Q1 2020 Earnings Call
Yes, Hello, and welcome to the Lyondellbasell teleconference. That's request of Lyondellbasell. This conference is being recorded for instant replay purposes.
Following today's presentation, we will conduct a question and answer session.
At that time to ask a question. Please press star one on your Touchtunes.
I'd now like to turn the conference over to Mr., David Kidney director of Investor Relations. Sir you may begin.
Thank you operator, Hello, and welcome to wind up sells first quarter 2020 teleconference. I'm joined today by Bob Teller, Chief Executive Officer, Michael Macquarie, Our Chief Financial Officer.
Before we begin the business discussion I would like to point out that a slide presentation that accompanies todays call and is available on our website at www Dot Lyondellbasell Dot com.
Today, we will be discussing our business results, while making reference to some forward looking statements and 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 can lead our actual results to differ by reviewing the cautionary statements in the presentation slides and our regulatory filings, which are available at www Dot Lyondellbasell Dot com Slash Investor Relations.
Reconciliations of non-GAAP financial measures to GAAP financial measures together with other disclosures, including 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 beginning at one PM Eastern time today until June 1st by calling 8663971 for three one in the United States and 20336 90538 outside the United States Pass code for both.
Numbers as one 160.
During today's call, we will focus on first quarter results. The current environment, our near term outlook and provide an update on a growth initiatives.
Before turning the call over to Bob I would like to call your attention to the noncash lower of cost or market inventory adjustments or LCM that we have discussed on past calls.
Adjustments are related to our use of less than first out or LIFO accounting and the recent decline and prices of our raw materials and finished goods inventories.
During the first quarter, we recognized pre tax LCM charges totaling $419 million.
Comments made on this call will be in regard to our underlying business results. Excluding the impacts of these LCM inventory charges.
That being said I'd now like to turn the call over to Bob.
Thank you, Dave and good day to all of you participating around the world I.
I hope that you your colleagues and your families are all staying healthy during these difficult times. We appreciate you taking the time to join US today as we discuss our Q1 results.
Let's begin with slide three and review the first quarter highlights.
Lyondellbasell business portfolio continued to deliver a relatively resilient performance amid challenging arising from the Corona virus pandemic.
Rapidly falling oil prices and deteriorating economic activity.
Our global asset footprint feedstock flexibility and disciplined financial strategies are serving us well and enabling us to navigate through these unprecedented market conditions.
Our first quarter EBITDA of $1.1 billion represents a decline of approximately 12% relative to the fourth quarter and 25% relative to the first quarter of the prior year.
Despite robust demand for our polymers Houston consumer packaging and medical applications profitability was impacted by soft demand for our transportation fuels and products used in automotive and other durable goods end markets.
Events surrounding the krona virus pandemic and the drop in oil prices continue to evolve and impact global markets for our products.
Let's turn to slide four and review our approach to mitigate the effects from these headwinds.
Currently all of our major manufacturing sites our operating.
In response to lower demand for certain products, we temporarily idled production at several small plants in our advanced polymer solutions segment, serving automotive end markets.
Definitely decreased production rates and other plans to match reduced end market demand.
Industry consultants estimate that petrochemical and refining assets in various parts of the world are running at 60% to 80% of nameplate capacity.
We expect that the majority of Lyondellbasell capacity will also operate within that range during the second quarter.
Our manufacturing operations have been declared as an essential industry supporting societies needs to fight endemic in a majority of the regions in which we operate.
We implemented best practices recommended by medical professionals and governmental bodies to protect our employees contractors assets and the communities, where we operate around the world, while maintaining business continuity with our customers and suppliers.
The activation of our global pandemic response team in late January we instituted social dispensing practices escalated par sanitization protocols and increased employee health monitoring and all of our manufacturing sites.
Our office based employees worked productively from home has a pandemic spread from Asia to Europe vented. The Americans, we are implementing processes to enable a safe and full return to workplaces has conditions permit around the world.
The majority of our 1000 employees in China are now back in our plants and offices.
I want to bank and acknowledge our over 19000 lyondellbasell employees for their tireless innovation dedication and sense of ownership they have exhibited.
For our company during these difficult times.
Since the full extent of the Pandemics the drop in oil prices and economic downturn remains uncertain.
We are acting on strategies to respond to a range of economic scenarios over the past few quarters, we've been working on meaningful cost saving initiatives across the company those initiatives have been accelerated in response to following demand we instituted more aggressive inventory management policies when combined with low.
Lower prices for raw materials and products. We expect these actions will provide a meaningful release of cash from working capital during 2020.
In order to reduce operational and financial risk, we postponed selected growth projects and planned maintenance, including slowing construction activities on our PVA plans.
We currently expect these actions will reduce 2020 capital expenditures by approximately 20% from our prior guidance of $2.4 billion to our current outlook of $1.9 billion.
During April strong demand for our investment grade bonds enabled us to increase liquidity by $2 billion with a successful offerings that resulted in the lowest us dollar interest rates in the history of our company.
We remain confident that are resilient cash generation and disciplined approach to capital deployment will serve us well during these challenging times.
Our focus on funding the dividends, while remaining committed to a strong investment grade balance sheet.
Plays an integral role to our shareholder value proposition, we believed that our actions to reduce operating costs capital expenditures and working capital will generate sufficient free cash flow over the coming quarters in the event of a prolonged or deeper downturn, we will act pragmatically and evaluate.
No options.
In March lower oil prices and reduced demand for transportation fuels negatively impacted both volumes and margins for our refining segment, and our oxyfuels and related products business within the intermediates and derivatives segment.
Global shutdowns by automotive manufacturers sharply reduced demand for our polypropylene compounds within the advanced polymer solutions segments.
Consumer driven demand for Polyolefins used in packaging and health care products supported relatively stable integrated polyethylene margins in the olefins and Polyolefins Americas segment.
Lower feedstock prices resulted in higher integrated polyethylene margins for our own Europe Asia and International segment.
While we expect that demand for durable goods will take some time to recover.
Lasting changes in consumer lifestyles man beneficial midterm implications for some of our large end use markets.
On slide five we show some recent north American market research that suggests changes in consumer buying habits that could indoor beyond the current crisis.
As you may have experienced consumers stockpiles home pantries has it became clear that societal restrictions were required to slow the spread of the virus.
Lyondellbasell self this search for our polymers using consumer packaging to safely deliver food medicines.
Other essential products to households around the world.
The need for plastic packaging increase to society moved from bulk volumes used in workplaces and restaurants toward smaller package sizes deliver and consumed in the home.
Excessive demand for paper goods has subsided and thankfully most stockpiles of home health care products do not require replenishment.
But lifestyle changes are creating a new normal as consumer base demand for frozen Terry and packaged food has risen by approximately 30% surveys indicate that after staying at home during the pandemic, 40% of Americans plan to increase the amount of time, they work from home and 65%.
We intend to eat at home more often.
These changes are likely to increase demand for the polyolefin packaging that is typically used in these applications.
Let's turn to slide six and review our recent safety performance.
And Elvis Els commitment to health and safety has become even more relevant to our employees contractors in communities during the pandemic.
Our employees have continued to deliver top quartile, if not top decile safety performance. Despite numerous potential distractions through these difficult times.
Earlier, I mentioned, our precautionary measures to increase of frequency and intensity of our workplace penetration social dispensing practices health monitoring and self reporting processes to reduce the spread of the virus among our workforce our processes have proven affair.
It is with limited virus spread across our global employee population.
Bind Lpas Els manufacturing operations have been designated as an essential industry to support societies needs during the Pandemics.
Let's turn to slide seven where we highlight lyondellbasell his role in supplying vital products that support healthcare hygiene and medical needs. For example, our polypropylene resins are used by customers to produce meltblown fibers that provides filtration and face masks are masterbatch.
Products are used to produce reasonable films are polyethylene is used for protective clothing, draping and medical packaging.
And our polypropylene.
Ethanol ISO propylene all ethylene oxide and propylene oxide are used to make syringes tubing test kits, so disinfectants medical devices and many other products.
With that I will turn the call over to Michael who will lead us through several topics related to our financial performance.
Thank you Bob and good morning, everyone.
Slide eight illustrates our relatively consistent cash flow performance over the past five years.
Over the last 12 months, 90% of our EBITDA translated into cash from operating activities.
With approximately $1 billion dedicated to maintaining our assets are free operating cash flow remain relatively healthy at $3.8 billion.
As you heard from Bob we're putting a significant amount of focus on cash generation and liquidity.
Now please turn to slide nine we provide further details on cash generation for the first quarter.
You can see that our businesses generated passive billion dollars of cash from operating activities. During the first quarter down just over 100 million from one year ago.
During the first quarter, we increased our cash on hand to $1.8 billion and an abundance of caution with borrowings from our revolving credit accounts receivable and commercial paper facilities.
Capital expenditures were approximately $660 million as we continue to move forward on our PVA plant.
In the first quarter, we paid $351 million in dividends to our shareholders.
As Bob mentioned, we have developed strategies to respond to a variety of economic scenarios slide 10 outlines the actions we have taken to maximize liquidity.
We are increasing cash inflows by accelerating cost saving initiatives and reducing working capital.
At the end of March we had $3.2 billion in liquidity. We further bolstered this liquidity due to successful issuance of $2 billion in senior notes in April at very attractive long term rates.
With a slowdown of our Potočnik plant construction postponement of growth projects and some deferral of planned maintenance will reduce our 2020 capital expenditures by $500 million relative to our prior guidance.
In the current uncertain environment, we will prioritize liquidity over share repurchases and any potential M&A activities.
We had a strong balance sheet and a favorable maturity profile.
Slide 11 illustrates the maturities over long term debt portfolio. After the April 2020 bond issuance.
Proceeds from the issuance will be utilized for general corporate purposes, including increasing our liquidity and managing shorter term debt maturities.
With the addition of the new bonds, our weighted average cost of debt remains about 3.8%.
Long term debt due in Twentytwenty to includes $500 million borrowed under our revolving credit facility in the first quarter.
This borrowing along with other short term borrowings were repaid in April from existing cash and proceeds from our recent bond offerings.
Our bonds have a well balanced maturity profile that reduces refinancing risk in any given year in the company benefits from a good mix of both dollar and euro denominated debt.
Before I turn the call over to Bob Please turn to slide 12, and allow me to provide an update on the annual financial modeling guidance that we discussed last quarter.
As we mentioned we are reducing our 2020 plan for capital expenditures by $500 billion to $1.9 billion.
Approximately $200 million of the reduction is associated with profit generating projects with the majority coming from the reduced pace of construction at our new Potočnik facility.
The reduce spending will become evident during the second half of this year.
We remain committed to the completion of our strategic investment in the PPA project and will resume full activities at the appropriate time.
The remaining $300 million of the capital expenditure reduction is primarily associated with postponements and our plant maintenance schedule.
In addition to Capex savings, we no longer anticipate EBITDA impacts the business associated with major planned maintenance activities for the second half of 2020.
We previously provided a cash interest estimate for 2020.
We thought it easier for you to model using our interest expense for 2020, which is expected to be $410 million. This includes a credit for capitalized interest of approximately $45 million.
2020 annual depreciation and amortization continues to be forecast at $1.5 billion.
We are reducing our plan for pension contributions in 2020 by $40 million to approximately $80 million and our pension expense remains estimated at $100 million.
We are reducing our estimated 2020 effective tax rate from about 20% to an expectation in the mid teens. The cash tax rate is expected to remain in the mid to high teens.
The lower effective rate is related to both lower profitability and favorable impacts from the us rotavirus aid relief in economic security or cares Act.
The Cures act resulted in a higher first quarter tax expense due to a revaluation of our deferred tax liabilities that was discrete to the first quarter.
The net impact of the Cures Act for the full year is expected to be favorable.
With that I will turn the call back to Bob for more detailed discussion of our segment results. Bob. Thank you, Michael Let's turn to Slide 13 and review our first quarter performance has mentioned previously my discussion of business results will be in regard to our underlying business results, excluding the impacts of the noncash.
Cash LCM inventory charges.
Our global footprint and diverse business portfolio continued to provide resiliency in this challenging market environment.
EBITDA for the first quarter was $1.1 billion profitability for both the olefins and Polyolefins Americas, and owing peak Europe Asia and international segments were supported by our capability to switch amongst low cost feedstocks and robust polymer demand from.
Consumer driven packaging and medical applications.
Our refining segment and the Oxyfuels and related products businesses within the I envy segment faced challenging market conditions created by reduced margins and demand for transportation fuels. The resiliency of our business portfolio continues to benefit from our relatively high participation in consume.
We are driven demand for non durable products and a diverse global manufacturing footprint.
Slide 14 highlights our differential feedstock flexibility relative to our peers at both our United States and European ethylene Cracker assets, we can leverage the most economical feedstocks with respect to root raw material costs and prices yielded from products.
In North America, our two Midwest Crackers, and Clinton and Morris for Bill to utilize low cost stranded ethane and propane.
On the us Gulf Coast three of our crackers can utilize a full range of feedstocks ethane propane butane Y grade mixed Ngls condensate and nap them, while the fourth cracker can flex amongst the most economical ngls.
This allows us to respond to feedstock prices and alleviate demand pressure on any one of the feedstocks.
Our cracker system offers distinct advantages relative to newbuilds crackers that can only run ethane.
In a similar away we have improved our flexibility in Europe with capabilities to run slightly more than 50% of our FY two eight using lpgs and other potentially advantage raw materials.
On slide 15, we highlight how this feedstock flexibility can provide advantage margins for Lyondellbasell integrated polyethylene margins in North America fluctuated in the first quarter as the advantage feed shifted from ethane propane and butane to NAFTA as the price of oil fell during March.
We are able to follow the most economical feedstock to maximize profitability by switching among the raw materials used in our flexible crackers in Europe.
Integrated polyethylene margins in March or the highest we have seen since 2015.
We've been able to maximize value across snap.
Propane butane and other advantaged feeds with significant asset bases in both Europe, and North America Lyondellbasell overall results are less volatile than if our business was reliant upon only one region.
With our feedstock flexibility in mine, let's review, our first quarter results, starting with our olefins and Polyolefins Americas segment on slide 16.
First quarter, EBITDA was $477 million $46 million lower than the fourth quarter profitability was driven by robust demand for polymers used in consumer packaging and medical applications, which supported improved polyethylene price spreads over ethylene monomer.
Olefins results decreased approximately $110 million compared to the fourth quarter.
Margins declined on lower ethylene sales prices, partially offset by a decrease in feedstock prices.
Ethylene operating rates fell to about 87% for the quarter due to a planned maintenance turnaround for one of the two crackers and our Channelview facility.
Polyolefin results increased about $95 million during the first quarter driven by an improvement in polyethylene price spread over ethylene of more than $105 per tonne, primarily due to lower ethylene costs.
During the first quarter, we advanced our growth initiatives by launching production at our 500000 ton per year Hyper zone high density polyethylene plant here on the Us Gulf Coast.
Hypersound polyethylene technology provides differential products for applications, such as water pipes, industrial drums, and intermediate bulk containers.
We expect a more challenging second quarter with the unprecedented market conditions as a backdrop.
While lower feedstock prices could reduce costs uncertainties around oil price and weaker underlying demand could reduce polyolefins prices and volumes.
Industry consultants predict that use crackers will operate at approximately 75% of nameplate capacity during the second quarter and our assets are expected to operate in a similar range.
Now please turn to slide 17 to review the performance of our Olefins and Polyolefins Europe Asia and international segments.
During the first quarter, EBITDA was $225 million $81 million higher than the fourth quarter.
Profitability was driven by lower feedstock prices increased reliability and higher volumes.
Olefins results increased more than $135 million driven by an increase in ethylene margin due to lower prices for NAFTA and other feedstocks.
All Yumes increased has cracker operating rates rose to 95%.
For the quarter due to improved reliability.
Combined polyolefins results were comparable to the previous quarter.
Polyethylene volume increased 15% over the fourth quarter with increased consumer driven demand for packaging due to stay at home orders.
Polyolefins margins declined offsetting the improvement in volume.
Reductions in both margins and volumes across our joint ventures contributed to a decline in equity income of approximately $35 million.
We expect the second quarter.
To follow similar trend as the Americas with benefits from lower feedstock costs muted by lower demand.
Our European crackers are expected to operate at 80% to 85% of nameplate capacity during the second quarter.
Please turn to slide 18, let's take a look at our intermediates and derivatives segments.
First quarter EBITDA was $281 million 48 million dollar decrease versus the prior quarter.
Results were affected by a significant decline in gasoline demand that severely impacted oxyfuels margins beginning in February.
First quarter propylene oxide and derivatives results.
Increased approximately $25 million due to higher volumes and margins.
Intermediate chemicals increased $15 million driven by an increase in acetate tow margins.
Volumes were lower due to planned maintenance at our Channelview methanol unit.
Oxyfuels and related products results decreased approximately $80 million as a result of lower product prices.
During February and March.
Oxyfuels margins declined with weaker gasoline demand.
Global travel restrictions and stay at home orders became more widespread.
We expect further declines for the segment into Q2 has lackluster demand for propylene oxide in polyurethane applications and continued pressure on oxyfuels demand and margins will likely persist through the second quarter.
On Slide 19, let's review the results of our advanced polymer solutions segments.
First quarter, EBITDA was $115 million $53 million higher than the fourth quarter.
Volumes and margins increased with typical seasonal improvements that were muted by pandemic related shutdowns in automotive end markets first quarter pretax integration costs were $14 million.
Compounding in solutions results increased approximately $30 million due to higher margins and volumes.
Seasonal volume improvements were partially offset by declines in automotive end market demand during March.
Hey, advance polymers results increased about $10 million supported by improved seasonal construction demand.
Our team is making continued progress on the integration efforts related to that 2018 acquisition of A. Schulman.
Integration activities are on schedule to achieve $200 million in forward annual run rate synergies by the third quarter of this year.
During the second quarter, we expect profitability for the segment to be increasingly impacted by severe reductions in demand for our polypropylene compounds utilized in automotive end markets.
As I mentioned, we have temporarily idled production at several of our small plants in response to manufacturing plant closures across the automotive industry.
Now, let's turn to slide 20, and discuss the results of our refining segment.
First quarter EBITDA was negative $80 million 102 million dollar decline versus the fourth quarter of 2019.
Results were driven by a decline in crack spreads and an unplanned outage on our fluid catalytic cracker unit.
In the first quarter, the Maya 211 industry benchmark crack spreads decrease to an average of $17.21 per barrel for the quarter.
Unplanned maintenance at our Houston refinery reduce the average crude throughput by over 40000 barrels per day to 226000 barrels per day for the quarter.
Refining market has been challenged by falling prices and demand for transportation fuels, including gasoline and jet fuel. We anticipate that these factors will continue to pressure our refining results until societal restrictions ease and demand for transportation fuels returns to typical.
Levels later in the year.
Our fluid catalytic cracker unit at the refinery returned to service in late April and we are currently operating the refinery at 85% to 90% of nameplate crude throughput.
Please turn to slide 21, as we review the result of our technology segment.
During the first quarter technology segment, EBITDA was $56 million, a decrease of $82 million compared to the record results from the fourth quarter of 2019.
Catalyst volumes and margins remained steady while licensing revenue decline due to fewer revenue milestones during the quarter.
Our technology segment licenses polymer production technologies for new manufacturing plants that enable subsequent catalyst sales to licensing customers over the lifetime of Viasat.
Individual contract terms and the timing of project milestones that results.
In an uneven pace for licensing revenues.
Based on the anticipated timing of upcoming milestones, we expect that second quarter licensing profitability will return to the higher levels of recent quarters.
Let me summarize this quarter's highlights and outlook, which slide 22.
During the first quarter, Lyondellbasell, leading and advantaged assets continued to deliver resilient results are foundations in leveraging our feedstock flexibility with our low operating costs and high asset utilization serves us well during any point in the cycles.
We remain consistent with our capital deployment strategy that supports our dividend with efficient cash generation and disciplined allocation of capital expenditures for required maintenance and profit generating growth projects.
All decisions are grounded by our commitment to a strong investment grade credit rating.
We anticipate that challenges from the Corona virus endemic and plummeting oil prices that are rose during the first quarter will extend for much of the year.
Demand and margins for transportation fuels will eventually rebound has various regions emerge from society will restrictions returned to work and regain comfort with prior to our travel patterns markets for discretionary durable goods will likely take longer to recover from the downturn.
We expect that robust consumer driven demand for our products in packaging and medical applications will continue.
Lyondellbasell is addressing these challenges by proactively reducing costs working capital and capital expenditures, while prioritizing and increasing liquidity. Our company is really well positioned to navigate these challenging markets have emerged stronger with the eventual rebound of the global economy.
We are now please take your questions.
Let's now open for questions. If you would like to ask a question over the phone. Please press star one and record your name.
I would like to withdraw your question Chris store to thank you.
Okay.
And we do have a question in the queue from John Mcnulty from BMO capital markets. Your line is now open.
Yes. Good morning, Thanks for taking my question. So I guess when we look at this recession, it's it's different than past ones because of the quarantining in the impact of that are the compounding effect of that.
It seems like when the quarantine starts to and there's a couple of your business is refining and obviously feels it should kind of snap back pretty quickly, but how should we think about the rest of the businesses and the potential impact that maybe the quarantining is having on it where you might as that and start to get relief maybe earlier than just the broader macro is there a way to think about that.
Yes, John so good morning.
The way, we think about earnings we have.
We have packaging and medical.
Which is probably nearly half of.
Half of the accompanying essentially and then durable goods autos probably about.
2025%.
And then and then the fuels.
And.
Oxy field and so on.
As a reminder.
I think that.
We should see demand improve even further.
The economies are opened.
Typically in the summertime as you know, we see seasonal effects and we see increases in demand. So relatively speaking we could see more of that.
On the packaging side and on fuels.
Got it rightly that.
As people get on the road and drive more our Oxyfuels and refining business should improve so.
Kind of the way we're thinking about it is.
Automobile production and demand will probably be the slowest to return.
But it's a pretty small part of our business.
Our next question is from Steve Byrne from Bank of America. Your line is now open.
Yes. Thank you.
If if your Bora.
Project Cracker in downstream polyethylene plant if they were so it was on stream today.
And you are able to receives maps.
As an internal transfer from from your partners refinery, how how would the integrated margin of that complex.
Fair to say your naps based margins in Europe and your.
Your us Gulf margins.
Yes, good morning, Steve.
Indeed, if it was running.
We'd have decent margins probably in the.
400 to 500 dollar per ton integrated basis range.
You'll recall that.
The the thesis around that investment.
About producing in China for China.
And.
Benefit of that project.
For us.
Beyond getting bigger position in China is that.
The timing of the investment will be success.
When we make our capital infusion and will be very close to start ups and within a quarter or too.
Decent margins today, if I was running.
Our next question is from David Thanks, a lot of Deutsche Bank. Your line is now open.
Good morning, Bob Hi, Good morning data about just some polyethylene prices are consultants said they fell four cents in April do you agree and they're calling for another.
Six cents in May and June for combined 10 cents decline in Q2 again do you agree do you think that's too.
To sit here.
Yes, David I think even the four cents I would say it's that.
And maybe more of a headline number as opposed to.
Matt kind of realized when you look from Oliver different end use segments that we supply in terms of the outlook with ethane prices rising like it has.
Difficult to imagine that you'd have that kind of a large step down.
And again as I mentioned earlier on the demand side.
Packaging related demand is still very good we're coming into the summer season, and there's different state economies in the U.S. start to open.
And outdoor activities actually are safer than indoor activities and that drives packaging demand. So if we see if we see some.
The increase in demand seasonally.
It seems to me that.
We have a decent market environment and in our case.
Regarding our assets and in olefins and Polyolefins into us at about 70% today.
So pretty decent rate given the kind of environment we're in.
Next question is from Vincent Andrews from Morgan Stanley. Your line is now open.
Thanks, and good good morning, everyone.
I'm wondering if you could talk a bit about.
The concern that's out there that with with lower oil prices will have less associated gas production and therefore less NGL production. So.
Yes does go above $3 re 50 wherever wherever it goes what do you think happens to ethane and propane prices.
Yes, so vincent.
In terms of.
Ethane supply demand and we're all working to get our arms around what could what could happen here's the way I think about it first of all there's quite a bit thats being rejected today.
Maybe as much as 350000 barrels a day of ethane being rejected so of course that rejection would get shut off and then in times past, what we've seen if ethane data is still snug and values rise specialty in a low oil price environment you'd see feedstock flexibility.
Feedstock flexibility kick in.
And companies like us, which who have a lot of feedstock flexibility, we would tilt more towards liquids and lpgs.
And beyond that.
Some of the exports could even get shut off for ethane. So it seems to me that.
What were what we're really trying to think through his could we have another spike as opposed to a sustained period of high ethane prices because in the end. We continue to believe that there's an abundance of ethane available in the us and higher prices will just attract more investment and more.
Supplier of ethane over the long term so it's more about thinking through transitory effects and I think your company like ours that has so much feedstock flexibility, we can manage through that probably better than most.
Next question is from the Swanton from RBC capital markets. Your line is now open.
Great. Thanks, good morning.
Morning.
Okay, all while I guess I just wanted to ask about polypropylene. So when you look at supply demand and what's going on the list.
Compounding and automotive.
Would you expect and then also feedstocks as well and would you expect.
Any capacity reductions in polypropylene over the next.
Year to even just your comment on your on your outlook for by Brooklyn. Thanks.
Yes.
It could be that some of the high cost capacity in Europe for us.
As idled.
But more importantly, while we've observed so far as projects are starting to get delayed.
Excluding China, but it's been elsewhere in the world.
If you look up and North America.
And other parts of the World those are the first signs of change and frankly, we're seeing that even in polyethylene. So one of the outcomes.
Area that we're going through June is theres delays in new construction and I certainly see that in polypropylene.
Next question comes from PJ Juvekar from Citi. Your line is now open.
Hey, Bob good to hear from your good morning PJ.
Good morning.
Just a quick question.
Given the plant shutdowns globally, what are your inventories a polyethylene and polypropylene went out of the before the industry and this double when vitamins, usually converters begin to destock anticipating lower prices.
Where do we stand on that.
And what kind of working capital do you expect to relieve given lower raw material Snowden buildings et cetera. Thank you.
Thank you BJ well inventory reduction has been a has been a very very high focus for us over the last 75 days or so we started reducing inventories back in.
Late February in early March and so today.
For our Polyolefins, we're we're sitting at 30 days or so of inventory based on lower demand right. So.
So you know we've already adjusted for anticipated lower demand right.
And we'll continue to do that and essentially what we're doing is were chart cycling our product wheel to preferentially produce the products, whether its high demand and only produce to order be areas, where we believe there is low demand or low visibility on demand.
And your question about working capital reduction and cash release, we expect about $500 million of.
Cash release from lower working capital as we work our way through this year most of that benefit should come through in Q2 with a little bit of tailing benefit in Q3.
Our next question comes from Kevin Mccarthy with vertical Research partners. Your line is now open.
Yes, good morning, Bob.
One of the sex of the pandemic seems to be rapidly changing consumer and government attitudes towards single use plastics, where do you observing in there and we anticipate any.
Any any backlash river.
That would lead to a structural benefit.
In addition to the other.
Working and staying at home cooking at home benefits that you alluded to in the prepared remarks.
Good morning, Kevin we do see some structural benefits I think accruing to both polyethylene and polypropylene phone for some time given what's happened.
Reversal of back bands and.
In the West coast on the East Coast.
Those could stay for a while I think what people are realizing is that there are very significant genic benefits to plastics and that single use.
As it has benefits the key thing that we have to remember that won't change does that the challenge of plastic waste still remains but I can tell you that we as a company have not lost our focus on that I think as an industry. The focus on plastic waste addressing recycling increasing capture of waste before it gets in.
The environment, that's something that we should continue our focus on as an industry in restarting we will continue as a company and then.
As single use applications increase in demand.
I think society can be confident that single use wage won't end up in the environment.
So plastic waste will continue to be an area of emphasis for us.
Our next question comes from a legacy your malls from Keybanc. Your line is now open.
Thank you good morning, everyone.
Bob you mentioned that benchmark margins for ethylene polyethylene in Europe, where we're fairly high close to records.
At the same time your EBITDA was was up sequentially, but below 2019 in 2019 averages so.
Hey, good could you explain why that is and B. If these benchmarks decline in the second quarter should your EBITDA declined less than the benchmark would apply.
Well, so I'd say, it's probably more about timing during the quarter in terms of the margins.
As in Europe is the all price decline.
We did see margin expansion and Thats very typical in Europe, and I think it speaks to again, a diversity of our of our asset base and and lower oil price environment, We generally see better contribution from from our European assets.
We'd like lease we'll see.
Some margin erosion in Europe, as we work through Q2, and as things normalize a bit more.
And the new sort of lower oil price environment sex and we do expect some margin erosion in Europe, but demands decent in Europe, frankly, we're running our own p. assets at about 80% in Europe today.
And as economies over there opened up we think that going into the summer season, we could run pretty good rates in this 80% to 85% range.
For the summer.
Next question comes from Duffy Fischer from Barclays. Your line is now open.
Yes, good morning Fellas.
Question, just around the differential between say us ethane based and kind of European and Asian, NAFTA based obviously as oils come down on paper at least those two regions look extremely competitive how quickly do you think as they ramp up some of their production rates do you think the bike products.
From the Nap. So we'll start just you know we adjust to lower levels. So you know the propylene the been seem to be designs that kind of stuff can you walk through how you see that playing out the rest of this year.
Yes, so and good morning Duffy.
Actually the byproduct disposition is already playing out.
And see force.
Computer diners containment, there's a real challenge and so our strategy is that we don't want to build inventory on Peter Dine and so we'll crack liquids up to a point, where we can move and Peter dying and I think thats already globally been restricting the amount of naphtha, that's that's being.
Correct.
And so we've had over the past 10 years I was thinking about this but we've had probably two or three periods like this where wed call product disposition became challenge typically doesn't last that long.
And in the current environment.
Some automobile production coming back and people driving and replacing tires should should provide some relief.
But I think it'll continue to be a constraint through most of this year, especially disposition of beauty nine and again, our our strategy even in the last for we have significant feedstock flexibility, we will maximize liquids up to a point, where we're not building inventory of see fours.
Next question comes from Bob Corey Goldman Sachs. Your line is now open.
Good morning, This is Don Campbell on for Bob.
Good morning on time on the cash flow.
Profile, you mentioned kind of working capital improvements.
Able to size that at any degree in terms of how much of those are your intrinsic improvements versus.
The decline in oil prices and.
And also on Capex, and what kind of 1.1 billion of growth Capex I'm still embedded.
And we'll total capex number for the years there for a room.
With that to the client mix here.
Hi, Good morning, going now let me let me answer the question in terms of how were.
The actions, we've taken to increase cash flow so as I mentioned earlier.
Taking capital release, we expect to be about 500 million.
Mostly in Q2 with some trailing.
Benefits in Q3.
Capex, we've reduced on a cash basis by about 500 million from two four to 1.9.
Most of that 500 million benefit will be evenly spread across Q3 in Q4.
In addition to that we've undertaken we've accelerated our cost reduction initiatives that we started in September of last year. We expect those to provide additional benefit this year on a cash basis of between 150 and $200 million. So when you kind of total all that out.
Between the working capital to Capex, and the and the cash basis cost reduction we expected we should boost cash flow this year by about $1.1 billion to $1.2 billion.
And the timing will start in Q2 through the end of the year.
Next question comes from Mikes Hassan from Wells Fargo. Your line is now open.
Hey, guys, Hey, Bob hiding on.
And then just sort of a longer term question. When you think about your EBITDA in olefins bolts American yes, I think you're going to be down this year right and given a lot of the challenges we have the in the in the economy. So when you think about it in a better volume environment hopefully over time.
And rebuilding that margin over time can you maybe walk us through the variables between oil and and.
And.
How much volume recovery comes back in terms of your EBITDA.
Maybe not in a more normalized EBITDA margin basis longer term.
Yes, I mean, I think you know.
In the near term Mike.
We we have decent visibility here with Q2 and into Q3 Q4, all of US are keeping an eye on whether we're going to have another wave of the virus or not and it's an unknown at something it's difficult to predict but if I look beyond the pandemic and look beyond.
The current period of low oil prices I mean, if history is an indicator typically oil prices do rebound within 24 months now.
At the moment, we also have lot of inventory to work through so we're not expecting significant improvement in oil price for most of this year, but I do think that if you were to look 24 months out.
You could see oil prices at higher levels.
Likely we'll also see project delays and cancellations.
And I think and some.
Demand improvement benefit from pent up demand, which should set up a very good supply demand environment.
24 months out 12, 12 to 24 months out.
But our focus is to make sure we maximize cash flow and maximize liquidity in the near term and make sure that we keep our focus on the long term projects that we've initiated.
Next question is from Frank Mitsch from Permiam Research. Your line is now open.
Hi, Good morning, gentlemen, I'm glad to hear your all doing well.
Good morning, Thank you Hey, Bob you mentioned it all the major plants are running although some of the smaller plants any PS are idle.
Just curious of I assume you looked at perhaps idling some polyethylene capacity is as others have.
What do you come out on the pros and cons of doing that and what will be the likelihood that that lyondell would go that route.
Yes, Frank we haven't we haven't really seen demand declined to a level when we would consider highlighting idling polyethylene capacity. So.
Our senses that hearing in April were kind of seen.
Our near term bottom in demand.
I would imagine that as have economies, partially reopen directionally that should should help on the demand side and as outstanding earlier on one of the other questions that.
In a partial locked down or reduced mobility mode for the rest of year, perhaps we think that packaging is a beneficiary of that.
So our expectation is that in the U.S., we're going to run.
Kind of 70, 80% across our assets and in olefins and Polyolefins in Europe, 80 80, 85%.
And we don't really foresee needing to idle for for a long period of time any polyethylene.
Next question is from Jeff Hoskins from JP Morgan Your line is an open.
Thanks very much.
Bob when you when you contemplate the experience of Lyondell.
Within its business performance and it and its share price during the current recession.
Change your view.
Concerning the distribution of dividend increase and share repurchase in the future for Lyondell that is do you think that youre behavior in allocating your free cash flow in the future will change because of your experience this year.
Yes. Thank you for that question Jeff.
In the near term as I mentioned given <unk>.
Visibility in terms of the outlook.
Beyond Q3, really our priorities are to maximize liquidity.
In terms of capital allocation, we're very consistent in our view that the dividends, there's a high priority for us.
Coupled with a strong triple b.
Our investment grade rating, which today is triple B for us So I don't expect that we would.
We would we would undertake buybacks.
Given that we're prioritizing with liquidity.
Our dividend, we expect that we will we will recommend the may dividend to our board, we expect that they'll approve that dividend for Q2.
When the visibility that we have done and the improvements we've made in terms of working capital Capex and the cash cost savings.
We think that we can largely covered the dividend for the full year.
And I think your question will be in a better positioned to answer when we get to later in the year about capital allocation today. The priority is maximized liquidity maximize cash flow.
And and all of those will will will allow us to continue enable us to continue to pay the dividend.
Largely from operating cash flow.
For the balance of the year.
Next question is from Jonas Oxgaard from Bernstein. Your line is now open.
Well thank you.
Question on the refining the Oxyfuels.
[music].
The changes the main issues right now is because of the lack of fuel demand. So can you give us an idea of what should those businesses look like.
After the locked on is over crude is still 30 40 Bucks probably.
But we are driving again.
Yes, So you know in refining Jonas.
Light heavy differential there is a very very significant driver for earnings followed by diesel cracks.
Our refinery.
Given that it's a heavy crude oil processing refinery and we make we make a significant amount of coke as a result.
In this environment could actually favors our refinery because of the amount of diesel that we produce.
We've said we've mentioned in prior earnings calls and and other venues that we expect that our refinery under more normalized conditions should earn about 100 million and EBITDA per quarter.
It'll be a challenge to get to that level. This year, because we still need more supply of sour crude oil, but we do think that.
The higher level of diesel production as as it as a portion of the total yield favors us and our refinery.
Oxyfuels.
We should start to see some benefits.
From the volume rising.
Higher oil price also helps in terms of Oxyfuel profitability.
So so both should directionally improve as the Lockdowns rvs and as activity at least daily activity and return to more normal normal levels.
Next question is from John Roberts from GBS. Your line is now open.
Thank you glad you also well.
If you were able to switch to 100% heavy feedstocks.
Would you be able to place all of the extra co products in this soft market.
Yeah, No I, we would not be able to do that and again, Peter dine would be probably our greatest challenge today.
And that's what limits us in terms of.
How much liquids, we can crack our capability we have to crackers are channelview that produce about 4 billion pounds of ethylene total we can we can.
Crack all liquids at those two crackers and in terms of our.
Corpus Christi Cracker, we can crack about two thirds non ethane fee. So so we have we have significant flexibility, but today, we could not place obviously force and as I said earlier, we do not intend to build inventory.
Our next question is from Matthew Blair from Tudor Pickering Holt. Your line is now open.
Hey, good morning, Bob glad to hear you are safe and sound. Just another question could you compare polypropylene demand with PE demand, which is holding up better and why.
Good morning that too good to hear from you.
You know there, they're both resilient for different reasons and polyethylene.
The the areas of weakness has been around construction and but we expect that thats more seasonal and that will pickup in polypropylene, it's more about auto.
Being weak, but on the other and it's been offset by by the Meltblown.
Type of products that are going into PPG from first first responders and there's quite a bit of packaging in polypropylene.
If I really had to call one or the other I would say maybe on the margin polypropylene is little bit weaker.
Then polyethylene just because of the auto.
Total content, but both are holding up pretty well and as I mentioned earlier, we're running our assets that 70, 70% plus here in the U.S.
Matthew the only other thing I would add has the export market from North America for polyethylene isn't as strong as it was earlier in the year. So that's a that's particularly weakness here in the second quarter anyone's until China's starts producing for the rest of world again.
The final question the cues from Hassan Ahmed from Alembic Global Advisors. Your line is now open.
I'm wondering Bob warning, but wanted to revisit some of the comments you made about your dividend.
You know having taken out beyond sit the 10-K it seems that get you know as I take a look at the covenants and the like.
You know if LTM EBITDA net debt to EBITDA sort of a you know approaches or exceeds three and a half times.
You know I guess, the verbiage was that.
There are certain restrictions that are booked on on dividend. Okay. So you know obviously, you know LTM kind of looking.
You know fairly sort of decent right now, but you know as if this then dennis or certain Lockdowns worked to last longer to you know if there was.
Oh go ahead related sort of Lockdowns to bump up later on.
You know as we go through the course of the yeah.
Or maybe you know if we start approaching LTM levels off.
I'd say you know close to three slightly north of 3 billion.
Dividends started becoming a bit more questionable just just wanted to sort of here your thoughts about that.
Yes.
EBITDA levels.
At that kind of levels, you're describing would be would be extremely low.
But I'd like Michael to comment on the covenants.
Yes, Hey, so one one thing to keep in mind regards the covenants that you're right.
It was there is a covenant related to total total debt to EBITDA at greater than three and a half times. You'll note from some recent filings if you've gone through them. We decided it was prudent to actually get credit for cash on sheets and so instead of a total debt. It's now a net debt covenants. So again as Bob said.
That outlook from an EBITDA perspective is is pretty pretty dire and would probably have to continue for some period of time, and then but I did want to point out that we actually did get some covenant relief as well going from total debt to net debt.
Okay.
Well. Thank you for all your questions I'd like to close with a few comments.
As I mentioned earlier, we were anticipating and we're ready to address continued challenges as we progressed through the current year.
Our consistent focus on cash generation disciplined capital allocation will serve us well and the challenging environment, we're leveraging our leading portfolio advantaged positions techxtend extend our track record of strong cash generation profitable growth initiatives and prudent financial policies to deliver sustainable.
Value for you our shareholders. So we thank you for your interest in our company and look forward to updating you in July on our second quarter was results, but with that weren't turn have a great weekend.
This concludes today's call. Thank you for your participation you may disconnect at this time.