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Edited Transcript of LYB earnings conference call or presentation 26-Apr-19 3:00pm GMT

Q1 2019 LyondellBasell Industries NV Earnings Call

HOUSTON May 1, 2019 (Thomson StreetEvents) -- Edited Transcript of LyondellBasell Industries NV earnings conference call or presentation Friday, April 26, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bhavesh V. Patel

LyondellBasell Industries N.V. - CEO & Director

* David Kinney

LyondellBasell Industries N.V. - Director of IR

* Thomas Aebischer

LyondellBasell Industries N.V. - Executive VP & CFO

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Conference Call Participants

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* Arun Shankar Viswanathan

RBC Capital Markets, LLC, Research Division - Analyst

* Bhavesh Mahesh Lodaya

BMO Capital Markets Equity Research - Senior Associate

* David L. Begleiter

Deutsche Bank AG, Research Division - MD and Senior Research Analyst

* Dylan Scott Carter Campbell

Goldman Sachs Group Inc., Research Division - Research Analyst

* Hassan Ijaz Ahmed

Alembic Global Advisors - Partner & Head of Research

* Jeffrey John Zekauskas

JP Morgan Chase & Co, Research Division - Senior Analyst

* John Ezekiel E. Roberts

UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals

* Jonas I. Oxgaard

Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

* Kevin William McCarthy

Vertical Research Partners, LLC - Partner

* Matthew Robert Lovseth Blair

Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Refining and Chemicals Research

* Matthew Stephen Skowronski

Nomura Securities Co. Ltd., Research Division - Research Analyst

* Nicholas Cecero

Jefferies LLC, Research Division - Equity Associate

* P.J. Juvekar

Citigroup Inc, Research Division - Global Head of Chemicals and Agriculture and MD

* Patrick Duffy Fischer

Barclays Bank PLC, Research Division - Director & Senior Chemical Analyst

* Steve Byrne

BofA Merrill Lynch, Research Division - Director of Equity Research

* Vincent Stephen Andrews

Morgan Stanley, Research Division - MD

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Presentation

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Operator [1]

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Hello, and welcome to the LyondellBasell teleconference. At the request of LyondellBasell, this conference is being recorded for instant replay purposes. (Operator Instructions)

I'd like to now turn the conference over to Mr. David Kinney, Director of Investor Relations. Sir, you may begin.

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David Kinney, LyondellBasell Industries N.V. - Director of IR [2]

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Thank you, Jaclyn. Hello, and welcome to LyondellBasell's First Quarter 2019 Teleconference. I'm joined today by Bob Patel, our Chief Executive Officer; and Thomas Aebischer, our Chief Financial Officer.

Before we begin the business discussion, I would like to point out that the slide presentation accompanies today's call and is available on our website at www.lyondellbasell.com.

I would also like for you to note that statements made in this call relating to matters that are not historical facts are forward-looking statements. These forward-looking statements are based upon assumptions of management, which are believed to be reasonable at the time made and are subject to significant risks and uncertainties. Actual results could differ materially from those forward-looking statements. For a more detailed information about the factors that could cause our actual results to differ, please refer to the cautionary statement in the presentation slides and our financial reports, which are available at www.lyondellbasell.com/investorrelations.

Reconciliations of non-GAAP financial measures to GAAP financial measures together with any other applicable disclosures including the earnings release are currently available at our website.

Finally, I would like to point out that a recording of this call will be available by telephone beginning at 1:30 p.m. Eastern Time today until 12:59 a.m. Eastern Time on June 25 by calling (888) 568-0028 in the United States and (203) 369-3451 outside the United States. The passcode for both numbers is 3108.

During today's call, we will focus on the first quarter results, the current environment, our near-term outlook and provide an update on our growth initiatives. With that being said, I would now like to turn the call over to Bob.

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Bhavesh V. Patel, LyondellBasell Industries N.V. - CEO & Director [3]

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Thanks, Dave. Good day to all of you participating around the world, and thank you for joining our first quarter earnings call.

Let's begin with Slide 3 and review the highlights. During the first quarter, our company demonstrated strong operational performance and moved forward on our value-driven growth strategy by advancing our business portfolio and delivering on synergies. Sales volumes for our Olefins and Polyolefins - Europe, Asia and International business increased to levels seen during the first and second quarters of 2018 while profitability improved to regain some of last year's margin compression, more than doubling our fourth quarter EBITDA for that segment. Across the company, 5 of our 6 business segments improved upon fourth quarter profitability. First quarter earnings were $2.19 per share, which represents a 22% improvement over the previous quarter. We continue to actively manage our business portfolio by acquiring a synthesis gas plant in La Porte, Texas. This acquisition included a minority interest in our former methanol joint venture at the site. The syngas plant converts natural gas into raw materials that we use in the production of methanol and acetic acid. We expect the transaction will provide synergies and operational efficiencies to generate accretive returns that materially exceed LyondellBasell's high standards for investment.

In the 7 months since we closed on our acquisition of A. Schulman in 2018, our synergy capture increased to an $85 million annual run rate by the end of the first quarter. This represents more than half of the annual synergies we initially expected to realize within 2 years. These synergies are becoming apparent in our Advanced Polymer Solutions profitability, and we anticipate exceeding our initial $150 million annual synergy target. Our organic growth program is in full swing with our new Hyperzone polyethylene technology approaching a third quarter start-up in La Porte and considerable progress underway on construction of the world's largest propylene oxide and tertiary butyl alcohol plant at our sites in Channelview and in Bayport in Texas. This new capacity from these investments will serve global markets' growing demand for polyethylene, polyurethanes and transportation fuels.

As we continue our evaluation of a potential transaction with Braskem, the company remains committed to a strong and progressive dividend while pursuing opportunistic share repurchases. LyondellBasell returned an additional $884 million to shareholders through dividends and share repurchases during the first quarter. All of our capital allocation decisions are guided by our commitment to be a solid investment-grade company. Two years ago at our Investor Day in New York, we described how LyondellBasell's resilient business portfolio and a more balanced approach to capital deployment would provide strong shareholder returns while also supporting long-term value-driven growth. I'm pleased to report that during the first quarter, employees of our company continued to deliver on these promises and advanced the strategy. Each year marks a fresh start for tracking safety performance, and 2018 will be the first full year where our metrics include the 20-plus percent of our workforce who joined LyondellBasell with the Schulman acquisition.

Prior to the acquisition in 2018, Schulman's injury rate was 1.54, 7 to 8x higher than typical LyondellBasell performance. On Slide 4, you can see that our first quarter combined safety performance is quite similar to the record-setting levels we achieved for the full year 2018. As you know, we strongly believe that safety performance is a leading indicator of strong operational results. The rapid improvement in these safety metrics provides further evidence of the deep and robust integration management process underway within LyondellBasell. All employees want to go home to their family safely, and we're grateful for the sense of ownership displayed by our employees and their frontline supervisors. We look forward to driving further improvements towards our goal of injury-free operations.

And now, Thomas will provide more detail on our financial highlights for the first quarter.

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Thomas Aebischer, LyondellBasell Industries N.V. - Executive VP & CFO [4]

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Thank you, Bob, and good day to all of you. Please turn to Slide 5, which illustrates developments within our company over the trailing 12 months. Our portfolio of diverse petrochemical businesses continues to be a source of resilience during times of challenging market conditions with improvements in 2 segments partially offsetting declines in other segments over the past year. As Bob mentioned, during the first quarter, 5 of our 6 business segments posted higher profitability relative to the previous quarter. Total EBITDA for the trailing 12 months declined in comparison to a relatively strong prior period.

During the first quarter, we incurred service disruptions related to the March fire at a third-party terminal in the Houston Ship Channel. The impact was primarily felt within our Intermediates and Derivatives segment and was not material to the company's first quarter result. We are still assessing ongoing disruptions, and we expect second quarter impact will be similar to slightly higher than the first quarter.

In North America, falling ethylene prices that declined faster than feedstock costs and the steep drop in propylene prices drove first quarter margins compressions for olefins. In the rest of the world, olefins and polyethylene margins improved on the back of strong volume recoveries relative to the fourth quarter.

Our Intermediates and Derivatives businesses exhibited stability with relatively balanced markets resisting through a -- the typical slow fourth and first quarters. We continue to run the Houston refinery well with our ninth consecutive quarter of strong operations. Unfortunately, high gasoline inventories and low discounts for heavy sour crude oil resulted in historically lower refining crack spreads during most of the first quarter.

Our technology business delivered another quarter of outstanding results with continued improvements in licensing revenue that increased over both the prior quarter and the last 12 months.

On Slide 6, you can see that LyondellBasell's businesses generated nearly $660 million of cash from operating activities during the first quarter. During the first quarter, we managed our debt portfolio by entering into a $2 billion term loan at favorable rates that was used to early refinance $1 billion of bonds that were due in April 2019, with the balance used for general corporate purposes. Beyond our quarterly dividend, our strong cash flows provided ample capability to continue our investments in organic growth projects while returning $512 million to shareholders in the form of share repurchases. The quarter closed with over $1.3 billion of cash and liquid investments on the balance sheet.

Please turn to Slide 7. The chart on the left illustrates our cash flow performance over the previous 4 years and the trailing 12 months. During the last 12 months, LyondellBasell generated more than $5.1 billion of cash from operating activities. Capital expenditures during the first quarter were nearly $600 million, with roughly 40% allocated to sustaining CapEx and the balance invested in profit-generating projects. We expect that investment will slightly increase over the remainder of the year as we complete the construction of our Hyperzone PE facility and accelerate the activity for building our PO/TBA plant in Houston. We believe that operating cash flow, after accounting for sustaining capital expenditures, provides visibility in our cash flow that is available for purposes such as dividends or accretive reinvestments such as share repurchases, organic growth or M&A.

The chart on the right side of the slide illustrates our total liquidity for the same periods. The decline in 2018 reflects the acquisition of A. Schulman. Liquidity improved during the first quarter of 2019 primarily due to the new drawn and undrawn term loan facilities. We closed the quarter with total liquidity in excess of $8 billion.

With that, I will turn the call back to Bob. Thank you very much.

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Bhavesh V. Patel, LyondellBasell Industries N.V. - CEO & Director [5]

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All right. Thank you, Thomas. Let's turn to Slide 8 and review our business results. In our Olefins and Polyolefins - Americas segment, first quarter EBITDA was $516 million, $115 million lower than the fourth quarter. Results were driven by lower margins due to well-supplied markets for most products. Olefins results declined by $130 million compared to the fourth quarter 2018 driven by a decrease in ethylene price of more than $40 per metric ton. Propylene prices also fell with a decline of more than $300 per metric ton. These price declines will largely offset reductions in feedstock costs. Ethylene operating rates remain strong during the first quarter averaging 93%, exceeding industry rates by 5%. We continued to optimize our cracker feedslate to benefit from lower NGL prices and found opportunities to capture discounts for our unpurified Y-grade NGL feedstocks in our U.S. Gulf Coast system. 83% of our ethylene production was from ethane and 93% came from NGLs. Polyolefins results decreased by $30 million during the first quarter. Margins declined in both polyethylene and polypropylene, partially offset by an increase in polypropylene sales volume. Polyethylene chain margins are showing signs of improvement in April as feedstock price trends -- prices trend lower. And we entered a higher seasonal demand period.

Now please turn to Slide 9 to review the performance of our Olefins and Polyolefins - Europe, Asia and International segment. During the first quarter, EBITDA was $296 million, a $169 million increase over the fourth quarter representing 133% improvement. Results were driven by increased volumes in all products and margin improvements for both ethylene and polyethylene. Market conditions improved with a strong recovery of polymer volumes following an unusually slow fourth quarter. Olefins results improved more than $95 million. Volume and margin increased driven by the completion of planned maintenance in our cracker investment in Germany, partially offset by some unplanned maintenance across our system in the first quarter. Combined polyolefins results increased more than $55 million. Polyolefins sales have rebounded in the first quarter with a volume improvement of 18% for polyethylene and 16% for polypropylene. Our polyethylene chain margins improved in the first quarter as fixed and variable costs declined due to the completion of maintenance. Joint venture equity income increased by $25 million. Industry polyethylene chain margins in Europe have remained stable in the first quarter at $560 per metric ton, a similar level to the average seen in the region for the full year 2018. We see potential for improved margins in the second quarter with early indications of ethylene and propylene prices outpacing feedstock price increases.

Slide 10 reflects the recently updated views of industry consultants on global supply-and-demand balances for both ethylene and polyethylene. Recent ethylene demand growth has outpaced new capacity resulting in very high effective operating rates, exceeding 95% over the past 3 years. We continue to believe that any reduction from these high operating rates during 2020 and 2021 will be relatively modest. The industry's recent experience with delays in the new capacity should not be forgotten, and any future delays will only serve to further improve upon this forecast. Polyethylene supply-and-demand balances shown in the chart on the right illustrate similar constructive trends. The upturn in the global operating rates for 2019 provides optimism for a good market to start our new Hyperzone capacity while typical delays in forecasted capacity could reduce the impact of the most -- of the modest downturn projected for 2020 to 2022. New industry capacity for both ethylene and polyethylene will create short-term fluctuations, particularly in local markets. However, global operating rates are forecasted to remain in the mid- to low-90s as illustrated by the shaded horizontal bands on the charts where we believe markets are balanced to tight, providing good profitability for advantaged producers.

Please turn to Slide 11. Let's take a look at our Intermediates and Derivatives segment. First quarter EBITDA was $390 million, an $11 million increase over the prior quarter. Results were driven by the balance in this business as margins and volumes improved modestly. PO and Derivatives results improved by nearly $30 million. Volumes increased with completion of planned maintenance at our Bayport, Texas facility in the fourth quarter. Intermediate Chemicals results decreased close to $50 million compared to the fourth quarter. Volumes declined for most products, margins decreased primarily for methanol and ethylene glycol, which was partially offset by margin improvements for styrene. Oxyfuels & Related Products results improved more than $15 million as margins increased slightly due to lower butane feedstock prices.

During April, European industry MTBE raw material margins have nearly doubled over levels seen in the first quarter and are exceeding the $225 per tonne margins seen for the second quarter of 2018. This indication of constructive fuel markets, coupled with low butane pricing, provide support for earnings improvement moving into the second quarter.

On Slide 12, I would like to highlight our circular steam project, which is under construction at our Maasvlakte site in Rotterdam. In coordination with the Dutch government, we are advancing on a sustainable project that contributes to the Dutch ambition of a 49% reduction in CO2 by 2030 through conserving energy and reducing costs. This project includes the construction of a new bio-based waste treatment plant and incinerator that deploys innovative technology to convert our water-based waste into energy. In short, the wastewater from our production unit will be separated into 2 streams. One stream will be sent to the bioplant for treatment to remove hydrocarbons. The recovered hydrocarbons then will be used as fuel for the incinerator. The second stream, containing mostly caustic water, will be sent to the incinerator where steam is produced and recycled back to our production unit. The circular steam project will allow us to realize an annual reduction of 140,000 tons of CO2, which is equivalent to taking 31,000 cars off the road.

Additionally, the project contributes annual energy savings of 0.9 petajoule, which is equivalent to the annual electricity usage for 90,000 households. This project is not only a great step towards a more sustainable production process, but also results in lower operating costs for our site. I look forward to providing you with updates as we make further progress on other sustainability programs.

Now please turn to Slide 13 to review the results of our Advanced Polymer Solutions segment. First quarter EBITDA was $148 million, a $62 million increase over the prior quarter. Results were driven by seasonal margins and volume improvements as the market showed modest recovery from an unusually weak fourth quarter. Results also benefited from our increasing capture of A. Schulman synergies. As we discussed in the 2 prior earnings calls, transaction and integration-related costs to the A. Schulman acquisition were $49 million during the third quarter of 2018. Additionally, integration costs were $20 million in the fourth quarter of 2018 and $16 million in the first quarter of 2019. All results depicted here include these transaction and integration costs.

Compounding & Solutions results for the first quarter were more than $40 million higher than the prior period driven by seasonal volume improvements and higher margins following a modest recovery for the weak automotive market seen in the fourth quarter.

Advanced polymers results improved by more than $5 million when compared with the prior period. Our plans for the integration of A. Schulman are progressing very well and delivering results. As I mentioned earlier, at the end of the first quarter, we have already captured cost synergies at an annual rate of $85 million. When you consider our first quarter EBITDA and add back the integration costs, we are nearing our expected quarterly run rate for this segment, plus synergies. We anticipate continued strength in the business as we enter the second quarter, which is a period of seasonally higher demand for most APS products. I'm very proud of our APS team and their hard work and continued focus on integration and synergy capture.

On Slide 14, I would like to highlight the Engineered Plastics business that we acquired from A. Schulman is now -- and is now part of our Advanced Polymer Solutions segment. Engineered plastics are similar LyondellBasell's polypropylene compounding products, but the compounds are made with different base resins such as nylon, styrenics, polybutylene or polyethylene terephthalate. The resulting polymer compound is developed mostly to replace metal and has high structural integrity and strength. It has low distortion and high heat resistance. There are multiple end markets for these plastics including building and construction, automotive and recreational products. This slide shows 2 end uses for engineered plastics, with which you may be familiar. Schulamid HT, which is manufactured using our proprietary technology, is a nylon compound used in the Duracell battery end cap assembly. This product helps to extend battery life and prevents battery fluid leakage. On the right, you can see one of our styrenic alloy products that is used in manufacturing GPS domes used in John Deere farm equipment. The alloy provides improvements in UV stability and radiofrequency transmission while reducing costs for our customers. Both of these products are sold to our customers in an easy to handle pellet form to facilitate manufacturing efficiency.

Turning to Slide 15, let's discuss the results of our Refining segment. First quarter EBITDA was a negative $15 million, a $69 million improvement over the fourth quarter. Crude throughput at the refinery increased to 259,000 barrels per day following the completion of planned maintenance during the fourth quarter. The Maya 2-1-1 crack spread reached historically low levels in January, but gradually improved and averaged more than $13 per barrel for the quarter. Unusually low discounts for heavy sour crude oil combined with high gasoline inventories created a challenging environment for our refining business during the first quarter. Fortunately, refining markets corrected over the month of March. And during April, we continued to see substantial improvements in the Maya 2-1-1 crack spread.

Slide 16 provides further detail of the refining spreads and shows the recovery in March and April. The price spread between Maya and Light Louisiana Sweet crude has improved during the first quarter as shown by the dark blue portion of the bar chart. However, Maya pricing is still strong relative to other crudes due to the Maya pricing formula. Weak gasoline crack spreads in the fourth quarter persisted through February. The turquoise portion of the bar chart shows the significant improvement in gasoline crack spreads in March and April. As we enter the summer driving season, we anticipate an improvement in the refining business through continued reliable operations and improved Maya 2-1-1 crack spreads.

On Slide 17, let me summarize this quarter's highlights. During the first quarter, we achieved earnings of $2.19 per share. Our O&P-EAI segment strongly rebounded from an unusually slow fourth quarter. Over the past 12 months, our company generated more than $5.1 billion of cash from operating activities that contributed to funding for increased capital investment, paying a top quartile dividend, completing over $2.2 billion in share repurchases and acquiring A. Schulman. Within 2.5 quarters of acquiring A. Schulman, we've achieved more than half of our annualized synergy run rate target of $150 million for our APS segment. We're advancing construction of our PO/TBA facility and approaching the start-up of our new Hyperzone polyethylene plant. We've continued to manage our portfolio through the acquisition of the syngas plant in La Porte, Texas, and we're continuing to evaluate the Braskem opportunity.

Going forward, we see improvement in market sentiment with continued strong global demand. We expect most of our businesses to benefit from seasonal margin and volume improvements. Additionally, as the refining markets adapt to new marine fuel regulations, we'll be ready to capture improved margins with our continued stable operations. Our global portfolio of businesses provides confidence in our capability to remain advantaged, resilient and poised to capture opportunities across a range of market environments.

With all that said, we're now pleased to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Our first question comes from Robert Koort of Goldman Sachs.

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Dylan Scott Carter Campbell, Goldman Sachs Group Inc., Research Division - Research Analyst [2]

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This is Dylan Campbell on for Bob. During the kind of the 4Q earnings call, you noted some improvement in the first few weeks in January. It sounds like you're seeing something similar with the first few weeks of April. Can you talk a little bit about what you've seen in terms of demand sequentially across the 4-month this year, across January, February, March and April? And how that sequential movement in demand has trended this year versus maybe last year or years before?

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Bhavesh V. Patel, LyondellBasell Industries N.V. - CEO & Director [3]

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So we've continued to see demand grow sequentially in all of our products. I think what's been more noticeable is that because Q4 was so weak, we're seeing now the seasonal uptick in, for example, polyethylene and polypropylene globally in that -- it's more typical of the kind of demand we would expect at this time of year, and as I mentioned, in the EAI, the volumes are already back to levels that we saw in Q1 and Q2. So we're seeing very typical volumes now that we're into the spring months.

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Dylan Scott Carter Campbell, Goldman Sachs Group Inc., Research Division - Research Analyst [4]

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Yes. That's helpful. And then for polyethylene prices headed into April negotiations and into May negotiations as well, it seems to be a little bit of a mixed bag. Brent crude is up close to 40% year-to-date, but there is new supply continuing to come online in the markets. So I guess what are your expectations for the April and May negotiations?

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Bhavesh V. Patel, LyondellBasell Industries N.V. - CEO & Director [5]

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Well, on the back of my earlier comment about volume improving, it would seem to me that in a seasonally stronger period, markets ought to be much firmer. I think some industry consultants have pointed towards potential increases in Q2. And if you think about it, we're talking about flat-to-higher prices during a period when a historic build-out of new capacity is coming and is already in the market, 2/3 of it is really in the market already. And in my view, I think this is really the ultimate evidence that operating rates are quite high. And the new capacity is frankly coming online at a time when it's needed.

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Operator [6]

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(Operator Instructions) Our next question comes from P.J. Juvekar from Citi.

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P.J. Juvekar, Citigroup Inc, Research Division - Global Head of Chemicals and Agriculture and MD [7]

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As oil prices rallied this year, NGL prices have declined and the delta is good for you. But on the flip side, polyethylene prices are also kind of stalled despite the oil rally. So can you give us your view on how do you see the margin progression happens with where oil is? And your view on [slate tail] with supply/demand?

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Bhavesh V. Patel, LyondellBasell Industries N.V. - CEO & Director [8]

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Well, I think first of all, on the NGL side, you've seen NGL prices come off some because the supply has increased, and we've seen new pipelines come online from the Permian to Mont Belvieu for Y-grade, more fractionation capacity has come online.

What's also really important, P.J., is that the NGLs that are coming from the Permian now have more ethane, so there's less rejection. So I think that all is a good set up for ethane, and with potentially modestly higher polyethylene prices through the Q2 and into Q3, we could see some margin expansion. I think pricing and margins have been stable because there is new capacity coming, but it's coming at a time when it's needed. So it seems to me that we have a very well-balanced market with some tightness in seasonally strong periods.

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Operator [9]

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Our next question comes from Steve Byrne of Bank of America.

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Steve Byrne, BofA Merrill Lynch, Research Division - Director of Equity Research [10]

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I'd like to hear your views on whether you'd wait for a 20-F filing by Braskem before you'd move any further than that. But really more importantly, this compounding business that you've expanded, the EBITDA in the business was essentially half of the EBITDA in your Olefins and Polyolefins outside of the Americas. I would assume it's just a fraction of the installed assets. Can you talk about what it will take to grow that business from here? Do you need to acquire more? Or can you organically grow into new products and new geographies?

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Bhavesh V. Patel, LyondellBasell Industries N.V. - CEO & Director [11]

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Yes. So our first priority is to continue and complete our integration efforts with the A. Schulman acquisition. And as I highlighted in my prepared comments, we're making excellent progress and well ahead of schedule in terms of our integration effort. Once we have that platform established through the completion of the integration, I fully expect that we'll continue to evaluate other smaller inorganic opportunities, and along the way, especially in Asia, we'll likely have opportunities to build new plants as well. So I think we'll be able to do both, Steve, with respect to our APS segment.

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Operator [12]

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Our next question comes from John McNulty of BMO Capital Markets.

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Bhavesh Mahesh Lodaya, BMO Capital Markets Equity Research - Senior Associate [13]

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This is Bhavesh Lodaya for John. I would like to ask a demand question in -- a bit differently. After the destocking phase we saw in late 4Q, in early 1Q, have you seen a decent restock phase? Or are customers just [turning] low inventories now? And also, the volume growth we saw in the quarter, is there a way to separate [both] and take the restock demand versus what you're seeing as core and market demand?

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Bhavesh V. Patel, LyondellBasell Industries N.V. - CEO & Director [14]

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Yes. Good question. I mean I think this is always a bit elusive in terms of being definitive. But I can tell you directionally, my impression is that given the macro backdrop of trade and Brexit and all these other things that create uncertainty, I continue to believe that buyers are really kind of buying what they need. Well, I don't think we've seen a significant restocking that occurred year-to-date. The increase in volume, I interpret that as an increase in the underlying market and how the market is developing.

Also, as is well known, buyers are expecting more capacity to come online. So in a backdrop like that, unlikely they would aggressively restock. So I think these are very healthy signs of underlying demand being very good and growing year-over-year as we come into the spring season and into the summer season. Restocking -- let me just add one other thing. Restocking, I think, would just add another layer of growth if and when it occurs.

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Operator [15]

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Our next question comes from David Begleiter of Deutsche Bank.

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David L. Begleiter, Deutsche Bank AG, Research Division - MD and Senior Research Analyst [16]

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Bob, just on Braskem. Are we getting to the point where you need to make the decision in the next few months? And if the decision is no, is there a plan B for M&A or a capital allocation?

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Bhavesh V. Patel, LyondellBasell Industries N.V. - CEO & Director [17]

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Well, first of all, I mean yes, it has been a rather lengthy period that we've been discussing with our counterparts. But David, on the other hand, it is a very complex transaction that has -- it's multifaceted. One of the facets was raised in a prior question. So we're working through it very methodically and thinking through value creation and weighing sort of the risk reward very carefully.

If we don't do it, we do evaluate, have a very robust pipeline of ideas that we can develop. But to just go back to what we said at Investor Day 2 years ago, which was that our priorities are to continue to pay a strong dividend that's progressive, and buybacks will be in the mix funded by operating cash flow. And when it comes to inorganic, we have return hurdles we want to meet and will -- our return aspirations will be adjusted based on the risk that we see in the transaction, so I think all things are open. And we continue to think about how we can build a great company over the long term.

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Operator [18]

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Our next question comes from Duffy Fischer of Barclays.

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Patrick Duffy Fischer, Barclays Bank PLC, Research Division - Director & Senior Chemical Analyst [19]

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Two questions around your Slide 10, which is the ethylene polyethylene supply/demand. One, can you square it, Bob, with your comment that 2/3 of the new capacity wave is already in the market, but yet on those charts, it looks like we peak in operating rates in '19, and then move down each of the next 3 years.

And then the second question would be if we do move down in a similar fashion to the way those charts are, what would your history and your gut tell you what happened to margins if we left everything else equal in natural gas, oil and all that stuff?

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Bhavesh V. Patel, LyondellBasell Industries N.V. - CEO & Director [20]

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Thank you, Duffy. There's a lot there in that question, so let me unpack it a little bit at a time. First of all, in the 2/3, my comment really related to the U.S. capacity that's coming online. And I think we would have -- the numbers suggest that we're kind of in the latter innings of this round of capacity additions. And in fact, in some cases, the derivatives are already online before the crackers are online. So from a polyethylene impact standpoint, I think we've largely seen the impact of the new capacity.

Referring to the charts, this is the latest IHS data, so we decided not to provide our interpretation through the glass but perhaps through the voiceover here. So if you look at IHS, they've added quite a bit of new Chinese capacity. Wood Mackenzie have not. So had we included the Wood Mackenzie forecast, it's actually quite different. History would suggest that likely we're going to come out somewhere in between. As you know, and as all the industry watchers know, that typically, new capacity, if anything, is delayed. Some of this has still -- hasn't gone into FID yet especially in polyethylene, so I think we'll have to see. But what my takeaways are from these graphs is that even with a more robust list of projects in Asia, we still see operating rates in the balance to zone still in the low to mid-90s. Any delays of a few units could flatten out the line, more material delays could actually create an upward slope in the operating rates. But we're kind of right on the margin.

And lastly, I would say if you think about the new capacity that's included now in the balances, really most of the new additions are in the third and fourth quartiles of the global cost curve, so they're not coming in advantaged regions. So I think to me, all of that is a set up to say that we could have really very stable markets for a longer period of time. And if there are a few delays or cancellations, you could actually see this operating rate graph turn up again, so I think we'll have to see. But our history, globally, in the industry has been that projects tend to get delayed. And some still haven't reached FID yet.

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Operator [21]

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Our next question comes from Arun Viswanathan of RBC Capital Markets.

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Arun Shankar Viswanathan, RBC Capital Markets, LLC, Research Division - Analyst [22]

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I guess just a quick 2-part question. So first off, just on the last question, if you carry, used it and see it and just looking where we are on seeing margins, you've seen a little bit of improvement in Europe. It looks like the polymer side has seen some increases recently. I know that North America folks have been trying to get a price increase for polyethylene for a little while. Your commentary sounds like it's potentially improving in chances as we go through restocking in 2Q.

My question is I guess have you -- do you feel that you could hit bottom in polyethylene margins? And do you think we could slowly climb out of that? And if so, how long would it take? And maybe you can just include your thoughts again on the global capacity build out. Now I know it's obviously in the upper end of the cost curve, but it seems like there's been recent additions of even more capacity in China. So maybe if you can just include that in your analysis, that'd be great.

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Bhavesh V. Patel, LyondellBasell Industries N.V. - CEO & Director [23]

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Sure. Well, again, I mean I think as you look at the new capacity coming online this year not only in the U.S. but globally, it's really meeting the new demand growth that we see year-over-year, and I think the demand growth projections are still similar to what we've seen before. Q4 was just extremely weak as we look back on it because of the destocking and some of the macro concerns. I think buyers really, really pulled back, and -- but we don't believe that the demand growth trends have changed materially. So my view is that I think 2/3 or more of the new capacity is in the market. As we go through the rest of the year, demand will grow to absorb the remaining capacity that's coming online. And yes, somewhere in here in the mid of this year, we should make a turn as there's less capacity coming in 2020.

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Operator [24]

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Our next question comes from Hassan Ahmed from Alembic Global.

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Hassan Ijaz Ahmed, Alembic Global Advisors - Partner & Head of Research [25]

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Not to bore you with sort of yet another question on Braskem but obviously, it's an important one. Look, obviously, we saw business conditions turn very sour very quickly in Q4, right? And you guys always talk about being sort of very prudent in thinking about M&A and the like. So my question is that, let's assume this Draconian scenario that over the next couple of quarters maybe the business environment becomes like Q4 '18 again. In that scenario, we saw sequentially Braskem's EBITDA go down by as much as 50%.

Now if that were the base case, would you guys still consider that acquisition as accretive? And would the synergy still sort of justify that acquisition at that run rate of EBITDA?

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Bhavesh V. Patel, LyondellBasell Industries N.V. - CEO & Director [26]

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Well, I mean, first of all, Hassan, it's a very good question.

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Hassan Ijaz Ahmed, Alembic Global Advisors - Partner & Head of Research [27]

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And I know I'm being Draconian.

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Bhavesh V. Patel, LyondellBasell Industries N.V. - CEO & Director [28]

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Yes. No, I understand. I understand. But I think for us, when we think about acquisitions of the size and magnitude of a Braskem, we've got to really take a longer-term view rather than 1 or 2 quarters. So frankly speaking, I mean what I would do is sit with my team and go through whether we think the business model has been altered or if there's some structural change in our view of the value creation from those assets. If there is, then we'd rethink it. But we don't believe that to be the case. And so I mean I think we just have to think through the reasons for the scenario that you described, and is it short term versus long term? So that's kind of the deliberation that we would go through.

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Hassan Ijaz Ahmed, Alembic Global Advisors - Partner & Head of Research [29]

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And I would also imagine the asset quality is very high, right, thinking about the replacement value and the like.

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Bhavesh V. Patel, LyondellBasell Industries N.V. - CEO & Director [30]

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Absolutely. Absolutely. And I have mentioned this on previous calls that we've been through diligence, and one outcome from the diligence was that we've confirmed that, indeed, the assets are of very good quality. So again, it's about thinking long term rather than -- or medium to longer term as opposed to the next quarter.

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Operator [31]

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Our next question comes from Vincent Andrews of Morgan Stanley.

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Vincent Stephen Andrews, Morgan Stanley, Research Division - MD [32]

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Bob, you did a nice job of laying out what's happened in the NGL markets and ethane, in particular. But as we look into the back half of the year as the new ethylene capacity starts up in the U.S., where do you think price gets back to you? Do you think we're talking high 20s, low-30s? Where do you see the price in the medium term?

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Bhavesh V. Patel, LyondellBasell Industries N.V. - CEO & Director [33]

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Vincent, it's hard to sort of forecast a short-term run up in the price like we saw last year. But my sense is that as more of this ethane -- so if you go back and dissect last year's spike, we'll call it that, there was actually less ethane coming down the Y-grade line from the Permian and other parts of West Texas down into Bellevue. That has now cracked itself, and there's a lot more ethane because there's new pipeline capacity. There are more fractionation capacity now, there's another one that's supposed to start up in the second quarter. Incremental delays help. Propane and butane prices are very low right now, and companies like ours have also now validated our ability to crack Y-grade.

So to summarize, first of all, I think there's plenty of ethane. But if ethane price were to rise, because propane and butane are so abundant, I think they'll quickly compete in terms of feedstock flexibility, and now Y-grade will compete as well. So all of that should really allow the feedstock price to be relatively stable through the rest of this year. And then next year, there are 6 to 8 new fracs coming in. Most of them are in the first half of the year, and by our math, there's like almost 0.5 million barrels a day of new ethane coming to market in 2020. So I think there's a good base case here that says we don't see a spike or any material sort of rise in ethane price unless gas price changes or something.

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Operator [34]

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Our next question comes from Aleksey Yefremov of Nomura.

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Matthew Stephen Skowronski, Nomura Securities Co. Ltd., Research Division - Research Analyst [35]

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This is Matt Skowronski on for Aleksey. PO and derivatives results were up quarter-over-quarter. Can you kind of talk about what you think about PO's supply/demand for the rest of the year? And maybe 2020 as well?

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Bhavesh V. Patel, LyondellBasell Industries N.V. - CEO & Director [36]

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Yes. So PO demand is still pretty good. We went through a little bit of a soft spot in Q4, and there is -- some tied to automotive. So -- but all of that seems to be recovering very nicely, and we see our PO business being as solid as we've seen in years past with modest year-over-year growth.

I think given that you've asked this question, I think the more important driver in Q2 will be the TBA portion and the oxyfuels because in oxyfuels, we had -- there's a parallel to our refining business and that's when gasoline values are low, it impacts our oxyfuels business as well. And so gasoline recovering will help oxyfuels values quite a lot. Blend premiums are up as well. On the cost side, butane is extremely cheap, so we're seeing pretty meaningful upticks in oxyfuel margins. So when I think about PO and derivatives together, the derivatives, especially oxyfuels, could provide pretty meaningful earnings improvement in Q2.

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Operator [37]

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Our next question comes from John Roberts of UBS.

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John Ezekiel E. Roberts, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals [38]

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Bob, you've taken a leadership role in Plastics Recycling. At the IHS conference last night, it seemed to me that the PET folks were missing from the discussion. Even though you're not in PET, do you think they need to get more involved? Or do you think you can move the debate without them? Or was that -- was I just misperceiving how it went last month?

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Bhavesh V. Patel, LyondellBasell Industries N.V. - CEO & Director [39]

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Well, you're not misperceiving it. I think they will join the broader movement. They already have initiatives in PET, and now it's just a matter of bringing it together under the umbrella of this alliance to end plastic waste. John, I think the key is collection of waste, and we start with the presumption that plastic waste has value, then the highest priority is to collect it closest to the source where the waste is generated so it doesn't leak into the environment, and we can reuse, recycle, recover the value that's in that plastic waste. And I think those principles are universally applicable to all polymers, and we're really gaining momentum on this alliance to end plastic waste. And you'll see more and more as the year progresses on tangible actions that the value chain are taking because ultimately, plastics are really a great sustainability story. The issue is dealing with the waste, and we're starting to see real solutions on how to deal with the waste. So I'm extremely encouraged. And I think PET will join.

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Operator [40]

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Our next question comes from Kevin McCarthy of Vertical Research Partners.

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Kevin William McCarthy, Vertical Research Partners, LLC - Partner [41]

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Bob, I was wondering if you could comment on the volatility we've seen in inventory levels of propylene monomer. Depending on when we start measuring, I guess have tripled from the bottom or doubled versus long-term averages. And then we've started to see some regression back down over the last 6 or 7 weeks. So could you comment on, a, why did they surge so high in late February or early March? And b, what is your outlook? Do you think that we've seen the peak and we come back down to more normal levels? Or has something changed that would be more durable or structural in nature?

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Bhavesh V. Patel, LyondellBasell Industries N.V. - CEO & Director [42]

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Yes. Kevin, these C3 inventories, the propylene inventories, they're really related to how well the PDH has brought in. We've had the large new PDHs that have been built have been running better is my impression. And when you couple that with the slower demand growth that we saw especially early in Q1 through January, February, I mean both of those things sort of went in opposite directions. So the demand was slow, the big PDHs ran very well. I think ultimately, also refining [STC] units have some role to play in this. So when STC is run well, you get -- you get more propylene as well. So propylene has been volatile for a number of years now. And I think as these new PDHs run well and are part of the baseload supply, we'll start to see these inventory swings moderate quite a lot.

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Operator [43]

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Our next question comes from Frank Mitsch of Fermium Research.

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Unidentified Analyst, [44]

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This is [Queenin Williams] sitting in for Frank. Bob, I was -- I wanted to follow up on the I&D business. Obviously, you spoke very positively about MTBE into the second quarter. Last quarter, you had spoke about that business having a $1.7 billion EBITDA base case. Would your comments be implying that we should start thinking about numbers north of that?

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Bhavesh V. Patel, LyondellBasell Industries N.V. - CEO & Director [45]

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Well, Frank, I -- let's see how the year plays out, but we've said $1.7 billion to $1.8 billion could be kind of the new normal in terms of the run rate for I&D, and I think we're very much in that zone. And with cheap butane prices as they are today, again, I think it points to the abundance of NGLs. And that business, in particular, really benefits when global butane prices are lower. And today, you're seeing butane trading around 50% of crude oil value, which is on the low end of recent ranges. So let's see how things play out. But we think certainly the $1.7 billion to $1.8 billion range as a base case is still a very good range to consider.

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Operator [46]

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Our next question comes from Jeff Zekauskas with JPMorgan.

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Jeffrey John Zekauskas, JP Morgan Chase & Co, Research Division - Senior Analyst [47]

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Since the beginning of the year, oil prices have gone from $50 a barrel to $70 a barrel and the price of polyethylene in Asia and the export price in the United States who really hasn't moved. Are you surprised by that? And how do you diagnose that there's really been no change because normally, those numbers really move together.

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Bhavesh V. Patel, LyondellBasell Industries N.V. - CEO & Director [48]

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Right, Jeff. That's a very good question. And I think it's really a result of a couple of things. First of all, in Q1, we still had demand that was coming off of very low levels. And as I said earlier in one of the other questions is that buyers still don't have conviction to build inventory. I think they're buying what they need. And so those 2 things probably led to this more sideways movement in polyethylene price. But again, it's during a period when we're seeing kind of the later innings of this new capacity build out. I think that set up is not so bad actually because it indicates that markets are still pretty resilient, and there were still decent margins in Asia even after some rise in the NAFTA price. So I think we'll have to see how this develops in -- as we come into the seasonally strong periods of April, May, June.

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Operator [49]

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Our next question comes from Jonas Oxgaard of Bernstein.

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Jonas I. Oxgaard, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [50]

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First off, I would like to thank you on behalf of humanity for first off, going metric; and second, for promoting waste incineration. Thank you.

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Bhavesh V. Patel, LyondellBasell Industries N.V. - CEO & Director [51]

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Well, Jonas, we are an international company. So we decided we better just go to metric tons across the board in a global company.

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Jonas I. Oxgaard, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [52]

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It could not have happened a decade too early. The actual question though, so Asia polyethylene is at the polypropylene floor now, which means polypropylene outlook becomes a lot more important. Do you have any views on where we can see Asia polypropylene going both over the next year? And if you'll think about the next 5 years or so?

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Bhavesh V. Patel, LyondellBasell Industries N.V. - CEO & Director [53]

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Well, we're still seeing very good demand growth year-over-year. I mentioned in my earlier comments that even in the U.S., we've seen volumes improve very well. There are some signs of stimulus being added in the economy in China, for example, the VAT cut that was implemented recently. Typically, our impression is that these are actions to provide stimulus in the economy. You see those maybe 90 to 120 days later. So we think those should bode well for polypropylene demand growth over the summer months and going into the full year.

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Jonas I. Oxgaard, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [54]

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Okay. And on the supply side?

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Bhavesh V. Patel, LyondellBasell Industries N.V. - CEO & Director [55]

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Supply side, I mean I think it's well known. I think overall, polypropylene operating rates are still very good globally even with some new capacity coming in Asia and particularly in China this year. So we continue to be very constructive about polypropylene going forward.

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Operator [56]

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Our next question comes from Matthew Blair of Tudor, Pickering, Holt.

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Matthew Robert Lovseth Blair, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Refining and Chemicals Research [57]

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Bob, a year ago, it looked like your refinery ran about 8% Venezuelan barrels, approximately. Just curious how you've been replacing those barrels this year. Have you found any alternatives in South America? Are you running more Canadian? Or have you had to move to a lighter slate and run more U.S. shale?

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Bhavesh V. Patel, LyondellBasell Industries N.V. - CEO & Director [58]

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No. I mean we've been able to buy some Colombian barrels and a little bit -- a few more barrels from other regions. The challenge for us, Matthew, in the refinery has been that the light heavy differential is so leveraging to that refinery, and we've had both sides of the equation go in the wrong direction, frankly.

On the sour side, we've seen reductions in supply from Venezuela. There's a little bit less coming out of Mexico. OPEC cuts take out some of the sour crude. Now on the other side, in the light crude, [LOS] has come down or has not gone up as much because there's a lot more supply coming out of the Permian. But I know you closely watch these things, and you've seen that, that differential is starting to open up again as various market factors kind of normalize. So we think this is going to be a very important driver of earnings, the light heavy differential normalizing in Q2 and Q3. And then while I'm talking about the refinery, I mean I think IMO is still in front of us as we look at Q3 and Q4, and the new marine fuel has to be deployed in the system globally so that there's compliance starting January 1 of 2020. So I think a lot of these sort of extraneous factors are already starting to normalize, and they'll benefit our refinery.

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Operator [59]

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Our last question comes from Laurence Alexander of Jefferies.

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Nicholas Cecero, Jefferies LLC, Research Division - Equity Associate [60]

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This is Nick Cecero on for Laurence. So within the I&D business, more specifically ethylene glycol, it seems as though inventory levels in China have been climbing pretty rapidly for some time. So I was just wondering how quickly inventory workdowns can happen from current levels. And then maybe just your view on supply/demand dynamics over the next few years.

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Bhavesh V. Patel, LyondellBasell Industries N.V. - CEO & Director [61]

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Well, on ethylene glycol, there is also a seasonality to that business because some of that ends up in PET. In the summer months, you have more demand for more disposable goods [in your own] products, if you will. So my sense is that the inventory will get worked off. And the thing to really watch there is more about the pace of new supply compared to demand growth, just like we look at fundamentals in the other businesses. And we see reasonably good patterns ahead of us. I think when you -- Nick, when you think about our I&D business, the biggest drivers are going to be PO, MTBE, methanol and styrene. And so we really kind of focus on those as the big drivers for earnings. While BDO and glycols are important, sort of the bigger levers are the ones that I just described.

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Thomas Aebischer, LyondellBasell Industries N.V. - Executive VP & CFO [62]

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And with low cost ethylene in the United States, this is the best place to be producing ethylene oxide and ethylene glycol. So that is helpful, but you're right, Nick. Prices have been very challenging this year.

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Operator [63]

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And we have no further questions.

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Bhavesh V. Patel, LyondellBasell Industries N.V. - CEO & Director [64]

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Great. So let me close with a few closing thoughts. So as we look ahead to the balance of the year, as you've heard through my commentary and through our prepared remarks, we do see improvement in market sentiment continuing and supporting continued demand growth and more importantly, tangible earnings growth. We see opportunities to grow earnings through the A. Schulman acquisition. Our new polyethylene capacity that will come online later this year, the I&D business, some more pricing improvements that will come through as well as the oxyfuel improvement that I mentioned earlier. Refining margins, we think, are normalizing, and most importantly, we're seeing that the light heavy differential is opening up. So I see in each segment of our business signs of sequential earnings growth as markets normalize and/or we implement our growth strategy.

So with all that said, I look forward to giving you all an update at the end of our second quarter and give you a progress report on our growth projects as well. So with that, we'll conclude our call. Thank you very much for your interest.

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Operator [65]

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Thank you for your participation in today's conference. You may now disconnect at this time. Have a wonderful day.