB's portfolio is often underappreciated but demonstrated in the first quarter with improvements in I&D and refining. And I want to emphasize this that LYB is more than just polyethylene, more than just polyethylene. And the I&D business had an awesome, awesome first quarter. And then we also have a sizable technology business with very high profit margins for licensing and catalyst that, again, is very resilient through cycles. We also have a track record of stepping up on innovation. So the company built upon a 70-year history of innovation, which is described here on this slide. On the left, 2 individuals, Karl Ziegler and Giulio Natta, worked with the company on Nobel Prize-winning inventions that led to the commercialization of polyethylene and polypropylene. And today, we're rolling out new innovations in circular plastics that will shape the future of our company and the industry during the 2020s and beyond. And we're stepping up earnings. Results of our innovation and growth seen in the recent step change in LYB's earnings is depicted on this slide. During the first decade of LYB, 2011 to 2019 EBITDA averaged $6.7 billion. Since 2018, we have pursued organic, inorganic growth that should add about $1.5 billion of estimated mid-cycle EBITDA for LYB. Expect an average of $8 billion of EBITDA during the 2020s due to this growth. And then recent strong markets have allowed us to exceed this target. So in summary, strong market demand, a growing asset base and a diverse portfolio are delivering resilient results for LYB. We are advancing our sustainability agenda. LYB is pursuing market leadership in circular plastics. We've made -- we've set substantive interim targets for decarbonization and have a goal of being net zero by 2050. And we have transparent disclosure of our progress in our latest sustainability report, which we published last month. And then we are deploying prudent capital allocation strategies. We have been generous in our shareholder returns through both dividends and stock repurchases. Our framework is guided by our commitment to our investment-grade credit rating. And then our strong balance sheet supports highly selective and accretive growth investments. So that's my opening. Mike, I look forward to your questions.

Well, that took care of everything. So I think we're good. So thank you very much. It's great. No, I'm joking. No, thanks, Michael. I appreciate the opening remarks. Let's start with polyethylenes, and this is your biggest product. I think what's interesting is really demand, right? In 2020, demand for polyethylene was up. I know because I had a lot of Amazon boxes that seemed to keep coming to my home. But do you think there's a step change in demand, meaning -- or I think most folks felt demand would be down during the pandemic. And maybe walk us through, it's not -- it doesn't have a lot of durable end markets. It's more consumable. And what are your thoughts in terms of demand would be potentially if things slow?

Yes. No, it's a really good question now. And then don't forget, we have other businesses that are highly profitable outside of polyethylene. So hopefully, we'll get a few questions there as well.

We have 4 hours.

Excellent. But no, I mean, listen, I think looking back over the last couple of years, going back to 2021, demand has been quite resilient, quite attractive. As we sit here today, save China, demand continues to be very, very healthy, including in Europe. If you had seen our earnings slides from this past Friday, we actually showed a data set of polyethylene demand going back over a long, long period of time. And as you know, polyethylene has a kind of a multiplier effect on GDP and has been very resilient from a demand perspective through prior recessions. So our outlook for polyethylene growth and demand continues to be quite constructive.

And how do you think demand would change if the economies do slow or go into recession this time around?

Yes. I think our demand will continue to be resilient. There could be some headwinds. But again, if the past is repeated, demand should be resilient through a recession.

Right. Let's talk profitability. Integrated margins were at all-time highs in October. They've come down a little bit, actually a lot relative to October. But maybe another question is, is there a step change in profitability potentially for this -- for integrated margins over time? And how do you think the rest of the year looks?

Yes. I mean, so listen, I mean, a couple of things. So there are a lot of folks predicting that pricing and margins were going to collapse late last year and early into this year. And while margins have moderated, they did not collapse. And then quite frankly, we reversed the pricing trend in March of this year and actually made some pricing progress. Margins today, I think, are pretty healthy. Clearly, no doubt, with nat gas ranging above $8 an MMBtu and ethane above $0.60, near, near term that creates some headwinds. But we're confident with the April and May price increase that we will make some progress.

To frame, integrated margins, just for the audience, I think the peak was in the mid-60s. The last peak was in the 40s. And I think prior to the pandemic, folks were kind of thinking the $0.15, $0.20 range. So I think we're in the low 50s now roughly. So do you think -- I mean, particularly if you think about beyond '23, there's not a lot of capacity.

That's right.

Are we in a new level, do you think, for quite some time?

Yes. I mean, I think we've demonstrated, based on our track record over the last couple of years, that possibly, we are at a new level and a new paradigm going forward.

Okay. There is an April price increase on deck. It doesn't seem to be a good price for Baker Mayfield anymore. So that doesn't seem to be going through. But what are your thoughts on the April increase? I know it's odd because it's like May 5, Cinco de Mayo, and things haven't been settled.

Makes sense. It is Cinco de Mayo.

Are producers are drinking too much margaritas to settle the price? Or what do you think is going on with the sentiment this time?

Yes. I mean, here's what I'd tell you from -- at least from LYB's perspective. So I know that there's supposedly a couple of the smaller players that have folded on the April price increase. We continue to stand tall, and we'll see where things ultimately settle. I'd say, the one thing I am confident about overall is that when you take April and May together, I'm confident we're going to make progress.

Right. Okay. Shifting to Europe, you have a lot of capacity in Europe. A lot of concerns with rising energy costs over there. Oil continues to go up. What's sort of the future of polyethylene in Europe?

Listen, we have a great portfolio in Europe. From a competitive position, our assets are well placed from a quartile point of view. We have a lot of differentiated applications that we sell into as well. We like our European business a lot. And then I'd say despite all the challenges that the continent is facing into with the war in Ukraine and with volatile energy prices, our European business has actually performed fairly well.

Right. March integrated margins, current IHS, were negative. Your first quarter is pretty good. In terms -- how did you do that? And I think the outlook for 2Q is good or sequentially a little bit better but not...

Sequentially, I'd say sequentially, overall, probably a little bit better. On -- within our prepared remarks on our call from Friday, we did say that our turnaround at our Berre cracker in the south of France has been extended by about 30 days. So that will create a bit of -- some bit of headwinds. But I think, overall, we should do pretty good in the second quarter in Europe.

Right. Okay. And what do you think the implications are for the industry with China? I mean, their margins are terrible, right? And a lot of it is because of the shutdown. But costs are very high. Any repercussions because of that for the rest of the world? And you have one JV, as I recall, in Bora.

Yes. We have a number of JVs, but one big JV...

One big one with Bora. No, I'm sorry, not Bora.

We call it Bora. So yes, I mean, listen, a couple of things. So if I kind of step back and look at all of our businesses and kind of look at kind of demand profiles and margin profiles, the whole world, save China, actually is quite constructive. And so China is not great. And so the demand is not good. And then pricing and spreads are terrible. So if you take our Bora cracker, which is -- it's new. It's world scale. And from a cost point of view, it is top quartile and probably at the upper end of the quartile. It is not covering fixed cost as we sit here today. And so I mean, something's got to give in China. There's -- it's not plausible that all those kind of fourth and third and second tier assets can continue to operate at these levels of pricing. So pricing will move at some point. Obviously, the policy of these lockdowns is really disrupting the economy and demand.

Right. And there's -- I think there's roughly 5 million tons expected to come on -- or is planned to come on this year.

Yes. 5 million to 6 million.

It's probably not.

Yes. Globally.

Yes. Right. So can they come on in this environment? Or why would they come on? Can they be delayed? And what do you think -- and first, it's going to come on this year, pretty close, right? It's not like you're far away from turning it on.

Yes. I think -- listen, I think that the assets that are being built will be completed. If it's not profitable to turn them on at the cash line, maybe starting them up will get delayed. And then I think -- thinking kind of medium term and longer term, I think it's going to push out new capacity additions.

Right. And beyond '23, when there's nothing else coming on, how do you think about new capacity, particularly given that in the U.S., you would have the lowest cost in doing that?

No. No, I think it bodes well for the industry. In particular, it bodes well for LyondellBasell, especially given our advantaged position that we have in North America.

Right. Great. Shifting gears, Intermediates and Derivatives has been a great business this year. You have a lot of buckets in there. So I thought maybe walking through some of the bigger buckets for everybody would -- might help and then -- and go from there.

So propylene oxide, which is a great business for us, that business, margins tend to be pretty resilient. A lot of our contracts are on kind of a cost-plus basis. Demand has been good. Margins have been good. You know we're bringing up a world-scale facility here at the end of the year on the Texas Gulf Coast. It looks like the timing on bringing up that new capacity couldn't have been better because of the overall demand environment, plus the fact that some of our competitors are actually shutting in capacity. So again, PO, having another really good year, and the outlook is just strong for this year. Our oxyfuels business, quite frankly, which suffered mildly during the pandemic, is earning -- had a really good first quarter and should have an even better -- a better second quarter. What's interesting about that business, if you go back over the last decade prior to the pandemic, on average, that business consistently generated about $400 million of EBITDA. And it was...

Annually.

Annually. And it looks like we're back at those levels. And quite frankly, I think the second quarter could outperform kind of given where overall margins are. So that's a really good business. And then the acetyls market is also quite favorable, a really good year last year. We're having a good year this year. Unfortunately, our unit for acetyls at our La Porte operations is shut down right now. So we had a failure in our syngas unit. And so hopefully, we'll get that asset back up and running, hopefully, not too much later than the end of this month. And then styrene today, because of industry outages, is actually doing quite well although, as you know, styrene margins can be pretty volatile.

Yes. Yes. In terms of acetyls, there's been a lot of volatility around the world. And actually, I forgot your positioning is more U.S., right, versus Asia where there's been -- or China, there's been a lot more volatility.

Yes. So it's -- our position is U.S. And as you may or may not know, the U.S. market is pretty well structured with 3 players, with us being the #2 player.

Right. Right. And then for oxyfuels, maybe give us a little bit of what's been driving the improvement in demand, I mean, gasoline prices and stuff.

Yes. So demand is good, right? And from a -- just from a pull from gas link point of view, butane costs have started to come down. But because of the rise in gasoline prices and resulting blend values, that's really driven a lot of margin expansion here in the first quarter. And then we're seeing the same thing happening in the second quarter and actually think it's widened out quite a bit here in the second quarter.

Right. Okay. Moving to APC (sic) [ APS ]. You bought a Cleveland-based company a couple of years ago. So excited about that.

A. Schulman.

It looks like Houston sold us a quarterback, too. So it looks like -- I don't know if that's payback. But -- so if you think about that, heavy auto, sort of as an end market, but it also does utilize a lot of your -- it gives you a little bit of vertical integration, a little bit more specialty. The integration has gone really well. So are there any thoughts of getting bigger? Are there other -- well, there are other Schulmans out there. But is that something that you generate so much cash? Again, maybe buy Baker for us, it would be great. But what do you -- is that a good avenue for your capital?

For growth? Yes. I mean, it's a space that we continue to look in to find attractive assets to buy. We haven't done anything meaningful thus far, but we do continue to look. To the extent we were to do an acquisition in that space, it's probably not super large.

Right. Okay.

Or bolt-ons.

You've had good recovery despite auto not really picking up where people thought.

Yes. I mean, listen, the first quarter rebounded quite significantly versus the fourth quarter. The building and construction for APS continues to be a bright spot and should be a bright spot through the balance of this year. And really, where we've suffered is automotive. And the latest numbers from IHS came out a week ago. And they brought down the outlook for this year pretty considerable. And then kind of getting back to peak got pushed out as well. So -- but automotive will come back eventually. And we'll get a lot of operating leverage as demand flows back into the business from the automotive sector.

Right. As normal, about 10 minutes left. If anybody in the audience has a question, just raise your hand, and I'll find you. Michael, the refinery, why did Elon Musk choose Twitter over your refinery? I'm joking. But...

I don't know. There's still time.

Yes. He clearly has plenty of cash to do it. It's performing really well. It should -- the outlook looks great for 2Q. Our oil and gas expert, Roger Read, feels good about that -- about the business heading into '23. You're going to decide to shut it down in the event you don't find another strategic opportunity for it. Maybe just walk us through some of the math there, given how well it's doing and some of the CapEx requirements that you will need if you want to keep running it post '23.

No. So good question. So most folks who followed us know that we ran a process looking at strategic alternatives for the refinery. There weren't any offers on the table that were acceptable from a financial perspective. Keep in mind, that is a very unique site. So it sits on the Houston Ship Channel. It's 700 acres, valuable access both from a water perspective, rail and a host of interconnected pipelines, including into our Channelview facility. We will make hay while the time is good. So we'll run it safely. We'll run it reliably until the end of '23. But after the end of '23, the refinery is facing into a mountain of turnaround capital, so as much as $1 billion. It's not a strategic asset for the company. So we're -- we shouldn't be in the refining business and nor are we going to be in the refining business in the future. But we do see valuable opportunities at that site for other uses for LyondellBasell. So again, it's very large. There are some of the refinery assets that can be repurposed, in particular, hydrotreating. So if we were to make pyrolysis oil, recycled plastic and pyrolysis oil at that site, we could use the hydrotreating assets to upgrade it and then ship it by pipeline over to our Channelview cracker. So this is the best choice for the company and for our shareholders. And oh, by the way, that refinery represents about 14% to 15% of our overall CO2 footprint. And so by closing it, we get to almost halfway to our 2030 goal just with that decision. So there's financial benefits from a CO2 perspective as well. And again, a lot of optionality around what we could use that site for. And then in the meantime, if someone comes along and makes a compelling offer, yes, we'll contemplate it. But we will close the refinery by the end of '23.

Right. And the site itself can be used for a lot of things, maybe not a USFL football team or XFL football team. But you talked about sustainability, right? I think your goal is to have 2 million tons of sustainable plastics or recycled plastics.

By 2030, that's right.

Can you talk about the challenges for -- to get to recycled -- to create recycled polyethylene or recycled polypropylene? A lot of the challenges I hear is that the pellets aren't as clear as a virgin pellet, and it's hard to do. So any thoughts on that?

Yes. I mean -- so listen, from a circularity point of view, there's bio-based feeds, which, quite frankly, is going to be a market longer term, but we think it's going to be pretty nichey. There's mechanical recycling. And we have a joint venture in Europe, which is active and profitable and growing. And we're looking to expand mechanical recycling to other parts of the world. And then there is molecular recycling, where you're converting mixed-use plastic waste into pyrolysis oil. We have a pilot plant that's up and running in Ferrara, Italy. I think we'll have a pretty good point of view in the second half of this year if we can scale that asset to an industrial level. But so far, things are encouraging. I'd say probably the biggest challenge that we and others are facing into is actually just getting access to source material, getting this stuff to actually recycle. That's the biggest challenge. The most effective frameworks are in Europe, where there's a lot of government regulations. And so things in the U.S. are going to need to change to actually help facilitate the collection of waste so it can be recycled. So anyway, sourcing plastic waste is probably one of the biggest challenges. But the demand is there because the big CPG guys have made really big commitments about the amount of recycled material that they're going to use in their packaging.

Yes. We have one bin in Cleveland. So I have very little faith that the glass and the plastic and the paper in that bin does anything. But -- so in order to get to the 2 million tons by 2030, it's going to be molecular.

Molecular has to work.

And the site selection, I've had -- other companies in the sector have chosen sites not for polyethylene, but PET or something else. How do you think about that? I think there's some in France. Is there any opportunity to do it in Houston given cost? And Cleveland is probably a #1 choice because it's such a great place to be.

It is a great place to be. I had the pleasure of living in Toledo for 11 years, 11 long years. Lovely people, though, very lovely people. Listen, so for us, the most likely sites for us to lay down a MoReTec facility would either be in Germany at our Wesseling site. And then what we just spoke about, the refinery site here in Houston is -- would be very, very viable.

Okay. So I think on recent calls, you've talked about your prior average EBITDA being $6.7 billion. You had that nice slide up there. And then over the last 12 months, in the last call, you said $9.7 billion. So any thoughts on -- and a lot of investors like to think about a mid-cycle EBITDA or what the new average could be over the next 5-or-so years. And any updated thoughts on that?

Yes. I mean, listen, so we've added through growth investments today about $1 billion of incremental EBITDA at kind of cycle averages. And then we have the PO/TBA facility that's coming up here towards the end of the year, which again will add another incremental $450 million. So you add it all up, that's $1.5 billion on top of the historic $6.5 billion. So we think $8 billion is the new mid-cycle EBITDA for LyondellBasell post PO/TBA coming up.

Right. Any reason it can't be where it is today? I mean, it seems like there's a new normal, sort of, barring a recession. And every quarter, you've seen either Dave just sandbags me every quarter or I'm just really bad at forecasting. But it does seem like it's higher than that.

It certainly -- I mean, it certainly is operating -- we've been operating above mid-cycle more recently. And let's see if we can continue it.

Free cash flow generation has always been a hallmark for Lyondell. I think -- well, again, I apologize, because some of my notes were yesterday, and free cash flow was 20%. It might be a little bit higher today. So the free cash flow looks amazing. In the past, you've done some big stock buybacks. And any thoughts about what to do with all this cash now?

Yes. So a couple of things I'd say, Mike. So I think, first, the balance sheet is in great shape, and there's no need to delever beyond the $4 billion of deleveraging that we did last year. I think you know that the company has a reputation of strong free cash flow delivery and strong free cash flow conversion, a record year last year. The first quarter was very strong at $1.5 billion. We're not going to carry a bunch of cash on sheet. So -- and you can hold me to it. We're not going to have a lazy balance sheet. Therefore, we're going to return a significant amount of free cash flow to our investors through dividends and buybacks.

Great. Well, I want to make sure you get back on time. You're not going to try to outbid Elon on Twitter, though, right?

Probably not.

Probably not.

Probably not.

Thanks again, Michael, and the team from Lyondell for coming today. And thanks, everybody, for listening in.

Thank you, Mike. Thanks, everybody.