LyondellBasell Industries Q2 2021 Earnings Call Transcript

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Provided by AlphaStreet
July 30, 2021
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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'd now like to turn the conference over to Mr. David Kinney, Head of Investor Relations. Sir, you may begin.

David Kinney
Head of Investor Relations at LyondellBasell Industries

Thank you, operator. Hello, and welcome to LyondellBasell's Second Quarter 2021 Teleconference. 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.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 risks 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 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 1:00 p.m. Eastern Time today until August 30 by calling (877) 660-6853 in the United States, and (201) 612-7415 outside the United States. The passcode for both numbers is 137-21413. During today's call, we will focus on second quarter results, the current environment, our near-term outlook and provide an update on our growth initiatives. 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.

With that being said, I would now like to turn the call over to Bob.

Bhavesh V. (Bob) Patel
Chief Executive Officer at LyondellBasell Industries

Thank you, Dave. 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 a tragic incident this week at our La Porte facility, which resulted in the death of two contractors and injuries to several additional contractors and employees. Every day, we work diligently to ensure that the colleagues, the friends and most importantly, the families of our employees and contractors never have to receive the calls that went out last Tuesday evening. Notifying them for the loss or injury of a loved one. Our investigation is underway, and it will be some time before we reach a conclusive determination recovery for all of the injured. Please turn to slide three, and let's review our second quarter financial results with more than $3 billion of quarterly EBITDA. Despite the increased working capital required by higher prices and volumes, we generated $1.9 billion of cash from operating activities.

These results demonstrate how LyondellBasell's 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 [Technical Issues] a 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 company's commitment to safe and reliable operations. Let's turn to slide four and review our recent safety performance. As of the end of June, our year-to-date total recordable incident rate of 0.22 for employees and contractors remained in the top 10% of our industry. As 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 is to learn from all incidents and achieve a goal 0 work environment that prevents such tragedies from occurring. On slide five, I would like to highlight our most recent sustainability report that we released last month.

This report focuses on LyondellBasell's efforts to address three urgent global challenges for 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 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 technologies. We will be sharing more details on our carbon reduction plans over the coming months.

In our work to advance the thriving society, I'm very pleased to see the enthusiasm from our employees [Technical Issues] with our emphasis on a safe work culture and community engagement, our work to capture the full potential of our diverse 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 six, I would like to point out why we believe that markets will be stronger for longer. COVID vaccinations have been the driving force behind the reopening of societies and the rebounding global economy.

As of July, only 14% of the global population is fully vaccinated. While the U.S. and roughly a dozen other countries 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 increased spread among unvaccinated populations and the rise of variants, we still have much work ahead of us to contain the coronavirus and realize 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 averaged $3.5 trillion during the first five months of 2021, nearly three times the level seen in 2019. With fiscal stimulus continuing to flow into the economy, consumers are both motivated and well funded to [Technical Issues]. This unfulfilled demand will persist to drive strong industrial production and demand for our materials for quite some time. One 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 this aging fleet of cars and trucks. Despite higher prices and supply chain constraints, demand for our products serving automotive manufacturing are forecast to increase a total of 10% in 2021 and an additional 11% during 2022. Strong U.S. household formation during the pandemic has evolved into a robust housing market. LyondellBasell benefits from both direct demand for building and construction materials as well as demand for our products used in the myriad of furniture, appliances and other goods that complete a new home. And as vaccinations facilitate improvements in global mobility, LyondellBasell's products 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's oxyfuels and refining businesses. In short, we remain confident that persistently 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.

Michael McMurray
Executive Vice President and Chief Financial Officer at LyondellBasell Industries

Thank you, Bob. Good morning, everyone. Please turn to slide seven, 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 four 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 eight and review the details of our cash generation and deployment during the second quarter. As I have 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 increasing the 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 million in 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. 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. One modeling item of note. Our original full year net interest expense guidance of $430 million did not include extinguishment costs 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 nine to review our quarterly profitability.

In the second quarter of 2021, LyondellBasell's 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 recovery in global economy and our growth investments. Markets remained tight during the second quarter as the industry returned 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. Persistent consumer and industrial demand has met tight markets, leading to seven consecutive months of 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 backlogs in the increasing demand for transportation fuels will all support strong margins across LyondellBasell's 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 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 to achieve improved results at all stages of the business cycle. Now let's review second quarter results for each of our segments. As mentioned, my discussion will describe our underlying business results, I will begin with our Olefins and Polyolefins Americas segment on slide 10. Strong demand, improved margins and our growth investments drove second quarter EBITDA to a record of $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.

LyondellBasell's cracker operating rates increased to 93% and following the first quarter Texas weather events, about five points above the second quarter industry average. 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 O&P and Americas businesses during the third quarter. While 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 month in 2021. Now please turn to slide 11 to review the performance of our Olefins and Polyolefins Europe, Asia and International segment. Similar to the Americas, robust demand and improving margins in our EAI markets drove second quarter EBITDA to a record $708 million, $296 million higher than the first quarter.

Olefins results improved by $100 million as margins increased driven by higher ethylene and coproduct prices. Demand was robust during the quarter, and we operated our crackers at a rate of 96%, more than 10% above industry benchmarks. Combined polyolefin results increased approximately $180 million compared to the prior quarter. Strong polymer demand drove spread improvements with price increases for polyethylene and polypropylene outpacing monomer prices. Margin improvements were partially offset by a small decline in polyolefin volume. 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 and increased our sales volumes following the Texas weather events and some plant maintenance during the prior quarter. Second quarter EBITDA was $596 million, more than three 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.

Oxyfuels and related products results increased by $70 million, driven by higher margins, benefiting from improved demand and higher gasoline prices. We expect continued strength in durable goods and improving transportation fuels demand to increase third quarter volumes for our I&D segment. Margins could slightly moderate if industry production rates remain strong. Please turn to slide 13 and allow me to dive a little deeper into transportation trends that support our improving outlook for LyondellBasell's oxyfuels and refined products. Demand for transportation fuels are rebounding from pandemic close. Total gasoline and distillate demand in June was within 5% of prepandemic levels.

Reduced demand in margins for refined products is mostly due to lagging demand for jet fuel associated with business and international travel. Jet fuel demand remains stubbornly below pre-pandemic levels. As vaccinations in global travel resumes through 2022 and 2023, we expect refining margins will improve and drive additional earnings power for LyondellBasell's Houston refinery. The chart on the left illustrates the Northwest Europe raw material margin for MTBE, which is an industry marker for our oxyfuels products sold into gasoline blending markets around the world. While Oxyfuels are typically a reliable performing business through the cycle, low demand for gasoline pushed this margin into breakeven or negative territory over the prior four quarters.

Since the beginning of this year, global demand for gasoline and gasoline blending components such as MTBE and ETBE has improved, increasing the margin to an average of $167 per ton during the second quarter. This is a significant rebound and well within the historical range shown by [Technical Issues] Now let's move forward and review the results of our Advanced Polymer Solutions segment on slide 14. The 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, lower than the first quarter.

Compounding & Solutions results decreased by about $25 million as volumes decline for polymers supplied to the automotive sector appliance manufacturing and other industries that were constrained by chip shortages. Advanced 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 compound supply to automotive electronics applications as semiconductor supply constraints decrease over the coming quarters.

Now let's turn to slide 15 and discuss [Technical Issues] and lower prices for 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 2-1-1 benchmark increased by $6.14 per barrel to $21.46 per barrel. The average crude throughput at the refinery increased to 248,000 barrels per day, an 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 improving demand for gasoline is expected to improve refining margins and could enable our refinery to return to profitability before the end of 2021. And as mentioned, full margin recovery will require a stronger rebound in 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, resulting in a second 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 timing of licensing revenue and catalyst demand.

With that, I'll turn the call over to Bob.

Bhavesh V. (Bob) Patel
Chief Executive Officer at LyondellBasell Industries

Thank you, Michael. 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. And despite the challenges from variants, 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 as reopening proceeds globally. Low inventories due to supply constraints and logistics disruptions will only serve to extend tight market conditions, downstream customer backlogs and persistent demand bode well for continued strength in LyondellBasell's order books. In polyethylene, strong U.S. and Latin American demand has overtaken volumes that previously flowed from the U.S. to export markets in Asia. As logistics constraints subside, and U.S. PG exports to Asia resume, producers will need to refill a depleted supply chain of 500,000 tons or more that is not fully captured in industry statistics. In North America, we expect markets for PE and PP will remain tight into next year.

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 oxyfuels and refining businesses, providing additional earnings upside for LyondellBasell. Let me close with slide 18. Our second quarter results provide clear evidence of LyondellBasell's progress in 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. In today's strong markets, our second quarter EBITDA results are 38% higher than our previous record. By 2023, we expect that our recent growth investments will provide an additional $1.5 billion of mid-cycle EBITDA earnings capability relative to 2017. Our value-driven growth investments should propel stronger performance in 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 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 the market. Further investments in petrochemicals are proceeding at a manageable rate and recent project cancellations and delays demonstrate capital discipline by market participants. At LyondellBasell, we're focused on providing leadership for our industry to establish a more sustainable future with new circular business models. We will increase our capacity to serve the growing market demand for circulun-branded polymers produced from recycled and renewable feedstocks as we work toward our goal of annually producing two million tons [Technical Issues] robust returns from our growing global business portfolio and look forward to updating you on our progress over the coming quarters.

We're now pleased to take your questions.

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Operator

[Operator Instructions] Our first question comes from Jeff Zekauskas with JPMorgan. Please proceed with your question.

Bhavesh V. (Bob) Patel
Chief Executive Officer at LyondellBasell Industries

Hi Good morning Jeff, thank you for that question. On inventory, we are starting to restore inventories back to more normal levels. They're better than they were -- or higher than they were back in Q1, but still not above historic levels. And we continue to be hand to mouth on several grades, both in the U.S. and in Europe. They are improving. One other comment about inventory is that in the U.S., in particular, we're not positioned to do a lot of exports. That will require another level of inventory, which we don't have today. So the inventory 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 Q3 and early Q4 in the U.S. So contract discussions are ongoing, and there are more announcements out there for August.

Operator

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

Steve Byrne
Analyst at Bank of America

Yes. Thank you. I'm curious as to how much visibility do you have about inventory levels at your customers and whether their inventory levels are back to normal or still low or maybe they're starting to run them down. Just curious on that. And is there anything structural that precludes your U.S. customers from from looking to the international market to fulfill their demand. Is there something that precludes them from really doing that, whether it's product quality or or the type of material they need from converters. Anything you can comment on that?

Bhavesh V. (Bob) Patel
Chief Executive Officer at LyondellBasell Industries

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 we've had some intermittent unplanned outages recently, we -- they seem to not have much inventory because for a day or two late, they're very concerned. So anecdotally, I would say there's not much inventory downstream, especially because there's this anticipation of pricing leveling off as well. And we've been talking about that for months now and prices continue to rise because of the persistent demand strength. So all of that says to me, customers are not holding an extraordinary amount of inventory.

When we're late, they call us right away. Secondly, your question about imports. Historically, and even today, imports 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 costs, including container cost is three to four times what it used to be prepandemic. So all of that limits the amount of imports that really come in and the customer's ability to import product.

Operator

Thank you. Our next question comes from PJ Juvekar with Citi. Please proceed with your questions.

PJ Juvekar
Analyst at Smith Barney Citigroup

Hi. Good morning Bob.

Bhavesh V. (Bob) Patel
Chief Executive Officer at LyondellBasell Industries

Good morning PJ

PJ Juvekar
Analyst at Smith Barney Citigroup

I hear your commentary about stronger for longer. But even if one takes a view that this tightness is temporary, maybe last for six months to a 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. What would you do with that free cash flow? Would you either go towards sort of green projects like CCS or CO2 recycling or hydrogen projects? Or B, would you rather go into M&A opportunity. There are a lot of mid-cap companies in chemical industry that would fit well with your IND or APS segment. How do you think about allocating this extra free cash flow?

Bhavesh V. (Bob) Patel
Chief Executive Officer at LyondellBasell Industries

Excellent. Thank you for that question, P.J. There's a lot there. First of all, you're absolutely right. This debate of where we are in the cycle whether we're at elevated levels or not, I think there's a couple of points to be made. One is that what's lost in this debate is that LyondellBasell's mid-cycle earnings have stepped up through the cycle earnings power is up by $1 billion to $1.1 billion so far in 2021 compared to 2017. And when we have a full year of PO/TBA production in '23, that will add another $400 million to $500 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 or 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 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'll continue to look for that. In terms of green projects, we're 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 a 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.

Operator

Thank you. Our next question comes from Bob Koort with Goldman Sachs. Please proceed with your question.

Bob Koort
Analyst at The Goldman Sachs Group

Thank you. Good morning. Bob, you mentioned that the freight rates crowd out imports in the U.S. market. I assume those freight rates are a friction point on export. So you had mentioned that maybe there could be more demand than we've seen. And I presume part of that would be into the export market. So how do you think it all plays out? I was looking this morning, it looks like export prices are $0.15, $0.20 less than domestic prices for well molding polyethylene. So do you have to give in on price in order to move that volume as inventories rebuild to do maybe offshore prices have to come up towards U.S. prices? How do you see that dynamic playing out?

Bhavesh V. (Bob) Patel
Chief Executive Officer at LyondellBasell Industries

Yes. Great question, Bob. So first of all, historically, even pre-pandemic freight rates coming from Asia to the U.S. were always higher than freight rates going out of U.S. to Asia because of the backhaul sort of concept on product going out. Typically, we would pay about $40 per ton, excluding packaging, just freight to get polyethylene, for example, from the Gulf Coast to Asia, 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 that are 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 the year progresses and some of 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 relieve themselves.

Operator

Thank you. Our next question comes from Mike Sison with Wells Fargo. Please proceed with your question.

Mike Sison
Analyst at Wells Fargo & Company

Hi. Good morning. Nice quarter, guys. When you think about your profitability heading into the second half of the year, given -- I think your outlook tends to be a little bit more positive than the consultants. Do you think your margins will continue to improve sequentially?

Bhavesh V. (Bob) Patel
Chief Executive Officer at LyondellBasell Industries

Yes, Good morning Mike. So first of all, you--know with all due respect to all prognosticators underestimated demands consistently over last year and you know my--comment about demand being stronger for longer, I think that's being played out and we've been talking about that since the last earnings call, I think that will continue. I mean, if you think about it, we still have global reopening in front of us, so many 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, we'll benefit as mobility increases. So when you think about all those factors, it's hard to imagine that demand would weaken in the second half of the year.

Now we do have some other forces at play. We have feedstocks are coming up a bit with natural gas in the U.S. coming up. fact spreads haven't really opened up, but feedstocks are coming up. But my sense is in this kind of market environment, there's some ability to pass some of that through. As a company, we have some 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 remains to be seen if we can 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, we'll 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 second half earnings for us.

Operator

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

Kevin McCarthy
Analyst at Vertical Research Partners

Good morning Bob, I was wondering if you could update us on your outlook for the propylene chain and specifically speak to polypropylene inventories, you mentioned a few times that you're seeing a substantial order backlog for durable goods. It looks like PP producers ran pretty hard in the quarter. How do you see inventories on that chain? And what implications do you see for polypropylene prices versus monomer as we move forward through the back half of the year?

Bhavesh V. (Bob) Patel
Chief Executive Officer at LyondellBasell Industries

All right. Thanks, Kevin. So I see continued strength. And I think as durables strengthen and especially auto because that is one of the larger end uses for polypropylene. For us, inventories are still low, and they're actually tighter on polypropylene than they are on polyethylene. We're kind of hand them out. And we have the lightning strike at Lake Charles, which set us back about a week or 2. And so we're very tight on polypropylene 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, the other benefit that we're waiting to see is in our APS segment, with the auto sector being sluggish because of the chip shortage, we're not seeing the full earnings power of APS just yet, and that's a very significant part of the APS segment. Our service of the automotive market. So I think polypropylene is going to be very strong. I think propylene is going to be persistently high for the foreseeable future.

Operator

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

Frank Mitsch
Analyst at Fermium Research

Yes, good morning. Let me offer 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 month of the year. I mean how anomalous is that? And do you have people on 100% order allocation? I mean, how are you dealing with it? I mean as I think about your volumes, the second quarter polyethylene volumes were basically flat with the first quarter, you know what are your thoughts about third quarter polyethylene volumes? Could you just stick in to that? That will be helpful.

Bhavesh V. (Bob) Patel
Chief Executive Officer at LyondellBasell Industries

Sure Frank. And Thank you for your word and support. On the August order book comment, I think 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, we can with confidence take on more orders, we're still constrained. So we're not selling 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 at contract minimums. And so bottom line is Q3 U.S. polyolefins sales should be higher than Q2 as we produce more and sell more. And I hope that, that trend continues.

Operator

Thank you. Our next question comes from Arun Viswanathan with RBC Capital Markets. Please proceed with your question.

Arun Viswanathan
Analyst at RBC Capital Markets

Okay. Thanks for taking my question. Congrats on the results. I just wanted to get your thoughts a little bit more on IND. It looks like your -- you had a pretty strong performance there. How would you kind of judge the acetyls chain as well as propylene oxide over the next, say, two to four quarters? Yes. Thanks.

Bhavesh V. (Bob) Patel
Chief Executive Officer at LyondellBasell Industries

Sure, Arun. So on propylene oxide demand is extremely strong margin, 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 shortages that plays right into PO also automotive because the seat cushions and all that come from urethanes. So we see a really good runway for propylene oxide going into the second half of the year and into even next year. Frankly, if the rate demand is growing, when our 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, in acetyls, continued strength from housing, and you see the paint market being very strong because of home improvement and people buying new houses and refurbishing them and so on. So I mean, I don't see a let up on either of those, adding to that, Arun, our oxyfuels business has recovered nicely as we see more mobility around the world. And still, Europe is largely in lockdown. And I think the best profitability in oxyfuels is still in front of us. And I think that will help offset any moderation in the O&P area as we see the fuels improving in Q3, Q4 and into next year.

Operator

Thank you. Our next question comes from Vincent Andrews with Morgan Stanley. Please proceed with your question.

Vincent Andrews
Analyst at Morgan Stanley

Thanks and good morning. Bob, wondering if you can give us an update on the molecular recycling initiative in the Italy plant.

Bhavesh V. (Bob) Patel
Chief Executive Officer at LyondellBasell Industries

Sure, Vincent. It's coming along very well. We're about to commission a semi works plant here in September. And we'll -- that will be the next stage of development of that technology. We continue to be very encouraged by the results we've seen at the bench scale. And we'll know within a couple of months what the bottlenecks are in that technology. And my hope is that in later in '22 and into '23, we're prepared to make an investment decision on a medium-scale molecular recycling plant, which could be in production in 25, plus or minus.

Operator

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

Hassan Ahmed
Analyst at Alembic Global Advisors

Good morning Bob.

Bhavesh V. (Bob) Patel
Chief Executive Officer at LyondellBasell Industries

Good morning.

Hassan Ahmed
Analyst at Alembic Global Advisors

Bob, wanted to revisit some of your comments about the I&D segment. I mean, obviously, similar to most businesses, 2020 was a bit rough. But nice bump up back to, call it, a run rate of $600 million in quarterly EBITDA. And historically, you've talked about the I&D segment being a pretty steady earner. And as I sort of sit there and think about that and the steadiness of the earnings trajectory, and some of the commentary you made from the sounds of it, it seems that maybe the earnings power on a quarterly basis is maybe even north of $700 million steady early basis. So call it almost $3 billion in steady EBITDA annualized from that segment. Is that the right way to think about it?

Bhavesh V. (Bob) Patel
Chief Executive Officer at LyondellBasell Industries

Yes. Thank you, Hassan. Well, one thing that we didn't experience in the past was a complete shutdown of global economy, and that caused more volatility in IND because of the oxyfuels typically, it's been very stable. I think today, with the assets we have, you should still think about IND as a $1.5 billion, plus or minus 15%. And then as we add the PO/TBA project, we should be able to be consistently above $2 billion in IND with upside when markets are strong like they are today. So that's how you should think about earnings power, 1.5 maybe to 1.7 in that range, plus or minus. And then after the PO/TBA project, mid-cycle consistently above $2 billion and in periods like this, well, well above.

Operator

Thank you. Our next question comes from David Begleiter with Deutsche Bank. Please proceed with your question.

David Begleiter
Analyst at Deutsche Bank Aktiengesellschaft

Thank you. Bob, just on refinery, do you think it can still be breakeven in Q3 and give you a comment about it being potentially profitable in Q4. How are you thinking about that business in 2022? Thank you.

Bhavesh V. (Bob) Patel
Chief Executive Officer at LyondellBasell Industries

Thanks, David. So on the refinery, I mean I think we need a reset in RINs, frankly. That would help a lot to get to breakeven. And as mobility increases, I think we have a good shot of Q4 being in the black. It all -- it really depends on how this variant plays out. If you think about our company, that most parts of the company have shown very good resilience through the pandemic, in fact, strength in areas like packaging. The refinery has been challenged, 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 a RINs reset. And in Q4, certainly, we should be in the black.

Operator

Thank you. Our next question comes from John Roberts with UBS. Please proceed with your question.

John Roberts
Analyst at UBS Group

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 [Indecipherable].

Bhavesh V. (Bob) Patel
Chief Executive Officer at LyondellBasell Industries

Well, there's a lot there, and I'll probably ask you to follow up with Dave afterwards on some of the details. But let me just talk about a couple of the JV. So first of all, our Saudi JVs, remember that the cracker is in ethane cracker. That's a big driver. And as oil price rises and as prices go up globally on polyethylene, that JV tends to do very well. That's a big contributor to the increase in earnings from the existing JVs. And then the Sasol JV has done extremely well with the merchant ethylene that we sell from that and the ethane to polyethylene cash margins being where they are today. Between operating cash flow and the expected tax refund on that investment, we expect to recover or get back half of our investment in 2021. So that's been a big driver. And then incrementally, all the other JVs 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 and the Sasol JV being brand new that was not in our P&L for most of last year.

Operator

Thank you. Our next question comes from Jaideep Pandya with Enfield Research. Please proceed with your question.

Jaideep Pandya
Analyst at Enfield Research

Thanks. Just a question really around your volumes in Q2. What was sort of constraining you? Because if I look at polyethylene, polypropylene, both in the U.S. and Europe, it not sequentially your volume in the quarter? And then just a little bit more longer-term question. When we think about your businesses, which are your businesses which you think have sort of room to grow in spreads as well as volumes as the economy reopens in 2022 and 2023 and people drive more, fly more, etc. Thanks.

Bhavesh V. (Bob) Patel
Chief Executive Officer at LyondellBasell Industries

Sure. So Jai, first of all, on volume constraints in Q2. Remember, we still had some freeze impacts early in Q2 here in the U.S. And then we had some unplanned downtime in the polymers. But sequentially, we were able to build a bit of inventory and we had pretty good production. So I think the headline, there's a lot underneath the details in which product lines were higher or lower. My sense is that the fuels part of the business was still a bit weak in Q2, 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. Definitely, it's in fuels. I do think there's incremental potential in spread improvement in the polymers area globally. But where I think we have the greatest opportunity for a step up in volume and and spread is in oxyfuels and in gasoline and distillate here in the U.S., and we hope that will be very meaningful as we work through Q3 and certainly into Q4.

Operator

Thank you. Our next question comes from Matthew Blair with Tudor, Pickering, Holt & Company. Please proceed with your question.

Matthew Blair
Analyst at Tudor Pickering

Hi. Good morning Bob. I'm sorry to hear about the accident. I had a question on the renewables side. So you have several initiatives on the table. I think it's probably fair to say that Lyondell is one of the leaders in this area. But at the same time, investors have a hard time gauging 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 QCP or Mortech or CircuLin, what are you most excited about? And what has the potential to really move the needle for you?

Bhavesh V. (Bob) Patel
Chief Executive Officer at LyondellBasell Industries

Sure. Thank you, Matthew, and I appreciate your words of support. Yes. I mean I have these conversations with investors often, and this is going to build momentum over the decade. First of all, recall that our goal is to have about two million tons of recycled or renewable-based plastics by the end of the decade by 2030. We think that will probably represent about 15% of our production. I mean think about our work on Maritech as well as on circularity on QCP, mechanical recycling and the circulun brand, in particular, that's all part of our polyolefin franchise. And given our capabilities in research and development, application development, we're leading in this area in circularity and we'll continue to it's just part of the polyolefin business is how I would think about it, not some separate significant step up in earnings, but it's part of making the polyolefin business work long term.

Operator

Thank you. Our final question comes from Jonathan Rao with JPMorgan. Please proceed with your question.

Jonathan Rao
Analyst at JPMorgan Chase & Co.

Hi. 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've referenced, that is a net target. I'm curious kind of how you think about paying down more debt versus just building cash on the balance sheet. And in the case of the former, possibly where within the debt capital structure you think about targeting. Thanks.

Bhavesh V. (Bob) Patel
Chief Executive Officer at LyondellBasell Industries

Yes. I'll ask Michael to respond to that question.

Michael McMurray
Executive Vice President and Chief Financial Officer at LyondellBasell Industries

No, sure. Great. So great question. Maybe just a couple of points. What I would say is that our overall maturity profile 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-date basis, we've taken out $1.8 billion that was done through our term loan and some of our 2023. 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 obviously something that is in a prime focus. And then lastly, we typically have a bit of commercial paper that's outstanding 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. And then just from a targeting point of view, kind of through the cycle, our total debt-to-EBITDA target is about 1.5 times to 2.5 times. And so quite frankly, as we're progressing through this year, we're in great shape from that perspective as well as evidenced by the upgrade that we received a week ago from S&P.

Bhavesh V. (Bob) Patel
Chief Executive Officer at LyondellBasell Industries

Great. Thank you, Michael. And Jonathan, let's see how the year progresses. When we get this $4 billion put away, let's continue the dialogue on capital allocation. I think we've proven over the years that we've been very disciplined in this area and you should continue to expect that from us.

Operator

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session, and I will now turn the call over to Bob Patel for closing remarks.

Bhavesh V. (Bob) Patel
Chief Executive Officer at LyondellBasell Industries

All right. Thank you, Alex. In Q2 2021, LyondellBasell has demonstrated its turbocharged earnings power in 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 and many parts of the world, backlogs in many product areas that have to be relieved, inventory restocking and increased mobility. We, at LyondellBasell, are really well positioned to significantly strengthen our investment-grade balance sheet, pay down debt and to capitalize on a stronger for longer market environment. The main point that I hope investors got out of the call today is that we've -- whether where we can debate about where we are in the cycle, LyondellBasell have increased our earnings power through the cycle by more than $1 billion to date compared to 2017. And after our PO/TBA project is online, we'll add another $500 million of EBITDA in earnings power. All of that should provide for very robust cash flow, which we will deploy in a very disciplined way to the benefit of our shareholders. Thank you for your interest, and hope you all have a great weekend.

Operator

[Operator Closing Remarks]

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