利安德巴塞爾 (LYB) 2009 Q3 法說會逐字稿

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

I would now like to turn the conference over to Mr. Doug Pike, Vice President Investor Relations.

Hello and welcome to LyondellBasell's teleconference. I am joined today by Jim Gallogly, our CEO; Ed Dineen, our COO; Kent Potter, our CFO; and Kevin McShea, our CRO. I would like to point out that a slide presentation accompanies today's call. It is available on our website, www.lyondellbasell.com.

Now before we begin the business discussion, I would 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 more detailed information about the factors that could cause our actual results to differ materially, please refer to disclaimer notice of the presentation slides and our financial reports, which are available on LyondellBasell.com/InvestorRelations.

I would also like to point out that a recording of this call will be available by telephone beginning at 2.30 PM Eastern time today until 11 PM Eastern time on December 3 by calling 866-448-7652 in the US and 203-369-1201 outside of the United States. The passcode for both numbers is 6578.

Now today Jim will open the call by speaking to our safety statistics and providing a brief overview.

Thank you for joining us today. Before I discuss the specific elements of our September results, I thought I would provide a brief overview of the third quarter, our strongest quarter of the year. We generated approximately $750 million of EBITDAR. Overall industry trends and conditions held fairly steady throughout the period.

We continued to benefit from good performance in our oxyfuels, propylene oxide, US polyethylene, and our advanced polyolefin businesses. Conversely, our refineries generated losses, as weak industry conditions persisted. In fact, September refining industry spreads were the lowest of the year.

I am pleased to report that within the Company we have accomplished a great deal during the past several months. Let me provide a few examples. We completed the conversion of our primary US MTBE facility to ETBE production and initial shipments to Europe and Japan are underway.

We also recently announced the official start up of our Al-Waha polypropylene joint venture in Saudi Arabia.

Based on signs of economic improvement, we restarted some previously idled facilities, including the propylene oxide facility and three polypropylene compounding lines. And our scheduled maintenance efforts have also progressed, as we are currently completing the maintenance turnaround of one of our German olefin plants. Our turnaround work at our French propylene oxide plant is also proceeding well.

Looking beyond our plant and business activities, our efforts to emerge from bankruptcy have also progressed, as we filed our planned reorganization and disclosure statement. I want to assure you that while advancing these efforts we have not lost focus on cost management goals. Later in today's discussion you will see that our cost savings are continuing to follow a steady, positive trend.

During the third quarter we continued to improve our internal efficiency, and reduced staffing by approximately 750 people, bringing total reductions under our program to slightly more than 2,000 employees and 1,500 contractors.

All of these events have brought us closer to emergence from bankruptcy and provide evidence of a revitalization as a company and competitor. Hopefully our Company's invigoration will be accompanied by a strengthening globally economy. But rest assured that we will not rely on this for our success.

With this backdrop, let's discuss specifics of performance, beginning with safety results. Unfortunately, I have to say that I'm disappointed with September results. It is not that we have experienced any major incidents, but we have had far too many minor injuries. Nobody should be injured at our facilities, and unfortunately these individual cases often indicate that the focus on details is not up to our expectations.

Having said this, I don't want you to come away thinking that our results are not up to industry standards. To the contrary, they are quite good and continue to place us as one of the safest companies in our industry. However, the results are not meeting our goals and we will address this systematically.

At this time I would like to turn the call over to Kent to discuss his September financial results.

Thanks, Jim. And all of you on the phone, thanks for joining us today. Let's turn to page 4 of the presentation and look at the results. As Jim said, September proved to be another good month for us and results were generally consistent with, although somewhat lower, than July and August results. As a consequence, our year-to-date EBITDAR reached almost $1.7 billion, approximately $130 million ahead of our operating forecast.

Trends of the prior months continued. Refining margins continued to disappoint. Fuels segment results were essentially breakeven, and small losses at the refineries were offset by oxyfuel profits.

Trends in polymers also continued as US polyethylene exports led the very strong performance. During September we continued to benefit from solid propylene oxide and advanced polyolefin results. Coupled with the benefits of our cost reduction programs, we were able to generate approximately $750 million of EBITDAR during the quarter, bringing our results somewhat ahead of our operating forecast and budget.

You might notice that there is exceptionally large restructuring costs this month. This includes approximately $20 million of severance and site closing costs, and $40 million of professional fees. In addition to these costs we had unusually high contract termination costs, as our people actively managed our right to reject contracts under Chapter 11 filings.

We also wrote off $195 million of debt issuance costs associated with classes of debt that will be compromised under our plan of reorganization.

Finally, I need to mention that we recognized a $483 million charge associated with environmental claims that have been filed against the estate. For those who are less familiar with bankruptcy, I should clarify, while this is the required accounting treatment for claims, it does not mean that the estate will ultimately be responsible for payment. In fact, these will become unsecured claims against the estate. And we expect that the majority of the costs will be expunged under our plan of reorganization.

If you turn to slide five, you will see that our cost reduction efforts remain on track. During September our fixed cash costs were approximately $70 million less than our operating forecast. This is generally consistent with prior months, and continues to demonstrate the success and sustainability of our efforts.

I would point out that our maintenance spending was so much greater -- so much greater in September than in prior months, as we have delayed spending -- some spending early in the year and are now returning to more typical, sustainable levels.

While I am speaking about cost control, I would also like to say a few words regarding capital spending. This is another area that we have managed very conservatively, while at the same time taking adequate steps to support safe, efficient operations of our assets in the long run.

Year-to-date our net spending for capital projects, plus turnaround and other amortized items, was approximately $360 million. This figure reflects the positive impact of approximately $75 million insurance reimbursements related to the rebuild of a German polymer facility, as well as our decision earlier in the year to [avert] spending as a means to manage cash and liquidity.

We will continue to manage our spending closely. However, with two major turnarounds underway, we anticipate that fourth-quarter spending will increase.

If you move to slide number six, you will see how this comes together in terms of our liquidity. We closed September with approximately $2.6 billion of liquidity. And as of October 29 this has increased approximately to $2.8 billion. Through the year we have maintained liquidity of approximately $2.5 billion, temporarily drawing on our asset backed revolving credit facility only when significant raw material payments have been due.

In summary, third-quarter EBITDAR, fixed cost savings and liquidity all remain on track with the plan. With EBITDAR reaching approximately $250 million a month, third quarter was the best of the year.

At this time I will turn the call over to Ed to discuss the business situation.

Thanks, Kent. Let's begin by turning to slide number seven and addressing the fuels business. As Jim and Kent mentioned, during September trends continued much as they had throughout the quarter and year. September industry refining spreads were very low, and in fact, as Jim mentioned, were the lowest of there, while oxyfuels margins followed typical seasonal trends.

This resulted in the overall fuel segment generating only $7 million of EBITDAR during September and $107 million for the third quarter. The refineries generated moderate losses throughout the period, while oxyfuels was the source of the positive results.

Let's look at the components of the division separately, beginning with the Houston refinery. During September the refinery generated negative EBITDAR of approximately $10 million, slightly better than August results. The industry benchmark, Maya 211 spread declined by approximately $4 per barrel to average only $9 per barrel during the month. Our corresponding spread also declined but to a lesser degree, as it averaged $11.30 per barrel, a decline of $1 from August.

Generally speaking, the difference can be explained by the fact that, although our gasoline and distillate prices declined versus August, we outperform the market benchmarks. Additionally, the decline on the benchmark parameters was somewhat offset by strength in some of our less significant refinery product, such as refinery grade propylene.

Results also benefited from a decline in natural gas costs. From a volume standpoint we trimmed production rates during the month, and the crude run averaged 262,000 barrels per day. Operationally rates could have been higher, but processing additional crude would not have been economically justified.

At the Berre refinery industry conditions and results were essentially unchanged versus August. September EBITDAR was approximately negative $10 million, and the refinery processed approximately 77,000 barrels per day, or approximately 73% of capacity. Like the Houston refinery, the economics were not sufficient to justify processing additional crude.

Oxyfuels generated approximately $25 million of EBITDAR during September. This is a decline of approximately $35 million from August, which is consistent with the seasonal decline in industry raw material margins. Compared to August, industry ETBE raw material margins declined by approximately $0.30 per gallon to average $0.45 per gallon during September.

September results were also impacted by a decline in volumes related to scheduled maintenance activities at our French facility and conversion of our principal US facility from MTBE to ETBE production capability. The latter work has been completed, and for most of October we have been producing ETBE at full rate.

A significant portion of this ETBE will be supplied to the Japanese refining industry as they adapt ETBE as a principal blending component. Also, our planned turnaround at our French PO/TBA plant has continued through October and will be completed in mid-November.

Looking forward to the balance of the year, we expect continued poor industry spreads, and thus poor results from the refineries. I would also note that during October crude runs were reduced as we had one of the crude still at the Houston refinery down for about two weeks of scheduled maintenance.

Within oxyfuels results are expected to follow the typical seasonal pattern, declining to near breakeven EBITDAR. If you look at the chart on the lower right, this may seem to be somewhat contradictory as October industry margins have been quite strong. However, we attribute this primarily to tightness created by our maintenance activity, as we do have a significant marketshare in this business.

Now I would like to proceed to slide number eight and discuss our chemical results. September EBITDAR was $106 million, relatively unchanged from August and sufficient to bring the third-quarter total EBITDAR close to $300 million.

USO US olefins generated approximately $30 million of EBITDAR during September. This is a decline of approximately $10 million versus August; however, this decline was related to a positive inventory adjustment that was realized in August. The underlying business results were actually relatively unchanged.

Compared to August, the economics of naphtha cracking improved significantly. The raw material cost declined, while coproduct credits were relatively unchanged, as an increase in chemical coproduct values was offset by a reduction in fuel coproduct values.

While this resulted in an improvement in the economics of naphtha processing, the cost of ethylene production from natural gas liquids increased. Overall our cost of ethylene production metric was essentially unchanged versus August.

During the month our feedstock mix averaged approximately 80% natural gas liquids. Our European olefin results improved to approximately $25 million from near breakeven results during August. This significant improvement was driven by lower naphtha costs, coupled with higher product prices.

Meanwhile, our propylene oxide and intermediates products have continued to post strong results. September EBITDAR was close to $60 million, as propylene oxide and derivative results remain strong, and were essentially unchanged as margins asnd volumes held steady near August levels.

Results of the intermediate chemical products improved by approximately $20 million, primarily due to improved margins. This was supplemented by an increase in styrene sales consistent with a restart of one of the US POSM plants.

Looking to the fourth quarter, we expect to experience some decline in results. The olefin plants have been subjected to increased raw material costs, while pricing of some coproducts, such as propylene, has declined. The propylene oxide and intermediates area has performed well all year, and we would expect this to continue over the coming months.

Turnaround work at one of our Wesseling crackers and two of our propylene oxide plants will have some negative impact on results. However, given industry conditions, this is not expected to have a major impact.

If you now proceed to slide number nine, I will discuss the polymers segment. Polymer results continued to be very strong, generating $100 million of EBITDAR during September, just slightly less than August. Overall there was minimal change in either volumes or margins, and the strong results continued to be led by US polyethylene export opportunities.

Within the polymers segment, polyethylene was responsible for approximately 60% of the EBITDAR. Advanced polyolefins contributed 25%, with the balance from polypropylene. Volumes were relatively unchanged versus August as polyethylene volumes decreased by approximately 5% or 40 million pounds. However, APO volumes increased by approximately the same amount. September volumes were essentially equivalent to year-ago levels. Year-to-date volumes still lag last year by approximately 9%.

With respect to price spreads between polymer and monomer, within polyethylene we benefited from an increase of approximately $0.025 per pound in Europe and the US. In polypropylene our European spread was unchanged, while the significant US propylene price increase led to its $0.02 per pound decrease in the spread.

As we consider the fourth quarter, we initially experienced some declines in US polyethylene export demand. However, this has since reversed itself and export demand has recently recovered. Polymer demand would typically decline during the fourth quarter, with the latter half of December being particularly slow as converters shut down for the holidays. However, since this year has been anything but typical, and inventories throughout the chain remain low, it is difficult to forecast this with any confidence.

On slide number 10, you see that our technology and R&D segment results recovered to $32 million following a slow August. For the most part the difference is related to the timing of licensing income. Additionally, September benefited from relatively strong catalyst volumes. Overall we continue to forecast annual technology segment results to be relatively consistent with our plan.

Now I would like to turn the call back over to Jim.

Thanks, Ed. If you would turn to slide 11, I would like to quickly summarize some of the metrics that we have been tracking as part of our cost reduction efforts. On the left side of the chart I would like to merely reemphasize a trend that Kent discussed previously. Overall our cash fixed costs are tracking approximately 25% below our budget and versus 2008 the reduction is slightly larger.

I hope that you can tell from the metrics on the right-hand side of the chart that we have been quite aggressive and have achieved savings across a broad spectrum of the Company. Our efforts range from the shutdown of nine plants and more than 15 offices to a 24% reduction in our inventories. And, of course, we have already discussed the manpower reductions.

I would like to point out that we are not merely coasting on the benefit of past actions during the third quarter, as we reduced our employee headcount by close to 750 people. As I have said before, and would like to again reemphasize, our cost reduction efforts are not a program, but rather an ongoing effort that will become part of our culture.

Now let's move forward to slide 12. This slide summarizes some points that we have made during the call. The one item that might benefit from further amplification is the comment that addresses raw material volatility.

Although our third-quarter results were quite steady across the months, we should not forget that raw material cost can significantly impact our short-term profits. I also don't want anyone to lose track of the fact that crude oil prices have increased by approximately $35 per barrel this year. In fact, from the low to high the cost per barrel has more than doubled. This is a very significant cost increase for our businesses. And I sometimes think that after last year's volatility we may fail to appreciate the magnitude of this movement.

The final item that I would like to briefly touch on is our bankruptcy proceedings and the status of our efforts. I would first like to point out that the Company has met and intends to continue to meet all of its deadlines. This includes a filing of the draft plan of organization and disclosure statement during September. Despite our efforts, we must acknowledge that this is a very complex process involving many parties.

Given this environment and the desire to ensure that there is adequate time to address every aspect of the process thoroughly and comprehensively, we have elected to extend our timeline. This includes an extension of the DIP loan, as well as a small delay in the litigation schedule.

While I realize that this may raise some questions, I want to assure you that the Company has and will continue to make every reasonable effort to exit bankruptcy as expeditiously as possible, but at the same time taking into consideration the number of interested parties and legal complexities of the case.

With this, I would like to thank you for your interest in LyondellBasell, and we will be happy to take your questions.

(Operator Instructions). Adrayll Askew, Hartford Investment.

Can you speak to the recent improvement in polymers export opportunities that you highlighted? And in your view what caused the initial decline and then what led to the recent reversal?

Maybe it would be best if Ed addresses this question.

We have seen strength in exports probably since the April/May timeframe out of the US. I think it has generally been driven on the cost side from the US because of the relatively low ethane and ethylene price compared to the rest of the world. So I think the US producers have a cost advantage that allows us to take advantage of some of these opportunities.

We have seen demand, particularly in China, where I think these opportunistic exports, if you can call them that, are largely moving, has been strong throughout the year. I think it turned down somewhat as we saw crude turn a little bit. And then, frankly, as crude turned back up towards $80, I think we generally see the Chinese market react pretty strongly to that.

Our sense is inventories are still pretty low throughout the world. So as we get cost movements you're going to get some reaction to polymer prices and volumes. So right now through November our order book is pretty much full with these export opportunities. We are assuming that it won't sustain into December, but it is yet to be seen whether that is actually going to be the case.

That's very helpful. Then switching gears here, can you talk to the potential impact of cap and trade legislation on the refining sector? There has been a lot of buzz, I guess, related to that in the press here recently. From an operational cost standpoint what do you see that doing to your business over the longer term?

That is a pretty difficult question to answer, but let me do my best. Generally the industry expects that to increase costs in the United States if cap and trade is adopted. The real question gets to be how, efficient is your refinery as against others, and what is your ability to pass on the costs. If you're an inefficient refiner you may not be able to pass on all of your costs, and it would be a fairly significant burden on your profitability. On the other hand, if you are efficient, hopefully, most of those costs could be passed on.

What is the industry doing to handle that if it, in fact, comes? Obviously, the first thing you would try to do is reduce your energy usage. Refineries boil oil and are very, very energy intensive. So if you can reduce your energy consumption that helps.

So what we are doing at our Houston refinery, for instance, is trying to reduce that energy profile that we use. We hope that we can have some small capital projects to have a fairly significant impact, but we don't have any large capital projects planned.

Environmentally we are pretty good shape in terms of all of the things that are required by regulation there at present. But again, if this were to come, we would try to maintain our efficiency and push those costs on to the consumer. Likely we would not be doing -- aiming treating those kinds of things to reduce greenhouse gases, but would potentially be purchasing credits.

I guess, do you feel any competitive constraints as it relates to your ability to pass those costs along? How are you sizing that piece of the equation up?

Today we are not happy with the profitability of our Houston refinery. We think we have some basis to improve that performance. Some of that will be cost reduction, some will be yield improvement. So at this moment in time we are not happy with that competitive position, but you will see that we are going to be improving that, hopefully, fairly dramatically in the coming months.

Kevin Brown has joined the Company as head of Refining -- has great experience. As you know, I have spent quite a bit of time in the refining business. Between the two of us and the rest of the team at our refineries we are going to put greater focus on that and try to give you improved results.

Thanks. That was very helpful.

Rajul Aggarwal, Marathon Asset Management.

Just a quick question on the PO business. I think, if I'm not wrong, in the last quarter you said that business was more or less a $40 million monthly EBITDAR business. In your prepared remarks you mentioned that was a $60 million ebit EBITDAR business this month. I just was wondering if that is correct and what explains the difference?

It has been running along fairly steadily going across. And when we said the $60 million EBITDAR was for the propylene oxide and the intermediates products, so that includes the [fills] business, styrene, our C4 chemicals business, etc., ethylene oxide, which actually has been a good business for us as well. So intermediates have a strong September. So the $40 million is a subset of the $60 million is the answer.

Thank you. That was the only question I had.

[Philip Babar], Royal Bank of Scotland.

Within the oxyfuels segment, after you completed this ETBE from MTBE conversion, what is the mix between MTBE and ETBE going forward, or where was it and where do you think it will be going forward?

Prior to the conversion we were 100% MTBE in the US. That is our largest facility, and initially our plans are to run it largely as an ETBE facility, driven by the demand we see coming out of Japan. But we have the flexibility to move back and forth, so that mix is really going to be driven by the market -- margin opportunities that we see for either ETBE or MTB in Asia and the Caribbean or over in Europe.

So that is pretty easy to switch back and forth?

It is relatively easy. We have that capability actually in all the facilities -- the two in the European arena, as well as the one we have just converted here in the US.

The facility that we converted will typically produce 25,000 to 30,000 barrels a day or something.

And it will have the same volume of ETBE, I'm assuming?

Essentially, pretty similar. Yes.

Within the other category on your EBITDAR chart, it was negative 20. The prior month it was also another fairly large negative number. Has there been a change from the normal trend to explain the higher than normal negative number there or --?

No, that picks up some FX impacts and some intra-department transfer impacts, so really nothing changed other than the FX situation.

Just on -- I know you mentioned that CapEx will jump up in the fourth quarter, any thoughts on any guidance on that and what you might think for 2010?

Let me take that first and see if somebody wants to expand. We have entered the year and typically have said we had a budget and a plan of about $800 million of CapEx. We held back spending early in the year, as we mentioned. I think if we look at the fourth-quarter spending with the turnaround activity, etc., we will probably be more to that budgeted rate, in that kind of a range.

Going forward, we have more turnaround type spending next year, and there is different programs we need to catch up on. So we would expect that number to increase next year, particularly coming off the relatively low levels of this year.

Yes, in fact, over the five-year period we are going to be spending roughly $1 billion a year, but 2010 is less than that. It is around -- a little closer to $900 million, recognizing that next year should be a difficult year as well.

But nothing above maintenance, no extra projects above maintenance level?

(multiple speakers). Very modest for-profit type projects.

(Operator Instructions). Michael Boam, BlueBay.

I have a couple of questions and they are more industry related. My first question, you have mentioned the low relative ethane price. And obviously the weak dollar has helped significantly in the chemicals and polymers business in the US. How do you see that playing out over the course of the next 12 to 18 months? It seems that a lot of natural gas production is largely to come off-line. I guess the oil to gas price ratio should start to normalize again. Is that the way you see things or --?

Let me go ahead and try to handle that. I was in the E&P business six months ago. I had a very good insight into natural gas prices in the United States and production levels. Drilling has declined in the United States for natural gas, but from a very high point. You will find that a lot of these resource plays that are generating a lot of the natural gas are profitable from $4 to $5 an M, generating 12% to 15% type returns.

There is a significant availability of prospects to grow those kind of wells. And if gas prices, for instance, right now above $4 -- those kind of activities continue, with those prospects available the number of independents, in particular, and some majors continuing to drill those wells, we would expect to see ethane continue to be priced below the heating value level of crude oil. We would expect to see ethane preferred over naphtha in the foreseeable future.

The question in the United States is does the export window remain open. We think it does, but maybe not at the robust level that it is today, and that is reflected in our forecast going forward.

Can I just ask -- of your volumes, how much are you actually shipping abroad as things stand today?

We are about 30% export. About half of that is to more traditional South America type markets and the other half of that is to Asian markets.

That is for polyethylene.

Polyethylene, that's right, which I think that is what we are talking about, right?

No, I mean, that is fine. Thanks for that. And then on the refining side, obviously the $60 million question -- and if you could give me an exact answer you would be very rich -- how do you -- how longer do you see it taking to work down this middle distillates inventory? Can you give us some sort of historic context to how big this is? I know it is bigger than it has been in the last five years, but is it bigger than it was during the last downturn?

Well, the economy is everything on this. Obviously, people are flying less, less long-haul carriers moving across the roads. Depending upon the economy, that could be eaten down fairly quickly, but is anybody's guess as to how quickly that does happen.

As you have seen these kind of trends -- if you look at last year, everybody thought that distillate cut was going to be profitable for the next three or four years at a very nice level. Everybody was figuring out a way to convert their processes to get more of that cut. A short period of time later all of a sudden it is no longer the preferred cut.

So this market moves fairly rapidly. A lot depends on the economy for the distillate cut. We will just have to see how that develops. I would say that people that were reconfiguring their refinery are changing their plans and going back and trying to make more gasoline at this moment in time.

Can you give us -- are we at the bottom now in terms of margins or is there still further to go -- not necessarily for you guys, but for the industry? It looks like you guys are around breakeven.

Certainly if you look across September, and you looked at some of the industry benchmark margins, some of the WTI 321 margins in the States here fell into the $2.50, $2.80 range. And I don't think anybody is really making money processing crudes at that kind of a point. So we dipped down. If things recovered to $4.50 to $5, but it is still pretty thin margin.

The Maya 211 has recovered some, as you know, this last month. It is not robust, but there is some light heavy diff again and a little bit of crack in there. So we will just have to see what we can do with that. (multiple speakers) in the refining business, but there has been a little uptick.

[Rina Beonce], Wexford.

In the month of September you have reclassified the current maturity of long-term debt into liabilities subject to compromise. Can you please address the rationale for that move?

Yes, this is Kent. I think it was required given the situation that we have experienced with those issues. I think accounting treatment required it.

Thank you.

Gentlemen, at this time we have no further questions. I would like to turn the call back to you.

If there are no questions, then I would like to thank everyone for participating today. And we will continue on our monthly schedule, so we will talk to you again in about a month. Thanks again.

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