LyondellBasell Industries Q2 2022 Earnings Report

LyondellBasell Industries EPS Results

• Actual EPS: $5.19
• Consensus EPS: $4.97
• Beat/Miss: Beat by +$0.22
• One Year Ago EPS: $6.13

LyondellBasell Industries Revenue Results

• Actual Revenue: $14.84 billion
• Expected Revenue: $13.70 billion
• Beat/Miss: Beat by +$1.14 billion
• YoY Revenue Growth: +28.30%

LyondellBasell Industries Announcement Details

• Quarter: Q2 2022
• Date: 7/29/2022
• Time: Before Market Opens
• Conference Call Date: Friday, July 29, 2022
• Conference Call Time: 4:08AM ET

LyondellBasell Industries (NYSE:LYB) (NYSE: LYB) is a global chemical company headquartered in Houston, Texas, that specializes in the production of polyolefins and advanced polymers. Through its extensive portfolio, the company supplies raw materials for a wide range of end markets, including packaging, automotive, construction, electronics and consumer goods. By combining proprietary process technologies with expertise in catalysts, LyondellBasell aims to deliver value-added solutions that enhance product performance and sustainability.

The company’s integrated operations encompass the manufacture of olefins and polyolefins, advanced polymer products, chemical intermediates and refining activities. Its olefins and polyolefins division produces ethylene, propylene and polyethylene grades under brands such as Hostalen and Lupolen. In its advanced polymers segment, LyondellBasell develops specialty compounds and high-performance materials for applications requiring durability, flexibility or chemical resistance. The intermediates business supplies key feedstocks to both internal and external customers, while the refining arm processes crude oil into fuels and feedstocks for downstream chemical production.

LyondellBasell was formed in December 2007 through the merger of Houston-based Lyondell Chemical Company and Basell Polyolefins, a joint venture between Royal Dutch Shell and BASF. Following a financial restructuring that concluded in 2010, the company emerged with a streamlined balance sheet and renewed focus on operational efficiency and growth. Over the years, LyondellBasell has invested in capacity expansions, technology licensing and sustainability initiatives aimed at reducing greenhouse gas emissions and increasing recycling of plastic waste.

Operating in more than 100 sites across the Americas, Europe, Asia and the Middle East, LyondellBasell serves a diversified global customer base. The company employs approximately 18,000 people worldwide and maintains regional research and technical centers to drive innovation. LyondellBasell is led by President and Chief Executive Officer Bob Patel, who oversees corporate strategy, global operations and ongoing efforts to advance circular economy solutions in the chemical industry.

LyondellBasell Industries Q2 2022 Earnings Call Transcript

Key Takeaways

• Strong Q2 results: EBITDA rose 20% sequentially to $2.5 billion, EPS was $5.19, and operating cash flow of $1.6 billion drove a 24% 12-month ROIC.
• Intermediates & Derivatives delivered record earnings on exceptionally high oxyfuels margins, and commissioning of the world-scale Houston POTBA plant begins in Q4 2022 with full ramp in Q1 2023.
• Renewable and circular commitments advanced with four PPAs for 380 MW of wind and solar (10% of global power) and a forecast increase of renewable feedstock processing from 12 kt to 40 kt in 2022, building on 140 kt sold under the CircleM brand.
• Safety performance improved significantly with a 40% reduction in the year-to-date TRIR to 0.12, underscoring the CEO’s commitment to zero injuries.
• Disciplined capital allocation returned $2.1 billion to shareholders through a $5.20 special dividend and dividend increase, while investing $530 million in maintenance and growth, including the nearly completed POTBA project.

Presentation

[Operator]

Hello, and welcome to the LyondellBasell teleconference. At the request of LyondellBasell, this conference is being recorded for instant replay purposes. Following today's presentation, we will conduct a question and answer session. I would now like to turn the conference over to Mr. David Kinney, Head of Investor Relations. Sir, you may begin.

[David Kinney, Head of Investor Relations at LyondellBasell]

Thank you, operator. Before we begin the discussion, I would like to point out that a slide presentation accompanies today's call and is available on our website at www.lyondellbasell.com/investorrelations. Today, we will be discussing our business results while making reference to some forward-looking statements and non-GAAP financial measures. We believe the forward-looking statements are based upon reasonable assumptions and the alternative measures are useful to investors. Nonetheless, the forward-looking statements are subject to significant risk and uncertainty. We encourage you to learn more about the factors that could lead our actual results to differ by reviewing the cautionary statements in the presentation slides in our regulatory filings, which are also available on our investor relations website. 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.

[David Kinney, Head of Investor Relations at LyondellBasell]

A recording of this call will be available by telephone beginning at 1 P.M. Eastern Time today until August 29th by calling 877-660-6853 in the United States, and 201-612-7415 outside the United States. The access code for both numbers is 13729909. Joining today's call will be Peter Vanacker, LyondellBasell's Chief Executive Officer, our CFO, Michael McMurray, Ken Lane, our Executive Vice President of Global Olefins and Polyolefins, Torkel Rhenman, EVP of Intermediates and Derivatives and Refining, and Jim Guilfoyle, EVP of Advanced Polymer Solutions and Supply Chain. During today's call, we will focus on second quarter results, current market dynamics, and our near-term outlook.

[David Kinney, Head of Investor Relations at LyondellBasell]

Before turning the call over to Peter, I would like to call your attention to the non-cash lower of cost or market inventory adjustments, or LCM, and impairments that we have discussed on past calls. LCM adjustments are related to our use of last in, first out or LIFO accounting and the volatility in prices for our raw materials and finished goods inventories. Impairment charges were recognized to write down assets to their estimated fair value. Impairments include the non-cash impairment of $69 million in the second quarter of 2022 that reflects the exit of our polypropylene business in Australia, and the non-cash impairment of $624 million in the fourth quarter of 2021 that reflects our evaluation of strategic options for the Houston Refinery.

[David Kinney, Head of Investor Relations at LyondellBasell]

Comments made on this call will be in regard to our underlying business results, excluding the impacts of impairments and LCM inventory adjustments. With that being said, I would now like to turn the call over to Peter.

[Peter Vanacker, CEO at LyondellBasell]

Thank you, Dave, and welcome to all of you. We appreciate you joining us today as we discuss our second quarter 2022 results. Let's begin with a short introduction of myself on slide number three. I am very grateful to be here on my first earnings call since becoming CEO of LyondellBasell on May 23rd. I grew up in Belgium and undertook an education as a Chemical Engineer with a specialization in Polymer Engineering. During my more than 32 years in the chemical industry, I have had the pleasure of working with LyondellBasell as a customer, a supplier, and a partner. During my time with Bayer, we invested in Lyondell's technology and assets while forming joint ventures for the production of propylene oxide. At Treofan, LyondellBasell was our largest polypropylene supplier.

[Peter Vanacker, CEO at LyondellBasell]

At Neste, we partnered with LyondellBasell to achieve the world's first commercial production of polyethylene and polypropylene from Neste's sustainable bio-based feedstocks. Since joining the board of directors in February and then starting as CEO in May, I have been meeting extensively with stakeholders around the world to learn more about how LyondellBasell has been so successful in creating value. More importantly, we have been asking ourselves how to best position the company to sustainably capture further value for years to come. I've always admired LyondellBasell's rich legacy of innovation and technology development, and I am pleased to confirm that our commitment and passion for safety and operational excellence are deeply embedded in our culture.

[Peter Vanacker, CEO at LyondellBasell]

These qualities will serve us well as work gets underway to advance our capabilities, to capture latent value embedded within the company, and establish LyondellBasell as a leader in serving the world's growing needs for circular and sustainable materials while reducing our carbon footprint. As Dave mentioned, additional members of our executive committee will join our earnings calls starting today. I believe that it is important for our investors to get to know our excellent leaders at LyondellBasell better, and I'm really impressed by this team, their market knowledge and leadership, and their passion for safety and value creation. Let's now turn to slide number four to discuss our excellent results during the second quarter. I am very happy with the outstanding work that LyondellBasell's leadership and employees have accomplished. This is a great way to start and gives me a lot of confidence for the future.

[Peter Vanacker, CEO at LyondellBasell]

Our businesses delivered strong earnings and cash generation during the second quarter, driven by record results from our Intermediates and Derivatives segments and strong refining margins. LyondellBasell's broad portfolio provided clear benefits as revenue grew sequentially by 13%, while margins expanded to support a more than 20% improvement in EBITDA. Earnings were $5.19 per share, and EBITDA was $2.5 billion, which resulted in $1.6 billion of cash from operating activities. Altogether, our company generated an impressive 24% return on invested capital over the last 12 months. Let's turn to slide number five and review our safety performance. LyondellBasell's commitment to safety leadership is outstanding and well-known. As the CEO, I will make sure that safety remains a consistent and unwavering cornerstone of our company's culture.

[Peter Vanacker, CEO at LyondellBasell]

During my career, I have witnessed that companies that are leaders in safety are also best in class in reliability and productivity, and as a result, in value creation. In 2022, the year to date total recordable incident rates for our global workforce improved by more than 40% to 0.12. This represents substantial progress towards our ultimate goal of zero injuries. I want to commend all of our employees and contractors for their clear commitment to Goal Zero. On slide six, we highlight some of our recent progress towards our sustainability goals. LyondellBasell's products, technologies, and solutions provide very important contributions to a more sustainable world. In addition, we have committed to industry-leading sustainability targets that improve this value. Over the past few weeks, we signed four renewable power purchase agreements for 380 MW of electrical generation capacity in Texas.

[Peter Vanacker, CEO at LyondellBasell]

These wind and solar projects will be able to supply more than 10% of LyondellBasell's global electricity needs, and represent meaningful progress towards the company's climate goal to procure a minimum of 50% of our electricity from renewable sources by 2030. These projects are expected to reduce the company's annual carbon dioxide emissions by approximately 370,000 tons, and represent the average annual electricity needs from about 100,000 U.S. homes. In addition to our renewable energy goals, LyondellBasell is growing our production of plastics utilizing renewable feedstocks under our CirculenRenew brands. Last year, we processed 12,000 tons of renewable feedstock in Europe, and we are forecasting to increase this number to 40,000 tons across both Europe and the United States during 2022.

[Peter Vanacker, CEO at LyondellBasell]

This material is being run through our existing ethylene cracker assets in Wesseling, Germany and Channelview, Texas, with the goal to increase scale over the coming years since we see that the demand for these products is growing. The growth of renewable feedstocks is one part of our broader mission to expand the reach of our sustainable products, including those sold under the Circulen brand. Since launching our Circulen brand in 2019, we have sold over 140,000 tons of products based on recycled and renewable feedstock. This represents more than the amount of polyethylene and polypropylene consumed by the population of Houston in one year. LyondellBasell is doing more than simply talking about the circular economy. We are building real businesses that can help provide a more sustainable future for our customers and society. Please turn to slide number seven to review our quarterly profitability.

[Peter Vanacker, CEO at LyondellBasell]

During the second quarter, our business portfolio delivered $2.5 billion of EBITDA, an improvement of $430 million compared to the prior quarter. LyondellBasell's results reflect how our global business portfolio can serve changing consumer needs. As in-person activities resume and global travel recovers, our oxyfuels and refining businesses are benefiting from increased demand. Strong North American demand and favorable NAFTA costs supported margins for our products in the Americas and Europe respectively, while higher ethane and energy costs, as well as inflation, created headwinds in these regions. We started to see moderating European demands due to high inflation at the end of the second quarter, and continue to pass through elevated energy and feedstock costs in the prices of our products where possible. During the quarter, China's zero-COVID measures and logistics constraints continued to impact both regional and global markets.

[Peter Vanacker, CEO at LyondellBasell]

We expect progress in China will continue to be challenging over the next few months, but anticipate that demands will recover towards the end of 2022. Let us turn to slide eight and review LyondellBasell's earnings power over the course of the first complete business cycle for our company. From 2011 to 2019, our portfolio of businesses delivered an average of $6.7 billion of EBITDA. Favorable markets and our growing asset base delivered $9.2 billion of EBITDA over the last 12 months, an increase of nearly 40% over the prior cycle average. With the commissioning of our new propylene oxide capacity underway, we expect that LyondellBasell's stepped up earnings performance will provide resilience through the next business cycle.

[Peter Vanacker, CEO at LyondellBasell]

With that, I will turn the call over to Michael first, then to each of our business leaders who will describe our financial and segment results in more detail.

[Michael McMurray, CFO at LyondellBasell]

Thank you, Peter, and good morning, everyone. Please turn to slide nine and let me begin with describing how the step up in our earnings is leading to increased cash generation from our business. In the second quarter, LyondellBasell generated $1.6 billion of cash from operating activities that contributed towards $8.3 billion in cash from operations over the last 12 months. During the past four quarters, our team efficiently converted over 90% of our EBITDA into cash. After accounting for sustaining capital reinvested in the business, we achieved a free operating cash flow yield of 26% relative to our market capitalization over the last 12 months. Let's continue with slide 10 and review the details of our cash generation and allocation during the second quarter.

[Michael McMurray, CFO at LyondellBasell]

The LyondellBasell team remains focused on extending our disciplined track record of capital allocation to provide for reinvestment in the company and generous returns for our shareholders. After generating $1.6 billion in cash from operations during the second quarter, we returned $2.1 billion to shareholders through a $5.20 per share special dividend, a 5% increase to our quarterly dividend that paid another $1.19 per share, all while repurchasing $45 million of our shares during the quarter. We continue to invest in maintenance and growth projects with approximately $530 million in capital expenditures, with a large portion funding our nearly completed world-scale PO/TBA plant. Now I'd like to provide an overview of the results for each of our segments on slide 11.

[Michael McMurray, CFO at LyondellBasell]

During the second quarter, LyondellBasell's business portfolio delivered nearly $2.5 billion of EBITDA. Our results reflect record profitability in our Intermediates and Derivatives segment, driven by strong oxyfuels margins, while our refining margins benefited from increased demand for transportation fuels. Conversely, margins in our O&P businesses encountered headwinds from rising costs for ethane feedstocks and moderating European demand. One modeling item of note, our original full-year pension expense guidance of approximately $55 million did not include a second quarter $94 million non-cash pension settlement charge that impacted earnings by $0.22 per share. As a result, our 2022 pension expense is expected to increase to approximately $180 million. During the third quarter, we anticipate that we will begin recording costs related to our planned exit from our refining business at the end of 2023.

[Michael McMurray, CFO at LyondellBasell]

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

[Ken Lane, EVP of Global Olefins and Polyolefins at LyondellBasell]

Thank you, Michael. Let's begin the individual segment discussions on slide 12 with the performance of our Olefins and Polyolefins Americas segment. Second quarter EBITDA was relatively flat at $905 million. North American demand for polyolefins continued to be very strong. Higher costs for ethane and energy pressured olefin margins and offset the benefits of improved polymer prices. During the third quarter, we expect continued strength and demand for polymers utilized in flexible packaging. Elevated costs for feedstocks and energy, as well as continuing export supply chain constraints and market headwinds, are likely to pressure margins. Now please turn to slide 13 to review the performance of our Olefins and Polyolefins Europe, Asia and International segment. Higher ethylene prices and relatively flat feedstock costs resulted in slightly higher second quarter EBITDA of $228 million.

[Ken Lane, EVP of Global Olefins and Polyolefins at LyondellBasell]

LyondellBasell's volumes declined due to downtime at our French cracker and moderating European demand for polymers in June. The extended maintenance in France resulted in an impact of $65 million to the segment during the second quarter. During the third quarter, we expect seasonally slower summer demand and continued higher energy costs associated with tight gas supply, which will pressure European markets. Also, with China demand remaining sluggish due to zero-COVID measures, the European market is also facing pricing pressure from dislocated Middle Eastern and Asian imports. Toward the end of this year, potential benefits from China's reopening could provide tailwinds for our businesses. With that, I'll turn the call over to Torkel.

[Torkel Rhenman, EVP of Intermediates and Derivatives and Refining at LyondellBasell]

Thank you, Ken. Please turn to slide 14 as we take a look at our Intermediates and Derivatives segment. Exceptional oxyfuel margins resulted in record second quarter segment EBITDA of $675 million.

[Torkel Rhenman, EVP of Intermediates and Derivatives and Refining at LyondellBasell]

During the quarter, styrene results benefited from tight market supply. We're beginning to see that softer demand for durable goods is leading to moderation in propylene oxide margins. In the third quarter, we expect margin compression across most product lines. Oxyfuel margins are also moderating, but expected to remain elevated at levels well above historical averages. The steady success of our Intermediates and Derivatives segments is rooted in the advantaged technologies underpinning our propylene oxide business. On slide 15, let me highlight the cost advantages of LyondellBasell's propylene oxide production. The chart on the right depicts the global cost curve for producing propylene oxide by asset. The lower an asset is positioned on the curve, the greater the cost advantage. As you can see, LyondellBasell's assets that produce propylene oxide with the tertiary butyl alcohol co-product are on the lowest or most favorable part of the cost curve.

[Torkel Rhenman, EVP of Intermediates and Derivatives and Refining at LyondellBasell]

PO/TBA assets represent roughly 50% of global capacity and derive their advantage from favorable costs for butane, raw materials, and strong pricing for the clean-burning high-octane oxyfuel products produced from tertiary butyl alcohol. LyondellBasell's plants that produce propylene oxide with a styrene monomer co-product are the next lowest cost technology and represent 35% share of global capacity. Much of the industry produces propylene oxide using older, higher-cost technologies, such as the chlorohydrin process. With the recent escalation in chlorine prices, the cost curve for chlorohydrin-based propylene oxide has only steepened, creating hardships for producers using this technology. LyondellBasell's advantage, PO/TBA technology, provides an excellent platform to address increasing global demand for propylene oxide and oxyfuels. Propylene oxide is used in the production of polyurethanes, versatile materials that save energy by producing insulation and reducing weight in a wide range of applications.

[Torkel Rhenman, EVP of Intermediates and Derivatives and Refining at LyondellBasell]

Oxyfuels are clean-burning, high-octane gasoline blending components that increase fuel efficiencies and improve air quality by reducing harmful emissions. Let's continue with slide 16 with an update on our PO/TBA project that we are completing here in Houston. This is the largest greenfield investment in LyondellBasell's history and will deliver much-needed capacity to serve growing demand for these products that provide sustainable solutions for our planet. We are thrilled to have nearly completed construction, and we have already begun commissioning the oxyfuel assets depicted in the photo on the right. The PO/TBA plant commissioning will begin during the fourth quarter, and we expect the integrated facility to start up in first quarter of 2023. Our ramp-up during 2023 will not provide for full year of production, but continued market strength is likely to support stronger margins than the mid-cycle economics depicted on this slide.

[Torkel Rhenman, EVP of Intermediates and Derivatives and Refining at LyondellBasell]

With LyondellBasell's advanced technology and affordable shale-advantaged butane feedstocks, our new capacity is starting up with the support of favorable markets. Now let's turn to slide 17 and discuss the results for our refining segment. Second quarter EBITDA was $418 million, with improved margins driven by increased demand for gasoline, diesel, and jet fuel. In the second quarter, the Maya 2-1-1 spread expanded significantly to about $56 per barrel. We operated the refinery at 94% of capacity with an average crude throughput of 252,000 barrels per day. In the near term, the Maya 2-1-1 spread is moderating from second quarter levels. We plan to run the refinery about 87% of capacity during the third quarter to perform a limited scope of plant maintenance. With that, I will turn the call over to Jim.

[Jim Guilfoyle, EVP of Advanced Polymer Solutions and Global Supply Chain at LyondellBasell]

Thank you, Torkel. Now let's review the results from our Advanced Polymer Solutions segment on slide 18. Our compounding and solutions business continued to be pressured by the slow recovery in automotive markets. In the first half of 2022, automotive production was 3% below the same period last year. Supply chain disruptions and raw material shortages continued to impact the recovery and therefore our compounding and solutions business. Industrial construction markets have demonstrated strength as Catalloy demand and margins supported higher advanced polymer results and a second quarter EBITDA for the segment of $118 million. We expect similar results for the segment in the third quarter as the gradual recovery in automotive production improves volumes while rising costs impact margins. A more significant step-up in earnings will be dependent upon stronger automotive production and the resolution of raw material constraints.

[Jim Guilfoyle, EVP of Advanced Polymer Solutions and Global Supply Chain at LyondellBasell]

With that, I will return the call back to Peter.

[Peter Vanacker, CEO at LyondellBasell]

Thank you again, team, for this impressive quarter. To close out on our segments, let's turn to slide number 19 and discuss the results for our technology business on behalf of Jim Seward, our Senior Vice President for R&D, Technology and Sustainability. I have always been highly impressed by the strength of LyondellBasell's international innovation and technology capabilities, the broad technology portfolio, and our leading market position. Very clearly, innovation is a core part of LyondellBasell's DNA.

[Peter Vanacker, CEO at LyondellBasell]

Second quarter EBITDA was $112 million, supported by strong licensing revenue and record year-to-date catalyst demand. While new licensing activity slowed, we have noted a recent shift in our licensing demands away from commodity polymers. Four of our five new licenses this year were sold in Asia to produce low-density polyethylene-vinyl acetate copolymers used in solar panel laminations and encapsulants that support the world's rising demand for renewable energy. In the third quarter, we expect our licensing revenue and catalyst volumes to moderate. This segment is likely to produce results similar to that seen in the first or second quarter of 2021. Now let me summarize the second quarter and the outlook for our company with slide number 20. LyondellBasell's second quarter results benefited from a balanced portfolio that captured considerable value with very efficient cash conversion.

[Peter Vanacker, CEO at LyondellBasell]

Margin expansion in our oxyfuels and refining businesses and solid demand for our products more than offset higher feedstock and energy costs. Our management team and board understands and respects the power of this portfolio. We are unwavering in our disciplined approach to capital allocation and demonstrated our commitment to shareholder returns during the second quarter. LyondellBasell is making measurable progress towards our ambitious interim and long-term goals for the reduction of our greenhouse gas emissions while developing sustainable businesses based on recycled and renewable materials. Our aim is to build upon our initial work, scale our reach, and establish LyondellBasell as a leader in serving the world's growing needs for circular and sustainable materials while reducing our carbon footprint. I began my journey as CEO with a commitment to leverage LyondellBasell's strength and capture value from both near-term and long-term opportunities.

[Peter Vanacker, CEO at LyondellBasell]

Over the past several months, we have undertaken an in-depth examination of our company to identify a North Star that will provide clarity and guiding principles for our strategic decisions, including our progress on circularity and sustainability. We are consulting with all stakeholders to ensure we have aligned on a durable and resilient strategy that will serve LyondellBasell well across a range of scenarios for many years. Last week, we had a very productive interim review with our board on this topic. We're planning further alignment during our board meetings in the second half of the year, with our work aimed towards communicating our North Star externally during an investor day in early 2023. In addition, a second work stream is underway to identify, prioritize, and execute on value opportunities that exist in LyondellBasell's current business structure.

[Peter Vanacker, CEO at LyondellBasell]

Thus far, our work has identified a considerable number of opportunities, such as creep capacity, the bottlenecks, automation, and energy-saving opportunities that can be delivered through modest investment by leveraging LyondellBasell's existing strengths. We believe the value of these projects is considerable and actionable. I am committed to communicating our initial assessment of this value opportunity and our timeline for realization during our third quarter earnings call. We look forward to sharing our vision for LyondellBasell and the additional value we plan to unlock from our company. We are now pleased to take your questions. Thank you.

[Operator]

Thank you, sir. Ladies and gentlemen, at this time, we will begin the question and answer session. As a reminder, if you have a question, please press the star followed by the one on your touch tone phone. If you'd like to withdraw your question, please press the star followed by the two. We do ask you to please limit to one question. Our first question comes from the line of Steve Byrne with Bank of America. Please go ahead.

[Steve Byrne, Analyst at Bank of America Securities]

Yes, thank you. I appreciate the slide 15 on your outlook for PO and Torkel, maybe you could comment on what do you think that slide or that chart would have looked like, you know, historically? Clearly now you have some reasons for it to be shaped like that with, you know, lower butane and, you know, higher ethylbenzene and certainly higher chlorine. But is it part of this just because TBA is so valuable right now? And is this the shape of this your outlook, you know, in the years to come? Is that part of your EBITDA forecast?

[Torkel Rhenman, EVP of Intermediates and Derivatives and Refining at LyondellBasell]

Hi, thank you for the question. I think as we looked at this, if you compare it to historical averages, it's actually widened in terms of the differential in terms of our competitive advantage. That's primarily driven by, you know, right now, the value of the co-products, and of course, that will fluctuate over the cycle. Fundamentally, we see for the next, you know, where we are right now and in the coming next two years, we are in a very favorable cycle situation. As you drive, if you look at energy costs going up, that will also favor our technology. I think fundamentally, where we are and look at it right now, I think our technology is very advantaged.

[Operator]

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

[Josh Spector, Analyst at UBS]

Yeah. Hi. Thanks for taking my question. I wanted to ask on polypropylene in the U.S. You know, looks like spreads were pretty volatile during the quarter, maybe starting at around $0.20 a pound to start, up near $0.50 in May, and kinda round-tripped back down. I'm curious, one, you know, is that similar to how your earnings progressed through the quarter? Two, what drove that volatility? And three, what's your outlook for the next couple of quarters in terms of the spreads? Thanks.

[Peter Vanacker, CEO at LyondellBasell]

Let me give that question, I mean, to you, Ken. You're close to that business, of course.

[Ken Lane, EVP of Global Olefins and Polyolefins at LyondellBasell]

Sure thing, Peter. Thanks, Josh, for the question. Look, a lot of the volatility that you've seen in the polypropylene market this year has been related to a lot of downtime in the industry, particularly in the U.S. I think that a lot of that is behind us. Inventory levels are frankly in our favor in polypropylene. I'd say looking forward, we mentioned some softening demand trends that we see around durable applications. We see that in the polypropylene area as well, but we still see very good demand in packaging. Net-net, we're gonna see some softening, some headwinds in polypropylene, but continued spreads that are gonna be above historic averages.

[Operator]

Thank you. Our next question comes from the line of Vincent Andrews with Morgan Stanley. Please go ahead.

[Vincent Andrews, Analyst at Morgan Stanley]

Thank you. Could you talk a little bit about naphtha costs in Europe and in Asia, which, you know, during the quarter seemed to disconnect from oil. Could you just sort of discuss what you see the outlook is there, and what impact it will have on your European operations?

[Peter Vanacker, CEO at LyondellBasell]

Yeah. Thank you, Vincent. A very good question on naphtha, and especially, I mean, what is happening in Europe and in China. As you notice well, I mean, naphtha is decoupling at the moment from what is happening on the oil side. But I think one needs to look at China and when demand will pick up substantially again in China, and that eventually would reestablish, in our opinion, the relationship between naphtha and crude oil. Giving a little bit of further information, I mean, around China, then we have seen a little bit already of an uptick in demand in China, but it was very modest during the second quarter.

[Peter Vanacker, CEO at LyondellBasell]

We expect that especially after October there will be quite some incentives coming out as it has been in the past. Towards the end of the year, beginning of next year, one may expect that demand in China would substantially pick up and be back on normal levels of growth that we have seen over the cycle.

[Operator]

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

[Frank Mitsch, Analyst at Fermium Research]

Uh-

[Frank Mitsch, Analyst at Fermium Research]

Peter, congrats on a very solid first quarter as CEO. May you have many more. If I could follow up on Europe and energy. How do you see the situation playing out if there is a material natural gas shortage? What would be the impact on LyondellBasell? What are the actions that you would take to possibly mitigate that?

[Peter Vanacker, CEO at LyondellBasell]

French, let me also say, I mean. [Foreign language]

[Frank Mitsch, Analyst at Fermium Research]

Thank you, pal.

[Peter Vanacker, CEO at LyondellBasell]

Sure. Yeah, of course, I mean, it's clear that in the current situation in Europe, we are very close, I mean, to what is happening there. That's what you may expect, of course, in such a situation that we have an internal crisis management team up and running, that we are developing different business continuity plans, that we have analyzed, I mean, our dependency also on nat gas. I must say, I mean, that the integrated crackers that we have, they show a low dependency on nat gas, mostly supplied by oil-based fuels.

[Peter Vanacker, CEO at LyondellBasell]

I wanna put it in perspective as when, where the biggest impact is eventually in Germany and Italy, but German revenues for us are, based upon last year's revenues, about 7% of total revenue, and Italy is about 4% of total revenue. We believe that we can continue to run our crackers in Europe at, like we have been doing at an 85%+ range. From that perspective, believe that we. If everything runs, let's say, in a normal way, we would be quite robust in continuing our operations, independent of the fact if Nord Stream 1 returns, I mean, back to 40% or would be lower than the 40%.

[Operator]

Thank you. Our next question comes from the line of John McNulty with BMO Capital Markets. Please go ahead.

[Bhavesh Lodaya, Analyst at BMO Capital Markets]

Hi. Good morning, Peter. This is Bhavesh Lodaya for John. Across the press release and your presentation, you highlighted the impact from lockdowns in China and a potential reversal towards the end of the year. Can you add some color around the profitability of your Chinese operations and any peers in the region? Assuming we are in this, say, higher for longer crude price environment, what is the market-

[Bhavesh Lodaya, Analyst at BMO Capital Markets]

-appetite for higher prices, which is probably required to get to your historical margins there. Thank you.

[Peter Vanacker, CEO at LyondellBasell]

Let me take, I mean, the first question, John. It's clear, I mean, that China operations, I mean, profitability at this point in time is low. But due to the fact, I mean, with our investments that we made in China, that we are in the first quartile in terms of delivered costs, cash costs, so we have a favorable position in China. But generally speaking, I mean, the profitability is very low. Having said that, also again, I like to put it into perspective. I mean, China, for us, in terms of revenues, of total revenues, is, let's say, a bit lower than 5%, so I don't wanna overemphasize that either. On your second question. Can I give that to you, Ken? Ken?

[Ken Lane, EVP of Global Olefins and Polyolefins at LyondellBasell]

Sure. Absolutely. Look, what we see happening in China in particular is prices are gonna move where feedstock go at this point. You know, people are cutting back utilization. A lot of the assets are frankly underwater, and you're making a decision almost daily about whether to continue to operate or is it better to shut down. That's putting a floor under pricing today. From my perspective, there's nowhere to go but up in China these days. There will be a reopening impact. The question is always gonna be about when, not if. Like Peter said, we've got very good new assets both in O&P and I&D. You know, we're still confident in the outlook beyond the end of the year.

[Operator]

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

[Kevin McCarthy, Analyst at Vertical Research Partners]

Yes, good morning. A question for Ken, perhaps. I was wondering if you could comment on the U.S. propylene market. It seems to have gotten a bit sloppy here in recent months. I believe the U.S. July contract price declined another $0.04 earlier this week, and, you know, it makes four consecutive monthly declines of 35% negative or so. Can you comment on both sides, supply, demand, what you're seeing there, and whether we might expect that pattern to reverse in coming months?

[Ken Lane, EVP of Global Olefins and Polyolefins at LyondellBasell]

Sure, Kevin. Thank you for the question. Yes, I do expect to see that trend in propylene reverse in the U.S. In fact, I think we're gonna see that in August already. We're starting to see spot prices move up again for propylene. I'll go back to the answer that I gave earlier. There's been a lot of downtime for polypropylene assets in the U.S., and that's put some length into the propylene market. What's happening now is you're starting to see those assets run again, and you're gonna start to see people refilling inventory levels because of all the downtime that we've had with polypropylene, and that's gonna start to bring the propylene price back up a little bit here in the back half of the year.

[Operator]

Thank you. Our next question comes from the line of Mike Leithead with Barclays. Please proceed with your question.

[Mike Leithead, Analyst at Barclays]

Great. Thanks. Good morning, guys. I think industry consultants are forecasting, I don't know, about $0.15-$0.20 a pound decline in U.S. polyethylene prices between now and the first quarter. I guess, do you agree with that assessment, and why or why not?

[Peter Vanacker, CEO at LyondellBasell]

Well, if we take that, and then, Ken, will also, further elaborate on your question, Mike. I mean, what we continue to see is very good demand, I mean, in the marketplace. Yes, maybe a little bit of slowdown like we alluded to in terms of durable goods. Then there are a couple of other points that I wanna highlight, here as well, is if you look in Europe and in North America at the average, inventory in terms of car builds, then we are today substantially below, actually at the lowest level since the last five years.

[Peter Vanacker, CEO at LyondellBasell]

That has not been, if you look at what the automotive industry has been saying in their quarterly calls, it's not because they have a lack of demand, but it's mainly still because of the supply chain, and they are expecting that towards the end of the year a lot of these issues will be resolved. The key question there will be how will that actually then result in restoring inventory levels in that particular industry. As one data point. The other data point is definitely also with regards to then more the feedstock costs. Feedstock costs have been exceptionally high. I would describe them, I mean, during Q2.

[Peter Vanacker, CEO at LyondellBasell]

If we look at natural gas towards the end of the year and eventually also the impact on ethane prices, we tend to believe, I mean, that that should moderate, I mean, during the second half of 2022, and as a result, and also have its impact on the margins. Ken, you wanna elaborate a little bit further on this?

[Ken Lane, EVP of Global Olefins and Polyolefins at LyondellBasell]

Yeah, I guess the one thing that I'll add is, you know, when we look at this, we've got a lot of levers that we pull here in terms of managing our margins. We do expect to see energy and feedstock costs continue to be elevated in the back half of the year, but they're gonna moderate versus the second quarter. You know, there'll be things that we're doing around our feed slate, our product slate, our channel selection, market segments, because we still do, to Peter's point, see strength in some of our market segments. You know, we'll be gearing our portfolio to serve that.

[Operator]

Thank you. Our next question comes from the line of Michael Sison with Wells Fargo. Please go ahead.

[Michael Sison, Analyst at Wells Fargo]

Hey, good morning. Nice quarter. I think as you guys know, polyethylene demand was fairly resilient during the pandemic, up 2% in 2020. Just curious what you think demand would be for polyethylene if we are or going into a recession, you know, as we head into 2023.

[Peter Vanacker, CEO at LyondellBasell]

Yeah. Thanks, I mean, for your comment, Michael, on the second quarter, highly appreciate it. Definitely, I mean, in terms of PE demand, and Ken has shown, and I think it was in the previous quarter also, how resilient, I mean, PE demand is actually, even if you talk about, downturns in the industry, if you call them recession or not. This is something that we continue to see as well, I mean, moving forward, that we expect that PE demand will continue to be resilient, in the next quarters. Ken, you agree?

[Ken Lane, EVP of Global Olefins and Polyolefins at LyondellBasell]

I absolutely agree. I think, you know, what we've seen in the past is that, you know, polyethylene is typically recession resistant. Even this year with China being down, we still expect to see, you know, growth in the kinda 2%-3% range, globally. You know, as China comes back, I think you're gonna see that growth number go up even higher, which is what we've seen historically.

[Operator]

Thank you. Our next question comes from the line of P.J. Juvekar with Citi. Please go ahead.

[P.J. Juvekar, Analyst at Citi]

Hey, Peter, a question on refining. You know, you announced the refinery shutdown way before the actual shutdown. If re-refining margins continue to remain high, would you be able to delay the refinery shutdown by putting in some incremental maintenance capital?

[Peter Vanacker, CEO at LyondellBasell]

Well, P.J., thank you for your question. We've been very clear, I mean, that latest, I mean, by the end of 2023, we will shut down our refinery in Houston. Nothing has changed in that regard, simply because of the technical reasons. You need to eventually invest a huge amount of money to keep the refinery operating. Definitely, as I alluded to in my preliminary comments, safety has always been the most important thing that we are looking at in the company. We will not at the expense of safety keep operating, I mean, the refinery. Which means as a consequence, one would have to invest a huge amount of money. We've alluded to that, about $1 billion, at least.

[Peter Vanacker, CEO at LyondellBasell]

My experience telling me that the moment you open up a reactor and so on, you start finding out that actually your billion will not be sufficient, and it's gonna be substantially higher in terms of the investments in the refinery. Nothing has changed towards what we have communicated before.

[Operator]

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

[Jeff Zekauskas, Analyst at JPMorgan]

If I could also follow up on the refinery issues. It's a multi-part question. Are you in active negotiations to still sell the refinery or are you not in negotiations? Second, if you thought the return on capital was adequate, would you close it anyway because of your carbon reduction targets? How do you weigh the carbon reduction targets versus the return on capital? Thirdly, are you continually reassessing the return on capital based on your assessment of refining margins, or if you already simply made the decision to exit?

[Peter Vanacker, CEO at LyondellBasell]

Yeah. Thank you, Jeff, I mean, for your very good questions. Let me go a little bit deeper and what actually is the intention that we are having with regard, I mean, to the refinery. What are we actually looking at, I mean, with the refinery? I mean, it's a very nice location that we have. We have very good assets also at the refinery. We're mainly looking at the fact, can we do what can we do else, I mean, with the assets that we have at the refinery? You're very familiar with the fact that we are making very good progress on our molecular recycling technology, so the advanced recycling technology developments. This site could be a very good fit for us to do a very large investment.

[Peter Vanacker, CEO at LyondellBasell]

Nothing has been decided yet. I've said this is investigation. The more we look at it, I mean, the more we are inspired, I mean, by it, because we have very good equipment that we eventually could then use, so there could be quite a lot of synergies. This is the direction of travel, Jeff, with regards, I mean, to the refinery.

[Operator]

Thank you. Our next question comes from the line of Chris Parkinson with Mizuho. Please go ahead.

[Chris Parkinson, Analyst at Mizuho]

Great. Thank you. Just given all the moving parts and, you know, spread compression across the Intermediates and Derivatives segment, can you just give the intermediate-term outlook in terms of spreads of the, you know, the various businesses in there, including oxyfuels, just to give us, you know, a little bit more perspective heading into 2023? Thank you.

[Peter Vanacker, CEO at LyondellBasell]

Yeah. Thank you, Chris. I mean, let me first, I mean, again, make a couple of comments on that when, of course I know LyondellBasell since quite a while, that's clear. Also, when I started moving into my position, then what impressed me a lot is the diversity of the different products and solutions that we have in the portfolio, and as such, I call it a kind of a natural hedge because all the products are not following the same cycle and therefore are hedging each other. That is quite good, I mean, to have a portfolio like that. Best demonstration was, of course on our earnings, I mean, during the second quarter as a result out of that.

[Peter Vanacker, CEO at LyondellBasell]

Now, if we go a little bit deeper, I mean, we've talked a lot already about polyethylene and polypropylene and margins and so on. I would put the focus maybe a little bit on the very important oxyfuels business that we have and the contribution of oxyfuels, as an octane enhancer, as you know, and then also with regard to repositioning in terms of sustainability solution offerings. If, Torkel, if you can give a little bit of an update on the oxyfuels, what you see.

[Torkel Rhenman, EVP of Intermediates and Derivatives and Refining at LyondellBasell]

Yes. No, thank you. Even inside of R&D, what we have through the portfolio, it's a very resilient portfolio in terms of over a cycle that they don't all, you know, follow the same cycle. The oxyfuels is a really good example of that, where we see maybe, you know, the gasoline cracks moderating. The oxyfuels margins are expected to stay well above the historical averages. It's the multitude of things that drives the margins there. It's also the advantaged butane cost that we see helping us looking forward. Also the very strong demand for octane, and that's basically drives the premium of our oxyfuels above gasoline.

[Torkel Rhenman, EVP of Intermediates and Derivatives and Refining at LyondellBasell]

That's also been a very strong factor for the excellent results, the record earnings that we had for Oxyfuels, and we think will remain at an elevated level.

[Operator]

Thank you. Our next question comes from the line of John Roberts with Credit Suisse. Please proceed with your question.

[John Roberts, Analyst at Credit Suisse]

Thank you. In the presentation you talked about continued strength in propylene oxide, but I think the release discussed some slowing in polyurethane markets, which I guess we'd expect with auto and appliances and construction. As you begin commissioning the new PO plant, do you plan to take downtime in other plants to kind of keep the market balanced if we are facing a slowdown there?

[Torkel Rhenman, EVP of Intermediates and Derivatives and Refining at LyondellBasell]

As part of our startup plan, we have other outages scheduled for other plants that we have delayed, so in terms of managing our supply on the PO. We also expect that the plant to ramp up during the year. We expect that for next year, we will produce about 50% of the nameplate capacity from the plant.

[Peter Vanacker, CEO at LyondellBasell]

This is with John. I mean, startup is scheduled, I mean, towards the end of Q1 2023. As said, I mean, by Torkel, then you gradually move into the nameplate capacity volume, so therefore if you average it out over the year 2023, then it would be approximately, we expect, I mean, 50% of the nameplate capacity.

[Operator]

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

[Hassan Ahmed, Analyst at Alembic Global]

Morning, guys. You know, just wanted to touch on O&P-EAI. In the press release, you guys, I believe, said that, around 30% of the, sort of feedstock slate, out there was, non-naphtha-based. I just wanted to get a better sense of how we should think about the feedstock flexibility you have in your European operations. Are you sort of hitting the upper limit when you say that, you know, 30% was non-naphtha?

[Peter Vanacker, CEO at LyondellBasell]

Ken?

[Ken Lane, EVP of Global Olefins and Polyolefins at LyondellBasell]

I would not say we're hitting the upper limit. There are a lot of things that we can still do on the feed slate. As you know, naphtha has been favored. A lot of that is driven by, you know, not only the naphtha price, but also the co-product pricing. You know, that is a big lever for us, not only in Europe, but also in U.S. markets, and we'll continue to find opportunities around the feed slate and optimize the portfolio as we go.

[Operator]

Thank you. Our next question comes from the line of Arun Viswanathan with RBC Capital Markets. Please go ahead.

[Arun Viswanathan, Analyst at RBC Capital Markets]

Great. Thanks for taking my question. Peter, I just wanted to drill down a little bit into O&P Americas profitability. You know, if you look ahead, I guess, into Q3 in the back half, you know, we potentially have some slowing demand, high consumer retail inventories, and, you know, continued high feedstock. Do you expect the continued high feedstock slate to persist and I guess, support pricing? Or is demand waning to the extent that, you know, maybe we see some margin deterioration as we go through the next couple quarters? Thanks.

[Peter Vanacker, CEO at LyondellBasell]

Yeah. Thanks, Arun. Let me take the first part of your question, then I will ask Ken to further elaborate. You alluded already a bit to it. I mean, in terms of demand, we continue to see demand to be healthy. And of course, I mean, with our portfolio of products that we have, we can shift more to the consumer-driven products, packaging, because as said before, we expect that packaging will continue to be quite healthy, something that we have seen in the past also in a downturn periods of the economy or recessions. With regards to the feedstocks, we said pressure will continue to be high on the feedstock and on the energy cost level.

[Peter Vanacker, CEO at LyondellBasell]

Toward the end of the year, we expect a little bit of moderation, but still, I mean, the pressure will continue to be high. Ken?

[Ken Lane, EVP of Global Olefins and Polyolefins at LyondellBasell]

Yeah. I think the only thing that I'll add to that is, you know, you do have new supply coming on and that's gonna be another headwind for us. The good news is that we'll start to see some of these supply chain constraints unwind at the back end of the year, and that's gonna help, you know, open up some channels to market. We also, you had mentioned inventory levels. We're already seeing downstream consumers start to reduce inventory levels. That's actually already started taking place. I think one thing we're gonna watch very closely, obviously, is gonna be what's happening with, you know, the weather impacts on that.

[Ken Lane, EVP of Global Olefins and Polyolefins at LyondellBasell]

Because there is a sort of a natural tendency in this industry to start to pull the inventories down, and this is not necessarily a great time of year to do that. Of course, we'll be watching that closely and see how those things develop.

[Operator]

Thank you. Our next question comes from the line of Steve Richardson with Evercore ISI. Please go ahead.

[Analyst at Evercore ISI]

Hello, hi. This is Kishan on for Steve. Just a question on I&D. Just curious, I was wondering if Scope 3 emission standards would disadvantage the business long term? Also, with MTBE prices normalizing, what might baseline earnings potential for I&D look like? Thank you.

[Peter Vanacker, CEO at LyondellBasell]

Good question. I mean, in the I&D business, I mean, Scope 3 emission standards, it's clear, of course, also that even if we have not clearly made a commitment on Scope 3, that we are deeply analyzing what are the emissions on Scope 3 that we have. We are approaching, of course, also our customers, in discussions in reducing their Scope 3 emissions on the products that they are supplying to us. So that's work in progress. It is important, I mean, that we are looking at it. I give you one example. I mean, we talked about the refinery beforehand. By shutting down the refinery, we're talking about approximately 40% of our global Scope 3 footprints that would be reduced.

[Peter Vanacker, CEO at LyondellBasell]

We're talking here about 30-40 million tons per year of Scope 3 emissions that would be reduced just by that action. Talking about the applications, not necessarily at this point in time, we see a disadvantage because Scope 3 is something that is extremely difficult, I mean, for the entire industry, I mean, to deal with. There is no clear accounting mechanism, I mean, on Scope 3. Lots of things that need to still be worked out, I mean, through legislation and how to account, I mean, for Scope 3 emissions. Immediate answer to that is we don't see that in terms of demand for those products, that would have an impact.

[Peter Vanacker, CEO at LyondellBasell]

I would say on the contrary, because the oxyfuels, if you talk about the oxyfuels, actually make a good contribution in that regard.

[Operator]

Thank you. Our final question comes from the line of David Begleiter with Deutsche Bank. Please go ahead.

[David Begleiter, Analyst at Deutsche Bank]

Thank you. Peter, you mentioned strength in styrene in the quarter, but it is expected to weaken going forward. What's your outlook for styrene in the intermediate and longer term, for you guys?

[Peter Vanacker, CEO at LyondellBasell]

Give that question to Mr. Torkel.

[Torkel Rhenman, EVP of Intermediates and Derivatives and Refining at LyondellBasell]

Yeah. I think, you know, second quarter was driven by both strong demand, but also primarily operational issues, scheduled and unscheduled outages. We see margins probably softening here in third quarter and the second half of the year. I think that there are growth areas, but there are also areas under pressure. Single-use plastics, of course, being one under pressure. You also have strong, and we've seen double-digit growth for EPS being used in insulation material. I would say that we probably have a moderate outlook in terms of margins in the immediate term.

[Operator]

Thank you. I am showing that there are no further questions. I will turn it back to Mr. Vanacker for closing comments.

[Peter Vanacker, CEO at LyondellBasell]

Yes, thank you very much, I mean, for all the very thoughtful questions, I would say as usual. We look of course forward to sharing more of our plans with you about how we at LyondellBasell would advance on our strategy. In addition to that, also unlock additional value over the coming months. As said, you may expect when we are releasing our third quarter results, that we're putting a number to the additional value that we believe we can capture and also a timeline to that, and then invite you for the beginning of next year to a Capital Markets Day to talk about our strategy. I wish you all a great weekend and of course, stay healthy and stay safe. Thank you very much.

[Operator]

Thank you. This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

Participants

Executives

• Michael McMurray, CFO
• Peter Vanacker, CEO

Analysts

• Arun Viswanathan, Analyst at RBC Capital Markets
• Bhavesh Lodaya, Analyst at BMO Capital Markets
• Chris Parkinson, Analyst at Mizuho
• David Begleiter, Analyst at Deutsche Bank
• David Kinney, Head of Investor Relations at LyondellBasell
• Frank Mitsch, Analyst at Fermium Research
• Hassan Ahmed, Analyst at Alembic Global
• Jeff Zekauskas, Analyst at JPMorgan
• Jim Guilfoyle, EVP of Advanced Polymer Solutions and Global Supply Chain at LyondellBasell
• John Roberts, Analyst at Credit Suisse
• Josh Spector, Analyst at UBS
• Ken Lane, EVP of Global Olefins and Polyolefins at LyondellBasell
• Kevin McCarthy, Analyst at Vertical Research Partners
• Michael Sison, Analyst at Wells Fargo
• Mike Leithead, Analyst at Barclays
• P.J. Juvekar, Analyst at Citi
• Steve Byrne, Analyst at Bank of America Securities
• Torkel Rhenman, EVP of Intermediates and Derivatives and Refining at LyondellBasell
• Vincent Andrews, Analyst at Morgan Stanley
• Analyst at Evercore ISI