Q2 2020 LyondellBasell Industries NV Earnings Call
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 answer session at that time to ask a question. Please press star one on her touchtone phone.
Now, let's turn the conference over to Mr., David <unk> Director of Investor Relations, Sir you may begin.
Hello, and welcome to Lyondellbasell second quarter 2020 teleconference. I'm joined today by Bob Miller, Chief Executive Officer, Mike The make Murray, 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 www dot lyondellbasell dot com.
He 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 on reasonable assumptions and the alternative measures are useful to investors. Nonetheless, the forward looking statements are subject to significant risk and uncertainty. We encourage you to learn more about factors that could lead our actual results to differ by reviewing the cautionary statements in the presentation slides in a regulatory filings which are available.
Www Dot Lyondellbasell dot com Slash Investor relations.
Reconciliations of non-GAAP financial measures to GAAP financial measures together with other just one Jersey city in the earnings release are also currently available on our website.
Finally, I'd like to point out that a recording of this call will be available by telephone in at one PM Eastern time today until September 1st by calling 808 794 to nine nine in the United States in two or 33693561 outside the United States Pass code for both numbers instead.
One for one zero.
During today's call, we will focus on second quarter results. The current environment, our near term outlook and provide an update on growth initiatives.
Before turning the call over to Bob I would like to call your attention to the noncash lower of cost when market inventory adjustments were LCM that we have discussed on past calls. These adjustments are related to our use of last in first stout LIFO accounting and the recent decline in prices of our raw material in finished goods inventories during the second.
This quarter, we recognize pretax LCM benefits totaling $96 million compared to LCM charges of $490 million into first quarter.
Comments made on this call will be in regard to our underlying business results. Excluding the impacts of these LCM inventory charges.
With that being said I would now lets turn call over to Bob.
Thank you, Dave and good day to all of you participating around the World I Hope that you. Your colleagues in your families are all seeing healthy during these challenging times. We appreciate you joining us today as we discuss our second quarter results.
Let's begin with my three and review the highlights.
Lyondellbasell employees leveraged our Fortunately operational excellence, that's management in commercial agility to generate $1.3 billion of cash from operating activities during an extremely challenging quarter.
This represents an improvement of over $100 million relative to the second quarter 2019, despite significantly lower earnings.
During the second quarter, our team rapidly responded to weakening market conditions.
My aggressively reducing inventory to match lower levels of demand they reduce cash working capital at $575 million, we developed plans to reduce capex by approximately $500 million during the year.
This includes slowing down as an IPO TV a project.
We also made significant progress on cost reduction efforts towards our goal of a run rate $150 million to $200 million recurring annual savings I ended this year.
Luckily adapted to changing conditions in our markets, where places and communities to ensure that are actually it's continued to operate safely and serve the dynamic needs of our customers.
Nine dealt with those products support many of societies critical needs such as Muslim fibers, and 95 face masks.
<unk> for Sanitizers and packaging that presents contamination in spoilage with ARPU.
I'm very thankful pretty innovative thinking tireless dedication and disciplined approach health and safety exhibited by our employees around the world to ensure we continue to serve our customers and protect our communities during these difficult times.
Our second quarter EBITDA, nearly $700 million represents a decline of nearly 40% relative to the first quarter and almost 60% relative to the second quarter of last year.
These results are reflective of pandemic driven declines in demand and margins across many of the markets, we serve especially in transportation fuels and products used in automotive manufacturing and other durable goods end markets.
Let's turn to slide four and review our recent safety performance Lyondellbasell commitment to health and safety has become even more relevant to our employees contractors in communities during that Brown a virus endemic.
We leveraged the early experience more employees in the Asia Pacific region developed protocols for workplace centers Asian facial covering social distancing health screening and contact racing to minimize the spread of buyers across our global facilities.
Although we have limited influence in our surrounding communities. Our process is a proven highly effective and limiting buyers Fred within our work places.
Employees have continued to deliver top ports.
If not top Deciles safety performance well adopting these additional endemic related protocols.
In June our company was honored to receive the American chemistry councils highest distinction there responsible care company of the year Award.
Award recognized our innovative practices and leadership in the areas of environmental Health safety and security Dishonor is a direct reflection of the dedication of our entire lyondellbasell team and their work to ensure that the health and safety of our people and the communities, where we operate are always our highest priorities.
The pandemic has generated a renewed appreciation for the value of our chemical and polymer products for society.
At the same time Lyondellbasell does not retreated from our commitment to developing circular and sustainable business models for our products.
Let's turn to slide five where we highlight our progress on molecular recycling.
<unk> cells mechanical recycling business model is focused on forming partnerships with.
Waste management companies, who can clean and sort of stick wage, enabling the production of premium cycle plastics.
Nonetheless, we recognize that many plastic products are composed of multiple materials that cannot be easily sorted in apparel waste streams made last year, we announced our initiative.
The new proprietary technology called more attack to convert mix I stick waste into a feedstock we could use in our existing assets to produce new chemicals in polymers on slide five you can see we have already scaled up this technology and the laboratory to a pilot plant that we commissioned.
During July and Ferrara, Italy.
Our aim is to advance our catalyzed process technology to an industrial scale that will enable the production of Monroe feedstock and waste plastic that is competitive would not the based economics.
Mark that could provide another option for satisfying growing demand for circular plastics produced without possible based feedstocks.
With that I'll turn the call over to Michael will lead us through several topics related to our financial performance.
Thank you Bob and good morning, everyone.
As Bob mentioned, our company continued to generate substantial cash during the second quarter.
Slide six illustrates our cash flow performance over the past five years.
During this time, we have consistently generated $5 billion to $6 billion of cash from operating activities on an annual basis.
Over the last 12 months more than 110% of our EBITDA was converted into cash from operating activities.
With approximately $1.1 billion as capital expenditures dedicated to maintaining our assets and $5 billion in cash from operating activities are free operating cash flow yield remains strong at 17.6%.
Our team is aggressively managing inventories do dynamic markets, while prioritizing cash generation and liquidity.
Now please turn to slide seven we provide further details on cash generation during the second quarter.
You can see that our businesses generated $1.3 billion of cash from operating activities.
More than $100 million from one year ago, Despite our significantly lower earnings.
During the second quarter, we increased our cash on hand to $3.2 billion with a $2 billion bond issuance in April at very attractive rates.
Capital expenditures of $588 million decline more than 10% compared to first quarter as we began to slow activities and the peer GBA plant construction.
In the second quarter, we paid $350 million and dividends to our shareholders.
We ended the quarter with about $5.8 billion of cash available liquidity.
The strong cash generation and ample liquidity, we've been confident in our ability to fund our dividend primarily from operating cash flows.
As announced during the prior quarter, we rapidly develop strategies to respond to a variety of economic scenarios.
Slide eight dose illustrates our actions to reduce capital expenditures in 2020 by approximately $500 million.
In addition to slowing the PEO TV a activities. We have also deferred planned maintenance during the endemic.
You may recall from our Investor Day last September that our plan was to reduce capital expenditures to $1.9 billion by 2022.
We are accelerating this program and now plan to achieve this target two years ahead of schedule.
Let's continue to slide nine and summarize the impact of these initiatives the combination of lower capital expenditures reduced discretionary spending and cash or at least from working capital is expected to improve our 2020 free cash flow by as much as $1.1 billion. We're also pursuing further optimization of our local.
Cost structure by accelerating cost efficiency initiatives.
With our disciplined approach to capital deployment and about $5.8 billion in cash and available liquidity. We believe the company is well positioned where this dynamic market environment.
Before I turn the call over to Bob allow me to provide an update on the annual financial modeling guidance that we discussed last quarter.
We had expected our 2020 effective tax rate will be lower than our previous guidance at the mid teens percentage rate.
The lower effective rate is related to both reduced profitability and favorable impacts from the U.S. run virus aid relief in economic security or cares Act.
And that impacted the cures act on the company for the full year is expected to be safe.
The 2020 cash tax rate is expected to remain in line. There previously committed estimate at a mid to high teens percentage rate.
With that I'll turn the call back to Bob more detailed discussion of our segment results Bob.
Thank you Michael Let's turn to slide 10, and review our second quarter performance as mentioned previously my discussion of business results will be in regard to our underlying business results, excluding the impacts of the noncash LCM inventory changes.
Our global footprint and diverse business portfolio continued to provide resiliency in this challenging market environment.
EBITDA for the second quarter was nearly $700 million.
Global response to limit the spread of cobot 19 reduced demand and margins for many of our products.
Our olefins and Polyolefins segments rapidly responded to increased demand for our products used in consumer driven packaging and health care.
Reducing production for polymers used in durable goods applications with falling demand.
Our intermediates and derivatives refining and advance polymer solutions segments were impacted by the significant reduction in demand for transportation fuels and polymers utilized in automotive and other durable goods segments.
The resiliency of our business portfolio continues to benefit from our relatively high participation in markets with consumer driven demand for non durable products and our global market Leach.
Let's review, our second quarter results, starting with our olefins and Polyolefins Americas segment on slide 11.
Second quarter, EBITDA was $210 million $267 million lower than the first quarter pandemic reduced demand for polyethylene from export markets and polyolefins for durable goods markets, resulting in margin and volume declines.
Olson's results decreased approximately $230 million compared to the first quarter.
Margins declined on lower co product prices, particularly for Buda downstream and others see force.
As discussed in our first quarter recall, we reduced our ethylene operating rates to about 75% of nameplate capacity for the second quarter to address weaker demand.
Ethane made up 60% of our ethylene cracker feed slate during the quarter as weak demand for beauty dying and other products offset the advantages of cracking low price naphtha feedstock.
Polyolefins results decreased about $45 million during the second quarter, driven by declines in both margins and volumes.
We believe the pandemic driven declines in demand bottom during the second quarter, we're seeing improvements in pricing and volumes as global economies reopened and demand for polyethylene exports and durable goods returns, we expect to operate our U.S. ethylene crackers at nearly full rates of 95% of.
Nameplate capacity during the third quarter.
With that let's turn to slide 12, and take a look at recent developments in feedstock costs around the world.
As illustrated in the chart during 2019, the cost of ethylene production in both North America, and the Middle East remain highly advantaged relative to NASA based cost in Europe, and the rest of the world.
This is then familiar shape of the global cost curve since you have shale oil and gas production came online over the prior decade.
The small amount of ethylene produced by methanol to olefins technology in China is typically on the high end of the cost curve.
In March and April crude oil prices rapidly fell in response to both would use feel demand from the pandemic hand increased crude production as Saudi Arabia, and Russia sought to pressure higher cost well producers.
When NASA based costs became favour during March and April some speculated that occur what would have remained converted.
Eliminating the U.S. shale gas advantage.
Economies began we opening during may and June the cost curve, we regain slope and reasserted the advantage.
Middle East and North American feedstocks.
North America had an abundance of ethane and other natural gas liquid resources.
Oh events may occasionally depressed oil prices and temporarily invert. The costs are we continue to believe that north American producers will typically have advantage for the foreseeable future.
Looking at the polypropylene market on slide 13, we are seeing indications of increased demand from the automotive market as well as continued strength in packaging orders.
Ultimately, 15% of Lyondellbasell, North American polypropylene business serves the automotive market by either providing base resins to our downstream events polymer solutions segment, or who direct sales to third party manufacturers or be able components.
In the first half of this year automotive manufacturers shutdown production to limit virus spread and then we opened.
First in China later in Europe, and then the United States.
China's progress can be seen by June 2020, new vehicle tire demand that is 11% higher and the same month last year.
In Europe, and the U.S. June 2020, new vehicle production remains down by 31, and 26% respectively relative to three told it forecasts.
The progress in North American automotive demand for polypropylene can be seen in the chart on the right that tracks our order books for these applications.
And then has risen sharply during June and July as automotive manufacturers resumed production.
In addition by Endo, Brazil's polypropylene orders for consumer driven packaging applications have remained at elevated levels, we have seen through the pandemic with 20% higher demand from packaging markets. During the first half of the year.
Now please turn to slide 14 to review the performance of our Olefins and Polyolefins Europe Asia and International segment.
During the second quarter, EBITDA was $219 million $6 million lower than the first quarter.
Despite reduced demand as a result of the pandemic integrated profit margins remained relatively stable.
Olefins results decreased approximately $75 million driven by a decrease in both margin and volume.
Definitely margin decreased as reductions in ethylene and co product prices outpaced declining feedstock costs.
Volume decreased following strong production in the prior quarter, coupled with lower demand in the second quarter.
Our European Frackers operated at 84% of capacity during the quarter.
Combined polyolefin results decreased more than $20 million compared to the prior quarter.
Margins improved and were partially offset by a decrease in polypropylene volumes due to reduced demand from automotive and other durable goods markets.
Higher margins in our joint ventures contributor to an increase in equity income of approximately $55 million.
Increased demand for Meltblown polypropylene used in 10, 95 face masks and other medical applications drove improved demand.
And margins for our multi Moray joint venture in South Korea.
In the coming quarter, we expect margins decreased due to higher feedstock costs, we expect that our European Packers and operate at about 90% of nameplate capacity during third quarter at some of our competitors in the region are expected to be down for planned maintenance.
Please turn to slide 15 for an update of our new Chinese integrated Packard joint venture with bore.
Over the past few weeks the construction team handed off the project to the operations team for commissioning during August.
Most of the ethylene feedstock will be net supplied by our partners adjacent refinery.
Cracker also as flexibility to utilize LPG feedstocks from global sources and this slide shows the first delivery of an LPG cargoes cracker a few weeks ago in preparation for our startup.
Our equity contribution to the joint venture is expected to occur during the third quarter.
This joint venture investment allows lyondellbasell to rapidly expanding the worlds fastest growing market for our products.
Please turn to slide slide 16, let's take a look at our intermediates and derivatives segment.
Second quarter, EBITDA was $121 million $160 million lower than the prior quarter.
As we expected second quarter results reflect a significant reduction in gasoline and other durable goods demand that impacted both margins and volume, we're obviously fuels and related products as well as propylene oxide and derivative volumes.
Second quarter propylene oxide and derivatives results decreased approximately $55 million due to lower volumes from reduced demand for polyurethanes.
Emotive instruction and furniture markets.
Intermediate chemicals results were relatively flat.
Oxyfuels and related products results decreased approximately $95 million as a result of lower margins and lower volumes.
Margins were compressed by lower gasoline prices.
Volumes declined due to lower demand for automotive fuels and Isobutylene.
We anticipate that demand for transportation fuel will improve in the third quarter profitability for exceed fuels and related products business is expected to follow but not to the typical high levels. We normally see realized during the summer driving season.
With that let's turn to slide 17, and look at some positive indicators in the demand for transportation fuels.
In the U.S. stayed home closure is largely occurred over the months of March and April we the Reopenings beginning in May this can be seen in the chart.
As vehicle miles traveled bottom during April.
Summer driving and reopening increase vehicle mileage for June to be about 95% of what it was in February.
In addition increased consumption is reducing gasoline inventories.
Allowing for a gradual improvement in refinery operating rates.
Well, we may need to moderate reopening progress to control virus, Fred the trends supports improving supply and demand balances for transportation fuels that should be constructive for profitability going forward.
Now, let's move on and review the results of our dance polymer solutions segment.
Slide 18.
Second quarter, EBITDA was $23 million $92 million lower than the first quarter.
Volumes declined significantly as a result of pandemic related shutdown that automotive manufacturers, we temporarily idled production at several of our small compounding plants in the segment to respond to reduce demand.
Second quarter pre tax integration costs were $16 million.
Combo me in solutions results decreased approximately $75 million due to lower volumes driven by decreased demand propelled polymer compounds from the automotive sector.
And dance polymers results decreased about $10 million due to lower demand in the construction.
And automotive end markets.
Automotive manufacturers, partially resumed production at their facilities in the latter part of the second quarter. As a result, we expect third quarter profitability for the segment to benefit from returning demand for our polypropylene compounds utilized in automotive end markets.
During July we restarted most of our idle plants and we plan to operator compounding capacity at rates that match downstream automotive demand.
Now, let's turn to slide 19, and discuss the results of our refining segment.
Second quarter, EBITDA was negative $14 million 66 million dollar improvement versus the first quarter of 2020.
Results were pressured by a significant reduction in transportation fuel demand has the U.S. implemented measures to reduce the spread of the virus.
In the second quarter margins improved as prices of Coke and sulfur Oh products from our refinery held up relative to the falling prices of food or.
We also benefited from mark to market gains from a hedge on a portion of our crude oil purchases.
These improvements were partially offset a decrease in the Maya 211 industry benchmark crack spread to an average of $13 in 27 cents per bear.
Average crude throughput increased by 11000 barrels per day to 237000 barrels per day with the resumption of operations at our fluidized analytic accurate unit during April.
We anticipate that reduced demand for gasoline and jet fuel will continue to pressure our refining margins until demand approaches three covert levels. We are planning to operate the refinery at 85% to 90% of nameplate crude throughput during the third quarter.
Please turn to slide 20, as we review the results of our technology segment.
During the second quarter Technology segment, EBITDA was $112 million, an increase of $56 million compared to the prior quarter.
Licensing revenues increased.
Catalyst volumes also increased as customers stopped inventories early in the pandemic.
Our technology segment licenses polymer production technologies for new manufacturing plants that enable subsequent catalyst sales to licensing customers over the lifetime of B assets.
As you will contract terms and the timing of project milestones results in an uneven pace for licensing revenues.
Based on the anticipated timing of upcoming milestones, we expect that third quarter licensing profitability will be comparable to the same quarter last year.
Let me summarize this quarter's highlights and outlook on slide 21.
During the second quarter Lyondellbasell, leading an advantage global positions continued to deliver resilient results during a challenging market environment.
We demonstrated commercial agility had pivoting production towards increased demand from packaging and health care markets, well aggressively managing inventories for products affected by shutdowns in the automotive and other durable goods manufacturing.
Our foundations in leveraging low operating costs and optimal asset utilization serves us well during any point in the cycle.
Our capital deployment strategy continues to provide support for our dividend through efficient cash generation and disciplined allocation of capital expenditures for required maintenance and selective profit generating growth.
Paul capital deployment decisions remain grounded in our commitment to an investment grade credit rating.
We believe the pandemic driven decline in demand bottom during the second quarter.
Demand and margins for transportation fuels, we eventually rebound as global economies continue to reopen.
That's for discretionary durable goods are improving but will likely take longer to recover from the downturn, we expect that strong consumer driven driven demand for our products in packaging and medical applications will continue over the near to medium term.
Lyondellbasell is addressing these challenges by moving rapidly and decisively to reduce costs minimize working capital and moderate capital expenditures, while prioritizing liquidity and maximizing free cash for.
These actions to bolster our cash generation, coupled with recent market improvements position as well to maintain the continuity of our dividend through this downturn.
We continue to look forward and position the company to benefit from opportunities as the global economy rebounds. We're now please take your questions.
So much about open for questions to ask a question over the phone. Please press star one and record. Your name also please limit yourself to one question if you'd like to withdraw your question press star to.
First question comes from Steve Byrne from Bank of America. Your line is now open.
Yes, Thank you Oh, well, we look at your.
Bustling production capacity it looks like Youre.
Likely producer of hydrogen to essentially hundreds of thousands of tons a year and perhaps some of that gets you where refinery operation then our assumption as most of it as burn for fuel value.
But as I was wondering if you had to you.
That's the best use for all of the hype.
Potentially to qualify it all for a color apartments in other than gray and.
Well you thought about.
Perhaps.
<unk>, reducing or the carbon footprint from natural gas.
Combustion is the best use of that but welcome your thoughts on that.
Yeah, Good morning, Steven Bob.
Indeed, we do produce a lot of hydrogen.
Our crackers, especially the ethane crackers, we have some integration with the refinery as you noted we also sell some crude hydrogen to the industrial gas companies are better than refine the hydrogen so there's a mix some of it is fuel some of it so two industrial gas companies and then.
The balance goes back to our refinery and we'll we'll look at that over time.
As we see industrial gas companies finding areas just for hydrogen.
If we can.
So more to them and recover.
Our next question comes from Jeff Zekauskas from Jpmorgan. Your line is open.
Hi, Thanks very much.
What's the timing of TV a plant I think originally youre going to spend about 2.4 billion to build but how much of you spend how much more is there to go and I think originally you thought that returns for a little bit over 400 million of either.
Have you changed your view of the returns.
Yes, Jeff Good morning, So we've essentially delayed the project by one year. So originally our schedule was to complete the project in Q3, or 21, and okay and to commence commissioning now we'll complete 10-Q three of 22 or so.
Updating our capital forecast on that project so.
Once we have a better.
Better number will will.
Provide that to the investment community, we're not really prepared to that today then it to your question about earnings. So indeed, I mean, we've talked about 400 to 400 150 million.
The EBITDA and so if you consider 2023 is the first full year of operation, we would expect that I'm kind of that mid cycle margins for PEO and for a MTV then we should be in that range or 402 point 450 million.
Oh, the EBITDA contribution.
Our next question comes from Bhavesh Lodaya from BMO Capital Bank. Your line is now open.
Hey, good morning, this is up a best for job.
So, but I just think about your different business since it seems like most of them a prime for a nice snapback in comes out in the earnings from the Twoqeleven. So from what you're seeing this month, where do you expect to process the country incomes other businesses and what's the magnitude of owning to comedy we should think about and we think about that Nick.
Thanks.
Sure. So there's a lot and I'll give you kind of the puts and takes so if you think about our all in P. business.
That was running well kind of server to server locked down period, especially for and uses like packaging a medical.
As we sit here today, we're running on the U.S. basically at full rates and Europe, we're running between 85, a 90% on our on T. assets.
And then I would expect.
That should hold through the corridor.
D., we're running between 85 and 90, depending on the region and the product remember that and I M E.
Our appeal those into more durable goods type applications.
The auto as well and that recovery well that's occurring it's happening at a slower pace same with fuel demand. It hasnt recovered off the lows, but we're far from where we were at a pre pandemic levels.
And then what's the refinery.
Challenge really is twofold, one is demand recovery for.
Gasoline and for jet fuel, so long way away from where we were before the pandemic said that.
And then come to light heavy differentials are still very very now which is usually leveraging far refinery. So no I think we'll be continue to see challenges.
And and the refining segment for sure.
Next question is from Alex Yefremov from Keybanc. Your line is now open.
Hi, Thank you and good morning did did you see any feedstock limitations said your middle Eastern Joint Ventures, and did you see.
This issue.
The industry overall.
Alex not really we didn't we didn't see much impact if there was it was marginal for maybe a week or two but not sustained a challenge for our middle East assets really in early part of Q2 was there maybe a flatter cost curve and a and also lower.
Relative prices in China for polyethylene, which both have now.
Well moved into right direction. So we see a full availability of feedstock today and a much better margins in our middle East assets.
Next question is from P.J. Juvekar from Citigroup. Your line is now open.
Yes, Hi, Bob Good morning, good morning.
So the question on slide 12, which is quite helpful.
When you show the regional production cost.
You show that attended event is [noise].
But coming back.
From April to June time period.
But on the same slide that does that had been the low cost and the high cost has come down.
Especially if you compare that back to 2019 levels on that chart.
What does that mean to you I mean does that mean that the profit available on the low cost Blair or.
Less than what they were before can you just interpret that slight for us into them, so sort of the slope [noise].
Sure so.
Certainly the slope is not as great as it was two or three years ago, but we still think theres enough advantage and I think today PJ margins are really more driven by.
The dynamics in China, and more what we're seeing today is that Oh polyethylene demand is quite strong in fact, there's there's very significant year over year growth. When we look at our for Q2 for far China polyethylene.
And prices have responded quite a lot.
So I think probably that will be a bigger driver of global polyethylene prices in the near term.
Has that continued.
Robust demand growth in China.
And Oh until all price most moves up further likely we have a cost curve that's similar to what it is today.
Yeah PJ. This is Dave I think what catches your eye on that charters, the MTO coming down sharply with lower methanol prices here in July and as you know that's a relatively small portion of global ethylene supply so.
Not as impactful as it might look on the chart.
Next question is from Vincent Andrews with Morgan Stanley. Your line is now open.
Thank you.
Bob could you give us your view on ethane prices sort of what's happened over the last quarter in terms of the increase in the widening a frac spread than what you're saying, it's going to happen in the back half of the era with ethane exports, maybe propane exports and how the.
The U.S. NGL feedstock price perspective could be second half.
Yeah, Good morning, Vincent so.
We had but we had a run up in price.
Midway through the quarter I think part of that was related to a certain producing basins.
Either shutting in and others restarting so it was chosen effect.
The timing of when certain basins, where rejecting in certain important recovery mode I.
I think as we look at the outlook.
It's it's reasonable to assume that ethane prices will remain kind of in the range, where they are today, there's already some talk about.
Some of the drilled but uncompleted wells coming back online and in the Permian and so that could burst supply that pain.
Today, there's still 500000 barrels a day of rejection of ethane. So we think there's there's enough ethane available it's more about local sort of a of dislocations that have impacted the price in terms of propane.
Propane exports have been a they've been fairly strong.
There's a lot of propane in the world today. So it seems to me that that given more modest demand for propane globally.
Given kind of economic situation, we find ourselves and I.
I don't think propane can rise a lot.
Relative to ethane. So we think probably kind of where we are today in terms of feedstocks are the right way to think about it going into <unk> or even into Q4.
Next question is from Kevin Mccarthy with vertical research partners. Your line is now open.
Hi, good morning.
This ethylene chain margins has compressed what impact do you anticipate.
On the new supply of ethylene in coming years, perhaps you could comment on on what you see happening with new projects and the U.S., China and elsewhere and also in terms of existing high cost assets like MTO and some of the higher costs maps, the base production and Asian on Europe.
Sure. So so you know coming coming back to one of the prior questions about the cost curve no I think that if we look at a high chess or others for forecast oil price it seems that.
Recovery will take some time to get back to the kind of cost curve that we had a backend 16 or 17, even and so I likely with with a a with less slope on the cost curve there will be less investment we've already seen some delays in the U.S. that have been announced of new projects.
I would expect said that that would continue.
In China are working assumption is that.
Personally what's been announced we'll get built.
Now I'd kind, there could be a little bit of delay.
But but I think it's fair to assume that what's on the books will come online elsewhere around the world, though whether it's the middle east or it's a U.S. I would expect very modest if any expansion given a given the outlook for especially advantaged feedstocks and then with MTO.
Dave mentioned earlier its represents a very small percentage of global capacity and it always tends to be the swing when it spend the money it will run when it's not shutdown.
Next question is from David Begleiter from Deutsche Bank. Your line is open.
Thank you good morning, Bob.
David.
Bob Summer recent U.S. polyethylene price trains husband due to strong U.S. exports.
I see about three to four ethylene crackers, including yours come on stream in the back half the year.
Do you think that could weaken U.S. exports and then we can you with polyethylene pricing as a result.
Well, David I think.
The given that where inventories are in Asia today, there are in China, China part inventory is a five year lows.
And Ah U.S. exports are maximum today, a very high level of imports from other parts as well into China. I don't think these couple or three crackers will well really kind of disturb the environment.
That we find ourselves and as I mentioned earlier.
Growth has resumed in China were finding that.
Growth rates are our no underpinned, 4% to 6% range on polyethylene year over year.
So and that's still recovery in front of us because even in China. There are hot spots in terms of though the virus. So so no I I'm pretty constructive.
About about the outlook for Q3.
Next question is from Hassan Ahmed from Alembic Global Advisors. Your line is now open.
Morning, Bob.
Morning.
The question around the I.M.D. segment, you know a busy historically.
It was one of those segments, which you know quarter after quarter should pretty stable margins and obviously things have changed all that well at the last two Cortez. My question, it's as I take a look at the volumes a byproduct within within that segment.
You know the styrene side of things the I'll sit to use side of things continues to be stable, but obviously you OTV and the like you don't have seen significant sort of corrections right. So now. The question is is this primarily because of the unique nature, if there's downtick <unk>.
He.
It's obviously the auto industry, that's gotten hit fairly hard and as we are seeing signs of recovery in that industry should we expect a snapback in these products and should we expect <unk> you know a reversal or do those sort of stable lodging levels.
And how quickly should we expect to see that.
Sure Hassan absolutely, we've we've always thought of our I envy segment as being a one of the more stable segments and the company and I think it will resume.
That profile post I mean does that some of the virus and after we have vaccines. We we've not had a period, where both U.S. and European auto manufacturers, where we're completely shut down. So we have no kind of historical reference for that and now we are seeing demand come.
Back in the auto sector, but it's not back to where it was and then and then for the T.V.A.
The you know the fuel demand has been hit very hard because of the locked down. So again something that we don't have any historical contacts for so both I think will correct post post pandemics. If you will and I do think that I and they will return tear it stable profile that we've come to come to like about that.
Yes, no timing for that I.
I do think that you know it's of course, it's tied to development of vaccines and therapeutics and.
And of course distribution of that so it's not just when one is discovered that one when when they are actually distributed and given to people I mean, I think the recovery and really we need to be thinking about second half 21.
Perhaps even into 22 before we see a full recovery.
[laughter]. Upon this is Dave and I, just add that even though the vehicle miles traveled does return to what it was in January February for the pandemic, it's nowhere near that the typical summer driving season, and that's what we really need to get those oxyfuels margins back Yeah. We're currently and may be winter like oxy.
Gross margins on that would be nice to be in a in a typical summer season, Yeah, and lastly oil prices also help on Oxyfuel margins. So you know higher oil is better for Oxyfuel as well.
Our next question is from a room to this one also from RBC capital markets. Your line is open.
Okay.
I guess just wanted to ask about.
Get your perspective on on polyethylene.
Well I guess, maybe could you help us understand the market or maybe the increase in Japan, what kind of led to success there and I guess, how are you thinking about July and maybe into persistence.
And holding onto some of this pricing we've gotten recently.
Do you think that's possible or do you think maybe that it was mainly the export market kind of improving that drove the price and so theres weakening there maybe we don't see it or if there is increased supply I mean, we don't see it so and just get your thoughts on on polyethylene. Thanks.
Sure. So the German increase really was from was underpinned with.
Lower inventories and and the return of exports. So it really isn't industry ramped up exports and I imagine.
And I think that continues so let me give me some context on inventories.
Today, the industry inventories as reported are somewhere between three and five days below.
Previous kind of median values, so very low inventories I think that.
The force and of course is then a five cents. We think it looks very farm operating rates are very high cross industry that also helps to support the increase and then the next five.
Beyond the four and five that are already kind of implemented.
We think given kind of the backdrop and the improvement in demand.
And as I mentioned strong exports, we think that that five also as pretty good chance of of going through.
And by the way the four and five.
That have been implemented most of the realization will be in Q3 for those increases given kind of how the market works.
Next question is from Frank Mitsch from Permian Research. Your line is now open.
Good morning, and congratulations on the responsible care company a year.
Thank you.
I I wanted to a follow up on the cash generation, you, obviously had a nice quarter and the second quarter and you've been taking steps to work to build up a nice.
Cash hoard here, it's kind of begs a question of abuse is a of cash.
You had also established nice track record of raising the dividend and Youre, obviously lyondell has been known historically.
For buying back stock I was wondering what's your latest thoughts on potentially dividend hikes and or buying back stock when might you be in a position given your outlook and given the success of the five cents that you just talked about might might we see some action on that front.
Yeah, Frank Thank you. So let me let me first more broadly answer that question by talking about our capital allocation priorities. Our priorities are very simple its investment grade rating through the cycle.
And continuity of the dividends through the cycle. So those are the two most important things that we're solving for as we kind of run the company.
This unusual period.
So in terms of 'em dividend I think Frank given the uncertain outlook too early to really say, whether we would do something to to increase the dividend or not our priorities about continuity of the $4 in 20 cents that we pay today.
Buybacks again same thing.
So there's quite a bit of uncertainty until there's a vaccine available.
And disseminated casino around the world So.
We're gonna be somewhat conservative when it comes to increasing dividend or buybacks, just given the uncertain outlook and to make sure that we deliver on the two priorities that I mentioned, so that's kind of I think about uses of cash.
The next question is from Duffy Fisher with Barclays. Your line is now open.
Yeah. Good morning, guys I'm, just a question on the China JV.
So as it is ramping up now first one is just the map. The contract you have with your partner how is that going to get priced and then as it ramps up how should we think about that impacting your results you know how long or will it take four to start Dividending to you guys and then do you have any off take that would actually impact.
Your sales number.
Yeah, So duffy on on the on the NAFTA pricing itself you should assume it's.
Yes, or minus had market essentially for northeast Asia and in terms of earnings impact.
Only minimal earnings this year, because where they're gonna be and the commissioning stage and and and just given our experience with.
Hypersound plant that a that we've done a wrapping up rates on a we shouldn't expect earnings from Barra for the remainder of the Oh.
The commissioning is underway got that JV.
Next question is from John Roberts with CBS. Your line is now open.
Thank you similar question are you X sporting any policy Polyolefins to board to help them seed the market in advance of the start up and did the improvement in the technology segment also include bore.
So.
Technology segment did not include any benefits from bar because they have essentially they paid us on our licensing our progress payments a while ago and then in terms of pre marketing as you know, we we market polyethylene and polypropylene in Asia today. So we have a with a decent view.
Oh, how we can place the additional volume and so we didnt need to send more volume for four ceding the market. We've we've been export into Asia, just a matter of normal course.
Next question is from Mikes the song with Wells Fargo. Your line is now open.
Hey, good morning, guys.
For opening Americas EBITDA margin was in the mid teen I would imagine it was a lot better in June any help in and understanding how much better it wasn't that she thinks about.
You are running your plants <unk> I think you said you know at near 100 per se or nameplate whatever in July how much better shit EBITDA margins improved third quarter versus second quarter.
Yeah, Mike I think you can you can look at high chess posted price change if you will on polyethylene thatll be a guide down now the four cents some of that tends to be realized and in July as well so not all of the form will be realized in Japan.
Same with the next five cents, that's being implemented now it kind of goes across two months.
Probably the biggest improvement in margin that we're seeing is from 74 market improving somewhat it's coming off the bottom it's not great.
To be Frank, but that's better than than what it was Bakken in March April so combination of stabilizing ethane price better C and higher polyethylene as we realize these increases is kind of the drivers for polyethylene margin.
Next question is from Jonas Oxgaard with Bernstein. Your line is now open.
Thank you.
I wanted to ask about.
After the pandemic has all the over we've we've seen increased demand from a packaging decreased spend from industrial so far and decreased recycling, but.
As for looking say six months from now how do you see this sort of squaring. Alex is this packaging demand permanent can we actually see a sustained boost then and what about the other pieces.
Yeah. So Jonas I think some of the packaging demand will be more permanent and as you probably noticed some of the single use plastic bans have been reversed because of the benefits of terms of hygiene single use bags and so on so I think there'll be some lasting benefit.
I wouldn't bank all of that in packaging and there'll be some improvement that's for the other segments.
Yeah like auto and so on I mean, we would expect there to be a rapid recovery. Once a vaccine has developed and then where for a clearly behind the pandemic and behind us. So so I I think nothing that probably positive for packaging and medical.
Last question the cues from Matthew Blair with Tudor Pickering Holt. Your line is now open.
See good morning, Bob how are you.
Morning match our here.
Good good. Thanks. So your your refining results came in better than our expectations I was hoping you could quantify the hedge benefit in Q2 and.
In Q3, just given higher higher crude.