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Executives

Doug Pike – VP, IR

Jim Gallogly – CEO

Kent Potter – CFO

Analysts

P.J. Juvekar – Citi Bank

Bob Koort – Goldman Sachs

W. Fisher – Barclays Capital

Don Carson – Susquehanna Financial

Kevin McCarthy – Bank of America/Merrill Lynch

Jeff Zekauskas – JPMC

Hamed Khorsand – BWS Financial

Bill Hoffmann – RBC Capital Markets

Andrew Cash – UBS

Laurence Alexander – Jefferies

Hassan Ahmed – Alembic Global

Bill Young – ChemSpeak

LyondellBasell Industries NV (LYB) Q2 2011 Earnings Call July 29, 2011 11:00 AM ET

Operator

Hello and welcome to the LyondellBasell teleconference. At the request of LyondellBasell, this conference is being recorded for instant replay purposes. Following today's presentation, we will conduct a question-and-answer session. (Operator Instructions).

I'd now like to turn the conference over to Mr. Doug Pike, Vice President of Investor Relations. Sir, you may begin.

Doug Pike

Well, thank you. Welcome to LyondellBasell's second quarter 2011 teleconference. I'm joined today by Jim Gallogly our CEO; Kent Potter, our CFO; and Sergey Vasnetsov, our Senior Vice President on Strategic Planning and Transactions.

Now before we begin the business discussion. I'd like to point out that a slide presentation accompanies today's call and is available on our website at www.Lyondellbasell.com. I'd also like for you to note that statements made in this call relating to matters that are not historical facts are forward-looking statements. And 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.

And actual risk 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 our cautionary statements in the presentation slide and our financial reports, which are available at www.LyondellBasell.com/investorrelations.

A reconciliation to non-GAAP financial measures to GAAP financial measures together with any other actual disclosures including the earnings release are currently available on our web site www.LyondellBasell.com.

Finally, I would like to point out that a recording of this call will be available by telephone beginning at 1 p.m. eastern time today until 1 p.m. eastern time on August 29, by calling 800-510-9771 in the United States and 402-334-6800 outside the United States, and the passcode for both numbers is 4765.

During today's call we'll focus on second quarter 2011 performance, the current environment and the near-term outlook.

And with that being said, I'd like to turn the call over to Jim.

Jim Gallogly

Thank you for joining our earnings call. As Doug mentioned, a set of presentation slides accompany this call and are available on our web site. Let's begin by turning to page four to review a few financial highlights.

Second-quarter results were strong. In fact, it was the best quarter that we've ever posted with earnings per share of $1.38. Our year-to-date earnings per share were $2.56, a very nice start to the year. Adjusted for various items noted in our earnings release this increases to $2.74 per share.

Our second-quarter EBITDA surpassed $1.5 billion, bringing the first half EBITDA to almost $3 billion. Not only did we have a great first half and a record second-quarter, we also had a nice balance across the period. Our portfolio performed well month-to-month. This was due in part to solid operations during the quarter. We finished our largest turnaround in company history at Channelview, a major activity during which we had more than 2000 contractors on-site at the peak. The plant restarted in late June and is operating well. This scheduled downtime negatively impacted our EBITDA by about $75 million.

We also had about two weeks of unscheduled downtime at our Morris, Illinois site. The downtime was tossed by multiple lightning strikes at the facilities of our third-party power provider. This adversely impacted a quarter results by approximately $25 million. Good, steady operations generally go hand in hand with good safety performance. On page 5, you can see that our safety performance continues to be excellent. However, within the quarter we experienced a number of isolated and generally minor injuries. To help bring focused to safety, we held our second company contractor and supplier Global Safety Day. All of our 50 plus sites participated in this event. Our company goal is safety perfection. In summary, we had a great quarter.

Via investments and our assets and our systematic approach to all aspects of our business we have made great progress and established a solid foundation. The first half of the year was a good example and performance that will build upon.

Let me now turn the call over to Kent to discuss our financial performance.

Kent Potter

Thanks Jim and thank you all for joining us today. As Jim said, the second quarter was another strong quarter. On slide six, we have charted the EBITDA by segment for both the second quarter and our year-to-date results. I want to step through each segment and Jim will do so in significant detail, but I do want to stress a few points, some of which Jim has already mentioned.

Of course, I first want to underline the strength of the second quarter and our six months results. EBITDA for the six-month period falls just shy of $3 billion. Consider that each of the four large segments were individually generating EBITDA, that when annualized (inaudible) surprised $1 billion, all from San Palio from Americas alone operated on an annualized pace of more than 2 billion.

Second, I want to emphasize the consistency of our results across the periods. Our results have been recently steady across most segments and the Refining & Oxyfuel businesses have followed normal seasonal trends. I also need to point out that we recorded several charges and credits during the first half of the year. Among these were credits of $75 million for the cumulative impact of an insurance recovery and profit from the sale of severance from catalyst.

Offsetting charges of 119 million related to their combination of marking our outstanding warrants to market prices, reorganization and severance accruals, debt restructuring costs and environmental legal approvals. The combined after-tax impact of these items was a charge of $43 million during the first quarter and a charge of 62 million during the second quarter. The details can be found on our press release

Finally as Jim mentioned, we were also impacted by an estimated 150 million in pre-tax opportunity cost related to the downtime associated with our major turnaround activity.

Moving forward to slide seven and eight. I'll now cover some of the key elements of our cash flow. During the second quarter, we generated $554 million of excess cash, sending our cash balance to 4.9 billion. I'll touch on a few of the components in this cash flows.

First, exclusive of working capital changes, our operations generated 1.1 billion of cash. Included in this figure were a few significant payments, including 120 million for interest and $330 million for income tax payments.

Working capital consumed approximately 50 million as rent crude oil averaged $117 per barrel during the quarter, versus a 105 during the first quarter.

The next slide addresses the changes in the key components working capital. However, there is nothing unusual in the results to justify special mention this quarter. During the quarter, we continue to reduce our debt paying down an additional 250 million or 8% bonds. We also paid our first dividend, $0.10 per share approximately $55 million.

Capital spending during the quarter was approximately $260 million bringing our year-to-date total to approximately $480 million. This is somewhat below our targeted spending pace, and anticipate the full-year spending will be between $1 billion to $1.2 billion, depending on certain timing considerations. On the right-hand side of the chart, you can see our cash generation since last May. Since then we’ve added $2.2 billion to our cash balance, are reducing our debt by $1.4 billion, and paying our first dividend. On June 30, our total cash balance was $4.9, liquidity was $7.1 billion and our net debt had declined to approximately $900 million. During the quarter, we closed a couple of financings, I’d like to explain.

First, we refinanced our asset back revolver facility. Through this refinancing we extended the term to 2016, expanded the facility side of $2 billion, reduce the pace and interest rates considerably and amended and modified covenants flexibility as we advance of financing strategy.

We also put in place a new agreement, which reduces the cost letters of credits. And you may have noticed that we’ve not included our balance sheet in our earnings release. We’ve identified certain areas associated with our bankrupts related tax positions, related accounting that will result in a revision to April 30, 2010, emergence balance sheet Deferred Tax Liabilities.

Our revisions will not change net income either in the credit period or the period since emergence. Of course our balance sheet so we’ve had on our coming 10-Q filing after our revisions finalized, I want to emphasize that these relations relate to our emergence balance sheet and will not affect income or cash flow. Our EBITDA, earnings, EPS and cash flow will not change from amounts previously reported.

And before I turn the call back to Jim, I want to speak to you about our joint venture reporting. Joint ventures are a very significant part of our company and I want to ensure the device fully appreciated.

Please turn to slide nine, as it’s related and it will help me make my point. On the left-hand side of the chart, I’ve including an information that provides a perspective of our individual joint ventures.

As discussed, drivers of few the key joint ventures. First our Saudi ventures sells product in Asia apart from our Saudi ventures sell products into Asia, while benefiting from large scale, a latest products and technology and cost advantage raw materials including ethane and propane.

Similarly, in Asia one of our key ventures, HMC enjoys many of the same benefits in the Saudi ventures converting the locally priced propane in the product propylene. In Mexico our Indelpro joint venture enjoys a raw material advantage as it upgrades refinery-grade propylene, the polymer-grade propylene and then polypropylene. Given the tightness in the North American propylene market, this has been a significant advantage.

Finally, our joint-venture in Poland operates in some of the newest polymer technology of benefiting from raw material supply from our partners polythene [ph] production. In summary, our ownership of these ventures represents 4 billion pounds of equivalent polythene capacity, which typically operates with advantage raw materials. They also service growing markets with the newest technologies available.

Any other ventures such as the Saudi Arabian plants are new while the other such as Indelpro and HMC have recently been expanded. Hence their future potential exceeds historic results. In general these ventures are structured to distribute

Excess cash to the owners and do so periodically during the year, some typically pay dividends quarterly while others pay annually. For the first six months of 2011, our joint ventures have generated a $131 million of equity income or share and paid $107 million of dividends.

We are aware that many of you use EBITDA multiples to value of our company. In our EBITDA presentation, we include cash dividend that we receive from our joint ventures rather than equity income. This approach is typical and high-yield financing as they represents immediate cash flow. And I believe that it underestimates the value of these ventures and basis for this belief is that dividends are paid out of net income that is after all financing tax expense. Therefore an EBIT multiple applied to dividend is not consistent, rather I’m going to propose that the JV value based on equity income and a typical priced earnings multiple. On the upper right-hand side of this chart, we have provided our 2010 and annualized year-to-date joint-venture equity income and dividends. In the chart on the lower right, we have valued the JVs based on three approaches.

First, we plotted the book value of the JVs is defined last year our emergence plant. This value was derived from the discounted cash flow of the (inaudible) current forecast. Our forecast which is proving to have been quite conservative. In the second column, we apply our multiple of five to both our last 12 months of dividends and our annualized first half of 2011. This methodology results in a joint-venture valuation between $600 million and $1.1 billion.

Finally, in the column on the right, I applied a multiple of 11 in the last 12 month and annualized first half 2011 equity incomes. Resulting joint-venture valuation using this methodology is between $2.1 billion and $2.9 billion. The multiples I’ve chosen are represented general chemical industry multiples. I don’t mean to suggest that you apply these multiples some to be selected multiples reflect recent trading levels.

The point that I want to make is that the use of an EBITDA multiple significantly undervalues the shares of our ventures.

Based on the examples I have presented, I suggest that the EBITDA multiple approach undervalues the JVs by more than $1.5 billion or $3 a share.

Thank you. Now I’ll return the call to Jim.

Jim Gallogly

Thanks Kent. Let’s do a summary of second-quarter results for each of our businesses. Page 10, addresses the key results for the olefins and Polyolefins America segment. The second quarter continue to (inaudible) strong quarterly results. EBITDA of $578 million, it was approximately $95 million more than the corresponding first-quarter result.

Within the segment, olefins EBITDA improved by approximately $130 million. The key drivers have the increased prices and margins. Our production volumes decline versus the first quarter primarily due to the scheduled turnaround of one of our Channelview olefins plants and the Morris downtime. Our margin increased by approximately $0.07 a pound as ethylene price increased by $0.09 a pound. Partially offsetting this increase was a $0.2 per pound increase to our cost, our ethylene cost to production metric.

Raw material cost increased significantly as crude oil base reached our cost increase by $11 per barrel. In Gulf Coast, ethane increased by $0.12 a gallon, and majority of these raw material increases were offset by increased coproduct prices with the net result being the modest increase in the cost of production metric. Examples of the core product price increases experience quarter include propylene up $0.11 a pound, butadiene up $0.36 of pound and gasoline burning stocks up approximately $0.50 a gallon.

As a result, the second quarter cost of ethylene production from crude oil based feedstock declined versus the first quarter. Additionally, we benefited from our advantage position in the Midwest, where ethylene cost increased by only $0.07 per gallon, $0.12 increased on the Gulf Coast where most industry capacity resides. Approximately 80% of our second quarter ethylene production was derived from natural gas liquids.

Overall all of our results were very strong particularly when one considers that we operated for the majority of the period with one of the Channelview olefins plants and turnaround. Polypropylene results declined by approximately $50 million versus the first quarter, as price increases did not keep pace with the ethylene increases. As a result, spreads decline by approximately $0.02 a pound. Volumes declined slightly impart due to our internal maintenance schedule, but also due to customer buying patterns.

Polypropylene results improved by approximately $10 billion and sales volumes increased by about 5%, our margins were unchanged.

Late in the second quarter, certain product prices declined most notably to polyethylene. Despite this decline, thus far third quarter ethylene chain margins have been good. Our ethylene plans are running near full rates. Current spot ethylene price to support to believe that we will benefit later in the year when several producers execute turnarounds.

Let’s page forward to slide 11 and turn on attention to olefins and polyolefins, Europe, Asia and International. This segment also had a strong quarter with EBITDA of $275 million. This was approximately $60 million less than the first quarter EBITDA, as increases in our underlying 100% owned operations were offset by an approximate $90 million decline in joint venture dividend receipts and approximately $16 million for accruals that Kent mentioned.

Absentee's items, our underlying second quarter EBITDA was approximately $336 million versus $240 million in the first quarter. To build on Kent’s previous discussion, I should mention that our second quarter equity income was $73 million versus $58 million during the first quarter.

Coming to the Americas segment, polyolefins was a source of strength during the quarter. Polyolefins EBITDA increased by approximately $95 million as both cracker and butadiene recovery margins increased. The margin improvement resulted from increased ethylene chain margins and various butadiene prices. The crackers contributed slightly more than half of the sequential improvement. Butadiene recovery continued to represent approximately half of the (inaudible) profit.

Order from production volumes were relatively unchanged versus the first quarter, while increasing by 20% versus the second quarter of 2010. Within polymers, our results improved by approximately $10 million. Polyethylene results remained generally steady across the quarter, combined polypropylene and polypropylene compounded results improved moderately.

Polypropylene volumes declines were in line with the industry. Of note, our polypropylene compound volumes were unchanged despite the uncertainty around automotive products following the Japanese earthquake.

Early in the third quarter, European trends were similar to those in the U.S. market, as industry chain margins have declined from the strong second quarter levels. However, ethylene chain margins have been greater than first quarter levels, and we’re seeing positive price movements in the Asian markets. Over the coming weeks, it will become clear whether this will enter the recent soft patch.

Please turn to page 12 for a discussion of the Intermediates & Derivatives segment. Second quarter EBITDA was $313 million, $43 million greater than the first quarter results. This improvement includes $41 million gain from the sale of silver and spent catalyst. Within the segment the propylene oxide and derivatives area results decline, volumes decline with the end of the aircraft deicer season our margins were relatively unchanged.

Our intermediates products continued to post good results as increased margins led to improved asset deals and stirring results. Independent of the game from the silver sale ethylene glycol and TBA intermediates continued to post strong results, which are relatively unchanged versus the first quarter. The markets for these products and our operations in these areas have been very good. The Intermediates & Derivatives segment has been a strong steady performer and is expected to remain so in the near future.

Moving forward to page 13, I’d like to discuss the Refining and Oxyfuels segment. Second quarter EBITDA was $353 million, a $144 million increase versus the first quarter, which included the benefit from the $34 million insurance settlement. The Houston refinery EBITDA increased by approximately $135 million as it benefited from both increased industry margins and strong operating rates, however in the first quarter fluid catalytic cracker turnaround. The cracker is running very well and it's exceeding our design expectations.

Second quarter crude rates exceeded 260,000 barrels per day, reaching 280,000 barrels per day at times. Compared to the first quarter, the industry benchmark 211 spread, increased by approximately $2 per barrel. The corresponding metric for our facility increased by several dollars more, as we continued to secure advantage crudes and benefited from a marking efforts and product mix.

I’d like to take a minute to speak about crude oil prices as there may be some confusion regarding the price of West Texas and immediate WTI crude relative to other light crudes. WTI price has been depressed, due to logistical limitations in the Midwest coupled with increase crude production from the (inaudible) Rocky and Canada. Essentially, crude oil is long in this region and thus price has depressed relative to global prices.

In order to better understand or reflect the spread between heavy and light crudes on the Golf Coast, we’ve dropped the 2011 data based on Light Louisiana Sweet or LLS crude as a better representation of the benefit derived from our Houston refinery assets.

The Berre Refinery continue to post a loss, as a results declined by approximately $10 billion versus the first quarter. Industry condition continued to press results as not the prices lagged both crude and gasoline prices.

Additionally, crude cost were elevated as a result of the Libyan political situation. During the quarter, we chose a limit crude runs due to economic conditions. Oxyfuels results improved by approximately $50 million this quarter. This is consistent with seasonal trends and it is attributed to both improved margins and volumes. The benchmark margin that we follow on report improved by approximately $0.35 per gallon.

I would also mention that our shipments of ETBE to Japan continue throughout the quarter without interruption.

As you can see from the industry benchmarks on the slide, conditions in this segment have remained strong essentially equal to the second quarter levels. As Houston refinery has been operating that full capacity, we’re realizing the expected benefits from our FCC turnaround, and believe that we’re well position to take advantage of this environment.

Let’s move to slide 14 and the technology segment. This segment posted second quarter EBITDA of $42 million. Catalyst results remained excellent. Licensing results declined relative to first quarter when we benefited from ongoing payments related to earlier activities. Results include an approximate $15 million accrual related to the relocation of our New Town Square Pennsylvania Research Center.

Let’s step back from the details and summarize environment on page 15. Our second-quarter results were the best we’ve ever recorded. And as a result, during the first half of year, we generated EBITDA of almost $3 billion. Later in the quarter, we saw some relaxing of polyethylene volumes and prices. However, this followed very high margins realized early in the quarter. I don’t think this is a longer term concern and for the most part, I believe that it was driven by inventory adjustments as energy prices began to fall. In fact, during the past few weeks, we have seen the Asian market already began to recover. This is typical of an inventory correction and a buying behavior that we’ve witnessed in the past within the Asian markets. Unfortunately, it’s impossible to define the duration or visibility of these adjustments, the uncertainties around global events have made it that much more difficult to quantify.

Regardless of this volatility, the fundamentals that supported business have remained intact. Low natural gas cost relative to crude oil create a global advantage for U. S. polyethylene operations. Our European business has performed well, driven by our strong technology and asset position coupled with global olefin on a co-product tightness. And in refining area, our eastern refiner is highly competitive and it’s clearly beginning to demonstrate its earnings power.

Across the company, our second quarter operations were solid. We completed a large critical turnaround at our channel olefins complex. We continue to invest in reliability and efficiency improvement projects across the company and as always cost management remains a key aspect of everything we do. We’re working aggressively to restructure staffs within our European operations that further improve our competitiveness. We’re consulting local works councils to finalize plans. We’re also optimizing our U. S. R&D efforts. We have taken accruals in the quarter related to these items. I should also mention that our global employee head count currently stands at 13,900, a reduction of 3,300 since we initiated our efforts three years ago and 600 below the year ago level.

Our corporate governance reference are also moving forward. During the quarter, we had four new directors to our supervisory Board. The board now has majority of independent members with six such directors out of the total of 11. With the Board now fully constituted, we’re positioned to conduct a question and debates, which will serve as the foundation for our longer term strategic investment and financial plans. As Kent mentioned, we continue to move our capital structure forward. During the quarter we reduced our debt, restructured our revolving credit facility and paid our first dividend. We also advanced the projects that I discussed during our last call; it is outlined in the final slide in this presentation. It's premature to report specific information on these efforts, but I will say that the engineering is progressing rapidly and I’m very encouraged that we have wonderful growth opportunities with excellent recurrence.

Our Channelview and the four crackers are already highly competitive. Following the bottle mix they will clearly be world-class. I hope that is apparent that will beginning to operate on all cylinders. Our result are reflecting this fact and our successors today are allowing us to turn more of our attention and resources toward the longer term. I stated a couple of years ago that we will have to earn the right to grow. We are now at that point.

Thank you for your past and future support. Cherri, we’d be happy to take questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer-session. (Operator Instructions) And our first question comes from P.J. Juvekar of Citi Bank. Your line is open.

P.J. Juvekar – Citi Bank

Yes, good morning. A couple of questions Jim, can you talk first a little bit about polyethylene, how much are you exporting and did you see any slowdown in those exports?

Jim Gallogly

Yes, P.J. let me comment on that. We had mentioned that there was a little bit of softness at the end of the period. You recall that we previously indicated that we significantly changed our polyethylene portfolio. A couple of years ago, we were exporting about 30% of which about half was to Asia. Today, we export very little from the United States to Asia, of course our Middle East production primarily goes to Asia. We export 10% to 15% generally the South America and that continues. So some of that softness in Asia that we saw didn’t impact as that much in the U.S. simply because we repositioned our slim patterns.

P.J. Juvekar – Citi Bank

Okay. And second, you talked about the right to grow, you mentioned condo cracker, I was just wondering if Kent or Sergey talk about how you are looking at build versus buy decisions and while the acquisitions of limit at this point and are you looking on lead to either brownfield or greenfield expansions.

Jim Gallogly

Well, first, I want to point out that our primary emphasis will be on the de-bottlenecks of our existing assets. We’ve got some very large, very competitive crackers already at Channelview and at La Porte and we’re seeing the opportunity to significantly de-bottleneck those plants.

Those brownfield type investments will have much better returns we believe than Greenfield. So we’re looking first and foremost to de-bottlenecks, and when I say the bottlenecks, potentially fairly significant de-bottlenecks. As I said, these could be absolutely world-class crackers in size.

So that work is ongoing. We’re doing it at very fast pace. We’re expecting to get some detailed engineering soon, so that’s moving ahead full speed. We’re also looking at potentially Greenfield investments. After the announcement we made last quarter in the earnings call, we’ve already been contacted by a couple of parties and said, you’d make a great partner, maybe we ought to discuss this. We will look at those opportunities. We’ll see what the economics are and then decide from that point. But again, the priority is first and foremost on the highly leveraged de-bottlenecks.

Operator

And our next question comes from Bob Koort of Goldman Sachs. Your line is open.

Bob Koort – Goldman Sachs

Thanks. Jim, it seems like these ethane prices in the US continue to stay definitely high and I know in the past you implied maybe you could put a little pressure on the suppliers by looking at building your own. You’ve got an awful a lot of cash and won’t be very expensive. So is there any potential that you could actually get closer to maybe building your own fractionator.

Jim Gallogly

Bob, that’s a good point. At this point in time, ethane prices are elevated that’s in part because most of the large crackers are running well. There are a actually a few smaller crackers at this moment that have hiccups that are working through a few issues. But generally, because everybody is running pretty hard, that balance favors the folks that are fractionating. Now when we get into the heavier turnaround season that we expect this fall that is likely to change.

Having said all of that, we remain open to the concept if necessary of building billing own fractionation. We know that there is some capacity that’s coming on about 40,000 barrels per day from enterprise. We think comes on late in December, target's got another 40,000 barrels per day, I think, early in the second quarter. There are some various things that I have talked about in Marcellus, maybe 2012 and over 100,000 barrels per day. So we see quite a bit of capacity coming in, but we remained open to good financial opportunities for the company.

Bob Koort – Goldman Sachs

All right, it sound like, follow-up for Kent, you gave an interesting analysis for your JVs and I believe I guess that you’re getting short changed by the market. Is it possibly you could also give us a sense of what the proportional EBITDA, proportional debt is that we can look at it on our pre-tax basis?

Kent Potter

Well, some of that is changing, one of issues that we’re seeing on these joint ventures, start-up pass all the completion tests and all that, we generally have been successful in refinancing. And so some of that is changing in the case of (inaudible) we’ll be doing that I think. So, no I really can’t give you those numbers today.

Operator

And our next question comes from W. Fisher of Barclays Capital. Your line is open.

W. Fisher – Barclays Capital

If you could, I know it’s early and there is a lot of planning yet, but roughly speaking, how much should we expect CapEx to be up for the you guys in 2012?

Jim Gallogly

We'd be saying that we would generally spend about $1 billion a year in base capital and modest growth. As we start to work these other projects that’s going to increase. And I would expect that we ramp up may be a couple of hundred million dollars next year and then we’ll see after that depending upon the size of these projects that we’re looking at.

There are various things that we’re considering and overall still for those cracker de-bottlenecks, we talked about the propylene oxide expansion, most of this heavy spending doesn’t happen in the first or second year, it happens after you get the permits and a couple of years after that. So for the next year or two, you won’t see a significant ramp up, but you will see a ramp up.

W. Fisher – Barclays Capital

Okay. And then what are the chances that a decent amount of your expansion will happen kind of via your JVs? Is they room to expand those meaningfully or most of that happened with wholly owned assets?

Jim Gallogly

Well the things that we're looking in the United States are wholly owned assets other than a potential kind of cracker that of course should be in the partnership by definition. In Asia and in the Middle East, several of those facilities as Kent mentioned have already been de-bottleneck, they are well positioned to go ahead and as NASA in Asia becomes more comparative there's this cycle starts to turn in our favor. Those will run at higher capacities and that’s all upside. We would like to be bottomed like some in the Middle East, but it will depend on feedstock availability. The Middle East as you know is extremely competitive, there is opportunity for us to do things there, but we have to get a feedstock allocation and I know we and our partners talk about that with the authorities on a regular basis.

W. Fisher – Barclays Capital

Okay. And then just the last one, right around the time of your last call, there had been a number of announcements, you guys had your own, some of your competitors had some about stuff they wanted to do in the US. based off the shale gas, you’ve kind had three months now or so to analyze that. Can you just handicap the whole of all the announcements and what do you think is probable as we look out of it the next four to five years as far as capacity coming on mine in the U.S.?

Jim Gallogly

That’s going to be a tough thing to do Duffy but I’ll tell you how I think about it. First, one of the reasons our company is pursuing the de-bottlenecking is because those can be executed quicker and the first guys done are going to be in the best position. And so, we’re working that very, very hard and with full emphasis with our engineering team and our external contractors. We would like to be one of the very early movers. There has been some of the announcements, if you look at kind of what’s been done or what’s been talked about, some of those, I call those lines in the sand, they’re telling as they may come, but that’s another way of saying we like to talk to people about product. And so, we'll just see. I really can’t handicap it, but some of the projects would be so late and in the cycle that by the time they got going, they’ll probably miss some of the early benefit.

Operator

And of our next question comes from Don Carson of Susquehanna Financial. Your line is open.

Don Carson – Susquehanna Financial

Yes, thank you. Just a question on OP Americas as for the second quarter, you ran a pretty heavy NGL slate and I know that U.S. NAFTA margins were very attractive in the quarter, just wondering why you didn’t run more NAFTA, was that because of OP-2 down and the need to maximize production hence you ran ethane. And Jim you mentioned about de-bottlenecking Channelview in La Porte in and wonder if you would have any plans to de-bottleneck your Midwest crackers to take advantage of what should be a sustained ethylene advantage in that region?

Kent Potter

Yeah, Don, first in terms of why we ran so light. At this moment in time, there is reasonable balance between light and heavy because of the strong, strong value of the co-products. We did have OP-2 down and that had a pretty significant influence. As you know that’s a very, very flexible cracker and we’ll run quite a few of the furnaces on heavies to take advantage of that co-product pricing. So you correctly analyzed that.

In terms of the Midwest, we’ve done some turnaround work there last year at Morris. And other than the lightning strike that hurt us this last quarter that unit is running very, very well. We’ve set new production records time after time after time to the point now where we’re looking at de-bottlenecking the polyethylene. So the unit itself following this turnaround, some of the things we’ve done, really is helping us there. Now Clinton we’re doing some furnace work, improving efficiencies that will help us on energy as well as yield structure. So again, those are the kinds of de-bottlenecks that do nothing, but good for you, very low capital and really nice returns. And so modest things there, but still given the spreads, pretty impressive.

Don Carson – Susquehanna Financial

Just If I may, a quick follow up on the refinery. You mentioned you did briefly get there to 280,000 barrels a day from time to time. Should we expect that as sort of a new potential run-rate as we get into the second half of the year, just what are your thoughts as to how you kind of run post the FCC turnaround?

Jim Gallogly

Yeah, I’m not going to call 280 at this point in time. But we have demonstrated the ability to do it. It depends on what crudes are running and a few other things and how we’re configuring the back end. But I think the great news is that we’re showing we really know how to be the company that refines again. You can see in the operations that we’re are lining things out, we’re lot smarter in the way that we’re buying crudes and selling finished products. And the margins have improved significantly in that business, but we’ve outperformed the general industry and you see it in our results. And I’m extremely proud to be saying that last year I kept making excuses for this refinery and said trust me it’ll get better, and now I’m able to tell you we’re demonstrating that.

Operator

And our next question comes from Kevin McCarthy of Bank of America Merrill Lynch. Your line is open.

Kevin McCarthy – Bank of America/Merrill Lynch

Yes. Good morning. Jim, in your prepared remarks you mentioned that your refining economics ran several dollars better than the benchmark Maya 211 spread. Was that delta above the Maya 211 better than it would have been in 1Q? And do you think its sustainable moving into the third quarter?

Jim Gallogly

Well, I think it’s a little better this quarter than in the first quarter. We have done a very nice job of buying crude oil. There is a significant disruption in WTI compared to other crudes that are coming in. If you look at WTI Maya, you’ll see a negative spread, never happens like that. But people price crudes WTI in Holland and we’ve been out there in the market I think doing some very clever buying and also optimizing the feedstock that that we bring into the refinery, the amount of heavy sulfur, we’ve always been a little light with (inaudible) in terms of total capacity and so we’ve been smart in pre-selling some coal products and doing this and doing that. I call it refining 101, although always been done by our team, it’s more like a senior class because they really demonstrating the ability to move quickly and adjust to markets and bring in some nice cargoes. Is it sustainable if the opportunities in the market remain, yes? We’ve got that run very well, but we’ve now demonstrated, we know how to do it and then in the past that stuff just was not happening in this company.

Kevin McCarthy – Bank of America/Merrill Lynch

So a follow up if I may, Jim, on a different subject related to the propylene chain, an awful lot of value has been created in propylene modem or I guess over the last year or two unless so at the polymer level based on some of the industry margins that we observe. Do you think that that will change in coming years and I’d welcome any thoughts you have on the industry consolidation there with the Dow Brascan deal?

Kent Potter

Yes, well, first on that the general propylene molecule and the polypropylene, we have to talk geographies there and as you know in the Middle East we have (inaudible) feedstock situation. So those economics will remain very, very robust. In Asia and in Europe things remain about the same simply because people continue to crack naphtha and so the balance between ethylene and propylene isn’t that different. Now, I would like to point out that we buy propylene fairly well in Europe, because of the size that we have or so net short and that some people get some standard propylene and we’ve been pretty good at buying that molecule.

Now in the United States, which is I think where your primary question is because of light cracking the propylene molecules has been very short as caused polypropylene to be more expensive than polyethylene and there has been some product substitution, that will normalize itself out. Overtime, we’ve reacted to it, the volumes have fallen some that we’ve been able now to adjust and get some decent margins. You saw our margins went up a little bit just last quarter in polypropylene, but the value will be primarily in propylene I think versus polypropylene and the near term. And in terms of the consolidation in the industry Brascan has been there in the past and are good competitor and they are very large, we are very large and we’ll enjoy competition.

Kevin McCarthy – Bank of America/Merrill Lynch

Great. Thank you Jim.

Doug Pike

This is Doug; I had to say remember we also have a very nice business in our polypropylene compound in there, so we got some price where we add some real value down to the propylene chain. Guys, one thing I want to say is, as we only got about 12 or 15 minutes left. So we will have to move pretty quick as we have a fairly long queue of questions. Be respectful of everybody's time.

Operator

And our next question in queue comes from Jeff Zekauskas of JPMC. Your line is open.

Jeff Zekauskas – JPMC

Hi. Good morning. Just two questions. Will there be a difference between your book taxes and your cash taxes this year?

And then secondly, can you speak about the profitability of your Berre refinery year-over-year and when you might expect the difficulties there to end?

Kent Potter

Let me take the tax question first, it sounds easier. In the US, we remain largely where we were before and just as I mentioned before, it’s really not going to change too much. We lost pretty much our attributes during the bankruptcy. So our cash taxes are pretty much the book taxes in the US. In the rest parts of the world, first of all we have large debts to rates in some places and some of our profits aren't taxed, at least on our books as you see like I was talking rather than the joint ventures. But and another place also, we’re not effected by bankruptcy our European operations, we still have significant temporary differences between book and tax. So there will be a still some differences.

Doug Pike

One other thing Jeff, I just mentioned, we do have our interest carry-forward available.

Kent Potter

Doug raises a good point. We do have what might we called another temporary difference, and we did not lose all of our interest deductions in bankruptcy. But those will be reported to deferred tax accounting, so we will be okay.

On the Berre refinery, we continue to have losses at that facility. European refinery industry is reasonably challenged in general at this moment time and our asset has run on purpose at lower volumes to minimize the losses. As we’ve announced in the past that asset is for sale. That process is in the early days and so we'll see how it continues on. I would like to point out if we are unsuccessful in selling the asset, it is a possibility we could shut that refinery down and run our cracker or low-density unit and polypropylene unit on the stand-alone basis.

Operator

And our next question comes from Hamed Khorsand of BWS Financial. Your line is open.

Hamed Khorsand – BWS Financial

Yeah. Good morning. Just one question here, as far as the maintenance scheduling goes in the second half of this year, how much market share you think you can gain while the competitors are running?

Kent Potter

Well, I’m not sure if I’d talk about market share but I will say that there is a pretty heavy turnaround schedule expected in September and October of this year. We generally don’t look at that as market share because it’s transitory but we think it should make the market very, very firm at that point in time and we’ll go ahead that we have OP-2 done already. Now, come spring there’s going to be an extremely heavy turnaround schedule including the OP-1 or other cracker Channelview. So things are getting very tight then.

Hamed Khorsand – BWS Financial

Okay and just a follow-up. As far as gain these customers from even if it’s temporary, how much of it can you maintain once the competitors are back on line?

Kent Potter

Well, generally that’s transitory. We don’t really think about it in terms of gaining market share on a permanent basis. As you may know, we contracted our long ethylene position to third parties. And so while we’re in the spot market, that’s not a market, we depend on per se. So in these kind of opportunities, we’ll consider where we can make the best money. You remember, last year we quit making some polyethylene to sell some extremely valuable ethylene. And so we do those kinds of things in short periods of time to optimize the benefit to of our shareholders.

Operator

And our next question comes from Bill Hoffmann of RBC Capital Markets. Your line is open.

Bill Hoffmann – RBC Capital Markets

Great. Good morning. Jim, I just wondered if you could address, you talked a lot about the greenfield and brownfield expansion, a lot of this organic growth. I just wonder if you could address the thought of acquisition potential within that context any thoughts about further integrating your business on the downstream.

Jim Gallogly

Yes, at this point in time, in terms of the ethylene component, we think we can build out the existing assets we have to the point as I mentioned we’ll have absolutely world-class size and cost structure type assets. You’re in the US between those OP1, OP2 in La Porte report with also a very nice facility down at corpus and two well positioned Midwest crackers.

If the right opportunity were there at the right price maybe in terms of an acquisition, but most people see the advantage that ethane has right now and I suspect that assets for sale may carry a pretty steep price. We just have to see what comes along.

Bill Hoffmann – RBC Capital Markets

And what about the thought of downstream integrating further?

Jim Gallogly

In terms of polyethylene, polypropylene or?

Bill Hoffmann – RBC Capital Markets

Yes.

Jim Gallogly

Well, I’ll just say that the last opportunity that was available, we decided not to pursue, if that helps. It’s always about value for our shareholders and we didn’t see the opportunity as being accretive to the level, thought we other opportunities for it.

Operator

And our next question comes from Andy Cash of UBS. Your line is open.

Andrew Cash – UBS

Yeah. Just one quick strategic one and then quick fundamental if I could. Jim, you’re talking about enlarging your footprint in North America, I’m just curious, do you think that the increase outside the US especially look at the Middle East or Asia, do you think the potential increase outside North America, especially Asia or Middle East would be greater than or about equal to what you expect in North America.

Jim Gallogly

Andy, I think, my impression is, the things you’re really slowing down with the exception of those this week’s announcement by one of our competitors. The Middle East is much slower because frankly they don’t have all the standard ethane available and the newer projects don’t have the same economics of the ones that were done previously, in my view, and I personally been responsible for building a lot of those plants.

In Asia, there is going to continue to be some expansion, but most of the forecast we see, most of the announcement says that the pace is reasonably slow and everybody is really cranked up right now. We’re in very, very good shape for the next years and that’s why we think we have such a bright future in part. We think it’s going to ramp up very slowly and the big growth in the Middle East is just not going to be what it used to be.

Andrew Cash – UBS

Okay, thanks. And then just quickly on fundamentals, I was wondering if you guys could size the silver catalyst sales in the tens of millions or in hundreds of millions, and then finally just trying to reconcile the North American EBITDA, your big numbers in the quarter compared to a little numbers in our estimate. I was just wondering was the metaphysis unit, did it play a big role in improving EBITDA in the second quarter compared to first quarter?

Jim Gallogly

Let me figure it out, we said it was a $41 million gain, it was about a 55 million – $60 million sale.

Andrew Cash – UBS

Okay.

Doug Pike

Yes, the timing was very good for us. As far as the metaphysis unit actually part of this whole major turnaround activity at Channelview involved in the metaphysis unit and some of C4 recovery. So we had a pretty big activity and turnaround and we saw the impact there.

Andrew Cash – UBS

So, it didn’t help out in the second quarter. It was down most of the quarters, right?

Doug Pike

Well, it was down for a portion of it

Andrew Cash – UBS

Okay. Got it. All right. Thank you

Doug Pike

But it’s a very important asset as you point out. It’s capable of making lot of money in this environment.

Andrew Cash – UBS

All right. Thank you.

Doug Pike

One is running.

Operator

And our next question in queue comes from Laurence Alexander of Jefferies. Your line is open.

Laurence Alexander – Jefferies

I have two quick questions. Most ones have been answered. On the refining business, how much of the refining results was specifically typically due to buying cost in Q1 that you don’t think you’ll be able to repeat going forward and secondly just a tactical question when you think about reporting here on segment EBITDA, a lot of companies consolidate the JV EBITDA into the segments EBITDA as it grows to the dividends and would you consider making such a shift in your accounting?

Jim Gallogly

Well, in terms of the accounting we do put the JV dividends into the segments that managed our interest in those joint ventures most of them primarily are in OMPO, EAI.

Laurence Alexander – Jefferies

(inaudible) changing from consolidating dividends to consolidated the EBITDA?

Kent Potter

Yes, we could but it’s actually what Bob was asking his question on debt financing we have to depreciate it, some of the big ones the ones that are materially impacting us or have recent debt that is being paid down and things are changing. We could take their EBITDA but we have to make sure that their reporting is on an US. GAAP basis. So there is a lot of complexities there but it is something that we thought about. This is the way we’ve done it because it represents cash and is equivalent to our cash but that is the thought, maybe we should take that under consideration.

Jim Gallogly

Yeah. In terms of what’s repeatable in terms of crude oil slate and all I would say that the general conditions that we experienced in the first half of the year in terms of crude purchasing seem to be continuing on into this third quarter and hopefully reasonable period of time, so we expect to do well on refining.

Doug Pike

Guys, I'm looking at time and I’m going to apologize and we'll try to take a couple of more questions, I am afraid we will have to all switch for today.

Operator

And you wanted to take two more questions?

Jim Gallogly

Yeah, we will take two more questions.

Operator

Thank you. Our next question in the queue comes from Mr. Hassan Ahmed of Alembic Global. Your line is open.

Hassan Ahmed – Alembic Global

Hi there, guys. Just a quick question on the cash conversion side of things. Taking a look at the Q1 numbers, you guys obviously did around $1.4 billion in EBITDA. But cash from operations was slightly north of $200 million. And looking at this quarter, EBITDA obviously north of $1.5 billion, and cash from operations over $1 billion. So on the Q1 side of things, was that really an inventory build ahead of your planned maintenance that brought the cash from operations levels down?

Kent Potter

No, well it’s number of things; it’s a number of things. In our business we have significant first quarter cash payments related to bonuses, rebates, very heavy rebate operations, our insurance premium, there is just a number of first quarter effects. And in our case, we also paid a significant contribution to our pensioned plan. So I think it was more a function of the timing of our cash payments in our annual cycle.

Hassan Ahmed – Alembic Global

Fair enough. So Q2 is more normal, is it?

Kent Potter

Yeah, so I would so in fact one could argue that, that we’re making accruals in two, three, and four quarter that we’ll have to be paid in the first quarter.

Operator

And our last question will come from Bill Young of ChemSpeak. Your line is open.

Bill Young – ChemSpeak

Thanks for taking my question. The inventory correction, you mentioned Asia looks like it's coming back a little bit. How would you characterize the North American market for polyethylene? With prices having gone up so steeply, there's probably been a lot of pre-buying. Where would you say that one is in the overall scheme of things, and how much longer you think it might last?

Kent Potter

Yeah, Bill that’s a bit difficult to project, but in the pattern that we saw was fairly typical. When oil prices start to fall people wonder if the polymer prices will also fall, so they start to destock inventories. They did that, the volumes fell a bit. We’ve already seen we’re intensified buying in Asia, it’s ramping up and typically that same kind of a pattern happens in the United States and in Europe. And so it's starting to gain a bit of momentum, we’re seeing a little picking up at the markets, but there was a soft patch and we will just see the duration of it. We’re optimistic that this was inventory destocking influenced by a temporary reduction, but inventories are a recently below.

Bill Young – ChemSpeak

Okay. And, lastly, on the condo cracker concept, you said you got some calls. Are you expecting other companies to announce plans besides what we've already seen, say in Marcellus, or were the calls mostly from people who already have made announcements?

Kent Potter

People who made announcements, I would say with the general once. As everybody knows, you just don’t build capacity; you have to have a derivative behind it. And we’re a very, very good competitor in polypropylene and polyethylene and we’re leading technology. So people think about what they might want to do downstream with the cracker and we come to their mind fairly quickly in many instances. So it’s not things that I had announce as things have been talked about in the press already.

Jim Gallogly

Thank you. All right well as we ramp up, I’d like to reinforce a couple of points. First, we truly are making progress on our fronts. The results have been very good. We just reported our best ever quarter. We think the recent soft patch is just that kind of a (inaudible) thing, where inventories readjust. We’re beginning to have growth plans, we’re investing in our assets, getting our turnarounds done. We’ve also begun to return cash to our shareholders, due to payment of our first dividend.

And we're continuing to repay debt. We’re very happy to have a full board in place. We’re looking very much forward to the discussions on our financial plans, our growth projects with the new members of the board and the existing members. We’re able to turn our attention now to the future and to new opportunities.

I said a year ago that we had to earn the right to grow. We think we’ve done that. We think we’re starting to operate like a very, very good company on the way to becoming the best in the industry. We feel good about our results in the first half of the year particularly good about this quarter.

We very much thank you for your support and look forward to the next quarter. Thank you.

Operator

Thank you for joining in today’s conference. You can now disconnect.

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