Lyondellbasell Industries N.V. quarterly report, Q1 FY2018

Business context and reporting period

LyondellBasell Industries N.V. is a global chemicals and polymers manufacturer, refiner, and technology licensor. This unaudited Form 10-Q covers the three months ended March 31, 2018; comparisons are with the first quarter of 2017 unless otherwise stated. Interim results are not necessarily indicative of full-year results.

Financial performance and position

Approximate margins, calculated from reported figures: gross margin was 18.0% versus 17.1%; operating margin was 15.3% versus 14.4%; net margin was 12.6% versus 9.5%; and EBITDA margin was 19.6% versus 19.2%. Interest expense was $91 million, down from $207 million, primarily because Q1 2017 included $113 million of charges related to the redemption of senior notes.

Cash and cash equivalents were $1.840 billion and short-term investments were $1.042 billion at March 31, 2018. The company also held $586 million in tri-party repurchase agreements. Total debt, including current maturities, was $8.613 billion; long-term debt was $8.531 billion. Unused availability under credit facilities was $3.4 billion, with no borrowings or letters of credit under the revolving or receivables facilities. The current ratio was approximately 2.6, versus 2.5 at December 31, 2017.

Operating cash flow less property, plant and equipment expenditures was approximately $577 million. The company paid $395 million in dividends and $119 million in cash for share repurchases during the quarter. The declared quarterly dividend was $1.00 per share, up from $0.85 in Q1 2017.

Material changes versus the prior comparable period

• Revenue growth reflected higher average sales prices (7%), higher volumes (3%), and favorable foreign-exchange effects (6%); cost of sales increased 15%, mainly from higher feedstock and energy costs.
• O&P-Americas EBITDA rose to $780 million from $723 million as polyolefin margins improved, partly offset by lower volumes and the absence of a prior-year asset-sale gain.
• O&P-EAI EBITDA declined to $518 million from $529 million as weaker European margins were mostly offset by favorable currency effects, volumes, and equity earnings.
• I&D EBITDA increased to $486 million from $339 million, on stronger margins and the absence of approximately $40 million of Q1 2017 precious-metal catalyst charges.
• Refining EBITDA improved to $63 million from a $30 million loss, with higher processing rates and yields versus prior-year turnaround and downtime effects.
• Technology EBITDA decreased to $56 million from $60 million, mainly on lower licensing and services revenue.
• The effective tax rate fell to 19.8% from 28.1%, primarily reflecting the U.S. Tax Act rate reduction and higher exempt income.
• Cash from operations increased, while working-capital components consumed $179 million in Q1 2018, compared with $423 million in Q1 2017.

Outlook, management commentary, risks and unusual items

Management described the quarter as a strong start to 2018, citing higher margins in several products, solid global polyolefins demand, strong I&D results, and improved refinery operations. The company expected typical seasonal margin improvement in oxyfuels and refining and continued high operating rates in Q2. Management said a recent U.S. ethylene production-consumption imbalance was expected to improve as downstream derivative units reached full rates; robust global demand and higher oil prices were described as supporting polyolefin pricing. Hyperzone HDPE and PO/TBA projects were reported on track.

The company expected to fund ongoing needs from operating cash flow and available liquidity, and stated that current resources were sufficient for anticipated capital requirements. The planned PO/TBA project was estimated at approximately $2.4 billion, with groundbreaking expected in Q3 2018 and completion in mid-2021. The proposed $2.25 billion A. Schulman acquisition, expected to close in the second half of 2018 subject to customary conditions and approvals, was to be funded with cash on hand. The company had acquired a 50% interest in Quality Circular Polymers.

Key risks include commodity-price and feedstock volatility, capacity additions and possible oversupply, operational interruptions and weather events, project execution, international currency and geopolitical exposures, tax-law changes, environmental and legal proceedings, and access to financing. The filing reported no material change in disclosed risk factors or market-risk exposure. A Houston refinery emissions matter had been referred to the Texas Attorney General; a penalty demand above $100,000 was considered reasonably possible. Environmental remediation liabilities were $102 million, and possible additional losses could not be estimated. In April 2018, the company and Access Entities settled related claims with no payment by either side.

Accounting changes adopted in Q1 included revenue recognition, which management said had an immaterial effect in the quarter and was expected to remain immaterial. Other adoption adjustments affected beginning retained earnings and accumulated other comprehensive income. The 2017 tax provision included a provisional $819 million benefit from remeasuring U.S. deferred tax liabilities; further adjustments, if any, were expected to be identified no later than Q4 2018. Disclosure controls were reported effective, with no material change in internal control over financial reporting.

Most important facts for investors to verify

• Whether strong product margins, polyolefin demand, and refinery operating performance persisted beyond Q1, particularly given feedstock costs and the U.S. ethylene imbalance.
• Progress, final cost, timing, and funding for the $2.4 billion PO/TBA project and the $2.25 billion A. Schulman acquisition.
• Cash generation and working-capital needs relative to capital expenditures, dividends, repurchases, and acquisition funding.
• Final tax effects of the U.S. Tax Act and whether the lower effective tax rate is sustainable.
• Potential outcomes and costs of environmental proceedings and remediation beyond the $102 million accrued liability.