Yahoo Finance LyondellBasell Industries N.V. (NYSE:LYB) Q1 2024 Earnings Call Transcript
LyondellBasell Industries N.V. (NYSE:LYB) Q1 2024 Earnings Call Transcript April 26, 2024
LyondellBasell Industries N.V. beats earnings expectations. Reported EPS is $1.53, expectations were $1.37. LyondellBasell Industries N.V. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello and welcome to the LyondellBasell Teleconference. 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 would now like to turn the conference over to Mr. David Kinney, Head of Investor Relations. Sir, you may begin.
David Kinney: Good day everybody and thank you for joining today's call. 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.lyondellbasell.com/investorrelations. Today, we will be discussing our business results, while making reference to some forward-looking statements and non-GAAP financial measures. We believe the forward-looking statements are based upon reasonable assumptions, and the alternative measures are useful to investors. Nonetheless, the forward-looking statements are subject to significant risk and uncertainty. We encourage you to learn more about the factors that could lead our actual results to differ by reviewing the cautionary statements in the presentation slides and our regulatory filings, which are also available on our Investor Relations website.
Comments made on this call will be in regard to our underlying business results using non-GAAP financial measures, such as EBITDA and earnings per share, excluding identified items. Additional documents on our Investor website provide reconciliations of non-GAAP financial measures to GAAP financial measures, together with other disclosures, including the earnings release and our business results discussion. A recording of this call will be available by telephone beginning at 1:00 P.M. Eastern Time today until May 26th, by calling 877-660-6853 in the United States and 201-612-7415 outside the United States. The access code for both numbers is 13743073. Joining today's call will be Peter Vanacker, LyondellBasell's Chief Executive Officer; our CFO, Michael McMurray; Kim Foley, our Executive Vice President of Global Olefins and Polyolefins and Refining; Aaron Ledet our Executive Vice President, Intermediates and Derivatives; and Torkel Rhenman, our EVP of Advanced Polymer Solutions.
During today's call, we will focus on first quarter results, current market dynamics, our near-term outlook, and our long-term strategy. With that being said, I would now like to turn the call over to Peter.
Peter Vanacker: Thank you, David and welcome to all of you. We appreciate you joining us today as we discuss our first quarter results. During today's call, our leaders will be discussing results in line with the organizational changes we announced on February 19th. In addition to her prior responsibilities for Refining and Supply Chain, Kim Foley is now our Executive Vice President for Global Olefins and Polyolefins. Kim will discuss the results for both O and P segments as well as the Refining segments. Joining us for the first time on our earnings telephone conference in his new role as Executive Vice President, is Aaron Ledet, who is taking over responsibility from Kim in leading our Intermediates and Derivatives segment.
Over more than 20 years in the petrochemical industry, with 12 of those years at LYB, Aaron has served in a variety of roles in both Europe and the United States. Most recently, Aaron was responsible for the manufacturing and commercial operations for our O&P Americas segment, where he was also responsible for developing future options for our Houston refinery. Please join me in welcoming Aaron to this call. Before we dive into the results, I hope you will invest some time to review this year's addition of our sustainability report that we released a few weeks ago. Over the past year, we embedded sustainability into our strategy and made significant progress on our ambitions. This year's sustainability report describes how LYB is making everyday sustainability a reality.
Let's turn to Slide 3 and begin the discussion with our continued leadership in safety performance. There is no greater accomplishment than having every member of our team return home to their families every day in the same health as when they began their working day. This is a cornerstone of our successful and sustainable business. LyondellBasell's first quarter incident rate for employees and contractors improved to a rate of only one injury per 2 million hours worked. We believe our safety metrics continue to hold a leading position in our industry. And I want to congratulate our team for their outstanding safety performance. Moving to Slide 4. As we discuss our company's performance during today's teleconference, we hope you will take away two main messages.
First, LyondellBasell continues to generate resilient results, while managing challenging market conditions, which have pressured our industry over the past two years. In the first quarter, LYB increased its EBITDA modestly over the fourth quarter. Our cash generation was negatively impacted by a build in working capital for good reasons: higher prices and higher volumes. And we see other encouraging signs that the industry is beginning to recover. The ratio of oil to gas prices strongly favors LYB's advantaged production in North America and the Middle East. Our Olefins and Polyolefins Europe, Asia, and International segment has returned to profitability and we're seeing early indications of improvements in the performance of our APS segments.
The second key message is that LyondellBasell's focused strategy is creating unique opportunities to transform our business. As you have heard me say many times, we are executing on three strategic pillars. We're growing and upgrading our core businesses through the startup of our new PO/TBA capacity and the acquisition of our NATPET joint venture in the Middle East. We intend to give a more substantive update on this pillar of our strategy during our second quarter results. And we're stepping up our performance in culture to embrace value creation through our value enhancement program and the transformation of our APS segment. As you might recall, we gave a detailed update on our VEP during last quarter's results. But the most impactful transformation is the progress we have made on our strategic pillar to build a profitable Circular and Low-Carbon Solutions business.
The so-called CLCS business will move our feedstocks away from fossil fuels towards an increasing share of recycled and renewable sources. We're building this business through a disciplined, capital-efficient strategy that leverages our existing infrastructure and our competitive advantages, such as leading positions in growing markets and a global network of deep customer relationships. In addition to the first quarter improvements in our underlying businesses, I hope you will come away from this call with an improved understanding of our progress in building CLCS and share our excitement for the future of LyondellBasell. Moving to Slide 5, let's focus on the actions we are taking to build a profitable CLCS business. LYB is targeting capabilities across the Circular and Low-Carbon Solutions value chain.
We are making a series of strategic investments in plastic waste sourcing, advanced sorting, mechanical recycling and advanced recycling. Slide 5 illustrates how all of these investments fit together to form a comprehensive approach to value creation for LyondellBasell CLCS business. LyondellBasell's investments in waste sourcing and advanced sorting enable our company to maximize value from a wide variety of recycled and renewable waste streams. Our network will allow LYB to select the highest value proposition for a particular waste feedstock, whether that involves mechanical recycling, advanced recycling, or renewables. We continue to use JV structures where appropriate to improve capital efficiency and builds in supply chain resiliency, while growing scale and gaining access to market-leading technologies.
Construction is underway in Germany at our Cologne integrated hub for our first advanced recycling assets using LYB's proprietary catalyst technology, MoReTec, with a final investment decision expected next year for a second unit in Houston that will likely be twice the size of the German facility. We are evaluating options for the potential reuse of the hydrotreaters at our Houston refinery to purify recycled and renewable cracker feedstocks. All of these capabilities enable LYB to leverage to substantial investments in our existing cracker and polymerization capacities to process recycled and renewable feedstocks. Finally, in collaboration with converters and brand owners, we bring the recycled and renewable content of these polymers to markets through both direct channels and through the custom compounding solutions offered by our APS business.
Using mass balancing, the majority of our sales volumes were sold under our well-known Circulen brands. Turning to Slide 6. You can see how the focused execution of our CLCS strategy is resulting in rapid and meaningful growth in sales volumes for LYB's recycled and renewable-based polymers. In 2023, our volumes grew to 123,000 tons, doubling our 2022 sales. And we expect this excellent momentum will continue as we drive towards our 2030 target of at least 2 million tons per year. Last year, at our Capital Markets Day, we outlined our financial targets for LyondellBasell's CLCS business. We continue to expect an incremental EBITDA contribution of $500 million by 2027 and $1 billion by 2030 from this business. By expanding our regional hubs with disciplined acquisitions and organic growth, we are confident we can continue to build and strengthen the leadership position to serve this undersupplied market while generating attractive margins to achieve our financial targets.
Let's turn to Slide 7 and summarize our financial results. During the first quarter, LyondellBasell's businesses delivered resilient results from our well-positioned and diverse portfolio. Earnings were $1.53 per share. EBITDA was $1.1 billion. During the quarter, cash from operating activities consumed about $100 million, and our balance sheet remains robust with $6.5 billion of available liquidity. Let me turn the call over to Michael first, and then to each of the business leaders who will describe our financial and segment results in more detail.
Michael McMurray: Thank you, Peter and good morning everyone. Please turn to Slide 8, and let me begin by addressing our cash generation. During the past four quarters, LyondellBasell generated $4.3 billion of cash from operating activities. Our team efficiently converted 93% of our EBITDA into cash over the last 12 months. At the end of the quarter, our cash balance was $2.3 billion. LYB's investment-grade balance sheet remains strong and enables us to continue to execute on our strategy and grow profitably while increasing returns for our shareholders. Let's continue with Slide 9 and review the details of our capital deployment. During the first quarter, our businesses consumed about $100 million in cash from operating activities.
EBITDA improvement was more than offset by a working capital build of just over $600 million. As Peter mentioned, our working capital build was for good reasons, including higher prices and higher volumes, primarily within our O&P EAI and I&D segments. In O&P EAI, receivables increased with higher sales volumes as we benefited from the Red Sea logistic disruptions. Our I&D segment had higher receivables due to styrene price increases, and we rebuilt some oxyfuel inventories after fourth quarter maintenance. Our resilient cash generation has resulted in $1.8 billion returned to shareholders over the last 12 months through both dividends and share repurchases. During the quarter, we successfully issued $750 million worth of bonds to refinance our 2024 maturity, which reduced our coupon rate by 25 basis points.
Our balance sheet is in great shape. We have $11 billion in long-term debt with an average maturity of about 18 years and a 4% average cost of debt. I would now like to provide a brief overview of the results from each of our segments on Slide 10. LyondellBasell's business portfolio delivered $1.1 billion of EBITDA during the first quarter. Profitability improved quarter-over-quarter in five of our six segments. In our O&P Americas segment, the absence of fourth quarter inventory valuation benefits sequentially impacted first quarter results. Conversely, our I&D and Refining segments benefited from the absence of fourth quarter inventory valuation charges. In our fourth quarter teleconference, we outlined $105 million of first quarter estimated EBITDA impact from planned maintenance in O&P Americas and Refining.
Additional unplanned downtime from winter storm Heather in Houston and other events increased the first quarter estimated EBITDA impact from downtime by approximately $150 million. Our estimate for second quarter planned maintenance EBITDA impact remains at $30 million and is focused on a turnaround of one of the POSM units in Channelview. We continue to align our operating rates with market demand to optimize working capital. During the second quarter, we expect operating rates of 85% for our global olefins and polyolefins assets and 80% for our intermediates and derivative assets. With that, I'll turn the call over to Kim. Kim?
Kim Foley: Thank you, Michael. After more than 35 years in various leadership positions at LYB, I am very excited to assume responsibility for our O&P segments. Earlier in my career, I was the site manager for our largest site here in Channelview, Texas. It is an honor for me to now lead LyondellBasell's work to grow and upgrade these core businesses for our company. Let's begin the segment discussions on Slide 11 with the performance of our Olefins and Polyolefins Americas segment. First quarter O&P Americas EBITDA was $521 million. Lower feedstock and energy costs, coupled with stable domestic polyethylene prices, were offset by lower volumes due to planned and unplanned downtime. Olefins margins were supported by higher co-product pricing.
As a reminder, fourth quarter results benefited from LIFO inventory valuation changes of $75 million. During the first quarter, the North American polyethylene demand continued to strengthen, and with the support of strong export markets, led to stable domestic prices despite new capacity entering the market. For the North American industry, domestic polyethylene sales volumes improved by more than 5% relative to the fourth quarter. The addition of new capacity to the North American market in 2023 has led to much higher exports from the region. During the first quarter, North American exports of polyethylene were significantly higher than 2023 average. For LYB, our strong domestic share in North America resulted in approximately 30% of our first quarter sales going to the export customers.
In the second quarter, we expect feedstock and energy costs will remain relatively low, with LYB targeting higher operating rates following downtime in the first quarter. North American integrated polyolefin producers, including LYB, continue to benefit from a highly advantaged oil-to-gas ratio, leading to a significantly lower cost relative to oil-derived production. With the remainder of the U.S. polyethylene capacity now online, the market is well supplied, yet demand is keeping the industry inventories relatively balanced at about 40 days of supply. We remain focused on aligning our operating rates to serve domestic and export market demand. As Peter mentioned, we are focused on growing our Circular and Low-Carbon Solutions business to build our leadership in the attractive markets of premium recycled and renewable-based polymers.
In February, we announced the acquisition of mechanical recycling assets from PreZero in Jurupa Valley, California. These assets extend our recycling footprint into the Greater Los Angeles Metropolitan area, providing good access to plastic waste feedstock in the region. We believe California offers a favorable backdrop to increase the recovery of plastic waste with better infrastructure, higher recycling rates, and supportive policies. Please turn to Slide 12 as we review the performance of our Olefins & Polyolefins Europe, Asia, and International segment. In the first quarter, higher volumes from near-shoring, combined with increased demand from restocking, drove improved results in Europe and Asia, resulting in EBITDA of $14 million. Additionally, throughout the quarter, logistical challenges in the Red Sea proved beneficial for local European producers, resulting in increased volumes and fixed cost recovery.
In Europe, variable margins benefited from modest price increases that were mostly offset by higher feedstock costs. As we progress through the second quarter, we expect European Olefins and Polymers results to improve due to firm pricing, lower energy costs and improved seasonal demand. In addition, we continue to monitor the slow and gradual return of Chinese demand. Finally, we are staying true to our commitment to grow and upgrade our core businesses. Our acquisition of the Saudi Arabian NATPET joint venture is expected to close in the coming months. The NATPET acquisition is an excellent example of LyondellBasell's strategy to drive long-term growth with advantaged assets. In line with our sustainability goals, we signed another renewable power purchase agreement of 208 megawatts of generation capacity in Germany.
With this new agreement, LyondellBasell is rapidly moving towards our 2030 target to supply at least half of our electricity from renewable sources. We now have more than 90% of our 2030 target sourced through agreements for wind and solar electricity capacity. Now, let's turn to Slide 13 and discuss the results for the Refining segment. First quarter EBITDA was $71 million. Fourth quarter 2023 results were impacted by LIFO charges of approximately $40 million. Improvement in the gasoline crack spread was partially offset by lower volumes related to planned and unplanned downtime. As previously mentioned, we have implemented a hedging program for a portion of our distillate production to mitigate risk throughout 2024. During the first quarter, distillate cracks outperformed expectations and our results include a mark-to-market losses for the program.
In the near-term, we expect seasonally stronger demand for gasoline amid rising crude oil prices. We intend to maximize crude throughput at the refinery and operated approximately 95% of capacity in the second quarter. Looking ahead, we remain committed to the safe and reliable operation of these assets. We will continue to target high operating rates until ramp-down begins in the first quarter of 2025. Our team is evaluating several new projects to transform the site in support of our Circular and Low-Carbon Solutions growth strategy. With that, I will turn the call over to Aaron.
Aaron Ledet: Thank you, Kim and thank you, Peter for the kind introduction at the beginning of the call. Like Kim, I'm honored to have the opportunity to lead the Intermediate to Derivatives segment. During my career at LyondellBasell, I have served in leadership roles touching on supply chain, APS, Europe, I&D, Refining, and most recently leading O&P in the Americas. I look forward to my new responsibilities to drive value creation and growth across the core businesses within Intermediates and Derivatives at LYB. Please turn to Slide 14 as we look at the Intermediates and Derivatives segment. In the first quarter, segment EBITDA was $312 million. As a reminder, the fourth quarter results were impacted by LIFO charges of approximately $95 million.
Our European propylene oxide and derivatives business benefited from logistics disruptions in the Red Sea, leading to near-shoring of local demand that drove higher volumes and margins in the region, a dynamic which has continued into the second quarter. In the first quarter, oxyfuels margins declined due to lower premiums for oxyfuels relative to gasoline. Despite these headwinds, oxyfuels margins remained more than double the level typically seen during the seasonally slow first quarter. Industry outages during the first quarter led to higher styrene margins that have since normalized in April. Looking ahead, we anticipate seasonal improvements across all businesses in the segment including benefits from the summer driving season and lower butane costs, providing support for continued strength in oxyfuels margins.
In line with our guidance from the beginning of the year, we have planned maintenance underway at one of our POSM assets in Channelview, Texas. We expect higher volumes across most of our business following unplanned downtime in the first quarter. Our team continues to do a fantastic job in running our new PO/TBA facility with high reliability and utilization, while ensuring superb product quality. After considering planned maintenance, we expect to operate at an average rate of about 80% of I&D capacity during the second quarter. The process to complete the sale of our ethylene oxide derivatives businesses to INEOS is well underway, and we expect to finalize the transaction in the second quarter. We anticipate a book gain on sale of $275 million, which will be reflected as an identified item during the second quarter.
With that, I will turn the call over to Torkel.
Torkel Rhenman: Thank you, Aaron. Let's review the first quarter results for the Advanced Polymer Solutions segment on Slide 15. First quarter EBITDA was $35 million. Volumes increased 12% across our portfolio driven by improving seasonal demand and the lack of typical fourth quarter customers' downtime. Variable margins increased due to higher pricing and product/mix improvements. This was offset by fixed cost investments during the quarter as we moved forward on our APS transformation. In the second quarter, we expect volumes will continue to show modest improvement benefiting from both seasonally higher demand and our growing pipeline of new business. We continue to see good momentum as we expand our growth funnel, with our team highly focused on winning projects with both new and existing customers.
Utilizing both our recently acquired metal assets as well as our existing asset base, we are providing customers with innovative and sustainable solutions. We believe that our APS transformation, coupled with market recovery, will deliver results to reach the goals we laid out at our Capital Markets Day last year. With that, I will return the call back to Peter.
Peter Vanacker: Thank you, Torkel. And please turn to Slide 16 and I will discuss the results for the Technology segment on behalf of Jim Seward. First quarter EBITDA of $118 million reflected higher licensing revenue and improved catalyst margins. In the second quarter, we expect that revenue associated with licensing milestones will decrease, matching fourth quarter 2023 levels, but will be slightly offset by an increased catalyst volumes. As a result, we estimate that second quarter Technology segment results will be similar or perhaps slightly better than fourth quarter results. Please turn to Slide 17 as we discuss the near-term market outlook by regions and end markets. As you heard from our business leaders, we expect to see typical increases in seasonal demand along with some moderate improvements in markets throughout the year.
In the Americas, improving export demand for polyethylene is expected to further tighten domestic markets. And additionally, low ethane costs should continue to strengthen integrated polyethylene margins. As we move through the year, we expect European markets will begin to see modest improvements. Industrial activity in the region is increasing, and we expect demand will continue to recover as lone energy costs gradually improve confidence. The Red Sea logistics disruptions that bolstered first quarter demand continued to influence local purchasing decisions. China markets are exhibiting very slow, but steady improvement. We're encouraged by China's targeted stimulus efforts and remain watchful for indications that these measures will deliver meaningful improvements in demand for LYB's products.
For the Packaging sector, demand for non-durables has been consistent. Given that destocking across the packaging value chain seems to be complete, we look forward to the potential for restocking ahead. In building and construction, we expect to see some benefits from moderating and perhaps falling interest rates and the inevitable recovery in demand for durable goods. In the U.S., stimulus funding from the Bipartisan Infrastructure Law will begin to support improving demand for commercial construction with growing benefits expected as the year unfolds. In the Automotive sector, global production is expected to modestly improve from first quarter levels throughout 2024. Moreover, our APS segment is committed to strategic initiatives focused on winning back customers and growing the business.
And in Oxyfuels and Refining, gasoline crack spreads are improving from the lows we saw at the end of the fourth quarter of last year. U.S. vehicle miles traveled have returned to pre-pandemic levels and the value for octane from our oxyfuels is strong. At LYB, we continue to optimize our assets on a global scale by aligning our operating rates to meet market demand and maximize cash generation. Now, let me summarize the first quarter, our outlook, and our long-term strategy for the company, with Slide 18. As we move into the summer months, we anticipate seasonal improvements across our businesses in the second quarter. Moving through the year, we expect improvement in the second half driven by stable to lower interest rates and modestly higher demand.
LYB's U.S. and Middle East production should continue to benefit from advantaged natural gas-based feedstock and energy costs compared to oil-based peers. Red Sea logistic disruptions were beneficial to our European businesses in the first quarter of 2024 and the time it will take for these tailwinds to fade is uncertain. As we mentioned in our fourth quarter earnings call, we are committed to delivering $600 million of recurring annual EBITDA by the end of 2024 through our value enhancement program. We continue to see enthusiastic support for the program across the company as it becomes an evergreen part of our culture. Our team will continue to remain focused on advancing value creation through the three pillars of our long-term strategy.
Progress continues on growing and upgrading our core businesses. In the coming months, we expect to close on the acquisition of our NATPET propylene and polypropylene joint venture in Saudi Arabia. Our divestiture of ethylene oxide and derivatives business to INEOS is expected to occur during the second quarter. As we discussed today, LYB continues to build a comprehensive business model to support a profitable Circular and Low-Carbon Solutions business. LyondellBasell is making smart investments to build capabilities across every step of the value chain with a global scale in mind. With construction already underway for our first MoReTec advanced recycling assets in Germany, we're building on this momentum with FID for our second larger unit in Houston plans for 2025.
Our actions demonstrate LYB's commitment to capture value with Circular and Low-Carbon Solutions. Our value enhancement program continues to grow and is a key element of our company culture. Currently, the program is on track to add up to $1 billion of incremental recurring annual EBITDA by the end of 2025, significantly surpassing our original goals. We're laser focused on our target to deliver a more profitable and sustainable growth engine for LyondellBasell. Now, with that, we're pleased to take your questions.
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