LyondellBasell Industries N : Q2 2023 Earnings Call Webcast - replay available until September 4, 2023

LyondellBasell

2Q23 Earnings Call

August 4, 2023

Presenters

Peter Vanacker, Chief Executive Officer

Michael McMurray, Executive Vice President & Chief Financial Officer Ken Lane, Executive Vice President, Global Olefins & Polyolefins

Kim Foley, Executive Vice President, Intermediates & Derivatives and Refining Torkel Rhenman, Executive Vice President, Advanced Polymer Solutions David Kinney, Head of Investor Relations

Q&A Participants

Aleksey Yefremov - KeyBanc Capital Markets

Arun Viswanathan - RBC Capital Markets

Christopher Parkinson - Mizuho

Frank Mitsch - Fermium Research

Hassan Ahmed - Alembic Global

Jeff Zekauskas - J.P. Morgan

Matthew Blair - TPH

Mike Leithead - Barclays

Steve Byrne - Bank of America

Steve Richardson - Evercore ISI

John Roberts - Credit Suisse

Duffy Fischer - Goldman Sachs

Vincent Andrews - Morgan Stanley

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 call over to Mr. David Kinney, Head of Investor Relations. Sir, you may begin.

David Kinney

Thank you, operator. Before we begin the discussion, I would like to point out that a slide presentation accompanies today's call is available on our website at www.lyondellbasell.com/investorrelations.

Today, we will be discussing 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

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our actual results to differ by reviewing the cautionary statements in the presentation slides and our regulatory filings, which are also available on our Investor Relations website.

Comments made on this call will be in regard to our underlying business results using non-GAAP financial measures, such as EBITDA and earnings per share, excluding identified items. Additional documents on our Investor website provide reconciliations of non-GAAP financial measures to GAAP financial measures, together with other disclosures, including the earnings release and our business results discussion.

A recording of this call will be available by telephone beginning at 1 p.m. Eastern time today until September 4, by calling [phone] in the United States and (201) 612- 7415 outside the United States. The access code for both numbers is 13739183.

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 & Polyolefins; Kim Foley, our EVP of Intermediates and Derivatives and Refining; and Torkel Rhenman, our EVP for Advanced Polymer Solutions. During today's call, we will focus on second quarter results, current market dynamics, our near-term outlook, and our long-term strategy. With that being said, I would now like to turn the call over to Peter.

Peter Vanacker

Thank you, David, and welcome to all of you. We appreciate you joining us today as we discuss our second quarter 2023 results. Starting with Slide 3. During today's call, we will discuss the resilient results that our team delivered during the challenging marketing conditions of the second quarter. And we will also provide an overview of our outlook for the second half of this year, as well as our plans to optimize our advantaged positions to navigate volatile markets and feedstock costs.

But first, let's take a few moments to review LyondellBasell's foundations and the progress we have made with our long-term strategy. Let's turn to Slide 4 and begin the discussion with our foundational commitment to leadership and safety performance. Our team continues to deliver outstanding safety results. LyondellBasell's year-to-date incident rate for employees and contractors is 0.15.

While slightly higher than our results for 2022, our focus on safety continues to deliver performance that exceeds the top 75th percentile for our industry. Our leading safety results produce benefits that are reflected in our operations and ultimately, in our financial performance. Safety is a fundamental part of our core values, and it will continue to be a critical enabler for our strategy and our future success.

Let's turn to Slide 5 and review the progress on our long-term strategy. As we shared during our Capital Markets Day in March, our strategy is built around three pillars -- grow and upgrade the core; build a profitable, circular, and low-carbon solutions business; and

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step up performance and culture. We are confident we have the right strategy, and we are not allowing current business conditions to slow our progress.

Let me highlight some of our actions on these pillars over the past few months. Our value enhancement program is providing benefits for two of the pillars in our strategy. The VEP is generating volume growth as part of grow and upgrade the core and margin improvement captured within step up performance and culture. I am pleased to see the rapid progress and execution of these VEP initiatives.

We are raising our 2023 VEP target for year-end annual recurring EBITDA run rate by $50 million, to $200 million based on mid-cycle margins to reflect our accelerated progress. I will provide more details on this progress in a few minutes. In grow and upgrade the core, we are investing in our business that fits with our long-term strategy. Last quarter, we announced a successful start-up of our new PO/TBA facility, the largest propylene oxide plant in the world.

This quarter, our team successfully completed technology performance tests to prove out the full capacity of the new facility. We're also managing our portfolio to ensure that all businesses are aligned with our long-term strategy. In May, we announced that we are extending our refining operations to no later than the first quarter of 2025. Let me be clear, we have not changed our decision to exit the refining business. The extension of operations will allow us to develop options to redeploy the site's workforce and assets in support of the company's sustainable growth strategy.

Now let's turn to the second pillar of our strategy. We're committed to building a profitable, circular, and low-carbon solutions business to drive our leadership in circularity and address the massive demand for these products from our customers and society. We expect this business will generate at least $0.5 billion of incremental EBITDA by 2027 and $1 billion of incremental EBITDA by 2030.

Through multiple acquisitions, partnerships and other arrangements, we are building a comprehensive business model with powerful, competitive advantages that come from new technologies, upstream sources of recycled and renewable feedstocks, and downstream relationships with our customers and brand owners.

The third pillar of our strategy is to step up our performance and culture. Last October, we streamlined our organizational structure to improve our line of sight with clear accountabilities and improved alignment across our commercial and manufacturing functions. We're leveraging the structure of our VEP to drive commercial excellence and improve our customer focus. And Torkel and his team are making solid progress on transforming the performance of our Advanced Polymer Solutions segment.

Altogether, the three pillars of LyondellBasell's strategy are working side by side to provide focus and alignment to drive our progress in capturing value and delivering a

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more profitable and sustainable growth engine for LyondellBasell. Let's turn to Slide 6 and take a closer look at our approach to establishing leadership in circular solutions. As Yvonne stated at our Capital Markets Day in March, our circular and low-carbon solutions business is taking a differentiated approach by gaining advantage in three key areas -- technologies, feedstocks, and downstream customer relationships. We believe that our comprehensive strategy based on regional hubs will establish LyondellBasell as the leader in sustainable solutions.

We're expanding our participation further up and down the plastic waste value chain to both gain scale and maximize the returns of various waste streams around the world. Today, our team is building supply chains to bring waste feedstocks into our existing facilities and driving innovation through investments in new technologies. As you saw on the previous slide, we are investing in both internal and external technologies, such as LyondellBasell's proprietary MoReTec advanced recycling process, as well as Pryme's pyrolysis process and LMF Nord's mechanical recycling.

In line with our sustainability goals, we are advancing our carbon reduction initiatives through partnerships. In June, we signed an MOU with Technip and Chevron Phillips to develop an electric cracker demonstration unit in Channelview, Texas. We have completed our purchase agreements to support the development and procurement of renewable power for LyondellBasell's locations around the world. These partnerships utilize the unique strengths of each party to deliver superior results with a common goal, reducing the carbon intensity of our products to increase the value of our products for our customers.

And we are leveraging the unique capabilities of our APS segment to upgrade our mechanical recycling portfolio while offering tailored solutions for our customers. Most importantly, we are building a business that provides these solutions at scale. Step by step, we are making progress toward our 2030 goal to sell 2 million tons of recycled or renewable-based polymers annually. Since 2019, we have produced and marketed approximately 220,000 tons of these polymers. LyondellBasell's differentiated approach uniquely positions us to unlock significant value as we address the needs of our customers and society.

On Slide 7, we ask that you save the date for a webinar on September 26, with Jim Seward, EVP and Chief Innovation Officer; and Yvonne van der Laan, EVP of Circular and Low-Carbon Solutions, will share more details on our MoReTec technology and our circular and low-carbon solutions business. We hope that you can join us virtually.

Let's turn to Slide 8 and discuss this year's updated target for our value enhancement program. Our company has a well-earned reputation for strong, operational excellence and cost leadership. Our goal is to build on these strengths to capture untapped value across the company through modest investments. Since the launch of our VEP, we have inspired a more agile and entrepreneurial mindset throughout our workforce.

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When we launched the value enhancement program last year, we announced targets to deliver recurring, annual EBITDA improvements, run rates of $150 million by the end of 2023, and $750 million by the end of 2025. Our team is progressing ahead of plan for 2023. As we expanded the VEP to Europe and smaller U.S. sites during the first and second quarter, we found the enthusiasm and energy gaining momentum. We now think our recurring annual EBITDA improvement will reach a run rate of at least $200 million by the end of 2023.

Let's get a bit more specific about a few of these VEP initiatives on Slide 9. At our low- density polyethylene manufacturing facilities in Clinton, Iowa, our team faced recurring reliability challenges related to valve controllers. With an investment of approximately $60,000, our team was able to upgrade the controllers and unlock more than $400,000 of annual value. The project was executed during a planned outage, with VEP providing the resources required to rapidly resolve this chronic issue.

A modest investment across our global engineering and procurement teams unlocked an opportunity to expand the supplier pool for electric motors at our manufacturing sites. We expect a direct annual cost benefit of $400,000, as well as an improvement in the security of our supply for these critical motors. These benefits will be realized with a total resource investment of only $70,000 over the next three years.

At our Channelview facility, we invested the engineering resources required to implement a new process control scheme to improve yields and decrease energy consumption and distillation towers. Through better steam control and increased butadiene yields, we will realize $1.4 million in annual value at a onetime cost of $50,000. In addition to the direct financial benefits, this project supports our sustainability goals by reducing CO2 emissions by over nine kilotons.

One of our larger VEP initiatives will install a filtration system to remove solids from a byproduct stream at our olefins plant in Channelview. By upgrading the byproducts, we anticipate over $5.1 million in recurring annual EBITDA improvement from higher margins and increased utilization through a modest $550,000 investment.

These examples are representative of the hundreds of initiatives in our VEP portfolio. The average annual benefit of our initiative is less than $1 million. But the program is supported by rigorous economic analysis, diligent tracking, and an evergreen process. The value enhancement program has been the catalyst within our organization to rapidly implement good ideas to create value. We look forward to providing you with regular updates on our progress as these initiatives become more prominent in our results.

Let's turn to Slide 10 and focus on our financial results for the second quarter. During the second quarter, LyondellBasell's businesses delivered resilient results and strong cash generation, despite challenging market conditions. Earnings were $2.44 per share.

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