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

Hi, good morning. I'm Jeff Zekauskas. I analyze chemicals for JPMorgan. It's my pleasure this morning to introduce the management of Lyondell. Representing Lyondell is Peter Vanacker, who is the Chief Executive Officer. Formally, he was the CEO of Neste and before that, he managed the polyurethane operations at Bayer Material Sciences, which is now Covestro. Accompanying Peter is Dave Kinney, who is in the first row, who's the Head of Investor Relations. The form of our discussion today will be a fireside chat. But I think Peter is going to begin with a couple of slides. Peter?

Thank you, Jeff. And of course, thanks for having us here today. Thanks to all of you joining on the webcast. And as usual, we ask that you review our customary language around our forward-looking statements and non-GAAP financial measures. Reconciliations of the non-GAAP financial measures are found in the appendix to this slide deck, which is also available on the lyondellbasell.com website. So I hope you have all read it now, and I'm going to move on to talk about our strategy. Our team is making great progress on the strategy that we introduced last year during our Capital Markets Day in New York. And actually, tomorrow will mark one year. I'm really pleased with how the strategy is bringing clarity and focus to our direction both within the company as well as with external stakeholders and that includes, of course, also investors. As a reminder, our strategy is built around 3 pillars: First, growing and upgrading the core; Secondly, building a profitable circular and low-carbon solutions business; and Third, stepping up performance and culture. We've been making progress on the 3 pillars of our strategy for a year with many tangible wins. We have already secured it in a relatively short space of time. As you can see on this slide, we have thoughtfully but rapidly executed portfolio changes to grow and upgrade our core business. These actions will ensure that we focus our capital expenditures on our core businesses. After starting up the world's largest propylene oxide and oxyfuels plant in Houston, we took decisive actions to shut down uncompetitive polypropylene production in Italy, sell our ethylene oxide and derivatives business to INEOS, and we also exited our polypropylene assets in Australia. We're buying into the NATPET joint venture in Saudi Arabia, with its cost advantaged feedstock position, and we made a series of acquisitions to underpin value creation in the circular and low-carbon solutions business. So I'm feeling very comfortable to say that we are demonstrating quite clearly how we are sharpening the focus of our portfolio in order to execute our strategy and create substantial value in the medium and long term. As we mentioned on our most recent earnings call, we're making great progress on our value creation strategy, targeting an incremental $3 billion of normalized EBITDA by 2027. After only 1 year into a 5-year journey, we are almost 1/3 of the way there. This is a result of the contribution from our new PO/TBA plant, which started up last year as said, and our value enhancement program. The value enhancement program has already unlocked more than $400 million in recurring annual EBITDA by the end of 2023. And there is more to come. NATPET, where we expect to complete our acquisition, during the second quarter, remember in Saudi Arabia, represents productive assets that will generate value already on day 1. And in addition, to over 35% share of the existing 400,000 tons of cost advantage polypropylene production at NATPET, we will add value by marketing the majority of the joint venture's output across our global sales network. And we see opportunity to grow earnings by leveraging a new propane feedstock allocation that could support the second set of PDH and PP assets at NATPET, which would increase production to about 1 million tons per year with attractive returns. We're moving swiftly to be able to take our final investment decision in the third quarter of this year and target a start-up during 2027. Our C&LCS business, or the circular and low-carbon solutions business is on track to deliver an incremental $500 million of normalized EBITDA by 2027 and $1 billion by 2030. We expect to be ramping up the first unit of our proprietary MoReTec catalytic advanced recycling technology in Germany during 2026. And we will continue to advance our [ hub ] model in the Cologne and Houston area to establish an integrated value chain for circular and renewable solutions and that at scale. And our APS, the Advanced Polymer Solutions team is doing a great job and has increased their win rates for new projects and businesses, which should underpin improved profitability for the segment. Our value enhancement program is making excellent progress, far exceeding expectations. We are creating substantial value that is being reinvested in building up our circular and low-carbon solutions business and our carbon reduction program. We are implementing a culture change, evolving past a singular focus on costs to a more comprehensive view on investing in value creation. This is having a profound impact on the level of engagement across the company, igniting passion in our employees to unlock significant recurring value. Last year, we invested about $200 million of capital and operating expense to complete about 450 VEP, value enhancement program, initiatives where each initiative delivered an average of nearly $1 million of incremental mid-cycle EBITDA. Our VEP is yet another example of how we continue to improve the business in a capital-efficient way. As you can see, the VEP is delivering results at pace, and our progress has provided confidence to increase our 2025 year-end target from $750 million to up to $1 billion. Our outstanding track record for cash generation and conversion is self-evident and even during one of the worst downturns in decades last year. Our balance sheet is robust with 1.5 turns of net debt to EBITDA. And last month, we refinanced $750 million in bonds to extend the weighted average maturity of our debt portfolio to nearly 18 years, with an average cost of debt of about 4%. We remain true to our disciplined capital allocation strategy with a progressive dividend policy and a commitment to return 70% of free cash flow to shareholders through the cycle. Finally, let me highlight our current outlook across regions and markets. In the few weeks since we reported our Q4 results, we are beginning to see some signs of modest improvement. In North America, relatively small disruptions from winter storm, Heather, in Houston, reduced supply across our industry and tightened markets. In polyethylene, strong demand from Latin America has served to further tighten domestic markets and support improved pricing. Combined with low ethane feedstock costs, North American integrated PE margins are slowly beginning to improve. In Europe, the backdrop continues to be very challenging. Nonetheless, disruptions in the Red Sea shipping have reduced the availability and attractiveness of imports. And our European volumes are improving as local customers turn to domestic supply in an environment where destocking has led to low inventory levels. Lower natural gas prices are reducing cost pressures on consumers and industry, which should also support local demand. China markets are still [indiscernible] after the Lunar New Year holidays. While we are encouraging -- while we are encouraged by China's targeted stimulus efforts, the programs have not yet resulted in a meaningful improvements. In the sectors, in packaging, destocking across the value chain appears to be complete, demand for nondurables has been consistent, but our customers have not yet found a conviction to initiate restocking. In building and construction, we expect benefits from moderating interest rates and the inevitable recovery in demand for durable goods after 2 years of low consumption. In the U.S., stimulus funding from the bilateral infrastructure law will begin to support improved infrastructure demand, we expect during the second half of 2024. In automotive, global production is expected to be relatively flat in 2024. Nonetheless, we anticipate some growth in our APS segment through improved customer centricity and a higher win rate with our customers as we continue our transformation of this business. And in oxyfuels and refining, gasoline crack spreads are improving from the low ends that we have seen at the end of fourth quarter last year. And U.S. vehicle miles traveled has returned also to pre-pandemic levels and the value for octane from our oxyfuels is strong. At LYB, we optimize our assets on a global basis. We will continue to align our operating rates with market demand to maximize cash generation through all stages of the business cycle. In short, Jeff, we're making meaningful progress on our journey to deliver a more profitable and sustainable growth engine for LyondellBasell. And with that, of course, I'm happy to take your questions.

Thank you very much for your presentation. Europe for Lyondell over a longer period of time has been a volatile area, in that maybe between 2014 and 2019, EBITDA from European Olefins and Polyolefins was mostly maybe $1.5 billion, maybe it peaked at $2 billion, fell to $1 billion. And I think in 2023, maybe EBITDA was $23 million. I don't know, some microscopic amount. And now in '21, maybe it was $1.7 billion. So it's been tremendously volatile. Can you give us a little bit of perspective as to why European returns are where they are now relative to the history? And what is your longer-term outlook concerning European returns?

Sure. I mean, of course, it's a very good question. I mean to start with Jeff, because we are, of course, also not happy with the European business and the profitability of the European business, especially if you look at it compared to the history and where EBITDAs have been in the history. So a couple of points that I want to outline. I mean, first of all, we have already taken action because we did consolidate and shut down an important polypropylene line in the southern part of Italy. Reason, very clear, another profitable line, older technology, not sufficient scale, very cost intensive in terms of feedstock and energy. And we did lead the industry by example by being the first one that actually did shut down the Polyolefin plants in Europe. Secondly, if you look at the cash cost curves, we have a very good position in Europe on the cash cost curve. So our assets were not the worst assets that, not the worst steam crackers, not the worst polymerization assets in Europe. So in such a long downturn, I mean, the longest one that we have ever seen, one would expect there will be consolidation in the market. Unfortunately, of course, we haven't really seen it yet. But the expectation because there are lots of assets there that are substantially worse than our assets. So the expectation that we have is at a certain point in time, there will have to be a consolidation in the industry in Europe. Energy costs, of course, have skyrocketed when -- actually before, I mean, the war in Ukraine, but have come back now, I mean, to a level, which is, if you look at history, back to pretty much pre-pandemic levels. Feedstock's costs are still a tick higher than they have been in the past. So if you take the overall view, plus in addition to that, of course, what I alluded to in my comments, you have this disruption now on the Red Sea. So that disruption on the Red Sea also lead to the fact that customers are going back to buying more locally. So there's a bit of a changing dynamic going on in Europe, but demand is not there yet. So consumer confidence is not high. Now you can say this is a positive and a negative. The positive is that margins go up in Europe. So we're recovering. The negative is, of course, I mean, since you have that disruption in the Middle East, it may eventually postpone certain decisions that need to be made in the industry by peers on nonprofitable assets to consolidate them because maybe they don't run [ again ] at breakeven.

So if I can see whether I understand what you've said to me, a certain amount of material that of petrochemicals comes from the Mid East into Europe, and that has slowed or disrupted by the issues at the Suez canal. Is that correct?

Yes, the Red Sea.

And that changes the supply-demand balance?

It changes the supply-demand. I mean from a supply perspective, it changes the balance. I mean, not really from a demand perspective because the demand in the local market continues to be rather weak. But the supply is not coming as much from Asia because even Asia has to go through the Red Sea and through the Canal. So plus, in addition to that, I think it was also the emotional aspect because, of course, everybody in the value chain and the inventory levels and the entire value chain in this industry have gone down substantially. So you see it and you feel it that there is not a lot of material in inventory. So you have then, of course, also the buying behavior that is changing from our customers and the customers of our customers to be able to secure, I mean, the molecules. So as a consequence, prices are going up in the European region.

So your point is we're going to have as a base case, improved profits and profitability out of Europe because of the supply-demand disruptions. But weather in the end that's best for the industry structure over time in Europe, that's harder to read.

Well, I mean, if you have a region where demand in fossil-based products is not growing as it maybe has grown in the past. And if, just like our company, you have a very strong footprint in the Gulf Coast with low energy costs and low feedstock costs that are there to stay and a strong footprint also in the Middle East because let's not forget we had 3 joint ventures, still have them, of course, in the Middle East. I know we have expanded to a fourth one on polypropylene, leveraging upon cheap energy cost and cheap feedstock costs with a very good location in terms of exportation because it's at the West Coast of Saudi Arabia. And then, of course, you know that we are a technology leader. So we can bring with the next step, our polypropylene technology to that joint venture and capture value through the technology license to the marketing through the catalyst sales, et cetera, et cetera. so we're very well positioned. Another point that I want to make is you see from our strategy, the second pillar of our strategy is building up a profitable circular and low-carbon solutions business. I see that regulation is substantially more advanced in Europe to build up a circular economy. And we are leveraging, of course, upon that. So we're building up our Cologne hub. We have invested in our own advanced recycling technology. It's a catalytic technology, so it's not a simple pyrolysis technology. It has received EUR 40 million European Innovation Fund support. And we are now -- actually, we have done the FID, as you know, last year. So we're building up that whole structure next to our 2 steam crackers that we have in Cologne, to build up a renewable and circular hub in Cologne because the market in Europe is moving away from fossil-based products. It's moving towards low CO2 emission footprint products. Regulation, I said, is advancing, I mean, extremely fast, and we want to be very well positioned in not just the polyolefin space, but also in polypropylene oxide and styrene by having these low carbon footprint and circular modules in the market. So and as you know, these markets, I mean, if you talk about circular product markets, they are local markets. So that's where we see a chance, I mean, for Europe moving forward, and that's what we are anticipating. So therefore, we are investing in Europe in that field.

So for MoReTec and your circular polymers, over a longer period of time for you, that's more of a European effort than it is a North American Effort. Is that fair?

We are doing the first steps in Europe. But we are advancing very fast also by building up the Houston hub in the United States. So currently, we are selling that so-called circle and family of products. So that consists out of 3 subgroups in the family because we believe that in order to be the partner of choice for brands, brand owners, OEMs, you need to have the entire family. And the family consists out of circular solutions that were advanced recycled, mechanical recycles and then third, renewable-based but nonplastic waste based. So -- and that's where we have a cooperation on the third one, I mean, with Neste, my previous company. So in addition to that, so we have these 3 families. We've grown our sales volumes last year, Europe and North America, mainly by more than 60%. The last number that I have seen is around 80% that we have grown. So we are growing substantially in those volumes in the marketplace, and we're capturing value that is higher than the value that we had actually mentioned in the Capital Markets Day about a year ago. So we see that this market is developing its own supply and demand. It will take time, of course, I mean to grow, but it is not just, I mean, a European value proposition and a European story, but it is also moving ahead in North America because substantial amount of that 80% growth has been in North America. So if I look now at our asset strategy that we had, I talked about the hub that we're building up in Cologne next to the 2 steam crackers that we have. We go upstream into waste plastic by building up these joint ventures. So we tap into our future raw material, so to say, to have security of supply and also waste plastic at the right cost. The same we are building up in Houston with the respective partnerships, and we're leveraging on our refinery that we, as you know, we will shut down the refinery latest at the end of Q1 2025. But we have very good equipment at the refinery so-called hydrotreater and hyrocrackers. So when we are looking at building the next MoReTec facility, which is going to be, let's say, double the size of what we build in Cologne, which is 50,000 tons in Cologne. That's going to be 100,000 tons, let's say, not an FID yet, we're preparing. But once we take the FID on, then it's going to be at the refinery side. And it's going to be next to our hydrotreaters that we have there, so that we can eventually -- the plastic oil that comes out of our MoReTec technology can be upgraded through hydrotreating. So it is very pure. It goes through the pipeline to Channelview, which is not far away, as you know, and then goes directly into our steam cracker in Channelview. So we're building up again here that interlink on the hub so that we have the backward integration into the waste plastic, the technology that we have developed on our own, the upgrading because we have the equipment. So it's not huge CapEx. We don't have to build a hydrotreater on our own. Now we have the interconnection, so we have the steam crackers there.

I think I understand your mechanical recycled plastics effort. And I think I have some understanding of your MoReTec effort. What are you doing with ExxonMobil with in your Cyclyx joint venture? And I think there may be a third partner. How is that different from the other two efforts? And why are you involved in the first place? And what do you get from there?

Yes. I mean we believe it's very important that we tap into the waste and that we do that in a smart way. We've always said, I mean, we're going to be very smart when we talk about CapEx -- capital deployment. So in this case, there is a company, a joint venture that had been created, and we tapped into that and bought a share into that joint venture so that we also have the outlets that comes out of the inlet to say that so the raw materials that come out, the plastic waste that come out of that joint venture, that is a raw material to go into our MoReTec facility. So that's why I'm talking about [ hubs ]. This is not just we invest in that particular MoReTec, I mean, so the catalytic advanced recycling process, but we go upstream as well and here go into potentially joint ventures like the one Cyclyx joint venture with ExxonMobil, so joining forces, so that we get a plastic waste that is being sorted for different applications as the feedstock because the plastic waste in the future can be then, of course, the future oil or the future naphtha or the future gas as a feedstock that is being used to produce, I mean, polyethylene and polypropylene. But you mentioned that example. Of course, that's a Cyclyx example. I mean you, of course, can also mention then the example that we have in Cologne because that's exactly what we are doing in Cologne as well. We go upstream also with a waste management company that is going downstream into the sorting. We also worked together there in Germany with a waste to energy company, so that the stream of plastic waste is not going into energy recovery, but actually it's going and is a source of raw materials to produce recycled polyethylene or recycled polypropylene.

Okay. So what I wanted to do is I wanted to touch on a few broader questions. Lyondell is a tremendous cash flow generator and free cash flow generator. And that's one of the reasons why it's always an attractive investment for so many North American investors. But acquisitions matter, and I think of your experience in polyurethanes, would a urethane business over a longer period of time at the right price fit within Lyondell strategically? Or it's really not the kind of asset that Lyondell would be interested in over a longer period of time?

The first point is, let's not forget that we are in a very valuable parts of the polyurethane chain because we are the way how I articulate it, the largest player in propylene oxide, low-cost propylene oxide and low-carbon footprint propylene oxide. And in total propylene oxide capacity, we're #2. But if you talk about non-carbon footprint capacity, we're #1. And that's a molecule that is needed to produce flexible foam, polyurethane flexible foam as well as polyurethane rigid foam. But also beyond that, by being so strong into propylene oxide, we do not just serve the polyurethane applications, but also other applications, for example, coatings, et cetera. That's the first thing. So we have, I mean, that very strong position, and we can capture a huge amount of value in there. The second thing is we have said, I mean, we are growing and upgrading the core. Now we have identified, I mean, what is core for our business. We've communicated criteria for core. We've done portfolio management by selling what is not core. Refinery transformation, ethylene oxide, exit, et cetera, et cetera. And we have moved already in Saudi Arabia by buying 35% of that from Alujain, that NATPET joint venture. So you see us moving. We have lots of opportunities that we believe in growing and upgrading the core. And that includes also that part that we have a new retained value chain, that propylene oxide part.

So if I understand what you've said, so that means maybe depends on the way the opportunities arise, but you have assets in that area that are leverageable?

As said, I mean, that position, I'm very happy with the position that we have in the urethane chain by -- I mean, you can't produce polyurethane without PO, simply doesn't work. And since we are, in my view, coming from the outside when I joined [indiscernible] Brazil, and as you very well said in the introduction, I ran the polyurethane business at Bayer at the time before it became Covestro for 9 years. It's a very strong position, I mean, to have in propylene oxide because we are, let's say, the only independent propylene oxide big player in the industry. So we're not competing with our customers, but we are supporting our customers in their growth, and we are capturing value by doing so by being the lowest cost propylene oxide producer with the lowest carbon footprint. So it's a great position to be in.

In terms of Lyondell's thoughts about dividends and share repurchase. From my point of view, I think over a longer period of time, Lyondell was very focused on reducing its share base. But when I look at 2023, maybe you generated $5 billion in cash flow and you spent $200 million on share repurchase. And so the way I read that is maybe that's not a strong focus. But over the past few years, you've increased your dividend, you've paid out a special dividend. Is there -- and now of course, Lyondell is $100 a share. It's not $30 or $120. So with Lyondell where it is today? Is the emphasis for the company's cash deployment more toward dividends or towards share repurchase?

Yes. I mean capital allocation strategy has not changed since I came on Board at LyondellBasell. So that means that very important, and I've made the statements also in my opening comments and also in earnings calls is, I would not like to be the CEO that changes, I mean, 13 consecutive years of dividend increase by having number year 14 and not increasing our dividend. So dividend comes very much on top, yes. As you rightly said, Jeff, I mean, we've demonstrated that also since I came on Board by not just increasing our dividend 5%, 6%, but also paying out in 2022 in my pretty much first week. When I joined the company, I had a Board meeting, I proposed to the Board, I mean, to pay out an extra dividend. So that's how we're looking at that. Are we not buying back shares anymore? No. We're being very smart about it. So we have bought back shares last year. And we will continue to look at doing that also in the future, but we're smart about it. It's not that we say, look, I mean, at every price, I mean we're buying back shares. Of course, I mean, we're investing a little bit more in capital expenditures. Last year was very slow. I mean our big investment in PO/TBA ran at its end. And we had alluded to the fact that we would only invest last year, I mean, about $1.5 billion, $1.6 billion, which is what we did. This year, it's about $2.1 billion. And we've also spent a little bit more maybe than in the past on bolt-on acquisitions. As I said, I mean, certainly low carbon solutions, not huge things. But also here and there where it fits, I mean where we can make smart deals, then we add them as well. So we've, I would say, spend a bit more proactive screening time investments in that field. And I mentioned already, of course, I mean, the $500 million that we are investing to buy, I mean, 35% of NATPET, which we expect, I mean, to close and also in the second half of this year, so that's also where cash is going.

So in the brief time we have remaining, what I want to do is to ask you 2 questions. The first one is about the I&D business, in that it seems that there has been an incident in your acetic acid and VAM operation, and it's difficult from the outside to know how serious that is. And maybe your butanediol assets have been offline for a while, and now they're back on. And there's been volatility in propylene prices. Where does I&D stand these days?

Well, of course, I mean, I&D is more than just, I mean, one particular product. As you know, it's an entire family. So when we screened them in the entire portfolio of I&D, we quickly came to the conclusion that if you have only one manufacturing site that is producing very successfully, we have a long history, ethylene oxide and derivatives. It's not really core. I mean we're competing with substantially bigger players. So we quickly, swiftly focused on executing that. So we have signed with INEOS. They're buying the business for $700 million pretax. So that was, for me, very clear and obvious move. So you could almost say, I mean, okay, we get $700 million I mean from the ethylene oxide and derivatives business. We are investing $500 million in the NATPET joint venture to buy that 35%. So we're demonstration of we are growing and upgrading the core. On the acetyls business, we are having heavy work since a couple of years on upgrading that business and especially, I mean, the reliability, not just, I mean, on the production of acetyls and VAM, but also on the upstream. So that's the main focus, I mean, that we have on that business as we speak. And of course, I mean, in the I&D very much clear, I mean, what is core, I mentioned it multiple times is our propylene oxide position if it is either combined, I mean, with TBA, MTBE, ETBE, oxyfuels, or if it is production of PO, PO/SM through the PO/SM routes and continue to work in reducing our CO2 emissions and eventually also having molecules that we are producing that circular for customers that have the willingness to pay.

And just if you could say a word or two on the acetyl outage. Is that a longer-term issue for you or it's brief or it's hard to assess at this moment?

Yes. I mean if you look at it over time, we are running pretty much, I mean, utilization rates, which were kind of industry standards. But as I said before, I'm not happy with the reliability of the units that we have. So we need to make sure -- and there is a task force that is working on that to get the reliability up of the unit because we want to be more than just in the 3 average over, let's say, the longer period of time.

Thank you very much for your presentation. Thank you for your attendance, and we hope that you'll come back and see us next year.

Absolutely. Thank you for the invitation, Jeff, and questioning.