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

Thank you. Next up is LyondellBasell. With us is the CFO, Michael McMurray. So a few brief comments and we'll go into the Q&A portion of the session. So with that, Michael, podium is all yours.

Thanks, David. Good morning, everyone. I was going to make a few opening comments before I sit back down and take questions from David. So these are the cautionary statements from our legal team. I'll let you take a quick look at that. We move on. This is kind of a performance snapshot. LyondellBasell reported first quarter results in late April. My comments here this morning will largely focus on kind of current conditions. We saw solid results in moderating improving market conditions in the first quarter. But since the first quarter, we've really kind of seen 3 things. I'd say, first and foremost, refining margins have moved off a good bit since the first quarter. And so that's going to be a headwind for LyondellBasell in the second quarter. Secondly, normally, in the second quarter, we start to see a little bit of seasonal demand uplift that carries through into the third quarter. That kind of normal seasonality uplift that we especially see in the second quarter has really not occurred. And then lastly, the Chinese recovery has been, I think, tepid and far less than what we thought and I think far less than what generally people thought was going to occur. And so that creates a little bit of risk as we think about the second half of the year as well. And so for our results in the second quarter, given all that, we likely will be down slightly versus the first quarter. I mean, as you know, just moving on to the next slide, the company has an outstanding reputation for very strong cash generation. And in fact, cash from operating activities totaled $5.1 billion over the last 12 months. And we ended the year with about $1.8 billion of cash on sheet. And again, we have a reputation for converting cash into EBITDA. And so over the past 4 quarters, we've converted almost 90% of EBITDA into cash and have very high confidence that, looking forward, that we have the ability to convert roughly 80% of our EBITDA into cash as we have done in the past. And then we remain committed to returning significant amounts of cash to our shareholders. And again, in fact, we've returned about $3.5 billion over the last 12 months to our shareholders in the forms of dividends and share repurchases. And as you know, our balance sheet is in excellent shape. Now moving on to our new strategy which we shared in mid-March at our Capital Markets Day. I'm confident that our new -- our new strategy is driving focus. And I'm confident that our new strategy will drive differential growth and differential value creation. Three pillars our strategy is around. The first pillar is around growing and upgrading the core. This is about building upon our core strengths and driving greater resiliency and stronger performance through the cycle. And we are in action. We are in action in pruning our legacy portfolio, and we've narrowed the aperture for inorganic growth. To be clear, our O&P businesses, our technology business, our I&D business and our APS business all fit well into this go-forward strategy for long-term growth. The second pillar is around building a profitable circular and low-carbon solutions business. This is about meeting the demand for sustainable solutions. It's about becoming a critical partner in helping our customers like the big consumer packaged goods companies achieving their sustainability goals. And in regards to this new business, I have confidence in its ability to grow at scale and generate attractive returns, and we'll talk about that in a bit more detail in a moment. And then the third pillar is around stepping up performance and culture. And I think many of you know already that we have a reputation for being a best-in-class operator, which is evidenced by our cost discipline and our really strong safety results. And now it's about putting equal focus around creating value and a value creation mindset. And that's tied to our value enhancement program, again, which I'll talk about in a bit more detail in a few moments. And then we've identified and we're acting upon a portfolio of improvement opportunities. And then when you take all 3 pillars and add them together on a normalized basis, we see the potential to deliver $3 billion of EBITDA uplift to our current portfolio. Now maybe just a few more words just around growing and upgrading the core. Again, this is growth in core strengths in our advantaged businesses. If you take a look at our existing portfolio, there's nothing broken. We're merely building upon the strong foundation that we already have. We've refined the criteria around our core. So we're looking for businesses that have market-leading positions. We're focused on end markets that have attractive growth opportunities with attractive returns and then looking for access to advantaged feedstocks or circular and renewable feedstocks and obviously, a heavy, heavy focus on growing our circularity in low carbon solutions business. I think a great example from an M&A perspective would be the Louisiana joint venture that we acquired a 50% interest in from Sasol back at the end of '20. That fits beautifully, I think, within this. And that was a very successful transaction that has created a lot of value for LYB and our shareholders. And again, we are taking decisive actions on different parts of the portfolio which do not fit or where we see that there is a better owner than LYB. And great examples would include the refinery, which we've taken a decision on. We announced the review of our -- a strategic review of our EO&D business. And we also sold some O&P assets in Australia last year as well. And again, we will be highly, highly disciplined from an M&A perspective going forward. And I think we were pretty clear at our Capital Markets Day as well that we will not be building a world-scale cracker anytime soon on the Gulf Coast. Now let's talk a little bit more about our circularity and low carbon solutions business. So as we kind of look forward, we're targeting a 20% market share with this comprehensive strategy. And we do think that our strategy is differential. It is end-to-end and, again, differential. We have confidence that we can grow this business to deliver $500 million of incremental EBITDA by 2027 and $1 billion of incremental EBITDA by 2030, and this is in a $25 billion total addressable market. Obviously, we'll be leveraging our existing asset base, both in Houston and Cologne, with Cologne being the primary area of focus. At our Capital Markets Day, as we looked out towards 2030, we said that this business will consume roughly 15% of our capital programs. So relatively capital-light or capital-efficient for the amount of EBITDA that we're expecting that this business should deliver. And therefore, that should result in a very high return on invested capital as well. And I'm confident in our ability to capture $1 billion of incremental EBITDA by 2020 -- by 2030 with our unique end-to-end strategy. And now maybe a few more comments on our value enhancement program. Again, this is a cultural shift to unlock value. Historically, the company had a singular focus on cost, and we're damn good at cost and you want to be good at cost as a commodity chemicals company, but it also can be your Achilles -- it can be an Achilles heel as well. So again, a cultural shift in igniting passion to unlock recurring value. And the enthusiasm at our sites is incredibly high, and I think we'll bring intangible benefits for years to come. And again, we call this our value enhancement program. It's not another cost-cutting program. Cost cutting tends to lead to kind of onetime short-term impact. This is long-term sustainable EBITDA value-creating opportunities that we are working on. It's a continuous improvement process to systematically drive value, and it's becoming part of our operating system. And the expectation is that we're going to generate $750 million of annual recurring EBITDA by 2025. And the expectation for this year is $150 million. And I have confidence that I think these numbers actually probably will grow. Now maybe just a few comments on financial principles that support our new strategy. So from a capital expenditure perspective, what we said at Capital Markets Day is that you should expect capital spending to be within the historic ranges through 2027. In 2023 will be kind of the low end of the range. So the expectation we guided to earlier was about $1.6 billion. With the announcement around extending the life of our refinery by another year, capital probably ticks up to about $1.7 billion this year. Over the next 3 years, we expect an average of $2 billion of capital spend with sustaining capital of about $1.2 billion on average. And then through 2027, capital spend should be below the historical high of $2.9 billion. And again, you heard me say earlier in my prepared remarks, the capital intensity of our new circular and low-carbon solutions business, actually quite low, quite attractive, should consume about 15% of our capital budget going through 2030. The other piece of new information we shared at our Capital Markets Day is that we gave kind of a commitment around returning capital to our shareholders. And we said that it's our plan over the long term to return 70% of our free cash flow to shareholders in the forms of dividends and share repurchases. And we are extending our track record of dividend growth and share buybacks and perhaps an occasional special dividend. And again, as I said earlier, we expect to continue converting 80% of our EBITDA into cash. So I think I have one more. And then -- forgive me. And so -- and then remain comfortable managing the company with about $1 billion to $1.5 billion of cash on sheet. Expect that net debt should track below 2.5x. And then you kind of take all these together, and we think all these principles support our drive to reach normalized EBITDA of $10 billion by 2027. I'm almost done, David, and then you can start questioning me. So just to kind of close things out. So again, successful implementation of our new strategy will increase our normalized EBITDA to $10 billion by 2027 and we think will result in a more profitable and sustainable growth engine for LYB going forward. And let me be clear about something. Our normalized EBITDA forecast is not guidance for industry cycles or macroeconomic trends because if I could predict cycles, I would not be here today. We're simply projecting LyondellBasell's average historical margins on our forward strategy to help you all think about our businesses and model our businesses. And again, this translates into a normalized EPS of $19 a share in 2025 and $23 a share in 2027. So to kind of come back to where I started, we see that tepid demand is providing headwinds near term. But longer term, we are confident in our strategy and the bright future for LYB. And with that, I'd be happy to take your questions, David.

Thank you, Michael. Appreciate the comments. On your updated outlook comments for Q2, a little bit below -- you said Q1 EBITDA about $1.5 billion in Q1. By end market, where are you seeing this tepid or weak demand most acutely?

Yes. I mean so the biggest driver or headwind kind of quarter-on-quarter sequentially is going to be refining margins. And then I'd say durables, kind of broadly speaking, are weak. And then we haven't seen kind of the normal seasonality that we see even in the consumer space around polyethylene. And then, as I said in my prepared remarks, China just hasn't bounced back at the speed and pace that we anticipated. And so I think that creates a bit of uncertainty as we think about the second half of the year as well.

Right. And how is Europe in this landscape as well?

Yes. I mean so supposedly, Europe is officially in a recession. It felt like there are certainly parts of Europe that have been in a recession for quite some time. My perspective, I mean if you kind of think about the adversity and the headwinds that the continent has faced into over the past 12 months, it actually performed a lot better than what I would have anticipated. The good news is that energy costs have moved off significantly. And they're actually back kind of prewar as we sit here today. That said, energy costs in Europe are still kind of 3 to 4x higher than what they are here in the United States. But demand is a bit weak in Europe, probably which is not a big surprise. I think consumers are getting impacted dominantly by inflation but also, in particular, high energy cost. But again, I mean, I think the continent and our markets have performed better than probably what I anticipated if I kind of think back upon the past year and all the challenges and adversities that the continent is faced into.

And is destocking still impacting Lyondell in Q2? And when will it end?

So it's our point of view that destocking has largely concluded. And quite frankly, we think the destocking largely concluded in the fourth quarter. We think -- and we don't have great visibility, but we think that our customers and our customer customers are being very cautious because of all the macro uncertainty. And so we think their inventories are probably rather low. From an industry perspective, specifically looking at polyethylene and polypropylene in North America, inventories are a smidge elevated, kind of in the low- to mid-40s, but it's not problematic.

Right. Looking beyond Q2, what are your expectations for the back half of the year globally? And is the recession in the U.S. in your expectation going forward?

Yes. So I don't -- I'm not going to call a recession. But what I will say is it's a bit of a complicated environment, David. And so I mean, if you look at the various macro indicators, they're pointing in different directions. So it's kind of difficult to make a call. Again, I'd say that even the U.S. economy has probably been a bit more resilient than maybe what I had anticipated as well and given some of the shocks and challenges that we faced into from the banking crisis where interest rates have moved in inflation. But it's -- I think I'm -- as I sit here today, I'm probably a little more cautious on the second half of the year than I was at the end of April. But listen, we're a commodity chemicals company. We know how to navigate cycles. That's what we do. And we've proven our ability to navigate cycles when you go back to the pandemic where -- I mean that was a black swan event. And we covered our dividend and we covered our capital program with cash from operations because we know the levers that we have to pull when we're entering it into a cycle.

And just on China, are you seeing any signs of improvement? Any green shoots in that region?

It's better. And automotive builds are up, but it's -- the demand is not at the pace that we were anticipating. And then -- and if you go to polyethylene, in particular, I mean, spreads in polyethylene have been at record lows for approaching 2 years. And historically, when you got to those levels of spreads, it typically lasted maybe 2, 3, 4 months at the most, and we're there for almost 2 years.

And how levered are you to like Chinese recovery overall?

Well, I mean, so from a direct perspective, it's modest at best. It's about 5% of our top line. But the indirect exposure is pretty significant because I mean, a, China is really important for global growth. China is the biggest consumer of petrochemicals globally. And then China imports 40% of their polyethylene needs. Obviously, the U.S. is a big exporter of polyethylene. So China is really important to global growth. China is really important to the petrochemical industry. That is -- yes, it's important.

Understood. Switching to Europe. What's your long-term outlook in that region given lower but still structurally higher energy cost?

Listen, Europe, Europe for us, Europe for the industry is and will always be a big, important market. There is no doubt from an energy cost perspective that the cost increases that they faced into are structural, and they're going to be structural for a long time. So that has big implications not only for our industry but other industries as well. And we've -- obviously, you saw us take a lot of short-term actions late last year and early into this year, where we shut in capacity. And we continually look at our portfolio everywhere.

On that note, are you thinking about closures of European assets longer term?

Nothing to share here today.

Got it. Refining, last week, you had a fairly big announcement. You delayed the exit of your business until latest Q1 2025. What went into that decision?

Yes. And so I mean it's actually -- it's pretty simple and pretty logical. So I mean, a, margins continue to be pretty robust. And even though they've moved off of where they were in the first quarter, margins continue to be robust. The asset has run incredibly well this past year. We've done a number of reviews and inspections, and we've concluded that we can safely run that asset for another year with modest investment. So investment, call it, kind of $150 million to $200 million over the next -- this year and next year. Also, we have a large, great labor force on site. This gives us the ability to kind of place those people, gives us another year to take that decision. And then lastly, it gives us another year around our repurposing plans as well, which are advancing at a great pace. And so we see that site as being an [ intrical ] hub, a part of our circularity and low carbon solutions business. You also have probably seen the consortium for hydrogen that we've announced with Chevron, Air Liquide and Uniper, and we've applied for IRA funds for that consortium as well. And so the decision to delay for a year, very logical and then, quite frankly, folds very nicely into our forward plans.

Any potential for further delay of the exit?

No.

This is it?

This is it.

Got it. And do we still expect cash flow from the wind down to offset any closure costs?

Yes. I mean so timing -- obviously, timing won't necessarily match up. But yes, so working capital release should largely cover cash decommissioning cost.

You mentioned the green hydrogen project on site potentially. What's the timing of that project? And how did it come together?

So timing, it's -- it's too early to tell. And I mean it just -- it came together, obviously, with the parties all talking together. And we all bring unique things to the party. And it made a lot of sense for us to come together and try to work this forward as a consortium and then work this forward as a consortium to hopefully monetize the IRA funds as well. And what's interesting on the IRA, I had a pretty extensive update day before yesterday. And so when that bill passed, the Fed thought it was going to cost $400 billion. All the credits are uncapped. The latest estimate is $1 trillion.

4 by [indiscernible]...

Debt, I guess [indiscernible].

Good news for all who are listening. Circular low-carbon solution, it's an impressive strategy that you and Pete laid out and done so in a capital-light fashion, which was a concern for many people. Can you focus first on the capital-light aspect, how you can do this in an efficient way for investors?

Yes. I mean -- so I mean, if you -- I can help you pretty easily on the capital-light piece because, one, we're going to be using a lot of our existing infrastructure, right? So when we make pyrolysis oil at the Houston refining site with our MoReTec technology that pyrolysis oil is going to go to our Channelview site which is interconnected to the refinery site. And so we're going to -- we're utilizing our existing cracker fleet, right? So it makes it to be a pretty capital-light opportunity. And then pricing, pricing for recycled plastic is quite attractive. And the demand will outstrip supply for quite some time to come. So we have high confidence that pricing should be attractive, demand is attractive. Our MoReTec technology, we think is differential and will give us a differential cost advantage versus other technologies that make pyrolysis oil. So as we continue to move forward, our confidence continues to build.

What are the biggest challenges to go from today to the $0.5 billion of EBITDA in 2027 and the $1 billion plus in 2030 which is your -- one of your targets?

Yes. I'd say probably one of the biggest single challenge that we're focused on is getting access to plastic waste in the form and quantities that we need. And that's where a lot of activities are underway today, including around sorting technologies, but we're making great progress. And then what's interesting and differential about our MoReTec technology in that regard is it can process mixed plastic waste. It doesn't -- it doesn't have to be a particular grade or a particular form, pretty much take anything.

And you believe that the markets will be there for these materials and that will be at a premium still by the back half of the decade? Is that still a foundational belief?

You bet.

Got it. So a lot of companies, yours, Dow, Westlake, Eastman, many others working in the field of molecular recycled plastics. How will you be a winner? What makes you differentiated versus those others?

So I think a couple of things. So I think our end-to-end strategy, which includes getting access to plastic waste. So we're going a bit downstream. So I think that's differential. Secondly, is our MoReTec technology, we think that's differential. And then what we think is unique is this hub strategy we have around Cologne and we have around Houston to start as well. And then there'll be other satellite hubs as well as we move forward. And we've identified locations, we can't share anything today. But we think our -- kind of our hub-and-spoke strategy is somewhat differential as well. And we're an early mover. I think we're -- I think it's fair to say that we're out in front in this regard versus a lot of our competition.

Very good. So Michael, on capital allocation, no new ethylene crackers, a capital-light circular and low corporate solutions strategy, where will your cash go? And is there M&A in Lyondell's future?

So well, at least 70% of our cash flow is going to go back to our shareholders in the forms of dividends and share repurchases. And then the outlook that we gave out to 2027, the 30% of cash that kind of "remains on sheet" is what's kind of funding M&A. So yes, it's our expectation that we get some M&A done. Our aperture around what we think fits has narrowed. We're looking for opportunities that are kind of in and around our existing portfolio, where we can be a better owner. That might have kind of market-consolidating effects as well. And then rest assured, we will be super, super disciplined, much like what we did with the Sasol asset towards the end of 2020.

Very clear. So back in March at the meeting, you unveiled, you and Peter, this value enhancement program. There were some pushback from people saying, how does an efficient company as Lyondell finding more cost savings? But this is not cost savings, correct?

No. I mean precisely. And I think because for so long, we had this singular focus on cost. And you heard me say a few comments in my prepared remarks, as a commodity chemicals company, you have to be cost-focused, you have to be low cost. But if you have a singular focus on cost, it can also become your Achilles heel. So we had all these great value-creating ideas at our sites, but they never got funded. So people just gave up. They quit putting them forward. And the -- so to generate the $150 million of benefit that we've guided to for this year, we'll probably spend about $150 million mix between kind of capital and OpEx. The fact that we're actually allowing FTEs to be added at certain sites or OpEx or a bit of CapEx be added to go chase these ideas, the enthusiasm and the energy has just been awe-inspiring. And I think the tangible benefits, $750 million in total, the $150 million this year, which are real and meaningful, I actually think the intangible benefits are going to be around for a long, long time and ultimately could be bigger.

Are there examples you can share that really capture this program and this excitement?

I'm trying to think of a good one. Dave, what's a good one that you'd call out? Yes, I mean there are thousands -- these are thousands of things. I mean they're not just -- it's not some big giant thing that was just sitting in front of us. Thousands, thousands of ideas that may generate $500,000 of ongoing benefit or a couple of million dollars, but they're small stuff, but they're -- when you add them all up, it's really meaningful.

And is there potential to exceed this target longer term as you find more ways to invest to grow and become more productive?

Yes. I mean, so listen, we continue -- so we've done all of our major sites, and we continue to roll out the program to some of our smaller sites. So yes, I mean, I think there's a high probability that the overall opportunity could get bigger. Hopefully, I mean it's our plan that we'll give some additional guidance on our second quarter call around what we expect for this year and then kind of the longer-term outlook as well. But it's still early days, David.

Right. Michael, on peak/trough mid-cycle earnings, in the last 2 years, you've seen $9 billion of peak earnings, $1 billion of trough earnings, looking at $9 million to $10 million of normalized EBITDA going forward. What's the path from this [ 4 to 9 ] range today, call it, mid-cycle [ 7 to 9 to 10 ] even higher going forward. Can you just bridge us that differential? How do you reduce the volatility in line with earnings going forward?

Well, so a couple of things. So I'm not going to call the cycle here today. I mean -- and again, which was one of the reasons -- I mean -- and I thought it was a pretty good idea to use this concept of normalized earnings to kind of take the noise of the cycle out. And then to be clear, we're not guiding on the cycle. And who knows? Hard to guide on the cycle. But what I can tell you that, on a normalized basis, the actions that we are taking, we have confidence that it can generate incremental EBITDA of $3 billion. And then the actions that we're taking from a portfolio perspective, whether it's growing or pruning, are going to make the company more resilient through the cycles as well. So higher highs and higher lows not lower lows.

Very good. Quickly on ethylene, polyethylene, where are we in the cycle? And what's the concern with this additional U.S. supply coming in the market that could keep it suppressed for a period of time here?

I mean so -- well, I mean, I guess on the good news front, the new builds in the U.S. are largely done. The fact that the shelf facility in Pennsylvania has been having a bit of trouble has been helpful, in particular, given that the demand environment hasn't materialized like we thought and I think the industry thought. And so there may be -- once the shelf facility comes back online here, there may be a bit of a period where we have to absorb it, but I'm confident that we'll ultimately work our way through it.

Just on the new PO/TBA facility, how is it operating? When does it ramp up to the full targeted run rate EBITDA?

Yes. So it's running really well, knock on wood. It's actually -- it's running better than what we had anticipated. We had planned our turnarounds this year with the anticipation of PO/TBA coming up. So net-net, there's not really a big add of supply this year for us because of turnarounds. We guided that the facility for this year, we should get about half of nameplate capacity. It's tracking ahead of that as we sit here today because the startup has been so successful. And then just as a reminder, on a cycle average basis when it's running at nameplate capacity, that asset has the ability to generate $450 million of EBITDA. So as we move into next year, that's going to be an additive piece to our portfolio, both from an earnings and a free cash flow perspective.

Demand stays weak. Does that mean you run your other assets at lower rates? What's it mean for the overall PO envelope of EBITDA?

Yes. I mean so we'll -- we have a global portfolio, and we'll obviously optimize to make PO and oxyfuels and other derivatives to maximize our profitability. And then obviously, a number of weeks ago, there was an announcement where one of the industry participants was taking out some capacity in the U.S. as well, which is, again, I think a positive indicator and I think also a proof point that this technology is the lowest cost in the industry.

Obviously, TBA [indiscernible] oxyfuels. What's the long-term outlook in that business, given again growth in electric vehicles and other drivers?

Yes. I mean I'd say a couple of things. So no doubt -- I mean actually, so the oxyfuel margins today are very healthy and above long-term averages meaningfully. Demand is good. Butane costs are low. Blend premiums are attractive. I think if you look long, long term, yes, no doubt that EV is a headwind. But there are a lot of markets across the world that have not been penetrated with oxyfuels. We have a big efficacy operation that's underway, country by country, getting oxyfuels into markets where they aren't today. So we think we can largely offset any headwinds.

Got it. And lastly, advanced polymer solutions business has not performed to expectations. Why has it not? And why will it going forward? What will you do to fix it?

I mean I'd say a couple of things. And so in regards to the integration, there was a lot of good work and a lot of successes. We took out a lot of cost and a lot of complexity in particular from their manufacturing operations. But unfortunately, from a commercial and go-to-market perspective, we tried to make that business look too much like the rest of LyondellBasell. And at the end of the day, it's a business that has thousands of customers and thousands of SKUs and customers demand speed and flexibility, and we weren't giving our customers what they needed. And so a big focus a big focus of the turnaround effort is actually fixing our go-to-market.

Very good. Look forward to that improvement. Michael, thank you, the team as well. Thank you for coming.

Thank you, David.

Thanks, everybody.