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

Good morning. I'm Jeff Zekauskas. I analyze chemicals for JPMorgan in North America. And this morning, it's my pleasure to introduce the management of Lyondell. Representing Lyondell is Peter Vanacker, who is the CEO and has been the CEO since 2022. He's a long-standing chemical and refining industry executive in that previously, he was the CEO of Neste. And back in the old days, he managed the urethanes business of Bayer MaterialScience, which became Covestro. Accompanying Peter is Dave Kinney, who's in the first row, who is the Head of Investor Relations. The format will be a fireside chat. And I think Peter will begin with some introductory remarks. Peter?

Yes, absolutely. And of course, Jeff, just like last year, I mean, thanks for having us here today. Thanks also to all of you for joining us on the webcast. I would like to start with a couple of few slides and remind everybody of LyondellBasell's strategy, the progress towards our goals and the current status of the markets. As usual, we ask that you review our customary language around our forward-looking statements and non-GAAP financial measures. Reconciliations of non-GAAP financial measures are found in the appendix to this deck, which is also available on lyb.com. Our team is making great progress on the strategy we introduced nearly 2 years ago at our Capital Markets Day also here in New York in 2023. And I'm really pleased with how the strategy is bringing clarity and focus to our direction, both within the company and with external stakeholders, including our investors. I'm also proud that we have been able to continue moving forward on our strategy despite the prolonged downturn facing our industry. And as a reminder, on Slide 3, we describe how our strategy is built around the 3 pillars: growing and upgrading the core, building a profitable circular and low-carbon solutions business and stepping up our performance and culture. As we mentioned on our most recent earnings call, we are making great progress on our value creation strategy, targeting an incremental $2 billion of normalized EBITDA by 2025 and $3 billion by 2027. And on this slide here, Slide #4, we describe our progress towards the $2 billion of incremental EBITDA in 2025. At the end of 2024, we found ourselves nearly 2/3 of the way towards our 2025 goal. And the successful start-up of our PO/TBA plant in 2023 is adding approximately $450 million to our normalized EBITDA by leveraging our proprietary technology and advantaged feedstock positions in these attractive markets. I'm also very pleased to report that our Value Enhancement Program is exceeding expectations. In 2024, the VEP, which stands for the Value Enhancement program, unlocked a year-end run rate of more than $800 million of recurring annual EBITDA improvement while contributing approximately $600 million to the 2024 EBITDA. In addition, we successfully completed the divestment of our noncore ethylene oxide and derivatives business, leveraging the sale -- the proceeds of the sale to strengthen our portfolio by acquiring a 35% share in NATPET in Saudi Arabia, and that has a cost-advantaged integrated polypropylene joint venture. There is more to come in 2025. We're confident in the progress of our Value Enhancement Program, and we expect to exceed our goal to achieve a year-end run rate of $1 billion of recurring annual EBITDA improvement by year-end 2025. We expect additional contributions from the transformation of our Advanced Polymer Solutions business and growth in our C&LCS volumes, so circular and low-carbon solution volumes. While we are always watchful for attractive M&A opportunities, you can be assured that we will not compromise our disciplined approach to capital allocation to fulfill growth targets with risky or marginal acquisitions. On Slide 5, we highlight 2 new growth initiatives. And as you noticed, 2 weeks ago, LYB and Sipchem were awarded a prestigious feedstock allocation by the Saudi Arabian Minister of Energy. The allocation provides sufficient ethane and butane feedstocks to support a 1.5 million metric ton ethylene cracker and downstream polyolefin derivatives. LYB and Sipchem have launched a joint feasibility study for a complex in Jubail with LYB having a 40% position. The project is consistent with our strategy of leveraging LYB's technologies to gain cost advantaged positions in growing markets aligned with our core. On the right side of this slide, we describe our final investment decision to proceed with building our second flex unit, utilizing metathesis technology to convert ethylene into propylene. And with spreads between propylene and ethylene averaging $300 per tonne and conversion costs of only a few pennies per pound, this new capacity will profitably reduce our net long ethylene position and our net short propylene position in North America by about half. Beyond the economics of converting 400,000 tonnes per year of ethylene into propylene, the project also benefits from the capability to upgrade 4 carbon or C4 streams into high-value products. And C4 upgrades and synergies with our existing Flex unit boost profitability by an additional 50%. We will start construction later this year and expect to start up in 2028. We're exhibiting capital discipline with both projects. Flex 2 is comfortably less than $1 billion, and our participation in the Saudi project is on a 40% basis with perhaps 2/3 financed with nonrecourse project debt. Our highly disciplined approach to grow and our investment-grade balance sheet is enabling us to continue with execution on our profitable growth strategy despite the ongoing downturn. On Slide #7, our outstanding track record for cash generation and conversion is self-evident even during one of the worst downturns I have seen in more than 30 years working in this industry. Over the past year, our business teams generated $3.8 billion of cash from operating activities. Cash on hand remained flat for the year at $3.4 billion. And during 2024, we achieved cash conversion of 90%, well above our long-term target of 80%. Our balance sheet is robust with 1.8 turns of net debt to EBITDA, a 17-year average debt maturity and a 4% weighted average cost of debt. 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 conclude with Slide #8 and highlight our current outlook across regions and markets. In the few weeks since we reported fourth quarter results, markets have been mostly stable, but remain challenging. In North America, most -- much of the industry along the U.S. Gulf Coast lost nearly a week of production from the winter storm Enzo, and that was in January. An unusually heavy schedule of planned maintenance across the industry is putting more than 10% of ethylene cracking capacity offline during February, March and April. And with a strong March order book and constrained industry supply, we're optimistic for improved polyethylene pricing in March. In Europe, we are seeing modest seasonal demand improvements and enjoying the benefits from lower feedstock costs associated with the fall in crude oil prices. Capacity rationalizations are accelerating as owners face substantial cost and regulatory mandates for decarbonization with minimal governmental support. Over the medium term, we expect capacity rationalizations will help improve market balance between supply and demand. In Asia, markets are showing slow but steady improvements in both volumes and margins, and we are encouraged by China's targeted stimulus programs, but remain cautious while monitoring for signs that these efforts can translate into more meaningful market improvements. For the packaging sector, we expect to continue seeing steady global demand as we move ahead in the new year. Building and construction, U.S. infrastructure stimulus efforts are supporting increased industrial activity, and we are encouraged by Germany's pivots away from fiscal austerity. Additionally, leading indicators for U.S. home remodeling activity are forecasting increased activity for the second and third quarters of 2025. In the automotive sector, a modest recovery in seasonal demand could be pressured by elevated inventory levels across the industry. Additionally, we're watchful for fallout from the unpredictable changes in trade policies that could impact production as we move through the year. For oxyfuels, stronger crude prices and typical springtime improvements in gasoline crack spreads should provide benefits as we move towards the second quarter. Our focus remains on reliable operations and continuous optimization across our global footprint to capture market opportunities, and we are maintaining our laser focus on cash generation. In short, Jeff, we are making meaningful progress on our journey to deliver a more profitable and sustainable growth engine for LyondellBasell. With that, happy to dive into our conversation.

Thank you for that very comprehensive introduction. In the chemical industry, our experience with mixed feed crackers is that they're often naphtha and ethane and butane and ethane represents at least to my mind, a step-up in keeping costs low. Would this project be something that would involve carbon capture at all? Or would these be more conventional polymers that would be made and shipped to other parts of the globe?

It's a very good question, Jeff, that you're asking and talking about this allocation that we have received in Saudi Arabia, the feedstock allocation. As you rightfully said and pointed out, I mean, this is based upon very competitive ethane and very competitive butane. We are, of course, I mean, at a very early stage of such a project. Therefore, current outlook is, if we proceed with the project, we are as said, I mean, in that feasibility study, we're talking about a startup in 2031, which in our view, fits well if you look at global supply and demand. In addition to that, we believe that having feedstock access that provides us a lowest delivered cost position is extremely important to continue to successfully navigate in the petrochemical industry between low points in the cycle and still have very good EBITDA margins and, of course, profit from the high points in the cycle. In addition to that, being in an environment in Saudi Arabia allows us eventually to tap in into low-carbon energy that could be photovoltaic electricity generation. It would also allow us to tap into existing projects that are being deployed for carbon capture and storage. It was in the whole discussion that we had with the Ministry of Energy, and that included, of course, also his Royal Highness the Minister of Energy personally. It was very important from the Ministry to give an allocation to 2 companies that consider sustainability as very important for the future. Therefore, also the access, I mean, to those possibilities to have a very low carbon footprint as well. You also asked about the polymers. The scope that we are envisioning, again, at an early stage, not a final investment decision yet, but the scope that we are envisioning includes also very special applications, special polymers, like, for example, our Catalloy. So this is not a scope that we intend provided, I mean, we continue to move ahead, I mean, towards a final investment decision. It is not a scope which is focused on commodity-type polymers.

Thank you for that. Are there particular advantages to investing in Saudi Arabia versus investing in other jurisdictions?

Well, we are, of course, the success of LyondellBasell, and that's why we also navigate very well through the current down cycle by continuously having record EBITDA turning into cash flow, shareholder -- returns to shareholders and so on is because we are very much focused on building up footprints that are lowest delivered cost footprints. So Saudi Arabia offers us that by having access assets on one hand side, to very competitive feedstocks with the right volumes of feedstocks with very low energy costs. And in a location whereby we can easily also not just support the local industry that clearly, I mean, Saudi Arabia is very convinced and actually already developing, but it has a very good location also to export these polymers. It could be in the northern part of Africa, Turkey, India, China, Europe as well. So if you look at our footprint, we have a very strong footprint that we already have in the Gulf Coast and United States. We intend to continue to expand that footprint with the same principle, lowest delivered cost, but also hedge between the positions that we have in the United States on one hand side and then also on the other hand side, in the Middle East. This is not the first time because of our heritage, as you know, Jeff, the Basell heritage. We have existing joint ventures. So we know how to operate in the Middle East and specifically here in Saudi Arabia. And then with the NATPET joint venture, we just recently added one, which is at the West Coast, focused on polypropylene, the West Coast of Saudi Arabia. And then, of course, the intention of the new allocation would be to build up something which is at the East Coast.

So maybe a final question on this project. So when I hear low cost, I think the Kingdom allocates at $2 per MMBtu. So at least that's the number that jumps to mind for the derived ethane costs. And in your description, what you said is that you might be able to have nonrecourse debt. So when I look at the project, it looks to me maybe as though it would cost $5 billion in its entirety and maybe $2 billion would be your share. And maybe you would do half equity, half debt, with $1 billion being nonrecourse. So is this going to -- that the Lyondell shareholder is going to contribute $1 billion in equity. Now I know you're going to say it's early stages. But in rough terms, is that the right way to conceptually?

Well, first of all, it depends on what is going to be the final scope of the investment, Jeff, because we have not finalized the scope of the investments.

Because it could be larger.

No. I mean, because -- what is known is, of course, the size of the cracker. But what is not known and we have not communicated is, and we are further evaluating with our partner is what kind of investments are we going to do in terms of the different polymer productions. Are we going to put the Hyperzone in there? Or are we going to put -- I referred to Catalloy. So that entire configuration needs to be taken. And that's why we are not, at this point in time, speculating on what is going to be the total investment. But you're right, I mean, if you invest in a country like Saudi Arabia, it's a very smart investment what we are doing because, first of all, we have 40% in the joint venture. Secondly, as you rightfully said, and I included also in my opening remarks, and I don't want to mention a number now on the total investment and not go into there, but 40% of the total investment, of that 40%, most probably, I mean, 2/3, you can have local debt. So 1/3 is then eventually the equity that you need to invest. So your number starts to get very, very small in terms of equity that needs to be injected in order to get access to the lowest delivered cost of not just commodity, polyethylene, polypropylene, but specialized, I mean, products in the right location at the right point in the cycle to get it up and running. But it will also allow us to leverage upon additional value streams because this will be, of course, our polymerization technology that is being applied. So as you know, we have this business unit technology. So we would out-license that technology to the joint venture. We would sell the catalyst to the joint venture and have that income stream, eventually support, I mean, to build and start up the units. And then in addition to that, of course, we have the path to market in different countries, very well established. So we get value capturing, I mean, from the path to market or the marketing fees.

So the derivatives that will come off this cracker are primarily varieties of polyethylene.

It would be a variety of polyethylene, but also polypropylene. We're not excluding -- I mean we are strong in both. So it's not just that we are saying from a scope perspective, we only invest in polyethylene. But we look at the different opportunities that we have. And again, very important in that is what I said before, not just looking at commodity type, I mean, linear low density polyethylene, but of course, also looking at the entire portfolio. And it may very well be. I referred to Catalloy. This would be the first time that we actually deploy our Catalloy technology in a joint venture outside of 100% LyondellBasell owns.

Okay. Maybe what we'll do is we'll turn to current demand and commercial conditions. So people think about tariffs and tariffs on Canadian product and Canada is a net exporter actually of polymers to the United States. And there was the idea that there might be a 25% tariff on Canada, on Canada -- Canadian imports into the U.S. And I believe prices in polyethylene settled flat in February. Can you give us a general sense of what the market is like these days in that some people might think the market is softer because of the tariff uncertainty and maybe different players have different attitudes toward paying or not paying the tariff. Can you give us sort of a sense of what's going on and the rising raw materials in the background. What's going on, on the playing field?

Absolutely, Jeff. I mean, happy to do so, and thanks for the question. It's a good question because that's what everybody is now looking at as we have quite a lot of noise and quite a lot of news, I mean, flows. I mean, first of all, let me point out that last year for polyethylene in North America was a growth market. So demand did grow last year in the local market by about 4%, which was since 2021, where we saw the recovery after the pandemic, which was the first year when polyethylene again grew in North America. Last year, demand was in North America, not the issue. We had some additional capacity that needed to be absorbed by the market. Competitiveness of producing in the United States has also not been the issue because you could -- and you could see that because there were very high export rates last year. I just quote I mean, polyethylene export of 12% growth, I mean, last year. And that, of course, always based upon a very good competitiveness position that you have if you manufacture in the United States for obvious reasons that we all know. Demand growth in Q1 in North America, we have not seen in polyethylene any difference compared to where we were last year. So we continue to be quite confident and remind, I mean, what I said at the opening remarks that there is about 10% of capacity because of these freeze impacts that we had at the beginning. Plus in addition to that, you have a very heavy season, cracker season of turnarounds that will run into April. It also means -- I mean, we are part of that. That means that we have in Channelview, we have a very extensive turnaround actually going on as we speak. So that's one point I want to make. The other point I want to make, if you look at our portfolio LYB, it's around 10% that we are exporting in polyolefins that is China, Mexico, Canada together. It's not a lot. So the direct impact for us is minute, actually, I would say, practically nonexisting because just like during the first, I mean, Trump administration, we successfully, wherever needed, shifted then also where within the whole model that we have between all the assets, we shifted, I mean, then from one region, I mean, to the other region. So our people are very expert. They know how to do that. It's part of their job. And due to the fact that we have strong operations also in the Middle East, and we have strong operations, of course, in the United States, you can always shift around in that. What I would also like to add to that is that polyethylene has always been quite robust when there is higher inflation. We've seen that in the past as well. So -- and I said also in my prepared remarks, I mean, that we have -- the order book, I mean, in March is quite strong. So you alluded to the fact, of course, also that we had a flat settlement for polyethylene during the month of February. This is, of course, I mean, as usual, you're always very well informed. This is absolutely accurate. We did have a $0.05 per pound increase in January. There may have been some opinions that maybe after settlements that was a $0.05 increase in January, maybe it would be too soon in February to do another increase. That's all speculation, who knows. Fact is, there is a price increase for March that is on the table that is hovering somewhere between $0.05 per pound and $0.07 per pound. And if you look at what I said at the beginning, quite a lot of capacities that are off-line on one hand side, good, I mean, demand on the other hand side. So I kind of have difficulties to see why prices would not go up in March.

No. Maybe we can just take a little bit of a trip around the globe. What we see is Lyondell was one of the first companies to restructure Europe or to seek strategic options for some of its assets. And we've seen Dow follow it. We've seen ExxonMobil close down operations in Europe or plan to close down operations. We've seen Shell put their olefins business and polyolefins business up for sale. How did it occur that people didn't look at Europe as just cyclically weak? What was it that made people say, this is a structural issue that we really need to take very, very different steps rather than waiting it out. And that's true, natural gas is higher, but that's not necessarily decisive for core petrochemical operations. Can you give us a little bit of a sense of what the thinking was in the industry as to there needing to be a larger change?

What you -- as you rightfully said, Jeff, when we -- when I came on board at LyondellBasell, then immediately, we sat together with the executive team of that time and clearly said we need to have a very well-articulated strategy, and we need to reflect upon the strengths that we have in the company. We also need to critically look through different scenarios in what could happen in the different regions. We follow the principle of what I said before, lowest delivered cost. So first of all, do we have a strong position in the marketplace? This is a market that we believe has continued to grow. Do we have the lowest delivered cost or are we having a leading technology. So a number of criteria that we looked at. And then we started reflecting on our portfolio. The result out of that is the communication we made at the Capital Markets Day, where we immediately took the decision to exit ethylene oxide and derivatives shortly after the Capital Markets Day, and we started the project on looking in depth at Europe. Of course, at that point in time, nobody really was looking, as you rightfully said, at Europe. We were very fast at looking at Europe. We did make the announcement only later because we wanted to make sure that we had the right scenarios in place before we started making certain announcement. We did anticipate and we did accelerate a couple of these decisions, as you know, not just limited to Europe, but we did exit in Australia on a manufacturing unit, and we did shut down in the southern part of Italy in our site in Brindisi. We did shut down an older polypropylene production line. Of course, lots of things have happened in Europe, which are more than just a bit higher energy costs. There's quite a lot of paradigm shifts. You have, of course, a move away from cheap gas that came out of Russia and then you can speculate, will there ever be a return back even if there is no war. So I call that a paradigm shift. Secondly, you have after the pandemic and after the recovery in 2021, for a lot of reasons, consumer behavior has changed. Consumer confidence, I mean, locally is quite low. And that goes hand-in-hand with an ever drive -- ever more drive in terms of regulation. And the regulation is not just in the area of how to do business in Europe, but also in addition to that, as you know, triggered by Fit for 55 in being a leading region for decarbonization of the industry, not just the industry, but also transportation. So these are multiple factors, of course, that have received more and more visibility. And I would assume that because of that, you get all these announcements now coming out and they get this big call towards regulators that the industry needs support that otherwise, the industry will leave the European region if there is not an appropriate support. Now back to LYB, we're well advanced with our strategic assessment, and as you know, and we talked about that yesterday evening as well, we are in the market on the 5 olefins and polyolefins assets as we speak. The other assets is a PO/SM joint venture with our partner, Covestro. So therefore, I mean, we do everything there together with our partner and therefore, needs to be considered a little bit more different than what we are doing in olefins and polyolefins.

Okay. So maybe as a very last question. When I think about Lyondell and its capital expenditures over time and its dividends, maybe its normal capital expenditures are about $2.5 billion. And right now, its dividend is about $1.7 billion or $1.8 billion. So every year, you need $4.2 billion or $4.3 billion to fund those 2 items. Now some years will be a little bit lower, some years will be a little bit more. But Lyondell's operating cash flow has been more in the $3 billion to $4 billion range when you look at current demand conditions. So if it's the case that over the next few years, current demand conditions are not so different and that you're still operating at that $3 billion to $4 billion in cash flow, what will you do? Will you lever up each year by, I don't know, $400 million or $500 million? Or will what you do is take projects and push them off into the future?

Well, of course, the first thing that we did and started immediately after the Capital Markets Day is portfolio change. So the future LyondellBasell will not be the same as the old LyondellBasell. That's very important, I mean, to notice that. We've shut down, I mean, the refinery. We are transforming the refinery to a circular and renewable hub, which means that we're not investing CapEx. We're not investing billions, I mean, to do a turnaround in the refinery. We exited the ethylene oxide and derivatives business. We only had one location. Ethylene oxide is highly regulated also in the United States. So we avoid, I mean, in the future that we have very high costs to keep up with the leaders in the marketplace. The same is also valid, I mean, for the European assessment because if we are exiting that portfolio, whilst keeping a very strong position in the European market as the market is going towards circular solutions. Therefore, we continue to invest around our Cologne hub with our MoReTec 1 facility and other measures. But we avoid that we need to invest all these -- all that amount of money as a public company in decarbonization as well as turnarounds and making sure that we have safe operations. So that's the first thing. So the portfolio is changing. The other thing is, you noticed, I mean, that last year and also this year, we are navigating through the cycle. And therefore, we continuously look at our scenarios and we prioritize and deprioritize where we actually invest in. So as a consequence, if you look at last year and this year, originally, we thought that the number would be EUR 2.2 billion this year. Well, actually, it's going to be EUR 1.9 billion. The same also last year. We invested less last year while still investing in our Value Enhancement Program and capturing those value creation projects, which have a huge, I mean, return on investments. So -- and then the third element is working capital. We've spent an enormous amount of efforts actually centrally driven by our treasury department in making sure that we free up capital through a very disciplined working capital management. We freed up more than a 3-digit million number last year. And all these things, if you all take them together, allowed us also last year to increase our dividend by 7%, whilst making sure that we actually were funding everything out of our operational cash flow. We ended the year with $3.4 billion cash on the bank. So that $3.4 billion cash on the bank is there. So we're not going to stop these projects now in 2025. It becomes part of the DNA in how we run our business. And that's why we are confident, just like I said, I mean, at the last earnings call, and I repeat it today, we have 14 consecutive years of dividend increase. Why would we not continue to increase our dividends? I don't see any reason why we could not do it. But of course, as usual, we will always be disciplined in our capital allocation.

So if I understand what you've said to me, you'll work as hard as you can so that your outflows and your inflows at least match.

Well, if you look at the portfolio change, I mean, add these numbers up, I mean, you easily come into multiple hundred millions of CapEx that are required without a turnaround of a refinery, which is easily $1.5 billion to $2 billion just to keep on operating your facilities. I think it's just being smart in the company of what is core. That's what we said, grow the core and upgrade the core in what is core and therefore, being, as a consequence, very disciplined on our CapEx investments, but not just CapEx, but also working capital management. I know the company put a lot of focus on working capital before I came on board. But together with Michael McMurray, our CFO, that has now retired and Augustin will keep that, of course, up as well. We heavily increased our focus on working capital management.

Thank you very much for your thoughtful discussion, and we hope you will return next year.

Yes. Thank you very much. Thank you, Jeff.

Thank you very much.