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

This is going to be a slightly modified format. He's going to give about, I think, a 10-minute overview of the company, and then we're going to transition to the normal fireside routine. And I'm going to -- in the absence of Jeff Zekauskas, our famed chemical analyst not being here. I'm going to try and step in and throw some questions, Adam. But over to you, Mike.

Thank you, Cameron, and good morning, everyone. As Cameron said, I'm going to share just a few prepared remarks. So there'll be brief, but there's a few things that we wanted to share and we wanted to have webcast as we well. So again, my name is Mike McMurray. I'm the Chief Financial Officer of LyondellBasell. I will have been with the company for 4 years this November, so joined right before the pandemic. So on to the cautionary statements from our friends at LYB Legal. So as usual, we ask that you review our customary language around our use of forward-looking statements and non-GAAP financial measures. Reconciliations of the non-GAAP financial measures are found in the appendix to this deck, which is also available on our website at lyb.com. A quick performance snapshot. So we reported second quarter results in early August. This slide provides details of recent performance, which I will not review in detail in the spirit of speed, Cameron. We delivered resilient results, reflecting challenging market conditions in the second quarter. Since earnings, demand has remained steady with some modest improvements in some markets, although Europe remains incredibly weak and we're pretty cautious on China still as well. But more on the outlook in a few minutes. If the company has a reputation for generating significant free cash flow, and we are continuing to build upon our reputation for outstanding cash generation and cash conversion, even during these challenging times. Cash from operating activities, we delivered cash from operating activities of $4.8 billion over the previous 12 months. And the balance sheet is in great shape with debt-to-EBITDA of less than 2 and cash on hand of $2.5 billion at the end of the second quarter with $6.6 billion of overall liquidity. We converted 103% of EBITDA into cash over the past 4 quarters, and we expect to continue generating, on average, 80% conversion over the long term as we have done in the past. And we remain committed to returning a significant amount of that cash to our shareholders. And we've delivered nearly $2 billion in dividends and share repurchases, again, over the past 12 months. We are advancing our new strategy that we revealed to investors at our March Capital Markets Day in New York City. I'm really pleased with how the strategy is bringing clarity and focus and direction both within the company and with external stakeholders, including investors. As a reminder, the 3 pillars of our new strategy is driving focus and will drive differential growth and value creation, and we are not allowing current business conditions to slow our progress. And as a reminder, allow me to review the 3 pillars of our new strategy and our action on these pillars over the past few months. So the first pillar is around growing and upgrading the core. We believe in the future of our core businesses, and we will grow and upgrade these businesses to improve profitability and that includes making divestments. We have made rapid progress in execution on our VEP initiatives, and I'll talk more about this in a few moments. Our new PO/TBA facility came to market at a great time when oxyfuel margins are incredibly strong and higher cost propylene oxide capacity is being rationalized by our competitors. And we are extending our refining operations to no later than the first quarter of 2025 to develop options to redeploy the site's workforce and assets in support of the company's sustainable growth strategy. The second pillar is around building a profitable circular and low-carbon solutions business. This is to drive our leadership in circularity and address the massive demand for sustainable solutions. We are building a comprehensive business model with new technologies, upstream sources of recycled and renewable feedstocks and downstream relationships with our customers and brand owners, and once again, more on this in a few moments. And then the third pillar is around stepping up performance and culture. We are a best-in-class operator as evidenced by our cost discipline and strong safety results. And now we're putting an equal focus on enabling a value-creation mindset. We have also streamlined our organizational structure to improve our line of sight. And we are leveraging the structure of our VEP initiative to drive commercial excellence and improve our customer focus. And Torkel is making solid progress on transforming the performance of our Advanced Polymer Solutions segment. And together, we think these 3 pillars should unlock incremental EBITDA of around $3 billion by 2027. We are establishing leadership in circular solutions with our differentiated approach. We are targeting a 20% market share with our comprehensive strategy, which is in line with our polymers market share. We are confident to grow incremental EBITDA in this new business of $500 million by 2027 and $1 billion of incremental EBITDA by 2030 and a $25 billion-plus total addressable market. And we are leveraging our existing asset bases in Houston and Cologne. And we have a differentiated approach versus our competition in technologies, feedstocks and downstream customer relationships. And we are expanding participation further up and down the plastic waste value chain. We are building supply chains and investing in new technologies like LYB's proprietary MoReTec advanced recycling process, and we are reducing the carbon intensity of our products in line with our sustainability goals. For example, we recently signed an MOU with Technip and Chevron Phillips to develop an electric cracker demonstration unit at our Channelview, Texas site. And we have signed numerous power purchase agreements to support the development and procurement of renewable power. And we are providing tailored solutions for our customers by leveraging the unique capabilities of our APS segment to upgrade our mechanical recycling portfolio. And then most importantly, we are building a business that provides these solutions at scale. Progress towards our 2030 goal to sell 2 million tons of recycled or renewable-based polymers annually. And we did about 220,000 tons since 2019. And this is a business that should have lower capital intensity with high return on invested capital. And then finally, we are confident our comprehensive strategy will establish LyondellBasell as the leader in sustainable solutions and capture $1 billion of incremental EBITDA by 2030. And then on September 26, a week from today, we're actually hosting an investor webinar on our circular and low-carbon solutions business, and in particular, our MoReTec technology. You can find more details on our investor website. Now on to our VEP program. So we launched our Value Enhancement Program last year and announced targets to deliver recurring annual EBITDA improvement, run rates of $150 million by the end of this year and $750 million in annual recurring EBITDA by the end of 2025. This is a culture shift, which is igniting significant passion to unlock significant recurring value for the company. It's not another cost-cutting program. Cost cutting tend to deliver onetime short-term impacts. It's a continuous improvement process to systematically drive value with a comprehensive focus on investments for value creation, and it's had a profound impact on the level of engagement at our sites. And I think the intangible benefits from this program are going to sustain for many, many years to come. Our team is progressing ahead of our plan for 2023. As we expanded the VEP program to Europe and smaller U.S. sites, we now think our recurring annual EBITDA improvement will reach a run rate of at least $200 million by the end of this year. I'm getting close, Cameron. Now just a few comments on the market outlook. So we expect challenging market conditions to persist for the remainder of the year. In the Americas, fundamental demand is steady, but tepid, cautious buying from both with cautious buying from both customers and consumers. Margins are expected to be pressured by near-term volatility in feedstock cost and new capacity. For Europe, the potential for energy cost volatility and associated consumer caution looms over European markets despite moderation in feedstock and energy costs relative to 2022. In China, slow economic activity and lack of import demand are impacting global supply and demand balances. We have seen some slow, but gradual improvement but not seen much benefit from the initial stimulus measures. And again, China is very, very important to global petrochemical markets, in particular, polyethylene. For consumer packaging, demand is stable, which has been supported by the service industries. However, our customers continue to keep their inventories cautiously low. From a building and construction perspective, it's relatively flat with benefits from new housing starts offset by reduced sales and maintenance for existing homes as owners resist trading into higher mortgage rates. But we are watchful for tailwinds in the U.S. from commercial construction stimulus like the U.S. Inflation Reduction Act, the Bilateral Infrastructure Law, the CHIPS and Science Act. Automotive headwinds are typical in the third quarter when they're doing platform change-outs. And then obviously, we have headwinds coming from the UAW strike as well. For oxyfuels and refining, we continue to see stable demand as refined product inventories remain low. Oxyfuel margins are doing very well due to recent U.S. GC producer outages. And then finally, at LyondellBasell, we optimize our well-positioned assets across the world. We will continue to align our operating rates with market demand and steer through all stages of the business cycle. On this final slide, let me summarize our outlook and strategy. Again, our second quarter results demonstrated resilience in challenging markets. In the third quarter, demand is holding steady for the most part with modest improvement in US PE markets, although still down meaningfully sequentially. U.S. PE contracts settled up $0.03 per pound in August and strong export markets are driving optimism for additional price improvement in September. Low inventory for fuels have kept oxyfuels and refining margins unusually strong into September. As a result of strong execution by our people and improved margin outlook, our third quarter profitability is playing out better than expected. So better than we had guided on our second quarter call. You might recall that during our second quarter earnings call at the beginning of August, we expect that margins for PE, oxyfuels and refining would decline in the third quarter and EBITDA would be mid-teen to mid-20 percentage points lower than the second quarter. As of today, we think third quarter EBITDA will likely positively exceed the upper end of our prior guidance. To close things out, I want to emphasize that we are confident we have the right long-term strategy and we are not allowing current business conditions to slow our progress. Our Value Enhancement Program is unlocking value at an accelerated pace. And we are making steady progress to deliver a more profitable and sustainable growth engine for LyondellBasell. With that, I'll be pleased to take your questions, Cameron.

This throws a lot more information to the original question bank. But thank you, I'm going to try my best. I had 3 points I really wanted to focus on, which is mainly around China, the VEP program, and then on recycling and that's via combo of Jeff and a lot of clients have owned it in years past. Maybe if we just go right into unpacking some of the views on China. As we understand that there's a lot of -- much of the Chinese production that continues to come to market in polyethylene has questionable levels of profitability, but yet it continues to come to market. Is that a surprise for you? How long do we think this condition persists? And are there any -- is there any historical context of other periods we've been through like this? How do we think about it? How do you think about it?

Yes. So let me give maybe a little bit of context until I specifically ask or answer your question. And so again, China is the world's largest consumer of petrochemicals. It's a particular importance to polyethylene in North America, which has significant advantages from low-cost feedstock, so NGLs, exports roughly 40% of what's produced in North America. China, on the other hand, actually imports about 40% of their annual needs despite them adding a fair amount of capacity last year and this year, which is expected to continue. Now spreads in China over the last 2 years have been at historic lows. And normally, when spreads move to this level, after a couple of quarters, things start to kind of normalize and things start to go back up. But this is -- these are kind of unprecedented times. And growth has slowed significantly in China, where you actually even saw some products in polyethylene, actually flowing unnaturally to markets like Latin America. That's largely stopped as we sit here today. I would say why haven't they rationalized sooner, I think fundamentally their economic model is different, right? It's not based on capitalism. A lot of it's based on actually employing people. But at the end of the day, simple economics ultimately will take hold, and we do actually think there will be some rationalization in China as well.

And then you guys have a Chinese JV partner there. I just -- what are the operating rates for that operation versus peers? How do you guys think about that?

Yes. So I mean, most operators, if not all operators, are running at minimums. So for our asset, it's roughly at 80%, and has been at 80% for quite some time.

And then I guess, as you -- if we transition to Europe and I know you just made some comments on Europe, but can you just lay out the profitability dynamics in Europe? Obviously, there's been huge shifts in energy even very recently. And then, I guess, in Europe specifically, how much -- can we just talk about the sensitivities to oil and gas there versus the rest of the world?

Yes. The environment in Europe is pretty difficult. The consumer is, I think, somewhat rattled. And then our businesses have had kind of a 3-side advice with lower demand, lower pricing and higher cost, which has been not very good for profitability. I think the balance of the year in Europe is going to continue to be pretty challenging. But we're hopeful that as we move into the new year that things start to gradually improve. But near term, things are quite challenging in Europe.

And then before I go to VEP recycling, which I do want to focus on, is the comment about August PE pricing being up by $0.03 a pound. I know it's supposed to be flat, you just mentioned that. How does that -- is that sort of on par with raw material pricing? Is it outpacing raw material pricing?

No. I mean it's a really good question. So as we came into the quarter and we gave our original guidance, which was less favorable than when we sit here today. We actually saw the risk of actually PE price continuing to fall in the third quarter. And so the fact that not only was it stable, but we actually achieved $0.03 in August is encouraging. I'd say that $0.03 is largely covering the increased cost of ethane. So ethane's kind of move from kind of the low $0.20 per gallon to the low 30s. Although rest assured, ethane is plentiful and should trade back down eventually, I think, into the 20s. But the fact that we did get price, I think, is quite encouraging. Also, what we've seen recently is that export volumes have also picked up quite a bit to regions like Latin America and so that's encouraging as well.

Okay. And then the other comment was just oxyfuel North American margins being slightly higher and you mentioned weather. Is there any other way we should think about that? Or how transitory does that tend to be?

Well, I mean, a couple of things I'd say about our oxyfuels business. So I mean, if you look at that business over a long period of time, it kind of consistently delivers EBITDA annually of about $400 million. I mean typically, gasoline doesn't cycle with recessions. We were earning margins in the second quarter for oxyfuels well above historic averages. Demand has been good. Gasoline cracks and blend premiums are very attractive. And then butane is very advantaged right now from a cost perspective, which is a significant feedstock for our oxyfuels business. So again, when we kind of gave the view for the third quarter, we are anticipating that oxyfuel margins were probably going to normalize a bit. We thought they'd still be above average, but what happened is there were a number of producers that went down in the third quarter, which has caused margins to actually blow out. So oxyfuels will have a very nice third quarter.

Okay. No, that's helpful. The recycling point, you guys have targeted 2 million tons by 2030 and I know you did touch on it there. The questions that come up from clients is really around pricing and maybe the cost journey to get there. How do you think about the return profile? You mentioned it would be more capital-light. Do you want to maybe just articulate for the investors here how do we think about the differences between virgin polyethylene?

No. No, that's great. So today, pricing for recycled material as a meaningful premium versus virgin plastics. And the large CPG companies have made very, very big commitments. And so we're pretty confident that looking forward that demand is going to outstrip supply for some time to come. We feel pretty confident in getting to the 2 million tons goal that we put out, which is roughly to be about 20% share of our PE business. The other thing that gives us confidence in our outlook is our differential MoReTec technology. And so there are competing pyrolysis oil technologies that are out there today, but they're difficult to scale. And when you can scale something, you can basically produce at a lower cost. And so our proprietary MoReTec technology where we've been running a semi industrial works plant in Ferrara, Italy, since the third quarter of '20. I believe that's right, Dave, right? Third quarter of '20 and we're likely to take FID on the first industrial tranche that we put in Cologne here in the fourth quarter, but let me tell you a little bit what's differential about that technology. So our technology has the ability to scale. Our technology has the ability to run continuously versus batch. So the competing technology actually have to shut down and clean out. And then we use a proprietary catalyst that, a, is enabling to some of the things I just spoke about, but also enables our technology to use less energy while delivering a higher yield. So that all adds up to a technology that's going to give us, we think, an attractive cost position versus competing technologies. And again, we've laid out a goal of $500 million of incremental EBITDA by 2027 and $1 billion of incremental EBITDA associated with this business by 2030. The second tranche of MoReTec technology we plan to put down at our Houston hub site, which is at the refinery that will be closing down the first quarter of '25.

And is there a way to think about a return profile on the journey to getting here? I know you talked about it being more capital-light. I have here my notes that you guys are pushing to like 15% of CapEx through 2030. I think Jeff thought it would be around $3 billion possibly from now to then. I don't know if that's a bit of......

Yes, I think that's a reasonable, reasonable way to think about it. Yes, and the return profile -- kind of a return on investment pretty good confidence around kind of mid-teens or better.

Okay. Okay. And then on the Value Enhancement Program, I had $150 million of EBITDA in my notes. You just updated it there to -- or saw the $200 million number.

We updated it.

Yes, to the $750 million. Thank you for doing that here. How do we think about the return profile on this? I think what's come up for investors is this whole history of cost consciousness. And does that follow suit here? And will you abide by that here?

So we're a commodities chemical company. So cost consciousness and cost focus always has to be a part of our DNA. But I'm confident that our people have the ability to think beyond just one singular focus. I think you can be both value-minded and cost conscious. Because we were so focused on cost for so many years, I mean, we wouldn't allow our sites to add any incremental FTEs for good opportunities they had. We wouldn't release CapEx. We wouldn't release OpEx. And so they basically, after so many years, basically just throw up their hands and said, we give up. And so we ran a thorough process last year with the help of McKinsey. And put a rigorous program in place to identify these opportunities, and Cameron, they're high return. And so each opportunity is different, but on average, we're probably investing about $1 of either OpEx or CapEx for each incremental dollar of EBITDA kind of in total. So the return on this investment is quite high.

Yes. Okay. And I guess on the M&A front, I know when you guys evaluate free cash flow generation, 70% goes back to shareholders and then the balance, close to 1/3, is left for dry powder. How do we think about the priorities as you guys evaluate M&A generally in the different business segments or geographies?

No, it's a good question. And so the 70% commitment that you referred to was something new that we had rolled out at our Capital Markets Day this past March. So again, it's our intention to return 70% of free cash flow to our investors in the form of dividends, buybacks and there were special dividends, which leaves 30% for things like accretive inorganic growth. From an inorganic growth perspective, one, we've put in place a comprehensive strategy. So we have a clear screen as to kind of what's in and what's out. We're focused on businesses where we're a better owner and a better operator. We're focused on businesses that face into attractive markets that are growing. In particular, we're focused on opportunities that have advantages, in particular, related to feedstock. So think North America, think the Middle East. And then also, we have a particular focus, obviously, on growing our circular and low-carbon solutions business, but those deals will tend to be much, much smaller. And then I think rest assured, from an M&A perspective, we will be disciplined, purposeful and inpatient. And quite frankly, if significant M&A doesn't materialize and so if we don't spend that 30% on M&A, you know what we'll do with it? We'll give it back to our shareholders.

Yes. And maybe just -- this came up in one of the last conference calls. But if we just take a step back, and consider the original EBITDA target in 2027 of around $10 billion and you guys were sort of 6-ish. And obviously, with Refining, that gets a little bit smaller. How do we think about the 4- to 5-year bridge from here to there? What does the business look like?

Yes. I mean listen, so basically, we laid out $3 billion of incremental EBITDA coming from our new strategy starting with a base of $7 billion, and the $7 billion is average margins and average operating rates going back over the last 10 years. So kind of think about it as kind of through-the-cycle view. And we did that purposefully, Cameron. I mean, one, we didn't want to give long-term guidance because giving long-term guidance on a cyclical business is pretty hard to do. And so we wanted to give investors kind of a basis to kind of think about our new strategy and the pillars of the strategy that we're driving towards to get the $3 billion of incremental EBITDA. It's still early days, so we released this in March. But across all 3 pillars we are making substantial progress. And I'd say, largely, everything is green as we sit here today, but it's still relatively early.

Okay. And just one thing I wanted to get back to on the recycled pricing, which is you mentioned right now there's a big gap between virgin pricing and recycled pricing. Can you just contextually talk about where you think that heads in the next few years? I know there might be a lot of puts and takes, but just...

So if you look at kind of the demand profile going forward, and this is kind of largely based on visible public commitments that have been made by large consumers of plastic, we think that the market is going to be short for a long time, which should be supportive of attractive premiums going forward for, again, for a long time.

And sorry, forgive my ignorance, is it like 10% or 15%? Or is it 25% to 30%?

I mean, it's as much or even more than $500 a ton versus virgin today. So it's meaningful.

Yes. Okay. That's helpful. Maybe we'll think about opening up to the audience. Any questions post the update from the company? I've got a few more I can ask. We'll start with Martino.

Also I'm also with JPMorgan, and we do a lot of tracking regarding China, Chinese data series. And what we hear lately is that in basic commodity pricing, things seem a little bit better than field. Can you maybe talk about what you're seeing, especially to Chinese demand for your products, do you see some better picture on what level?

It's a little better, say, than it was coming from? Yes. So I mean the Chinese stimulus thus far has been not terribly effective. And it hasn't been a significance either. We're seeing some positive coming from EVs in China, which has a lot of plastics components in EVs, also appliances. And then I'd say just demand and pricing has gotten a little bit better. But again, it still has a long, long way to go.

Just another question on China longer term. In terms of capital allocation, M&A and the different businesses that you're in, how do you think about maybe getting out of some of them where you compete with someone that has different metrics to you? Or how do you think longer term about the ability to compete with some of these players?

So great question. So I think from an LYB perspective, China is the largest petrochemical market in the world. We've had a selling presence there for a long time. The investments that we've made thus far are modest compared to the size of the LYB enterprise overall. So our direct exposure to China is relatively small. But we think we need to be present in the world's largest market for the foreseeable future. That said, we're probably thinking a bit more cautiously and differently around laying new assets on the ground in China than we were maybe, say, 2 or 3 years ago, which probably isn't a fundamental surprise. So we are thinking differently about China. I also think that growth in China going forward is going to be muted compared to the growth that we had seen, say, over the last decade.

Nobody has touched on the balance sheet. And obviously, net debt-to-EBITDA, sub 2x, in healthy shape. But how should we think about that current 1.8 level? Guide for the future?

So I mean our credit ratios are elevated a little bit right now just because our earnings have fallen with given where we are in the cycle. But the balance sheet is in great shape. So we have $11.5 billion of debt. We refinanced probably about 80% of the balance sheet during 2020 and '21 and took a lot of long-dated money. And so our maturity profile today average is out at about 18 years with an all-in cost of debt at about 4% and very little near-term maturity. So the balance sheet is in fabulous shape and sitting down $2.5 billion of cash at the end of the second quarter and then $6.6 billion of liquidity at the end of the second quarter.

Any other questions from the group? I've got 1 or 2 more I'll fire way. Maybe just back to the MoReTec technology that you mentioned earlier. Is there -- this has come internally and I think it was a client question, but basically, is there a way to foster using your own renewable feedstock rather than buying it, I think you guys buy it from Neste.

Yes. So we do buy renewable feedstock today from Neste and other producers as well. But now that, yes, the goal is to make it ourself, right? That's fundamentally behind MoReTec.

And how -- is there -- can you just walk us through what that might look like time line-wise? Or is that a multiyear journey? Or how do we...

So FID, we'll likely take FID on the first industrial tranche of capacity here in the fourth quarter. And the asset probably starts up towards the latter part of '25, maybe early '26 mechanically.

Okay. And then slightly going back to renewables and recycling. You talked about the market being out tapped out and just demand being -- going out multiple years. What are contracts like in that? So if pricing is $500 million -- $500 a ton elevated, do people price out a year? Or how far out do those tend to go? Are they different than virgin -- contract not necessarily, so forgive my ignorance.

Well, we definitely want to price it different than virgin. We want to price it for the value that we're delivering. We don't want to use a pricing mechanism that's tied to virgin either. So we want to price it again very, very separately and specifically around the value that it's creating. And then the actual arrangements with the customers can be different, but typically not long term.

Okay. Any other questions from the crowd? Is there anything else I asked that we should be focused on?

Dave? Balance sheet is good shape. Yes.

Well, it's been a pleasure.

Likewise, Cameron.

Thanks for your time. And thank you, guys, very much for being here.

Thanks, everyone.

All the best.