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

So for our next fireside chat, we have Michael McMurray, Executive Vice President and CFO of LyondellBasell and in the crowd joined by a fantastic IR team, David and Nicky. So Michael has been CFO since November 2019 and joined LyondellBasell after an 11-year tenure at Owens Corning, he was CFO for over 7 years. He spent 21 years in various positions with Royal Dutch Shell. And Michael helped navigate Lyondell through the lows of the COVID-19 pandemic and led the way to top line and EBITDA recovery post pandemic. So here to tell us more about Lyondell's businesses and long-term growth opportunities, please welcome Michael McMurray, who I know has some opening comments.

Thank you, Patrick, and good morning, everyone, and good morning and good afternoon to folks maybe following along online as well. And so I wanted to use just a few materials and prepared remarks that I think to set some necessary context. So again, welcome. So thanks for having us here today, Patrick. And thanks to all of you for joining us and for joining on the webcast as well. As usual, we ask that you review our customary language around our usage of forward-looking statements and non-GAAP financial measures. Reconciliations of the non-GAAP financial measures are found in the appendix to the slide deck, which is also available on the lyb.com website. So moving on to the third quarter. So we reported third quarter results at the end of October. This slide provides some of the details on our recent performance. Quite frankly, we think we delivered resilient results amidst dynamic market conditions in the third quarter. And in the third quarter, we delivered record results in our I&D business, driven by exceptional oxyfuel margins. And I'd say since that time, we have seen seasonally slower demand across most of our businesses, largely in line with expectations, and probably a little bit more margin compression in oxyfuels than we originally anticipated. But again, I'll do more on the outlook here in a few moments. Now I'm super proud and super pleased with the company's ability to generate free cash flow, really, really good actions across all of our businesses and maintaining working capital. So we have maintained our investment-grade balance sheet and strong shareholder returns with very efficient cash conversions during these challenging times. So cash from operating activities going back over the last year, $5 billion. And the balance sheet, as most of you know, is in great shape with a debt-to-EBITDA calc about 1.6x and sitting on $2.8 billion of cash at the end of the quarter. And then again, in regards to conversion, converted 102% of EBITDA into cash over the last four quarters. And at our Investor Day in March, we said that over the long term, we would expect that to be 80% as it has been over the past. And then again, we remain committed to returning a significant amount of that cash to our investors. And looking back over the last year, about $2 billion in dividends and share repurchases over the last 12 months. We have made a lot of progress at advancing our strategy. Our team is making great progress on that strategy that we introduced to investors this past March in New York City. I'm really pleased with how the strategy is bringing clarity and focus to our direction both within the company, but also with including stakeholders, including our investors. From my perspective, I think our -- the 3 pillars of our strategy is driving focus and I think it will drive differential growth and value creation. And despite kind of current market conditions, we are not letting it kind of to distract us or slow us for making progress. And then just as a reminder, allow me to kind of quickly remind you all of the 3 pillars around our strategy and how we're making progress. 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 overall profitability. We are making rapid progress on our value enhancement program. So super, super pleased. I'll talk more about that as well in a few moments. And then our new world-scale PO/TBA facility that came up earlier this year came up at a great time from a market perspective when Oxyfuel margins are incredibly strong and higher cost propylene oxide capacity is being rationalized by our competitors. And then, we are extending our refining operations to no later than the first quarter of 2025, so that's not new news. But the plans to develop that site are progressing quite well. And then, we continue to optimize and take decisions around our portfolio. Earlier this year, we exited the Australian polypropylene business. In the third quarter, we announced the closure of a small asset, polypropylene asset in Italy, Brindisi and you can expect that we will continue to be focused on optimizing our portfolio going forward. And clearly, I think this shows that we've been kind of in action including the announcement that we have with the strategic review that's going around our EO/EG business as well. The second pillar is around building a profitable circular and low carbon solutions business. And this is really to drive our leadership in circularity and address the significant demand for sustainable materials. And by building out a comprehensive business model with new technologies, upstream sources of recycled and renewable feedstocks and downstream relationships with our customers and brand owners, and we think that's pretty powerful. And again, I'll go into that in a little bit more detail here in a few minutes. And then last week, we announced the final investment decision on our first commercial scale MoReTec unit, which is a 50 KTA advanced catalytic recycling plant that we built in Cologne, Germany. So took FID a week before Thanksgiving with our Board here -- there in Houston. And so kind of putting this all together, we think that our actions are aligned with our path towards 2 million tons of recycled and renewable polymers, which would represent about 20% of our market share for both polyethylene and polypropylene on a 2022 basis and then delivering at least $1 billion of incremental EBITDA by the year 2030. And then lastly, our third pillar is around stepping up performance and culture. We are a best-in-class operator, which is evidenced by both our cost discipline and our safety results. And now we are putting similar focus or equal focus on enabling a value creation mindset, and I do believe our people have the ability to think 2-dimensional. We made significant progress in last October in streamlining our organizational structure to improve overall line of sight. And then we are leveraging the structure of our VEP program to drive commercial excellence and improve customer focus. And then lastly, Torkel is making solid progress in transforming the performance of the APS segment. And then you roll all this together, and we think this has the potential to create on a cycle average basis, incremental EBITDA of about $3 billion. Now to talk in a little bit more detail about our circularity and low carbon solutions business, just to remind you about a few points. Again, we are targeting a 20% market share with a comprehensive strategy. And again, that market share is on the basis of our 2022 market share for both PP and PE. Again, we're confident that we can grow this business to be a contributor of $500 million of EBITDA by 2027. And then again, $1 billion of incremental EBITDA by 2030. And we think by 2030, this is a $25 billion-plus total addressable market. And we are leveraging our existing asset base in our Houston and Cologne hubs. And we actually think our approach is differentiated, both from a technology perspective, how we're going after and approaching feedstocks and then also our downstream customer relationships. And then we're expanding our participation, both up and down the plastics value waste chain, and you would have seen this as evidenced by a number of smaller announcements that we've made around various partnerships in that space. Getting close, Patrick. Sorry. Dave made me do it. And then in addition, we're reducing the carbon intensity of our products, which is in line with our sustainability goals. And then we're providing tailored solutions for our customers by leveraging the unique capabilities of our APS segment to upgrade our mechanical recycling portfolio. And then again, most importantly, we are building a business that provides these solutions at scale to progress towards our 2030 goal to sell 2 million tons of recycled or renewable-based polymers annually. And again, let me point out, again, this is a relatively low capital intensity business. We said at our Capital Markets Day that we expect that between now and 2030 that this business will consume about 15% of our capital plan, maybe a smidge more but then delivering $1 billion of incremental EBITDA by 2030. So do the math, simple math, those are pretty compelling returns. Now to talk a little bit more about our value enhancement program. So I'm very, very pleased overall with our progress thus far. This is a cultural shift and it's igniting passion at our manufacturing sites to unlock significant recurring value. So we launched the program last year. We announced targets of $150 million for this year, $750 million exit run-rate by '25. And then we've upgraded current year to $200 million plus. And again, may be clear this is not a cost-cutting program. Cost-cutting programs tend to deliver onetime short-term impacts, this is a continuous improvement process to systematically drive value with a comprehensive focus on investments for value creation. And again, I'm really pleased with the impact of the overall level of engagement at our sites. And as I said before, we're tracking ahead of plan, expect $200 million plus for 2023. Now I'm almost done, Patrick. So maybe a few comments just on market, which I suspect people are probably interested in. So I expect challenging market conditions to persist for the remainder of the year and then particularly for the fourth quarter, seeing seasonally slower demand across most businesses. In the Americas, pricing is expected to be supported by increased polyethylene exports and stable demand so that's good news. Although integrated polyethylene margins will be constrained by new market capacity. In Europe, markets are expected to remain highly challenged. And so we're seeing weak market demand, coupled with kind of volatile feedstock and energy costs, which will continue to compress margins for the foreseeable future. And then in China, I guess, markets are improving, albeit very slow, in some part, driven by some of the stimulus initiatives. But again, progress has been painfully slow, and it's super important to us going forward. Maybe just a bit of color on some key segments. So from a consumer packaging perspective, I would say that demand is slow but steady, and again, supported by consumer industrial packaging markets, but our customers and our customers continue to keep their inventory levels very low, so they're buying very, very cautiously. From a building and construction perspective, markets are also slow, not a huge surprise, but we're watchful for the potential benefits in the U.S., enabled by the stimulus actions from the Inflation Reduction Act, The Bipartisan Infrastructure Law and The CHIPS and Science Act. And then automotive continue to see demand for -- and automotive production should continue to gain momentum as we go forward. And then the strike really didn't impact our results of anything to speak of. And then on an oxyfuels and refining perspective, oxyfuel margins have declined significantly since the third quarter. I think you all heard me say probably a little bit more than what we were anticipating. And so kind of they're down to levels as seen in the second half of '23. And then also, we're seeing lower gasoline cracks. So the gasoline crack is actually quite low and higher butane feedstock costs. And then distillate inventories are expected to remain on the low end of seasonal averages and gasoline inventories have risen with the end of the summer driving season. And then again, LyondellBasell will continue to optimize our well-positioned assets across the globe, and we'll continue to match capacity with demand. We will continue to be very, very disciplined. So in closing, let me summarize our outlook and our strategy. So I think our third quarter results demonstrated resilience in challenging markets. This was driven by the diversity of our portfolio that benefited from exceptional oxyfuel margins during the quarter. We continue to achieve outstanding cash conversion and remain disciplined in our capital allocation to deliver high returns for our shareholders. And then in the fourth quarter, we are seeing seasonally softer demand across most of our businesses. And again, LYB is positioned to deliver resilient results despite these conditions overall. And then to close things out, I want to emphasize that we are confident that we have the right long-term strategy and that we're not allowing current business conditions to slow our progress. Our value enhancement program is unlocking value at an accelerated pace, and we're really excited to provide an update on our progress in 2023 during our fourth quarter earnings call. So we'll get more visibility to the actuals that we actually delivered this year. And then finally, we're making steady progress to deliver a more profitable and sustainable growth engine for LyondellBasell. With that, Patrick, I'll turn it over to you for our Q&A session.

Great. That was very helpful. And I think when we look across sort of near-term market outlook, really seems like everything is remaining challenging from an end market perspective. Even things like oxyfuels, which helped you deliver the record quarter in 3Q declined very significantly. So -- and we have low visibility, near-term seasonality. Where is the setup maybe most positive? And I appreciate you talk about a value chain or an end market there. But where do you see the setup is most positive for next year? Is there potential restock? Is there areas which might be capacity constrained? Or what's the outlook for next year?

Yes. I mean -- and so I'd say, as we sit here today, we're relatively cautious and we're kind of manning the levers very, very closely. Again, we did a really good job in managing working capital over the last couple of quarters, and that will continue through the fourth quarter. There aren't a lot of incredible right spots. I'd say things are generally slow but steady. It's a little concerning still because there are a number of kind of macro indicators that are pointing in opposite directions. And so it kind of makes it harder to predict. I've been in business for 35 years. I've done many of business plans. The LRP and the business plan that we went through this year was probably one of the more challenging ones, and we had lots of vigorous debates among the management team, but also our Board of Directors just because there is so much uncertainty. But on a net-net basis, I expect our company and most businesses to see improved demand and improved earnings next year. I think from a margin perspective, probably the 2 headwinds that I'd call out, and it won't be a surprise to anybody would be refining and oxyfuels. But I'd say aside from refining and oxyfuels, I think we're hopeful that we can improve margins in all other businesses. And then our expectation is for better demand overall, but probably more weighted towards the second half of the year versus the front half of the year. So we're pretty cautious near term.

Got it. And then just maybe starting with polyethylene, your integrated margins have been challenged from higher feedstock costs, very low demand, continued oversupply in the Americas. Maybe talk a little bit about some of the recent pricing strength and export trends. Is there a risk that maybe there is some sort of reversal or deceleration there and we could get additional margin declines into the first half of next year?

So there's always that risk, Patrick. So I wouldn't say there's never that risk. But I mean, I'd say a couple of things. Over the last couple of months, 2, 3, 4 months, the export volumes have been quite encouraging. The latest month, they were as high as about 40% of overall production if my memory serves me correctly. That has been supportive for domestic pricing. And then ethane more recently has given us a bit of relief as well. So ethane is down to kind of call, $0.21 a gallon. So that's a very attractive place for all gas -- ratio is very attractive. And while we didn't make progress on the October price increase here domestically, we did in August and September $0.03 each. So yeah, I mean, things are okay.

Any confidence in November price increase?

It's too soon to tell. And it's a time that's a little bit more difficult when things are seasonally weak. Quite frankly, I think it's stable, it's good.

Got it. And then just maybe, you mentioned you see demand potentially getting better in the second half. Is it safe to say that most of the sort of maybe year-on-year margin improvement would be relatively loaded into the second half of next year or?

Yes. I think it's kind of a tale of two halves from being better next year versus this year. I do think that when I think consumers and then more importantly, our customers kind of get more confidence in the outlook. We're actually going to see a restocking event, I think, which will be very attractive. I think when that moves, it will have pretty good momentum.

Got it. Got it. And then maybe just shifting quickly to polypropylene. I think both near and long term, there's been some challenges there. Maybe there's some pricing strength just on higher feedstock costs that we're seeing right now. And then long term, there's this threat of China continuing to add new capacity. So maybe what's your outlook there for the next 12 to 18 months? Is there going to be enough demand to absorb what we've seen some pretty tremendous capacity additions there?

Yeah. I mean, I think at the -- I mean, to be honest, at the end of the day -- so the market, I mean over time, will absorb. But there are fourth quartile assets in this space that need to come out, not too different than with the decision that we took with our Brindisi, Italy asset here more recently. So it's a good business overall long term, a little challenging with the supply additions near term, but things will rationalize.

Got it. And then just in terms of asset rationalization, you took the actions in Italy, maybe just focusing on Europe first, how do you view the fundamentals there near term and cost competitiveness? And are they looking to take out other potential assets there as well?

Yes. I mean, so the one thing I'd say, maybe kind of going back high level is that we have a new strategy. Part of that strategy is very focused on portfolio optimization. If you've followed the company for any period of time, we have been kind of in action the most, I think, in a long, long time from kind of pruning -- overall pruning the portfolio in the last two years versus probably the previous 10 and we can go through a number of decisions and actions that we've taken. I think rest certain, we're looking at our European portfolio hard. It's very challenged from an earnings perspective, near-term dynamics are challenging. But then quite frankly, I -- this is my point of view, this is not the company's point of view. I'm worried about the longer-term industrialization of the European continent, if politicians and regulators in Europe don't start driving some different decisions.

That's helpful. And then maybe just the bright spot in the IND business since the new PO/TBA asset that you've added. So this sort of offset some of the planned maintenance you had on your POSM assets. Can you maybe talk about how we should think about operating rates for both sides of the POSM and PO/TBA into next year? And if we can start to see some earnings expansion from that side of the business.

Yes. So really, really good question. So a couple of things to kind of point out. And so that business is largely run on a global basis. And most of those -- a lot of those products kind of flow on a global basis as well. Now during this year, when markets were challenging, when costs in Europe were particularly high, and then if you think about kind of our 2 technologies that we have within the IND space, which is PO/TBA and POSM. So PO/TBA, kind of the byproduct is oxyfuels, which is doing really, really well. On POSM, styrene, which is not very good. So we were trying to run our PO/TBA assets as hard as possible, and then idling or curtailing the POSM asset. So Dave, we guided fourth quarter to 70%, right? 75%, and it was 70% in the third quarter, thank you for that. So -- but no, I mean, that asset came up at a great time. Quite frankly, it exceeded our expectations from a performance perspective, and it's first year of operation from a cost competitive point of view and especially with folks that use chlorine and their PO manufacturing process, I mean it's well placed.

Got it. Maybe just shifting to circular and low carbon. I think the knee-jerk reaction is with a lot of these types of projects is of CapEx intensity, is they are actually going to be a premium going forward. So how should we think about the economics of this business and get comfortable with incremental CapEx spend there?

Okay. So a really good question. And obviously, in advance of our Capital Markets Day, we had done a tremendous amount of work around this business. It is part of our LRP plan for this year. We kind of -- we updated everything and ground on hard again. And I'd say the view -- I mean, there are puts and takes, but it's largely unchanged. This is a, what I call, a capital-light business because we're going to be utilizing a lot of downstream assets, crackers and PE assets after you produce the pyrolysis oil. So we said out of our forward capital program kind of looking out to 2030, we expect about 15% which would be, call it, in the order of $2 billion to $3 billion and then $1 billion of incremental EBITDA by 2030 on that investment. So the return should be pretty attractive. And I'd say so far, so good from a pricing perspective, the demand is significant. And as we sit here today and as we look out into the future, demand should significantly outpace supply which should be good for pricing margins.

Got it. And it's -- I mean, to be fair, I think it's going to take a lot in terms of investment on waste collection, all the way through the downstream and getting it back into the cracker. So what's Lyondell's strategy in terms of JVs, partnerships, investments to help expedite this process?

No. So it's a really good question. And you would have seen a number of these smaller announcements. So one, we're actually going to invest in some competing pyrolysis technologies on a small level because we want to kind of spread our bets. But now to get access to plastic waste, we're having to go downstream and partner with collectors and we have a big partnership where a lot of waste in Europe is burned. And so instead of burning it, it's actually -- the mixed used plastic waste is actually going to go into a MoReTec unit, but we're partnering with people to actually get access to that waste, investing partnerships around sorting technology and the like as well. So we're having to go downstream a bit. And I think that is differential in our strategy versus most others.

Got it. And I just want to dig into the one comment. Aren't you investing in other potential pyrolysis oil technologies? Because I know at your MoReTec webinar, you talked about some of the opportunity for out-licensing of your own technology. So how do we sort of balance that potential there versus maybe having to get ahead and buy out some of these pyrolysis technologies?

I'd say that we're committed and confident around our own technology. But we thought it made sense, and these are small investments. So we thought it made sense to kind of spread our bets. I'll also give visibility to what more visibility to what competing technologies are. But fundamentally, we think our technology is a winner. And really for a couple of reasons. One, you can scale it. And it's a continuous versus a batch process. And the fact that we're using proprietary LYB catalyst is one of the reasons that enables us to scale it that enables us to run it on a continuous versus batch process, will enable us to use less energy, because it can run with less heat, and also deliver higher yields. And then, by the way, because you can run it at less heat, we can use renewable energy, taking run off of electricity.

Got it. And just -- Maybe another interesting component here, you obviously had the FID on the first MoReTec facility. So another interesting component is the re-purposing of the Houston refinery. So maybe talk about what the options are going to be there? And what would this involve in terms of incremental spend?

Okay. It's a great question. So -- and just as a reminder, so 700 acres on the Houston Ship Channel, which is a very unique and valuable position to have. There are a number of assets at that site that we think can be reused or repurposed. I mean, obviously, things like office space, laboratories, utilities, but also of great importance is hydro-treating assets that are at that site that we think can be repurposed for treating the pyrolysis oil that comes off of the MoReTec unit. We also see opportunities to repurpose and reuse those hydro-treaters to process other sustainable feedstocks for like our channel side and so. And then lastly, we're part of a consortium to produce -- to build a hydrogen facility with Chevron and Air Liquide. So it has the possibility of actually being selected for the government grant, we'll see. But that is also one of the options that we're evaluating as well. And then it's hard to say. I mean, as we see here today about spend. And I would tell you that a MoReTec unit is in the hundreds of millions, it's gone billions of dollars. And then just so people don't get scared on the hydrogen opportunity. Our sites valuable, it's a really good location. And we want access to hydrogen for our operations, but I don't think producing hydrogen is going to be a core business for one that is all.

Fair enough. And maybe just to talk a little bit on the value enhancement program. You guys have exceeded expectations this year. You have the $750 million target. So maybe if you could highlight what some of the -- if any regions or businesses stand out that have either generated the most opportunity or maybe have the most opportunity going forward?

Yes. So I mean, it's interesting. So there's no single gigantic opportunity to point out, which actually should be comforting and encouraging. So it's hundreds upon hundreds of opportunities. Most of them being $1 million or less, which again, is a good thing, right? So we're not kind of betting the ranch. And there are simple things around energy efficiency, small de-bottlenecking, and a lot of it is kind of amazing that we haven't ceased upon them sooner. So high confidence and getting to the $750 million will exceed the $200 million that we guided to for this year. Things are coming along really good. Momentum is building. We started out at our biggest sites first. And now we've moved on to -- we're moving on to smaller sites as well.

Great. We have a few minutes left here, so I wanted to just open it up to see if there are any questions from the audience. Got a shy group today.

Early still. After a Thanksgiving weekend.

Yes, you've got -- you have strong operating cash flow conversion at this point. Net leverage is probably much lower than it's been in previous cycles. And so how should we think about capital light investments associated with building out the low carbon solutions? So how should we think about dividend growth, stock buybacks, general capital allocation going forward?

Great. It's a great question. So I mean a couple of things. So I mean, hopefully, folks heard me say that I'm super pleased and proud of our cash flow generating capability during these challenging times. Last 12 months and the last quarter, quite frankly was fabulous. And my expectation that, that continues going forward. Just to reinforce and remind everybody, from a capital expenditure perspective, we're keeping the range pretty tight, consistent with what we told investors at our Capital Markets Day on average of $2 billion over the next 3 years. That includes this year, which will come in or we guided to $1.7 billion. Our dividend is super important to us. It's our expectation to continue to grow our dividend, much like we did this year for the 13th consecutive year. Buybacks will continue to be an important part of the mix. As you all have heard me on earnings calls, we have a point of view. We tend to be a little bit opportunistic. I'm not a fan of putting buybacks just on autopilot and never looking back. And now we're carrying a little bit more cash maybe than we normally do. So $2.8 billion versus kind of a stated external goal of $1.5 billion. So it's actually, it's not that much incremental cash flow. And kind of given all the uncertainty, if I make sense, to have a little bit of extra liquidity, you're right today. But again, the 70% guidance around returning free cash flow to investors that we gave at our March Capital Markets Day holds true, but it will -- it's not necessarily 70% every quarter, right? But we will continue to return lots of free cash flow to our investors as we have done in the past.

And maybe the one thing we didn't talk about was long-term outlook for APS business. so I know it's been a strong focus to the value enhancement program, and maybe there's been a bit too much cost cutting there in the past. So how long does it take to restore that business to more attractive margins?

So we're coming up on being kind of a year into the transformation. I think, it's fair to say if you look back on this year versus from where we started. It's probably been a little bit more challenging than what we had anticipated. I'd say that Torkel and his team have made incredible progress in kind of getting service levels back to where they need to be. I think it's probably been a little bit more challenging and winning accounts back that we have lost. But the business is making progress there as well and momentum is building. I'd say we've probably got kind of a good 12 to 18 months more, where we thought to declare that we are high, high confidence that we got it at exactly where we need it to keep it going. Still a lot of work to do.

All right. Well, unless there are any further questions, please join me in thanking our speaker, Michael McMurray.

Thank you all.