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

We'll get started quickly with our next presentation. We have LyondellBasell up here, who are going through a little transition themselves with new management coming in. They had a new strategy just at their Investor Day. Very happy that Ken has come up to spend some time with us. Ken is a very knowledgeable of the whole company. He was interim CEO for a while. He now runs the O&P business for them, which is by far their largest profit contributor. He's got a few slides that he just wants to kind of walk through just because the story has changed a little bit with the new strategy that they've come up with around their Investor Day. So with that, I will turn it over to Ken. And then once he's done with his slides, we'll jump into the Q&A. Ken, thanks for coming up from Texas [indiscernible].

All right. Can I just do it from here or...

If you're comfortable...

I am comfortable. Yes, that's perfect. All right. Thank you very much, Duffy. I appreciate it. Thank you for having me. So I did want to start off and just hit a couple of highlights on the slides that we provided. First of all, of course, I'll start off with the cautionary statement. If we talk about any forward-looking views, of course, I encourage you to review this and consider it carefully. Now in terms of our earnings that we released just a couple of weeks ago, one of the things that we saw in the first quarter is a pretty significant improvement versus the fourth quarter coming off of -- well, frankly, was a very weak fourth quarter. Obviously, we consider that to be really a sort of bottom of cycle for us at that point. We did generate significant cash in the last 12 months. And if you look at what we've returned to shareholders, more than $3.5 billion returned to shareholders. We had 89% cash conversion in the last 12 months, so very, very strong cash conversion. Part of what I'm going to talk about in a minute around our new strategy, obviously, is going to be underpinned by that continued capital allocation discipline that we have. We're not changing that. And we're going to continue to be true to that. The other thing that we're not going to lose is our operational focus. That is something that has defined us. It's part of our DNA, and we're not going to move away from being very strong operators of our assets, very safe and reliable operators of our assets. But that continued strong cash generation, returning cash to shareholders is going to be at the -- really at the core of what we're doing. Now shifting to our new strategy, I thought it would be important just to take a few minutes for those of you that may not have been able to attend the Capital Markets Day that we had back in March and just highlight the 3 pillars around our strategy. The first is grow and upgrade the core. The second is build a profitable Circular & Low Carbon Solutions business and then finally, stepping up our performance and culture. And if you go back to the first one, upgrading and growing the core, O&P, Olefins and Polyolefins is obviously a core business for us, propylene oxide is as well. And we just started up this new PO/TBA asset down in Texas. A very good start-up. The team did an outstanding job there. We're going to continue to build on that core business that we have. And as those businesses grow and continue to generate a lot of cash, of course, we'll be able to reinvest that in the other 2 pillars around building that profitable Low Carbon Solutions business. Olefins and Polyolefins is obviously going to be a critical part of enabling that because a lot of the assets that we have in our portfolio, the crackers and even the polymer plants are going to be used to produce those products. And then stepping up the performance and culture. We've also announced the value enhancement program where we're committed to delivering $750 million by the end of 2025. Very happy to report that we are on a good pace to achieve that. We've seen a lot of energy and momentum across the organization with that change. Some of the organizational changes that we made are supportive of that. So we now have got strategic business units that have full accountability for the P&L and the balance sheet, and that's helping us drive that, the delivery there. But again, all 3 of these pillars reinforce one another so that as we, in the short term, improve our performance and generate that additional value that supports the first thing that I mentioned earlier, which is the disciplined capital allocation and returning cash to shareholders, but it also allows us to reinvest in the other 2 pillars. So each of these are sort of self-reinforcing among the others. I want to quickly talk about this just for a moment. I had mentioned how O&P is critical for enabling that Circular & Low Carbon Solutions business. We're going to be focusing initially on 2 hubs, one in Cologne, Germany, one in Houston, Texas. And what we're going to do is we're going to build out and demonstrate what we can do around Circular & Low Carbon solutions. So that includes things like advanced recycling. We've announced that we're going to be building the first advanced recycling facility using our own MoReTec technology in our Wesseling site there. We have not FID-ed that yet, but that is coming, and I'm really excited to see the progress that we're making in developing that technology in Ferrara, Italy. The Houston, Texas hub is something where we're going to leverage our refinery that we're exiting the refinery business. Some of those assets we're going to reuse and we're going to reuse those to support our Circular & Low Carbon business as we develop things like pyrolysis oil technologies, either our own or other peoples', we can use a lot of the assets there to process them and then feed them into to the cracker at Channelview, Texas. So there's a lot of very good synergies there where we can reuse some of those assets. Finally, we have committed to improving the normalized EBITDA level for the company by 2027. 2022, we were at $6.3 billion on a normalized basis. So then you get up to the $10 billion on an EBITDA basis by 2027. When you look at all of the strategy pillars between the upgrading the performance or upgrading the core and the Circular & Low Carbon Solutions business as well as stepping up our performance and culture, we see a very clear path to get to the $10 billion by 2027. So just wanted to kind of walk through that quickly to get us started and then be happy to take your questions.

Yes, I have lots of them.

Sure.

And again, thanks again for coming to spend some time with us, Ken. Let's start with O&P just because that's such a big profit driver for LyondellBasell historically. You kind of threw out a $9 billion number. And we were not at that level, not that long ago, right, kind of $8 billion to $9 billion run rate before you add on the stuff you're trying to do strategically or structurally improve your profitability. When you look at the market, is there any chance that just the market gets you back to that level this year or next year? Or when you look at kind of the new supply and stuff and we'll dig into that, is it kind of a '25, '26, '27 time period before we can get back to something that's more normal as far as just the market itself [indiscernible]?

Well -- and let me -- there has been some confusion. So I want to make sure we clarify what we mean by normalized because we tried to do that to take a lot of the cycle out of the numbers. And we use the historical average of the margins that we have seen as well as a historical average around the utilization rate to give you a normalized level of EBITDA. So when we get back to that level, is going to be dependent on a lot of things around supply and demand. And it's not just for O&P. O&P is a big part of the company. But it's also propylene oxide, and as we ramp up the new PO/TBA asset, we're continuing to ramp up things like the Hyperzone asset, right? We're still building that portfolio out. So there are going to be portfolio of things that are going to naturally get us there on a volume basis. Where the margins are going to end up being in each of those businesses is a little bit hard to predict, which is why we normalize it. But certainly, I think if you look at the O&P market, I would say that sometime in the middle of the decade, you start getting back into that normalized level of margins as we see growth to absorb the new supply that's coming on today, it's going to take a couple of years for us to get through that.

Okay. And can you maybe -- so there's a lot of different angles to come at the new supply. Obviously, this year, we're adding quite a lot in the U.S., some in China. After this year, we don't add a lot more in the U.S. as long as people get up [indiscernible] projecting. But you still had quite a lot in China, in particular, some in the Middle East going forward. How do you see that playing out? One this year where we're adding both places, and you can argue things could get sloppy. Is there a chance that our netbacks for U.S.-sold product come down meaningfully versus what our export parity price, I guess [indiscernible] and has been a really nice premium for over a decade now. But I guess when I started late '90s, early 2000s, over that time that basically our netback in the U.S. was the exact same as our export parity pricing. So is there a chance in your view that, that premium would go away, at least for a year or 2 based on just the size of the oversupply in the U.S. and the amount that we actually have to physically export now?

Well, look, long term, we're still expecting polymer markets to grow at a multiple of GDP. It's not going to be with GDP. So we've seen, in the last year, GDP has been a little bit more challenged globally, especially with China, not really being in growth mode. So as that growth comes back on, they're adding, the global capacity is around -- they're growing their capacity around 6% a year. So just to absorb that capacity, that market needs to grow 6%. That's not far off where they've grown in the past, right? So they just have to get out of the COVID lockdowns that they've been in. And I kind of compare that to if you're -- if you've been trained to stay inside and not consume anything, it's hard to come out of that shell. And it's taking longer than what we had thought. But getting back to a 6% growth rate in China is easy, typically after a low growth market or a low growth year, let's say, historically, they would go from maybe a 1% or 2% growth rate, which we have seen recently to 10% or 12% and they do it in one year. I'm not saying we're seeing that today, but that can happen. So the netbacks, of course, we track that very, very carefully. A year ago, the netbacks were much higher -- the netback premium were much higher. And what's happened is that's come down. And that's really what we saw in the fourth quarter. So we saw the spreads in China collapse historic lows. And we saw that netback premium in the U.S. dropped back to a bottom-of-cycle level in the fourth quarter. So I think we've already set the bottom. If prices go any lower, then the exports are going to dry up because it doesn't make any sense. And you already saw that in the fourth quarter, you saw the industry adjusting operating rates to reflect the fact that those netback premiums were already very low. As a company, we're going to be very focused on adjusting our operating rates to meet the demand that we see. And we're not looking to build inventory or push volume into the market that's not profitable for us. So I think we've already set that kind of bottom there.

Okay. And you mentioned China. I think most people have been a little bit disappointed with the demand out of China, for polyethylene in particular, this year. Because the argument is kind of been that's nondurable. When you see things like miles driven, it should almost be kind of a concurrent increase in their consumption of nondurable goods? Do you think the reason we haven't seen that is just do you think the real consumption hasn't been there? Or are there some hidden inventories that maybe they're needing to eat through first before that picks up? Just how do you see China, I guess, playing out this year as long as something doesn't inflect back down, whether that be COVID or something else? But if they keep growing, when do you expect us to start to see polyethylene move in the direction that we all would expect based off of GDP [indiscernible]?

Well, listen, we're sort of seeing the same thing in China that we saw here as we came out of COVID. The first thing people are doing is they're traveling. Their services are really booming. That's where the consumer is spending a lot of money. The real estate market is more tepid. You don't see the Chinese government putting stimulus into the real estate market like they had previously. And the real estate market is what [indiscernible] the consumer to buy more durable goods and that sort of thing. So we're not seeing that come through in durable goods demand. We're also not seeing though inventory levels very high. We're actually seeing the opposite. We're seeing people in the value chains being very, very prudent about inventory levels, and they're being very cautious about buying. So they buy what they need based on the demand that they see. There's not a lot of hidden inventories out there that we can see that worries me. It really is more about getting the consumer back into consuming durable goods. One of the right spots that we've seen there is actually automotive. So we've seen automotive do a little bit better than other markets. But that's -- so far, that's what we're seeing in China.

Okay. And then maybe come back to the U.S. and kind of a number of different things happening. Obviously, Shell has got a big plant that's kind of in start-up mode, had some issues. Maybe your views on kind of how that could progress and what impact that might have on the market. Shell in Texas, actually had a pretty big fire over the last weekend, and what impact do you think that will have on the market? And in a couple of the smaller capacity additions happening, just your sense from what you're hearing in the market, how those are progressing? And maybe when do we get to kind of the worst period of the supply situation? Is it second quarter, third quarter, fourth quarter this year before, obviously, if we get some normal demand back, we'll start growing into that supply in the U.S.?

Well, first, you never like to see an incident like what happened with Shell in Deer Park, and I'm just happy that it was not worse and that there were not more injuries. We're obviously going to watch that closely and see what we can learn from the incident there. It has had a muted impact on the market. It really is not having a meaningful impact. It did have a small impact, but we're not going to see that significantly longer term. In terms of the capacity that's coming on here, that capacity, while it's been delayed and it was starting up, some of that volume was already in the market, and they were already marketing volume from other suppliers. And so the impact of going to a customer and offering the volume has already been seen in the market. And what we've seen now is it's the physical volume not being there, that it has helped some of the dynamics in the market recently. I don't know what the -- I only know what you read in the press like you around timing for their restart, but it will keep things tighter more for longer. And of course, the hope is that in the meantime, demand begins to come back in the U.S. Again, it's been modest so far what we've seen in terms of improvement in volume in the second quarter, which normally we would see more seasonality here. So if we get the economy kind of settle down and we get through some of the noise around debt ceiling increases and all that, then hopefully, we start to see some more demand. And when that capacity physically comes back into the market, it would have less of an impact.

Okay. Maybe jump to your EMEA business. Obviously, over the last year, it was fairly stressed, given all the energy movements and stuff in Europe. What's changed in your mind structurally there to mitigate maybe something like that happening again? And what does it take to get that business back to, say, I don't -- $1 billion-ish of EBITDA kind of run rate. What has to happen stock-wise, demand-wise, maybe structure-wise for you, for LyondellBasell?

It has been challenging. Your words were a little more softer than I would have expected. I mean it's -- that market has been really, really challenging with everything around energy costs and feedstocks. And what we're going to see happen over the next year or so is we're going to continue to go through this transition of weaning off of the Russian pipeline supply of gas and energy into that market into imported LNG. Good news is that they're coming out of the winter months with relatively high inventory levels of gas that's going to help them going into the winter next year. So I'm impressed with how fast the market has reacted and adjusted to the situation around Ukraine and the embargoes around energy imports from Russia. So that structural element is going to continue to play out over the next year or 2. We're maxed out on LNG exports here. There's really not any new LNG capacity coming online for the next several years. So we're going to be very careful in terms of watching the cost structure there and how we operate our assets there. We'll optimize them just like we did last year based on what we see around the economics. But structurally, we need more clarity coming out of Brussels in terms of policy and regulation to really be able to tell you what's going to happen in that market. Will this Carbon Border Adjustment Mechanism, how is that going to work and what does that mean for the industry? Does it really protect the industry? Does it make them more competitive or less? Time will tell. It's too early to say, but I think we're going to be cautiously optimistic that the regulators and the government is going to get their act together across the different countries because right now, it's every country is doing their own thing, which is also not great. There needs to be a more holistic framework that companies like ours are going to look at and point to and go, okay, I can see how that is going to benefit our asset position and then we can make decisions around what we're going to do going forward. But we just don't have that clarity yet.

Okay. And we'll jump around a little bit, but Peter seemed very happy with how the PO plant, and you had referenced it earlier, a brand-new large, world-scale PO plant you guys were starting up or have started up. I guess a couple of things. What has that done to your footprint? Obviously, you ramped down some of your other PO production to make way for that, given that the PO market is not very healthy right now. But how much of that unhealthiness is kind of this new supply coming? How much is just bad demand globally right now? And how do you see the path to ramping up your older assets and kind of getting back to across the whole platform operating rate of mid-80s to low 90s where you can be more profitable and better unit costs?

Well, listen, polyurethanes is -- it's a great market. And I've been in that business previously, love the chemistry and the end markets. They're more durable oriented. And so going back to the conversation we were having before, I think that's having more of an impact today is the demand side of the equation, right? Construction and starting to see some improvement in automotive, but with construction goes furniture, right? So people are building homes, they're buying a sofa or a bed to put in those homes. And as long as housing starts and construction in China and those sorts of things are not happening, furniture markets are going to be depressed. So it's more on the demand side. The team has done an outstanding job starting up that asset. We're already operating at around 70% utilization rates in anticipation of this plant starting up and knowing that we would do a really good job with that, and they have. We planned some turnarounds for some of our other assets here to be able to offset that capacity coming on. So net impact on supply in the market this year is really not going to be meaningful because we're going to have some turnarounds later. And then you're going to start to see demand pick up in 2024 and beyond, and we're going to be in a really good position to be able to supply those markets with industry-leading technology in terms of cost and frankly, greenhouse gas emissions. That's one of the things that people don't necessarily talk about very often. Not only do we have the best cost position around PO production, we've also got the best technology for greenhouse gas emissions.

Fair. And then -- do you think that industry needs to see some rationalization? Particularly on the non-PO/TBA-type assets where you don't have as much byproduct credit, the economics aren't as good. Would you expect to see some rationalization on some of the older technologies over the next 2 or 3 years?

Yes, I do. I mean listen, it's been the name of the game for decades in polyurethanes, especially on PO technology. It's one of the only chemical products where you've got a diversity of technologies to produce that, that have become more and more challenging in terms of their competitiveness with time [indiscernible] technologies are going to be rationalized. And there have been some announcements about rationalizing that capacity here in the U.S. Some of that has been expected for a long time because when you look at the scale of a lot of those older assets, they're getting obviously less advantaged. But on a cost structure basis, on greenhouse gas emissions basis, they are getting less and less competitive. So you're going to see rationalization. And perfect timing for us to be starting up this very competitive asset on the Gulf Coast.