David Kinney - LyondellBasell Industries NV Bhavesh Vaghjibhai Patel - LyondellBasell Industries NV Thomas Aebischer - LyondellBasell Industries NV.

P.J. Juvekar - Citigroup Global Markets, Inc. Hassan I. Ahmed - Alembic Global Advisors LLC David I. Begleiter - Deutsche Bank Securities, Inc. Kevin W. McCarthy - Vertical Research Partners LLC Aleksey Yefremov - Nomura Instinet Stephen Byrne - Bank of America Merrill Lynch Arun Viswanathan - RBC Capital Markets LLC Jeffrey J.

Zekauskas - JPMorgan Securities LLC Vincent Stephen Andrews - Morgan Stanley & Co. LLC John Roberts - UBS Securities LLC Dylan Campbell - Goldman Sachs & Co. LLC Jonas I. Oxgaard - Sanford C. Bernstein & Co. LLC Matthew Blair - Tudor, Pickering, Holt & Co. Securities, Inc..

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. Dave Kinney, Director of Investor Relations. Sir, you may begin..

Thank you, Johan. Hello, and welcome to the LyondellBasell's second quarter 2018 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 a slide presentation accompanies today's call and is available on our website, www.lyb.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 on 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 those forward-looking statements.

For a more detailed information about the factors that could cause our actual results to differ, please refer to the cautionary statements in the presentation slides and our financial reports, which are available at www.lyb.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 on our website at www.lyb.com.

Finally, I would like to point out that a recording of this call will be available by telephone beginning at 1:30 PM Eastern Time today until 11.59 PM Eastern time on September 27, by calling 866-483-9089 in the United States and 203-369-1588 outside the United States. The passcode for both numbers is 3564.

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. With that being said, I would now like to turn the call over to Bob..

All right. Thanks, Dave. Good day to all of you participating around the world and thank you for joining our second quarter earnings call. By now I'm sure many of you have seen our earnings release that we put out this morning highlighting the specifics of the quarter.

While I will go into greater depth on these results shortly, I want to take a brief moment to provide a longer view on why they are significant. Every year, over the past four years, our company has consistently generated more than $5 billion of cash from operating activities under a wide range of oil prices and industry conditions.

During the second quarter of 2018, we generated $1.7 billion. In my view, these superior results are a product of our team's outstanding focus on efficiency, value creation, disciplined execution and our strong portfolio of businesses.

This approach has not only delivered value, but also created the opportunity for us to develop and execute on a broader growth strategy that goes beyond brownfield expansions and is beginning to yield tangible results. Now, let's begin with slide 3 and review the highlights.

During the second quarter, our focus on safe, reliable operations and diligent commercial efforts captured market opportunities, particularly within our Intermediate and Derivatives, Refining and Technology segments. Second quarter diluted earnings were $4.22 per share.

Our second quarter results included a $346 million non-cash benefit from the settlement of a prior-year tax positions that increased earnings by $0.88 per share. Excluding this benefit and a one-time benefit from the U.S.

tax reform during the fourth quarter of 2017, our second quarter earnings per share represents a quarterly record that exceeds the previous record set in the first quarter of 2018. We also achieved quarterly EBITDA records for both our Intermediates and Derivative segment and our Technology segment.

At our Annual General Meeting on June 1st, LyondellBasell shareholders approved a new share repurchase program that authorizes the repurchase of up to 10% of the company's shares over the next 18 months.

In a few moments, Thomas will provide further detail on how our strong cash flows supported substantial shareholder returns with more than $700 million of dividends and share repurchases during the second quarter. We continue to advance our growth program during the second quarter, with significant progress on multiple initiatives.

In June, we announced that LyondellBasell entered into exclusive discussions with Odebrecht regarding a potential transaction with Braskem. As you might expect, there is little to say at this point in the discussions. Our teams are working diligently to assess the feasibility and shareholder value of such a transaction. Our pending acquisition of A.

Schulman moved forward with Schulman shareholders approving the transaction in June. Antitrust clearances have been obtained from the United States, the European Commission, China, Brazil, Mexico, Turkey and Russia, to name a few.

Our team anticipates securing the remaining regulatory approval during the third quarter and is ready to begin the integration process. To this end, we announced last week that Jim Guilfoyle, who leads our Intermediates and Derivatives segment, will lead our new Advanced Polymer Solutions segment following the close of the transaction.

Until his replacement is named, Jim will continue to oversee our I&D segment. In June, we continue to expand our joint venture portfolio with the announcement of a new 400 kiloton per year of polypropylene plant in South Korea that will utilize LyondellBasell's industry-leading Spheripol technology to serve customers in Asia.

Our organic growth programs are advancing well with significant construction activity in our Hyperzone polyethylene plant in La Porte, Texas. This is scheduled to start up in the middle of 2019. We also made very good progress in our PO/TBA project, as we work toward a 2021 start-up.

Underlying all of our business results, there's one outcome that is perhaps the most important to us. On slide 4, I would like to take a moment to highlight the significant improvement in the safety performance achieved by our employees and contractors during the first half of 2018.

In my view, this is an important indicator for our investors because of the close tie between safety and operational excellence.

Although it's tempting to become complacent about safety after years of top decile performance, as a team, we rededicated ourselves to the goal of zero injuries and delivered a 38% improvement in workers safety during the first half of this year.

We're extremely proud of this achievement and I want to thank all of our employees and contractors who've contributed such great 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 shows our quarterly and trailing 12 months segments results. During the second quarter, robust demand for polyolefins supported chain margins for both of the regional Olefins and Polyolefins segment, especially in the United States.

Strong operations and markets across nearly all product lines generated record quarterly EBITDA for our Intermediates and Derivatives segment, while continued strength in operational reliability and improving markets increased refining results.

I also would like to highlight how increased licensing revenue drove a record quarterly EBITDA of $113 million for our Technology segment. Our Technology group has been increasingly successful at licensing both LyondellBasell's polyethylene and polypropylene process technology over the past year.

With this strong quarter, LyondellBasell's trailing 12 months EBITDA has increased to approximately $7.5 billion. On slide 6, we describe our recent cash generation and deployment.

As Bob mentioned, during the second quarter we generated over $1.7 billion of cash from operating activities and over $700 million was returned to investors through dividends and share repurchases, as we repurchased more than 3 million shares.

We increased our investment in capital expenditures to approximately $500 million during the quarter, primarily due to increased activity related to construction of the Hyperzone polyethylene plant. After this activity, our balance of cash and liquid investments grew by approximately $400 million during the second quarter.

Over the past 12 months, we generated $5.7 billion of cash from operating activities and used approximately 40% for dividends and share repurchases.

After investments in our capital program and other financial activities, the cash and liquid investment balance increased over the past year by approximately $1.3 billion to end the quarter at nearly $3.9 billion. Slide 7 depicts some recent history of our cash generation and deployment.

Operating activities at LyondellBasell have consistently generated between $5 billion and $6 billion of cash over the past several years. Our trailing 12 months free cash flow has increased to over $4 billion, with less capital investment during 2017 and stronger cash generation during 2018.

Over the remainder of 2018, we expect to increase our capital investment for growth, as we complete the Hyperzone polyethylene plant and ramp up activity for construction of the world's largest propylene oxide and tertiary butyl alcohol plant.

Our forecast for capital expenditure during 2018 remains at approximately $2.4 billion, with approximately $1.1 billion allocated to maintenance that supports our high operational reliability. The chart on the right illustrates returns to shareholders in the form of dividends and share repurchases.

The foundation of our capital deployment strategy is a leading, sustainable and progressively growing dividend. Our dividend yield of 3.6% remains in the top quartile of the S&P 500. LyondellBasell's substantial cash flow generation continues to provide capability for shareholder returns through share repurchases.

As Bob mentioned earlier, our shareholders recently approved the new buyback program for as much as 10% of our shares over the next 18 months. Our tactics to optimize share repurchase may occasionally produce short-term reliability in the rate of our repurchase volumes such as that seen in the fourth quarter of 2017.

But share buybacks continue to be a component of our capital deployment strategy. With that, I will turn the call back to Bob. Thank you very much..

All right. Thank you, Thomas. Let's turn to slide 8 and review our segment results. In our Olefins and Polyolefins Americas segment, second quarter EBITDA was $700 million, an $80 million decline from the first quarter. Olefins results decreased by approximately $175 million compared to the first quarter of 2018.

Ethylene margins declined by approximately $0.07 per pound and volume increased with improved derivative operating rates. Ethylene operating rates remained strong across our system during the second quarter, averaging 89% despite planned maintenance downtime at one of our Channelview, Texas crackers.

Approximately 85% of our ethylene production was from ethane and an approximately 93% came from NGLs. In polyolefins, combined results improved by approximately $105 million. Polyethylene spreads over ethylene increased by approximately $0.07 per pound, as ethylene prices declined while polyethylene prices were relatively unchanged.

Planned maintenance on one of our two crackers at Channelview was completed during the second quarter. We estimate that the impact to second quarter results was approximately $50 million. We have no significant planned maintenance in this segment for the remainder of 2018.

We continue to see weakness in spot ethylene prices during July, due to inconsistent and lower than anticipated operating rates on downstream derivatives. This is creating length (00:14:02) ethylene. Strong domestic and global demand for polyethylene is supporting firm polyethylene pricing and robust ethylene to polyethylene chain margins.

Improving operating rates on these profitable downstream derivatives is expected to provide a more balanced ethylene market over the coming months. With the recent commissioning of another U.S. ethylene cracker, ethane feedstock prices have increased in a similar pattern seen during previous start-ups of crackers and ethane export terminals.

Strong NGL production coupled with new pipeline and fractionation capacity is supporting the recent reversion to lower ethane prices, as new demand is addressed with plentiful ethane supplies. The highly anticipated wave of ethylene and polyethylene capacity additions in North America is well underway.

As seen on the upper right part of slide 9, the majority of the capacity planned for the period from 2016 to 2019 has started. Approximately 65% of both ethylene and polyethylene has entered the markets. In addition to polyethylene, ethylene consumption by other derivatives such as ethylene oxide and alpha olefins is also expanding.

In general, much of the new ethylene capacity has ramped up smoothly, while some of the new and existing derivative units are struggling with operating issues that are temporarily limiting ethylene demand. So far, the new U.S. polyethylene capacity has been largely absorbed by this year's strong domestic U.S.

demand with exports only recently increasing above historical norms. Over the coming months, North American polyethylene capacity additions will increasingly serve a relatively balanced global market and China's growing trade deficit for polyethylene.

Turning to slide 10, let's review performance in the Olefins and Polyolefins – Europe, Asia and International segment. During the second quarter, EBITDA was $447 million, $71 million lower than the first quarter. Olefins results declined approximately $15 million. Utilization of advantaged feedstock increased by 3%.

Our crackers operated at 95% of their nameplate capacity during the second quarter, exceeding industry average performance by about 5%. Combined polyolefin results declined by approximately $40 million, primarily due to reduced margins for polyethylene. Joint venture equity income declined by approximately $20 million.

During July, global markets remained tight to balanced with robust demand. Industry consultants indicate that three European crackers will undergo planned maintenance during the third quarter. This includes the larger of our two crackers in Wesseling, Germany, which will begin approximately two months of maintenance in the middle of September.

We estimate the impact from this downtime will be approximately $55 million, with about $15 million impacting the third quarter and $40 million impacting the fourth quarter. On slide 11, we again highlight the record-setting quarter from our Intermediates and Derivatives segment.

Second quarter EBITDA increased to $642 million, exceeding the previous record established in the first quarter of 2018 by $156 million. Our assets ran well and allowed us to realize opportunities from tight markets. PO and derivatives performed similarly to the previous quarter, continuing to capture margin strength seen year-to-date.

Strong volumes and higher margins across nearly every product drove approximately $110 million of improvement for intermediate chemicals. Oxyfuels and related products results improved by approximately $45 million due to increased margins and volumes associated with seasonal demand for oxyfuels.

During July, oxyfuels margins moderated due to higher feedstock costs. Margins for styrene and methanol are also expected to moderate, as new methanol capacity enters the market and styrene markets become more balanced with reduced industry maintenance.

We will be performing maintenance at one of our three propylene oxide plants in Bayport, Texas during the third and fourth quarter of this year. We expect the maintenance will reduce EBITDA by approximately $50 million, with about $20 million of that impact during the third quarter and $30 million in the fourth quarter.

On slide 12, we describe the drivers behind the $450 million of improved performance by our I&D segment during the first half of 2018.

Although much of this year's improvement is due to synchronized margin strength across multiple value chains in this segment, roughly 15% of this year's improvement can be attributed to sustainable contracting improvements and a return to our typical asset reliability.

We've implemented new contracting strategies that improve our capture of market upside without significantly increasing downside exposure. Another 20% of this year's improvement can be attributed to PO and TBA volumes with less planned maintenance and a reduction in the precious metal catalyst costs incurred during the first half of 2017.

The remaining 65% of this year's improvement is derived from capturing market opportunities afforded by strong supply and demand fundamentals. These are the times when LyondellBasell's commitment to safe and reliable operations generates exceptional returns.

While not all of this upside is durable, we expect to see an upward trajectory for this segment relative to the annual profitability seen in 2016 and 2017, as we advance towards start-up of our next world-scale PO/TBA plant in 2021. Now, let's move to slide 13 for a discussion of our Refining segment.

Second quarter EBITDA was $104 million, a $41 million improvement over the first quarter. The refinery continued operating at a strong rate of 259,000 barrels per day during the second quarter. The Maya 2-1-1 crack spread increased over $5 per barrel when compared to the first quarter.

Margin improvements were partially offset by other crude differentials and an increase in blending cost to meet summer gasoline specifications. The cost of RINs decreased relative to the first quarter.

During July, our refinery has continued to operate near nameplate capacity, but refining margins are moderating with a declining Maya 2-1-1 crack spread. In the middle of September, we will begin planned maintenance on one of the two pairs of crude distillation and coking units at the refinery.

This maintenance is expected to impact EBITDA by approximately $65 million, with $20 million of that impact in the third quarter and the balance in the fourth quarter. Please turn to slide 14 for an update on several significant milestones that were achieved in the A. Schulman acquisition during the second quarter. On June 14, A.

Schulman shareholders approved the acquisition; and on June 27, we've received European antitrust clearance. In the coming weeks, we anticipate approval from the Committee on Foreign Investment in the United States. We look forward to welcoming A.

Schulman employees to our team and are really excited about the shareholder value that the combined business will create. We'll continue to update you on our progress as we expect to finalize the transaction during the third quarter of 2018. Slide 15 summarizes a few drivers that could fuel LyondellBasell's earnings growth over the next 12 months.

The completion of the A. Schulman acquisition will improve our vertical integration and expand our reach into growing and attractive markets. Start-up of our Hyperzone polyethylene capacity in 2019 will meet a rising demand for high-density polyethylene and improve our capture of integrated ethylene/polyethylene chain margins.

Our Intermediates and Derivatives team has diligently driven structural business improvements and is reaping the benefits from favorable market conditions. Our team at the refinery has delivered five consecutive quarters of highly reliable operations with improved margin.

And going forward, our Houston refinery is well positioned to benefit from new regulations from marine fuels during the latter half of next year. Turning to slide 16, allow me to recap some highlights.

Building on our strong track record of performance, our team delivered another quarter of superior results from our global portfolio of diverse petrochemical businesses.

Record quarterly EBITDA results from Intermediates and Derivatives and Technology, along with solid improvements from Refining, more than offset the challenging conditions from rising olefin feedstocks and capacity additions in North America.

Our robust cash flows continue to support both reinvestment in our growth programs and generate shareholder returns. We see continued strength in our business with strong global demand growth for our products in both consumer-based and industrial markets over the remainder of 2018.

As new North American industry capacity is absorbed by the market, we anticipate decreasing impacts from short-term feedstock constraints and inventory imbalances across the value chain.

With a solid pipeline of organic growth charted for the next decade and the potential for additional growth from M&A, our team is working diligently to advance our progress and maximize return to our shareholders. With that said, we're now pleased to take your questions..

Our first question is from P.J. Juvekar from Citi..

Yes, good morning..

Good morning, P.J..

Bob, question on polyethylene inventory. Typically, converters destock or carry low inventories when they see new plants starting up.

So can you talk about where do we stand on inventories in the U.S.? And actually a similar question for China, because with all the tariffs and ban on imported recycled plastic, what's going on there in terms of inventories?.

Yeah. P.J., I've commented on this at the last earnings call and my view has not changed. I think converter inventories here in the U.S. are on the low end because of the expectation of new capacity coming, as you rightly mentioned, and I think that will continue here through the fall.

So, I think any unplanned events will likely cause more tightness in the market. China inventories, a little bit less visibility in terms of what goes on there. But our sense is that demand is growing at very good rates.

Per IHS, the forecast for demand growth for polyethylene is 8.5% for 2018, so a very strong rate, and I think that all points to a very good market in the back half of 2018..

It is a sort of extension of that question, if you think about these tariffs and plastic bans and all that, would that mean the Chinese MTO plants will run at a higher rate to meet local demand?.

I think it's possible. First of all, I think we're – as I mentioned before, we believe that fair and free trade is certainly very important to have healthy markets and a healthy global economy. I think in the near term, demand is fairly fixed. It's a question of how that demand is met.

And I think, one consequence of the tariffs could be, yes, that MTO plants run harder. The other is that maybe trade patterns will shift such that China's demand could be met more from the Middle East and perhaps more U.S. product flows to Europe and other places. We've seen a bit of that in styrene.

As you know, there have been anti-dumping duties and tariffs that have been levied, but the market has kind of managed through that change very well. So I would expect that we'd see similar things in polyethylene.

And I kind of step back from all the tariff noise and say that global operating rates are very high and demand is growing at very good rate..

Thank you. Our next question is from Hassan Ahmed from Alembic Global..

Good morning, Bob..

Good Morning..

Bob, obviously, strong results within I&D and particularly strong volume growth within the acetyl side of things. My question is that, one of your acetyl competitors recently gave their views about supply/demand fundamentals over the next two years.

And they talked about global utilization rates tightening by 600 to 800 basis points between, call it, now and 2020. And two-thirds of that they attributed, so two-thirds of that tightening they attributed to just regular demand growth, but a third to Chinese environmental sort of related closures.

So, do you – first of all, do you have a similar sort of supply/demand global utilization rate view? And the follow-up to that would be that, if this is impacting acetic in such a way or VAM in such a significant way, I'd imagine there are other sort of petrochemicals and chemicals which would be impacted as well.

So are you – any sort of clarity around this and your thoughts would be appreciated..

Yes, Hassan. So on VAM, directionally I tend to agree that the outlook looks good. I think the magnitude, we'll have to see how that plays out.

But the broader point you raised which I think is very important is that, the growing sort of regulation or a more tightening regulatory environment on chemical operations in China is important and meaningful, and I think will tend to favor our intermediate and chemicals business, whether it's EO or VAM or other products.

So directionally, I think it's good for our I&D segment and constructive for the market..

Thank you. Our next question is from David Begleiter from Deutsche Bank..

Thank you. Good morning..

Good morning..

Nice quarter, Bob. Bob, I know you can't discuss the Braskem acquisition.

But in theory, what makes that asset attractive? I know you do like polypropylene, but maybe discuss maybe polypropylene or – overall what makes Braskem attractive to you and Lyondell?.

Yeah. Well, I've described in the past that from an industrial logic standpoint, there's sort of a consolidation play in the O&P space. It gives us a presence in Latin America that we don't have today, and we think that's a very important market as we look out long term in terms of the Olefins and Polyolefins space.

They have very high-quality assets and it's a well-run company. So I think there are a lot of, I think, potential benefits to our shareholders. So, we'll just have to kind of work through our process and see where we come out..

Thank you. Our next question is from Kevin McCarthy from Vertical Research Partners..

Yes. Good morning..

Hi, Kevin..

Bob, how would you compare and contrast the propylene monomer market these days in the United States versus Europe?.

Well, there is a very important distinction in the U.S. is that the cracker fleet in the U.S. is much more flexible. So, that drives some of the variability in propylene supply. Generally speaking, I would say, propylene supply remains very tight in the U.S. and likely will continue to be so.

And especially, as over the last decade you've seen more ethane cracking, that's reduced the amount of propylene output and incrementally some new derivatives have come to market. So, I would expect propylene to be more dynamic in terms of prices or continued sort of dynamic as it has been.

In Europe, it's more of a stable market and tends to follow naphtha and tends to kind of follow overall cracker margins. It's not as dynamic in terms of price just because of the supply being more stable..

Thank you. Our next question is from Alex Yefremov from Nomura Instinet..

Good morning. Thank you. Just following up on VAM.

Bob, is there any interest in perhaps adding to VAM capacity if there is enough return on capital in that area?.

Yeah. Good morning, Alex. I've been focusing the team on maximizing the potential of the asset we have on the ground today. And so, we're trying to find opportunities where we can increase output and increase efficiency at little or no cost.

And I think we do have some opportunities in that area and I'd like to see us reap those benefits before we think about other assets..

Thank you. Our next question is from Steve Byrne from Bank of America..

Yes. Thank you. Bob, you put in some data in one of these slides about domestic demand growth for polyethylene U.S. and Canada, almost 55% – sorry, 5% (00:33:12) year-over-year in the first half.

Is that consistent with demand growth that either you've been expecting or that you're seeing from your customers? And if so, what's driving that level of demand growth? And are you having any increased dialogue with your customers on addressing some of the chatter that's out there on banning one-time use of plastic? Is that just noise out there or do you see any meaningful impact from it?.

Yeah. So, on the growth rates, I think they're really reflecting a very strong U.S. GDP environment. And as you know, polyethylene growth tends to tie very closely to GDP growth. So I think it's – the growth rates are a reflection of a very good U.S. market and more penetration of plastics into other end users.

So, I think that trend is very good and very durable. I've also pointed out in prior earnings calls that, typically our industry experiences most of our annual growth in the first three quarters of the year because of seasonality and the like. So, I think that also plays a role as it does in prior years.

Now, let me answer your question on sort of plastics waste. First of all, there's been a lot of press about plastic waste in oceans and rivers and landfills and so on. I can tell you that our industry understands that this is a very, very important issue and something that we must be a part of the solution.

It's a key focus area for trade associations around the world including American Chemistry Council and Cefic and others. And we hold membership – we have core (00:35:11) members in a lot of these associations and hold leadership positions on many of these.

There is a lot of alignment globally in the industry that we've got to do substantial things to address this challenge of plastic waste. You should expect a pretty significant launch before year-end on an initiative around plastic waste. And I think that will clarify how serious the industry is about addressing this.

But on sustainability, there is a positive side to it in terms of plastics. So first of all, plastics extend the life of food through packaging. And if you think about fuel efficiency in vehicles, it's made possible by light-weighting which comes from plastic. So there is a very positive aspect in terms of sustainability.

The last thing I wanted to mention is, here at LyondellBasell we're doing a lot in this area. You heard me talk in the past about our Quality Circular Polymers joint venture. It's a one of a kind recycling joint venture with a waste management company called SUEZ in Europe. That's off to a really good start.

And I'm convinced and I think it's a model for a platform we'll be able to replicate elsewhere in Europe. We also recently signed an agreement with the Karlsruhe Institute of Technology in Germany to develop catalyst and process technology that decompose post-consumer plastic waste. So, there's a lot going on in this area.

So look for big announcements from the industry by year-end as we get serious about tackling this issue of plastic waste..

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

Great. Thanks. Good morning..

Good morning..

Just a question on your outlook, I guess, for both North America and ex-North America olefins. I guess, we've seen some softening in Asian prices. What do you expect for the rest of the year in North America? I mean, on the polyethylene side we've seen some price increases pushed out.

You expect ultimately those would have support or not? And then, secondarily in Europe, it looks like sequentially we are going to be lower on the margin side in Q3, Q4. Just wanted to get your thoughts on those two dynamics..

Yeah. So Arun, first of all, prices like any year tend to follow seasonal patterns. So we typically have a stronger spring and a strong fall sort of period. That seasonality is much stronger in Europe because of a more prevalent sort of summer holiday season or many factory shutdown – converter shutdown.

Let me kind of step back and think about operating rates. So last year, globally we had very high operating rates, really near full capacity in ethylene and polyethylene. Now if you look at change in supply and change in demand from 2017 to 2018, supply growth is exceeding demand growth by forecast from IHS by less than 1% from 2017 to 2018.

So given that we're starting at very high operating rates, coming off maybe 100 basis points on operating rates is frankly negligible in terms of impact on market. Prior cycles we've seen reduction of 10% in operating rates or greater. It's a very modest reduction.

Furthermore, if you kind of peel that back and you look at high-density polyethylene which is kind of 70-or-so-percent of our output in polyethylene – actually, this year demand growth is forecasted to exceed supply growth by almost 150 basis points, and we're seeing that in the way kind of pricing is playing out.

And if you look next year, overall polyethylene supply growth and demand growth will be very close to matched; and in HD, supply growth falls short again of demand growth projections.

So who would have thought, Arun, that we would have had price rollovers when you've had this much new capacity comes on? And if by the end of the year operating rates have dropped 1% in my view, we still have a very tight market with not so much capacity coming in the next couple of years.

I think it's important as we try to sort of sort through all of the noise from month-to-month, just step back and look at where operating rates are and we got a pretty tight market with normal seasonality..

Thank you. Our next question is from Jeff Zekauskas from JPMorgan..

Thanks very much. I was wondering, Bob, if you could discuss the differences in the European high-density polyethylene market year-over-year? That is, why was it such a better market in the second quarter of 2017 than it is in the second quarter of 2018? And likewise, for the polypropylene market year-over-year in Europe.

And then, I have a question about how are cash taxes this year versus last year or the cash tax rate? Thank you..

Okay. Well, I'll take the first part of that and then ask Thomas to answer the second part of that.

In terms of the European polyethylene and polypropylene business Q2 2017 compared to Q2 2018, if you go back to Q2 2017, last year was a very strong year in Europe, and I think many units in the industry or many plants were trying to ramp up and didn't run as well last year. We had a very, very tight market last year.

This year I think you're seeing a more normal pattern where we see summer weakness in both polyethylene and polypropylene. I expect that with fall turnarounds planned and fall demand coming up, we'll see that come back into balance like we do in most years.

And I would expect that the global sort of overlay of both polyethylene and polypropylene being strong will bear out in Europe as well. So, I just think Q2 2017 was unusually tight because of the big demand growth relatively speaking for Europe from 2016 to 2017 and then seasonality here in 2018. So, hope that answers your question, Jeff.

And Thomas, on tax?.

Okay, Jeff. Thank you for the question. So with respect to the cash tax rate, so we ended 2017 with a cash tax rate of approximately 19% and we expect now the cash tax rate 2018, as we have communicated earlier, to be a little bit higher, somewhere between 22% and 24% for 2018..

Thank you. Our next question is from Vincent Andrews from Morgan Stanley..

Thanks, and good morning, everyone..

Good morning..

Just two questions, Bob. You talked a little bit about ethane and the price retreat recently in Mont Belvieu. So maybe just give us an update on your sort of $0.07 to $0.10 frac spread forecast. I think it's a bit higher than that now. And secondly, in Conway, a nice big discounts opened up again against (00:43:08) versus Mont Belvieu.

So what's the durability of that? And then lastly, just as a clarifying question. In Tech, can you – is this the new run rate we should be thinking about from a quarterly perspective, or is any of that licensing revenue in the quarter just sort of a start-up one-time benefit? Thanks so much..

Sure. So I'll take those one at a time. On ethane, first of all, I just want to provide some context on how these big tranches of ethane demand occur when new cracker start up. So a new cracker start-up, when it's world-scale cracker like 1.5 million tons, that's about 100,000 barrels a day of additional ethane demand when those start up.

Now these are kind of big steps. It doesn't happen gradually. Now as you can imagine on the supply side, the supply then has to adjust and it takes a period of time, maybe a quarter or so, for the supply to adjust, to meet the demand of these big kind of jumps in demand.

I've said in the past as you rightly mentioned that – I think $0.07 to $0.10 could be quite normal going forward. As you say, we're above that today. But on the other hand, with higher oil prices, the U.S. sort of advantage and the slope of the global cost curve is still quite good. And we also had in Q2 some issues on the Mariner East pipeline.

So that impacted the source of exports of ethane and put more tightness on the Gulf Coast. I think all of this is going to kind of work its way through, as we get to a new normal. But again, when I step back and look at ethane fundamentals, there's a lot of ethane available on the Permian.

New pipelines have been announced for Y-grade coming through the Gulf Coast. New fracs have been announced. There's one new frac that's about to start up. One other one recently started up.

So kind of if each frac adds 60,000 barrels a day or so of ethane and more logistics are available to bring Y-grade from Permian, I think this will all kind of work its way through. But you have to appreciate that these jumps in demand are quite large for the size of the business that it is in the U.S. in terms of ethane.

So, we may see some blips here in terms of ethane being above $0.10 frac spreads. But I think $0.10 is the reasonable thing to plan around longer term. Certainly, we're doing that. The Conway advantage and its durability, that ebbs and flows, it depends again on more about Gulf Coast; and up in Conway, very few consumers.

I mean we represent a large part of the consumption of ethane up there. I continue to believe there will be a meaningful advantage in Conway and we should reap the benefits of that for years to come. On Technology, the run rate – first of all, when you think about our Technology business, there is kind of three components.

There's our catalyst business which tends to be very steady. We have service income from licenses that we've issued over the years. That tends to be steady and modestly growing as we have more licenses. You can imagine as we have more units out there that are licensed, we're providing more service to those.

What makes it more variable is the timing of license payments. And if you go back and look at the number of press releases we issued on new licenses last year, there was a meaningful step up from 2016. So we're seeing now the payments in 2017 of that of – sorry, in 2018 from the 2017 licenses that we signed. 2018 looks to be also a very active year.

Again, you go back and you look at our press releases year-to-date, we're having a fairly active year. So, you know I'd caution you from taking Q2 as a run rate, but I would tell you that there's been a step up in activity in 2017 and 2018, and I expect that to continue. Our focus is in China, more polypropylene than polyethylene.

So that's how I would kind of characterize our licensing activity. So hope I've answered the three questions..

Thank you. Our next question is from John Roberts from UBS..

Thank you.

Are you contemplating any major I&D investments besides propylene oxide, given the strong performance in the rest of the chemicals in that portfolio?.

Yeah. Good morning, John. That's a pretty big investment that we're undertaking. So, I'd like to see our team deliver that before we consider others. As you know, we have a joint venture in PO/SM in China and there is a potential to do more there.

But in the U.S., I'd like to see us deliver on our PO/TBA project which is, by the way, the largest capital investment this company or its predecessors have undertaken. So, focus on execution is also really important..

Thank you. Our next question is from Bob Koort from Goldman Sachs..

Good morning. This is Dylan Campbell on for Bob. In the slides, you mentioned that not all PE units are currently operating at full operating rates.

Can you talk generally kind of what's hampering them to come up to speed or to a full run rate, and generally how long that takes across the market? And also with your own Hyperzone HDPE project, how long you would expect that to come online?.

Yeah. So good morning, Dylan. Just sort of anecdotal frankly, but my sense is that operations continue to improve. And your question about how long does it take, I would expect from 30 to 90 days something like that, about a quarter, to get to the grade slate and work out the bugs of these. All of these units are redefining world scale.

So, we shouldn't minimize the challenge in ramping up and getting to new world scale. I'd expect our Hyperzone is going to be very similar. We're also introducing a new technology here. So if it takes a little longer, it may not surprise me. But I don't think it's a quarter longer, it's maybe a month longer or something like that.

But what makes I think polyethylene more complex is that you have multiple products and you have to go through a sort of, what we call, a product wheel as opposed to with ethylene it's one product, and you're just trying to get on spec and get to full rates which in its way is also difficult, but a different set of challenges compared to numerous products in polyethylene..

Our next question is from Jonas Oxgaard from Bernstein..

Morning, guys..

Good morning..

Congrats to Jim to his new job, and way to go out on a high note at I&D..

Well, we expect a lot of him when he gets to our Advanced Polyolefins Solutions (sic) [Advanced Polymer Solutions] (00:50:26)..

Big job ahead of him. But on that I&D, it seems a lot of the performance was – the volumes are really high. It seems that practically every unit was operating at max capacity.

So, does it mean that maintenance was deferred for later – or not deferred perhaps, but at least lower maintenance than average? And so, what can we expect [Technical Difficulty] (00:50:55) forward sort of normalized volumes? And then if you don't mind a follow-up, based on the same question on the Technology segment, how much of that is sustainable?.

Yeah. So on the maintenance side on I&D, we just didn't have much planned maintenance. As I mentioned during my prepared comments, we will have planned maintenance at our Bayport PO plant – one of our Bayport PO plants in Q3 and Q4. Look, I think we ran well as we expect to run well. We had in the prior period some issues that were uncharacteristic.

So, part of that is the step up in volume from our I&D business. So I think the unplanned part, this is more typical what we did in Q2. The planned is, we don't defer maintenance. We typically do it when we need to do it and in terms of our planned schedule, we'll stay on that cadence.

In terms of the run rate and the change in the Technology business, we can't really quantify the change. But I would tell you that, again, compared to – when you look at 2016 to 2017, there was a step up in the amount of licenses that we announced. The 2017 licenses are coming through in the P&L in 2018.

We have a similar pace in 2018 signings that will come through in 2019. But when you look quarter-to-quarter, it still can be lumpy because of the way the payments are done. But I encourage you to kind of think about annual time horizons when you look at our Technology segment and quarterly the payments can be lumpy..

Thank you. Our next question is from Matthew Blair from Tudor, Pickering, Holt..

Hey. Good morning, Bob.

How are you?.

Good morning. Doing well.

How are you?.

Good. Thanks. Could you walk us through what you're seeing in the U.S. polypropylene market? On slide 8, you showed some margin expansion. I think there has been some outages. Where do we stand on inventories? Are the higher absolute prices having any impact on demand? And do you have any update on your potential U.S. PP/PDH project? Thanks..

Yeah. Sure. Well, the PP market continues to be very tight, and any small outages sort of make the tightness more acute. Inventories, my sense is, are average or below average. The industry is kind of working through the usual seasonal high period in PP. I'd expect that to continue until there is meaningful new capacity.

Imports have increased because of just more demand in the U.S. that has to be met. And I suspect that whenever new units come on down the road then some of those imports will decline. In terms of our own project, we're still working through the details and sort of the engineering of that.

I want to make sure my team provides a very good estimate on capital so that we can make a good decision and with an eye towards creating shareholder value. So, we're still working through it. I don't have anything definitive to report to you today, but we still see the project as being attractive..

Thank you. And I am showing no further questions. I'll now turn the call back over to Bob, for closing comments..

All right. Well, thank you. Thank you, everyone, for your thoughtful questions, as usual. At LyondellBasell, we recognize that our core focus on operational excellence, cost management, disciplined capital deployment, provides advantages in our industry.

We're capturing opportunities to add value by leveraging these advantages with highly targeted growth. I'm very proud of the record-setting results our team delivered this quarter, and I'm confident that our winning strategies will allow us to continue on this trajectory over the coming years.

So, thank you very much for your interest in our company and we look forward to updating you on our third quarter results, as well as the progress on all of our growth initiatives during the next call. With that, we're adjourned. Have a great weekend..

Thank you. And this does conclude today's conference. You may disconnect at this time..