Q3 2019 Earnings Call
Hello, and welcome to the Lyondellbasell teleconference. At the request of Lyondellbasell. This conference is being recorded for.
A replay purposes. Following today's presentation, we will conduct a question and answer session at that time to ask a question. Please press Star then one on your Touchtone Oh I'd now like to turn the conference over to Mr., David Kenny Director of Investor Relations. Sir you may begin.
Thank you Britney Hello, and welcome each lined up sells third quarter 2019 teleconference. I'm joined today by Bob Patel, Our Chief Executive Officer, Thomas Aebischer, Our Chief Financial Officer.
Before we begin the business discussion I would like to point out that a slide presentation accompanies todays call is available on our website www dot.
Lyondellbasell Dot com.
Stable, we will be discussing our business results, while making reference to some forward looking statements non-GAAP financial measures. We believe the forward looking statements are based upon reasonable assumptions and the alternative measures are useful to investors. Nonetheless, the forward looking statements are subject to significant risks and uncertainty.
We encourage you to learn more about the factors that could lead our actual results to differ by reviewing the cautionary statements in the presentation slides no regulatory filings, which are available at www dot lined up sell dot com slash investor relations reconciliations of non-GAAP financial measures to GAAP financial measures together with other disclosures.
Operating earnings release are also currently available on our website.
Finally, I would like to point out that a recording of this call will be available by telephone getting at two PM Eastern time today until 11 59 PM Eastern time on December Onest by calling 8568 zero 509 in the United States and two or three.
The 693479 outside the United States.
Passcode for both numbers as 5713.
During today's call, we will focus on third quarter results. The current environment, our near term outlook and provide an update on our growth initiatives.
That being said I would now like to turn call over to Bob.
Thanks, Dave.
Good day to all of you participating around the world and thank you for joining our third quarter earnings call.
Let's begin with slide three and review the third quarter highlights during our Investor day in September we emphasized our leading and advantage portfolio of businesses is poised to deliver a resilient performance and strong cash flows.
It was across a range of market conditions.
Our company delivered on this commitment during the third quarter with $1.9 billion of cash from operating activities.
Our third quarter EBITDA of $1.5 billion represents a decline of approximately 4%.
Relative to the second quarter and 13.
10% relative to prior year.
Third quarter earnings for $2.85 per share, which represents a 6% improvement over the previous quarter.
This is our third consecutive quarter of increasing earnings per share.
The advantage of abundant low cost natural gas liquid feedstocks.
Continued to benefit our north American businesses demand for consumer driven non durable products, reflecting typical seasonal strength.
The 5% increase in our global polyethylene and polypropylene sales volume relative to the second quarter.
Industrial industrial driven markets for general more.
Products saw a weaker margins and demand due to trade uncertainty.
Despite the challenging market conditions, our portfolio of businesses performed well during the quarter continue to efficiently deliver outstanding cash flow, let's turn to slide four and review our approach to maximizing returns from this cash.
Generation.
Followed a consistent disciplined capital allocation strategy that provides a sustainable balance between value driven growth.
Strong shareholder returns.
Our growth investments in new capacity are underway with our hyper zone polyethylene capacity being commissioned as we speak we now expect.
Sales volumes to ramp up during the first quarter of 2020 with increasing profitability throughout the year.
Cost for the project is estimated at approximately $900 million.
Project continues to be very attractive due to our advantage feedstock position in North America, and the differentiated technology, which will deliver new.
Hi, performing products to our customers.
During our recent Investor day, many of you toward the construction of our new propylene oxide plant that is being built across two sites outside of Houston in Channelview and Bayport.
We continue to expect this plant will be completed in the second half of 2021 and.
Further increase our cash generation during 2022.
The box on the right.
Slide illustrates our progress on additional value driven opportunities.
In late September we extended our long term relationship with enterprise has been anchor customer for their second propane dehydrogenation plan.
That will start in 2023.
This contract provides lyondellbasell with additional propylene supply at cost base economics to support our downstream capacity growth in propylene oxide.
Earlier in September we announced a memorandum of understanding with learning Barbara.
To form a joint venture that will rapidly expand our global olefins and Polyolefins network in China.
The project provides lyondellbasell with the local production presence in a market that is growing at more than twice the rate of global GDP.
This project is more than 50% complete and expected to begin operations into.
2021.
Finally, we completed a tender offer in July that resulted in the repurchase of approximately 9.5% of our outstanding shares for $3.1 billion.
These actions demonstrate our discipline and commitment to balancing growth with substantial returns to our shareholders.
Others.
Let's turn to slide five and discuss our safety results.
Our emphasis on operating safely is embedded in our culture.
It has never taken for granted we realized that we need to work every day to cultivate processes and behaviors that support leading safety performance for our employees.
Contractors, our communities in our business partners, we will continue to maintain a consistent focus on safety as we believe it underpins everything that we did.
Let's turn to slide six where we highlight lined out sales activities in advancing our sustainability agenda.
During the same week as our Investor day.
In September .
Published our second annual sustainability report.
This reported on our website and a describes our goals and progress over the prior year.
Our company is also developing innovative business models that advances circular economy.
In addition to RPC and pp mechanical.
Recycling business can usage of bio based feedstocks to produce new plastics last month, we announced the construction of a new pilot facility in Italy far more tech molecular recycling technology.
We are moving forward with these three business models to increase circularity develops.
Sustainable and profitable business platforms within the next decade.
It's important to remember that Asterix provide many benefits to society and we'll continue to do so in the future. However, we must address the issue of plastic waste, we've committed to pursue zero loss and plastic pellets from our production facilities.
And we are leading meaningful solutions to eliminate the leakage of plastic into the environment through the alliance 10 plastic legs.
Additionally, our company is targeting a 15% reduction in carbon dioxide emissions intensity by 2030.
We hope that you as our investors and stakeholders.
We'll take time to review, our sustainability report and provide us with your feedback on our progress and now Thomas will provide more detail on our financial highlights for the third quarter.
Thank you have all been good thanks to all of you.
Please turn to slide seven where you can see the growth of our earnings over the past three quarters.
As Paul mentioned third quarter earnings over $2.85 per share were supported by strong consumer driven seasonal demand for our products as well as always sizable share repurchases.
Third quarter results included an 85 million dollar non cash benefit from the central.
Australia tax year positions that increased earnings by 25 cents per share.
Integration costs during the third quarter related to the Schulman acquisition impacted net income by $33 million or 10 cents per share.
During the third quarter, we repurchased.
37 million shares.
Now, let's look more closely at over consistent and efficient cash flow performance on slide eight.
Our businesses have generated $5 billion to $6 billion of cash from operating activities over each of the prior year for calendar years and $5 billion over.
Over the trailing 12 months.
With $1.1 billion required for sustaining capital expenditures, our free operating cash flow yield was 13.2% over the past 12 months.
Slide nine describes our cash flow generation and deployment during a very.
Active third quarter for auto Finance Department.
Cash flow from operating activities effectively doubled our starting balance $1.9 billion.
<unk> increased by nearly $1.7 billion during the third quarter, while the timing of to increase that.
Earnings is always to light tender offer you will recall that we invested approximately $1.9 billion.
Cash on hand.
Wiring A. Schulman last year.
During the third quarter, we issued 1 billion in euro bonds into drawn shoes and used the proceeds to repay a term loan.
And the portion of our short term debt.
The coupon rates for denotes who are the lowest in our company's history.
<unk> 0.87 size person and 1.6% to 5% for seven and 12 year terms respectively.
End of September we priced $1 billion.
Holders in 30 year Golar nodes that settled in October .
The 4.2% coupon rate for these notes is also the lowest in company history for us bones of this tender.
We use these proceeds to repay short term debt.
During the third quarter.
Mentioned before we repurchased 37 million shares and in addition pay dividends returning a total of $3.6 billion to shareholders.
Capital expenditures for the third quarter were approximately seven owned $40 million roughly 60%.
They sit in profit generating growth projects with the remainder located to sustaining capital.
Our investment in growth has increased since the second quarter and we expect a similar trends over the remainder of the year as we complete our hyper some PE plan and accelerate the.
Construction for our new deviate plant in Houston.
The core to closer is approximately $1.1 billion of cash and liquid investment.
Slide 10 illustrates the maturities of our long term debt off to the October issuance to two recent.
Offerings reduced our weighted average cost of fifth by 42 basis points, we have a well balanced maturity profile that reduces refinancing risks and enables the company to benefit from a consistent operations in both you with euro fixed income markets.
Let's turn to slide 11, and review our disciplined approach to capital deployment that we discussed in detail during our Investor day.
The principles for our capital allocation strategy have remained consistent.
Our businesses generate tremendous cash flows we are first and foremost committed to a strong.
And progressive dividend.
We will make.
Capital investments.
Investments that sustain our manufacturing reliability and expand our asset footprint.
We will pursue value minded inorganic growth opportunities and return to surplus cash to share.
Purchases.
All of these decisions points are underpinned by our commitment to the flexibility provided by our strong investment grade credit ratings.
With that thank you very much and I will turn to call back to both thank you. Thank you Thomas as many of you know Thomas will be retiring.
From the company in the coming weeks I wanted to take this opportunity to thank Thomas for his hard work over the past four years to build and enhance our finance organization.
His contributions to the development of our growth strategy and his leadership and standardizing several of our processes I wish Thomas and his family all the best.
I, particularly want to thank Thomas for agreeing to help us manage thoughtful transition for his successor, Michael Mcmurray, who will join the company as an executive Vice President and our Chief Financial Officer next Tuesday November 5th.
Michael joins us after serving as CFO for Owens Corning and of course.
Career that spans more than 30 years in various finance Treasury and Investor relations roles for Owens, Corning and Royal Dutch Shell I.
I Hope you will all join me in warmly welcoming Michael to Lyondellbasell.
Now, let's turn to slide 12, and review our third quarter EBITDA performance our global.
And diverse business portfolio continued demonstrate strength and resiliency and a challenging market environment.
EBITDA for the third quarter was $1.5 billion profitability for integrated polyethylene production remains strong in both the Americas and Europe .
With industry benchmark chain margins.
Of approximately $700 and $600 per tonne, respectively. During the third quarter.
Turning the corner, we maintained high crude processing rates at our Houston refinery and benefited from improved margins relative to second quarter.
Several of our intermediate chemicals businesses, mainly styrene suffered from.
Margins due to lack luster industrial demand well supplied market.
Let's begin with our olefins and Polyolefins Americas segment on slide 13.
Third quarter, EBITDA was $653 million $18 million higher than the second quarter.
Profitability was driven by robust.
Global demand.
Our capability to capture the benefits of abundant and affordable natural gas liquids through our feedstock optimization.
Well the funds results increased by $120 million compared to the second quarter margins expanded on higher ethylene sales prices and lower feedstock costs.
Ethylene operating rates fell to 80% due to a planned maintenance turnaround that we completed at our Clinton, Iowa facility during the third quarter.
As propane and butane prices fell by nearly 20% in the third quarter, we captured value from the high feedstock flexibility across our fleet of six us ethylene.
Crackers.
We increased utilization of propane and butane feedstocks by nearly 10 percentage points to 35% in the third quarter.
Polyolefin results decreased by about $100 million during the third quarter polyethylene spread over ethylene price declined by about $220 per.
On.
Partly due to higher ethylene costs and declining polymer prices.
Polyolefin volumes increased due to an increase in polyethylene exports.
We expect the fourth quarter will follow typical seasonal trends with reduced demand as customers take holiday downtime and seek to minimize year end anvil.
Lorries.
Approximately 80% of the new us polyethylene capacity now in the market.
This is an opportune time to review the impact of new capacity on polyethylene pricing.
Slide 14 teller straight quarterly contract price change for the North American polyethylene industry over the past five years.
The green bars indicate increases orange bars represent decreases the amplitude and volatility of price changes during the 18 and 19 have been relatively moderate when compared to the prior four years in fact, the net reported price change over the first three quarters of 2019.
Has been zero.
Industry statistics indicate that days of sales in inventory.
Well in September with export sales now representing 35% of production.
Increasing exports decreasing inventories and muted pricing responses.
All imply that the new.
Cds meeting demand in the global market.
Our view is that the new capacity will create short term fluctuations, particularly in local markets. However, we believe the new capacity is ultimately needed and global polyethylene markets will remain relatively balanced providing good.
Profitability for.
Vantage producers such as Lyondellbasell.
Now please turn to slide 15 to review the performance of our Olefins and Polyolefins Europe Asia on International segment.
During the third quarter EBITDA was $291 million.
$40 million decrease compared to the second quarter.
Underlying.
In this results were impacted by lower polyethylene chain margins, but supported by healthy Polyolefins demand.
Olefins results decreased by about $10 million due to a small decline in volume.
Combined polyolefins results were comparable to the previous quarter.
Polyethylene volume increased 10% over.
The second quarter with customers returning to the market.
They're taking a pause during the second half of June .
Polyethylene margins declined upsetting the improvement in volume.
Modest reductions in margins across our joint ventures contributed to a decline in equity income of approximately $15 million.
We expect the fourth quarter and following the same seasonal trend has the Americas with reductions in year end demand.
Please turn to slide 16, let's take a look at our intermediates and derivatives segment.
Third quarter, EBITDA was $390 million and $58 million decrease compared to prior quarter.
Results were affected by a decline in margins due to a well supplied market for our intermediate chemicals business, but bolstered by seasonally strong oxyfuels profitability.
Intermediate chemicals results decreased by $95 million compared to the second quarter driven by margin decline in all businesses.
Primarily styrene.
We began planned maintenance at our asset deals plant and the port.
In the third quarter, which will reduce volumes for both the third and fourth quarter.
Huxley fuels and related products results improved nearly $30 million as we saw margin increases driven by a higher gasoline blend.
Premium and lower butane butane feedstock prices.
During October Oxyfuels margins have declined with weaker gasoline demand has a summer driving season ends we expect typical fourth quarter seasonal declines for the segment and continued pressure from a well supplied market.
Now please turn to slide.
To 17 to review the results of our advanced polymer solutions segment.
Third quarter, EBITDA was $102 million, an $18 million decrease compared to the prior quarter.
Results were impacted by increased integration costs and continued headwinds in the automotive sector, partially partially offset.
By modest improvement in construction demand.
Included in the results were $43 million of integration costs for the third quarter, which impacted earnings by 10 cents per share.
Compounding and solutions results were relatively unchanged due to the softness in the automotive market.
Advance polymers results increased by.
$10 million third quarter performance was supported by improved seasonal demand from the roofing market.
Our team is making continued progress on the integration efforts in fact, we increased our two year cost synergy targets by $50 million to a total of $200 million at the end of the third quarter.
We are capturing cost synergies at a forward annual run rate of approximately $125 million.
We expect profitability for the segment to follow normal seasonal trends trade on uncertainty and labor disruptions continue to affect the automotive industry and our business is likely to continue following the.
General sentiment for that market.
Turning to slide 18, let's discuss the result for our refining segment.
EBITDA improved by $60 million over the second quarter, two negative $6 million for the third quarter.
We continue to demonstrate the benefits of our reliability program at the Houston.
With crude throughput increasing to two 264000 barrels per day operating at 99% of nameplate capacity for the corner.
Our Houston refinery processes heavy sour crude oils from Mexico, Canada, and other locations in the third quarter refinery margins.
And from improved diesel spreads and stronger discounts for the portion of heavy sour crude oil we purchased on the open market in Houston.
The U.S. refining market has been challenged by global disruptions in the supply of heavy sour crude oil, resulting in a string of quarterly losses in our refining segment.
During September profitability was further impacted by unusual increases in the formula pricing from my accrued from Mexico.
These pricing decisions have spurred us to pursue increased utilization of alternative crude oils for the long term supply of our refining business.
At the implementation of the IMO 2020.
In marine fuel regulation inches closer we expect continued margin improvement.
Turning results during the fourth quarter, we're well positioned to take advantage of this regulatory change by converting high sulfur crude oils into more environmentally friendly marine fuels.
Please turn to slide 19 as.
As we review the results of our technology segment.
During the third quarter, EBITDA was $83 million, a decrease of $24 million compared to previous quarter.
The business model for our technology segment is based upon the licensing of polymer production technologies and catalyst sales.
Individual.
Contract terms and the timing of project milestones drives the pace of licensing revenues for the business.
In the third quarter, we had fewer licensing milestones in the prior quarter, which resulted in reduced EBITDA.
Catalyst sales volumes and licensing activity are projected to be strong during the fourth quarter.
On Slide 20, let me summarize this quarter's results.
During the quarter, we increased our earnings to $2.85 per share our profitability remains strong and generated cash from operating activities of $1.9 billion.
Our company is delivering resilient performance in a challenging.
Okay Fair trade uncertainty and lack of confidence in the industrial sector has reduced demand for many of our products. The long awaited polyethylene cycle is now upon us with approximately 80% of use capacity now online.
Polyethylene spreads over NASA and Asia are approaching 10 year.
With inventory largely destocked.
Any improvement in industrial confidence is likely to reverse these trends and trigger restocking that should tighten markets and increased margins.
In addition to the market improvements lyondellbasell as tangible sources of cash flow growth that are independent of.
And sentiment.
During October the looming implementation of the IMO 2020 marine fuel regulation drove favorable crude oil differentials and higher diesel spreads that improved profitability for our business in October .
We will increase our polyethylene capacity and reduced our capex.
Over the next year with the completion of our new I presume fine.
With higher earnings and lower capital spending we expect additional cash flow to provide further support for our secure dividend and opportunistic share repurchases. We continue to advance our growth objectives by pursuing a new.
Ship in China.
Propylene supply agreement with enterprise in short order, leveraging our leading portfolio and advantaged positions to support disciplined investments that should deliver sustainable value for our investors. We're now please take your questions.
Thank you we'll now begin in question and answer session. If you like.
Question on the phone. Please press Star then one on you touched on phone and record your name clearly when prompted can lead to withdraw. Your question you may do still by pressing Star then Tim first question comes from Duffy Fischer from Barclays. Your line is now open.
Yes, good morning, guys good morning.
First question is just if you look at you know a number of the major consultants in the space. They would have integrated polyethylene margins coming down.
Kind of throughout our all the way through 2020, obviously you get their data in kind of.
Where do you think they're getting a wrong what are they two punitive on.
That they would be more negative than your outlook for polyethylene.
Well.
First of all of you if you consider the market environment today.
And if you look at prior downturns.
On on the demand side, we from we already have a lot of uncertainty that's impacted demand.
You think about the auto sector trade uncertainty recession fares Brexit and so on.
Those of all weighed on demand all year long and we've seen destocking. So we think on the demand side we've.
We're already seeing somewhat of a downturn.
And to your question about.
About what they might be missing if I would point to the Asia.
And that the spread.
It's approaching $300 per ton and if you look over the last 10 years thats, reaching the lows.
Over that period of time and it seems to me that.
That is pointing towards a troughing in polyethylene margins.
As a reminder, if you would like to ask a question. Please press star one each call. Let me ask one question and our next question comes from Kevin Mccarthy from vertical.
Research Partners. Your line is now open.
Yes, Bob.
Couple of questions on the refinery you referenced IMO 2020 .
Walk through the expected impact to that events.
Does that influence the way the you're running your asset.
In terms of.
Catalyst slates mix of products.
And how did the unit run in October please.
So unit ran very well in October and.
You will recall from our.
Prior conversations.
The impact from IMO comes and several forms for US one is.
That will benefit from a wider.
I'd like to heavy differential meaning that.
Sour crudes, we'll see less demand has not all refineries are able to meet the new specifications. We should also see wider distillate spreads diesel spreads were already seeing that some of that in October so too.
To give you some points of reference.
Timber Maya 211 was about $14 in 60 cents.
Total our average is now 20 130, so we've seen.
Approximately six dollar and 50 cents improvement and the Maya 211 from September to October we.
I think that way as we go into next year.
We have significant leverage to that improvement or the widening of the light light heavy differential.
In terms of our refineries positioning you'll also recall that we've completed all of our turnaround work. So next year, we do not have any major turnaround activity in our refinery.
So we're prepared to run at full rates next year, and where we're doing our best to buy the most competitive crude oils that suit our refinery and we're going to continue to focus on that so I think we're really well position than we think about the volume leverage.
At.
At at.
950 million barrels per year that we process.
Hi, sorry, 95 million barrels per year that we process. So every dollar.
Has a pretty significant impact over a year when you multiply by the 95 million barrels.
Thank you and then next question comes from David Begleiter from Deutsche Bank. Your line is now.
Okay.
Thank you good morning.
Bob just on hyper zones discuss whether the expected EBITDA contribution remains the same.
How are you going to seed your volumes, who has the how's that progress is progressing and at the costs at the end increase for the project.
Thank you.
Yes so.
Ill speak to cost and schedule first David.
So on cost yes. It did increase we're showing about a 900 million sort of.
Capex number at this point.
It's still very competitive compared to bills that have occurred recently in fact, I would say still.
Better than market average from from from what we can tell schedule wise were commissioning now various parts of the plant and we expect to move into production very late in the year or early next year.
Turns of EBITDA contribution it will ramp up through next year as we as we.
We demonstrate the production and start to demonstrate the types of products at that plant can make very typical of new starts is that you have some ups and downs early on.
Makes him off spec, while you're trying to prove out the technology and certainly by the back half of the year, we ought to be producing many of the products that.
We had we had envisioned that this differentiated product.
Technology will produce.
Thanks.
Thank you and our next question comes from P.J. Juvekar from Citi. Your line is now open.
Yes, hi, good morning, Bob Good morning.
Can you talk a little bit about your approved stocks late on the Gulf Coast, you mentioned ramping up broken and Bugsense needs one of your competitors one too.
Zero NAFTA, so, we'll keep global and deal with enterprise can you can you go even more later.
Let me just talk about sort of.
Today, then how do you see that evolving.
Well PJ first of all on our feedstock.
Consideration so far that the amount of propylene, we produce hasn't really driven the feedstock decision, it's more about the relative price and relative economics.
Perhaps the price of propylene has more impact in the amount of volume we.
Because we have RF flex unit, where we can also convert ethylene and propylene if we needed more propylene and it made economic sense as I mentioned earlier, we increased butane and propane cracking up to 35% and.
I think we could perhaps stretched out a little bit more.
For the key point on feedstock flexibility is that with our ability to crack that much of LPG.
And.
Moreover, migrate if Y grade becomes economical I think we have the full range of feedstocks available to us.
At two to capitalize on whatever feedstock environment to.
Hence itself, we still see ethane is being really well supplied and well priced to maintain.
The us advantage when you think about a global cost curve.
Given our next question comes from Bob Court from Goldman Sachs. Your line is now open.
Thank you brothers wanted to talk a little bit about capital allocation in particular reinvestment in lyondell versus the potential of inorganic targets.
Since the summer we've seen a pretty good rally in some of these cyclical names listen valuation levels as well as your own frankly, but.
Talking about the tension between how you.
Think about M&A and maybe the short term fluctuations in valuations and long term value and then.
Maybe to also speak to the Schulman.
Great and cost and what that students looks like going forward. Thanks.
So Bob first of all on on M&A and there are few principles that we and we really.
The whole to one is that we're committed to a very strong investment grade rating through the cycle minimum triple B rating post any transaction that we might consider that's very important to us and tend to have.
And the flexibility and the strength in terms of our balance sheet, secondly must have strategic fit and we're going to be.
Very value oriented.
Patient and disciplined and I think we've demonstrated all of those things through our decisions on what we have done and what we havent time.
To your point about the tension between.
Acquiring ourselves and acquiring perhaps others.
I think about this is that.
For.
For the use of our operating cash flow first and foremost we're committed to this strong secure and progressive dividend overtime and as we demonstrated an investor day to really well covered.
Sustaining capex about 1.1 billion organic growth will be declining. So we think we'll have excess cash flow.
Dedicate.
Opportunistic buybacks.
As we progress over the next 12 to 18 months.
As far as using our balance sheet likely we would not use that for buybacks, we when we would consider.
More of that for.
Very value oriented M&A so.
Look for us to stay disciplined stay close to our core and constantly solve for a strong investment grade rating.
And your question about Schulman integration.
Operation costs will ramp up further and.
Thomas I don't know if you wanted to comment on how much will float.
Oh through 2020 right. So we thank you both what we did you have seen integration costs for the third quarter. We're where we are no were 43 million bullish that we made further progress in accelerating the integration of Schumann's off the tax 33 million until we are we are.
We will go lives with a large part both the S&P integration of Schulman into Lyondellbasell into first half will for 2020 and Thats. Fortunately, we are integration costs will will peak.
Thank you and our next question comes from Vincent Andrews from Morgan Stanley . Your line is now open.
Thank you.
Bob just another question on the refinery and I guess my question is as you've obviously improved the reliability of it and now there is opportunity for structural change in its and its.
Margins earnings power.
How core to Lyondellbasell is the refinery and would you consider monetizing it.
Thanks for your question Vincent well as I've said in the past I mean, our focus has been to improve reliability and controlling the controllables. If you will which is run the asset really well.
Really proud of the team at the refinery I think they deliver really great performance, we wanted to position ourselves.
Selves for IMO 2020, I think we've done that completing our turnaround work. So that we have a clear runway for next year to operate at maximum capacity the key focus Vince and at the time at the moment is I want to see that refinery turn a profit generate free cash flow that we can reinvest.
Back into Lyondellbasell, we're going to continue to focus on that and in terms of portfolio will continue to we'll we'll consider options over time, but at the moment. The key is to get the refinery to generate free cash flow.
Thank you and our next question comes from Steve Byrne from Bank.
Of America. Your line is now open.
Hi, Bob you talked about both mechanical and molecular recycling and then just curious your longer term views. On these is is your motivation to develop these please projects to help drive a.
You know a plastic recycling industry or do you think either one of them could become.
Really meaningful contributors to your business model and say the next five years.
Good morning, Steve.
First of all I think what's what's really important when we undertake this plastics debate is that.
We've got to close the loop.
We have to prevent leakage in plastics in the environment. That's the first first objective then when we've collected that waste my view is that we're going to need a range of solutions.
Chemical recycling.
Mechanical recycling and so on and so yes, indeed, our our AR.
Our ambition is to have a platform in both areas in mechanical and chemical recycling and have a sustainable business platform over the long term, we expect to earn returns just like we do in any other investment where I wouldnt, where I would perhaps draw difference here is that the timeline will be a little.
Longer in terms of how long it takes for us to have a platform that scalable or very committed to that in both chemical and mechanical recycling and I see a path to success there.
Okay.
Thank you and our next question comes from a room vis we'll now open from RBC capital markets. Your line is now.
Open.
Great. Thanks, Good morning, my questions on polyethylene so.
Just wanted to get your thoughts on.
Nice evolution here there was a three cents increase.
The industry was able to get in September .
Do you see that potentially sticking.
The next quarter or two and if so why and if not.
Would you expect prices to come down in December per usual kind of seasonality.
What are the drivers that you're looking at.
To help you understand our form some outlook on on polyethylene pricing. Thanks.
Okay. So arena.
First I started with the market backdrop and.
In the prepared remarks in our slides we showed you that through the end of the third quarter. The net price changes zero. So to me that indicates that markets are somewhat balanced.
We've seen a reasonable amount of destocking.
And industry reports and indicated even PE inventories have come down in the U.S. So so the backdrop going into the fourth quarter two us feels like there's not a lot of excess inventory downstream because of all of the factors that are the macro factors that have created lack of.
Confidence.
So I mentioned that.
The Asia PE to NAFTA spreads.
Our currently at very low levels around $300 per ton.
If you look back over the last 10 years. These are kind of trough levels. When we get to this when we get to this point on Asia PE to NAFTA spreads.
So yes, we could have some seasonal.
Pricing adjustments like we do every year in the fourth quarter, but I don't expect extraordinary changes because we've reached some evidence of trough sort of conditions, whether you think about destocking or.
Look at this.
You tend not to sprint in Asia, and I think Thats. One that's that's held true if you look back over the last 10 years. So that's kind of how I'm thinking about things and then next year once we get into the spring season.
We'll see continued demand growth like we do every year and annual recall.
That.
Typically the growth in a year happens in the first nine months of the year. So by the time, we get into the spring we should start to feel the impact of demand growth going in 2020, some quite constructive on all of this because I think we've already had in some ways quite a correction in terms of.
Ladies and.
And margins and the evidence I would point to the Asia feed and that the sprint.
Thank you and our next question comes from John Mcnulty from BMO capital markets. Your line is now open.
Hey, Good morning, Bob This is Bob extra that John .
Morning.
The Chinese.
These GDV Buddha it abuse everything is going going to blended Guinea Shane.
Good tracking Dan as you go ahead, and what gets you more comfortable in terms of making additional investments in the region.
Well, there's few factors as especially with the Navarro JV first of all its time based on our.
Polyolefin technology.
And then.
The construction costs are are almost half of what they would be on the Gulf coast. So those are two really important factors that construction is about 50% complete now so by the time we have.
Tentative agreements and and where to point, where we're going to contribute equity into the venture it will be even more closer to startup so.
So all of those factors give us good confidence about about the costs and the denominator in the return equation if you will.
It's.
Got it has produced in China for China, So, it's a large growing market.
We're very confident about our ability to place that product.
As we as we look ahead to other investments I think this will be a very good test case for us and build our capability in our presence locally in the region.
So that when there are future phases in the bar JV, we should be able to investment confidence and grow our position in a very important market. So.
Those are all of the factors that give us confidence in our investment.
When we conclude the joint venture with.
Sure.
Thank you on our next question comes from Frank Mitsch from from Research. Your line is now open.
Thank you good morning.
Hey, Thomas It was nice to work with you and certainly wish you the best for the future.
Thank you Frank.
Bob as I say.
Look at the I'd business, you've had four quarters in a row of negative year over year comps and your LTM EBITDA is at $1.6 billion is this kind of the.
The base level that we should be thinking about this business or how do you. How do you think about kind of the base level of earnings of I'd now like I guess as part of that is there any.
You can offer with respect to what the pace of economic activity has been either on the industrial or slice consumer side.
That has had that impact on R&D being down as I said four quarters in a row.
Well so Frank.
Puts and takes on R&D have been that styrene as as we can.
Considerably.
As has methanol and as you know when you think about the R&D business.
That's the part of the portfolio that provides the upside and when it's not there kind of land, where we are now that's an indication of.
Those value chains, and how the demand is evolving in the styrene.
Well you change.
PEO has been a bit weaker as well because of automotive.
So that's been a consistent story throughout the year and methanol is weakened as well now offsetting all of that has been a better oxyfuel business. So we've had not only better plan premiums this year, but also cheaper butane.
Especially in the U.S. So so Frank for I Envy, you really have to look at this whole portfolio. Because there are typically offsets and one is doing better or the other doesn't not that they are correlated with we find that.
It's unusual for all of them or a trough conditions.
So.
Difficult to really point data had an exact number but the part of our portfolio that provides upside has corrected considerably when you think about styrene and methanol.
Thank you and our next question comes from Sandler Ahmed from Alembic Global Global.
Your line is now open.
Good morning, Bob Good morning.
Well, but lot of discussion around ethylene polyethylene and and I think maybe okay, it's pretty clear that job.
Most of capacity additions are behind us things potentially but cycle up from here.
Could you could you also give us your views.
On the polypropylene side of things.
How you're thinking about supply demand over there and how should we be thinking about sort of 2020 I mean, what would sort of margin deal when the headwind any any any sort of talked around that would be good.
Sure Hassan.
So on polypropylene.
There is some new capacity, that's starting up next year, but our sense is that we kind of go sideways.
As demand grows likely this capacity new capacity will be absorbed and polypropylene growth rates have been have been pretty strong we think those could be bolstered by an improvement in the automotive sector thats.
I've seen this over the last 10 years that when when the automotive sector comes back you really see a big burst in demand and we saw this back in.
12, and 13, we solid and 16, so likely that will benefit pp as well.
In today's economics include or.
These margins factor in a very weak automotive market, which probably has more impact on BP. Even PE. So so I think kind of net of more supply maybe better demand.
We go sideways from 19 to 20.
Thank you and our next question comes from John .
Robert from you.
Your line is now open.
Thank you and best wishes as well Thomas.
Thanks to.
This relatively little discussion about polypropylene I assume it underperformed polyethylene because it's more durables exposed didnt was Europe significantly different than the us.
No you'll you'll recall that polypropylene is really more more of a regional market. There is some global trade, but generally.
There is much more regional markets. So.
In Europe , and you asked in terms of demand performance are similar us probably a little bit better.
Because the automotive sector has been.
When had much harder on Europe and it has here.
And frankly, we see that more more in our compounding business.
Where Europe is weaker so.
Yes, polypropylene has been a decent business this year for us and as I mentioned in the prior question that I see the net of sort of capacity.
The additions in demand growth showing sideways sort of performance from this year to next.
Thank you and our next question comes from Mike Sison from Wells Fargo. Your line is now open.
Hey, guys nice quarter.
Bob when you think about your outlook for.
For the fourth quarter, you of course sort of talked about normal seasonal.
Kind of declines fourth quarter versus third quarter and lot of companies are seeing much more dire sort of outlooks sequentially. So is there anything different in either polyethylene or.
Other markets that you're not seeing a sort of a weaker sequential.
Hi.
Well I think we've already seen a lot of the Destocking and.
And then sort of weakness in our markets throughout the whole year I mean, you go back to Q on Q2.
Trade uncertainty recession theaters expectations of.
New capacity, causing pricing to come down and as all cause destocking downstream and so typically when you go into fourth quarter, you see some destocking because of your end, but my sense is a lot of that's already occurred, especially in polyethylene and again I would point you to the.
Asia Ethernet.
I mean, it's really showing trough conditions. So this expectation.
Weaker markets has been has been in has been around and the sentiment has been there from most of this year and has driven buyer behavior. So other than.
Directionally some seasonal impacts that we get every year.
And it's difficult to imagine there would be a lot more.
And Mike I would remind you that the fourth quarter of 18 was very weak so it should be easy fairly easy to beat that comp.
Thank you and our next question comes from Jeff Zekauskas from Jpmorgan. Your line is now open.
Thanks very much.
For the past four or five years polyethylene globally has grown.
I think pretty close to 5%.
Great. Thank you grew or its growing in 2019.
So Jeff polyethylene has grown probably more like 4% to 4.5% and in the timeframe you.
Hi.
And this year, it's it's still growing kind of in that range, maybe a little bit lower.
Again, as I mentioned earlier with Destocking happening globally.
And and the concerns around trade and so on I think we've seen a little bit reduction in this demand growth, but a lot of its packaging.
So and consumable end use demand. So we're still very constructive about demand growth on polyethylene going forward.
I think it's hard to sort out this year because of the increased exports from North America, we're going to have to see where all that polyethylene ended up at the end of things that especially after that.
The trade lanes got we adjusted after the tariffs.
Thank you and our next question comes from Jim Sheehan from Suntrust. Your line is now open.
Good morning, Bob you said earlier that return timelines in plastic waste projects might be longer than for conventional projects related to that you.
Only signed onto a commitment of what the trade association to serve the interest of all stakeholders not just shareholders.
Could you. Please comment on how you would address another situation in which case stakeholder interests, Mike conflict with maximizing value for shareholders. For example, if its stakeholder objected.
To using cash per share repurchases and instead wanted you to use that cash for something else. How would you resolve the complex I'm, just trying to understand where shareholders fit in the hierarchy of priority.
Indeed, well I think with with with stakeholders, we have to emphasize that our aim is to be.
The going concern that generates good results. So that we can have sustainability in our business model.
And we're responsible and disciplined and how we deploy the cash flow we earn not only how we do it but what we do that actually earn the cash flow and so I would frame it in that way.
That it's important that we generate the results we do keeping all stakeholders in mind and deploy the cash flow that we deploy.
Keeping all stakeholders in mind and I think frankly, we've done that so I don't know that this this new commitment requires a change in our approach.
I think we've been living by this in the past and we'll continue to do that in the future and as it as it relates to share repurchases. The idea is to have a really strong company over long period of time, and so we're going to be very prudent and where we invest and and shareholders are very very important.
Certain stakeholder.
Constituency.
Thank you and our next question comes from Jonas Oxgaard from Bernstein. Your line is now open.
Well. Thank you for squeezing me in here.
Youre talking about increasing exports could you talk a little bit but what.
Vintage of your RVP is exported now where it's going and what kind of price realizations you get on those volumes.
So today Jonas about 20% of RPC is exported that's come up actually from low double digits.
So we've already increased our exports and I can imagine next year.
After we start hyper zone that we will increase that further and approach approach the industry average of.
Something like mid Thirtys, I think and exports, 30% to 35% of exports out of us.
We'll likely still be under that but.
But approach that a little bit more as we go into next year.
Just a reminder, if you would like to ask your question. Please press Star then one my next question comes from Laurence Alexander from Jefferies. Your line is now open.
Good morning.
On the sustainability in Circularity discussion could you provide some initial thoughts to help you will think about what the next 10 years might look like.
In terms of your willingness to shift to using bio nap.
For example in Europe .
Your willingness to lets circularity investments move above say, 10% of Capex over time.
And would you be willing to buy recyclable products from other.
Companies.
In order to get to assertion mix in your total portfolio over time.
Yes, so Lawrence on bio based nap that we've already demonstrated we can crack that it at our investment in Germany site.
And as we find more sources of that will.
Our aim is to scale that up.
And that I think over time.
Based on availability of feedstock and our ability to evolve technology I'm convinced that we're going to have.
Very sustainable good return sort of business models.
And that's been sort of the nature of our industry and our company is that first we.
Okay, and then we get to scale. So we can earn returns and I don't see mechanical recycling chemical recycling any differently. We're on the front end of this investment.
I'm fully prepared that while the investments are very modest at this point, they perhaps we'll have a little longer time horizon.
But we will be able to.
At the right time and we welcome.
The adoption of Circularity, we think thats very important.
As we think about the use of plastics going long.
Going into the long term and again as I mentioned earlier, the most important imperative today is to prevent the leakage of plastic waste.
Or plastic pellets into the environment, then once we collect that.
Companies like us are endeavoring to use that waste in many different ways to create new products.
To close the loop and we'll we're very committed to that and we'll continue to invest in that regard.
Thank you.
Last question comes from Matthew Blair from Tudor Pickering Holt. Your line is now open.
Hey, Bob Thanks for taking my question. So naphtha pricing is generally weak in this year relative to crude there's a thought that it may soften more going forward and that could either come from the demand side.
As crackers shift to letter.
Feedstocks are maybe from the supply side as you a shale crude production grows.
Do you.
What's your view on this are you worried about NAFTA.
Getting weaker and if so how would that affect the cost curve for PE and potential pricing for Pete.
Hey, Matt.
Good morning. Good question. So as you mentioned rightly NAFTA has already come off quite a lot and frankly, that's part of what's ailing our refining performances, we don't have the reformer at the refinery so.
When when when some of these products like NAFTA, and propylene and others come down in price.
That further.
Sure Directionally.
Affects the results at the refinery, having said all of that I always kind of go back to historical net.
Premiums are discounts and.
And I think we're at a point, where if there is if there is further reduction in NAFTA.
Crude oil.
Harken imagine that that would be sustained.
If it does mean, there offsets obviously, our European operations would benefit from that because NAFTA would become a lot cheaper.
We also.
Could crack more naphtha into it was advantage compared to ethane here in the us.
So.
I think there's sort of that theres two sites that ledger in terms of naphtha and we'll have to work our way through that but it seems to me that hey sustained stepped down in NAFTA.
It's more difficult to contemplate.
Thank you and that.
Final question ill now turn the meeting back over to Mr., David Kenny.
Well. Thank you this is Bob Patel offer a few.
Closing remarks first of all thanks for all the great questions.
Our company is delivering resilient performance during these times of macro uncertainty market headwinds and weak industrial.
Man.
At Lyondellbasell were not simply waiting for markets to rebound, we're taking steps to further increase our cash flow make disciplined investment decisions and create more value for our shareholders.
Thank you for your interest in our company and we look forward to updating you on our full year results and growth initiatives during our fourth quarter.
The earnings call with that we'll end the call well beyond a great. Thank you.
Thank you for your participation in today's conference all parties may disconnect at this time.
Okay.
Thanks.
Right.
Please.
Okay.
Yes.
Okay.
Yes.
Good morning.