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

Let me take a few minutes to set the stage for our conversation with some brief updates on LyondellBasell. So cautionary statements. Okay, there we go. As always, we ask that you review our customary language around forward-looking statements and non-GAAP financial measures. We also provide some reconciliations of the non-GAAP financial measures in the appendix. Next slide. As you saw in recent results from LyondellBasell and our peers, the third quarter was very challenging for our industry, and September's exit rate is pointing to lower fourth quarter results. Nonetheless, at LyondellBasell, we are very excited about the work underway to reshape our longer-term strategy and deliver value for investors. Before we discuss our strategic initiatives, let's review Slide 3 and some details of our recent performance. Despite third quarter challenges, LyondellBasell generated $7.7 billion in EBITDA over the past 12 months and converted nearly all of that EBITDA into $7.6 billion of cash from operations. In our segments, margin compression across our O&P businesses have pressured results, most notably in Europe, but improved demand and margins for transportation fuels has helped our Oxyfuels business in the Intermediates and Derivatives segment and our Refining segment to deliver their best segment results since 2018. Altogether, our resilient portfolio delivered a 19% return on invested capital over the past 12 months. Next slide. As the CFO of LyondellBasell, I'm particularly proud of the cash generation performance from our team that is depicted on Slide 4. After we funded investments in maintenance and growth CapEx, we delivered $5.5 billion in free cash flow over the past 12 months. In the third quarter, we added $400 million in cash to the balance sheet, mostly by managing working capital. And our commitment to shareholder returns continues under Peter's leadership, with $4 billion in dividends and share repurchases over the last 12 months. At LyondellBasell, we think about managing the company to generate differential value and high returns under a range of economic conditions. On Slide 5, we highlight some of the sources of advantage. Our company is widely recognized for our deep commitment to safe operations, cost management and operational excellence. These values are part of our DNA. LyondellBasell's global portfolio of businesses benefits from both geographic and end-market diversity. Our leading positions in diverse markets balance the portfolio and reduce risk from market concentration. I will talk about some extensions we are making to these decisions in a few moments. On the right side, I would like to emphasize our financial metrics that will serve us well during these challenging times. In addition to our efficient cash generation, we prudently managed our investment-grade balance sheet. Our weighted average cost of debt currently stands at 3.9%, with an average maturity of 18 years. So we got a lot of work in 2020 and 2021 around the balance sheet. At the core of our capital allocation planning is a secure and growing quarterly dividend. Over the past 12 months, cash from operating activities comfortably covered our quarterly dividend by a factor of 5. Slide 6 highlights one of the decisions that quickly emerged from our strategy work, the creation of our new Circular and Low Carbon Solutions business unit. Businesses focusing on circular and renewable solutions require a differentiated business model and a more entrepreneur mindset to succeed. We are setting up our new Circular and Low Carbon Solutions business unit with this in mind. Our aim is to sell at least 2 million tons per year of these products by 2030. For perspective, 2 million tons represents a material amount of our 2021 global sales of polyethylene and polypropylene, about 20%. In the past few weeks, we've announced our participation in several agreements related to new capacity for our Circular and Low Carbon Solutions businesses in the U.S., Germany, China and India. In Germany, we expect the facility to provide a material amount of the feedstock required for our first advanced recycling plant using LyondellBasell's proprietary MoReTec technology. In addition, we are moving forward on partnerships for renewable power, carbon capture and low-carbon hydrogen. We are quickly and methodically building a robust supply chain to support attractive growth opportunities for Circular and Low Carbon Solutions business. On Slide 7, let me outline the launch of our value enhancement program that is targeting $750 million in recurring annual EBITDA improvement by 2025. Let me be clear, P.J., this program is not about onetime cost cutting or deferred maintenance. We are building an evergreen continuous improvement process that will become part of LyondellBasell's core competencies. It became clear that after 12 years with a singular focus on managing cost in our company that a significant number of untapped value opportunities have accumulated. We think this value can be unlocked with only modest incremental investment in resources. The program is about balancing cost and value. The program is well-organized and professionally managed by a newly established transformation office, a bottoms-up planning process generated over 2,000 ideas, and we have validated more than 1,500 initiatives to date, but we are just getting started. We look forward to sharing more details on this program during our upcoming Capital Markets Day in March of next year. I'm almost done.

Okay.

Let me summarize on Slide 9. Despite third quarter headwinds, LYB's growing asset base and diverse portfolio are delivering results, $7.7 billion in EBITDA over the past 12 months. We are quickly and decisively moving forward on opportunities in circular and low-carbon solutions. We recognize the differential needs of these emerging businesses, and we are rapidly putting into place the proper organization design and partnerships required to establish leading positions. The third quarter was challenging, but I have no doubt we anticipate that seasonally weaker demand and volatile energy costs will provide further pressure on fourth quarter margins. In response, we are proactively lowering operating rates to match reduced demand. LyondellBasell is taking the right steps to optimize working capital and further strengthening our balance sheet's flexibility to position our businesses to capture opportunity throughout the cycle. And I'm incredibly excited about all the activity and progress underway in the company to develop a north star to guide our strategic initiatives. We have shared a few details about our initial decision to ramp organizational design and value capture. We look forward to sharing more details over the coming months and at our Capital Markets Day in New York next March that should clarify your understanding of LyondellBasell's forward strategy. So I hope my comments are addressing your questions, P.J., but I would be pleased to discuss further.

Well, thank you. Thank you for that. I do have some questions, and then we'll open up for Q&A. Let's start backwards. And I want to talk about this new program that you and Peter, your new CEO, Peter Vanacker, has talked about in terms of $750 million of value enhancement. And you said that, that came out of because there was a singular focus on cost cutting for many years. Do you believe that some areas were capital-starved as a result of that cost-cutting program? And what is the CapEx needed to achieve those savings?

No. So I mean, listen, so a couple of things. I think having the company emerge from bankruptcy 12 years ago, I think many, if not all, the actions that were taken were the right actions to take. We are incredibly cost-disciplined. And as a commodity chemicals company, we have to remain cost-disciplined. It needs to remain part of our DNA. But the fact is, we were probably too cost-disciplined and was also our Achilles' heel. And we were leaving value-creation opportunities on the table. And people at our sites, after many years, basically got frustrated. They quit putting forth these ideas because they were never getting funded. And so we've done a tremendous amount of bottoms-up work. We have high confidence in the $750 million run rate at the end of 3 years. We have good visibility that we think we can do about 20% or $150 million of that $750 million by the end of next year. The investments, overall, are relatively modest. So to achieve the $150 million, we think we need to invest about $150 million between CapEx, OpEx and the like. So -- and the interesting -- the other interesting thing that I'll add is that the excitement and motivation by our folks in operations that we're willing, actually, to make limited investments and value-creation opportunities and ideas is really motivating them. And I'm confident that, as we move through the balance of next year, that the size of the price actually should grow.

Great. You made a big push into low-carbon solutions, circular and plastic and the circular economy, almost taking 2 million metric tons of circular plastics. You've invested in Germany, in India. In U.S., you announced a joint venture collaboration with Air Liquide and Chevron and Uniper. Can you talk about some of these initiatives? How much capital do you need? And what kind of returns do you expect? Because that's the question I get from investors. These companies are investing in ESG and circular plastic, but what returns will they get? Can you just talk about that?

Yes. So I mean, a couple of things. So this activity, historically, had been embedded in our O&P business and kind of overseen by folks who have full-time day jobs. Maybe another -- maybe another area where our cost-discipline was possibly taken too far because the reality is that the way that you're going to make money in circularity and low-carbon solutions is fundamentally different than our core businesses. And identifying the profit pools and putting in place a strategy of how you're going to monetize and capture that value is different, again, than our core businesses. The other reality is that, today, circularity product offerings trade or sell at a nice premium. And we're confident, and we've done a tremendous amount of work over the last 4 or 5 months in mapping value pools and putting in place a strategy of how we're going to execute and capture value that we think this business has the ability to earn a return profile that's not different than our core portfolio today. So we see returns in the mid-teens.

Well, it's good to know because that message needs to come out loud and clear. And companies that are focused specifically on that topic of single multiples go up.

Well, yes. Well, I mean, again, our confidence has built significantly over the last 4 or 5 months on our ability to actually make real money and earn attractive returns. And then our thinking has also really expanded in the last 4 or 5 months around actually how we can capture value with low-carbon solutions as well, which is tied to decarb. A lot of people think that decarb is just a headwind and a cost burden. But actually, there's opportunities to create value there as well.

And before I get into sort of polyethylene cycle and all that, I do want to ask you about your MoReTec technology. When can we see any big announcements there? Can you just take maybe 30 seconds?

No, no, no. So I think pretty promising as well. So our MoReTec technology is our proprietary mixed-plastic use recycling technology. We've added a semi-works scale plant that's been operational in Ferrara, Italy since September of '20. We announced actually 2 weeks ago that we took an initial investment decision to lay down a scale piece of capacity at our Wesseling site in Germany. So 50kt. And what's different about our technology versus some of the competing technology that's out there today is, one, we're utilizing a proprietary catalyst that comes from LYB. Our design, along with catalyst, our catalyst enables it to work on a continuous basis, not batch. That's super important from a cost perspective. Our technology, along with our catalyst, enables lower energy use and higher yields. And then lastly, we think that we're going to have the ability to scale this to a much larger train versus the competing technology, so much larger than the 50kt that we're laying down investment first. So we're pretty encouraged.

Great. let's get back to olefins and polyolefins business.

Sure.

So look, you mentioned that margins are challenged in the fourth quarter. There is a lot of destocking going on in polyethylene as China is shut down and not importing as much. The product was backing up here. So -- but you and others, like Dow and others have announced that as well. So where do we stand in terms of inventories of polyethylene now? And is there more to go in sort of first half?

Yes. So inventories for October on ACC data, we're kind of in the mid-40s. So probably a little bit higher than we'd like to see kind of given the current demand environment, in particular, the lack of demand that we continue to see in China. I think given the overall operating rates for us and the rest of the industry, so Europe is at 60%, for us, we'll do 75% in the fourth quarter in the U.S. We think that with, hopefully, the demand environment starting to improve a bit next year should begin to help. But personally, I'd say the good news is, it feels like we found the bottom. Polyethylene pricing has been relatively stable as of late. I do think the first quarter for the enterprise probably looks a lot like the fourth quarter. And we really need China to kind of reopen, I think, for the overall demand environment to improve and hopefully for margins to start improving as well, but that's probably in the second half of next year.

Great. And can you just move -- let's move over to Europe, and you've taken a couple of plants down. How long do they stay down? And are you importing more lighter feeds into Europe from West Africa or whatever?

Yes. No, good question. So we have 2 facilities that we've taken down. Our French cracker, that was down. It's been down for quite a while. And we said it would be down at least through the end of this year. And then we took down 1 of our POSM joint ventures in the Netherlands. That's a joint venture with Covestro. And again, that will be down likely through at least the end of this year. The operating rates in Europe, again, 60% for O&P in the fourth quarter, and then globally for I&D at about 70% to 75%. Our European portfolio overall for O&P has feedstock flexibility of about 50%. A big part of that flexibility is in our French cracker, which has the ability to process LPGs coming from North Africa. So -- yes.

Great. And can you -- you mentioned China, and we haven't really seen reopening in China yet. There are news headlines every day. Talk about that. And we're also...

Arguably gotten worse this week.

Right. But you have a joint venture there with Bora, which is, I think, it's a top-quartile plant in China. How is that running? And what are you hearing or what intelligence you're getting from that with your folks on the ground?

Yes. Maybe a bit of context first, and then I'll go to Bora. But just for everybody's benefit, so I mean China is the largest consumer of petrochemicals in the world for polyethylene, which is our biggest and most profitable business. They're the largest consumer polyethylene in the world. Under normal times, China imports about 40% of its polyethylene needs. North America exports about 40% of polyethylene produced. So around the world, lots of it goes to Asia, in China. Polyethylene in China over, say, a decade plus has kind of grown at 5% or 6%. It will hopefully grow at about 1% this year. And at that same time, China has added a meaningful amount of capacity this year and last year and next year, and then it starts to ramp down in a meaningful way. Our Bora asset, which, when we turn that asset on with our partner, it ran very well and very profitable for a handful of months. But this year has been really tough. Margins are at kind of historic lows, and they've been at historic lows for a long time spreads. And that asset is running at about 80% capacity. It is a top-quartile asset, and it's making no money, no net income, no cash flow as we sit here today, which means there are many other assets, competing assets in China that are significantly underwater. So something's got to give. Potentially, in China, hopefully, will reopen in the not-too-distant future. Our point of view, it's our point of view that we won't see kind of any reopening effect until the second quarter just because there's a lot of party apparatus that has to kind of change out and get put into place. And our intelligence tells us that doesn't get done until kind of late Q1, early Q2. And then the protest this week kind of throw in a new wrench.

A new wrench, yes. So we can talk about polypropylene, which is the other plastic. Polypropylene goes more into durable goods compared to polyethylene going into consumables. With housing auto slowing down, what are you expecting? I think polypropylene has outgrown polyethylene in the last few years, I think.

Yes, last year, it actually grew 8%. This year, actually, it could be slightly negative. And then margins have been impacted by not only not demand kind of tracking down from a durables perspective, but there's a good bit of supply that is coming on here on the Gulf Coast with Exxon and then up in Canada. And so that probably has implications at least through first half of next year with the new supply coming on.

Okay. And then moving on to Intermediates and Derivatives. I guess, POSM is down because starting profitability is down, but PO/TBA is probably running better. But can you just talk about the dynamic there? And with your new plant as well.

Yes, yes, yes. So obviously, styrene had an ugly third quarter. The fourth quarter should be better. But our long-term outlook for styrene is not terribly favorable. That said, PO markets have been pretty good this year. No doubt things have slowed from a durable perspective, kind of starting in August. But margins are kind of hanging in there. So they're above long-term average. And then on the TBA or oxyfuels chain, actually, demand has been good, and then margins have been very, very strong. So record margins earlier in the year. And while margins have moved down, they're still quite, quite healthy and kind of well above cycle average. Our PO/TBA plant is due to start up, the one that's outside of Houston. Our expectation for next year is that, with the ramp-up, that we'd probably see about 50% of nameplate production for the year. We had previously guided that on a full year basis with cycle average margins that asset is capable of producing about $450 million of EBITDA in a given year. And so where kind of current margins are today, on a full year basis, with the asset loaded, it would deliver EBITDA in excess of $450 million.

Great. In the past, you've talked about some profit EBITDA and then how you can improve your operations, your new plants like PO/TBA adding to that. Would you have any sense about profit normalized EBITDA that you can't share?

A normalized drop.

Normalized drop.

No.

Okay.

But what I would say, so our historic cycle average would be about $6.5 billion. And then in all the projects that you laid out, the last being PO/TBA coming up early next year, adds an incremental $1.5 billion to our cycle average EBITDA. And then layer on the $750 million plus of value-enhancement program activities that we're going to be delivering over the next 3 years, and it's pretty meaningful.

Okay. And on financial-wise, we talked about Europe's free cash flow and free cash flow-to-EBITDA conversion. Your balance sheet is already strong, which is at somewhere around 1.5x.

It's less than that.

That' a downturn, very strong. So how do you think about dividends versus CapEx versus share buybacks?

No, it's a good question. So the balance sheet is in great shape. You heard me say in my prepared remarks, because of all the work that we did in '20 and '21, interest costs is 3.9% per annum on our portfolio, average maturity of 18 years. This level of debt, so about 11.3, 11.5 of permanent debt, existing portfolio adequately supports that. So no need to pay down any more debt. The company has a reputation of converting EBITDA into free cash flow. Capital for next year will actually leg down with the completion of PO/TBA. So a good -- we'll give guidance on our fourth quarter call, but capital will leg down in '23. We have plans to continue to grow our dividend. And then we'll continue to return excess free cash flow to our shareholders, either through repurchases or maybe a special dividend here and there, like we did earlier this year. The special dividend that we did in May was important for a couple of factors. One, Peter had just joined the company. There was a fair amount of chatter that he was going to come in and radically change our capital spending profile and our capital allocation profile. And so we wanted to be clear that, going forward, that our capital allocation strategy and our plans to return excess cash to shareholders fundamentally remains unchanged.

Right. So special dividends could be again [indiscernible]?

Yes. It could be in the next. It was an interesting time to do a special. If you do it in a spreadsheet, the spreadsheet is always going to tell you to do buybacks, right, David? But the rest of the market had traded down significantly. And our share price at that point in time was hanging in relatively high compared to where it is today. And so we thought it was an opportune time to do a special versus a buyback. And I'd say, the preponderance of our shareholders very much appreciate the special. But capital allocation is as much art as it is science, and you can't put it on autopilot. And so -- and there's a lot of different things that kind of factor into a decision like that.

Great. Well, with that, I'm going to take some questions from the audience. I know the audience is not shy, so I'm sure we'll get some questions here. Chris in the back.

Only soft balls, though.

All right. I'll pass. Can you just talk about the refinery wind down in 2023, just how that works its way through your system? Because, obviously, certain units start to shut their expenses. Can you just walk us through the expense profile maybe quarter-by-quarter? And then the potential in a pretty good refining environment, it's obviously going to fade as you start shutting units, assuming you're still on track to shut it by year-end.

Yes. So early this year, we announced that we were going to close our Houston refinery at the end of next year. The closure cost that we 8-K-ed earlier the year, we estimate it to be $650 million to $850 million. As we sit here today, we think it's tracking towards the lower end of that outlook. The other thing is that working capital, inventory, in particular, will largely offset all closure costs. And then if you followed us closely, you will have seen that we're actually starting to take some of those closure costs this year. So this past quarter, I think it was about $80 million or $90 million that we booked in the quarter. That would be my expectation for the fourth quarter as well. And then, again, we'll close it at the end of next year. Operationally, the implications really kind of start to pick up probably late Q3, early Q4 of next year.

[indiscernible] next year?

Yes, definitely, definitely. And then it's 700 acres on the Houston Ship Channel with lots of infrastructure, whether it's the ship channel, pipelines, tanks. It's interconnected to our largest site in the world, Channelview. And so as LyondellBasell, we see lots of opportunity for that site going forward. There's even some assets at the refinery that we're building confidence around our ability to repurpose, in particular around hypetreating, that we bolt on to our MoReTec technology to upgrade the pyrolysis oil if we're producing it in kind of meaningful quantities to clean it up and then run it through our cracker.

Let me ask you a question. As people talk about Scope 1 and Scope 2 emissions, the different companies are approaching it differently. I mean, Dow has talked about electrifying its crackers. Some companies have talked about use of hydrogen, especially with the new IRA and 45Q credits for blue hydrogen. That could become a meaningful way to decarbonize. How are you thinking about that?

Yes, so listen, we are working on and thinking about the same things that the Dow is. So we're looking at electric cracking. We're looking at hydrogen. But then there's even -- there's a lot that we can do around our existing portfolio around things like energy efficiency and then also reining in things like hydrogen as a fuel source. So lots of activities that are underway. And again, quite frankly, our confidence is building that there are ways to actually make money off of this activity as well, in particular, around low-carbon solutions. So people, companies, customers are actually willing to pay more for a low-carbon solution, so a low-carbon [ feel ], for example, that goes into that matters.

And how would you harness IRA to benefit you in that specific case? Would you be buying blue hydrogen on the grid? Or do you put in a project to get that [ depending ] on the location?

I think -- yes, I think, as it stands today. I mean, so we announced that consortium recently we're studying it with a number of partners, so I think that could be all of the above, P.J.

And is that where some incremental capital could go in the next few years?

Not the next few years, I think it's in the second half of the decade. I think anything in the front half of this decade is pretty [ de minimis ] from a capital spend perspective, as it relates to hydrogen or things like carbon capture. But the Inflation Reduction Act is going to help jump-start and get things moving. It already has.

There's one more question from Chris.

Just a couple of quick ones. Can you just walk us through how your feedstock costs are sort of trending both in the U.S. and Europe through the fourth quarter? And then secondly, if you assume the consensus, EBITDA is correct. How much cash do you expect to have on your balance sheet at the end of the quarter? Maybe put a different way, how much working capital do you think you can harvest in the fourth quarter?

Yes. So broadly speaking, feedstock costs, I mean, in the fourth quarter should be lower than the third quarter, I think, both for Europe and the U.S. So that's point 1. On working capital, we released about $300 million of working capital in the third quarter. I won't guide to specifics for the fourth quarter, but I would expect a reasonable amount of working capital release in the fourth quarter as well. We ended the third quarter with $1.5 billion of cash on-sheet. And then barring -- and then we should have a good conversion ratio fourth quarter with -- because we're releasing working capital. And then some kind of keeping things all equal, we probably should build a bit of cash on the sheet in the fourth quarter versus the third quarter. Does that makes sense?

Great. If there are no questions, Michael, thank you.

Thanks, P.J..

Appreciate it.

Yes.

Yes.

Have a good one.

Great. Thank you.

Good to see you.

Yes, good to see you.

Thanks, everyone.