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

So welcome everyone to the Credit Suisse 35th Annual Basics and Specialties Conference here. I'm John Roberts. I lead the U.S. chemical team here for Credit Suisse. This next fireside chat is going to be with LyondellBasell. We have Ken Lane, EVP of Global Olefins and Polyolefins at LyondellBasell. It's the company's largest segment. Ken was also the interim CEO during the recent transition. Ken was also earlier in executive with BASF and Polyurethanes and Catalysts, which are also 2 other key businesses for LyondellBasell. So he has got a very long history in most of LyondellBasell's markets. With Ken is Dave Kinney and Nicole Hubatch, from Lyondell's Investor Relations team. Welcome, Ken. Do you have any opening remarks that you'd like to make here before we start the Q&A.

I do. Thank you very much for that introduction, John. And just to introduce the company a little bit and reacquaint folks with what's happening in LyondellBasell. We've got a few slides that I'd like to quickly touch on and highlight some things that are happening in the company. So first, of course, we've got the cautionary statement. We will be talking about some forward-looking statements. I'll let you redefine prints, but not anything surprising there. As a company, LyondellBasell, we do continue to leverage our operating and safety prowess and leadership to be able to generate strong earnings results in and strong performance. That's going to continue to be a focus for us. We are very proud of what we're doing around sustainability and circularity as well as low carbon solutions. I'm going to talk a little bit more about that, shortly. We've put some bold targets that are out there, and we're making good progress towards those. Obviously, we're going to continue to stay focused on maximizing cash flow. We have had a very good performance over the last 12 months, very efficient in converting that EBITDA into cash, and that's going to be a priority for us going forward. Likewise, no shift in our capital allocation strategy. We're going to continue to be focused on being very disciplined around our capital investments and investment-grade balance sheet and returning capital to our shareholders. So that is going to continue to be a strong focus for the company going forward. Everybody knows that we do have a new CEO. I had the privilege of being the interim CEO, but I'm very happy to have Peter here now, Peter is somebody that I worked with many years ago, or at least competed against in Polyurethanes. And I'm very happy to have Peter on board. Peter is a leader that has a track record of shaping industries. We're very active working with Peter today on looking at what we can do with the LyondellBasell strategy going forward. And I know that Peter has mentioned that at the third quarter earnings call, we're going to be talking more about what we call Project Polaris and looking at improving some areas around performance. All companies have things that they can do to improve performance. And we're really taking more of a soup to nuts approach to looking at where we think we can continue to lead and build on our leading positions, and we'll talk more about what that looks like in detail at third quarter earnings results call that we have later in October. We also are working on a new strategy that we're calling our North Star, and we've scheduled an Investor Day for the end of March. And if you tune in, then we'll be very excited to share with you more about the future of our company and where we see the company going over the next period of time, focusing really on business opportunities that we see and developing those further. So excited to have Peter on board and looking forward to his leadership. Going back to our second quarter earnings results. Again, we delivered very strong results that we announced in the second quarter that was just 6 weeks ago, continue to generate strong cash flow, converting that cash, like I mentioned earlier, that EBITDA into cash and passing that back through to our shareholders. So we did have the special dividend earlier this year and very proud of that performance that we've had, businesses were supported quite strongly by reopening the economies. We had really tailwinds with tighter supply demand. We had a recovering market environment, but also if you look at refining very strong marketing or market results there for refining and that continues today. Now if you look at what we have in the portfolio and you think about where we're coming from, over the last decade, we've had an average of about $6.7 billion of EBITDA over the last decade. But we have made a number of investments over the last few years that we'll be adding about $1.5 billion of mid-cycle earnings. So we expect to be stepping up to a level of around $8 billion of earnings over the next decade and part of that is going to be the new PO/TBA asset that we're currently completing down in Texas. That asset is going to be starting up next year, and we look forward to having that online. It's actually quite a good time to be starting up that asset with some of the oxyfuels margins that we see continuing to be above mid-cycle level, propylene oxide as well. So all of the investments that we've made are going to be very accretive to us going forward, and we're looking forward to realizing that benefit. Skipped one there. Talk a bit about sustainability and what we're doing around that. I mentioned earlier that we have put some industry-leading targets out there around CO2 reduction and around circular products. And we really see those as opportunities going forward. These are going to be big market opportunities for us. We want to be leaders in this space. We have just recently made some announcements about some renewable power agreements that we put in place; it's going to be accounting for about 10% of our total global power demand. So good progress there in decarbonizing our portfolio. Renewable feedstocks, we're also making good progress with. We've got year-to-date 12,000 tons processed of renewable materials. We're forecasting for 2022 40,000 tons of product that we're going to be selling there as well. So growing that business quite a bit today. Circulen and other circular solutions, we're also increasing our opportunity for selling those products in the market as well. 140,000 tons so far since we launched our Circulen brand back in 2019, that is an area that we continue to see very robust demand, and we're working very hard on developing those markets further. All right. Just to give you a bit of an update, a lot has changed since the second quarter when we had our earnings call just 6 weeks ago. I'll just start off, go back to where we were in the second quarter, really has not been much changed when we think about China and the Asian market. That was already a market where we're not seeing significant growth particularly seeing challenges in terms of profitability in that market. That's not something new. But what we have really seen new in the last 6 weeks or so is a fairly significant drop-off in demand and margins, particularly in our European business. And that's across the board really. We currently are seeing the headwinds of inflation and energy impacts. That's obviously compressing our margins but also declining demand. I think, ultimately, the consumer is just buckling under the pressure of inflation, and we are certainly seeing that in our portfolio. We guided at the beginning of the year. We've got currently a turnaround ongoing at one of our crackers and that's in Germany. But we also have, unfortunately, an unplanned outage at our cracker in France. So we've got 2 of our crackers down in Europe right now, which is going to give us some more headwinds. We're estimating that right now to be about $100 million. I think if you look just for Olefins in general, we're looking at a utilization rate for us in Europe at around 60%. A lot of that is related to this unplanned downtime with the French cracker. We expect that cracker will be back up sometime at the beginning of November. But of course, market conditions can always change that. So we'll be watching that very closely, and we'll be making a decision as we get closer to the end of October around restarting that cracker. Intermediates and Derivatives, it's a similar situation in Europe, reduced operating rates, not quite as much as what we've seen for Olefins, but definitely seeing challenges in the portfolio there as well. In the Americas, we're seeing relatively stable demand domestically. Export economics are certainly not attractive really at this moment. Things have deteriorated quite rapidly but we do see fairly healthy consumer demand in the U.S. market. We certainly have seen lower demand for durable good -- durable goods. That's not something that is really new. We just have seen that trend continue into the third quarter. Obviously, automotive and housing is not growing like what we had hoped back at the beginning of the year. But all of those things with the pressure in the export markets is really starting to back up into the U.S. markets, and we are seeing margins compress even here in the Americas. So with that, I think, John will start off with questions that you may have, and we can go from there.

Let's start off with some peeling a part of your market condition update. So 2 big products are polyethylene and polypropylene. Maybe you could talk about what you're seeing regionally polypropylene more durables oriented in its end markets and polyethylene more consumables oriented?

Sure. Yes. So polypropylene is definitely more exposed into the durables market. And like I said, we saw some slowing there already back in June in Europe, and that is continuing. We are, fortunately, though, seeing spreads have sort of reset during COVID. And so we see spreads remaining reasonably healthy in that market. Unfortunately, demand is coming off. And in particular, in Europe, we've seen a lot of challenges in polypropylene. Now for polyethylene, it's a little bit more balanced because you do have more exposure to consumer goods. So we are seeing less reduction in volume in terms of packaging demand and that sort of thing. But even in the polyethylene segments that are more durable in Europe like pipe and plastic fuel tanks. In Europe, we see those softening fairly rapidly. Interestingly, here in the U.S., the pipe market for polyethylene is one where we've got a nice position in. That's driven a lot by oil and gas demand, and that one is holding up fairly well. Small market, but nice margin for it. So polyethylene is a lot more diversified in the applications that it goes into. But certainly, in polypropylene, we're seeing more pressure on the durable side of the business there.

And then if we just narrow in on Europe, in particular, you've got 2 crackers down. It's a good time to have them down right now. I don't know, is that earnings enhancing by having those crackers down or you'd rather have them back up right now?

Right now, we would rather have them back up. We do look asset by asset. And on an integrated basis, yes, those crackers would be good to have running at this point. The issue certainly is that the demand is lower. So even if they were up, we would not be running them flat out. We would be running them at reduced rates. But on an integrated basis, margins have moved a lot up into the cracker. And so certainly, having those crackers running would be beneficial.

And obviously, I asked the question because energy prices have gone crazy in Europe recently. What planning are you doing? So hopefully, we'll have those plants back up again then during the winter months and the winter months is when we might have the tightest situation with gas in Europe, what kind of contingency planning you're doing. And my understanding is you can run the plants differently to maybe make more off gas for yourself.

Yes. So there's a lot that you can do around self-sufficiency on energy. There are things that you can do around switching on your source of energy in some of these, whether you switch from natural gas to fuel oils or even coal that we do burn at our site in Germany. So there is a lot of things that we can do in the energy portfolio side of things. But what we're doing as a company, we started months ago with a crisis management team, really looking at different scenarios to try to figure out, okay, what if we lose natural gas supply entirely, what does that do to us? And to be honest with you, we don't see a scenario where even in some of the more extreme cases of natural gas curtailments where it would impact us significantly. We think we've got contingency plans to be able to meet the market demand that we currently see without any issue.

Okay. And also, we've seen other plants shut down already in Europe in the ammonia market even though there's not a gas shortage, you don't foresee a profitability issue that might have you shutting the plants down even if you have enough gas?

Well, I think it's hard to predict what's going to happen in this environment. It's extremely dynamic. Profitability in Europe is low. Fortunately, we've got competitive assets. So we're able to continue to operate profitably, although at fairly narrow margins. There are going to be people that are operating in that market that are not going to be as in such good shape. So I do think you're going to see some assets that close. That's going to be inevitable as we go through this next trough. But it will be a challenging period, and it's going to be something that we're going to have to be really focused on operating as efficiently as we can, staying focused on keeping our inventories under control, making the right products and having the right products for our customers at the right time.

You mentioned Project Polaris, which is the tactical program about further optimizing the cost structure here at Lyondell. Lyondell is usually showing a slide, you didn't show it today about how you've got the lowest SG&A in the industry. And so your thought of it is very lean and mean. You've got one of the largest businesses. So I assume you're not going to be immune to whatever the results are going to be at this study. But what is it -- what are the issues that you're trying to address that are going to allow you to make even further improvements?

Well, and you're right, we are very lean and mean, and we have industry-leading cost structure, and that's going to -- I expect that's going to continue. I don't see that changing. But what we are looking at is how do we approach our business with our customers? What can we do in terms of -- there's always room to improve on things like yields and efficiency and reliability and where can we really extend our leadership position in those areas? It's not saying that something is broken. That's not at all what we're saying. What we're saying is we want to set the bar even higher, and that's where we want to get to.

Okay. And then the follow-on bigger program called North Star, which is the strategic review, I don't expect that you're going to want to tell us what the new things that will come out of that. But what are the things that maybe are not touchable at their core strategies you've had in the past, and they'll definitely be part of the new North Star strategy as well?

Well, listen, I do think that you're going to see that sustainability and what the focus that we put over the last 18, 24 months around sustainability is going to continue to be a very big part of our strategy. We see that being a very big market opportunity going forward, and that's something that I don't see changing. At least it will not be reduced. Things like our operability and our focus on being at the top in terms of operating safety leadership, that's going to continue as well. But I'm not going to get any further than that, we'll invite everybody back at the end of March, and we're going to have a meeting here in New York where we share a lot more details with you, along with the rest of the leadership team and look forward to doing that.

Great. So you mentioned sustainability. You're one of the few big companies doing both mechanical and molecular recycling. Tell us a little bit more about the circular plastic strategy because, again, that's going to be part of, I think, North Star and the core strategy for the company going forward.

Yes. So like I said, we've already put very important targets out there around what we want to do for circularity, and we are focused on both mechanical and advanced recycling. We're developing our own advanced recycling technology, but we're also going to be somewhat technology agnostic because, frankly, this is where we see the markets going in the long term is consumers and our customers are demanding that we provide recycled content, either through advanced recycling or mechanical recycling. Advanced recycling, you've got a lot more flexibility with the applications that you can go into. And we're excited about some of the things that we can unlock in terms of market access with advanced recycling that you can't with mechanical. But mechanical recycling is going to be an important part of the portfolio going forward. The other thing that I don't want to miss on is the renewable piece of this. Renewables is also going to be an important part. So we're focused on both the renewable feedstock side of it, the mechanical recycling and the advanced recycling, all 3 of those, we think, are going to be really important for our business going forward.

Is there anything in the new Inflation Reduction Act regarding sustainability and environmental credits and initiatives that would cause you to accelerate any of the programs that you have or do something different?

Well, I don't know that I would say we will accelerate because we've already got some pretty aggressive targets that we put out there. But some of the extension and expansion of the 45Q credits that you get, those are things that are certainly going to help us in our decision-making around CO2 reduction and how we think about that. To be honest, I wish we would have seen maybe a little bit more around recycling in that and some more support at the federal level, and this is consistent with the position we've taken with the ACC is that we want to see a framework, a federal framework that supports both advanced and mechanical recycling. And that's part of what is going to help facilitate those markets, at least here domestically.

Okay. Probably a good point to talk a little bit about investments in the future. So you're finishing up on the massive propylene oxide project. What are the other big capital items that are coming for LyondellBasell? And maybe talk a little bit about capital deployment broadly, you just paid a onetime dividend, you're known for your share repurchase program. So how do you think about cash going out over the next couple of years?

Sure. Well, listen, we haven't announced any new large capital investment programs. What we have said is, I think, at the last earnings call and continues to be the case is we're going to keep our capital levels somewhere a little bit below $2 billion in that range over the next several years. So that, combined with our operating cash flow, we'll be able to fund our dividend going forward. And no real change in that. I think if there's going to be something that we want to announce around an investment, we would do that probably at the Investor Day, but nothing to share at this point in time.

When I -- I just want to ask a couple of other things. The Sasol cracker is something I think about as an opportunity for Lyondell longer term to invest in, is that's something you've planned for or it's just completely opportunistic?

Well, it's -- yes, you like to plan for those things, but there's got to be a willing seller. And we have got a very good partnership with Sasol. We've said it before, and I'll say it again, we would certainly like to have the other half of that asset. But they're happy with it as well. And together, we're doing a very good job of operating the asset and marketing the products off of the asset. So for now, no updates on that.

Okay. Let me switch now to some of the areas outside of Olefins & Polyolefins. And you've had experience across all the markets, but I'm going to start with the refinery, which is probably the furthest outside the core scope. It's scheduled for closure at the end of 2023. Give us an update on -- or at least the rationale on why it's going to close? And does it have any implications at all for the rest of Lyondell?

Sure. Look, you started with it. It is a noncore business for us. It's an asset that we've had in the portfolio based on legacy. We've taken a very hard look at what we want to do with that asset. It's going to require a lot of investments after the end of 2023 that, frankly, we don't think is going to be supported longer term in the market and we've got better uses for that cash. So we'll run it until the end of 2023 and barring something happening in the meantime that we would shut it down sooner, but that's the plan currently. Margins continue to be good. The operating rate for the refinery, we've actually had a very good track record in the last year. The reliability has been very good and utilization rate is still in the 87%. So quite a good performance there. But longer term, once you start having to make those investments, it doesn't fit. Now the implications for the rest of the portfolio, there is integration between the refinery and our cracker channel view. And we're currently working through optimizing what we do with those flows between the site. But we're also looking at how could we utilize some of the kit -- some of the assets that are at that site potentially to support our circularity strategy and some of the assets could have some use there as well. So we're excited about the optionality that, that site can offer, and we'll continue to study that.

You mentioned oxyfuel is one of the best-performing businesses here, and you're going to start up the new PO/TBA facility, which will supply into there. And I think you mentioned propylene oxide, you said, is still above cycle in terms of profitability. So talk about what's driving the need for this new propylene oxide plant and how you bring it into the marketplace here without being disruptive?

Sure. Well, listen, we've got -- I've -- I was in the polyurethanes industry for a while, and I have an affinity for that market. It's going to continue to grow above global GDP, the applications that it goes into for construction, insulation, automotive, all of those applications are going to continue to pull more polyurethane. So PO is going to be a product that is very important and a core product for us in the future. We already are working on marketing that volume to our customers. And Torkel and his team have done an outstanding job building a pipeline of customers, new customers as well as existing customers that are also growing their business. And we're lining up the ramp-up of that production with those customers' needs. So it's a very good market and one that long term is going to continue to grow. So we're excited to be starting it up.

And what's driving the strength in oxyfuels, which is the other side of that plan?

Well, what's driving it is really octane. So you look at it and we're basically making gasoline from a very inexpensive feedstock, which is butane. And so that -- butane compared to crude oil is a very cheap feedstock for octane. And that uplift is something that we're continuing to benefit from with the increased pricing that you see for gasoline and spreads that you see in the market, we're getting even better spread. So that's something that we think is going to continue for a while.

And then your acetyls business is your most natural gas-intensive business that you have there. So natural gas prices have soared here in the U.S. as well. Give us an update on what's going on in the acetyls market?

Well, look, the acetyls market is one that does get more challenged from a feedstock standpoint, let's say. But I think from our perspective, we've got the asset back online. We've had, frankly, some operating issues around the methanol asset there, which has not been very beneficial for operating rates around acetyls, but this is a business that is -- or a market that is going to also trade based on what you see global demand, supply and demand doing. And once we get back into growth mode, then I think you're going to see even improvements in acetyls.

In the advanced plastics area, there's been an incredible amount of M&A. So you bought A. Schulman, Avient bought Clariant business, DuPont selling most of its business to Celanese. We've had transactions by DSM and LANXESS, not all the same plastics, but I would say all in the engineered advanced plastics world here, what's driving all the activity here and talk about your competitive position in this consolidating space?

Well, look, this is traditionally a very fragmented market, and it's one that everybody will have maybe a little bit different take on what their strategy is about why they're doing it. We're doing it because of the integration benefits and the market access that having that compounding business part of large polyolefins business, there's a lot of synergies there. And so from our perspective, it's more about that integration. Others are going to have different reasons for doing it. This is -- this is always a market that historically has been seen as a specialty market. And I would say not all of it has been specialty. But certainly, there are going to be segments of that market that carry beneficial margins. But on top of it, we get the integration and the synergy with that, with the Schulman acquisition.

Not that it's a big part of Lyondell, but I think it's a core part. The technology segment where you do the licensing, I think of it as your leading indicator into what's going on with the capacity cycle. So you'll out-license technology to people building new plants. Maybe talk about the activity going on in China, which is the biggest market in the world where much of the new capacity gets added. And maybe if you want to weave into that, you've got your Bora business, and you also have the styrene PO JVs that's there. So are you seeing good licensing activity still in China where there'll be more capacity coming? And what are the market conditions they're doing to your business?

Sure. Yes. So look, the technology business is core for us. We're an industry leader in licensing polyolefin technology. We are seeing a slowdown, though, in licensing, as you would expect. We've seen a very big wave of new licensing and new plants coming online. We do see that beginning to slow. What's happening is all of that capacity coming online and China has really put a lot of pressure on crackers and integrated margins in China. So we're operating the Bora joint venture at technical minimums. We've got one of the newest largest crackers in China. And if we're having to do that, I can guarantee you, there are a lot of people that are suffering a lot worse than we are. So that is going to cause a slowdown in new investments. It just is going to be the reality. So technology is still going to be a really important business for us, but we are going to see slowing demand around licensing.

And are you seeing slowing in the JVs as well? The styrene JVs?

Yes, we are. So we're seeing the same impacts in those PO/SM joint ventures as well in China.

And then maybe one last one, then I'll see if the audience has some questions. We've had some news about port conditions in the Houston area. There's a potential rail strike that's been talked about. Give us an update on your read of what's going on with logistics, both in the U.S. or anywhere else in the world that you'd like to comment on?

Sure. Except for the rail strike, the logistics constraints that we've been seeing have been going on for almost a year now. They really started in the fourth quarter of last year. We're continuing to see that, and it's starting to ease up moving product offshore, but there are still constraints there. It doesn't necessarily mean that the economics of moving the product offshore are very attractive. But certainly, there'll be some loosening in moving product offshore, I think, in the next 6 months. The rail strike that's coming up, we expect that it's going to be fairly short. We're already seeing some embargoes on hazardous shipments things like ethylene oxide and styrene. We think that it's going to have really an immaterial impact on our business relative to what we've already seen in logistics constraints.

Maybe another one on raw materials and feedstocks. So with the natural gas increase that we've had here and ethane costs moving up as well, have you changed your cracker slate materially here over the last, say, 6 weeks?

In the last 6 weeks, we have shifted to cracking more butanes, certainly, but we still crack a lot of ethane. And it's really dictated by the product portfolio and where we see the most value there. Of course, we optimize our feedstock slate every week. So that's pretty dynamic. But we will shift where we see the products margin going and feedstock costs.

Right. We've got a lot of people in the room here. Do we have any questions from the audience? There, Chris?

A little more granularity around comments [Audio Gap]

Question is can you quantify some of the weakness that you're seeing in the business here in -- during the quarter?

I can't -- I can't really quantify for you. But directionally, when you look at where we're going, it's -- when you look at our utilization rates, I think you can model it pretty well. If you think about the U.S. operating rates being 80% or even less, I mentioned operating rates for our crackers in Europe being 60%. IND is going to be somewhere in that 80-ish percent range. You start getting into some numbers that you can model, I think, fairly easy and quantify. Good news is refining is still doing fairly well.

Any last questions? Any closing comments that you'd like to make, Ken?

No, listen, I just want to say thank you, John. Great to meet you. Thanks for hosting this and look forward to seeing you all in March for our Investor Day.

Great. Thank you very much.

Thank you.