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 over the conference to Mr. David Kinney, Director of Investor Relations. Sir, you may begin.

Thank you, Angela. Hello, and welcome to LyondellBasell's second 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 these 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 2:00 p.m. Eastern Time today until 11:59 p.m. Eastern Time on September 1 by calling (888) 277-9385 in the United States and (402) 998-0509 outside the United States. The passcode for both numbers is 5713. During today's call, we will focus on the second quarter results, the current environment, our near-term outlook and we will provide an update on our growth initiatives. With that being said, I would now like to turn the call over to Bob.

Thanks, Dave. Good day to all of you participating around the world, and thank you for joining our second quarter earnings call. Let's begin with Slide 3 and review the highlights. During the second quarter, consumer-driven demand for our products and low feedstock costs improved profitability in four of our six segments. Despite concerns about capacity additions in the industry and a challenging business environment, integrated polyethylene profitability increased during the second quarter, with industry margins of approximately $600 per ton in Europe and $800 per ton in North America. Across the company, our second quarter EBITDA improved by approximately 11% relative to the first quarter. Second quarter earnings were $2.70 per share, which represents a 23% improvement over the previous quarter. Our second quarter income was slightly below the guidance range we've provided in June primarily due to compressed margins from our refining business. As the price of oil fell by more than 15% from mid-May to mid-June, we saw many of our customers holding back on June orders, particularly in markets that are driven by industrial demand such as automotive, appliances and industrial construction. During July, volumes for most products rebounded to levels 10% to 20% above June, and third quarter demand seems to be following typical summer seasonal strength. Our company moved forward on our disciplined value-driven growth strategy by announcing the second Spherizone polypropylene project at our joint venture in Thailand and ending discussions regarding the potential acquisition of Braskem. We are leveraging our innovative technologies by expanding our footprint in the growing Southeast Asian polypropylene market. We're completing construction on our first Hyperzone polyethylene plant and building a new propylene oxide plant that addresses growing demand for polyurethanes. These decisions demonstrate our disciplined approach to investments, which are focused on growth opportunities, where we see a clear path to value creation for our shareholders. Our strong cash flows and conservative balance sheet allowed us to launch a tender offer in June that resulted in the purchase of approximately 9.5% of our outstanding shares in July. Our actions in the last quarter are consistent with our balanced capital deployment strategy that positions us to grow cash flow and provide consistently strong shareholder returns in the form of both opportunistic share buybacks and a top decile dividend. Let's turn to Slide 4 and discuss our safety performance. Our approach to the integration of the A. Schulman acquisition began by immediately instilling LyondellBasell's safety culture across our new assets, employees and contractors. A. Schulman expanded our employee population by approximately 40%, and through the end of the second quarter, we achieved considerable progress to sustain LyondellBasell's leading safety performance. And now Thomas will provide more detail on our financial highlights for the second quarter.

Thank you, Bob, and good day to all of you. Please turn to Slide 5, which illustrates developments within our company during the quarter and over the trailing 12 months. As Bob mentioned, during the second quarter, four of our six business segments posted higher profitability relative to the previous quarter. EBITDA for the entire company has continued to increase sequentially since the fourth quarter of 2018. Our business portfolio continues to provide earnings resilience through the diversity of our petrochemical products and markets and can often reduce volatility for the overall company performance. Integrated polyethylene margins have expanded in both Europe and North America due to favorable feedstock prices. In addition, seasonally low butane raw material prices drove benchmark Northwest Europe, MTBE, oxyfuels margins to the highest levels since 2015. In the first quarter, we mentioned that we had a minor impact due to the service disruptions related to the March fire at the third-party terminal on the Houston Ship Channel. The impact of lost sales volume and expenses extended to the second quarter, and we estimate that results for our I&D segment were impacted by approximately $50 million during the first half of 2019, primarily in our oxyfuels and related business. We anticipate that third quarter results will have little to no impact due to this issue at the terminal. Our Houston refinery continued to run well at 97% of nameplate capacity. Unfortunately high prices on the portion of heavy sulfur crude oil we buy on the open Houston market, reduced profitability relative to Maya 2-1-1 referenced crack spreads. Our technology business delivered another quarter of outstanding results with several licenses reaching revenue recognition milestones. On Slide 6, you can see that LyondellBasell's businesses generated nearly $1.2 billion of cash from operating activities during the second quarter. We…

Thanks, Thomas. Let's turn to Slide 9 and review our business results. In our Olefins and Polyolefins Americas segment, second quarter EBITDA was $635 million, $119 million higher than the first quarter. Results were driven by abundant and affordable natural gas liquids. Olefins results increased by approximately $90 million compared to the first quarter. This improvement was driven by a higher margin as declines in the cost of raw materials outpaced declines in the price of ethylene. Ethylene operating rates remained strong during the second quarter, averaging 91%, exceeding industry rates by 5%. We continue to optimize our cracker feedslate to benefit from lower NGL prices in our U.S. Gulf Coast system. We've previously spoke about how much of our ethylene production was produced from NGLs. It may be more useful to understand the composition of our feedslate. In the second quarter, we found advantage in low propane and butane prices. More than 25% of the raw materials used in North American crackers were propane- or butane-based and more than 55% was purely ethane. We continue to increase our utilization of mixed Y-grade NGLs as an advantaged ethylene feedstock. During the second quarter, mid single-digit percentages of our North American cracker feedslate was composed of Y-grade. Polyethylene results increased more than $25 million during the second quarter. Polyethylene margin improved with the spread increase in polyethylene over ethylene of about $65 per ton. Spot prices of ethylene have risen during July due to industry downtime and continued delays in the commissioning of new capacity. North American polyethylene production is increasingly serving global demand and more than one-third of U.S. and Canada industry production is now being exported. Slide 10, depicts historical and forecast impacts from capacity additions on global polyethylene operating rates. The green dash line illustrates consultants' forecast from…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Arun Viswanathan with RBC Capital Markets. Your line is open.

Great. Thanks. Good morning.

Good morning.

Just wanted to ask about the outlook for the rest of the year. You mentioned that July, you saw some improvement from the weakness in June. Conversely, polyethylene looks like there was some movement up in mid-June and then that kind of looks like it's going to recede in July, August. I mean that could be typical seasonality, too, but if you can just give us your thoughts on both the polyethylene as well as I&D and related to your earlier comments about July improvement. Thanks.

So Arun, I mean we've continued to see the consumer demand driving demand for our products. Where we see a little bit more tepid buying is on the industrial side. As you know, there's a lot of concern about trade and tariffs and Brexit and the direction of interest rates. Our view is that that's all causing industrial sentiment or industrial buyers to be cautious in what they buy. Having said all that, we still see in the case of polyethylene, demand growth for this year of at least 4% year-over-year. And as new supply comes on, we think that the demand is there to meet it.

[Operator Instructions] Our next question comes from Duffy Fischer with Barclays. Your line is open.

Yes. Good morning, guys. A question just on your PO project. The polyurethane chain has been weak recently. When you look out, how does that impact your PO when it comes online? Do we need to see kind of an acceleration in growth in the polyurethane chain for that to be a healthy launch when that plant comes on? Can you just kind of walk through maybe how the economics look to you today versus when you pull the trigger on that plant?

Yes, Duffy. They haven't changed considerably. I mean it's really – what we're seeing today is a slowdown in the automotive market that we think is more temporary for a variety of reasons. Some are economic. Some are because of standards. For example, in Europe, diesel standards are changing and emission regulations are changing. So frankly speaking and I mean I think consumers in Europe don't know today what type of car they should buy, so they're just forgoing purchases until there's more clarity in the regulatory environment around emissions and so on. So our belief is that as the middle class grows in India, China and the rest of the world, and we think that automotive demand, although it's cyclical, longer-term, we believe that more automotive ownership and generally the middle class buying furniture and all the other things that polyurethanes go into really will underpin that investment. So our view has not changed in terms of our ability to price the product or to deliver the returns that we expect.

Thank you. Our next question comes from Bob Koort with Goldman Sachs. Your lien is open.

Good morning. This is Dylan Campbell on for Bob. Earlier this year, you guys talked a little bit on I&D in terms of contract improvements, maybe adding $100 million of EBITDA starting essentially around now. Have you guys have any update on those contract improvements?

I mean those are – Dylan, those are coming through our P&L now, and you see those in the results. And there's a lot of kind of moving parts in I&D, with styrene and methanol and so on. But I can tell you, we see it in our oxyfuels business and even more importantly, the advantaged butane especially here in the U.S. has been a really – a good positive driver for I&D earnings. So it is in the P&L.

Dylan, this is Dave. I would remind you of Thomas' comments around the $50 million hit that we've taken in the first half of this year related to the ITC buyer. That's primarily been felt in that segment.

Thank you. Our next question comes from Kevin McCarthy with Vertical Research Partners. Your line is open.

In the data that you've provided in the supplemental section of your release, it looks as though your polyethylene sales volumes declined 15% year-over-year in O&P-EAI. I know you mentioned June was soft and just wondered if you could elaborate on that. Was it due to the monthly sales patterns or did you have any operational or other issues that would explain that?

Yes, Kevin. Good morning. We did have some operational issues in one of our crackers, where we can't really buy ethylene to supplement. So that was most of that change in volume that you see, and some of that was just kind of managing our inventory. But most of it was unplanned maintenance.

Thank you. Our next question comes from Vincent Andrews with Morgan Stanley. Your line is open.

Thank you very much, Bob. On the Hyperzone project, could you give us a little more definition on the timing of the startup and the ramp? And then also what's your view on the export markets pricing and sort of ability to move that volume? And then to which regions will you go?

Yes. So Vincent, we're going to start to – we're starting to get systems turned over to us now. We're not mechanically complete yet, but the commissioning process will really begin in earnest here in the coming month or two. And our idea is that we will have production in Q4 on the Hyperzone project. In terms export markets, the way to think about it is that we're going to export from the system on the Gulf Coast, so it's not that all of the product that comes out of Hyperzone will be exported. We'll export some also from other segments. Our early indications from what we did with customers in Europe and some in Asia was that indeed, the products that will come off of Hyperzone are expected to be unique and provide unique characteristics, for example, large-part blow molding. And so we have a very good, detailed marketing plan that includes all regions and aims to capitalize on the uniqueness of the products that come off of Hyperzone.

Thank you. Our next question comes from David Begleiter with Deutsche Bank. Your line is open.

Thank you. Good morning. Bob, with Braskem not happening, are you thinking perhaps ramping up ramping up your organic growth activities? And as part of that, can you discuss maybe your ethylene strategy going forward? You've been prudent not adding ethylene capacity, but you are an ethylene company, so you might – at some point I'm sure you will. Thank you.

Yes. Thank you, David. First of all, as we think about organic and inorganic, our capital allocation strategy is really geared around funding organic growth from operating cash flow. And so I wouldn't make a direct tie to not pursuing Braskem with increasing our organic programs. And we'll provide more of an update at the Investor Day. But our strategy around organic growth has not changed. After we complete PO/TBA, we potentially can do one or two more derivative one or two more derivative plants. I actually think that our organic growth program in terms of the funds require will scale down somewhat after PO/TBA. And we don't anticipate that changing. So I think we'll continue to strengthen balance sheet capacity for primarily in organic which as we demonstrated who quite patient.

Thank you. Our next question come P.J. Juvekar with Citi. Your line is open.

Quickly on – butane was your cheapest feedstock. I mean how much max butane can you go? And was there any benefit of lower butane in oxyfuels? And then you mentioned wider NGLs. How should we think about wider NGLs? The margins there would be your regular cracker margins plus captured in frac margins. Is that the way to think about it?

Yes. So first of all, your question on butane really we should think about propane and butane together. We can crack up to 40% - or 40% of our ethylene can come from propane and butane. 40% of our feedslate can be propane and butane. Yes, indeed, it did benefit our oxyfuels as well especially here in the U.S. So I think there was – again, it highlights our feedstock flexibility and our ability to be resilient in a range of energy price environments. In terms of Y-grade, we're continuing to increase our demonstration of our ability to crack Y-grade. So soon, we'll have demonstrated on four of our crackers on the Gulf Coast that we can crack Y-grade. So when ethane prices were a bit higher, Y-grade made a lot of sense for us. Today with where ethane is, ethane is far better from an economic perspective. So I think, P.J., the way to think about Y-grade is that it's one more lever in our ability to flex feedstocks to maximize value. And I think now we're very confident that we can do this at meaningful rates.

Thank you. Our next question comes from Hassan Ahmed with Alembic Global Advisors. Your line is open.

Good morning, Bob.

Good morning.

Bob, just wanted to focus on near-term, compare and contrast relative to the back half of last year. It just seems that in the U.S. in particular, it's exactly the opposite. You have ethane, which is [indiscernible]. You have spot ethylene, which is topping. And like you said in your prepared remarks, the scale of 30% increment, not a 30% increment but 30% of the remaining capacity that was expected between 2016 and 2019 is yet to come. So what are you guys seeing on the ground?

Okay. Well, there is a lot there, Hassan, so I'll kind of take it in pieces. First of all, when we think about the feedstock environment, you'll recall that even six months ago, we were concerned about another run in ethylene prices and that hasn't materialized. So why is that? Well, first of all, there's a lot of wet gas coming out of the Permian. There's been more pipeline capacity added, more fracs have been added. We've also had the turnaround season and project delays. So all of that has led to ethane prices falling below even, frankly, our expectations. I've had recent conversations with a couple of midstream company CEOs, and the impression I get is that there's a lot of ethane available that's going in the rejection now. It wouldn't take much of a price increase to bring that ethane out of rejection. So our view is that even with new cracker start-ups and turnaround season ending and so on, there's plenty of ethane. And we think that ethane price could perhaps return to recent levels before this latest decline, but we don't see a large runoff. On the polyethylene side, demand is still growing at reasonably good rates globally even with the backdrop of all of these concerns that are on peoples mind. So my sense is that I don't think inventories are terribly bloated. And some confidence returning to the market could boost the operating rates and the firmness in the market. Lastly, I think as you think through these new plants that start up, you have to remember that in our business, the supply comes on in a very lumpy fashion and demand grows over time. So generally, when I look at our business, I step back and look at quarterly operating rates and I look at annual operating rates. And that's why taking back to the chart that was in our presentation that annual operating rates are still very high, and I think that should be a good guide in terms of how we should think about profitability. So we're very constructive even in this environment where there's a good bit of uncertainty. I think if some of this uncertainty clears, confidence will come back to markets.

Thank you. Our next question comes from Frank Mitsch with Fermium Research. Your line is open.

Good morning, Bob and good luck with getting that uncertainty cleared up anytime soon with Brent down 7% today. Hey, listen, I was interested in your thoughts on the Exxon Baytown accident, the unfortunate accident there and what the impact might be on the propylene business. And just in general, what your outlook is for propylene into polypro.

Yes. So Frank, certainly, the uncertainty will have to – it won't be solved overnight, and there will be, I suspect, more news flow on that. On the Exxon fire, first of all, I was really pleased that there were no significant injuries. That's the first thing that I look for when I see incidents like that, so I'm really pleased to see that. In terms of the impact on the propylene market, it could have a modest impact. I mean, I think we need to see how this plays out, but if you look at propylene prices, they've dropped a good bit compared to where they were a year ago. So to give you some round numbers, propylene was about $0.60 on average in Q3 last year, about $0.50 in Q4 last year, and we dropped down to $0.38 in Q1 this year and then $0.37 in Q2. So I cite all of that only to say that it seems that propylene prices are kind of – it seems they wouldn't go too much lower. And we'll have to see how this Exxon fire and their disruption impacts prices, but I would suspect there will be some modest impact.

Thank you. Our next question comes from Jonas Oxgaard with Bernstein. Your line is open.

Good morning, guys.

Good morning.

I want to return to your comment around the demand has been growing well this year. I find it hard to square with Asia margins now being down to four-year lows even though we haven't added any real capacity in the last six months. So what am I missing here?

Well, I think part of that, Jonas, is that new – well, new capacity is coming to the market over the last 12 months. And I think that buying patterns are more dynamic now than they were before because of the trade news and the tariffs and so on. But again, our perspective is that we're seeing growth in all three regions in polyolefins generally. So yes, I mean I think that this is just a reflection of oil price movements and buyers sort of anticipating the direction of prices.

Okay. Bob, what we've seen, though, is that demand has been declining in practically every petrochemical in Asia over the last six months. So why would polyethylene be the exception here?

Well, our view is that that's because of the consumer – consumable nature of a lot of the end users. And our presumption has been that for the growing middle class, you have more consumption of those sorts of end users.

Thank you. Our next question comes from Steve Byrne with Bank of America. Your line is open.

Hi, good morning. This is actually Luke Washer on for Steve. I was wondering if you could give us some update on the progress you've made on your footprint and headcount consolidation at A. Schulman.

Yes. So as I mentioned earlier in my prepared remarks, our synergy run rate that we've captured thus far as of the end of Q2 were at about $100 million of synergy run rate. We've announced some closures of sites with – and we're working through our plans on that. And the restructuring on the business side is moving very swiftly. So we've made lots of progress. I won't get into specifics about each site, but generally, when we announced the transaction, we said that we would reach a run rate of synergies of $150 million per year about 18 months after the transaction was completed. We're not quite at 12 months, but we're about at the 12-month point this month and we're at a run rate of $100 million. So I think we're well on track.

Thank you. Our next question comes from Alex Yefremov with Nomura Instinet. Your line is open.

Thank you. Good morning. Your refinery has been running well recently, and you have – you lost money last quarter. Is there a structural disadvantage in crude purchasing? And how long do you think it will continue? And other investments you can make to overcome this disadvantage?

So, on the refinery, I think you have to look at both sides of the equation, the crude side and the product side. So on the crude side, we do purchase Canadian crude by pipeline, so we processed about 25% of our crude slate in Q2 was Canadian crude. As we buy other like crude-by-rail or other sour crudes, those do tend to be higher priced than the pipeline crude. So as I mentioned in my prepared remarks, I think the way you think about our crude slate is that we don't buy all on a Maya basis. And what we've had is a situation with Venezuela going out is that the supply of sour crude has shrunk, and with the Permian doing so well, the supply of light crude has increased, and that's what's caused this light-heavy differential to narrow. Just to give you some idea, that light-heavy differential was about $5 per barrel in July. It should be more like $8 to $10 per barrel. It's extremely leveraging. I think the other thing that probably is not on the investors' radar is that on the product side, because the propylene prices have declined so much, that's impacted profitability. I cited of some of those numbers. We've dropped from the $0.50 to $0.60 per pound range down into the high 30s, so that's had an impact. And lastly, at our refinery, our configuration is such that we don't convert naphtha into gasoline, but we don't have reformer. And with a lot of light crude processing in the industry, there's more naphtha available, which has impacted the price of naphtha. So I think all of this could normalize here with IMO approaching, as sour crude gets pushed back into the market and some of these product markets normalize.

Thank you. Our next question comes from John Roberts with UBS. Your line is open.

Thank you. Bob, it seems like every earnings call has more discussion about sustainability and more of your efforts of recycling in new product. Do you have any overarching targets longer-term, say, five years, in terms of sales that you want to get to? Or any other metric you're using?

No, we haven't stated targets nor will we. But the idea, John, is that we do see a business model here in terms of capturing the value that exists in plastic waste, and it's going to come through in a range of forms. So it's going to be mechanical recycling. We're also doing some research on chemical recycling. And I think this is going to be a growing area for us and one that will create value over time. We’ve not set hard targets. As you know, we're a very sort of return-minded company. And as we think through investments, we think about the value-creation potential on each investment. But I do see this growing in our portfolio over time.

Thank you. Our next question comes from Matthew Blair with Tudor, Pickering, Holt. Your line is open.

Good morning, Bob. Maybe just to circle back to refining, it looks like DOE data indicates that your Houston refinery is running perhaps a little bit more domestic crudes this year than the same point last year. It seems some other Gulf Coast refiners are lightening up their slate over the past few years. Is that an option that you're thinking about or considering? And if so, any thoughts on what kind of spending that would take?

Good morning, Matthew. We have increased slightly our light crude processing. We can go up to about 10% in our light crude cracking. It would require a significant investment for us to increase the flexibility to do more than 10%, and our current plan is not to do that. So we think, again, that with IMO 2020 around the corner here, we think that some of these markets are going to normalize and move in favor of the configuration of our Houston refinery. And as I've mentioned in prior calls, we are ready to meet those specifications, and we've completed really all of our turnaround activities. So we're prepared to run at full rates through 2020.

Thank you. Our last question comes from P.J. Juvekar with Citi. Your line is open.

Yes. Bob, another question on recycling. First of all, your efforts here are commendable and your QCP products that you showed look quite look. And you also have this other alliance with chemical companies and some customers about ending plastic waste. So if you take a step back and look at how recycling is playing out, how would it impact virgin plastics demand? And then maybe in recycling, could you potentially get higher margins if customers want these products?

Yes. So as you have several questions there and it's a very big topic for us, so I'll start with your last question, which is how customers perceive recycled product. Many of the consumer brands have announced targets of how much recycled content they will have in their packaging, so I do see demand for recycled – high-quality recycled resins increasing. And I think what's unique about our joint venture with SUEZ is that it really combines the strength of both of the companies. So in the case of SUEZ, their waste collection infrastructure, sorting infrastructure brings to our joint venture segregated polyolefin waste, which enables high-quality recycled products. And then when you combine that with our technological know-how around polyolefins, you can see from those couple of examples that we've really created some unique and high-quality recycled products. I think the degree to which recycled products impact virgin resin demand growth, that's something that we'll have to monitor as recycling ramps up. One of the challenges, as many of you know, is that recycling in the past has been difficult because mixed waste is the challenge and sorting has been prohibited from an economic perspective. So if the waste is very mixed coming in, then the recycled product is of very poor quality. I think that's the thing that we've been able to solve at QCP. So I think it's something we'll have to monitor. Let me say a couple of words about The Alliance to End Plastic Waste, which you also asked about. So you'll recall that we launched this alliance at the beginning of this year in January. We've increased our membership now by 14 more companies in the last couple of months to 39 companies across the value chain. So we have brand owners, we have chemical companies, we have waste handlers, and we have converters, and we're seeking to add retailers as well. I think what's really great is that this – we all have rallied around the thought that plastic waste has value. It's now about how do we create infrastructure and systems to collect the waste? How do we innovate so that we can use the waste and convert it to recycled products that can be reused? How do we educate consumers on how to responsibly dispose of waste so that the value can be captured? And ultimately, the alliance will also aim to fund projects that remove waste from the environment. So we're making great progress. We had a great board meeting in July, and the momentum continues to build around The Alliance to End Plastic Waste. So thanks for that question. Okay.

So if there are no other questions, then let me offer a few closing remarks. First of all, the combination of our advantaged assets and consumer-driven demand for our products is generating resilient performance during somewhat uncertain times in terms of industrial demand. You can see from our quarterly results that with the portfolio of businesses that we have and our organic and inorganic growth, we're able to continue to provide strong earnings in a range of environments. I mentioned during my prepared remarks as well as during the Q&A that we continue to invest in feedstock flexibility. I think that we'll continue to strengthen our ability to do well in a range of energy and feedstock price environments. And lastly, we talked a lot about capital allocation and our disciplined approach to capital allocation. You should continue to expect that we will focus on a strong and growing dividend over time. Our organic growth program will be modest and very disciplined. I expect that our CapEx will probably come down after the PO/TBA project is completed. And our aim ultimately is to deliver strong and consistent value for you, our shareholders. So with all of that said, thank you for your interest in our company, and we look forward to updating you on the third quarter earnings call. In the meantime, we hope to see many of you at our Investor Day. Thank you and have a great weekend.

Thank you for your participation in today's conference. Please disconnect at this time.