Q2 2021 LyondellBasell Industries NV Earnings Call
At the request of Lyondellbasell. This conference is being recorded for instant replay purposes.
Following today's presentation, we will conduct a question and answer session.
I'd now like to turn the conference over to Mr. David Kenny head of Investor Relations, Sir you may begin.
Thank you operator, Hello, and welcome to Lyondellbasell second quarter.
2021teleconference I'm joined today by Bob Patel, Our Chief Executive Officer, and Michael Mcmurray, Our Chief Financial Officer.
Before we begin the discussion I would like to point out that a slide presentation accompanies today's call and is available on our website at www Dot Lyondellbasell Dot com Slash Investor Relations.
Today, we won't be discussing our.
Business results, while making reference to some forward looking statements on non-GAAP financial measures.
We believe the forward looking statements are based upon reasonable assumptions I mean 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 by.
And the cautionary statements on the presentation slides and our regulatory filings, which are also available at our Investor Relations website.
Additional documents on our Investor Relations website provides reconciliations of non-GAAP financial measures to GAAP financial measures together with other disclosures, including the earnings release.
Finally, I would like to point out that a recording.
Of this call will be available by telephone beginning at 1 PM Eastern time today until August 30th by calling 870.76606853 in the United States and 20161 to 740 <unk> 5 outside the United States. The passcode for both numbers is 103.7214.
My review on 3.
During today's call, we'll focus on second quarter results. The current environment, our near term outlook and provide an update on our growth initiatives common.
Comments made on this call will be in regard to our underlying business results in some cases, excluding the impacts of lower of cost or market inventory adjustments or LCM.
That.
That being said I would now like to turn the call over to Bob.
Thank you Dave good.
Good day to all of you. We appreciate you joining us today as we discuss our second quarter results.
Before we begin with the business discussion I would like to acknowledge.
The sadness, we are feeling throughout the Lyondellbasell family after our tragic incident.
This week at our La Porte facility, which resulted in the death of 2 contractors and injuries to several additional contractors and employees.
Every day, we work diligently to ensure that the colleagues friends and most importantly, the families of our employees and contractors never.
Never have to received calls that went out last Tuesday evening notifying them of the loss or injury of a loved 1.
Our investigation is underway and it will be some time before we reach a conclusive determination regarding the cause of the incident.
Our sincere condolences go out to the families of the 2 men.
<unk> lost in the incident, and we pray for a fast and full recovery for all of the injured.
Please turn to slide 3 and let's review, our second quarter financial results.
Lyondellbasell as global businesses are benefiting from robust demand and rebounding economies during the second quarter.
Net income increased to $2.1 billion more than 90% higher than our first quarter results strong demand for our products allowed us to increase prices and expand margins to generate more than $3 billion of quarterly EBITDA.
A spicy increased working capital required.
Prices and volumes, we generated $1.9 billion of cash from operating activities. These results demonstrate how lyondellbasell disciplined investments in growth and share repurchases over the past few years have enabled us to establish new benchmarks for our company's profitability.
Second quarter, EBITDA is 38% higher than our previous record established in the third quarter of 2015.
Earnings per share has more than doubled since that time.
The larger Lyondellbasell is now positioned to generate stronger results and higher cash flow through business cycles.
The events of this week provide a vivid reminder of the reasons behind our companys commitment to safe and reliable operations, let's.
Let's turn to slide 4 and review our recent safety performance.
As of the end of June our year to date total recordable incident rate of 0.2 to 4 <unk>.
Cycles and contractors remained in the top 10% of our industry.
How do we do with all major incidents, we will investigate the root cause and contributing factors involved in this week's events and share our findings with our contractors our employees and our industry peers.
Our aim.
He has to learn from all incidents and achieve our goals euro work environment that prevents such tragedies from occurring.
On slide 5 I would like to highlight our most recent sustainability report that we released last month.
This report focuses on Lyondellbasell as efforts to address 3 urgent global <unk>.
Employee of our business, eliminating plastic waste in the environment addressing climate change and supporting a thriving society.
Lyondellbasell is leading work to transform our industry towards more sustainable business models customers are eager to adopt our circulin brand of polymers.
<unk> on recycled or renewable feedstocks we.
We are developing projects that should enable us to achieve our industry, leading goal of producing and marketing 2 million metric tons of recycled and renewable based polymers annually by 2030.
Lyondellbasell.
Basically a leader in supplying the large and growing addressable market for circular polymers.
On climate change, we support the ambitions of the Paris climate agreement and we're moving forward with investments in energy reduction increased utilization of renewable energy and evaluation of new low carbon technology.
Technologies, we will be sharing more details on our carbon reduction plans over the coming months.
And our work to advance a thriving society I'm very pleased to see the enthusiasm from our employees to embrace a more inclusive work environment.
During the second quarter, we launched employee networks too advanced.
<unk> aims diversity equity and inclusion at Lyondellbasell.
These networks allow colleagues with similar interests identities and goals to foster a professional and personal growth.
When combined with our emphasis on a safe work culture and community engagement, our work to capture the full potential of our.
<unk> global workforce should further enhance the sustainability of our company's performance.
Following an exceptional second quarter some market observers are predicting a rapid decline in prices and profitability for our industry.
On slide 6 I would like to point out why.
<unk> debt markets will be stronger for longer.
Covid vaccinations have been the driving force behind the reopening of societies and the rebound in global economy.
As of July only 14% of the global population is fully vaccinated.
While the U S and roughly a dozen other countries of <unk>.
Seat have achieved vaccination rates approaching or exceeding 50%.
Health experts anticipate that vaccines will be rolling out to the rest of the world throughout 2022 and into 2023.
As seen by the increase spread among unvaccinated population.
<unk> and the rise of variance we still have much work ahead of us to contain the coronavirus and realized the full economic power of global reopening.
Returning to normalcy is eagerly anticipated by consumers with considerable pent up demand and increased disposable.
Income.
The Bureau of economic analysis estimates that U S personal savings average 3.5 trillion dollars.
During the first 5 months of 2021.
Nearly 3 times the level seen in 2019 with.
With fiscal stimulus continuing to flow into the economy consumer.
<unk> are both motivated and well funded to drive global economic activity.
In durable goods markets high demand and low inventories are leading to substantial order backlogs. We expect this unfulfilled demand will persist to drive strong industrial production and demand for our materials for.
Elizabeth like some time.
1 example is that the average age of an automobile in the U S reached an all time high of 12 years in 2021.
Businesses and consumers will eventually need to replace aging fleet of cars and trucks.
Despite higher prices and supply chain constraint.
Strains.
<unk> for our products, serving automotive manufacturing are forecast to increase a total of 10% in 2021.
On an additional 11% during 2022.
Strong U S household formation during the pandemic has evolved into a robust housing market.
Or quite Lyondellbasell benefits from both in direct demand for building and construction materials as well as demand for our products used in the myriad of furniture appliances, and other goods and complete a new home.
And as vaccinations facilitate improvements in global mobility Lyondellbasell products.
We will see increased demand from restocking and consumption by service entertainment travel and hospitality industries as well as increased demand for transportation fuels supplied by Lyondellbasell as oxy fuels and refining businesses in.
In short we remain confident that.
Suddenly high demand should support strong markets for our products through 2022.
With that I will turn the call over to Michael who will describe our financial and segment results over the past quarter.
Thank you Bob and good morning, everyone. Please turn to slide 7 and let me begin by.
Highlighting our strong cash generation, which has been enhanced by our recent growth investments.
In the second quarter, Lyondellbasell generated $1.9 billion of cash from operating activities that contributed towards the more than $4 billion over the past 12 months.
Our free operating cash flow yield has.
Been 10, 1% over the past 4 quarters and free operating cash flow for the second quarter improved by more than 80% relative to the second quarter of 2019.
We expect continued improvement of our last 12 months cash flow performance as we move forward through each quarter of 2021.
Let's turn to slide 8 and review the details of our cash generation and deployment during the second quarter.
As I've mentioned during previous calls a strong and progressive dividend plays a fundamental role in our capital deployment strategy.
In the second quarter, we expressed our confidence in our outlook by inquiry.
On a quarterly dividend by 7.6% to $1.13 per share.
We continue to invest in maintenance and growth projects during the quarter with approximately 430.
And capital expenditures strong cash flow supported debt repayments of $1.3 billion.
Bringing our year to date debt reduction to $1.8 billion.
We closed the second quarter with cash and liquid investments of $1.5 billion.
Last week S&P global ratings recognize the improvement in our metrics by upgrading our credit ratings and indicating a stable outlook.
<unk>, we expect that robust cash generation and an anticipated tax refund will enable continued progress on our goal to reduce our net debt by up to $4 billion during 2021, and further strengthen our investment grade balance sheet.
1.1 modeling item of note.
Our original full.
Full year net interest expense guidance of $430 million did not include extinguishment cost associated with our accelerated debt repayment program.
As a result, our 2021 net interest expense will likely exceed this prior guidance.
Please turn to slide 9 to review our quarter.
Profitability in the second quarter of 2021, Lyondellbasell business portfolio delivered record EBITDA of $3 billion.
This was an improvement of more than $1.4 billion relative to the first quarter.
Our results reflect robust demand for our products driven by the recovering global.
And our growth investments markets remain tight during the second quarter as the industry return to normal operation following first quarter disruptions from the winter storm that constrained production for Lyondellbasell and nearly all of our competitors with operations in the state of Texas.
Economy persistent consumer and industrial demand is met type markets, leading to 7 consecutive months up North American polyethylene contract price increases totaling more than $900 per ton.
We expect market conditions to remain robust and that continued progress in global reopening.
Sizable order.
And the increasing demand for transportation fuels will all support strong margins across Lyondellbasell businesses.
Our previous quarterly EBITDA record set in the third quarter of 2015 was approximately $2.2 billion.
With more than $140 million of EBITDA contributed by our refining.
<unk> segment.
Today, our growth investments are helping offset a challenging refining environment and enabling us to surpass the 2015 record. Our aim is to leverage our larger business portfolio 2 to achieve improved results at all stages of the business cycle.
Now let's.
<unk> second quarter results for each of our segments as mentioned my discussion will describe our underlying business results I will begin with our olefins <unk> Polyolefin Americas segment on slide 10.
Strong demand improved margins and our growth investments drove second quarter EBITDA to a record.
<unk> reviewed $1.6 billion.
$709 million higher than the first quarter.
Olefins results increased by approximately $310 million compared to the first quarter due to higher margins and volumes lined.
<unk> cracker operating rates increased to 93% following the first quarter <unk>.
This weather events about 5 points above the second quarter industry average margins.
Margins improved primarily due to the absence of high cost incurred during the prior quarter's weather events.
Polyolefin results increased by about $400 million during the second quarter as robust demand in tight markets drove higher prices and margins.
For polyethylene and polypropylene.
We anticipate continued strength in demand and margins for our <unk> and Americas businesses during the third quarter.
Ill consultants are predicting some margin compression for ethylene recent outages have caused prices to quickly rebound and demonstrated that markets remain.
Relatively tight.
High demand low downstream inventories and customer backlogs are expected to continue and provide ongoing support for strong polymer margins as of this week. Our August order volumes for PE and pp in the Americas segment are stronger than any prior months in.
'twenty 1.
Now please turn to slide 11 to review the performance of our Olefins and <unk> Europe Asia and International segment.
Similar to the Americas robust demand and improving margins in our AI markets drove second quarter EBITDA to a record 700.
$8 million $296 million higher than the first quarter.
Olefins results improved by $100 million.
As margins increased driven by higher ethylene and co product prices.
Demand was robust during the quarter and we operated our crackers at a rate of 96% more than 10% above industry.
In <unk> remarks.
Combined polyolefin results increased approximately $180 million compared to the prior quarter strong polymer on demand drove spread improvements with price increases for polyethylene and polypropylene outpacing moderate prices.
Margin improvements were partially offset by a small decline in policies.
Industry best on volume.
During this during the third quarter, we could see modest rebalancing of tight European markets as customers take downtime for summer holidays.
Please turn to slide 12, as we take a look at our intermediates and derivatives segment.
Robust demand expanded our margins.
<unk> increased our sales volumes following the Texas weather events and some planned maintenance during the prior quarter.
Quarter EBITDA was $596 million.
More than 3 times higher than the prior quarter.
Second quarter propylene oxide and derivative results increased by $170 million.
Driven by record high margins intermediate chemicals results increased by about $170 million, primarily due to higher product prices for most of the businesses.
Oxy fuels and related products results increased by $70 million driven by higher margins benefiting from improved demand and higher gasoline prices.
And we expect continued strength in durable goods and improving transportation fuels demand to increase third quarter volumes for our <unk> segment margins could slightly moderate if industry production rates remained strong.
Please turn to slide 13, and allow me to dive a little deeper into transportation trends.
<unk> that support our improving outlook for Lyondellbasell, oxy fuels and refined products.
Demand for transportation fuels are rebounding from pandemic lows.
Gasoline and distillate demand in June was within 5% of pre pandemic levels.
Reduced demand and.
<unk> is for refined products is mostly due to lagging demand for jet fuel associated with business and international travel.
Jet fuel demand remained stubbornly below pre pandemic levels.
As vaccinations in global travel resumes through 2022, and 2023, we expect refining margins will improve and.
And drive additional earnings power for Lyondellbasell Houston refinery.
The chart on the left illustrates the northwest Europe raw material margin for MTBE, which is an industry marker for our oxy fuels products sold into gasoline blending markets around the world.
While oxy fuels are typically.
A reliable performing business through the cycle low demand for gasoline pushed this margin into breakeven or negative territory over the prior 4 quarters since the beginning of this year global demand for gasoline and gasoline blending components, such as MTBE and ETE has improved increasing the margin to an average.
$167 per ton during the second quarter. This is a significant rebound and well within the historical range shown by the Blue band on the chart.
As we expected faster recovery in gasoline markets has returned profitability to our oxy fuels business ahead of our refining business.
Now, let's move forward and reviewed results of our advanced polymer solutions segment on slide 14.
Margin improvement was offset by a decline in volumes as semiconductor shortages reduced demand for our polymers, serving automotive and electronic end markets second quarter EBITDA was 129 million.
Bridge of a $6 million lower than the first quarter compounding.
Compounding <unk> solutions results decreased by about $25 million.
As volumes decline for polymer supplied to the automotive sector appliance manufacturing and other industries that we're constrained by chip shortages.
Vance polymer results increased by approximately $10 million.
Due to improved polymer price spreads over propylene raw materials.
In July feedstock cost for our polypropylene compounds produced in Europe have increased and are likely to pressure margins. During the third quarter, we only expect gradual volume recovery for compounds supply to automotive.
Electronics.
The applications as semiconductor supply constraints decrease over the coming quarters.
Now, let's turn to slide 15, and discuss the results for our refining segment.
Improvements in the Maya 211, refining crack spreads were partially offset by higher costs for renewable fuel credits or rins and lower prices for refinery.
Refinery grade propylene co product.
This resulted in second quarter EBITDA of negative $81 million, an improvement of $29 million relative to the first quarter of 2021.
In the second quarter, the Maya 211 benchmark increased by $6.14 per barrel to $21.40.
<unk> per barrel the average crude throughput at the refinery increased to 248000 barrels per day and operating rate of 93% in July we continue to see improvements in refined product demand and we are running the refinery at nearly full rates.
Strong demand for diesel and <unk>.
So expand for gasoline is expected to improve refining margins and could enable a refinery to return to profitability before the end of 2021.
As mentioned full margin recovery will require a stronger rebound and jet fuel demand.
Please turn to slide 16, as we review the results.
Of our technology segment.
Increased licensing revenue was offset by a decline in catalyst margin resulted in our second quarter EBITDA of $92 million.
$2 million lower than the prior quarter, we expect that third quarter profitability for our technology business will be similar to the same quarter last year based on the anticipated.
Moving to mean of licensing revenue and catalyst demand with that I'll turn the call over to Bob.
Thank you Michael So let me summarize our view of current conditions and the outlook for our businesses with slide 17.
In the near to midterm, we are still in the early stages of the global economic recovery.
<unk> and despite the challenges from variance continued progress with vaccinations and reopening should continue to support robust demand and margins for our products.
Pent up demand is tangible and consumers have ample liquidity to drive purchases of both services and manufactured goods.
<unk> has reopening proceeds globally.
Low inventories due to supply constraints and logistics disruptions will only serve to extend tight market conditions.
<unk> customer backlogs and persistent demand bode well for continued strength in Lyondellbasell order books.
And polyethylene.
<unk> U S and Latin American demand has overtaken volumes that previously flowed from the U S to export markets in Asia.
<unk> logistics constraints subside and U S exports to Asia resume producers will need to refill a depleted supply.
My chain of 500000 tons or more that is not fully captured in the industry statistics in North America, we expect market for PV and <unk> will remain tight into next year high.
Higher vaccination rates are expected to improve global mobility over the coming year.
The return of international travel will drive further recovery in transportation fuels markets to increase profitability for our oxy fuels and refining businesses, providing additional earnings upside per lyondellbasell.
Let me close with slide 18.
Our second quarter.
<unk> provide clear evidence of Lyondellbasell is progress and maximizing cash flow performance through all stages of the business cycle.
We are leveraging our leading and advantaged positions across a larger asset base to deliver results that far exceed our previous benchmarks and.
In today's strong.
Our second quarter EBITDA results are 38% higher than our previous record.
By 2023, we expect that our recent growth investments, we will provide an additional $1.5 billion of mid cycle EBITDA earnings capability relative to 2017.
<unk> value driven growth investments should propel stronger performance on a variety of business environments.
Our prudent financial strategy remains consistent we have increased our quarterly dividend and remain confident in our capability to deliver on this commitment throughout business cycles.
We are.
We're prioritizing deleveraging and our rapid progress on debt repayment will serve to further strengthen our investment grade balance sheet.
Capacity expansions are coming online in our industry during a period of extraordinary demand growth and enabling an orderly absorption of this new capacity into.
Into the market.
Further investments in petrochemicals are proceeding at a manageable rate and recent project cancellations and delays demonstrated capital discipline by market participants.
<unk>, Brazil, we're focused on providing leadership for our industry to establish a more sustainable future with.
With new circular business models.
We will increase our capacity to serve the growing market demand per circular on branded polymers produced from recycled and renewable feedstocks as we work toward our goal of annually producing 2 million tons of these products by 2030.
And look forward to updating you on our progress over the coming quarters. We're now pleased to take your questions.
Thank you.
At this time, we will.
A question answer session, if you'd like to ask a question. Please press star 1 on your telephone keypad.
Our pro formation tone will indicate your line is on the question queue. You May Press Star 2 if you like.
Your questions on the queue for participants using speaker equipment on maybe necessary to pick up your handset before pressing the star keys.
We begin to ask that you. Please limit your questions to 1 to allow time for everyone.
Our first question comes from Jeff Zekauskas with Jpmorgan. Please proceed with your question.
Uh huh.
Thanks, very much at the end of the first quarter, Bob you talked about how low your inventories were 8 in Europe.
We'd be you said they were 11 day can you talk about where your inventories inventory days are now.
And.
And secondly, do you have.
You have U S contract polyol prices for July settled and if they have settled what was the change.
Alright, good morning, Jeff.
Thank you for that question on inventory.
We are starting to restore on inventories back to more normal levels.
They're better than they were are higher than they were back in Q1, but still not above historic levels.
We.
We continue to be hand to mouth on several grades both in the U S and in Europe.
They are improving 1 other comment on inventory is that in the U S. In particular, we're not positioned to do a lot of exports that will require on another level of inventory, which we don't have today.
So.
Our situation is improving not back to historic levels on July contract.
Discussions are still ongoing markets are very firm tight we still have.
Hurricane season in front of US we have a heavy maintenance schedule in the industry in in Q3.
On the inventory in early Q4 in the U S. So.
Contract discussions are ongoing and there are more announcements out there for August.
Thank you. Our next question comes from Steve Byrne with Bank of America. Please proceed with your question.
Yes. Thank you.
<unk>.
I'm curious as to how much visibility do you have about inventory levels at your customers on weather.
Our inventory levels are.
Back to normal or or or.
Were still low or maybe they are starting to run them down just curious on.
On that and is there anything structural that precludes your U S customers from true.
Looking to the.
The international market.
To fulfill their demand.
Something that precludes them from really doing whether its product quality or.
Per or the type of material they need from converters anything you can comment on that.
Sure Steve Good morning, first of all inventory at customers, it's difficult for us to have exact numbers on that but I can tell you that when when we've had some intermittent unplanned outages recently.
We.
They seem to not have much inventory, because we reported a day or 2 later they are very concerned so anecdotally I would say, there's not much inventory downstream.
Especially because theres this anticipation of pricing leveling off as well and we've been talking about that for months now.
Prices continue to rise because of the persistent demand strength so all.
All of that says to me.
Customers are not holding an extraordinary amount of inventory when were light they call us right away Secondly, your question about imports.
Historically and even today imports.
And because of long lead times and generally only the more generic grades are available for import the imports tend to be limited. Furthermore, if you think about today.
Transportation costs shipping costs and container costs from Asia to the U S.
Basically wipe out the entire arbitrage that exists today in polyethylene price for example.
Shipping cost, including container cost is 3 to 4 X when it used to be pre pandemic. So all of that limits the amount of imports that really come in and the customers.
<unk> ability to important product.
Thank you. Our next question comes from P. J <unk> with Citi. Please proceed with your question.
Hey, good morning, Bob Good morning.
I hear your commentary about stronger for longer.
But even if 1.
We view that this tightness as temporary maybe last for 6 months to year. The free cash flow you will get is real I mean, you almost get $3 billion to $4 billion of free cash flow during this period of tightness and on.
And what would you do with that free cash flow would you either go towards.
Sure.
<unk> projects, like Ccs or Seo to recycling or.
Hydrogen projects or B would you rather going to M&A opportunity.
There are lots of me to GAAP companies and chemical industries that would fit well with your <unk> segment, how how how do you think about.
Green allocating this extra free cash flow.
Excellent. Thank you for that question. Please yeah, there's a lot there.
First of all you're absolutely right.
You know there's this debate of where we are on the cycle.
Whether were at elevated levels or not I think there's a couple of points to be made 1 is.
With lost in this debate is that Lyondellbasell as mid cycle earnings have stepped up.
Through the cycle earnings power is up by $1 billion to $1 billion..1 so far in 2021 compared to 2017 and when we have a full year of TBA production in 'twenty 3 that will add another 4 to.
That $100 million of EBITDA to our earnings power I think that's very important in terms of through the cycle cash generation ability to pay dividend fund buybacks in the future all of that we must not forget that while we continue to debate are we at peak or not.
Secondly in terms of capital allocation.
Our first priority is to continue to pay down debt and Michael talked about that in the prepared remarks about our target of up to $4 billion of debt reduction. This year. We think that's very achievable, we'll continue to update.
Everyone on that.
Once we're to that point, where we've.
We've.
<unk> taken out of $4 billion of debt, then I think the whole range of sort of alternatives come into play.
Continue to strengthen the dividend.
Think about buybacks.
Look for deep value M&A I think we've demonstrated that.
That's our focus and stay within the lanes, where we swim today.
So we will continue to look for that in terms of green projects.
Still studying where we can get the most bang for the Buck if you will and I suspect that our Capex will reflect some of those green investments.
Later in the decade, probably 2025 onwards, and I would suspect that will be for our total in the second half of 2021 somewhere in $2 billion to $3 billion range in terms of Capex in the second half of the decade not annually, but total for the second half of the decade.
Thank you. Our next question comes from Bob Court with Goldman Sachs. Please proceed with your question.
Thank you good morning.
Bob you mentioned that the freight rates.
Crowd out imports into the U S market I assume those freight rates are.
A friction point on exports. So you had mentioned.
Maybe there could be more demand than we've seen in I presume part of that would be into the export market. So.
How do you think it all plays out I was looking at this morning, it looks like export prices are.
On a 15 to 20 less than domestic prices for molding polyethylene. So.
Do you have to give in on price in order to move that.
And that name as inventories rebuild due to maybe offshore prices have to come up towards U S prices, how do you see that dynamic playing out.
Yeah, Great question Bob.
So first of all historically, even pre pandemic.
On freight rates coming from Asia to the U S were always higher than.
That volume it is growing out of U S to Asia because of the backhaul sort of concept on.
On a product going out.
Typically we would we would pay about $40 per ton.
Excluding packaging just freight to get polyethylene for example from the Gulf Coast to Asia.
On freight today, that's probably double it's not really limited in terms of exports.
Frankly, we just don't have enough production today to be able to export spot volume to Asia. We are doing some exports into more contract oriented down to Latin America, we have some contract commitments even in Asia that we continue.
To fulfill but we're not quite back in that mode, certainly as a company we're not.
Where we're looking for spot volume going to Asia.
And I think as as the year progresses and some of these deepening these bottlenecks around shipping relieve themselves I don't see that as being.
A challenge and over time as that happens I think the price in China should start to come up as their ability to export finished goods improves and I think the world will kind of equilibrate with China prices coming up.
As these shipping constraints relieving themselves.
Thank you. Our next question comes from Mike Sison with Wells Fargo. Please proceed with your question.
Hey, good morning, nice quarter guys.
Your profitability heading into the second half of the year given.
Thank you your outlook.
Tends to be a little bit more positive than than than the consultants.
Your margins will continue to improve sequentially.
Yeah. Good morning, Mike So first of all with with all due respect to all the Prognosticators.
Underestimated demand.
Look certainly over the last year.
On my my comment about demand being stronger for longer and I think that's really played out and we've been talking about that since the last earnings call.
That will continue I mean, if you think about it we still have global reopening in front of us.
So.
<unk> can be durable goods that are on back order automobiles appliances furniture I could go on and on.
Many value chains are still very low on inventory down through finished goods so that needs to get rebuilt and then for us as a company will benefit as mobility increases. So when you think about all of those factors.
Or is it hard to imagine that demand would weaken in.
In the second half of the year now we do have some other forces at play we have feedstocks were coming up a bit with natural gas in the U S coming up Frac spreads haven't really opened up feedstocks are coming up on my sensors and this kind of market environment.
<unk> ability to pass some of that through.
Many are as a company we have <unk>.
Planned and unplanned outages here in Q3, So we don't guide on earnings, but if I think about Q3 versus Q2.
We should have another very strong quarter in Q3 remains to be seen if we can get get to a record level like we did in Q2.
But certainly very strong and well above prior records I mean, that's how you should think about Q3 and in Q4, and we will have some seasonality, but still from a historic perspective, Q4 will be well above historic Q4 levels.
So hope that helps you in thinking.
Through the second half earnings for Us.
Thank you. Our next question comes from Kevin Mccarthy with vertical Research partners. Please proceed with your question.
Good morning, Bob I was wondering if you could update us on your outlook for the propylene chain and specifically speak to.
To polypropylene inventories I think you mentioned a few times that you're seeing a substantial order backlog for durable goods looks like P. P producers ran pretty hard in the quarter. How do you see inventories on that chain and what implications do you see for poly.
<unk>.
<unk> through prices versus monomer as we move forward through the back half of the year.
Alright, Thanks, Kevin.
So.
I see continued strength and I think there's durables.
Strengthen in especially auto because you know that is 1 of them on 1 of the larger end users.
For polymer.
Polypropylene.
For us inventories are still low and there are actually tighter on polypropylene than they are on polyethylene.
We're kind of hand to mouth, and we've had we had the lightning strike in Lake, Charles which which set us back about a week or a week or 2 and so we're very tight on polypropylene.
Propylene and love for the most part we're managing to contract minimums with our customers as some of these bottlenecks relieve themselves for auto production, that's just going to make the market tighter and then appliances.
Those are big draws on polypropylene. So my outlook is.
That polypropylene is going to be tight through the rest of the year and by the way on the other benefit that we're waiting to see it in our Aps segment with the auto sector being being sluggish because of the chip shortage.
Not seeing the full earnings power of Aps just yet.
And Thats, a very significant part of the Aps.
Segment.
Our service on the automotive market. So I think polypropylene is going to be very strong I think propylene is going to be persistently.
Hi for the foreseeable future.
Thank you. Our next question comes from Frank Mitsch with.
Fermium Research. Please proceed with your question.
Yes, good morning, and let me go off on my condolences as well.
Looking at the business I was struck by the comment that your August order book on polyethylene is the best that it's been in any other months of the year I mean, how anomalous is that in.
If people on 100% order allocation I mean, how are you dealing with it I mean on it.
Think about your volumes day, the second quarter polyethylene volumes were basically flat with the first quarter. What are your thoughts on the third quarter polyethylene volumes, if you could dig into that a little bit that'd be helpful.
Sure Frank and thank you for your words of support.
On the August order book comment.
It's just an indication of us having more volume to sell.
We've been constrained all year and as we try to inch our inventory back to more normal levels.
With confidence to take on more orders.
Still constrained so we're not.
Having polyethylene unconstrained across the system, but there are some grades now where we have enough availability that if a customer wants a product we're able to do it but it's really grade by grade in some areas, we're still on contract minimums.
So bottom line is Q3 <unk>.
Probably olefins.
Our sales should be higher than Q2.
As we produce more and sell more and I hope that that trend continues.
Thank you.
Our next question will come from Arun Viswanathan with RBC capital markets. Please proceed with your question.
Alright, Thanks for taking my question congrats on the results.
I just wanted to get your thoughts a little bit more on R&D.
It looks like your you had a pretty.
Pretty strong performance there.
How would you kind of judge the acetyl chain as well as propylene oxide.
Over the next say 2 to 4 quarters.
Yes.
Thanks, Charlie.
So on the propylene.
Propylene oxide <unk>.
<unk> is extremely strong margins are very very strong there we could sell more if we had it frankly.
I expect that to continue again coming back to my earlier comments about furniture short.
That plays right into P. O also automotive because the seat cushions and all of that come from from urethane. So we see a really good runway for our propylene oxide <unk>.
Into the second half of the year and into even next year frankly.
Frankly, it's a range demand is growing.
<unk> plant starts up we have a decent chance at absorbing a good bit of it right away and I think it will come on when it's needed likewise on asset deals.
Continued strength from from housing and you see the paint market being very strong because of home improvement and people buying new houses in.
And refurbishing them and so on so I mean, I don't see a letup on either of those adding to that Arun.
Our oxy fuels business has recovered nicely as we see more on mobility around the world.
And still Europe isn't in largely in Lockdown and I think the.
The best profitability and Oxy fuels is still in front of us.
And I think that will that will help offset any moderation in the LNP area as we see the fuels improving.
In Q3, Q4 and into next year.
Thank you our.
Next question comes from Vincent Andrews with Morgan Stanley. Please proceed with your question.
Thanks, and good morning.
I was wondering if you could give us an update on the molecular recycling initiative.
On the Italy plant.
Sure Vincent.
Coming along very well we're about to commission.
A semi works plant here in September.
And we will put out will be the next stage of development of that technology.
We continue to be very encouraged by the results we've seen.
Net.
At the bench scale and.
We'll know within a couple of months.
What the bottlenecks.
Or in that technology, and my hope is that in.
Later in 'twenty, 2 and into 'twenty 3 we're prepared to make an investment decision on.
On a medium scale molecular recycling plant, which could be in production in 'twenty, 5 plus or minus.
Thank you.
Our next question.
<unk> come from Hassan Ahmed with Alembic Global. Please proceed with your question.
Good morning, Bob.
Good morning.
Bob wanted to revisit some of your comments about the <unk> segment.
I mean, obviously similar to most businesses.
2020 was a bit rough but get on.
On nice bump up back to call. It a run rate of 600 million.
Importantly, EBITDA and historically, you've talked about the R&D segment being a pretty steady on and as I sort of sit there and think about that and the steadiness.
The earnings trajectory.
And some of the commentary you made from the sounds of it it seems that.
Maybe you know the earnings power on a quarterly basis is maybe even north of 700 million on a steady Eddie basis. So call. It almost 3 billion. Instead, he had EBITDA annualized from that from that segment is that the right way to think about it.
Yes, thank you and sound well.
Saying that we didn't experience in the past was a day complete shutdown of global economy in that that caused more volatility and I. Indeed, because of the oxy fuels typically it's been very stable I think you know today with the assets. We have you should still think about <unk> as a 1.5.
5 billion, plus or minus <unk> 15.
<unk>, 15% and then as we as we add the TBA project, we should be able to be consistently above 2 billion.
With upside when markets are strong like they are today.
That's how you should think about earnings power 1.5 maybe.
<unk> to $1.7 in that range, plus or minus and then after the TBA project.
Mid cycle consistently above $2 billion and in periods like this well well above.
Thank you.
Next question comes from David Begleiter with Deutsche Bank. Please proceed.
With your question.
Thank you Bob.
Bob just on the refinery I do you think it can still be breakeven in Q3 and give me a comes about or be it depends on profitable in Q4.
I was thinking about that business in 2022.
Thank you.
Thanks, David.
So on the refinery I mean, I think we need a reset in.
Frankly that would help a lot to get to breakeven.
And has mobility increases I think we have a good shot of Q4 being being in the black.
It all it really depends on how this variant plays out there you know as you think about our company.
Most parts of the company have shown very good resilience through the pandemic in fact strength in areas like packaging.
The refining the refinery has been challenge not only from a demand standpoint, but the light heavy differential narrowing.
I think we can get to close to breakeven here in Q3, we need.
Need a rent reset and then Q4, certainly we should be in the black.
Thank you.
Our next question comes from John Roberts with UBS. Please proceed with your question.
Thank you income from equity investments doubled sequentially from the first quarter what's.
The EBITDA equivalent of that $285 million in equity income and maybe you could unpack for us a little bit the sequential improvement between SaaS I'll bore.
Oh geez.
Okay, well, there's a lot there and I'll, probably ask you to follow up with Dave afterwards on some of the details.
But.
Talk about a couple of the JV. So first of all our Saudi JV remember that.
The cracker is an ethane cracker and Thats, a big driver and is as oil price rises and as.
Prices go up globally on polyethylene that JV tends to do very well.
Let me that's a big big contributor to the increase in earnings.
From the existing JV and then on the SaaS on JV has done extremely well with with the with the merchant ethylene that we sell from that JV and the <unk>.
Cathay into polyethylene cash margins being where they are today.
Yes.
That between operating cash flow and the expected tax refund on that on that investment we expect to recover our get.
Get back half.
Half of our investment in 2021, so that's been a big driver and then incrementally be on all the other jv's have.
Have contributed to the improvement, but I would say the Saudi JV and the Sasol JV, we're probably the largest contributor in the increase.
On the Sasol JV being brand new that was not in our P&L for most of last year.
Thank you.
Our next question comes.
From J D.
With on field Research. Please proceed with your question.
Just a question.
Shouldn't really around your volumes in Q2, what was sort of constraining you because you know that if I look at polyethylene polypropylene.
Growth in the U S and Europe, which accounts sequentially grow volume.
In the quarter.
And then just a little bit more longer term question. Let me think about your business as you know, which on your businesses, which you think have a sort of room to grow in spreads.
Spreads as well as volumes are as the economy reopens Ah in 2022 and 2023.
People.
Drive more fly more et cetera. Thanks.
Sure. So adjusted first of all on on volume constraints in Q2 remember, we still had some freeze impacts early in Q2.
Here on the U S and then we.
Had some unplanned downtime in the polymers.
3.
But sequentially, we were able to build a bit of inventory and.
We had pretty good production so.
I think the headline and there's a lot underneath the details and which product lines were higher or lower.
My sense is that the fuel is part of the business was still a bit weak in Q.
But the polymers and the Po was very strong in production in Q2, and certainly up compared to Q1.
Going forward, you asked about which product lines have the most potential for spread and volume improvement and definitely it's in fuels I do think theres incremental potential.
Q2 can spread improvement in the polymer area globally.
But where I think we have the greatest opportunity for a step up in volume in and Spreaders and oxy fuels and gasoline and distillate here on the U S. And then we hope that will be very meaningful as we work through Q3 and certainly into.
On the Q4.
Thank you. Our next question comes from Matthew Blair with Tudor Pickering, Holt and company. Please proceed with your question.
Hey, good morning, Bob sorry to hear about the accident.
I had a question on the renewable side. So you have several initiatives on the table I think it's probably fair.
Say that 1 of the leaders in this area, but at the same time investors.
I have a hard time engaging just how meaningful these projects might be for such a large company. So could you help put that into perspective as you look at like <unk> or more attack or circulin.
What are you most excited.
Cited about in and what is the potential to really move the needle for you.
Sure. Thank you Matthew and I appreciate your words of support.
Yes, I mean, that's you know I have these conversations with investors often enough. This is going to build momentum over the decade first of all recall that our goal is to have.
About about.
The 2 million tons of recycled or renewable based plastics by the end of the decade by by 2030, we think that will probably represent about 15% of our production I mean think about our work on more attack as well as on circularity on QC P mechanical recycling and circular on brand.
Brand in particular, that's all part of our polyolefin franchise and given our our capabilities in research and development application development.
We're leading in this area on circularity, and we will continue to.
It's just part of.
The polyolefin business as how I would think about it not knock some separate significant step up in earnings, but it's part of making the polyolefin business work long term.
Yeah.
Thank you. Our final question comes from Jonathan <unk> with J P. Morgan. Please proceed with your question.
Jim.
Hi, Thanks, Thanks for taking my question really appreciate the focus on deleveraging and the very good progress you've made there year to date and I guess as it relates to the $4 billion net debt reduction target that you referenced.
Did the net target I'm curious kind of how you think about paying down more.
Our debt versus just building cash on the balance sheet.
And in the case of the former.
Possibly where within the debt capital structure do you think about targeting thanks.
Yes.
Michael to respond to that question no share great. So so so great question, maybe just a couple of points.
What I would say is that our overall maturity.
Price is in great shape, especially after all the actions that we took in 2020.
Actually our weighted average maturity is about 16 years as we sit here today and we don't have any significant near term maturities.
On a year to day basis, we've taken out a $1 billion that was done through our term loan and some of our.
2020 threes.
We have the ability to further deleverage in the second half of the year with the $650 million of callable notes that we have as well. So that's a that's obviously something that is in prime focus and then lastly, we typically have a bit of commercial paper that's outstanding that we can.
And that we can use to Delever and then we're contemplating potentially doing a tender as well again in the second half of the year.
Then just from a from a targeting point of view kind of through the cycle. Our total debt to EBITDA target is about 1.5 to 2.5 times and so quite frankly as we're progressing.
Year, we're in we're in great shape from that perspective, as well as evidenced by the upgrade that we received.
A week ago from S&P.
Great. Thank you Michael on Jonathan let's see how the year progresses, when we get this $4 billion put away, let's let's continue the dialogue on capital allocation I think we've proved.
Going through there as per the year is that we've been very disciplined in this area and you should continue to expect that from us.
Thank you ladies and gentlemen, we have reached the end of our question and answer session and I will now turn the call over to Bob Patel for closing remarks.
Alright, Thank you Alex in Q2.2021.
Lyondellbasell has demonstrated its turbocharged earnings power on a very strong market environment and a larger company going forward, we expect demand to remain strong as I've mentioned throughout this call with reopening still ahead of us in many parts of the world backlogs in many product areas that have to be relieved.
Moving to inventory restocking and increase mobility.
We at Lyondellbasell are really well positioned to significantly strengthen our investment grade balance sheet pay down debt.
To capitalize on our stronger for longer market environment.
The main point that I hope investors got out of the call today is that we've.
<unk> for where we can debate about where we are on the cycle Lyondellbasell has increased our earnings power through the cycle by more than $1 billion to date compared to 2017 and after our TBA project is online we will add another $500 million of EBITDA and earnings power.
All.
Whether should provide for very robust cash flow, which we will deploy in a very disciplined way to the benefit of our shareholders.
For your interest and hope you all have a great weekend.
Thank you all for participating in today's conference you may disconnect your lines and enjoy the rest of your day.