LyondellBasell Industries Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 26, 2024

There are 12 speakers on the call.

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.

Operator

Sir, you may begin.

Speaker 1

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 that accompanies today's call and is available on our website at www.lyndalbasell.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.

Speaker 1

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 unidentified 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 pm Eastern Time today until May 26 by calling 877-660-6853 in the United States and 201 6127415 outside the United States. The access code for both numbers is 1,374,370

Speaker 2

3. Joining

Speaker 1

today's call will be Peter Banneker, LyondUpsell's Chief Executive Officer our CFO, Michael McMurray Kim Foley, our Executive Vice President of Global Olefins and Polyolefins and Refining Aaron Laday, our EVP of Intermediates and Derivatives and Torkel Remman, our EVP of Advanced Polymer Solutions. During today's call, we will focus on Q1 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.

Speaker 2

Thank you, David, and welcome to all of you. We appreciate you joining us today as we discuss our Q1 results. During today's call, our leaders will be discussing results in line with the organizational changes we announced on February 19. 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.

Speaker 2

Joining us for the first time on our earnings telephone conference in his new role as Executive Vice President is Aaron Laday, who is taking over responsibility from Kym in leading our Intermediates and Derivatives segments. 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 and 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 would invest some time to review this year's edition of our sustainability report that we released a few weeks ago.

Speaker 2

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.

Speaker 2

Leineer Basel's 1st quarter incident rate for employees and contractors improved to a rate of only 1 injury per 2,000,000 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 2 main messages. First, Laimer Brasel continues to generate resilient results while managing challenging market conditions, which have pressured our industry over the past 2 years.

Speaker 2

In the Q1, LYB increased its EBITDA modestly over the Q4. 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.

Speaker 2

And we're seeing early indications of improvement in the performance of our APS segment. The second key message is that Leindeer Basel's focused strategy is creating unique opportunities to transform our business. As you have heard me say many times, we are executing on 3 strategic pillars. We're growing and upgrading our core businesses through the start up of our new POTBA capacity and the acquisition of our NetBet joint venture in the Middle East. We intend to give a more substantive update on this pillar of our strategy during our Q2 results.

Speaker 2

And we're stepping up our performance and 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.

Speaker 2

In addition to the Q1 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're 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 Leindel Basel CLCS business.

Speaker 2

Leindeer Basel'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 build 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 1st advanced recycling assets using LYB's proprietary catalyzed technology Moritec 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.

Speaker 2

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 market through both direct channels and through the custom compounding solutions offered by our APS business. Using mass balancing, the majority of our sales volumes are sold under our well known Circulin 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 tonnes, doubling our 2022 sales, and we expect this excellent momentum will continue as we drive towards our 2,030 target of at least 2,000,000 tonne per year.

Speaker 2

Last year at our Capital Markets Day, we outlined our financial targets for Leiner Bazell's CN LCS business. We continue to expect an incremental EBITDA contribution of $500,000,000 by 2027 $1,000,000,000 by 2,030 from this business. By expanding our regional apps with disciplined acquisitions and organic growth, we are confident we can continue to build and strengthen the leadership position to serve this undersupplied markets while generating attractive margins to achieve our financial targets. Let's turn to Slide 7 and summarize our financial results. During the Q1, Leininger Basel's businesses delivered resilient results from our well positioned and diverse portfolio.

Speaker 2

Earnings were $1.53 per share. EBITDA was $1,100,000,000 During the quarter, cash from operating activities consumed about $100,000,000 and our balance sheet remains robust with $6,500,000,000 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.

Speaker 3

Thank you, Peter, and good morning, everyone. Please turn to Slide 8, and let me begin by addressing our cash generation. During the past 4 quarters, LyondellBasell generated $4,300,000,000 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 $2,300,000,000 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.

Speaker 3

Let's continue with Slide 9 and review the details of our capital deployment. During the Q1, our businesses consumed about $100,000,000 in cash from operating activities. EBITDA improvement was more than offset by working capital build of just over $600,000,000 As Peter mentioned, our working capital build was for good reasons, including higher prices and higher volumes, primarily within our O and P EAI and I and D segments. In O and P EAI receivables increased with higher sales volumes as we benefited from the Red Sea Logistics disruptions. Our I and D segment had higher receivables due to styrene price increases and we rebuild some oxy fuel inventories after 4th quarter maintenance.

Speaker 3

Our resilient cash generation has resulted in $1,800,000,000 return to shareholders over the last 12 months through both dividends and share repurchases. During the quarter, we successfully issued $750,000,000 worth of bonds to refinance our 20 which reduced our coupon rate by 25 basis points. Our balance sheet is in great shape. We have $11,000,000,000 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.

Speaker 3

LyondellBasell's business portfolio delivered $1,100,000,000 of EBITDA during the Q1. Profitability improved quarter over quarter in 5 of our 6 segments. In our O&P Americas segment, the absence of 4th quarter inventory valuation benefits sequentially impacted 1st quarter results. Conversely, our I and D and Refining segments benefited from the absence of 4th quarter inventory valuation charges. In our Q4 teleconference, we outlined $105,000,000 of 1st quarter estimated EBITDA impact from planned maintenance in O&P Americas and refining.

Speaker 3

Additional unplanned downtime from winter storm Heather in Houston and other events increased the Q1 estimated EBITDA impact from downtime by approximately $150,000,000 Our estimate for Q2 planned maintenance EBITDA impacts remains at $30,000,000 and is focused on a turnaround of 1 of the POSIM units in Channelview. We continue to align our operating rates with market demand to optimize working capital. During the Q2, 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?

Speaker 4

Thank you, Michael. After more than 35 years in various leadership positions at LYB, I am very excited to assume responsibility for O and 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.

Speaker 4

First quarter O&P Americas EBITDA was $521,000,000 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, 4th quarter results benefited from LIFO inventory valuation changes of $75,000,000 During the Q1, 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 4th quarter. The addition of new capacity to the North American market in 2023 has led to much higher exports from the region.

Speaker 4

During the Q1, 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 Q1 sales going to the export customers. In the Q2, we expect feedstock and energy costs will remain relatively low with LYB targeting higher operating rates following downtime in the Q1. 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.

Speaker 4

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 Pre 0 in Jurupa Valley, California.

Speaker 4

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 and polyolefins Europe, Asia and International segment. In the Q1, higher volumes from near shoring combined with increased demand from restocking drove improved results in Europe and Asia resulting in EBITDA of $14,000,000 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.

Speaker 4

As we progress through the Q2, 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 Net Pet joint venture is expected to close in the coming months. The Net Pet acquisition is an excellent example of LyondellBasell's strategy to drive long term growth with advantaged assets.

Speaker 4

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 2,030 target to supply at least half of our electricity from renewable sources. We now have more than 90% of our 2,030 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. 1st quarter EBITDA was $71,000,000 4th quarter 2023 results were impacted by LIFO charges of approximately $40,000,000 Improvement in the gasoline crack spread was partially offset by lower volumes related to planned and unplanned downtime.

Speaker 4

As previously mentioned, we have implemented a hedging program for a portion of our distillate production to mitigate risk throughout 2024. During the Q1, 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 operate at approximately 95% of capacity in the second quarter. Looking ahead, we remain committed to the safe and reliable operation of these assets.

Speaker 4

We will continue to target high operating rates until ramp down begins in the Q1 of 2025. Our team is evaluating several new projects to transform the site in support of our circular and

Speaker 5

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 derivative segment. During my career at LyondellBasell, I have served in leadership roles touching on supply chain, APS, Europe, I and 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.

Speaker 5

In the Q1, segment EBITDA was $312,000,000 As a reminder, the 4th quarter results were impacted by LIFO charges of approximately $95,000,000 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 2nd quarter. In the Q1, Oxyfuels margins declined due to lower premiums for Oxyfuels relative to gasoline. Despite these headwinds, Oxyfuels margins remain more than double the level typically seen during the seasonally slow 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.

Speaker 5

We expect higher volumes across most of our business following unplanned downtime in the Q1. Our team continues to do a fantastic job in running our new POTVA 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 IND capacity during the Q2. 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 2nd quarter. We anticipate a book gain on sale of $275,000,000 which will be reflected as an identified item during the Q2.

Speaker 5

With that, I will turn the call over to Torkel.

Speaker 6

Thank you, Aaron. Let's review the Q1 results for the Advanced Polymer Solutions segment on Slide 15. 1st quarter EBITDA was $35,000,000 Volumes increased 12% across our portfolio, driven by improving seasonal demand and the lack of typical 4th 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 move forward on our APS transformation.

Speaker 6

In the Q2, 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.

Speaker 2

Thank you, Thorkell, and please turn to Slide 16, and I will discuss the results for the Technology segment on behalf of Jim Seward. 1st quarter EBITDA of $118,000,000 reflected higher licensing revenue and improved catalyst margins. In the Q2, we expect that revenue associated with licensing milestones will decrease matching Q4 2023 levels, but will be slightly offset by an increased catalyst volumes. As a result, we estimate that 2nd quarter Technologies segment results will be similar or perhaps slightly better than 4th quarter results. Please turn to Slide 17 as we discuss the near term market outlook by regions and end markets.

Speaker 2

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 long energy costs gradually improve confidence.

Speaker 2

The Red Sea Logistics disruptions that bolstered 1st quarter demand continue to influence local purchasing decisions. China markets are exhibiting very slow but steady improvements. 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.

Speaker 2

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 Q1 levels throughout 2024. Moreover, our APS segment is committed to strategic initiatives focused on winning back customers and growing the business.

Speaker 2

And in Oxyfuels and Refining, gasoline crack spreads are improving from the lows we saw at the end of the Q4 of last year. U. S. Vehicle miles struggles 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 demands and maximize cash generation.

Speaker 2

Now let me summarize the Q1, 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.

Speaker 2

And Middle East production should continue to benefit from advantaged natural gas based feedstock and energy costs compared to oil based peers. Wetsea logistic disruptions were beneficial to our European businesses in the Q1 of 2024 and the time it will take for these tailwinds to fade is uncertain. As we mentioned in our Q4 earnings call, we are committed to delivering $600,000,000 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 3 pillars of our long term strategy.

Speaker 2

Progress continues on growing and upgrading our core businesses. In the coming months, we expect to close on the acquisition of our Netbed Propylene and Polypropylene joint venture in Saudi Arabia. Our divestiture of Yttrium oxide and derivatives business to INEOS expected to occur during the Q2. As we discussed today, LYB continues to build a comprehensive business model to support a profitable circular and low carbon solutions business. Leidner Basel is making smart investments to build capabilities across every step of the value chain with a global scale in mind.

Speaker 2

With construction already underway for our 1st Moritec advanced recycling asset in Germany, we're building on this momentum with FID for our 2nd larger unit in Houston planned 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 $1,000,000,000 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.

Speaker 2

And with that, we're pleased to take your questions.

Operator

Thank you. Our first question comes from the line of Steve Byrne with Bank of America. Please proceed with your question.

Speaker 7

Yes, thank you. I'm interested in the level of demand that you're hearing from your downstream polyethylene customers for your renewable products, whether

Speaker 8

it's the Renewable 3.5. Are they willing to sign a long term contract? In order for you to build this larger VorTeq client presumably in Houston? Hydrogen requirements to convert the peralez to soil in the cracker feedstock. So just curious whether you think this would be cost plus?

Speaker 8

Thank you.

Speaker 2

Hi, Steve. I mean, thanks for your question. This is Peter. It was a bit difficult, I mean, to understand the line was breaking up. But you were asking for our level of demand on the renewable side of polyethylene as well as it is cost plus or not.

Speaker 2

Well, we continue to see very good traction in that market. You saw from our presentation that last year we doubled approximately the volumes of our Circuland family, so the mechanical recycles, the advanced recycles and as well the non plastic waste renewable, so biowaste recycled products. We have continued to see very good demands in that regards. We see also that regulation is advancing, particularly in Europe. With regards to the contract structures, if we take our first investments in the advanced recycling technology or Moritec technology in the Cologne hub in West Linn, then we have a big part of the capacity already contracted.

Speaker 2

We on purpose do not contract the entire capacity because we believe there will be value that we can capture for that part that is not contracted once we start up the facility. We are not contracting on a cost plus basis. I said that multiple times. These markets will have its own supply and demand and that is actually what we currently are seeing. That means that pricing for renewable recycled polyethylene but also polypropylene has its own price points that is being set in the marketplace.

Speaker 2

And all that we see is still very much aligned even ahead of what we had said in March last year at the Capital Markets Day.

Operator

Thank you. Our next question comes from the line of Patrick Cunningham with Citi. Please proceed with your question.

Speaker 7

Hi, good morning. So O and P EAI seems to be seeing some nice benefits from volume trends and firmer prices, particularly in Europe. How do you expect prices to trend into the Q2 and throughout the year? And do you get any sense we may see some reversal in this near shoring and restocking trends that you've highlighted?

Speaker 2

Good question, Patrick. And of course, we are very pleased that we see that the situation is changing in Europe. Of course, as you alluded to and as we said in the prepared remarks, helped by discontinuity because of the issues in the Red Sea. Generally spoken and then I will hand over to Kim. Generally spoken, we see that situation not changing very rapidly, because the behavior of our customers has changed that they are buying more locally than eventually relying on cheap imports.

Speaker 2

So therefore, we expect, as we alluded to in the prepared remarks, I mean, to see further advancement in our profitability in that particular region in the Q2. Kim, you want to add something to that?

Speaker 4

Think the only thing that I would add, Peter, is we continue to see strength in packaging, which you alluded to in our prepared remarks. And none of us can predict what's going to happen with the supply chains. And so long as that threat is out there, I think we'll continue to see more nearshore.

Speaker 2

And another topic that I want to point out is everybody has noticed that now in Europe, there is consolidation announcements in the markets. So if you do the back of the envelope calculation of in total now the 3 announcements that have been made, then we're talking about approximately 1,500,000 tons of ethylene capacity that in, let's say, relatively short term should disappear in the markets. Another point that I want to allude to is that the average age of crackers in Europe is about 45 years, whereby in the United States, it's less than 30 years. There are about 40 crackers in Europe. Close to half of them have a capacity that is lower than 500,000 tonnes per year.

Speaker 2

So you see that restructuring is actually starting to happen in Europe. And if these announcements are being made, then we would expect also that that is being taken into consideration in the value chain. That means our customers and customers of our customers in where they want to secure their products. Having said that, we do not see yet in Europe that there is restocking. So what Kim was alluding to is mainly based upon higher demand because of higher consumption downstream of products being produced.

Speaker 2

So it's not yet restocking.

Operator

Thank you. Our next question comes from the line of Frank Mitsch with Fermium Research. Please proceed with your question.

Speaker 9

Good morning and congrats Kim on the new role. Why don't we stay with Europe for a minute or 2. First off, you indicated that global O and P operates, you expect 85% in the second quarter. Curious what the split might be, Americas versus Europe. But it does seem that the business is catching a break with the Red Sea issues.

Speaker 9

And to your point, Peter, you also indicated that you were starting to see some rationalizations and so forth. You have already taken some actions. Is there more that we should be expecting to happen in Europe? Theoretically, the threat in the Red Sea will be neutralized and then we'll start to see the global trade flows again and that will obviously appear to catalyze some actions. So any color there would be very helpful.

Speaker 9

Thank you.

Speaker 2

Let me take the latter part of your question. Very good question as usual, Frank. The latter part, I mean, around our assets, you rightfully said, we took a very early step when the industry was not undertaking any steps yet by rationalizing our polypropylene facility to one line in the southern part of Italy in Brundisi. Of course, we've always said that we continue to look at all the different assets that we have in Europe, taking into consideration that we have flexible assets in Europe compared to some other assets that are still there in the industry that are not flexible, that are subscale, that are dealing with high costs. We have a quite good position with our assets if you look at the cash cost curve in Europe.

Speaker 2

But nevertheless, as we said before, we continue to strategically evaluate our positions in Europe. As I alluded to before, we are quite positive by the dynamics around new regulation that supports the demands for recycled products. And therefore, we've also said, I mean, our Cologne assets were very strategic in that regard. We're building up our Colon up around, I mean, renewable, polyolefins, around advanced recycling with the Moritec investments. So that will continue to get a lot of focus as we move forward.

Speaker 2

On the short term question with the Red Sea, anything that we can add? I mean Kim?

Speaker 4

I think I want to go back to the first part of Frank's question, just so I can answer that. As many of you saw in the prepared remarks and the releases this morning, our Q1 North American olefins and polyolefins would operate at our crackers at about 75%. So you asked the question about operating rates for global OPAM. I would say OPAM or Global O&P Americas as well as Global Europe, Asia and International are both at 85% in the second quarter of the year.

Operator

Thank you. Our next question comes from the line of Matthew Blair with Tudor, Pickering, Holt. Please proceed with your question.

Speaker 7

Hey, good morning. Could you go into your outlook for PE pricing in the second quarter as well the back half of the year. And is it fair to say that the export demand right now is stronger than domestic demand for PE? And also, could you talk a little bit about just overall inventory levels? Thanks.

Speaker 2

Thank you, Matthew. Before I hand over to Kim, let me point out that we are, of course, very pleased to see that domestic demand in the United States has improved by 5% versus Q4 last year, reminding everybody that this is the strongest quarter since Q3 2022. In addition to that, as you rightfully said, I mean, the export sales continue to grow, actually breaking records for the 4th consecutive quarter, which is not so much a surprise if you see at the cost base and if you see the differential between oil and gas. So these are very good dynamics that we see in the marketplace for PE and for producers like ourselves with a very low cost basis in the Gulf. Kim?

Speaker 4

So Peter, I think what I would add to that, and it's hidden throughout our messaging today, is that domestic demand, as you mentioned, is up. Export demand is up. Just to put numbers to your comment around year on year, year on year PE exports out of North America are up 27%. So the new capacity that's now online is absolutely being exported around the world. Those channels to market are open.

Speaker 4

We're involved in all of those and we're very optimistic now that we have our cracker backed up in Corpus Christi that we're going to be able to fulfill all those channels. So yes, as you think about it, we've got a high oil to gas ratio. We've got low energy. The U. S.

Speaker 4

Is set with a very competitive advantage to meet the demands of the world.

Speaker 2

And a couple of points that I also want to outline here. If you look at days on hand in PE, it went down from Q4 to Q1, I mean, from 42 to 40. So you see there as well domestic demand going up, export sales, the topics, I mean, also that Kim highlighted. So we saw also that the capacity utilization in this fleet despite, I mean, that we saw a lot of additional capacity being brought online and we believe that most of that capacity is now producing, maybe a couple of exemptions there with some technical issues, but there is not a lot of major capacities in the United States that still need to come online. So we saw capacity utilization actually moving up to around 90% in PE in the United States.

Operator

Thank you. Our next question comes from the line of Jeff Zekauskas with JPMorgan. Please proceed with your question.

Speaker 10

Thanks very much. I have a 2 part question. Is the real break on polyethylene prices over the overcapacity situation in China? And do you think that what the market needs is either a tighter supply demand balance in China or something moving China prices up in order for prices to really be affected positively in the other jurisdiction. The second part is on Slide 11, under the our actions in talking about Olefins and Polyolefins America, you say balancing domestic demand with disciplined capacity utilization.

Speaker 10

What does that exactly mean?

Speaker 2

Let me go, I mean, to your first question, Josh. Indeed, as you rightfully pointed out, even though we have seen a little bit of an uptick in demand in China. I would make the case that everybody is bleeding. Margins are not where they need to be, NAFTA is expensive. And then the question is, how long will that last?

Speaker 2

Because there may be newer facilities, of course, that can hold on longer, but there is also quite a lot of subscale capacities in China. And I'm sure after how much 12, 18 months of bleeding, even 24 months of bleeding, how long will that can last until we will see some actions being undertaken. But nevertheless, despite the fact, I mean, that China supply and demand is not where it should be, you see these exports from the United States into other parts of the world reaching breaking records. So the material finds its way then into other markets, markets where maybe also again older facilities, not backward integrated, not flexible, fully dependent on NAFTA. These are the facilities of course that have it very difficult to be competitive.

Speaker 2

As a consequence, we continue to believe, you've seen, I mean, the price increases at the beginning of the year. You saw the two rounds of price increases in the United States last year, at the end of last year. We have these price increases out in the markets for April May. And there is a very strong case, if you look at everything that is happening, for those price increases, I mean, to stick. If I turn to Kim on the second question?

Speaker 4

The second question, I think the easiest way to explain that is it's an optimization. You're going to look at what margin you have on your domestic demand. You're going to look at your incremental cost of production to export and you're going to make the right optimization across our assets.

Operator

Thank you. Our next question comes from the line of Josh Spector with UBS. Please proceed with your question.

Speaker 11

Yes, hi, good morning. I wanted to ask on the cost side of the equation. So I mean you continue to make good progress on your value enhancement plan, but at the same time you're investing to stand up a new business in CLCS. I think correct me if I'm wrong, that's probably a big driver about why your SG and A continues to increase, up about $100,000,000 over the last couple of years. So I wonder if you can kind of break the pieces apart in terms of the benefit from VEP you see yourself getting, the costs that you're adding for that new business maybe over the next couple of years that don't have the EBITDA to match that at this point, and maybe inflation.

Speaker 11

So we can maybe better model over 2024 and 2025 what the actual drop through is of the savings versus cost versus new businesses? Thank you.

Speaker 2

Let me go first and then I hand over to Michael. Of course, I mean, we continue to be very pleased with our VEP program, the acceptance in the organization, the value that we have been able to create last year and that we continue to see being created this year. We are very well on track as such to reach or exceed our targets on the VEP for this year. I'll give you an example, I mean, because last year mid cycle margin value creation at the end of the year was slightly above 400,000,000 dollars Bottom line, with effective margins and effective products being sold, for the year was around, I mean, dollars 300,000,000 Well, a part of that $300,000,000 that's how the 3 pillars work, have been reinvested in building up the 2nd pillar, and that is the business unit circular and low carbon solutions. Not the complete amount we have invested, but a substantial amount of that 300,000,000 dollars has been reinvested to build up that pillar and as such also more before.

Speaker 2

That of course also leads, remember, we have bought out joint venture partners, we have done a number of bolt on acquisitions. So of course with that, of course, you get higher SG and A on your balance sheet. But all that is where it works together, I mean, the pillars in our strategy.

Speaker 3

Yes, Josh. And maybe just a few more comments in regards to cost. I think we have a pretty good reputation for operating lean, which we think actually gives us an advantage versus others. When times are good, we actually continue to be disciplined. Quite frankly, in 2023, I think underlying cost control was strong.

Speaker 3

SG and A as a percent of sale, sales totaled 3.8% despite revenue and cost headwinds. We also made investments in our footprint when we started up POTBA and circularity as you noted and VEP and some capability building across the enterprise. And clearly inflation was a significant headwind last year. And as we've moved into 2024, we continue to make some targeted investments. For example, in our CLCS business and our BEP program, where we will invest about $270,000,000 this year, a fourth of that is OpEx, 3 quarters of that is CapEx.

Speaker 3

But again, we're managing well and driving actions this year, both in CapEx and in OpEx. And so I'd say overall, cost control is strong and

Speaker 5

we are making targeted investments and you can continue to expect

Speaker 3

us to manage cost well going forward.

Speaker 2

And our portfolio management, of course, helps us with that. I mean, as you know, we're almost, I mean, at the point of closing the divestiture of ethylene oxide and derivatives. And we're almost closed at close at closing our netback joint venture and that triggers and of course also soon after that a final investment decision to expand with an additional line with newer technology. So, these things all work together is what I wanted to highlight.

Operator

Thank you. Our next question comes from the line of Hassan Ahmed with Alembic Global. Please proceed with your question.

Speaker 9

Good morning, Peter. Peter, you obviously mentioned a couple of the joint ventures and you recently did obviously the Nat Pet sort of venture out in Saudi Arabia as well. Would love to hear your latest and greatest thoughts about where you guys stand in terms of potentially maybe consolidating the Sasol joint venture?

Speaker 2

Thank you, Hassan. Good question. As you alluded to, I mean, in Saudi Arabia, we have lots of activities ongoing, not just with the existing joint ventures, but then of course also with the Natsped joint venture and then the next step with the investments. We are happy and actually that deal was on before my time, so I'm even super happy with the fact that we have entered in that joint venture with SASO. I would say generally spoken operation is running well in that joint venture.

Speaker 2

We're pleased, I mean, with our position that we have in there. And of course, we continue, as we have said multiple times, to always look at opportunities in the marketplace where we can grow and upgrade the core. So, we are not focusing now on just one thing, but we are continuing to look at growing and upgrading the core. Having said that, we have multiple times outlined that we will be extremely disciplined in our M and A activities. Michael?

Speaker 3

Yes. And maybe Hassan, I'd say a couple more things. I think clearly, just looking back upon the last 2 years, we've been much more active from a portfolio management perspective, both on bringing things in, but also jettison things that where there are better owners. But I don't think it's appropriate for us to comment on a specific transaction.

Operator

Thank you. Our next question comes from the line of Kevin McCarthy with Vertical Research Partners. Please proceed with your question.

Speaker 7

Yes. Thank you and good morning. Peter, last March, in March of 'twenty 3, I should say, you unveiled some financial goals around your CLCS initiatives, dollars 500,000,000 in EBITDA by 2027 on route to $1,000,000,000 in 2,030. I was wondering if you could speak to your level of confidence in the March toward the first piece of that in 2027. And part of the reason I ask is, it sounds like you may not take a final investment decision on MorTeq in Houston until next year.

Speaker 7

I'm not sure exactly how long that might take to build out, but maybe you could kind of speak to the timing and ramp of tonnage extending on what you show on Slide 6, how does that 123 kilotons maybe ramp over the next 2 or 3 years toward your medium and long term goals?

Speaker 2

Yes. Thank you, Kevin, for your very good question. Generally spoken, we continue to be very confident that we can reach what we have set a bit more than 1 year ago on CN LCS, but also on the overall targets that we had put out there, €500,000,000 on CN LCS 2027 in additional profitability. We are making very good progress, I mean, with the entire family. You saw that one particular slide, I mean, doubling the volumes, very good margins that we are generating for the entire family.

Speaker 2

We as you know, Kevin, some of the parts go faster than other parts. So it's clear that the Renew, Circle and Renew family goes faster, because we have been in the market since a couple of years with the bio waste based polyolefins. The network that we have built up and continue to build up on the mechanical recycled, remember all the deals and it's also on the slide that we did in Europe, and then also starting in the United States is ramping up very fast as we had planned. And the advanced recycling parts, yes, of course, we have the first investment decision taken for the capacity in the Cologne hub. It's on track.

Speaker 2

Work is on the go. It's underway. The team is on the ground. We look positively on the timeline that we have there, I mean, to reach what we had said starting up by the end of 2025. And we are now looking at, of course, the concepts as we have alluded to and is in the slides to double that capacity, bring it, I mean, to Houston at the refinery sites, do the necessary work on the upgrading, looking at that from a technical point of view by leveraging upon our hydrotreaters that we have in the refining.

Speaker 2

So that one, I would say, you're right. I mean, final investment decision, not this year, but next year, and then it takes time to build. But in the meantime, what we are also doing is we are working up as remember, we always said we will be technology agnostic. So, we work together with different partners on the Advanced Recycling side. So, as an offtaker of plastic oil that we can either upgrade or move directly into our steam crackers.

Speaker 2

So, from that perspective, it gives us the possibility to continue to grow with the advanced recycling polyolefins in the marketplace. So I have no indications that we would not be able to reach our targets. We continue to be very confident.

Operator

Thank you. Ladies and gentlemen, our final question this morning comes from the line of Vincent Andrews with Morgan Stanley. Please proceed with your question.

Speaker 7

Thanks and good morning everyone. Can I just ask on the cash flow going forward? Are we done with the working capital builds or is there probably a little bit more of that to come in the Q2?

Speaker 3

Vincent, it's Michael. Yes, well, I'd probably answer the question in two ways. I think for the Q2, it should be relatively stable, but I hope things actually get better in the second half when we consume a bit. But that said, I don't expect us to consume anything that's material.

Operator

Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Mr. Vannekar for any final comments. Yes.

Speaker 2

Thank you, everybody. Very good questions. But of course, I was missing a little bit questions around our propylene oxide business, our oxyfuels business and our APS business. And let me highlight that the team is doing a fantastic work in all of these businesses. We are making very good progress and we are moving, I mean, to driving season, which as you know is always good for an Oxyfuels, I mean, from an Oxyfuels point of view.

Speaker 2

We continue to see early indications that the overall goods demand is going up, which is of course also good for our leadership position that we have in low cost and low carbon footprint propylene oxide. And I'm also very pleased, as I said in the prepared remarks, by seeing how we are on track in the transformation of our APS business, Our win rates or service level, these are things that we are looking at and Torkel and his team are making fantastic progress. So also very pleased with that, despite, of course, certain markets on a global basis, especially in durable goods not being at the top level yet. So, it is very, very promising when those markets then also continue back, I mean, to sustainable growth. So, thank you all for the thoughts, for questions.

Speaker 2

And of course, we look forward to sharing updates over the coming months as we continue to make progress on our long term strategy. We hope you all have a great weekend. Stay well and stay safe. Thank you.

Operator

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.

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Earnings Conference Call
LyondellBasell Industries Q1 2024
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