LyondellBasell Industries N.V. ($LYB)

Hi, good afternoon. I'm Jeff Zekauskas. I analyze chemicals for JPMorgan. It's my pleasure this afternoon to introduce the management of Lyondell. Representing Lyondell is Agustin Izquierdo, who's the Chief Financial Officer. And I think he's only been Chief Financial Officer through events, whether it's Liberation Day, the conflict, the dividend cut. It's just -- he's had an eventful year. He worked at BASF for 10 or 12 years from 2009 to 2022. He has both an Engineering degree and a degree in Actuarial Science. And on top of that, I think he went to the [ UFC ] Business School. So he's a pretty sharp guy. Accompanying Agustin is Dave Kinney, who's in the audience, who's retiring. And Dave has done a terrific job as the Head IR contact at Lyondell for years and continuing a tradition where Doug Pike, who is the previous IR Head, did a wonderful job. And next to him is the new IR contact, David Dennison. And so we look forward to working with him. The format will be a fireside chat. And Agustin, would you like to begin with a few slides?

Perfect. Yes. Thank you very much, Jeff, and thank you, everybody, for joining us. I'll go over just a handful of slides that talk about our outlook, obviously, the existing conflict in the Middle East and how we are positioned to take advantage of that situation. And then we'll open up for Q&A. So as always, with the legal disclaimers, we'll be talking about some forward-looking statements. And of course, any reconciliations to GAAP, you can look in the -- in our website to all the non-GAAP financial measures. And so let's just take a few moments to recap where are we and where we even before February 28, which now seems like a long time ago. So if we just quickly go throughout the regions. In North America, what we were seeing in Q1, especially demand-wise, right? So January and February were okay months sort of following the normal seasonal demand patterns. And we were getting a few bright spots, as you mentioned on the previous fireside, PMI was looking good for North America, and that's normally a leading indicator. So if you get a few strong PMIs as usually a 6- to 9-month lag that really we have some recovery on the durable side, which is good news for us. What we've seen now, obviously, since the conflict started, we've seen quite an increase in terms of prices. Prices around PE and PP, of course, have increased. Our oxyfuels pricing has also benefited as it is linked to crude. And it's becoming obvious that North America is an advantaged region in terms of feedstock, and we'll continue to take advantage of that going forward, and we'll touch more on what happens in the other regions. In terms of Europe, we see -- we saw the pressures that they were seeing from imports from the Middle East and China. Obviously, since the conflict, the feedstock prices have also increased, and we'll also touch on the measures that we're taking. And we're taking just a measured approach in general to operating rates to make sure that we were matching supply and demand. And what we do continue to see is the rationalization in Europe, which has even increased at a faster pace than we had anticipated. In Asia, no surprises. The continued oversupply that we had seen in the market continues. Now the elevated cost of feedstock is playing an important role. And as you well know, on the polyethylene side, they're on the high end of the cost curve. And with -- after the conflict, what they have done is obviously secured sort of the feedstock for their own supplies. They've cut the exports of gasoline and diesel, which has also been supportive for our MTBE business. And petchems, except for those that are part of integrated complexes are also -- we see operating rates coming down or in some cases, even shutting down. And Middle East, of course, the war, the conflict is creating quite a bit of disruptions in the Strait of Hormuz. We'll touch about on some of the capacities and how they're affected but the materials obviously become very, very constrained, both on the material that is trapped as well as the feedstock implications that it has for Asia. The operating rates, which we'll also touch on, we haven't seen much change actually in terms of operating rates in the Middle East, but they will start to run out of storage if the supply chain doesn't improve fairly quickly here. And the constraints will also -- even after the conflict is resolved, will take a few months to normalize. Moving into some of the dynamics that we were looking before sort of during the conflict. At the very -- on the left-hand side, we have the days -- inventory days for PE. And if you recall, we finished the fourth quarter with inventory days around 37 days PE. This is according to the ACC statistics. This is very low levels. We usually balance when we're about 45 days, which was also very supportive for the January price increase that we got the $0.05 per pound. Then as you recall, February was flat. And of course, after the conflict, we have nominations for $0.10 per pound for March as well as April with some producers even having nominations of $0.15 per pound. But what we saw also the February statistics just came down, even though utilization rates increased, the inventory days at ACC level are 37.7 versus 37.1. So it hasn't been a massive increase, which still continues to be supportive. And it just also shows that inventories were quite low. And now with the conflict, it makes it even more sort of dramatic the situation in terms of giving support to the price increase. The second chart you've seen also in some of our earnings releases, and this is the rationalization that we have seen since 2020. It's roughly the 23 million metric tons of ethylene capacity that are coming out of the system across the world with an acceleration, I would say, particularly in Europe. We've also seen announcements in Japan, in South Korea and the anti-involution measures that have been announced in China. There's still more to come on the net, I would say, from now until 2030, roughly 13 million metric tons, which we'll also talk about this, what's going on in the Middle East right now. We see a lot more sort of capacity coming out of the system that would net those 13 million metric tons. And on the right-hand side, just the demand that we continue to see on the durable and nondurable side. Demand in the U.S. hasn't really come down, continues to be fairly healthy at around the 2% or 3%, close to 4% here in 2025, and that gives us hope. Eventually, the cycle will have to come back, right, the durables that we bought during COVID, the replacement will have to come after 5 or 6 years. And that's what we're starting to see, which, as I mentioned at the beginning, combined with good PMI numbers that we saw at the beginning of the year was giving us hope even before the conflict started that there could be light at the end of the tunnel for the PE cycle and PP as well. And so we also wanted to just give you a sense of what are some of the implications and how does this -- the war in the Middle East sort of affect us not only in terms of the margins that you can see here in terms of dollars per ton for increases, but also the material that is affected. So for the PE, we estimate that roughly 30% of the global capacity of PE is affected, either roughly 50% of that is material that is strapped in the Middle East that cannot leave because of the Strait of Hormuz. And then another 50% or 15 million metric tons is related to shortages that you have related to feedstock. Here, the 57% that you see here on the slide, that's the overall sort of PE that is touched, not necessarily the 30% that I just mentioned. But you can see how leveraging it is in North America, $100 per ton increase is $320 million of EBITDA for us. And if you recall, our operating rates of 85%, which we have listed here, we still have room to increase by 5% to 10%, which is obviously very supportive for us. In Europe, $100 per ton increase, as you can see there, translates a little bit less is $280 million for EBITDA annualized, but our operating rates were much lower. So we have the room to grow by, call it, 15% to 20% more. So there's significant upside. In Europe, in addition, what you have is, obviously, you don't have the imports now from the Middle East and China coming into Europe. Yes, we have increases in the raw materials in naphtha in particular. And what we have done is, in this particular case, declare a commercial force majeure to make sure that we can talk to our customers and renegotiate terms and conditions and pricing to make sure that our pricing can catch up with the fast increases that we're seeing in terms of raw materials. Oxyfuels, obviously very leveraging for us, strictly related there to the price of Brent. This is the metric that we've seen in the past, $1 per barrel is $20 million EBITDA for us, very leveraging. We're one of the largest oxyfuels producers, and then we'll also talk a little bit about the vapor situation in a few minutes. But roughly 11% of all the oxyfuels globally passes through the Strait of Hormuz. And it's -- and we have seen already prices in March for the raw material margin being in the $300 per metric ton, which is mid-cycle, it's roughly around $240. So we're already seeing prices above that. And in the case of polypropylene, which you know is the -- we call it the sleeping giant for LyondellBasell, which we haven't been able to push much spread increase over the past few years, you can see how leveraging this is in terms of $100 per ton. It's roughly $440 million for EBITDA annualized for North America and Europe. And as we see now throughout the world that it's more difficult to ship propane, you see PDH rates across the globe coming down. I think we've seen rates in Asia even in the mid-50s, which is quite low. And obviously, the material from the Middle East is tracked in the region. So this gives an opportunity for North America to actually start exporting polypropylene, and it can be quite leveraging for us. And hopefully, this gives just a good sense and rules of thumb to -- for everybody to get a sense as to the impacts that we can achieve and how leveraging pricing is across our different value chains. And I believe that's our last slide. So we'll keep the numbers up.

Thank you for that. I haven't seen the slides. Maybe the place to start is what's your expectation for price nominations in polyethylene in March and in April in North America. And how have you come to those numbers?

Sure. So we have $0.10 per pound for March. We started with $0.07. Some of our competitors had $0.08 and then the market sort of came down to the $0.10 per pound. The same for April, we have $0.10 on the table for now. Some of our competitors have even $0.15 per pound on the table. And I think this just came us a little bit of price discovery realization, right? We were talking earlier today during the meetings that during Katrina, I believe that most price increase the industry has pushed was $0.095. So $0.10 per pound is sort of on the high end. But it's there's a basis for achieving it, right? So we said inventories are at almost all-time low at 37 days, 38 days. The inventories that we also see in China are 25% below what they normally are after Lunar New Year. So the inventories are quite tight. And obviously, the 30 million metric tons of ethylene derivatives that are not coming or being exported out of Middle East and China is quite significant. So it gives a lot of room, I would say, and support for the $0.10 per pound. And we see the order book, we were just looking at it right before coming here. The order book for April for both PE and PP is significantly higher than March and the highest we've had for the past 3 or 4 months. So the $0.10 per pound is not scaring anybody. And still, we see a healthy number of orders in the books.

So I'm trying to remember what your ethylene utilization rates were likely to be in the first quarter. Maybe 80% to 85%?

Correct.

Yes. So as a base case, should your utilization rates go to 90% or 95%? Or are the utilization rates different for polyethylene than they are for ethylene, if you know?

Yes. I mean on the olefin side, you usually run the crackers at higher utilization rates. So those are normally in the mid-90s. So what we normally talk about utilization rates is the blend of ethylene and polyethylene. So what you'll see for Q1, you will see a tick up or closer to the 85 and above because remember, January and February, we didn't run at the higher rates, right? So really, the impact on the effects of the war on utilization rates will be more pronounced during Q2, but you will still see a tick up on utilization rates during Q1, closer to the high 80s.

And where will those pounds go?

We have Europe, Latin America, Africa, we have demand everywhere. I see export prices are also going up quite a bit, right? So there -- the price discovery is much more dynamic. We've seen price increases in the $0.20 per pound, $0.25, even $0.30 per pound and orders keep coming. And as you know, in this market, you need export prices to go up before you can push it in the domestic market. And so that dynamic is quite healthy, and we can also flex a little bit our percentages of domestic versus exports based on that.

So again, I didn't have a chance to produce your slides. When I talk to my contacts in Asia, what they say is even though polyethylene prices are rising $300 a ton, they're not keeping up with raw material cost inflation. That is naphtha values are rising at a faster rate. And the way they explain this is that there's still overcapacity conditions, and they can raise prices, but they can't raise them high enough to offset the raw material cost inflation. So there's a dimension where the raw material inflation, at least for now, seems the more dominant market dynamic rather than shortage of polymer from the Middle East. Do you think that's fair or no?

Well, I think a little bit of both, right? If you think of the case in Europe, for example, it's definitely a raw material pricing story, right? There's availability of feedstock. That's not the issue. It's just prices have gone up quite significantly, maybe naphtha $250 to $300 per metric ton. So that's why we declared the commercial force majeure, right, to make sure that we can catch up with those prices. And we have a number of mechanisms as well to make sure that we are capturing the price and not making -- losing on every sale. We have power surcharges and changing general terms and conditions. So Europe, absolutely, I would say it's more of a catch-up story in terms of the prices. In Asia, I would say maybe it's 2 things, right? If you're an integrated complex and you have a refinery, you have 4 or 5 months of supply, you'll run for longer and maybe it's not so much a pricing issue if you're a nonintegrated producer and you have to import naphtha, butane and other raw materials, then you're squeezed. And I think those are the plants that will definitely start to rationalize faster and stop producing. But fairly soon, it will be both, the raw material pricing and just product availability.

So in Asia, so much of plastics capacity is back integrated all the way into oil and the prices at which you buy oil now are different because Russia was constrained before Russian oil numbers were constrained. So they have significant raw material inflation that's still to come.

Correct. They'll be much more on the wrong end of the cost curve.

So how do you manage working capital under this -- in this world? Off the top of my head, I think maybe Lyondell had an $850 million working capital benefit last year that you have to contend with. How will cash generation for Lyondell and working capital needs match up this year. If you can forecast that.

Sure. So the level that we finished working capital at the end of 2025 was very low. I mean we released roughly $1 billion or more in the fourth quarter. And for the full year, you're absolutely right, $800 million. We don't -- I mean, that's not repeatable, right? So we are thinking that -- and our forecast is roughly a consumption of, call it, $200 million to $250 million working cap.

Pre-war?

Pre-war, yes. Of course, you must have talked to Peter, but we have a lot of pressures to keep working capital flat or release as much as we can. So I think, yes, we will build working capital. I don't think that it will be significantly above probably the $250 million or $300 million even...

Even with enhanced production.

Yes, we'll work incredibly hard to do that. And then we have the cash improvement plan in general that we have launch just as cash generation goes, the $500 million for 2026, we did the $800 million for 2025. So we increased the size of the program from $1.1 billion to $1.3 billion. And largely, the '26 figures comes largely from CapEx. Of course, we'll consume some working capital, as I just said. We also have fixed cost reductions, at least in the $200 million to $250 million savings. And we have, I think, a good sets of measures that to help us overachieve on the cash improvement plan for 2026. We have good visibility to overachieve the $500 million.

I see that you declared force majeure in some of your operations in Europe. What was the logic behind the declarations of force majeure? And how do you envision your operation?

So the force majeure in Europe is what we call the commercial force majeure. So it's nothing related to our assets. Our assets are running fine. We have feedstock availability, but it was really when we saw the disconnect on the increase on the raw material side, naphtha was going up so fast, and we just couldn't catch up with our customers on the pricing because you negotiated at the beginning of the month and then you have very high prices. So we declared this commercial force majeure to make sure that we have the ability to renegotiate pricing, renegotiate terms, put these energy surcharges in price and in place and then continue to just increase prices to catch up, right? If you have an increase on naphtha of $300 per ton, you need to improve your pricing at least, call it, $450 or so, right, or more. And without this force majeure, we would be losing with every sale. So it's a protective mechanism to -- as we go through this price discovery as we discussed, to make sure that we are selling at a profit and not losing money.

So does that mean that your operations in Europe in March are challenged?

Correct. I think you'll see some margin squeeze in March as we're trying to catch up, but you will see the benefit then as we go into Q2, right, April, May, June, et cetera. But yes, you shouldn't be surprised that March -- Q1 and March in general will be a squeeze because it was very sudden the increase in raw materials.

You're also selling assets in Europe. How is that transaction affected by? Because there are different working capital needs?

So I think in Europe, the situation is very interesting because now Europe is not receiving material from the Middle East and China, right? So for the local producers, it's actually a good situation. Now if they can adjust the prices on -- according to the raw materials, it's a positive event. So actually, if you're -- the private equity that bought our assets, you should be in a pretty good place, right? Now supply is reduced in Europe. You have good assets and you have the ability to increase prices. So this is one of the events they were looking for. In terms of upside for Europe, I would say, right? That transaction for us continues to be going on track. It will close in the first half of 2026. But we'll capitalize those assets, EUR 265 million at the moment of closing. There's the working capital that is associated with those assets also transfers to them and with that also all the liabilities. And in the case that this situation does play out and material stops coming, they can increase prices. We also have built in 100 million earn-out as part of the transaction. So we can also benefit from any upside that comes from the region.

So you have assets in the Middle East. What are they doing? Are they continuing to produce at normal rates and inventorying their product? What's the general tenor of the actions in those areas?

Sure. So we have 4 joint ventures in the Middle East, 3 of them are on the east side, so facing the straight and then one on the side of the Red Sea. We have one of them in turnaround. It was a scheduled turnaround that started before the crisis, and they're still in the turnaround. And the rest of the assets are running at normal rates. Actually, I was talking to our team today, but this is a day-by-day situation now because soon they will run out of storage. So even though we're moving product from East to West, but this is a lot of trucking and trying to move it out the product from the Red Sea, but it's -- there's only so much you can do that way for the 2 JVs that are on the east side. So it's likely that we'll end up producing rates soon. But as of now, and we're not alone here, operating rates haven't come down as much as we thought in the Middle East. So the people are storing product wherever they can and soon they'll run out of storage.

So the joint ventures are building working capital?

Yes.

That's not your issue. So I think NATPET is in Yanbu or close to Yanbu. Is that -- is it easy to get polypropylene tons out of Yanbu either down through the Red Sea or up through the Suez Canal? Is that turning out to be a very profitable volume growing venture? Or are there different challenges that are more invisible to us?

No, so far, we have been able to move product out of Yanbu through the Red Sea and the Suez Canal without any issues. Probably as the conflict continues, we could see potential issues with shipping and containers. But so far, we've been able to move product without problems.

And what about insurance or...

Insurance rates have gone up, obviously, also freight rates, but nothing that is materially disrupting operations from that joint venture.

I see. Lyondell had an outage, and I think it's propylene oxide, maybe connected to your MTBE units in Texas. Can you describe the constraints you may or may not under with that facility?

Correct. So last Friday, there was a fire at our Bayport facility at the flare. And the Bayport facility has -- we have 3 plants for PO/TBA, total capacity of PO of 620 kt. So multiply that times 2 and gives you the TBA equivalent is roughly 40% of our global TBA capacity. And so the flare is a common, if you want to think of it the exhaust system for the site, right? So there are other flares at the site, and we're right now evaluating the extent of the damage. The 3 PO plants are down, and it will take a few weeks to reassess when to bring them down, what's the extent of the damage and effects, but we are down at the Bayport plant.

And so it's difficult at this time to know when that unit will come back up?

Correct. Yes.

And it affects the TBA operations, but not the propylene oxide operation?

But on the -- so we have PO/SM. So PO with styrene monomer at channel view that we could ramp up for propylene oxide. In terms of TBA, our network has the Bayport site, which as I just mentioned, has those 3 plants. Then we have the new asset in channel view, which is 470 kt of PO and roughly 1 million tons of TBA that is running perfectly fine. And then we have the assets that we have in Europe, in Fos, France and then in Botlek in the Netherlands and those are running without issues. So -- but PO, we have the PO/SM sites to dial them up to get more propylene oxide, TBA, we're constrained.

And as CFO, you're going to have, as a base case, all of this cash coming in. What do you plan to do with it? Or how will Lyondell look different after this cash comes in?

So first, let's see how long the conflict lasts. Of course, if it's sustained or not. I think we want to make sure that we have reestablished our minimum cash balances, again, at the $1.5 billion, really, our capital allocation doesn't change much, right, and some of the other metrics that we've put forward. We still want to have leverage at 2.5x through the cycle.

I'm sorry, at 2.5x. And based on an EBITDA -- theoretical EBITDA of [ 1 ].

Net debt to EBITDA. Yes.

Well, in other words, what would the EBITDA be that you want to be 2.5x.

Have to be around 3 or 3.5. Yes, roughly. We continues to be very focused on our cash conversion, continues to do all the -- none of the self-help measures go away even if we have all this money. And what I want to make sure is that we have now a sustainable EBITDA, and we start to go back to this mid-cycle level before we start doing any other big investments or capital deployments. Let's be just vigilant on how we manage through this cycle.

So the real focus will be on debt paydown?

I mean for now, yes, we've prefinanced it. As you know, the maturities that we have at the end of '26 and early '27. We issued the $1.5 billion bonds last year, maturities then until 2030. But just normally, the leverage and credit metrics will improve as EBITDA grows.

So in your -- to go back to your European operations for a moment, that's an area where tons can come in from the Middle East. And so those Mid Eastern tons are not coming into Europe.

Correct.

And I think your utilization rates in Europe are really pretty low. Maybe they're in the mid-70s.

70s, correct.

So is that an opportunity to raise your utilization rates there?

Yes, for sure. I think that Europe is one of the regions that could benefit the most, right? Because you have imports from either the Middle East or China, Asia in general, not coming into the region. As I said, if you can catch up with your pricing to mitigate the raw material and energy increases, then you -- for sure, you can increase your utilization rates by 15%, 20%.

Do you have sufficient raw materials for Europe?

Yes. Correct. Yes, we do. We get it from Algeria, from Mediterranean. So there's no shortage of really raw materials for Europe. It's really catching up to the price, but it's not a raw material or a feedstock.

So you have availability in Europe. The difficulty is that the value of the raw materials is...

Continue to catch up with that.

Whereas you don't have that issue in the United States?

Correct. You see really prices stay pretty good, right, meaning natural gas is not spiking. Ethane is still at the $0.24, $0.25 per gallon. So we haven't seen any dramatic feedstock price increases in the U.S.

Is polypropylene beginning to rise at a faster rate than propylene, if you know. Is polypropylene prices, are they beginning to move a little bit faster than the propylene value increase?

Yes. I mean -- so you know that polypropylene gets priced as a spread, right, over propylene. So we've now put for April a $0.10 per pound spread increase, which we haven't seen in a long time, right? As you know, the polypropylene cost curve is fairly flat around the world. But now with propane being much more expensive and operating rates coming down in Asia and material being trapped in the Middle East, we have really an opportunity even to start exporting out of North America. And it's very, very leveraging for us. I think if you have it there in the numbers, right, the $100 per ton price increase for us, it's $440 million EBITDA potential for LyondellBasell. So it's -- as I said at the beginning, the sleeping giant. But we are seeing, to your point, the spread increase that we try to push is going at a faster rate than the propylene price increase.

What was the previous -- so you're looking for a $0.10 spread now?

Increase.

Increase. And what was the spread before?

I think it's around $0.20.

You have the acetic acid unit. Is that functioning normally yet?

So we had a few -- not fully functional yet. We had a few issues coming out of the winter storm Fern. And we also were doing a turnaround, if you recall at the beginning -- at the end of last year. So it's not running at full rates. It is running, but not at full rates, unfortunately.

So I guess just to sum up, in the first quarter, things aren't great because there's pressure in Europe, maybe you get some price in -- for the last month, for the last couple of weeks but then the world changes for Lyondell...

Correct. I think that -- yes, Q1 will be -- it won't be a blowout quarter, right, because precisely to your point, Q1 -- January and February were sort of following the normal seasonal trends. We have the winter storm and then we'll see March, if we do settle at $0.10 per price. Price increase, obviously, we'll benefit. But really, the most of the tangible benefits come Q2, Q3 and depending on the length of the conflict, right? Yes.

Okay. Thank you very much Agustin for a nice explanation. Thank you very much for your attendance.