Hello and welcome to the LyondellBasell teleconference. At the request of LyondellBasell, this conference is being recorded for instant replay purposes. [Operator Instructions] I'd now like to turn the conference over to Mr. David Kinney, Director of Investor Relations. Sir, you may begin.

Hello, and welcome to LyondellBasell's Second Quarter 2020 Teleconference. I am joined today by Bob Patel, our Chief Executive Officer; and Michael McMurray, our Chief Financial Officer. Before we begin the business discussion, I would like to point out that a slide presentation accompanies today's call and is available on our website at www.lyondellbasell.com. We will be discussing our business results while making reference to some forward-looking statements and non-GAAP financial measures. We believe the forward-looking statements are based upon reasonable assumptions, and the alternative measures are useful to investors. Nonetheless, the forward-looking statements are subject to significant risk and uncertainty. We encourage you to learn more about the factors that could lead our actual results to differ by reviewing the cautionary statements in the presentation slides and our regulatory filings, which are available at www.lyondellbasell.com/investorrelations. Reconciliations of non-GAAP financial measures to GAAP financial measures, together with other disclosures, including the earnings release, are also currently available on our website. 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 September 1 by calling (800) 879-4299 in the United States and (203) 369-3561 outside the United States. The passcode for both numbers is 7410. During today's call, we will focus on second quarter results, the current environment, our near-term outlook and provide an update on our growth initiatives. Before turning the call over to Bob, I would like to call your attention to the noncash lower op cost or market inventory adjustments, or LCM, that we have discussed on past calls. These adjustments are related to our use of last-in, first-out or LIFO accounting and the recent decline in prices of our raw material and finished goods inventories. During the second quarter, we've recognized pretax LCM benefits totaling $96 million compared to LCM charges of $419 million in the first quarter. Comments made on this call will be in regard to our underlying business results, excluding the impacts of these LCM inventory charges. With that being said, I would now like to turn the call over to Bob.

Thank you, Dave, and good day to all of you participating around the world. I hope that you, your colleagues and your families are all staying healthy during these challenging times. We appreciate you joining us today as we discuss our second quarter results. Let's begin with Slide 3 and review the highlights. LyondellBasell's employees leveraged our core strengths in operational excellence, cost management and commercial agility to generate $1.3 billion of cash from operating activities during an extremely challenging quarter. This represents an improvement of over $100 million relative to the second quarter of 2019 despite our significantly lower earnings. During the second quarter, our team rapidly responded to weakening market conditions by aggressively reducing inventory to match lower levels of demand that reduced cash working capital by $575 million. We developed plans to reduce CapEx by approximately $500 million during the year. This includes slowing down of our PO/TBA project. We also made significant progress on cost-reduction efforts towards our goal of a run rate of $150 million to $200 million in recurring annual savings by the end of this year. We have quickly adapted to changing conditions in our markets, workplaces and communities to ensure that our assets continue to operate safely and serve the dynamic needs of our customers. LyondellBasell's products support many of society's critical needs such as melt-blown fibers for N95 face masks, alcohols for sanitizers and packaging that prevents the contamination and spoilage of our food I'm very thankful for the innovative thinking, tireless dedication and disciplined approach to health and safety exhibited by our employees around the world to ensure that we continue to serve our customers and protect our communities during these difficult times. Our second quarter EBITDA of nearly $700 million represents a decline of nearly 40% relative to the…

Thank you, Bob, and good morning, everyone. As Bob mentioned, our company continued to generate substantial cash during the second quarter. Slide 6 illustrates our cash flow performance over the past 5 years. During this time, we have consistently generated $5 billion to $6 billion of cash from operating activities on an annual basis. Over the last 12 months, more than 110% of our EBITDA was converted into cash from operating activities. With approximately $1.1 billion of capital expenditures dedicated to maintaining our assets and $5 billion in cash from operating activities, our free operating cash flow yield remained strong at 17.6%. Our team is aggressively managing inventories through dynamic markets while prioritizing cash generation and liquidity. Now please turn to Slide 7, where we provide further details on cash generation during the second quarter. You can see that our businesses generated $1.3 billion cash from operating activities, up more than $100 million from 1 year ago, despite our significantly lower earnings. During the second quarter, we increased our cash on hand to $3.2 billion with a $2 billion bond issuance in April at very attractive rates. Capital expenditures of $588 million declined more than 10% compared to the first quarter as we began to slow activities on the PO/TBA plant construction. In the second quarter, we paid $350 million in dividends to our shareholders. We ended the quarter with about $5.8 billion of cash and available liquidity. With strong cash generation and ample liquidity, we remain confident in our ability to fund our dividend, primarily from operating cash flows. As announced during the prior quarter, we rapidly developed strategies to respond to a variety of economic scenarios. Slide 8 illustrates our actions to reduce capital expenditures in 2020 by approximately $500 million. In addition to slowing the PO/TBA activities,…

Thank you, Michael. Let's turn to Slide 10 and review our second quarter performance. As mentioned previously, my discussion of business results will be in regard to our underlying business results, excluding the impacts of these LCM inventory changes. Our global footprint and diverse business portfolio continue to provide resiliency in this challenging market environment. EBITDA for the second quarter was nearly $700 million. The global response to limit the spread of COVID-19 reduced demand and margins for many of our products. Our Olefin and Polyolefin segments rapidly responded to increased demand for our products used in consumer-driven packaging and health care while reducing production for polymers used in durable goods applications with falling demand. Our Intermediates and Derivatives, Refining and Advanced Polymer Solutions segments were impacted by the significant reduction in demand for transportation fuels and polymers utilized in automotive and other durable goods segments. The resiliency of our business portfolio continues to benefit from our relatively high participation in markets with consumer-driven demand for nondurable products and our global market reach. Let's review our second quarter results, starting with our Olefins and Polyolefins Americas segment on Slide 11. Second quarter EBITDA was $210 million, $267 million lower than the first quarter. The pandemic reduced demand for polyethylene from export markets and polyolefins for durable goods markets, resulting in margin and volume declines. Olefins results decreased approximately $230 million compared to the first quarter. Margins declined on lower coal product prices, particularly for butadiene and other C4s. As discussed in our first quarter call, we reduced our ethylene operating rates to about 75% of nameplate capacity for the second quarter to address weaker demand. Ethane made up 60% of our ethylene cracker feed slate during the quarter as weak demand for butadiene and other coal products offset the advantages…

[Operator Instructions] The first question comes from Steve Byrne from Bank of America.

When we look at your ethylene production capacity, it looks like you're likely a producer of hydrogen, potentially hundreds of thousands of tons a year, and perhaps some of that gets used in the refinery operation, and our assumption is most of it is burned for fuel value. But I was just wondering if you had a view of whether that's the best use for all of that hydrogen potentially to qualify for a color of hydrogen other than gray, and whether you thought about that. Perhaps reducing the carbon footprint from natural gas combustion is the best use of that, but welcome your thoughts on that.

Steve, this is Bob. Indeed, we do produce a lot of hydrogen off of our crackers, especially the ethane crackers. We have some integration with the refinery, as you noted. We also sell some crude hydrogen to the industrial gas companies who then refine the hydrogen. So there's a mix. Some of it is fuel. Some of it is sold to industrial gas companies, and then -- and the balance goes back to our refinery. And we'll look at that over time as we see industrial gas companies finding new uses for hydrogen to see if we can sell more to them and recover.

Our next question comes from Jeff Zekauskas from JPMorgan.

What's the timing of the TBA plant? I think, originally, you were going to spend about $2.4 billion to build it. How much have you spent? How much more is there to go? And I think, originally, you thought that the returns were a little bit over $400 million of EBITDA. Have you changed your view of the returns?

Yes, Jeff. So we've essentially delayed the project by 1 year. So originally, our schedule was to complete the project in Q3 of '21 and to commence commissioning. Now we'll complete in Q3 of '22. We're still updating our capital forecast on that project. So once we have a better number, we'll provide that to the investment community. We're not really prepared to do that today. And then to your question about earnings. So indeed, I mean, we've talked about $400 million to $450 million of EBITDA. And so if you consider 2023 as the first full year of operation, we would expect that kind of that mid-cycle margins for PO and for MTBE, then we should be in that range of $400 million to $450 million of EBITDA contribution.

Our next question comes from Bhavesh Lodaya from BMO Capital Bank.

This is Bhavesh for John. So Bob, as we think about your different businesses, it seems like most of them are prime for a nice snapback in terms of earnings from the 2Q levels. So from what you are seeing this month, where do you expect the fastest recovery in terms of the businesses? And what's the magnitude of earnings recovery we should think about as you think about the near term?

Sure. So there's a lot there, and I'll give you kind of the puts and takes. So if you think about our O&P business, that was running well kind of through the lockdown period, especially for end uses like packaging and medical. As we sit here today, we're running in the U.S. basically at full rates. In Europe, we're running between 85% and 90% on our O&P assets. And I would expect that should hold through the quarter. I&D, we're running between 85% and 90%, depending on the region and the product. Remember that in I&D, our PO goes into more durable good-type applications tied to auto as well. And that recovery, while it's occurring, it's happening at a slower pace. Same with fuel demand. It has recovered off the lows, but we're far from where we were at -- in pre-pandemic levels. And then with the refinery, our challenge really is twofold. One is demand recovery for gasoline and for jet fuel, still a long way away from where we were before the pandemic set in. And then the light heavy differential is still very, very narrow, which is hugely leveraging for our refinery. So I think we'll be -- continue to see challenges in the Refining segment for sure.

Next question is from Alex Yefremov from KeyBanc.

Did you see any feedstock limitations at your Middle Eastern joint ventures? And did you see this issue impact the industry overall?

Alex, not really. We didn't see much impact. If there was, it was marginal for maybe a week or 2, but not sustained. The challenge for our Middle East assets, really in the early part of Q2, was the flatter cost curve and also lower relative prices in China for polyethylene, which both have now moved in the right direction. So we see full availability of feedstock today and much better margins in our Middle East assets.

Next question is from P.J. Juvekar from Citigroup.

So the question on Slide 12, which is quite helpful when you show the regional production costs, you show that ethane advantage sort of returning back from April to June time period. But on the same slide, the delta between the low cost and the high cost has come down, especially if you compare that back to 2019 levels on that chart. What does that mean to you? I mean does that mean that the profit available for the low-cost player are less than what they were before? Can you just interpret that slide for us in terms of sort of the slope?

Sure. So certainly, the slope is not as great as it was 2 or 3 years ago. But we still think there's enough advantage. And I think today, P.J., margins are really more driven by the dynamics in China. And what we're seeing today is that polyethylene demand is quite strong. In fact, there's very significant year-over-year growth when we look at -- through Q2 for China polyethylene. And prices have responded quite a lot. So I think probably that will be a bigger driver of global polyethylene prices in the near term, is the continued robust demand growth in China. And until oil price moves up further, likely, we have a cost curve that's similar to what it is today.

Yes. And P.J., this is Dave. I think what catches your eye on that chart is the MTO coming down sharply with lower methanol prices here in July. And as you know, that's a relatively small portion of global ethylene supply. So not as impactful as it might look on that chart.

Next question is from Vincent Andrews with Morgan Stanley.

Bob, could you give us your view on ethane prices sort of what's happened over the last quarter in terms of the increase and the widening of frac spreads and what you think is going to happen in the back half of the year with ethane exports and maybe propane exports and how the U.S. NGL feedstock price perspective could be in the second half?

Yes. Vincent, so on ethane, we had a run-up in price about midway through the quarter. And I think part of that was related to certain producing basins, either shutting in and others restarting, so that it was an effect of the timing of when certain basins were rejecting and certain were in recovery mode. I think as we look at the outlook, it's reasonable to assume that ethane prices will remain kind of in the range where they are today. There's already some talk about some of the drilled but uncompleted wells coming back online in the Permian. And so that could boost supply of ethane. Today, there's still 500,000 barrels a day of rejection of ethane. So we think there's enough ethane available. It's more about local sort of dislocations that have impacted the price. In terms of propane, propane exports have been fairly strong. There's a lot of propane in the world today. So it seems to me that given more modest demand for propane globally, given kind of the economic situation we find ourselves in, I don't think propane can rise a lot relative to ethane. So we think probably kind of where we are today in terms of feedstocks is the right way to think about it going into -- even into Q4.

Next question is from Kevin McCarthy with Vertical Research Partners.

Bob, as ethylene chain margins have compressed, what impacts do you anticipate on the new supply of ethylene in coming years? Perhaps you could comment on what you see happening with new projects in the U.S., China and elsewhere and also in terms of existing high-cost assets like MTO and some of the higher-cost naphtha-based production in Asia and Europe?

Sure. So coming back to one of the prior questions about the cost curve, I think that if we look at IHS or others who forecast oil price, it seems that the recovery will take some time to get back to the kind of cost curve that we had back in '16 or '17 even. And so likely, with less slope on the cost curve, there will be less investment. We've already seen some delays in the U.S. that have been announced of new projects. I would expect that, that would continue. In China, our working assumption is that largely what's been announced will get built. Now there could be a little bit of delay, but I think it's fair to assume that what's on the books will come online. Elsewhere in the world, though, whether it's the Middle East or it's U.S., I would expect very modest, if any, expansion, given the outlook for especially advantaged feedstocks. And then with MTO, as Dave mentioned earlier, it represents a very small percentage of global capacity, and it always tends to be the swing. When it's in the money, it will run; when it's not, it will shut down.

Next question is from David Begleiter from Deutsche.

Bob, some of the recent U.S. polyethylene price strains has been due to strong U.S. exports. But we are going to see about 3 to 4 ethylene crackers, including yours, come on stream in the back half of the year. Do you think that could weaken U.S. exports and then weaken U.S. polyethylene pricing as a result?

Well, David, I think that given that where inventories are in Asia today, they're at -- in China. China port inventory is at 5-year lows, and U.S. exports are at maximum today. Very high level of imports from other parts as well into China. I don't think these couple of 3 crackers will really kind of disturb the environment that we find ourselves in. As I mentioned earlier, growth has resumed in China. We're finding that growth rates are in the 4% to 6% range on polyethylene year-over-year. So -- and still recovery in front of us because even in China, there are hotspots in terms of the virus. So I'm pretty constructive about the outlook through Q3.

Next question is from Hassan Ahmed, Alembic Global Advisors.

Bob, a question around the I&D segment. Obviously, historically, it was one of those segments which quarter after quarter, showed pretty stable margins. And obviously, things have changed over, call it, the last 2 quarters. My question is, as I take a look at the volumes by product within that segment, the styrene side of things, the asset use side of things continues to be stable. But obviously, PO/TBA and the like have seen significant sort of corrections, right? So now the question is that, is this primarily because of the unique nature of this downtake, i.e. it's obviously the auto industry that's gotten hit fairly hard. And as we are seeing signs of recovery in that industry, should we expect a snapback in these products? And should we expect a reversal or -- to those sort of stable margin levels? And how quickly should we expect to see that?

Sure, Hassan. Absolutely. We've always thought of our I&D segment as being one of the more stable segments in the company. And I think it will resume that profile post the virus and after we have vaccines. We've not had a period where both U.S. and European auto manufacturers were completely shut down. So we have no kind of historical reference for that. And now we are seeing demand come back in the auto sector, but it's not back to where it was. And then for the TBA, the fuels demand has been hit very hard because of the lockdowns. Again, something that we don't have any historical context for. So both, I think, will correct post pandemic, if you will. And I do think that I&D will return to its stable profile that we've come to like about that business. Now timing for that, I do think that it's -- of course, it's tied to development of vaccines and therapeutics and, of course, distribution of that. So not just when one is discovered, but when they're actually distributed and given to people. I mean I think the recovery, really, we need to be thinking about second half '21, perhaps even into '22 before we see a full recovery.

Hassan, this is Dave. And I'd just add that even though the vehicle miles traveled has returned to what was in January and February before the pandemic, it's nowhere near than the typical summer driving season. And that's what we really need to get those oxyfuels margins back. We're currently in maybe winter-like oxyfuels margins, and it would be nice to be in a typical summer season.

Yes. And lastly, oil prices also help on oxyfuel margins. So higher oil is better for oxyfuel as well.

Our next question is from Arun Viswanathan from RBC Capital Markets.

I guess I just wanted to ask about -- get your perspective on polyethylene. I guess maybe -- could you help us understand the market? Maybe the increase in June, what kind of led to success there? And I guess, how are you thinking about July and maybe the persistence and holding on to some of this price that we've gotten recently, do you think that's possible? Or do you think maybe that it was mainly the export market kind of improving that drove the price? And so if there's weakening there, maybe we don't see it, or if there's increased supply, maybe we don't see it. So maybe just get your thoughts on polyethylene.

Sure. So the June increase really was underpinned with lower inventories and the return of exports. So we really, as an industry, ramped up exports in May, June. And I think that continues. So let me give you some context on inventories. Today, the industry inventories, as reported, are somewhere between 3 and 5 days below previous kind of median values. So very low inventories. I think that the $0.04, of course, is in. $0.05, we think, it looks very firm. Operating rates are very high across the industry. That also helps to support the increase. And then the next $0.05, beyond the $0.04 and the $0.05 that are already kind of implemented, we think given kind of the backdrop and the improvement in demand, and as I mentioned, strong exports, we think that, that $0.05 also has pretty good chance of going through. And by the way, the $0.04 and the $0.05 that have been implemented, most of the realization will be in Q3 for those increases given kind of how the market works.

Next question is from Frank Mitsch from Fermium Research.

Congratulations on the Responsible Care Company of the Year.

Thank you.

I wanted to follow up on the cash generation. You obviously had a nice quarter in the second quarter, and you've been taking steps to build up a nice cash hoard here. So it kind of begs a question of uses of cash. You had also established a nice track record of raising the dividend. And obviously, Lyondell has been known historically for buying back stock. I was wondering what your latest thoughts on potentially dividend hikes and/or buying back stocks. When might you be in a position given your outlook? And given the success of the $0.05 that you just talked about, might we see some action on that front?

Yes, Frank. Thank you. So let me first more broadly answer that question by talking about our capital allocation priorities. So our priorities are very simple. It's investment-grade rating through the cycle and continuity of the dividend through the cycle. So those are the 2 most important things that we're solving for as we kind of run the company through this unusual period. So in terms of dividend, I think, Frank, given the uncertain outlook, too early to really say whether we would do something to increase the dividend or not. Our priority is about continuity of the $4.20 that we paid today. Buybacks. Again, same thing. There's quite a bit of uncertainty until there's a vaccine available and disseminated around the world. So we're going to be somewhat conservative when it comes to increasing dividend or buybacks, just given the uncertain outlook and to make sure that we deliver on the 2 priorities that I mentioned. So that's kind of how I think about uses of cash.

The next question is from Duffy Fischer with Barclays.

Just a question on the China JV, so as it's ramping up now. First one is just the map the contract you have with your partner, how is that going to get priced? And then as it ramps up, how should we think about that impacting your results? How long will it take for it to start kind of dividend-ing to you guys? And then do you have any offtake that would actually impact your sales number?

Yes. So Duffy, on the naphtha pricing itself, you should assume it's plus or minus at market essentially for Northeast Asia. And in terms of earnings impact, really minimal earnings this year because we're going to be in the commissioning stage. And just given our experience with our Hyperzone plant that we've been ramping up rates on, we shouldn't expect earnings from Bora for the remainder of the year. But the commissioning is underway at that JV.

The next question is from John Roberts with UBS.

Similar question. Are you exporting any polyolefins to Bora to help them seed the market in advance of the start-up? And did the improvement in the Technology segment also include Bora?

So Technology segment did not include any benefits from Bora because they've essentially -- they've paid us on our licensing progress payments a while ago. And then in terms of premarketing, as you know, we market polyethylene and polypropylene in Asia today. So we have a decent view of how we can place the additional volume. And so we didn't need to send more volume for seeding the market. We've been exporting to Asia, just a matter of normal course.

Next question is from Mike Sison with Wells Fargo.

For OP Americas, your EBITDA margin was in the mid-teens. I would imagine it was a lot better in June. Any help in understanding how much better it was? And as you think about you running your plants, I think you said at near 100 -- or nameplate, whatever, in July, how much better should EBITDA margins improve in third quarter versus second quarter?

Yes. Mike, I think you can look at IHS-posted price change, if you will, on polyethylene. That will be a guide. Now the $0.04, some of that tends to be realized in July as well. So not all of the $0.04 will be realized in June. And same with the next $0.05 that's being implemented now. It kind of goes across 2 months. Probably the biggest improvement in margin that we're seeing is from the C4 market improving somewhat. It's coming off bottom. It's not great, to be frank, but it's better than what it was back in March, April. So a combination of stabilizing ethane price, better C4 and higher polyethylene as we realize these increases as kind of the drivers for polyethylene margin.

Next question is from Jonas Oxgaard with Bernstein.

Just wanted to ask about like after the pandemic is all over. We've seen increased demand from packaging, decreased trend from industrial so far and decreased recycling. But as we're looking, say, 6 months from now, how do you see this sort of squaring out? Is this packaging demand permanent? Can we actually see a sustained boost? And what about the other pieces?

Yes. So Jonas, I think some of the packaging demand will be more permanent. And as you've probably noted, some of the single-use plastic bans have been reversed because of the benefits of -- in terms of hygiene of single-use bags and so on. So I think there will be some lasting benefit, but I wouldn't bank all of it in packaging. There will be some improvement. Then as for the other segments like auto and so on, I mean, we would expect there to be a rapid recovery once a vaccine is developed and we're clearly behind -- the pandemic is behind us. So I think net-net, probably positive for packaging and medical.

The last question in the queue is from Matthew Blair with Tudor, Pickering, Holt.

So your Refining results came in better than our expectations. I was hoping you could quantify the hedge benefit in Q2 and just talk about whether that might reverse in Q3, just given higher crude prices. And then also, could you talk about what's allowing you to run the refinery at levels so much higher than the U.S.? I think in Q2, you were at 88% utilization. U.S. is closer to 72%. So I guess, is that a function of like any Middle Eastern barrels or any sort of wider crude discounts rolling through?

Yes. So I'm going to ask Michael to answer the first question on the results.

Matthew, so it's Michael. Yes, so earlier in the year, we locked in a favorable Maya-Brent differential, hedged out roughly kind of 10% to 15% of our volumes from April through December. At the end of the quarter, had a positive mark of about $3 to $4. That was -- we did not achieve hedge accounting, so that was all in the quarter itself. So that should kind of give you a little bit of color. We would not expect that to kind of recur in the third and fourth quarter, obviously, because we marked it in the second quarter.

Yes. And then in terms of the crude run rates, Matthew, it's more about the configuration of our refinery and the fact that we don't make as much jet or gasoline because we're a heavy crude processing refinery. So for us, it was more about finding incremental barrels to get from 85% to 90% that had positive contribution margin. But I think the heavy processing setup of our refinery probably favored us incrementally.

And that was the final question in the queue.

Okay. Thank you. Well, let me offer a few closing remarks. Our consistent focus on cash generation and disciplined capital allocation will help us steer through any point in the cycle. We're really well equipped for the current challenges. We've leveraged our leading portfolio, our advantaged positions toward our goal of delivering sustainable value for our shareholders. We look forward to updating you on our next earnings call in October. Thank you. And with that, we're adjourned.

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