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. I'd now like to turn the conference over to Mr. David Kenny, Director of Investor Relations.
Sir, you may begin.
Thank you, Britney. Hello, and welcome
to LyondellBasell's third quarter 2019 teleconference. I'm joined today by Bob Patel, our Chief Executive Officer and Thomas Abysher, our Chief Financial Officer. Before we begin the business discussion, I would like to point out that a slide presentation accompanies today's call is available on our website at www.windelbesell.com. Stay, 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, 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 dotlinedellbasell.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 2 pm Eastern Time today until 11:59 pm Eastern Time on December 1st. By calling 888-568 0509 in the United States and 2033693479 outside the United States. The passcode for both numbers is 5713. During today's call, we will focus on 3rd quarter results, the current environment, our near term outlook and provide an update on our growth initiatives.
With that being said,
I would now like to turn the call over to Bob.
Thanks, Dave. Good day to all of you participating around the world, and thank you for joining our 3rd quarter earnings call. Let's begin with Slide 3 and review the third quarter highlights. During our Investor Day in September, we emphasize how our leading and advantaged portfolio of businesses is poised to deliver resilient performance and strong cash flows across a range of market conditions. Our company delivered on this commitment during the third quarter with $1,900,000,000 of cash from operating activities.
Our 3rd quarter EBITDA of $1,500,000,000 represents a decline of approximately 4% relative to the 2nd quarter and 13% relative to the prior year. 3rd quarter earnings were $2.85 per share, which represents a 6% improvement over the previous quarter. This is our 3rd consecutive quarter of increasing earnings per share. The advantage of abundant low cost natural gas liquid feedstocks continue to benefit our North American businesses demand for our consumer driven non durable products reflected typical seasonal strength with a 5% increase in our global polyethylene and polypropylene sales volume relative to the second quarter. Industrial driven markets for durable products saw weaker margins and demand due to trade uncertainty.
Despite the challenging market conditions, our portfolio of businesses performed well during the quarter, continue to efficiently deliver outstanding cash flow. Let's turn to Slide 4 and review our approach to maximizing the returns from this cash generation We have followed a consistent and disciplined capital allocation strategy that provides a sustainable balance between value driven growth and strong shareholder returns. Our growth investments in new capacity are underway with our Hyperzone polyethylene capacity being commissioned as we speak We now expect sales volumes to ramp up during the first quarter of 2020 with increasing profitability throughout the year. Cost for the project is estimated at approximately $900,000,000. This project continues to be very attractive due to our advantaged feedstock position in North America and the differentiated technology, which will deliver new high performing products to our customers.
During our recent Investor Day, many of you toured the construction of our new propylene oxide plant that is being built across two sites outside of Houston in Channelview and Bayport. We continue to expect this plant will be completed in the second half of twenty twenty one and further increase our cash generation during 2022. The box on the right of the slide illustrates our progress on additional value driven opportunities. In late September, we extended our long term relationship with enterprise as the anchor customer for their second propane dehydrogenation plant that will start in 2023. This contract provides LyondellBasell with additional propylene supply at cost based economics to support our down capacity growth and propylene outside.
Earlier in September, we announced a memorandum of understanding with Leonning Bora Group to form a joint venture that will rapidly expand our global olefins and polyolefins network in China. The project for LiveLyondellBasell with a local production presence in a market that is growing at more than twice the rate of global GDP. This project is more than 50% complete and expected to begin operations in 2021. Finally, we completed a tender offer in July that results the repurchase of approximately 9.5 percent of our outstanding shares for $3,100,000,000. These actions demonstrate our discipline and commitment to balancing growth with substantial returns to our shareholders.
Let's turn to Slide 5 and discuss our safety results. Our emphasis on operating safely is embedded in our culture. It has never taken for granted. We realize that we need to work every day to cultivate processes and behaviors that support leading safety performance for our employees, contractors, our communities and our business partners. We will continue to maintain Let's turn to Slide 6, where we highlight LyondellBasell's activities in advancing our sustainability agenda.
During the same week as our Investor Day in September, we published our 2nd annual sustainability report. This report is on our website and it describes our goals and progress over the prior year. Our company is also developing innovative business models that advance the Circular Economy. In addition to our PE and P mechanical recycling business and usage of bio based feedstocks to produce new plastics. Last month, we announced the construction of a new pilot facility in Italy for our Moritech Molecular Recycling technology.
We are moving forward with these 3 business models to increase Circularity and develop sustainable and profitable business platforms within the next decade. It's important to remember that plastics provide many benefits to society and will continue to do so in the future. However, we must address the issue of plastic waste. We have committed to pursue 0 loss of plastic pellets from our production facilities and we are leading meaningful solutions to eliminate the leakage of plastic into the environment through the alliance to end plastic waste. Additionally, our company is targeting a 15% reduction in carbon dioxide emission intensity by 2030.
We hope that you as our investors and stakeholders will take time to review our sustainability report and provide us with your feedback on our progress. And now Thomas will provide more detail on our financial highlights for the third quarter.
Thank you, Bob, and good day to all of you. Please turn to Slide 7, where you can see the growth of our earnings over the past three quarters. As Bob mentioned, 3rd quarter earnings of $2.85 per share were supported by strong consumer driven seasonal demand for our products as well as our sizable share repurchases. 3rd quarter results included an $85,000,000 noncash benefit from the settlement of prior tax, year positions that increased earnings by $0.25 per share. Integration costs during the third quarter related to the Schulman acquisition impacted net income by $33,000,000 or $0.10 per share.
During the third quarter, we repurchased 37,000,000 shares. Now let's look more closely at our consistent and efficient cash flow performance on Our businesses have generated $5,000,000,000 to $6,000,000,000 of cash from operating activities over each of the prior 4 calendar years, and $5,000,000,000 over the trailing 12 months. With $1,100,000,000 required for sustaining capital expenditures, Our free operating cash flow yield was 13.2 percent over the past 12 months. Slide 9 describes our cash flow generation and deployment during a very active third quarter for our finance department. Cash flow from operating activities effectively doubled our starting balance of $1,900,000,000.
Debt increased by net $1,700,000,000 during the third quarter, while the timing of the increased debt Alliance is our July tender offer, you will recall that we invested approximately $1,900,000,000 of cash on hand in acquiring annual enrollment last year. During the third quarter, we issued EUR 1,000,000,000 in Eurobonds in two tranches and use the proceeds to repay a term loan and a portion of our short term debt. The coupon rates for the notes were the lowest in our company's history, 0.875 percent and 1.625 percent for 7 and 12 year terms, respectively. Near the end of September, we priced $1,000,000,000 in 30 year dollar notes had settled in October. The 4.2 percent coupon rate for these notes is also the lowest in company history for U.
S. Bonds of this tender. We used these proceeds to repay short term debt. During the third quarter, as mentioned before, We repurchased 37,000,000 shares, and in addition, pay dividends returning a total of $3,600,000,000 to shareholders. Capital expenditure for the 3rd quarter was approximately $740,000,000, with roughly 60% invested in profit generating growth projects, with the reminder allocated to sustaining capital.
Our investment in growth has increased since the second quarter, and we expect a similar trend over the remainder of the year as we complete our Hyperzone TV plant and accelerate the activity on construction for our new POTBA plant in Houston. The quarter closed with approximately $1,100,000,000 of cash and liquid investments Slide 10 illustrates the maturities of our long term debt after the October issuance. The 2 recent bond offerings review our weighted average cost of debt by 42 basis points. We have a well balanced maturity profile that reduces refinancing risks and enables the company to benefit from a consistent presence in both U. S.
And euro fixed income markets. Let's turn to Slide 11 and review our disciplined approach to capital deployment that we discussed in detail during our Investor Day. The principles for our capital allocation strategy have remained consistent. Our businesses generate tremendous cash flows We are 1st and foremost committed to a strong and progressive dividend. We will make capital investments investments that sustain our manufacturing reliability and expand our asset footprint.
We will pursue value minded inorganic growth opportunities and return the surplus cash to share repurchases. All of these decisions points are underpinned by our commitment to the flexibility provided by our strong investment grade credit ratings. With that, thank you very much. And I will turn the call back to Bob. Thank you.
Thank you, Thomas. As many of you know, Thomas will be retiring from the company in the coming weeks. I wanna take this opportunity to thank Thomas for his hard work over the past 4 years to build and enhance our finance organization. His contributions to the development of our growth strategy and his leadership and standardizing several of our processes, at which Thomas and his family all the best. I particularly want to thank Thomas for agreeing to help us managed a thoughtful transition for a successor, Michael McMurray, who will join the company as an Executive Vice President and our Chief Financial Officer, next Tuesday, November 5th.
Michael joined us after serving as CFO for Owens Corning, and a career that spans more than 30 years in various finance, treasury, and investor relations roles for Owens Corning And Royal dot Shell. I hope you will all join me in warmly welcoming Michael to LyondellBasell. Now let's turn to slide 12 and review our third quarter EBITDA performance. Our global footprint and diverse business portfolio continue to demonstrate strength and resiliency in a challenging market environment. EBITDA for the third quarter was $1,500,000,000.
Profitability for integrated polyethylene production remained strong in both the Americas, and Europe with industry benchmark chain margins of approximately $700 $600 per ton respectively during the third quarter. During the quarter, we maintained high food processing rates at our Houston refinery, and benefited from improved margins relative to the second quarter. Several of our intermediate chemicals businesses, mainly styrene, suffered from weak margins due to lackluster industrial demand in a well supplied market. Let's begin with our Olefins and polyolefins Americas on Slide 13. 3rd quarter EBITDA was $653,000,000, $18,000,000 higher than the 2nd quarter.
Profitability was driven by robust global demand and our capability to capture the benefits of abundant and affordable natural gas liquids through our feedstock optimization. Olefins results increased by $120,000,000 compared to the 2nd quarter. Margins expanded on higher ethylene sales prices and lower feedstock costs. Ethylene operating rates fell to 80% due to a planned maintenance turnaround that we completed at our Clinton Iowa facility during the third quarter. As propane and butane prices fell by nearly of 20% in the third quarter, we captured value from the high feedstock flexibility across our fleet of 6 U.
S. Ethylene crackers. We increased utilization of propane and retained feedstocks by nearly 10 percentage points to 35% in the 3rd quarter. Polyolefin results decreased by about $100,000,000 during the third quarter. Polyethylene spread over ethylene price declined by about $2.20 per ton, partly due to higher ethylene costs and declining polymer prices.
Polyolefin volumes increased due to an increase in polyethylene exports. We expect the 4th quarter will follow typical seasonal trends with reduced demand as customers take holiday downtime and seek to minimize year end inventories. With approximately 80% of the new U. S. Polyethylene capacity now in the market.
This is an opportune time to review the impact of new capacity on polyethylene pricing. Slide 14 illustrates quarterly contract price change for the North American polyethylene industry over the past 5 years. The green bars indicate increases orange bars represent decreases. The amplitude and volatility of price changes during the 18 19 have been relatively moderate when compared to the prior 4 years. In fact, the net reported price change over the 1st 3 quarters of 2019 has been 0.
Industry statistics indicate that days of sales in inventory fell in September with export sales now representing 35 percent of production. Increasing exports, decreasing inventories, and muted pricing responses, all imply that the new capacity is meeting demand in the global market. Our view is that the new capacity will create short term fluctuations, particularly in local markets. However, We believe the new capacity is ultimately needed and global polyethylene markets will remain relatively balanced, providing good profitability for advantaged producers such as LyondellBasell. Now please turn to Slide 15 to review the performance of our Olefins and Palio and Europe, Asia And International segment.
During the third quarter, EBITDA was $291,000,000, a $40,000,000 decrease compared to the 2nd quarter. Underlying business results were impacted by lower polyethylene chain margins, but supported by healthy polyolefins demand. Olefins results decreased by about $10,000,000 due to a small decline in volume. Combined polyolefins results were comparable to the previous quarter. Polyethylene volume increased 10% over the 2nd quarter with customers returning to the market after taking a pause during the second half of June.
Polyethylene margins declined offsetting the improvement in volume. Modest reductions in margins across our joint ventures contributed to a decline in equity income of approximately $15,000,000. We expect the fourth quarter to follow the same seasonal trend as the Americas with reductions in year end demand. Please turn to Slide 16 take a look at our Intermediates And Derivatives segment. 3rd quarter EBITDA was $390,000,000, a $58,000,000 decrease compared to the prior quarter.
Results were affected by a decline in margins due to a well supplied market for our intermediate chemicals business, but bolstered by seasonally strong Oxyfuels profitability. Intermediate chemicals results decreased by $95,000,000 compared to the 2nd quarter driven by a margin decline in all businesses, primarily styrene. We began plant maintenance at our acetyls plant in La Porte, in the third quarter, which will reduce volumes for both the 3rd and 4th quarter. Hoxyfuels and related products, results to prove nearly $30,000,000 as we saw market increases, driven by a higher gasoline blend premium and lower butane butane feedstock prices. During October, Oxyfuels margins have declined with weaker gasoline demand as the summer driving season ends.
We expect typical fourth quarter seasonal declines for the segment and continued pressure from a well supplied market. Now please turn to Slide 17 to review the results of our Advanced Polymer Solutions segment. 3rd quarter EBITDA was $102,000,000, an $18,000,000 decrease compared to the prior quarter. Results were impacted by increased integration costs and continued headwinds in Included in the results were $43,000,000 of integration costs for the 3rd quarter, which impacted earnings by $0.10 per share. Compounding and solutions results were relatively unchanged due to the softness in the automotive market.
Advanced Polymers results increased by $10,000,000, 3rd quarter performance was supported by improved seasonal demand from the roofing market. Our team is making continued progress on the integration efforts In fact, we increased our 2 year cost synergy target by $50,000,000 to a total of $200,000,000, At the end of the third quarter, we are capturing cost synergies at a forward annual run rate of approximately $125,000,000, We expect profitability for this segment to follow normal seasonal trends: trade uncertainty and labor disruptions continue to affect the automotive industry and our business is likely to continue following the general sentiment for that market. Turning to Slide 18. Let's discuss the results for our refining segment. EBITDA improved by $60,000,000 over the 2nd quarter to negative $6,000,000 for the 3rd quarter.
We continue to demonstrate the benefits of our reliability program at the Houston refinery with crude throughput increasing to 264,000 barrels per day, operating at 99% of nameplate capacity for the quarter. Our Houston refinery processes heavy sour crude oils from Mexico, Canada, and other locations. In the third quarter, refinery margins benefited from improved diesel spreads and stronger discounts for the portion of heavy sour crude oil we purchased on the open market in Houston. The U. S.
Refining market has been challenged by global disruptions in the supply of heavy sour crude oil, resulting in string of quarterly losses in our refining segment. During September, profitability was further impacted by unusual increases in the formula pricing from IACruv from Mexico. These pricing decisions have spurred us to pursue increased utilization of alternative crude oils for the long term supply of our refining business. At the implementation of the IMO 2020 marine fuel regulation inches closer, we expect continued margin improvement in our refining results during the fourth quarter. We are well positioned to take advantage of this regulatory change by converting high sulfur crude oils into more environmentally friendly marine fuels.
Please turn to Slide 19 as we review the results of our Technology segment, During the third quarter, EBITDA was $83,000,000, a decrease of $24,000,000 compared to the previous quarter. The business model for our technology segment is based upon the licensing of polymer production technologies and catalyst sales. Individual contract terms and the timing of project milestones drives the pace of licensing revenues for the business. In the third quarter, we had fewer licensing milestones in the prior quarter, which resulted in reduced EBITDAum. Catalyst sales volumes and licensing activity are projected to be strong during the fourth quarter.
On Slide 20, Let me summarize this quarter's results. During the quarter, we increased our earnings to $2.85 per share, Our profitability remains strong and generated cash from operating activities of $1,900,000,000. Our company is delivering resilient performance in a challenging market where trade uncertainty and lack of confidence in the industrial sector has reduced demand for many of our products. The long awaited polyethylene cycle is now upon us with approximately 80% of the U. S.
Capacity now online. Polyethylene spreads over Napa and Asia are approaching 10 year lows, with inventories largely de stocked Any improvement in industrial confidence is likely to reverse these trends and trigger restocking that should tighten markets and increase margins. In addition to the market improvements, LyondellBasell has tangible sources of cash flow growth that are independent of market sentiment. During October, the looming implementation of the IMO 2020 marine fuel regulation, co favorable crude oil differentials, and higher diesel spreads, that improved profitability for our business in October. We will increase our polyethylene capacity and reduce our CapEx over the next year with the completion of our new Hyperzone plan.
With higher earnings and lower capital spending We expect additional cash flow We continue to advance our growth objectives by pursuing a new partnership in China and appropriately supply agreement with enterprise. In short, for leveraging our leading portfolio in advantaged positions to support disciplined investments that should deliver sustainable value for our investors.
Our first question comes from Duffy Fischer from Barclays. Your line is now open.
Yes, good morning guys.
First question
is just if you look at a number of the major consultants in the space, they would have integrated polyethylene margins coming down, kind of throughout or all the way through 2020. Obviously, you get their data and and kind of analyze. Where do you think they're getting it wrong? What, you know, what are they too punitive on that they would be more negative than your outlook for polyethylene.
Well, Duffy, you know, 1st of all, if you consider the market environment today, and and if you look at prior downturns, on on the demand side, we've we already have a lot of uncertainty that's impacted demand. You think about, the auto sector trade uncertainty, recession fears, Brexit, and so on. Those have all weighed on demand all year long, and we've seen destocking So we think on the demand side, we've already seen somewhat of a downturn. And and to your question about, about what they might be missing. If you could, I would point to the AsiaPEs, to map the spread.
If approaching $300 per ton. And if you look over the last 10 years, that's reaching the lows, over that period of time. And it seems to me that that's pointing towards a trough in polyethylene margins.
And our next question comes from Kevin McCarthy from Vertical Research Partners. Your line is now open. Yes,
Bob. A couple of questions
on the Finery, you referenced IMO 2020. Can you talk through the expected, impact of that event? Does it influence the way that you're running your asset, in terms of, you know, catalyst slates, a mix of products, And how did the unit run-in October, please?
So, unit ran very well in October. And, you'll recall from our plat prior conversations, the impact from IMO comes in in several forms for us. One is that will benefit from a wider, light to heavy differential, meaning that, sour crudes will will see less demand as not all refineries are able to meet the new specifications, we should also see wider, distillate spreads, diesel spreads. We're already seeing that, some of that in October. So to to give you some points of reference, the September Maya 211 was about $14.60.
The October average is now 21.30. So we've seen approximately $6.50 improvement in in the Maya 211 from September to October. We think that as we go into next year, we have significant leverage to that, improvement or the widening of the light light heavy differential. In terms of our refineries positioning, you'll also recall that we've completed all of our turnaround work. So next year, we do not have any major turnaround activity in our refineries.
So we're prepared to run-in full rates, next year And we're, we're we're doing our best to buy the most competitive crude oils that suit our refinery, and we're gonna continue to focus on that. So I think we're really well positioned. And we think about the volume leverage, at, at, 950,000,000 barrels per year that we process. 90 5. 90 5, sorry, 95,000,000 barrels per year that we process.
So every dollar has a pretty significant impact over a year when you multiply by the 95,000,000 barrels.
Question comes from David Begleiter from Deutsche Bank.
Bob, just on Hyperzone, can you discuss whether the expected EBITDA contribution remains the same? How are you gonna feed your volumes, who are you how's the how's that progress progressing? And did the cost at the end increase for the project? Thank you. Yes.
So, I'll speak to, cost and schedule first, David. So on cost, yes, it did increase we're showing about a $900,000,000 sort of, CapEx number at this point. Still very competitive compared to, bills that have occurred recently. In fact, I would say, still better than market average from what we can tell. Schedule wise, we're commissioning now various parts of the plant, and, we expect to move into production very late in the year or early next year.
In terms of the EBITDA contribution, it'll ramp up through next year as we, as we demonstrate the production and start to demonstrate the types of products that that client can make, but it's very typical of new starts is that you have some ups and downs early on. Make them off spec while you're trying to prove out the technology. And, certainly by the back half of the year, we ought to be producing many of the products that, we had envisioned that this differentiated technology will produce.
And our next question comes from P. J. Juvekar from Citi. Your line is now open.
Yes, hi. Good morning, Bob.
Good morning.
Can you talk a little bit about your feedstocks late on the Gulf Coast? You know, you mentioned ramping up broken and built in feeds. You know, one of your competitors went to, 0 NAPA. So with your propylene dealer with enterprise, can you can you go even more lighter? Can you just talk about, you know, sort of your free stocks later and how do you see that evolving?
Well, PJ, 1st of all, you know, on our, feedstock, consideration, so far, the the amount of propylene we produce hasn't really driven the feedstock decision. It's more about the relative price and relative economic. Perhaps the price of propylene has more impact than the amount of volume we output because we have our flex unit where we can also convert ethylene to propylene if we needed more propylene and it made economic sense. As I mentioned earlier, we increased, butane and, propane cracking up to 35%. And, and, you know, I think we could perhaps stretch that a little bit more.
The key point on feedstock flexibility is that with our ability to crack and back much of LPG and, more Y grade if if Y grade become economical, think we have the full range of feedstocks available to us, to, to capitalize on whatever feedstock environment presents itself. We still see ethane as being really well supplied and well priced to to maintain, the US advantage when you think about a global cost curve.
And our next question comes from Bob Koort from Goldman Sachs. Your line is now open.
Thank you. Bob, I wanted to talk a little bit about capital allocation in particular, reinvestment in Lyondell versus the potential in organic targets. I guess since the summer, we've seen
a pretty good rally in some
of these cyclical needs based evaluation levels, as well as your own, frankly, but just talk about the tension between how you think about M And A and maybe the short term fluctuations and valuations and long term value. And then Maybe you could also speak to the Schulman integration cost and what that cadence looks like going forward. Thanks.
Okay. So, Bob, first of all, on, on M And A, there there are a few principles that we, that we really hold to One is that we're committed to a very strong investment grade rating through the cycle. Minimum BBB rating post any transaction that we might consider that's very important to us and to have the flexibility and the strength in terms of our balance sheet. Secondly, must have strategic fit and we're gonna be very value oriented, patient, and discipline. And I think we've demonstrated all of those things through our decisions on what we have done and what we haven't done.
To your point about the tension between, acquiring ourselves and and acquiring perhaps others, And the way I think about this is that, for, for, for the use of our operating cash flow, 1st and foremost, we're committed to the strong secure and progressive dividend over time. And as we demonstrated at Investor Day, it's really well covered. Sustaining CapEx about 1,100,000,000 Organic growth will be declining, so we think we'll have excess cash flow to dedicate to opportunistic buybacks. As we progress over the next 12 to 18 months. As far as using our balance sheet, likely, we would not use that for, buybacks.
So we would we would consider, more of that for very value oriented M and A. So look for us to stay disciplined, stay close to our core, and constantly solve for strong investment grade ratings. Oh, and your question about Schulman Integration, The integration costs will ramp up further. And, Thomas, I don't know if you wanted to comment on how much will flow through 2020.
Right. So we, we, thank you both. So we, you have seen the integration costs for the third quarter where, where we are now at 43,000,000 Paul, so we made further progress in accelerating, the integration of Schulman. So after tax, 33,000,000 And so we are, you know, we are at the we will go live with a large part of the, SAP integration of Schulman into LyondellBasell in the first half of twenty twenty, and that's virtually where integration costs will will peak.
Thank you. And our next question comes from Vincent Andrews from Morgan Stanley. Your line is now open.
Bob, just another question on the refinery. And I guess my question is as you've obviously improved the reliability of it and now there's the opportunity for a structural change and it's margins or earnings power. How core to LyondellBasell is the refinery? And would you consider monetizing it?
Thanks for your question Vincent. Well, as I've said in the past, I mean, our focus has been to improve reliability and, control the controllables, if you will, which has run the asset really well. We're really proud of the team at the refinery. I think they've delivered really great performance We wanted to position ourselves for IMO 2020. I think we've done that completing our turnaround work so that we have a clear runway for next year to operate at maximum capacity.
The key focus, Vincent, at the time at at the moment is I wanna see the refinery turn of profit, generate free cash flow that we can, reinvest back into LyondellBasell we're gonna continue to focus on that. And in terms of portfolio, you know, we'll continue to we'll consider options over time. But at the moment, The key is
from Steve Byrne from Bank of America. Your line is now open.
Hi Bob. You talked about both mechanical and molecular wing. And I'm just curious, your longer term views on these, is your motivation to develop these projects to help drive a, you know, a plastic recycling industry, or do you think either one of them could become really meaningful contributors to your business model and say the next 5 years?
Yeah, good morning, Steve. First of all, I think with what's really important when we undertake this plastics debate is that, we've gotta close the loop. We have to prevent leakage of plastics into the environment. That's the first, first objective. Then when we've collected that waste, my view is that we're gonna need a range of solutions, chemical recycling, mechanical recycling, and so on.
And so, yes, indeed our our our our our ambition is to have a platform in both areas in mechanical and chemical recycling and have a sustainable business platform over the long term. We expect to earn returns just like we do in any other investment, where I would where I would perhaps draw a difference here is that the timeline will be a little longer. In terms of how long it takes for us to have a platform that's scalable. We're very committed to that, in both chemical and mechanical recycling and I see a path to success there.
And our next question comes from Arun Viswanathan from RBC Capital Markets. Your line is now open.
Great, thanks. Good morning. My questions on polyethylene So, just wanted to get your thoughts on, you know, price evolution here. There was a 3¢ increase that the industry was able to get in September. Do you see that potentially sticking, through the next quarter or 2?
And and if so, why? And if not, Would you expect prices to come down in in December per usual kind of seasonality? What are the drivers that you're looking at? You know, to to help you understand, you know, or or form some outlook on, on polyethylene pricing. Thanks.
Okay. So Arun, you have first, I'd start with the market backdrop. And, and, in the prepared remarks in our slides, we showed you that, through the end of the third quarter, the net price change is 0. So to me, that indicates that markets are are somewhat balanced. We've seen reasonable amount of destocking recent, industry reports have indicated even PE inventory that come down in the U.
S. So so the backdrop going into the fourth quarter to us feels like there's not a lot of, excess inventory downstream because of all of the factors that are the macro factors that have created lack of confidence. Also, I mentioned that, the Asia PE to NAFTA spreads, are currently at, very low levels around $300 per ton. And if you look back over the last 10 years, These are kind of trough levels when we get to this when we get to this point on Asia PE to NAFTA spreads. So yes, we could have some seasonal pricing adjustments like we do every year in fourth quarter, but I don't expect extraordinary changes because we've reached some evidence of trough sort of conditions, whether you think about destocking, or you look at this, PE to Net the spread in Asia.
And I think that's one that's, that's held true if you look back over the last 10 years. So that's kind of how I'm thinking about things. And then, you know, next year, once we get into the spring season, we'll see continued demand growth like we do every year. And, and you will recall that typically the growth in a year happened in the 1st 9 months of the year. So, by the time we get into the spring, we should start to feel the impact of demand growth going into 2020.
So I'm quite constructive on all of this because I think we've already had in some ways quite a correction in terms of inventories and and, and margins and the evidence I would point to the Asia if you need to map the spread.
Thank you. And our next question comes from John McNulty from BMO Capital Markets. Your line is now open.
Hey, good morning Bob. This is Pavesh for John.
Good morning.
On the Chinese JV with Bora, it appears everything is going according to plan there. Can you share kind of, like, what goalpost are you tracking there as we go ahead And what gets you more comfortable in terms of making additional investments in the region?
Well, there's a few factors as especially with the, the Deborah JV, first of all, it's, you know, it's, it's based on our polyolefin technology. And, and the and the and the the construction costs are are almost half of what they would be on the Gulf Coast. So those are 2 really important factors. The construction is about 50% complete now. So by the time we have, definitive agreements and, and we're at point where we're going to contribute, equity into the venture.
It'll be even more closer to startup. So, so all of those factors give us good confidence about, about the costs and, and, the denominator in the return equation, if you will. It's product that's produced in China for China. So it's it's a large growing market. We're very confident about our ability to place that product.
And as we as we look ahead to other investments, I think this will be a very good test case for us and build our capability and our presence locally in the region. So that if when there are future phases in the Bora JV, we should be able to invest with confidence and grow our position in in a very important market. So, you know, those are all of the factors that give us confidence in, in our investment, when we conclude the joint venture with Bora.
Thank you. And our next question comes from Frank Mitsch from Fermium Research.
Thank you. Good morning. Hey, Thomas. It was nice to work with you and certainly wish you the best for the future.
Thank you, Frank. Bob, as I look at
the IND business, you've had four quarters in a row of negative year over year comps and your LTM EBITDA is at $1,600,000,000. Is this kind of the base level that we should be thinking about this business? Or how do you, how do you think about, you know, kind of the base level of earnings of EIND? And I guess as part of that, is there any, thing you can offer with respect to what the pace of economic activity has been either on the industrial or size consumer side, that has had that impact on IND being down, as I said, four quarters in a row?
Well, so Frank, the puts and takes on IND and tiring as as we can considerably, has has methanol. And and as you know, when you think about the IND business, that's the part of the portfolio that provides the upside. And and when it's not there, you know, we kinda land where we are now. That's an indication of of those value chains and how the demand is evolving in the styrene value chains. PO has been a bit weaker as well because of automotive.
That's, that's been a, you know, a consistent story throughout the year in methanol this weekend as well. Now offsetting all of that has been a better oxy fuel business. So we've had not only better blend premiums this year, but also cheaper butane, especially in the US. So So, Frank, for I and D, I mean, you really have to look at this whole portfolio because there are typically offsets. If one is doing better, the other doesn't not that they're correlated, but we find that that, it's unusual if if all of them were trough conditions, So, so difficult to really point that at an exact number, but the part of our portfolio that provides upside has corrected considerably when you think about styrene and methanol.
Thank you. And our next question comes from Hassan Ahmed from Alethia.
Good morning, Bob. Good morning. Bob, a lot of discussion around ethylene and and, you know, I think, you know, we've made your case pretty clear that, that most of the capacity additions are behind us, things potentially could cycle up from here. Could you also give us your views on the polypropylene side of things? You know, how are you thinking about supply demand over there?
And how should we be thinking about sort of, 2020? I mean, would would sort of margins be a tailwind, a headwind, you know, any any any sort of thoughts around that would be great.
Sure, Hassan. So on polypropylene, there is some new capacity that's, starting up next year, but our sense is that we kind of go sideways, as demand grows, likely this capacity, new capacity will be absorbed, and polypropylene growth rates have been have been pretty strong We think those could be bolstered by an improvement in the automotive sector. And I've seen this over the last, 10 years that when when the automotive sector comes back, you really see a big burst in demand. And we saw this back in, 1213. We saw it in 16.
So, likely that'll benefit, PP as well. And in today's economics, include, or today's margins, factor in a very weak automotive market, which probably has more impact on PT than PE. So So I think kind of net of more supply, maybe better demand, we we go sideways, from 19 to 20.
And our next question comes from John Roberts from UBS. Your line is now open.
Thank you and best wishes as well, Thomas. Thanks, John. There's a relatively little discussion about polypropylene. I assume it underperformed polyethylene because it's more durable exposed and was Europe significantly different than the U. S.
No. You you'll you'll recall that, polypropylene is really more more of a regional market. There is some global trade, but generally,
you know, there's it's more of
a regional market. So, in Europe and U. S. In terms of demand performance are similar. US probably a little bit better, because the automotive sector has been hit much harder in Europe than it has here.
And and frankly, we see that more more in our compounding business where where Europe is weaker. So polypropylene has been a decent business this year for us. And as I mentioned in the prior question, I see the net of sort of capacity additions and demand growth showing a sideways sort of performance from this year to next.
Thank you. And our next question comes from Mike Sison from Wells Fargo. Your line is now open.
Guys. Nice quarter. Bob, when you think about your outlook for the fourth quarter, you've you've sort of talked about normal seasonal kind of declined 4th quarter versus 3rd quarter. And, you know, a lot of companies are seeing much more dire sort of outlook sequentially. So Is there anything different in in either polyethylene or your other markets that, you're not seeing a sort of a weaker sequential decline?
Well, I think, you know, we've already seen a lot of the destocking and and sort of weakness in our markets throughout the whole year. I mean, if you go back to Q1, Q2, trade uncertainty, recession fears, expectations of new capacity causing pricing to come down. That has all caused destocking downstream. And so, typically, when you go into 4th quarter, you see somebody stocking because of year end, But my sense is a lot of that's already occurred, especially in polyethylene. And again, I would point you to the, you know, AGFP even after spread.
I mean, it's really showing trough conditions. So this expectation of weaker markets has been has been in has been around and the sentiment has been there for most of this year and and has driven buyer behavior. So other than, you know, directionally some seasonal impacts that we get every year, it's difficult to imagine there would be a lot more.
And, Mike, I would remind you that the fourth quarter
of 18 was very weak. So it should be easy, fairly easy to beat that comp.
Thank you. And our next question comes from Jeff Zekauskas from JP Morgan.
Over the past 4 or 5 years, polyethylene globally has grown, I think pretty close to 5%. At what rate do you think it grew or it's growing in 2019?
So Jack, polyethylene has grown probably more like 4 to 4 a half percent in in the timeframe you described. And this year, it's it's still growing kind of in that range, maybe a little bit lower. Again, as I mentioned earlier, with destocking happening globally, and, and and the concerns around trade and so on, I think we've seen a little bit reduction in this demand growth. But a lot of it's packaging based. So and and and, a consumable end use demand, we're still very constructive about demand growth on polyethylene going forward.
I think it's hard
to sort out here because the the increased exports from North America, and we're gonna have to see where all that polyethylene ends up at the end of things that especially after the the trade lanes got re adjusted after the tariffs. Thank
you. And our next question comes from Jim Sheein from SunTrust. Your line is now open.
Good morning, Bob. You said earlier that return timelines in plastic waste projects might be longer than for conventional projects. Related to that, you recently signed on to a commitment with the trade association to serve the interest of all stakeholders, not just shareholders. Could you please comment on how you would address another situation in which a stakeholder interest might conflict with maximizing value for shareholders? For example, if a stakeholder objected to using cash for share repurchases and instead wanted you to use that cash for something else, How would you resolve the conflict?
I'm just trying to understand where shareholders fit in the hierarchy of priorities. In the Well, I think with with, with with stakeholders, we we have to emphasize that our aim is to be a going concern that generates good results so that we can have, sustainability in our business model, and and we're responsible and disciplined in how we deploy the cash flow we earn, not only how we do it, but what we do is it has to learn the cash flow. And so I would frame it in that way that, it's important that we we generate the results we do, keeping all stakeholders in mind, and deploy the cash flow that we deploy keeping all stakeholders in mind. And I think, frankly, we've done that. So I don't know that this, this new commitment requires a change in our approach I think we've been living by this, in the past.
And we'll continue to do that in the future. And as it, as it relates to share repurchases, the idea is to have a really strong company over a long period of time. And so we're gonna be very prudent in in where we invest and, and shareholders are very, are very important stakeholder, constituency.
Thank you. And our next question comes from Jonas Oxgaard from Bernstein.
Oh, thank you for squeezing me in here. When you look, you're talking about increasing exports. Could you talk a little bit about what percentage of your of your P is exported now, where it's going, what kind of price realization you get from those volumes?
So today, Jonas, about 20 percent of RPE is exported. That's come up actually from low double digits. We've already increased our exports. And I can imagine next year after we start Hyperzone, that we will increase that further, and approach approach the industry average of something like mid thirties, I think, in in exports, 30 to 35% of exports out of the U. S.
We'll likely still be under that, but, but approach that a little bit more as we go into next year.
Our next question comes from Lawrence Alexander from Jeff Your line is now open.
Good morning. On the sustainability and Circularity discussion, could you provide some initial thoughts to help you think about what the next 10 years might look like in terms of your willingness to shift to using BioNAP, for, for example, in Europe, you're willingness to let Circularity investments move above, say, 10% of CapEx over time And would you be willing to buy recyclable products from other companies in order to get to a certain mix in your total portfolio over time?
Yes. So Lawrence, on bio based net, we've already demonstrated that we can crack that at our investment in Germany site. And as we find more sources of that, we'll, our our aim is to scale that up. And and I I think over time, based on availability of feedstock and our ability to evolve technology, I'm convinced that we're going to have very sustainable good return sort of business models. And it's been sort of the nature of our industry and our company is that first we innovate and then we get to scale so we can earn returns.
And I don't see mechanical recycling, chemical recycling any differently. We're on the front end of this investment. I'm fully prepared that while the investments are very modest at this point, they perhaps will have a little longer time horizon but we will be able to scale up, at the right time. And we welcome, the adoption of Circularity. We think that's very important as we think about the use of plastics going long going into the long term.
And again, as I mentioned earlier, the most important imperative today is to prevent the leakage of plastic waste or plastic pellets into the environment Then once we collect that, companies like us are endeavoring to use that waste in many different ways to create new products to close the loop. And and we'll, we're very committed to that, and we'll continue to invest in that regard.
Thank you. And our last question comes from Matthew Blair from Tudor Pickering Holt. Your line is now open.
Hey, Bob. Thanks for taking my question. So NASA pricing is generally weakened this year relative to crude. There's the thought that it may soften more going forward. And that could either come from the demand side, you know, as crackers shift to lighter, feedstocks or maybe from the supply side is as US Shell Crude production grows.
Do you what what's your view on this? Are are you worried about NASA getting weaker? And if so, how would that affect the cost curve for PE and and potential pricing for PE?
Hey, Matthew. Good morning. Good question. So as you mentioned rightly, NASA has already come off quite a lot. And frankly, that's part of what's ailing our refining performance is we don't have a reformer through a refinery.
So, you know, when when some of these products like NAPA and propylene and others come down in price, that further, you know, directionally affects the results of the refinery. Having said all of that, I always kind of go back to historical, that's premiums or discounts. And, and I think we're at a point where if there is, if there is further reduction and and that's the relative to crude oil. It's hard to imagine that that would be sustained. If it does, I mean, there are offsets.
Obviously, our European operations would benefit from that because Napa would become a lot cheaper. We also, could crack more Napa if it was advantage compared to ethane here in the U. S. So, I mean, I think there's sort of that there's two sides to the ledger in terms of Metha and we'll have to you know, work our way through that, but it seems to me that, a sustained step down in Napa is, is more difficult to contemplate
Thank you. And that was our final question. And now we'll turn the meeting back over to Mr. David Kinney.
Well, thank you. This is Bob Patel. I offer a few, closing remarks. First of all, thanks for all the great questions. You know, our company is delivering resilient performance during these times of macro uncertainty, market headwinds, and weak industrial demand.
At LyondellBasell, we're not simply waiting for markets to rebound. We're taking steps to further increase our cash flow, make disciplined investment decisions and create more value for our shareholders. Thank you for your interest in our company and we look forward to updating you on our full year results and growth initiatives during our fourth quarter earnings call. With that, we'll end the call. Hope you all have a great weekend.
Thank you.
Thank you for your participation in today's conference. All parties may disconnect at this time.