LyondellBasell Industries Q2 2024 Earnings Call Transcript

Hi Steve. Thank you very much for your question, and warm welcome from my side. On the refinery, we have announced that multiple times, and it's again in our prepared remarks that we plan at the latest to run down the refinery at the latest at the end of Q1 2025. In the meantime, our teams are making very good progress with regards I mean to a couple of projects that we have alluded to before. One of them is our second investment in MoReTec. The first one, remember, is in the Cologne hub, next to our steam crackers in Wesseling, the second one we plan to bring to the Houston refinery leverage up on the hydro treaters. We have modified those hydro treaters, so we can upgrade the plastic oil that is being produced in MoReTec number two. And that plastic oil would then be supplied to our steam crackers through pipelines in, for example, Channelview. So that's one project that is proceeding well. I hope that we will take a first decision -- a first milestone decision on that still this year.

The second project is around the renewable hydrocarbon, so these are not plastic waste type hydrocarbons, but hydrocarbons eventually produced out of used cooking oil or other wastes. We see also opportunities to leverage upon the equipment we have at the refinery to produce those renewable hydrocarbons as a feedstock in our refinery in Houston. And again, the same principle, those hydrocarbons would then go through our pipelines to Channelview to the same crackers and then based upon that, we would crack them and we would polymerize them. So we have done two elements of our Circulen family on the advanced recycling part based upon the MoReTec investment and the other one, the renew part, which is based upon renewable hydrocarbons. So all that is proceeding well as we had alluded to in the past.

Hey Steve, it's Michael. I would say that a lot of the hydrogen projects are probably challenged without subsidies. And then before we move on to the next question, I wanted to clarify something. We received a lot of questions around our operating rates this morning from the materials that we had posted online. So let me see if I can clarify a few points for you all. In April, we guided to second quarter operating rates for the segment as 85% for both O&P-Americas and O&P-EAI and 80% for Intermediates and Derivatives. Our rates for the second quarter were largely in line with that guidance.

In the business results discussion posted on our website, we disclosed second quarter cracker -- cracker operating rates were 95% for O&P-Americas and 90% for O&P-EAI. We operated our crackers in both regions at higher rates during the second quarter to capture favorable economics for olefins. Our polymer plants operated at lower rates to match second quarter market demand for polymers. As Kim and Aaron mentioned, during the third quarter, we will operate the O&P-Americas segment at 85%, O&P-EAI at 80% and I&D at 75%. In O&P-Americas, we proactively took some downtime during Hurricane Beryl that will reduce rates by about 5 percentage points for the third quarter. In EAI, we are starting a turnaround on our larger cracker investing during the third quarter. We expect our crackers in both regions will operate at higher rates than the segment to continue to capture attractive margins for ethylene, propylene and other coproducts.

In I&D, we are performing a turnaround on one of our older PO/TBA plants in Bayport, Texas during the third quarter. In addition, we are taking some downtime at our POSM joint venture in the Netherlands to balance the low market demand for propylene oxide and styrene in the region. If you have any further questions on rates, please feel free to reach out to the IR team for further clarification. Next question.

Thank you, Matthew, and welcome as well to you. On propylene oxide. If you talk about the new facility, the PO/TBA facility that we have successfully started up, last year I am very pleased, I mean, to say that we run close, I mean, to 90% during Q2 in terms of capacity utilization. I think that's based upon my 34 years in the industry, that's a huge success because that's a major investment that we have made to be able to run pretty much close to nameplate capacity of such a facility in such a relatively short period of time of ramping up. So with that, I will also hand over to Aaron to give a little bit more background on the market supply and demand.

Yeah. Thank you, Peter, and thank you for the question. I would say that as we look at overall PO demand, as many of you know, most of it goes into durable applications with roughly two-thirds going into the polyurethane chain. We have not seen any rebound from durables, at least noticeable rebound from durables over the first part of this year. We don't expect it to rebound either in the second half of the year. We remain optimistic that the rate cuts will have an impact on us, although they won't be immediate. The other third demand for PO really comes through derivatives and glycols and BDO. And we're also -- while glycols might be a little bit better than what we were anticipating BDO remains somewhat modest. So generally speaking, PO demand is relatively modest right now.

I do want to add, I mean, just on the big picture. Now we've alluded to that in the past as well. One needs to look at the total different capacities to produce propylene oxide. And still in the world, I would say, approximately half of the capacities are based upon chlorohydrin technology, which is a technology that is older, has higher CO2 emissions, is more costly. And actually, on January 8, 2024, the China National Development and Reform Commission, the so-called NDRC announced a ban on most of the chlorohydrin-based PO technology by the end of 2025. So we estimate about 25% of China propylene oxide is chlorohydrin technology. So if you see that, that is going to be banned and you look at that compared to the additional investments in propylene oxide that have been taken place in China is probably going to -- these rationalizations will partially offset, if not fully offset, I mean the new capacity in China.

Of course, I'm very pleased, I mean, to say that the total capital return yield at Q2 was 6%. So I think that's very attractive. Michael, you want to add something on the question of Frank?

Yeah. So thanks for the question, Frank. I mean, just a couple of things. And you know that we have a reputation as a company for delivering strong free cash flow and converted EBITDA into cash. In the last 12 months, we generated $4.4 billion, which is 95% conversion, which is well ahead of our 80%. And -- and just kind of thinking about the year itself, as Peter alluded, we grew our dividend and -- but -- and we did some buybacks as well in the quarter. As we look to the second half, I think buybacks will continue to be in the mix, probably somewhat modestly. So we're still being a little bit cautious. But from a long-term perspective, the 70% guidance of returning free cash flow to our investors is fully in place, and we're fully committed to it.

Hi John, welcome as well, and thank you for your question. Of course, technologies are difficult to compare -- I mean, to one each other. What I can say on our MoReTec technology, we have a unit which is up and running in our Ferrara plants, where we also have our R&D people in Italy. So that is not an industrial scale plans, but it's not a lab scale either. It's not a small plant. I mean this is about four stories, I mean high I mean the plant. So -- we have very good experience. I mean with that. The scope, I mean, on the MoReTec one investments has been finalized. And we're starting to prepare, I mean, on the ground on the investments. So that is proceeding well in Wesseling. So for our Cologne hub. Our process is, as I said multiple times, is different than practically any other process that you find out there because it is a catalytic process, leveraging upon our vast experience we have in catalysis.

Well, David, welcome, and thank you for your question as well. I mean if you look at the first half of this year from a group perspective, of course, then Q1 was better than Q4 last year. Now Q2 was better than Q1, quite impressively, I mean, 29% better than Q1. Another point that I want to make is if you now excludes the refinery business, which as we alluded to before in the call, is going to end its operations. It's a different environment in refining than what we have seen last year.

So if you compare Q2 results without refining for this year, with Q2 results without refining last year, then our results are better than last year. So the core business is improving as we are progressing. Now to your question on the second half of this year, if you look, I mean, what we alluded to in the prepared remarks, we expect that ethane will remain cheap. They are two $0.05 per pound North American polyethylene price increases in the markets. Kim said practically all increased capacity in North America has been absorbed through demand growth as well as exports, record exports. We don't see any inventory buildup throughout the value chain. And we're only at the beginning of the hurricane season.

So if you look at all these things, then one would expect that we have a very good momentum and that should support, I mean, also price increases for polyethylene. We will have to see, of course, how much of the two times $0.05 per pound price increases are out there, but at least you see the momentum in the North American market which should support I mean, these price increases.

Thank you very much, Kevin. Good question. Of course, I mean, there's not a lot in addition that we can disclose at this point in time because we continue to keep all the options open. But as you know, we have made the announcement in the market. So by having made the announcement in the market that allows us to also have discussions with potential other owners for those assets. I need to differentiate a little bit like you saw on Slide number 8. One part is around propylene oxide so the POSM units that we have in the Maasvlakte, which is a 50-50 joint venture with Covestro. So that is a bit different, of course, than if you compare, I mean, to the cracker/PE/PP sites that we have identified within the scope. So progressing well, I would say. We're not excluding any opportunity that we have at this point in time. And one thing that I can say is we are very diligent. We're laser focused, and we will not delay the actions that need to be taken.

Hey, Chris.

Chris, thanks, good question. Well, we continue to see that there is momentum being built up. I talked already a bit on PE. So if you look at PE, you see that just the U.S. domestic demand in Q2 was up by 4% versus Q1, which, just to remind everybody, this is the strongest quarter since two years. Exports were up, let's say, around 8%, 9% versus May and June. So they were these exports about the second highest, I mean, all time.

And I alluded to the price increases that we have in the marketplace. The same is also a bit valid, I mean, on polypropylene. So we -- I mean demand continues to improve. Of course, we're still waiting for inflation rates to go down. We're still waiting as a consequence for interest rates to go down so that consumer confidence would go up, especially for durable goods. But in polypropylene, we see that even if consumer confidence remains low, that there is a bit of improvements already in some other areas like rigid packaging, seeds, films. Our order book is also quite full on polyethylene and polypropylene. So we're happy with that as well.

The main issue that continues to be is around China. China demand, we have seen slowly going up. We think around 4%, 5% locally, but that is being absorbed with the additional capacity that is coming on stream, Europe continues to be soft. But then there is some encouraging messages, numbers that we see, especially on the southern part of Europe, the southern countries, with higher GDP growth, higher demands. And we see that inflation rates continue to slowly go down in Europe as well. So if you look at everything together, we see a slow increase, the continued increase in terms of demand. So if we talk about these capacity utilization percentages and Michael made some clarifications on that, it's not so much, I mean, for the second half of the year because we see -- and we are worried about demand growth, it's mainly because of our own actions that we have because if you have scheduled turnarounds on our big cracker that we have in Wesseling in Europe, well, of course, I mean, that gives you lesser capacity that you have available.

But rest assured, I mean, we continue to see continuous slow but good momentum, steady momentum in terms of demand creation. So flattish to Q3, slightly up second half versus first half. And then Chris, you know that seasonally, the first and fourth quarters tend to be the weakest with seasonally the second and third the strongest, just as a reminder.

Thank you, Hassan. Thank you for your question. I made a couple of remarks. I mean it was more around propylene oxides, but maybe I hand over since I have Aaron also in the room here, and he is heading the I&D business, as you know, that he can make a couple of additional comments around the PO, the oxyfuels business.

Yeah. Thank you, Peter. I appreciate it. And thanks for the question, Hassan. I'd point to a couple of different things. I agree with your comment about I&D historical earnings being very steady. We sold the O&D business in the second quarter. So you have to consider removing that from that profile. However, we've added the PO/TBA facility and we're now operating that facility better than planned rates close to benchmark.

As I look forward, given that the challenges that we're currently seeing with durable demand, specifically in automotive, housing and construction, we are optimizing our PO assets according to technology. We've already talked to the benefit that we see with PO/TBA and that's why we're running all of those assets close to benchmark with POSM assets being more like swing assets to meet supply with demand. When you're looking specifically at POSM, we would actually prioritize our U.S. assets, just given our cost position. And that's why the comment that Michael made earlier on PO11 being idled in August it's reflecting current demand in the region. That being said, I still expect that I&D remains steady going forward.

I mentioned earlier in my answer to the previous question that with interest rates potentially coming down we do see some potential upside that's not currently built into our forecast, and it won't be immediate, but we do see some potential upside there.

Of course, we're very well positioned because we have that new PO/TBA plant that is running very well. So if durable good demand starts moving up, but then we have the capacity available to fulfill the demand.

Thank you, Chris. I mean before I hand over to Kim, let me elaborate also that we saw -- despite the fact, I mean, that really durable goods is demand is not really yet going up substantially, the domestic demand in the United States for polypropylene was up about 5% versus Q1, which means that this is the strongest quarter in polypropylene that we have seen since Q3 2021. So with that, Kim?

So Peter, I guess what I would add to that is when you ask about the overall kind of global dynamics, you've seen a lot of growth in polypropylene, specifically in China over the last couple of years. So what you're seeing play out is more of a regional market. It's much less of the export market than what you see in polyethylene. Polypropylene -- just to compare and contrast polypropylene, you may export 8% to 10% in the U.S. versus polyethylene where it would be more like 40% or 50%. So it's a much more regional dynamic, and that dynamic is based on the feedstock to your question around feedstocks.

So what is your cost of propylene in different parts of the world, whether you're getting it from refineries, whether you're getting it from on-purpose PDH units, and then the thing that's really an interesting dynamic in North America, specifically right now is the reliability of that supply of propylene. There's been a lot of PDH capacity that's been brought online as people have been phasing out propylene coming out of olefins crackers as they've gone to lighter ethane feedstocks. So you see on purpose PDH having reliability problems and you're seeing higher what we would call propylene grade -- polypropylene causing the problems. So I hope that answers your question. I apologize, there were some other things going on here in the room.

And Chris, we also have a spread improvement price increase, I mean, that is on the table in the market for North America for July of $0.03 per pound on polypropylene.

Kim?

Your -- simple answer is yes. There were very good co-product values, especially in butadiene as well as we felt that, that was the best optimization of our European crackers at the time. As we've said in the past, and we'll just reiterate it because I think it's very important, whether it's in Europe or in the U.S., we are always looking week-to-week to optimize the feedstock slate of our crackers and produce the best value for LYB. It's not always ethylene, sometimes is the coproduct.

Yes. Thank you very much. Thank you again for all of the thoughtful questions. Let me maybe still articulate a couple of key messages of this call.

I believe that we are making excellent progress on our strategy to make LYB a much more focused company with a leading advantaged asset portfolio as well as product mix. And why am I saying that? I mean, first of all, we're making good progress on our goal to add $3 billion in incremental normalized EBITDA by 2027; secondly, you see that we have clear actions to increase our historical average EBITDA margin from 18% to above 22%; third, our second quarter total capital return yield at 6% that we have due to an increased dividend and also some share buybacks is, I think, quite state-of-the-art; and fourth, our current cost advantaged operations in feedstock advantage regions without our refining is already about 60% of LyondellBasell's production volume.

And after we have implemented our European strategic assessment, we expect that, that will grow to around 70%, so let's say, in a couple of years. So of course, we look forward to sharing updates over the coming months as we continue to make progress on all aspects of our long-term strategy. We hope you all have a great weekend. Stay well, stay healthy and stay safe. Thank you very much.