Q3 2020 LyondellBasell Industries NV Earnings Call
Hello, and welcome to the Lyondellbasell teleconference at the request.
Lyondellbasell. This conference is being recorded for instant replay purposes.
Today's presentation, we will conduct a question answer session.
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Let's turn the conference over to Mr., David Kelley Director of Investor Relations, Sir you may begin.
Thank you operator, Hello, and welcome to wind up sells third quarter 2020 teleconference I'm.
Joining today by Bob Patel, our Chief Executive Officer, and Michael Mcmurray, Our Chief Financial Officer.
Before we begin the business is concerned I would like to point out that a slide presentation that accompanies today's call and as a.
To help on our website at Www Dot Lyondellbasell Dot com.
Today, we will be discussing our business results.
In reference to some forward looking statements and non-GAAP financial measures.
We believe the forward looking statements are based upon reasonable assumptions.
Alternative measures are useful to investors.
Nonetheless, the forward looking statements are subject to significant risks and uncertainties.
We encourage you to learn more about the factors that could lead our actual results to differ.
Reviewing the cautionary statements in the presentation slides and a 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 the 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 November Thirtyth by calling 88566 0568 in the United States and two or 33693 zeros explore outside the United States Pass code for both numbers is 654.
One.
During today's call, we will focus on third quarter results. The current environment, our near term outlook and provide an update on our growth initiatives before.
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've discussed on past calls.
These adjustments are related to our use of last in first out or LIFO accounting and the recent volatility in prices for our raw materials and finished goods inventories.
During the third quarter, we recognized a pre tax LCM benefits totaling $160 million compared to LCM charges of $323 million during the first half of 2020.
During the third quarter, we also recognized a noncash impairment of $582 million that reflects our expectation for reduced profitability from are you seeing refinery.
Comments made on this call will be in regard to our underlying business results, excluding the impacts of the refinery impairment and the LCM inventory adjustments, but.
With that being said I would now like to turn the call over to Bob.
Thank you, Dave and good day to all of you participating around the world.
We hope that you your colleagues in your families are all staying healthy and safe during these challenging times.
We appreciate you joining us today as we discuss our third quarter results.
Let's begin with slide three and review the highlights in the third quarter Lyondellbasell businesses benefited from improving volumes during the initial months of a recovering global economy.
After excluding the non cash impacts of LCM inventory benefits and an impairment of our refinery third quarter EBITDA was approximately $900 million an improvement of more than $200 million relative to the second quarter.
We continued to focus on cash generation and retention by efficiently converting more than 90% of our EBITDA into cash from operating activities and by carefully managing our working capital to end the quarter with approximately five and $1 billion of cash and available liquidity.
Our strong balance sheet has served us well by allowing the company to capture opportunity. During this downturn through the establishment and startup of a new integrated polyolefin joint venture in China, followed by the announcement in October of our intent to form another integrated polyethylene joint venture and we.
Yeah before the end of this year.
Both of these joint ventures offer unique opportunities for Lyondellbasell to grow one of the core areas of our business.
Investing in new already operating high quality assets that have significant upside as market conditions continue to improve.
These transactions are prime examples of our strategy to identify develop and capture opportunities through business cycles.
Let's turn to slide four and review our recent safety performance.
Our employees and contractors maintained their focus on performing work safely to eliminate injuries prevent virus spread and minimize emissions from our assets. During September we had one recordable injury across our global workforce of more than 19000 employees.
Although our goal is always zero injuries September year to date recordable injury rate across both our employees and contractors is on track to improve upon the top decile industry performance, we achieved in 2019.
Our protocols for workplace, Sanitization, vishal, covering social distancing health screening and contact tracing have been successful in minimizing the spread of current a virus across our global facilities.
We have no evidence of work related a bit infections across our global workforce.
Our major manufacturing locations operated continuously throughout endemic hasn't is essential industries.
Our office workers have returned to work in Asia, and we are gradually increasing our office populations across the rest of the world in accordance with local regulations and safety metrics driven by both employee and community infection rates.
We are using a safe and responsible approach to gradually increase the number of personnel at our Houston headquarters during the fourth quarter.
In September our company released our annual sustainability report the cover of which is shown on slide five.
We hope that you will all take some time to review the report.
You will note that the cover image of our report does not depict images of solar arrays windmills are pristine beach, our products make modern life possible and often have a favorable environmental footprint relative to the alternatives, we recognize that plastic waste represents.
Stansell Challenge for Society.
Goal is to play a central role in developing pragmatic solutions that balanced the needs for environmental economic and social sustainability.
Our sustainability report describes the actions we will take as a company to help tackle three global challenges, eliminating plastic waste addressing climate change and supporting a thriving society.
Over the next decade, we will continue to develop successful waste management projects through the alliance and plastic waste that will recover and reuse millions of tons of plastic waste.
20, Thirtys, we aim to produce 2 million tons of recycled and renewable polymers across our asset base.
We are targeting a COO to intensity there will be 15% lower by 2030 than it was in 2015.
And the events of this year have let us to redouble, our efforts to ensure a culture of inclusion across our diverse global workforce.
We hope you will find that this years report not only tracks our progress on meaningful metrics for investors, but also describes the increasing scope of our company's ambitions and strategies to support the transition to a low carbon circular economy and drive solutions for a more sustainable and driving society.
Let's turn to slide six and briefly review, how we are advancing our growth strategy with the Sasol joint venture that we announced on October 2nd.
In summary, Lyondellbasell has agreed to purchase a 50% interest in a newly built ethylene cracker to polyethylene units and the associated utilities and infrastructure located in Lake Charles Louisiana for $2 billion.
Lyondellbasell will operate the assets and market all of the polyethylene produced by this joint venture.
As we discussed a few weeks ago. This transaction will enable both partners to maximize the value of these world class assets, while advancing our respective strategic objectives.
Well no formal process is set out in the agreements Lyondellbasell will have the potential to acquire the JV assets in full.
Some point in the future.
In addition to the Louisiana Joint venture. We also established and started up a joint venture with Barbara in China, just a few weeks ago.
We've been very clear that we have no intention of building a new integrated ethylene cracker on our own for the foreseeable future.
But when these two jvs in China in Louisiana are taken together, we are essentially acquiring the full capacity in immediate financial benefits of a new and operational Worldscale integrated cracker complex with minimal exposure to the risk on project execution.
I mean uncertainty and opportunity costs that are typically incurred during the multiyear construction of these types of facilities.
Plus we are acquiring this world scale integrated cracker at a very attractive valuation.
With respect to our joint venture with Sasol, both partners are working diligently and making good progress towards obtaining the required approvals that should allow us to close the transaction before the end of this calendar year.
With that I'll turn the call over to Michael who will describe our financial results over the past quarter.
Thank you Bob and good morning, everyone. Please turn to slide seven while the recession and subsequent recovery.
Presented challenges for our business. We have also found great opportunities in the debt capital markets to reduce our interest cost and extend maturities by refinancing some of our debt as we raise capital to support the formation of the Louisiana joint venture.
Immediately after announcing our agreement with Sasol, we renegotiated covenants extended our revolving credit facility by one year and issued $3.9 billion and new bonds. These bonds were very well received by the market with an order book that was more than five times oversubscribed we.
Reluctant favorable rates with a weighted average coupon of 2.72% across six traunches with maturities ranging from three to 40 years.
New bonds served to reduce the weighted average interest rate across our debt portfolio by 34 basis points.
After redemptions plans for the coming days, we will have both accessible near term maturities as well as staggered long term maturities without any large maturity towers.
The completion of this axle joint venture, we will prioritize de leveraging over share repurchases and work towards improving debt ratios to levels consistent with a stronger investment grade credit rating.
We expect to continue to fund our dividend primarily from operating cash flows.
One more modeling item in the fourth quarter, we will have a charge of approximately $80 million for loss on extinguishment of debt associated with our refinancing activities.
As Bob mentioned, our cash conversion remains strong in the third quarter on slide eight you can see that over the last 12 months more than 100% of our EBITDA was converted into nearly $4 billion of cash from operating activities.
Our business teams remain highly focused on aggressively managing inventories to these dynamic markets, while prioritizing cash generation and liquidity.
Now please turn to slide nine we will provide further details on cash generation during the third quarter we.
We closed the third quarter with cash and liquid investments of $2.8 billion.
Capital expenditures of $425 million declined more than 25% relative to the second quarter largely due to the reduced pace of construction and our new PEO GBA facility in Houston.
In March we announced that we were reducing activity on the PEO TV a project to both prevent virus spread at the construction site and conserve capital as we prepare for an uncertain economic environment from the pandemic.
We have recently begun to reactivate the projects and expect to return to full pace over the coming weeks. We now expect the project to be completed in the fourth quarter of 2022, approximately one year later than our original schedule.
The delayed timing of the startup should provide benefits from a more fully recovered global economy as well as another year of global demand growth for the products.
Higher cost arising from the delayed project execution more extensive civil construction and unexpected tariffs on materials are expected to add at least 30% to our original cost estimate of $2.4 billion. We plan to provide a more definitive update on the estimated cost after activity.
He is fully restored on the project early next year.
In the third quarter. We also funded some $472 million equity contribution for our joint venture was born in China, and paid $352 million in dividends to our shareholders. We ended the quarter.
Five and $110 billion of cash and available liquidity.
The recognition of the impairment of our refinery during the third quarter has substantially changed the math for computing, our 2020 forecast attach rates. We now believe that our effective tax rate will be significantly lower than our prior guidance of a less than mid teens percentage rate due to the uncertainty regarding the impact of the cares Act.
The timing of certain discrete events, we will not be providing more specific guidance at this time.
On the other hand refinery impairment has resulted in our cash tax rate being higher than previously communicated while it's difficult to forecast a specific percentage, we expect that our cash tax payments net of refunds for 2020 will be approximately $200 million with that I will turn the call over to Bob.
Thank you Michael Let's turn to slide 10, and review our third quarter performance as mentioned previously my discussion of business results will be in regard to our underlying business results. Excluding the impacts of the non cash LCM inventory changes and the impairment of the Houston refinery.
Our global footprint and diverse business portfolio continued to provide the resiliency in this challenging market environment.
EBITDA for the third quarter was nearly $900 million more than $200 million higher than the prior quarter.
The upward trajectory supports our belief that pandemic driven reductions in demand for our products autumn during the second quarter.
Our olefins and Polyolefins segments continued to serve strong consumer demand for products used in packaging and healthcare markets, while demand increase for intermediates and polymers used in durable goods applications.
Volumes rebounded for compounded polymers from our advanced polymer solutions segment as automotive manufacturing reopened.
Our refining segment and the oxy fuels and related products business continued to be challenged by decreased mobility that has reduced demand for transportation fuels.
We expect that our diverse portfolio of businesses will see further improvement over the coming quarters as global economies continue on the path to recovery.
Let's take a little deeper on how the recovery is playing out in two significant markets for our company polyethylene and transportation fuels.
Let's turn to slide 11, and review the growth in polyethylene demand during the pandemic and.
In a typical year global polyethylene growth rate is approximately 4%.
As you can see from the chart in spite of the pandemic and recession global polyethylene demand is still grown by 1% over the first nine months of this year.
As expected Europe has seen a decline.
The ethylene demand in the us and Canada and northeast Asia regions has grown despite.
Despite capacity additions, China demand will continue to far exceed its domestic domestic production and incentivize North American exports.
No industry operating rates during the second quarter, along with Hurricane Laura in August and strong demand tighten supply on the us Gulf Coast, which led to polyethylene contract price increases totaling $420 per ton over the months of June through September.
Recovery in demand for transportation fuels continues to be stubbornly slow on slide 12, you can see that while us passenger and commercial vehicles travel has returned to within 10% of 2019 levels use flights and associated a jet fuel consumption is still down by 40%.
In March and April refiners reduced operating rates in response to low demand and shifted distillate production from jet fuel diesel.
Well gasoline and jet fuel inventories are currently at manageable levels. The excess distillate capacity has driven diesel inventories to levels, 30% above the same period last year.
Industry consultants believed that up to 3 million barrels of global refining capacity will need to be rationalized over the coming years to support more normalized margins since it is unlikely for airline travel to rebound to full utilization of the available refining capacity.
As a result of an extended challenging outlook for refined product demand and margins, we recognized an impairment of the value of our refineries during the third quarter.
Now let me summarize how these trends have come together for our company on slide 13.
In these initial months of economic recovery following the pandemic lockdowns demand for our products has proven to be resilient as you can see in the comparison to the third quarter of last year in the top chart. Our sales volumes are largely intact.
Our progress is needed to drive margin recovery.
Comparing our performance relative to the second quarter and the bottom chart you.
You see the stepwise improvements.
Columns are up and margins have improved in all of our businesses, except for those serving transportation fuels markets.
Continuing recovery in gasoline demand from passenger cars, we expect that our oxy fuels business should recover more quickly than the broader refining market.
Let's review the third quarter results for each of our segments as mentioned in my discussion will describe our underlying business results. Excluding the noncash impacts of LCM inventory changes and the impairment of the Houston refinery I'll begin with our olefins and Polyolefins Americas segment.
Slide 14.
Third quarter, EBITDA was $404 million $194 million higher than the second quarter.
Improved demand for polyethylene and higher ethylene prices resulted in higher margins and volumes.
Elephants results increased approximately $220 million compared to the second quarter.
Industry ethylene supply tightened, which led to price increase.
[music].
Olefins margins.
Volume increased due to higher demand and the completion of planned maintenance at our Channelview cracker in the second quarter.
Polyolefin results increased by about $25 million during the third quarter.
Increased polyethylene demand drove higher margin and volume, partially offset by a decrease in polypropylene margins.
We anticipate both volume and margin improvement for our own IP American segment.
During the fourth quarter.
Recent polyolefins price increases are expected to find support from industry supply constraints and robust demand.
Global economies continue to improve this momentum could persist for the remainder of the year.
Now please turn to slide 15 to review the performance of our Olefins and Polyolefins Europe Asia and International segment.
During the third quarter, EBITDA was $131 million $88 million lower than the second quarter.
Integrated profit margins were impacted by rising feedstock costs.
Olefins results decreased approximately $30 million driven by a decrease in margin.
Operating margin decreased as higher feedstock costs outpaced in increase in ethylene prices.
Combined polyolefins results decreased $20 million compared to the prior quarter.
Polyethylene volume decreased due to summer demand and polypropylene margin declined on lower spreads although equity income decreased by approximately $10 million during the quarter. We were pleased to record a positive contribution for our boral joint venture in September the very first month of its operations.
Tobar, we've seen a slight decline in the integrated polyethylene margin over the fourth quarter, we expect to typical seasonal decline in demand as we approach the year end holiday season.
Please turn to slide 16, let's take a look at our intermediates and derivatives segment.
Third quarter, EBITDA was $245 million $124 million higher than the prior quarter.
Volumes rebounded with increased demand from durable goods markets in our propylene.
Propylene oxide and derivatives business and the completion of planned maintenance in the intermediate chemicals business.
Third quarter propylene oxide and derivatives results.
Increased by approximately $45 million driven by higher volumes from increased demand from Polyurethanes and automotive construction and furniture markets.
Intermediate chemicals results increased about $40 million, mostly driven by higher volumes. After the completion of our planned maintenance.
Possibly fuels and related products results in.
Increased approximately $10 million as a result of slightly higher margins due to higher product prices.
In the coming quarter stable demand for durable goods should continue to support profitability across most of the businesses in this segment.
In October.
Fuel prices and margins have come under additional pressure with lower seasonal driving demand.
Now, let's move on and review the results of our advanced polymer solutions segment on slide 17.
Third quarter, EBITDA was $117 million $94 million higher than the second quarter.
Volumes rebounded significantly driven by higher demand for our products serve.
Third quarter integration costs were $7 million.
Compounding and solutions results increased approximately $90 million due to higher volumes driven by increased demand for our polypropylene compounds utilized in automotive end markets.
Vance polymers results were relatively unchanged.
Although the demand for our products is improving we expect typical seasonality to affect fourth quarter profitability for the advanced polymer solutions segment has activities in the automotive and construction market slowdown at the end of each calendar year.
At our Investor Day last September we updated our targets for synergies from the A. Schulman acquisition to $200 million I'm happy to say that we have successfully implemented our synergy plan and we believe that the annual run rate of more than $200 million will become increasingly visible with volume recovery.
In this segment.
Now, let's turn to slide 18, and discuss the results for our refining segment.
Third quarter, EBITDA was negative $121 million, a $107 million or decrease versus the second quarter of 2020.
As I discussed earlier this excludes the impact of both calcium and the onetime impairment of the Houston refinery.
Results for the quarter were pressured by excess industry capacity and reduced demand for transportation fuels.
In the third quarter lower demand for gasoline and jet fuel negatively impacted both margins and volumes Mark.
Margins declined in the third quarter due to the absence of a hedging gain recorded in the second quarter.
Unfavorable byproduct spreads and a decrease in the Maya 211 benchmark crack spreads.
During the quarter, the Maya 211 crack spreads decreased to as low as $7.75 per barrel and ended at a historically low quarterly average of $9.89 per barrel.
In response to sluggish demand, we reduce the utilization rate at the refinery to 81% with an average crude throughput of 216000 barrels per day.
Refining margins are expected to remain compressed until demand for gasoline and jet fuel returns closer to pre covert levels. We plan to operate the refinery at about 80% of nameplate capacity during the fourth quarter.
Let me be clear that we're leaving no stone unturned in our efforts to reduce expenses and minimize losses at the refinery were deferring non safety related discretionary activities and reducing the salaried workforce by approximately 10% at our refinery to early retirements and potential worker region.
One cents to our other facilities in the Houston area.
We are evaluating every possible option with regard to procuring crude oil and optimizing production from this asset.
Please turn to slide 19, as we review the results of our technology segment.
Third quarter technologies segment, EBITDA was comparable to the prior quarter at $111 million licensing revenues increased while catalyst margin and volume decreased.
Based on the anticipated timing of upcoming licensing milestones and catalysts demand, we expect that the fourth quarter technology business profitability will be similar to the first quarter of this year.
Please turn to slide 20, and allow me to review the progress of our value driven growth investments. Our company is executing on a very clear and simple strategy to increase free cash flow by harvesting new sources of EBITDA generation are moderating our capital expenditures.
Earlier this year, we expect accelerated our plans to reduce capital expenditures to $2 billion or less we intend to maintain our capital budget at these levels for the next three years.
In the second quarter, we started a 500000 ton per year polyethylene plant in Houston utilizing our next generation Hypersound HDTV technology.
At full nameplate capacity and average margins from 2017 to 2019, we estimate this asset is capable of generating $170 million of annual EBITDA.
On September Onest, we established a new joint venture our northeastern China with borrowings.
This investment has already contributed earnings in September and recent margins indicate joint venture is capable of generating $150 million of annual EBITDA for our company.
In 2018, we expanded our compounding business by acquiring a showman.
We form B.
Thats polymer solutions segment.
With integration completed we are on track to capture $200 million in estimated synergies that should become increasingly visible as volumes recover in the markets served by this segment.
We expect to close the transaction for the Louisiana joint venture with Sasol before the end of this year.
At full capacity and historical margins. This investment is capable of contributing $330 million in EBITDA to our company.
In our intermediates and derivatives segment, the combination of two new propylene oxide investments in China, and Houston, starting in 2022, and 2023 put together add almost $500 million of annual estimated EBITDA of.
The Formula is very simple more EBITDA and moderating capital expenditures should result in higher free cash flow at any point in the business cycles.
Let me summarize this quarters highlights and outlook with slide 21.
During the third quarter, Lyondellbasell, leading and advantaged global positions enabled us to capture value and deliver resilient results.
We demonstrated commercial agility by matching production with continued demand from packaging and healthcare markets and increasing volumes from automotive and other durable goods markets.
We are seeing higher demand for our products from recovering global economies.
Our North America polyethylene exports are increasing to support growing demand in Asia.
Markets for discretionary durable goods are improving.
As global mobility increases the demand and margins for transportation fuels will eventually show improvement.
Our financial strategy continues to support our commitment to an investment grade rating.
But sound cash generation and disciplined capital deployment decisions, we are focused on maintaining the continuity of our dividend and prioritizing de leveraging upon completion of the Sasol transaction. Our goal at Lyondellbasell is to capture opportunities throughout all points of business cycles over.
Over the past several years, we have carefully planted the seeds for profit generating growth by building acquiring and partnering on assets that expand our reach with new capabilities to sustainably harvest profitability from advantaged feedstocks expanded product ranges and an increased footprint.
The world's fastest growing markets.
We look forward to discussing our progress on maximizing cash flow from these investments over the coming quarters, where now please state your questions.
So I'd like to now open for questions. If you would like to ask a question over the phone. Please press star one and record your name.
You'd like to withdraw your question press stones.
One moment for our first question.
First question in the queue is from John Mcnulty with BMO capital markets. Your line is now open.
Yes, Thanks for taking my question. So it looks like Theres normally you have a seasonal dip as you go from kind of threeq levels to for Q for a whole host of reasons, but it seems like.
Given this year is a little bit of a.
An atypical year, we'll call it where you've got polyethylene prices surging throughout the third quarter and into the fourth.
And you've got maybe not quite as big of a of a delta around transportation fuels and and that type of thing I guess, how how should we be thinking about your ability to maybe bucked the trend of the normal seasonal dip going into fourq.
Is that something that's possible as the economies are recovering reset so it may be too much of a stretch.
Yeah, Good morning, John.
Engage it especially in polyethylene as you noted this year and polypropylene to an extent this year was because of the hurricanes and prior to that the inventory reduction that we undertook as a company and generally as an industry.
Likely if theres some slowdown in demand.
Well certainly we as a company will take the opportunity to rebuild some inventory were very very low levels today, and really kind of hand to mouth on many products and I suspect that that will get us through the seasonally soft period and get.
Get into next year, so I suspect that will be the case in polyolefins for the most part.
Next question is from Steve Byrne Bank of America. Your line is now open.
Well I was just curious about this more JV.
$450 million EBITDA projection is that effectively net income number.
How would you how would you compare that to.
To your other assets in terms of.
The merger and the reason I ask is.
Yeah, no so pricing has been pretty volatile over there and I don't know whether that's.
Fair to be looking at for that joint venture is it more likely that.
You are really getting the naps a linked to oil prices from your refinery JV partner.
Yeah, So Steve the 150 million will be at the EBITDA level. So it's like equity earnings think of it that way.
We do not expect dividends.
From bar for a couple of years, because the priority will be to de lever you will recall that.
The financing was roughly one third equity two third debt for Bora. So you know.
The way, we've outlined the joint venture and how the.
The bank covenants work, we need to prioritize that Delevering first well get some incremental commission income from the sales of Polyolefins.
Likely dividend income will come.
In year, three four and onwards.
Next question is from Jeff Zekauskas with JP Morgan Your line is now open.
Thanks very much.
Brent Brent prices have moved down from about I don't know $44 a barrel to 37 over the past month.
Do you think that will make a difference to glow.
Global petrochemical prices.
Yes, good morning, Jeff.
So it it may but I think right now, what's driving global petrochemical prices and especially polyolefin prices, it's more about.
The heightened level of demand that we've seen.
Very low levels of inventory and I think that's really what's going to drive near term pricing and provide support potentially for the final increase.
That's fair announced here in the U.S. there the other thing to note about falling oil price.
Is that it.
It should benefit our European business is typically when oil price declines we see margins open up in Europe. We saw the opposite of that in Q3 as oil prices actually increased and we saw a bit of margin squeeze, whereas we couldn't pass all that through.
To the end user so so I think that.
Probably benefit for Europe, and near term supply demand likely drives pricing more so than than Brent price.
Next question is from Alex Yefremov from Keybanc. Your line is now open.
Yes, good morning, everyone.
For MP Europe, EBITDA has been sort of all over the place over the last four quarters.
Crude oil moving around just like you said, Bob what's a good normalized number for the current environment for this segment is this you know close to 230 140 million that you just printed in the third quarter or maybe around 220 million EBITDA that you had in the first half of this year.
Yeah, let's say right now because there's so many moving parts I hesitate to give you a normalized number I think you put your finger on a few of the drivers which is a direction of oil price.
Also Europe has has been one of the softer regions in the world. We've seen improvement in Europe from Q2 to Q3, but it has not been to the degree that we've seen in China and the U.S.. So I would say more of a mixed market in Europe.
And more clear strength in the U.S. and in China.
Well, let's wait until next quarter and we'll we'll try to help you with that normalized number but today I hesitate just given all the moving parts.
Next question is from Duffy Fischer with Barclays. Your line is open.
Yes, good morning.
Question, but to your assets. So first one is just the refinery with the write down what is the current book value of that asset and are we in the ZIP code, where we're actually thinking about maybe shuttering the asset.
And then the second one is just PEO TB, the increasing cost during the delay what's that going to do to the return on that project.
Yeah, Hey, good morning Duffy.
On the refinery book value will be a little over $500 million.
And we will post said in our Q later today or tomorrow or Monday so.
So that's that's after the write down on the PEO TBA project I'm, certainly returns will be lower we think.
Probably in the 10% range.
On returns for PMT BA.
I think in the end, we're going to net out kind of the delay of the project.
In this way I think first of all it gave us some cushion on cash flow this year that given the uncertainty at the time, we made the decision back in Q2 I still continue to believe that was the right thing to do secondly.
When we do start up it'll be time, better when markets are recovering or fully recover and hopefully by then and we will be bringing new capacity online at a time, where where it's more likely to be needed. So in the end.
You know I think balancing near term needs with long term.
Market demand I think this was the right call to make and we continue to believe that was the right call.
Next question is from PJ Juvekar with Citigroup. Your line is now open.
Yes, hi, good morning, Bob.
Good morning, VJ Polyolefin goes in disposables like plastic bags and packaging. So the utopian PD men down 3% versus North America up 4%. It was quite a stark difference.
Differences between the two.
Utopians stuck at home would be doing the similar things like ordering from home and packaging demand goes up with that.
What's what's is there something underlying in Europe, that's going on besides just the weak economy.
So you know from our perspective, we really saw the industrial part of the demand to be very weak.
And you will recall that the automotive sector was essentially shutdown for example, we produce polyethylene that goes into fuel tanks.
And so that's continued to be weak the automotive sector has not come back in Europe is strongly.
It has in the U.S. industrial bulk containers and things like that so the industrial part of demand was softer in Europe.
I think on the packaging side, we saw similar shrank to what we've seen in the U.S. So.
It's more about the level of activity. It didnt resumed to the rate could we we had expected and lastly in Q3.
We still saw some seasonal slowdown from a typical European holiday season.
The European Kinda vacation season, where some of the factory shutdown there.
There was still some of that and enough that it cost some seasonality in Q3.
Next question is from Bob Koort with Goldman Sachs. Your line is now open.
Thank you Bob I was wondering if you could comment a little bit on on ethane was.
I was looking at at the Nat gas markets are up 80, or 90% from the summer and and the ethane markets look like only up about 10 cents the strip on ethane looks.
Fairly subdued, but I guess, if the oil markets are terrible maybe theres less drilling there.
There's some more the downtime curtailments start to dissipate you see or potential run on ethane.
In the first quarter and is there something you guys can do proactively too.
Insulate yourself, if that were to happen.
Hi, good morning, Bob.
So first of all we estimate that ethane rejection rates are still pretty high probably north of 500000 barrels per day ive heard numbers much higher almost double that but likely the rejection is probably happening in regions that are further away from the Gulf coast. So there's probably some in the Permian, but probably more as you get out towards the rock.
He's in certainly in the Marcellus.
So.
Today, you see ethane in the low twentys.
I wouldn't be surprised to see ethane moved to the mid twentys.
You know, especially here in the winter as natural gas prices rise a little bit more I don't think we'll get to see a spike.
Only because higher prices will likely consent.
More supply to come online and maybe you know as you say were with more crackers, starting up we may on the margin need more supply from further away regions and if that were to happen.
Then maybe ethane does move to the mid Twentys.
I still think theres, so much rejection out there that are a little bit of price for inside more supply.
Next question is from David Begleiter with Deutsche Bank. Your line is now open.
Thank you good morning, Bob.
Bob just on polyethylene for the October increased.
One of the leading consultants sees as the clubs that increase not successful.
Do you agree with that assessment.
So David first of all.
They're kind of timing effects on when these price increases get implemented and it's phased over.
A two month period, depending on contracts and size of buyer and that sort of thing, but have you kind of step back and look at the market environment. Today. So I mentioned earlier inventories are still really low.
And has an impact this morning, I was just looking at KCC data and.
Days on hand.
Like 10% lower than where it was last year, but thats days on hand, so including lower sales rate the absolute inventory levels are incredibly low today.
So I think that points to a tighter market secondly, we don't see demand really letting up yet.
Our order books are are filling up quickly.
For November and a and as I said earlier likely if there is some softness our certainly our approach is going to be we're going to have to go back a bit of inventory.
Because of the impacts of weather and ER and also just stronger demand so let's.
Let's see how it plays out but it seems to me that.
From our perspective, the increase is shown in the table.
Next question is from Vincent Andrews with Morgan Stanley. Your line is open.
Thanks, and good morning, everyone, just getting back to the polyethylene demand dynamics.
You know it's if this year, let's just say it finished the year plus 1% Thats posted growth for how do you think about next year do we have an above 4% year next year, because some of the rebound maybe in the auto and industrial part as you suggested or do we just have had this air pocket this year and we don't make any EBITDA.
Yeah. So good morning Vincent.
You SPE demand so far year to date has grown about 1.7% and if you look at Q3 the year over year is like 2.5%. So you can really see the the higher level of demand growth post the low Q2.
So I think Q2 is kind of a last quarter.
Okay, just to kind of round out the regional look in Europe demand is up 2.5% year to date and in China, It's up almost 5% year to date.
And in China imports are up about 5% year to date as well so really good growth rates globally in polyethylene and to your point about is there some catch up growth next year.
I do think in the industrial and auto areas now auto impacts polypropylene more than it does probably ethylene but.
I think when the recovery recovery really takes hold we should see above trend line growth.
For a year to 18 months.
I still expect that to.
To be the case, we'll probably see that more dramatic and polypropylene, just given that theres more durable goods and use in polypropylene.
Next question is from Hassan Ahmed with Alembic Global Your line is now open.
Good morning, Bob.
Morning.
Bob I wanted to sort of continue with some of your thoughts around polyethylene well.
Let's take a quick look at.
Chinese polyethylene import data that just came out for September.
Imports were up 36% year on year or a month on month, they were up 17%.
Obviously, that's for the back drop off you know continued sort of supply additions out there. So you know as you look at the net you know call. It 2021, and things start sort of normalizing, but you know obviously more capacity keeps coming online how should we be thinking about the base oil Chinese polyethylene imports.
Yes. So if you look over the next two to three years it seems that.
If you use historical demand growth.
The new capacity likely won't be enough to meet demand growth.
And so they're going to need to incrementally import more polyethylene and we don't think imports have leveled out yet in China, and we think that will be the case.
I don't know about next year because of timing of projects, whether they are delayed or not but if I look over the next two three year horizon likely they're important needs grow another thing to think about us on is that if you look at Q2 to Q3 as U.S. demand came back in polyethylene.
Exports actually declined significantly from Q2 to Q3 out of the U.S. and if you look at US next year, there's very little new capacity in polyethylene coming online. So speaking to the prior question about where we see higher demand growth in the U.S. is theres catch up demand I think its axis.
Case, there will be less being exported out of the U.S. and likely that will create a tighter global market.
And lastly, if you look out further on polyethylene supply demand.
We're already seeing many projects that are being canceled or delayed. So it seems to me that we're seeing kind of a classic set up.
The cycle here as.
As we said in the trough you starting to see delays, starting see cancellations and lets assume China brings on.
All of the capacity, that's announced they still need to import more.
Next question is from a routine is one Olson your line is from RBC capital markets. Your line is open.
Question Good morning.
Yes, I just wanted to go back to polypropylene.
Could you just remind us how much of your portfolio is levered there across on P. Americas, Europe and EPS.
And what is your outlook there I guess you mentioned a lot of durables exposure, obviously could remain quite depressed, especially if we go into another round of Lockdowns, but maybe you can just offer your thoughts on the polypropylene market and.
The impact on Lyondellbasell. Thanks.
Certainly so sorry at a high level.
Polyethylene certainly has a bigger driver than polypropylene, if I look if I look globally in the U.S. polyethylene is a bigger business for us in polypropylene in Europe, polypropylene is a bit bigger than polyethylene not by a lot and in Hps post the acquisition of a showman, we're much more diverse.
Hi.
Prior to the acquisition of a showman Mike.
Yes, 100% of our compounding was essentially a polypropylene and about 90% was automotive so and you will recall back when we announced that transaction that was part of the rationale was to to have more diversity and participation in the end use segments and packaging and medical and have more polyethylene.
In content.
So I'd say you know on on Hps, we're probably still 60% polypropylene, 40% other just as kind of a rough breakdown.
Hi on the polypropylene outlook.
Certainly you know polypropylene a struggle this year, especially in Q2 because of the higher durable good and auto content.
Polypropylene demand is down year to date by.
By 1% to 2% in Europe and us up.
Up significantly though in China. So.
China polypropylene demand has up some 15% it's a very very large increase so our view is that polypropylene will be very constructive we don't see kind of a wall of supply and actually I think that as the economies recover around the world durable goods will like.
We grow faster.
Into a growing economy in a recovering economy, which probably favors polypropylene even more than polyethylene.
Next question is from Kevin Mccarthy with vertical research partners. Your line is open.
Yes, good morning.
Financial question for you it looks like your net debt balance increased about $425 million on a sequential basis I've heard you call out the payment support so.
So if I adjust for that and.
With its trended flat to down let's say.
My question is.
Our other.
Issues.
On the working capital timing issues other than the one time.
Events that.
That would have prevented you from key leveraging more in the third quarter.
It's Michael yet really Bora is the big one to call out there's really nothing else of any significance to call out.
Hey, Kevin if you look at this year.
Our operating cash flow will more than cover dividends and hauled ongoing expenses. So we should have a surplus pre the bora equity.
Equity infusion Jeff.
Next question is from Frank Mitsch with premium research. Your line is now open good morning, gentlemen.
If I could just follow up on that.
Bobby you mentioned when you were talking about the sample JV that perhaps in future you might acquire.
All of those assets and obviously you also discussed that the priority right now is to de lever how should we think about the potential timing of doing something with sasol in the future and then I guess just kind of an overarching theme.
You know should we think that lyondell might do some more M&A in terms of making acquisitions in 21 or or really well the de levering or be front and center.
Yeah, Frank good morning.
So first of all I, just want to be real clear on our capital allocation priorities.
Maximize cash flow can continuity of the dividend and solid investment grade rating through the cycle, we're committed whatever we decide to do.
We're committed to the dividend and the investment grade rating, having said all of that.
Timing of a step too.
Probably three to five years out so I think we have a window to de lever before that decision is upon US now of course, you know a lot of that depends on the pace of the recovery how much excess free cash flow, we generate in 21 22 and 23.
But remember that Sasol, though the first half of the JV will be contributing excess cash flow beyond the additional interest expenses that will take on so we think that will be accretive accretive or additive to cash flow for next year based on our current outlook, we think next year.
We can cover the dividend.
From an operating cash flow so.
So I think in our priorities are going to be to de lever first and foremost.
And I think theres enough time before step two will be upon us well, we will be able to delever meaningfully.
Next question is from Mike Sison from Wells Fargo. Your line is open.
Hey, guys.
I apologize I Miss heard this but I thought you mentioned that OTI Americas would improve.
In the fourth quarter versus the third quarter hopefully the Browns continue that route as well, but when you think about that margin green in slide 14 lists the bulk of that achieved in September and and is that sort of the run rate as we head into the fourth quarter.
Yeah, Mike Good morning, so the engage.
Engage our feet on the timing of price increases.
Except for that last five most.
Most of it was implemented kind of later in the quarter as the wave should all lays out so.
I think thats, probably a reasonable way to look at it is the September.
No would be the run rate going into Q4, I think the thing we'll have to watch for is the seasonality as I mentioned earlier in response to some of the other questions. My sense is that the market is so tight in the inventories are so low that I.
I don't think we will see.
The degree of seasonal softness that we've seen in past years this year.
But let's see into your comment about the grounds, let's hope they continue to strengthen as we go into Q4.
Yes.
Next question is from Jonas Oxgaard with Bernstein. Your line is now open.
Thank you.
Looking at the.
Compounding business. So it sounds like your synergies are captured in automotive is coming back.
Polymer prices are for lack of a better word normalizing.
So can you give us a sense for how how do you think about sustained or sustainable earnings in that business and how.
How are you thinking about a strategic outlook for it is this something you looking at adding too.
Good morning, John S. so.
First of all and yes, I think you're really in Q3, starting to see what a fully synergized JPS represents and the earnings power.
As volume grows more of those dollars will flow straight to the bottom line.
And then in a much more efficient platform post our synergies. If you. If you go back to pre call that and around the time of the acquisition.
We can we have the lyondellbasell business that wasn't Ats that isn't it yesterday was earning at that time about.
About $375 million of EBITDA.
We acquired 200 million from A., Schulman, and we achieved $200 million of synergies.
Nearly 800 million of EBITDA.
That was kind of the run rate back in 18. So the question now is what's the trajectory to get back to that.
Earnings rate and I think as you mentioned earlier.
A lot of that will be tied to the recovery in automotive.
Looks very good in U.S. and in China.
Europe needs to improve meaningfully for us to firmly beyond the path to get to those kind of numbers that we had back in 18, but again I think as volume increases we should see.
A large part of that revenue fall to the bottom line.
On the margin.
Because the fixed costs are now all covered and we have to synergize platform. So.
So normalized earnings if you go back to 18 conditions should be closer to 800.
Next question is from John Roberts with CBS. Your line is now open.
Thank you do you need to write down the TB TB a assets as well like you wrote down the refinery or because it's integrated into the PEO operations the value doesn't need an impairment.
Yes exactly.
Exactly as you said first of all it's a co product in our in our R&D business.
But but more importantly, John.
The market characteristics for Fourk TV are a bit different than than what we see for our refinery.
Because the the margin in TV is based on upgrading butane tier MTV, so whereas in the refinery part of our margin is the light heavy differential and there. We think there is a longer road to recovery to get more sour crude back on the market.
I would characterize the TB, a downturn is cyclical and perhaps.
Part of the refining downturn has being a little bit more lasting because of this.
Lack of supply of sour crude so we will not be writing down our PVA.
For our TV a assets.
Think of that as being more cyclical.
The last question the cues from Matthew Blair with Tudor Pickering Holt. Your line is now open.
Hey, good morning, Bob.
Hey, Matt.
Are you still planning a refinery turnaround in 2021, and if so can you share any details on the cost and the scope.
Yep. So Matthew here, you got us in the middle of thinking through that so I'll be able to give you a definitive answer.
At the next earnings call, we're thinking through.
Our our cash needs for the company how the markets will develop we want to make a really thoughtful decision because we still think that our refinery is an asset that.
That makes it through this downturn, so partly what I'm trying to balance here is near term versus long term and how do we position the refinery best for when markets do return so.
We're going through all that math, now and and certainly we're going to do whatever we need to do to to manage the regulatory requirements and all of the safety related projects that we need to do and those are our primary focus for us and beyond that.
Turnaround timing as part of a broader set of.
Decisions that we're trying to make next year for the refinery at stake here.
I'm showing no further questions at this time.
All right well. Thank you will let me offer a few closing remarks.
Our team at Lyondellbasell, we're continuing to focus on near term near term maximizing free cash flow continue to pay the dividend and maintaining a solid investment grade rating through the cycle has consistently mentioned over the past few calls.
At the same time, I think we're really well positioned to emerge stronger from the pandemic.
Because we'll have a lot more assets Synergized EPS platform will have lower capex as we come out of the pandemic as well and I think all of that sets us up to really accelerate on free cash flow generation.
With with our initial focus being on Delevering, but I think our company is really setting up for coming out of this downturn.
In a very good way much stronger than when we entered so thank you for your interest in our company and we'll look forward to updating you and at the end of January have a great weekend and be safe.
This concludes today's call. Thank you for your participation you may disconnect at this time.