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

Robert Koort - Goldman Sachs & Co. LLC Steve Byrne - Bank of America Merrill Lynch Jeffrey J. Zekauskas - JPMorgan Securities LLC Frank J. Mitsch - Fermium Research LLC Aleksey Yefremov - Nomura Instinet P.J. Juvekar - Citigroup Global Markets, Inc. Vincent Stephen Andrews - Morgan Stanley & Co.

LLC Bhavesh Lodaya - BMO Capital Markets (United States) Kevin W. McCarthy - Vertical Research Partners LLC David I. Begleiter - Deutsche Bank Securities, Inc. Duffy Fischer - Barclays Capital, Inc. James Sheehan - SunTrust Robinson Humphrey, Inc. Arun Viswanathan - RBC Capital Markets LLC Hassan I.

Ahmed - Alembic Global Advisors LLC John Roberts - UBS Securities LLC Laurence Alexander - Jefferies 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. David Kinney, Director of Investor Relations. Sir, you may begin..

Thank you, Sue. Hello and welcome to LyondellBasell's third 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 at www.lyondellbasell.com. I would also like for you to note that statements made in this call relating to matters that are not historical facts are forward-looking statements.

These forward-looking statements are based upon assumptions of management which are believed to be reasonable at the time made and are subject to significant risks and uncertainties. Actual results could differ materially from those forward-looking statements.

For 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.lyondellbasell.com/investorrelations.

Reconciliations of non-GAAP financial measures to GAAP financial measures together with any other applicable disclosures including the earnings release are currently available on our website at www.lyondellbasell.com Finally, I would like to point out that a recording of this call will be available by telephone beginning at 11:30 AM Eastern Time today until 9:59 PM Eastern Time on December 21 by calling 888-566-0748 in the United States and 203-369-3051 outside the United States.

The passcode for both numbers is 1346. During today's call, we will focus on third quarter results, the current environment, our near-term outlook, and provide an update on our growth initiatives. That being said, I would now like to turn the call over to Bob..

All right. Thank you, Dave. Good day to all of you for participating around the world and thank you for joining our third quarter earnings call. Let's begin with slide 3 and review the highlights. During the third quarter, our company overcame headwinds from rising feedstock costs, global trade rebalancing, and new industry capacity.

We ran our assets well and improved on 2017 profitability in four of our six segments. Year-to-date, LyondellBasell's EBITDA is nearly $250 million higher than 2017. Third quarter diluted earnings were $2.85 per share. Our results include $53 million of pre-tax charges associated with the acquisition of A. Schulman on August 21.

That reduced earnings by $0.11 per share. After adjusting for transaction and integration expenses from A. Schulman and gains from an asset sale in the third quarter of 2017, our quarterly results improved by $0.55 per share relative to the prior year. During the third quarter, LyondellBasell's value-driven growth strategy achieved several milestones.

We've formed the world's largest compounding company with the acquisition of A. Schulman. We launched the Advanced Polymer Solutions business segment to provide focus and visibility for this new global platform. And, in Houston, we began construction of the world's largest propylene oxide and tertiary butyl alcohol plant.

We continue to evaluate a potential transaction with Braskem. At the same time, our strong cash flows enabled us to return over $700 million to shareholders during the quarter in the form of dividends and share repurchases.

In short, the employees of LyondellBasell are delivering on our promise of value-driven growth through a balanced strategy of operational excellence, profitable organic expansions, accretive M&A, and generous shareholder returns. Please turn to slide 4 where we report our safety performance for the third quarter with combined A.

Schulman results since August 21. The drive for excellence at LyondellBasell begins with a commitment to safety and environmental performance based on the idea that our assets, the communities in which we operate, and our more than 17,000 employees should all finish the day in the same or better condition than they were at the start of the day.

Our first communications with the A. Schulman employees that joined LyondellBasell in August consistently emphasized the importance of safe, injury-free operations. As we complete the fourth quarter, our team has recommitted to ourselves, our colleagues, and our families to finish strong in 2018 with another record year of improved safety performance.

On slide 5 we describe the businesses that form our new Advanced Polymer Solutions business segment. APS is more than just the former A. Schulman business.

The segment also includes LyondellBasell's global polypropylene compounds business from our Olefins and Polyolefins Europe, Asia, and International segment, to double the volume and add more than twice the EBITDA to the legacy Schulman business.

We also moved nearly 1 billion pounds of premium Catalloy and polybutene-1 polymers from O&P EAI and O&P Americas to complete the new APS segment. Combined with the adjusted EBITDA of approximately $200 million reported by A. Schulman, these businesses generated approximately $640 million of EBITDA during 2017.

Slide 6 provides a glimpse of how our new Advanced Polymer Solutions segment extends LyondellBasell's reach into growing and attractive markets. We have grouped the Advanced Polymer Solutions segment into two business lines.

The Compounding & Solutions business combines LyondellBasell's existing polypropylene compounding business, which is largely focused on automotive applications, with A. Schulman's more diverse business lines.

Masterbatches, our compounds that provide differentiated properties when combined with commodity plastics used in packaging, agriculture, and durable goods applications. Engineered composites and engineered polymers add value for more specialized high-performance applications across a variety of industries.

Specialty powders are largely used to mold toys, industrial tanks, and sporting goods such as kayaks. Performance colors provide powdered, pelletized and liquid color concentrates for the plastics industry. The Advanced Polymers business of APS consists of LyondellBasell's legacy Catalloy and polybutene-1 polymer product lines.

These unique polymers can be used within APS for downstream compounding or can be sold as raw materials to third-party customers.

Catalloy is a line of differentiated propylene-based polymers that add value in packaging applications and construction materials such as the white membranes that are capturing an increasing share of the commercial roofing market. Polybutene-1 is a unique polymer that is used in both specialty piping and packaging applications.

The Advanced Polymer Solutions segment provides both focus and visibility for LyondellBasell's new platform of profitable growth. 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 7 which illustrates the developments of our business segments over the trailing 12 months. As Bob mentioned, four of our six segments have delivered increased profitability over 2017.

Improved performance, particularly from our Intermediates and Derivatives segment, more than offset compressed margins in O&P Europe, Asia, and International.

During the third quarter, we were pleased to see continued strength in ethylene and polyethylene chain margins in North America where robust demand offset headwinds from higher ethane costs to support quarter-over-quarter earnings growth for our Olefins and Polyolefins America segment. Our refinery ran well during the third quarter.

In the coming days, we will complete our last major planned maintenance event in advance of 2019 when increased demand of low-sulfur marine fuels specified by the International Maritime Organization is predicted to bolster margins for LyondellBasell's refinery.

We were pleased to see that last week's IMO meetings in London reaffirmed the implementation plans for these new standards to reduce ship emissions. LyondellBasell's Technology business delivered another quarter of outstanding results, driven by increased licensing revenue.

In the first nine months of 2018, LyondellBasell announced new license agreements for nine polyethylene and polypropylene plants around the world. During October, we announced another seven new plant licenses, bringing the year-to-date total to 16 new license agreements, the most ever in company history.

The net result is that LyondellBasell's trailing 12 months' EBITDA is now approximately $7.4 billion, more than $550 million higher than the same period last year. As Bob mentioned, earnings grew by $0.55 per share relative to the same quarter last year.

While nearly one-fourth of this improvement is due to higher earnings, nearly 70% of this earnings growth can be attributed to the reduction in our effective tax rate due to U.S. tax reform and other tax planning that decreased our rate by 9.2 percentage points to 17.2% in the third quarter.

After excluding our beneficial second quarter tax settlements, we expect the full year effective tax rate to be somewhat lower than our initial guidance of 21%. On slide 8, you can see that LyondellBasell's businesses continued to generate over $1.4 billion of cash from operating activities during the third quarter.

Approximately $1.8 billion of cash was invested in August to acquire A. Schulman and, during September, we called $375 million of A. Schulman debt. Our strong balance sheet enabled us to continue investing in our organic growth projects while returning over $700 million to shareholders in the form of dividends and share repurchases.

The quarter closed with over $2 billion of cash and liquid investments on the balance sheet. With approximately $3.3 billion of unused and available credit facilities, we closed the quarter with a total liquidity in excess of $5 billion. Now please turn to slide 9. The chart on the left illustrates our cash flow performance over the trailing 12 months.

Over this period, LyondellBasell generated nearly $5.7 billion of cash from operating activities. This powerful cash generation has enabled our free cash flow to rise at the same time that our capital investments are also increasing. LyondellBasell's trailing 12 months' free cash flow yield was 9.7% at the end of the third quarter.

Capital expenditures during the third quarter were approximately $480 million. Investments should increase during the fourth quarter as we continue the construction of our Hyperzone PE facility and accelerate the activity for building our PO/TBA plant in Houston. Our 3.9% dividend yield remains in the top quartile of all S&P 500 companies.

Similar to the second quarter, we repurchased more than 3 million shares during the third quarter and finished September with 387 million shares outstanding. With that, I will turn the call back to Bob. Thank you..

Thank you, Thomas. Let's turn to slide 10 and review our segment results. In our Olefins and Polyolefins Americas segment third quarter EBITDA was $704 million, a $33 million increase over the second quarter.

Olefins results improved by approximately $120 million compared to the second quarter of 2018 with the price of ethylene increasing approximately $0.04 per pound. Ethylene operating rates increased during the third quarter, averaging 93%.

With the completion of planned maintenance at one of our four – one of our Channelview, Texas crackers in the second quarter, we were able to partially offset the impact of increased feedstock costs in the third quarter with propylene production from our flex unit. Approximately 81% of our ethylene production was from ethane and 93% came from NGLs.

Polyethylene results decreased approximately $80 million during the third quarter, partially offsetting the improvement in olefins. Polyethylene spreads over ethylene decreased by approximately $0.06 per pound as the increase in ethylene price was coupled with the decline in polyethylene prices.

Polyethylene chain margins are stable in October as an increase in polyethylene price was offset by higher ethane costs. We may see some margin recovery with the higher polyethylene prices in the fourth quarter and the recent moderation in ethane. Please turn to slide 11 to review the fundamentals behind the current ethane volatility.

While most observers agree that ethane will be abundant in the long term, supply constraints in the recent weeks have caused prices to escalate from below $0.30 per gallon to over $0.60 per gallon. This past week, we've seen prices moderate to the low $0.30 per gallon range.

This volatility is driven by an increase in ethane demand from new crackers and exports combined with constraints in midstream pipeline and fractionation capacity. The chart on the right illustrates our view of the U.S. Gulf Coast ethane situation. The bars represent ethane demand from both Gulf Coast ethylene crackers and exports.

Many of the older ethylene crackers have the capability to optimize by switching feedstocks as market conditions change. For the years 2018 and beyond, we show this range of feedstock flexibility and the resulting impact to ethane demand.

As you can see, supply and demand balances can quickly change by switching feedstocks in response to input prices, and reduced demand from ethylene crackers is rapidly reflected in lower prices for ethane.

Today, many crackers continue to maximize ethane feed but we will likely see increased utilization of feedstock flexibility as the industry navigates through this period of volatility. We believe our view of port purity (00:16:07) ethane supply, represented by the blue line, is conservative and only considers fractionation projects that are underway.

In addition to these projects, there is potential for new pipelines, expansions, or additional fractionation capacity that can further improve the ethane balances.

Beyond new midstream investments and the increased utilization of alternative feedstocks, any increase in cracker maintenance downtime and the moderation of ethylene capacity additions will provide further relief over the coming quarters. Most supply-and-demand forecasts indicate that the current tightness in ethane should resolve by 2020.

In summary, we believe this volatility is temporary and a result of misaligned investment cycles in the petrochemical and midstream industries. The strong underlying fundamentals are supportive, and there is attractive earnings growth potential as ethane supply improves while demand growth moderates.

On slide 12, I would like to size the potential impact of higher ethane prices and highlight how LyondellBasell's feedstock flexibility and diverse business portfolio can reduce this impact. LyondellBasell's fleet of U.S. Gulf Coast crackers have very high feedstock flexibility.

The chart on the right shows you the range of feedstocks where we can operate. As you can see, we are able to use as little as 25% ethane and as much as 65% naphtha in our feed. Our olefins optimization team is continuously seeking to maximize profitability across our crackers through optimization of feeds and products.

We can rebalance NGL feeds within hours and switch to liquids within days to respond to changing economic conditions. Additionally, our two Midwest crackers have access to low-priced Conway ethane/propane mixed feeds. During October, ethane supply to our Midwest crackers was priced at approximately $0.13 per gallon.

These crackers are not subject to the higher Gulf Coast ethane prices and continue to benefit from very strong chain margins. If you consider our last 12 months' U.S.

ethylene production and subtract our low-cost Midwest volumes and Gulf Coast merchant ethylene sales that pass through the ethane increase costs, you're left with about 5.5 billion pounds of annual ethylene volume that could be impacted by higher ethane prices.

For this volume, a $0.20 per gallon change in ethane price will impact annual earnings by about $380 million. This estimate assumes we continue to crack around 80% ethane and does not take into account benefits from feedstock flexibility.

Furthermore, we are assuming in this analysis that prices for ethylene derivative products such as polyethylene, styrene, ethylene oxide, and VAM do not change. A price increase of $0.03 per pound for both polyethylene and styrene could reduce the impact by $290 million.

This is another example of how LyondellBasell's diverse portfolio of businesses and assets helps to stabilize earnings during challenging market conditions and produce the resilient results that we delivered during the third quarter.

Now please turn to slide 13 to review the performance of our Olefins and Polyolefins Europe, Asia, and International segment. During the third quarter, EBITDA was $262 million, $93 million lower than the second quarter. Olefins results declined approximately $55 million.

Volume decreased primarily due to planned maintenance which began in September at our cracker in Wesseling, Germany, impacting the quarter by approximately $15 million. This maintenance will be completed in the fourth quarter and is expected to impact results by $25 million in Q4.

Olefin margins also declined in third quarter as increases in feedstock costs outpaced an increase in the olefin prices. Combined polyolefin results decreased approximately $45 million. Polyolefin demand followed typical seasonal declines during the third quarter and polypropylene margins have decreased following increases in the price of propylene.

Joint venture equity income increased by $15 million. The chart on the lower left indicates that European polyethylene chain margins in the third quarter of 2018 were approximately $0.21 per pound, a similar level to the average seen five years ago in the region for the full year 2013.

European polypropylene margins have also declined, reaching approximately $0.02 per pound in the third quarter of 2018. Minimal industry investment has resulted in a slight improvement in polypropylene margins compared to the average for 2013.

Annualizing the third quarter 2018 profitability from our O&P EAI segment produces a much higher result than what we realized in 2013. After adjusting for historical profitability from businesses that were moved to our new APS segment, O&P EAI is now generating EBITDA at an annual rate that is more than $500 million higher than five years ago.

Our restructuring efforts for the segment in the early years of this decade and an improved market for polypropylene are producing sustainable earnings improvements for LyondellBasell. During October, European markets for polymers remained pressured with sluggish demand growth and ample supply.

Market pressure is expected to continue during the fourth quarter with typically lower seasonal demand. Low water levels on the Rhine are also causing disruptions for petrochemical transportation and production in Germany that could counter these trends and lead to tighter market conditions.

On slide 14, let's take a look at our Intermediates and Derivatives segment. Third quarter EBITDA was $504 million, a reduction of $138 million from the prior quarter. While the high number of red arrows in the chart on the upper right clearly indicates a decline, you might recall that we are following a record-setting second quarter.

We continue to be very pleased with the margins and business performance of the segment. Planned maintenance on one of our propylene oxide plants in Bayport, Texas impacted third quarter results by approximately $20 million. This maintenance will be completed in November and is expected to impact fourth quarter results by approximately $25 million.

PO and derivatives results declined approximately $50 million. Volumes were lower due to planned and unplanned downtime, and we also experienced a seasonal decline in markets. Intermediate chemicals results fell by approximately $35 million compared to the second quarter, primarily due to a $0.04 per pound decrease in styrene margins.

Lower seasonal margins in the third quarter drove a decline in oxyfuels and related products of $55 million. During October, oxyfuels margins declined with weaker gasoline demand.

Margins for styrene and methanol are also expected to moderate as new methanol capacity fully enters the market and styrene capacity returns following industry maintenance downtime. Turning to slide 15, let's review the results of our Advanced Polymer Solutions segment. As I mentioned, we completed the acquisition of A.

Schulman on August 21, and the results from the new product lines are included from that point forward. Thus, comparisons of underlying business drivers for the second quarter are related to the LyondellBasell legacy product lines of polypropylene compounds, Catalloy, and polybutene-1. EBITDA decreased by $51 million compared to the second quarter.

Transaction and integration costs related to the acquisition were approximately $49 million during the third quarter of 2018. Results for both Compounding & Solutions and advanced polymers were relatively unchanged versus the second quarter.

The addition of new product lines from the acquisition offset seasonal volume and margin declines for polypropylene compounds. Our integration of A. Schulman is going very well. Of the $49 million of costs assigned to the segment during the quarter, approximately 60% were related to the integration and 40% to the transaction.

As of the end of the third quarter, we have focused on reducing redundancies to capture cost synergies at an annual rate of $32 million. We are well on track to reach our target of $150 million in cost-based synergies within two years.

The chart on the lower right provides a good example of one of the attractive and growing markets found in our Advanced Polymer Solutions segment.

As I mentioned earlier, Catalloy is a line of differentiated propylene-based polymers that can be used in packaging, compounding or in construction materials such as the white commercial roofing membranes that we see in a photograph on slide 6.

Polyolefin roofing membranes are becoming the preferred solution for commercial roofing and growing at an annual rate of 7% per year due to their durability, cost savings and energy efficiency.

The unique and desirable properties of LyondellBasell's Catalloy polymers provides an advantage for commercial roofing applications, and our sales volumes in this market have outpaced the industry and have grown by 9% over recent years.

We look forward to sharing more examples of the products and customer solutions that are driving growth for our new Advanced Polymer Solutions segment in future calls. Now let's move to slide 16 for a discussion of our Refining segment. Third quarter EBITDA was $84 million, a $20 million decline from the second quarter.

Crude throughput at the refinery averaged 232,000 barrels per day with planned maintenance beginning in September that impacted EBITDA approximately $20 million. This maintenance will be completed in November and is expected to impact fourth quarter results by $45 million.

While the Maya 2-1-1 crack spread decreased by more than $4 per barrel when compared to the second quarter, our refinery benefited from margin improvements driven by favorable Canadian crude oil prices relative to the Maya price. During October, we continued the safe execution of our planned maintenance at the refinery.

Margins are moderating with a declining Maya 2-1-1 crack spread driven by lengthened gasoline inventories as the summer driving season ends. On slide 17, I would like to review the drivers that could fuel LyondellBasell's earnings growth over the next 12 months. These are no longer distant promises.

These are opportunities that we focused on during the third quarter and will continue to advance during the coming months. The completion of the A. Schulman acquisition is improving our vertical integration and expanding our reach into growing and attractive markets.

Our integration management office is rapidly driving integration and capturing synergies. The startup of our Hyperzone polyethylene capacity in 2019 will meet the rising demand and favorable markets for high-density polyethylene to improve our capture of integrated chain margins.

Our Intermediates and Derivatives team have diligently driven structural improvements within their business which continues to benefit from favorable market conditions. Our team at the Houston refinery has delivered six consecutive quarters of highly reliable operations with improved margins.

And going forward, our refinery is well positioned to benefit from new regulations for marine fuels during the latter half of next year. Turning to slide 18, let me summarize this quarter's highlights. During the third quarter, our company delivered year-over-year and year-to-date EBITDA improvements in four of our business segments.

We overcame the challenges of new industry capacity and rising feedstock costs, increased third quarter profitability for our O&P Americas segment.

Over the past 12 months, our company generated approximately $5.7 billion of cash from operating activities that contributed to funding for our increased capital investment, paying a top-quartile dividend, completing over $800 million in share repurchases, and completing the acquisition of A. Schulman.

We have built the world's largest plastics compounding business. We're progressing on integration that will capture significant synergies in this new segment. We have advanced on the construction of our new polyethylene and PO/TBA capacity, and we're continuing to evaluate the Braskem opportunity.

Our global portfolio of businesses provides confidence in our ability to remain resilient, flexible and advantaged in this environment. Going forward, we look forward to the safe and timely completion of our fourth quarter planned maintenance that will allow us to capture this advantage during 2019 and beyond.

With that said, we're now pleased to take your questions..

Thank you. The first question is from Robert Koort with Goldman Sachs. You may go ahead..

Thanks very much. Good morning..

Good morning..

Bob, the ethane flexibility slide you showed is quite interesting. And you mentioned you've got pretty quick ability to switch.

So I'm curious, in light of when ethane got up to $0.60, can you give us your spread across those different input molecules, what you used, ethane, the propane, butanes and the naphtha?.

Well, so as I mentioned in my prepared remarks, we can change very quickly. And in some cases, we were able to switch to liquids very quickly. Channelview and Corpus Christi are our most flexible crackers and that's where we tend to focus on pushing more on liquids.

So, I don't have the exact numbers with me at that point in time what we did, but we did start to move where we could quickly..

And did you adjust at all? I noticed in your interesting slide about the industry flexibility, you referred back to 10 years ago. It seemed like there's been a wave of conversions or upgrading to ethane feedstock ability.

Are you pretty confident that most of those – and I guess speaking from your own assets that you can go back to where you were 10 years ago in terms of liquids processing capability?.

Yes.

In our case, certainly we've accounted for our ability to process the co-products from heavier feeds and we've retained all that capability, again, primarily at Channelview, and we did our best estimate of the rest of the industry and took into account what capacity was converted versus which part of the capacity was made more flexible (00:32:44)..

Right. Thanks for the help..

Okay..

Thank you. The next question is from Steve Byrne with Bank of America. You may go ahead..

Yes. Thank you. Bob, I was wondering if you have the ability to crack Y-grade.

If there's a surplus of it with not enough fractionation capacity, can you crack Y-grade or do you have downstream limitations on recovering that methane?.

Yes. So, Steve, we do have capability of cracking Y-grade and, in fact, we're working on increasing that capability, and we're able to make some relatively low-cost investments and increase our flexibility to crack Y-grade and we're working on that right now..

Interesting. And then a quick one on all the media attention on recycled plastic and so forth.

Do you see that as just kind of peripheral noise or are you hearing it from your plastics customers where they have a meaningful interest in increasing the blend of recycled plastic into their product that could create a pull?.

Well, I think, Steve, the area of plastic waste and sustainability is continuing to get more interest and rightfully so. But I think it'll take time for the infrastructure to develop and the capability to develop to increase recycling. As you know, we have a joint venture with SUEZ in the Netherlands, what we call QCP, and that's very much that.

It's a platform that eventually we will grow to have more recycled content. But if you step back and think about plastics demand growth, demand growth for plastics is still growing at a multiple of GDP. So to the extent that there's more recycled content, I still think the growth story is in place for plastics..

Thank you..

Thank you. The next question is from Jeff Zekauskas with JPMorgan. You may go ahead..

Thanks very much. Ethane has come down quite a lot, Bob, recently.

Do you think that that has to do with different crackers being turned around or do you think that the industry is already switching over to other feedstocks and so, what that did is it lessened demand for ethane and brought the price down? How do you diagnose the price change?.

Yes. Good morning, Jeff. Slide 11 in our presentation really shows how balanced the market is on ethane. And when we reach this sort of balance between supply and demand, small shifts in supply or demand tend to make the price dynamic.

And I think what's happened in the recent weeks is that there's been some planned maintenance on some fairly large ethane crackers. There's also been some switching to other feedstocks. So, I expect that for the next few quarters we're going to see this sort of dynamic pricing on ethane.

When some of these crackers return, you could see ethane price rise again. And that's why we wanted to size the impact to LyondellBasell on a large change in ethane if it were to be sustained an entire year.

And what you see is, given our portfolio of crackers and given our two Midwest crackers, the impact to us is not as great as one might think before flexibility-based mitigation. So, if we just continued to crack a lot of ethane – we've sized the impact on page 12, if we flex to other feeds, then the impact would be less.

So, I think we're going to see ebbs and flows through next year. We'll have turnaround season again in the spring. So, likely, that will reduce ethane demand. And in the meantime, more fractionation capacity is coming in 2019. More pipeline capacity is being built.

So, we're going to go through a period of sort of timing of when feedstock is built out and when new consumptive capacity comes on..

So, given that there seems to be some switching to probably naphtha, when you think about propylene values for next year, do you think propylene will be a little bit looser in 2019 than it was in 2018 given feedstock switches and other considerations?.

Possibly. But it will be episodic I think, right, because as feed slates change, it won't be consistently well supplied. So I think ultimately, Jeff, what changes the propylene situation is as new PDHs are built, those are sort of structural increases in supply. And to your point about naphtha, there's actually also switching to propane and butane.

And there are more LPGs coming from West Texas down the Y-grade lines. So, there's a lot of propane and butane on the Gulf Coast..

Okay. Good. Thank you so much..

Thank you..

Thank you. And the next question is from Frank Mitsch with Fermium Research. You may go ahead..

Thank you, and good morning, gentlemen. Bob, I'm guessing a little less stressful this third quarter than where we were a year ago with Harvey. I wanted to ask about Braskem. When do you think you're going to have a decision there? And obviously I'm wondering if that might also play a role in your pace of buybacks here in Q4 with the market turmoil.

Can you add a little color as to what investors might be able to expect in terms of M&A versus buyback and kind of the timing on that?.

Yeah. So, Frank, we're continuing to work diligently and thoughtfully through our analysis around the Braskem transaction. There's really no timing to report at this point. We're continuing our work and thinking around shareholder value creation. And so, as we consider buybacks, to me, those are sort of independent decisions today.

And whatever it is we decide in terms of our allocation of capital, we're aiming to create shareholder value. So stay tuned..

All right. Great. So, the decisions are kind of independent at this point. Fair enough. And then, I was struck by the title and the discussion on slide 17, Tangible Earnings Growth Over the Next 12 Months. Obviously, there's some debate out there as to what happens on margins on the olefin/polyolefin side of things.

Should we be interpreting that statement to say that you're anticipating EBITDA over the next 12 months to be higher than EBITDA over the previous 12 months?.

Well, what we're trying to indicate there is just sources of earnings growth. We haven't netted against polyolefins' market conditions. But I think, clearly, our I&D business has had a step up in earnings this year.

We, at the last earnings call, talked about a 15% or so increase that's sort of structural in our business in I&D compared to our prior run rate. Refinery is running better. We think second half of next year, there will be some fuel switching as IMO starts to take hold and people get ready for March of 2020.

And our new polyethylene plant in the second half of next year will consume ethylene today that essentially is selling near its cost. So, those are three, we think, meaningful sources of earnings growth next year..

All right. Very helpful. Thank you..

Thank you. The next question is from Alex Yefremov with Nomura Instinet. You may go ahead..

Thank you. Good morning, everyone. Bob, European polypropylene margins declined meaningfully this year. And in the U.S., polypropylene margins held up pretty well. What in your view explains this difference and where do these regions are likely to converge? Is Europe likely to improve or U.S.

decline?.

Well, I think, Alex, globally, polypropylene is still very constructive. Operating rates are still relatively high. I think, in Europe, as we've had in years past, typically in the summer season, we see seasonality because the vacation periods are longer and often converters shut down for periods of time.

Demand growth is a little bit slower this year in Europe. So, we think that partly also contributes. But if I step back and look at the global situation in polypropylene, I think polypropylene still looks to us to be a very balanced tight (00:42:11) for the coming year or so. And so we would expect that polypropylene should hold up pretty well..

Thank you. And as a follow-up on polypropylene, you've indicated that you're looking at some polypropylene capacity projects in the U.S. and Europe and also PDH.

Have you moved the likelihood of those projects higher or lower over the last six to nine months or so?.

We're still working through our early engineering estimates. Frankly, we're thinking through – on the Gulf Coast locations which location would be better given propylene supply, and we've had a few other things going on in the company. So, we're still working through it, and we think that propylene is an area where we'd like to continue to invest..

Understood. Thank you..

Thank you. The next question is from P.J. Juvekar with Citi. You may go ahead..

Yes. Hi. Good morning, Bob..

Good morning..

With ban on single-use plastic bags in many large cities around the world, do you see that end market for polyethylene coming under pressure? In other words, historically, people have assumed a GDP multiplier of 1.3 times or 1.4 times on polyethylene.

Do you think that comes under pressure in the future?.

Well, P.J., it's not a large part of the overall polyethylene market. And so, segment by segment there are different drivers but if I kind of step back and think about polyethylene demand growth, it's more about food packaging, polyethylene pipe, and some other sort of durable goods where I think polyethylene demand will continue to be driven.

With respect to the single-use bags, some parts of the world have mandated thicker bags that can be reused. So, ironically, if that were the case, then more polyethylene would be consumed because the bags are thicker. And I can tell you, when I lived in the Netherlands, we used to buy those thicker bags and reuse them.

So, I don't know that demand really sort of goes away for those bags. It just converts to other forms of packaging..

Okay. Thank you for that. And secondly, what are your views on the second wave of these ethylene crackers in the U.S.

in light of this volatility in ethane? Do these companies say that this ethane situation would be resolved by the time these crackers come online, so they'll continue to build or do you think they start to get pushed out because of the situation?.

Well, it's difficult for me to predict what others may do, but certainly, for us, we think through long-term supply and essentially the returns that we can earn on new investment – and we want to see more of the fractionation capacity and more pipeline capacity investments actually come to fruition before we would consider further ethylene investment in the U.S.

Now, we're a bit uniquely placed because we've already invested in ethylene earlier in the decade. And our focus for the coming three, four years is really about now investing in derivatives to consume the ethylene that we've already expanded.

So I would imagine that this volatility and impact on the global cost curve should be a part of the equation as new investments are contemplated..

Okay. Thank you very much..

Thank you..

Thank you. The next question is from Vincent Andrews with Morgan Stanley. You may go ahead..

Thanks. And good morning, everyone. Just on U.S. polyethylene, we saw a surprising price decrease in August and then we had the ethane spike in September and then got the price back. And now there are, I believe, nominations for both October, which is almost over, and November. So, could you just sort of reconcile what's going on in the U.S.

market with that surprise decrease and now the increases and maybe contrast it to some of the weakness we're seeing in the Asian PE markets? Thanks..

Yeah. Well, I mean, it's difficult to predict here how prices will evolve. But the increases and decreases, Vincent, to me say that the market is relatively balanced. And in the face of a significant cost push, there was some increase that went through in the market. And I suspect that as we look at operating rates globally, not a lot will change.

Even though there's new capacity coming, demand is growing as well. And we've gone through this in prior earnings call slides where we've shown operating rates are still 90-plus percent. And so, I suspect that prices will be dynamic based on how costs develop as well..

Okay. And maybe just on that, this whole ethane thing seemed to come – we all seemed to get blindsided by it, analysts and producers alike.

As you guys did your sort of look-back on what's happened over the past three months, what do you think the blind spot was for everyone that we didn't see that big spike coming?.

Yeah. That's a great question, Vincent. I think that the thing that many of us missed was the fact that ethane was being rejected in the Permian in favor of more propane and butane moving on the Y-grade capacity, the line capacity that's already there.

In the past, we were of the mind that the Y-grade that comes from West Texas is very rich in ethane and it's been wetter and wetter as time has gone on. But when that ethane got rejected, the composition of the Y-grade that came to Belvieu had less ethane. And I think that's what we didn't see.

And you can imagine from a midstream gas processor perspective, by rejecting some ethane, they can actually move more Y-grade in total out of the gas pool. So, I think that's the part we probably missed..

Okay. Thanks very much, guys..

Thank you..

Thank you. The next question is from John McNulty with BMO Capital Markets. You may go ahead..

Hi. This is Bhavesh Lodaya for John. So, one more on the ethane and on the U.S. ethane advantage as such which we have enjoyed for quite many years for now. So, while you may see flex economics come into play, it's also more likely that that comes into play when ethane rises significantly from here.

So, are we going to enter a period where the entire NGL barrel kind of like raises in value? And what does that do for the U.S.

ethane advantage as you look forward the next few years?.

Yeah. I think it's really – the ethane advantage still looks very durable to us because it's based on a view that there's an abundance of ethane supply. So, what we're seeing today is just a little bit of mismatch in timing of new cracker capacity for ethane consumption and new fractionation and pipeline that brings ethane to market.

So, we view this very much as temporary and we think that the U.S. will continue to enjoy some advantage over the long term. The thing that certainly our company is watching is the degree of that advantage and how that might result in investment returns for new capacity.

So, in the early days, in our company, we made a conscious choice to not convert to ethane cracking. We retained our flexibility, and we concentrated it around a couple of our crackers, and I think that will serve us well as we manage through a dynamic market environment like we have today..

Okay. And then one on the Technology segment. Some impressive wins with new licenses there and we're also seeing a very strong first nine months compared to the previous year.

Can you share what the breakup is between the catalysts and the licensing revenues, and how sticky are some of these earnings?.

Yeah. So, first of all, as we license technology, the catalyst sales go with it. So, the catalyst revenue and earnings tends to be more consistent and growing. The licensing can be cyclical based on investment cycles. But at the moment, we're seeing quite a bit of interest in our technology especially in Asia.

And there's been some shift in the licensing landscape for polyolefins as well, which has worked to our benefit. And ultimately, I think the investment that's occurring around the world speaks to the confidence in plastic's demand growth at greater than GDP levels.

So, we're quite optimistic about our technology segment and we continue to invest in new catalyst capacity. As we sell new licenses, we anticipate that we'll be selling more catalyst over time as well..

Thank you..

Thank you..

Thank you. The next question is from Kevin McCarthy with Vertical Research Partners. You may go ahead..

Good morning.

Bob, as you survey your portfolio, are you witnessing a normal demand pattern from a seasonal perspective across your major product lines in October and to the extent you have visibility into November or are there areas either by product line or geography where destocking is more pronounced than you would normally expect from a seasonal point of view?.

Yeah. Kevin, good morning. We see very typical demand here in the fall. Europe is slightly weaker I would say but otherwise, the rest of the world, we see demand being quite good and we're running our assets extremely hard around the world..

And then just to follow up on the technology licensing activity, obviously impressive results there.

Do you think that you can go higher in 2019 from an investment cycle perspective in polypropylene plants, for example, or not?.

No. I mean, the rate at which we're doing licenses today is quite high. So, just to sustain these rates gives us great earnings potential as we go forward. Again, typically, we see the catalyst income from a license four, five years later, and when we do these – when we sign these licenses, there are progress payments that occur over three, four years.

So, there's kind of a – there's a tail of earnings that come. And so, there's been a meaningful step up here, and I think we can certainly continue this level for next year..

Understood. Thanks very much..

Thank you..

Thank you. The next question comes from David Begleiter with Deutsche Bank. You may go ahead..

Thanks. Good morning..

Good morning..

Bob, just on ethane in 2019, how are you thinking about prices both on an absolute level as well as a relative level relative to its fuel value?.

Yeah. Well, David, I've been saying for quite a long time that ethane is going to trade over time $0.07 to $0.10 over its fuel value. Given that supply and demand are much more balanced today on ethane than they have been in the past few years, we could see that price over fuel value increase.

I do think that it's going to be – it's going to move around depending on turnaround season. So, in the spring when there are turnarounds and there's less ethane consumption, then prices could moderate. New fractionation capacity is coming. I think it's estimated to be online sometime around the middle of next year. And new Y-grade pipeline.

So, it'll be dynamic.

But I think given that our overall thesis is there's lots of propane, there's a lot of butane, and if some of the ethane that's being rejected today in the Permian, if it ends up coming back into the pipe and coming down to Belvieu, then we just need 50,000, 100,000 barrels a day more of ethane to change the supply/demand balance.

And so, I think it will be dynamic. And companies like us, we just need to make sure that we're looking at economics weekly as we do and shift our feed slate to maximize profitability..

Very good.

And just on Braskem, how do the recent Brazilian election results impact or affect your thinking on Braskem?.

Well, I read everything that you read about the new president. And so, I mean, for now, we're very much focused on the fundamentals and value creation potential. And so, as I said earlier, we're working through the analysis and thinking through the value proposition..

Thank you..

Thank you..

Thank you. The next question comes from Duffy Fischer with Barclays. You may go ahead..

Yeah. Good morning, fellas..

Good morning..

Question, just you had mentioned that spot ethylene is close to cash breakeven.

With Indorama about to start up a cracker where they'll back out some spot purchases that they've done historically, do you think you'll be able to continue to run full out or will you actually have to run at lower operating rates, do you think, until you get your polyolefins absorption online later next year?.

Yeah, Duffy, I expect that we'll continue to run pretty full. I don't expect us to slow down on ethylene..

Okay. And then just one more on Braskem. For the majority of the dance, at least that we've been privy to kind of know about with Braskem, your stock price was circa $110 a share.

Now that it's $90, does that change the way you look at Braskem or your share value is disconnected in your mind from the value of Braskem?.

Well, look, I mean, again, it's really about long-term value creation in a transaction like this. And so, we're firmly focused on – just like we did with Schulman, thinking through how we can create value with something like this.

So, our – it hasn't changed and as you can see, as evidenced by the third quarter, we've had still significant amount of share buyback. So, nothing has really changed in my mind..

Okay. Thank you, guys..

Thank you..

Thank you. The next question is from Jim Sheehan with SunTrust. You may go ahead..

Morning. Can you talk about the Rhine River impacts? You said that this could tighten up some product chains for you.

What about your ability to either obtain raw materials or ship products or supply raw materials to property tenants in Wesseling and things like that? Do you see any downside risks?.

Yes, Jim. So, our European team is hard at work in managing through the low Rhine levels, and we do see some very modest downtime and then downside risk in our EAI segment as a result of the low Rhine levels.

So, just on an output basis, not considering any increase in product prices, we could see in Q4 $30 million to $40 million of impact across the quarter if this situation continues and we don't get rain over there. So, it's pretty modest, and we've had one of our crackers down for turnaround, so that actually reduces the impact.

Our larger cracker at Wesseling is down for turnaround and will be coming up in November. So, as we bring that up, really, our consideration will be do we bring it up to full rates or do we bring it up to a little bit lower than full range. So, that maybe helps you size the Rhine River impact. It's quite modest..

Terrific.

And on IMO 2020, are you confident that the EPA will not be able to delay this process or reduce enforcement of the standard?.

Well, it's difficult to predict what regulatory agencies may do, but it seems to me that there's a lot of momentum around the world around this change in regulation. And many ship owners have acknowledged that this will happen. So, the only thing we can do is make sure that we're prepared to run our refinery at full rates.

And given that we're just finishing our maintenance on the crude unit in the cokery – one of the two coker units at our refinery, we're set up for virtually no planned maintenance in the second half of 2019 through 2020. So, I think we're really well positioned to take advantage of whatever IMO turns out to be.

And frankly, I think it's degrees of upside..

Thank you..

Thank you. The next question is from Arun Viswanathan with RBC Capital Markets. You may go ahead..

Great. Thanks. Good morning. Just a question on I&D. The business has been performing very well in 2018. Do you see that business kind of moderating in coming years back to $1.6 billion or $1.7 billion in annual EBITDA or do you see a trajectory towards $2 billion kind of continuing? Thanks..

Well, so the run rate, if you look back before this year, our run rate's been about $1.5 billion plus or minus. And I've talked about a 15% to 20% step-up that's structural, and I think that's how you ought to be thinking about it off of the $1.5 billion number.

And then, there's some seasonality, as you know, with our oxyfuels business that puts some seasonality in that segment. But over an entire year, a 15% to 20% step-up over the $1.5 billion number is, I think, a good basis going forward..

Great. Thanks. And just on polypropylene, maybe you can just give us your assessment of supply/demand. There hasn't really been a lot of new supply added. I mean, what's your view on whether the market could bear something like that or your own footprint? Thanks..

Yeah. So, polypropylene, I mean, in the U.S., there's not a lot of new capacity coming in the next 12 to 18 months, or 15 months, let's say. There's a few debottlenecks here and there including we have a couple of small ones that we're implementing now.

I think in the absence of new capacity, and demand growing at 3%, 4% a year in the U.S., market looks to be very solid in the U.S. Globally, it seems that operating rates are still going to be quite high and, around the world, demand growth for polypropylene has been extremely strong and especially in the Far East, in China.

So, I expect polypropylene to be a very constructive business going forward..

Thanks..

Thank you. The next question comes from Hassan Ahmed with Alembic Global Advisors. You may go ahead..

Good morning, Bob..

Good morning, Hassan..

Bob, two-part question on Braskem. First, obviously, you talked a bit about Brazil and the Brazilian elections and the like. But obviously there's been a government change in Mexico as well, and at least recently, I've been reading more and more articles pertaining to the Mexico contract, that it's below market, they may reconsider that contract.

So, first part to the question is, how does that sort of go into your calculus about the deal? And then the second part is, obviously valuations have come down tremendously across the board but certain product areas have been hit harder, like polyurethanes in particular.

So, how are you thinking about other deals as well above and beyond Braskem in light of some of these valuation moves?.

Yeah. Good question. So first of all, on Braskem, I mean, I'd just kind of repeat what I said earlier. We're working through our analysis and obviously, thinking through the Mexico situation is part of our analysis. And so, we'll work through that. But it's a fairly new asset that they have down there. So, we consider that as well.

As far as other alternatives, we just need to work through kind of one opportunity at a time and think through value creation. So, we're very focused on understanding the various aspects that have been raised on this call and things that you've read and being thoughtful about how we can create value for our shareholders..

Understood. Now as a follow-up, Bob, on the China pollution side of things, again, sort of mixed messages out there. Some people sort of talking about how regulation is going to move from federal to provincial levels and that may sort of make things a bit more lax, meaning thereby that maybe capacity comes back online.

But then the flip side of that is that people are talking about the 2+26 being expanded to 11 more cities.

So, what are you guys seeing on the ground there? How do you see that in terms of influx of new capacity or further curtailments?.

Well, I think, directionally, environmental pressure will continue in China, and there will be some ebb and flow in terms of news. But I think, directionally, there is a move towards reducing coal and improving air quality in China, and I don't think that changes. So hence, more methanol being consumed for olefins.

I mean, I think that will – it's cleaner than coal-based olefins, so we could see that, and some naphtha crackers I suppose. But I don't see the environmental pressures easing. I think, over time, they'll continue to get more stringent, as the rest of the world is..

Very helpful, Bob. Thanks so much..

All right. Thank you..

Thank you. The next question comes from John Roberts with UBS. You may go ahead..

Thank you. We started with ethane, maybe we'll finish with ethane here. But on slide 11 again, in 2019, Bob, you have the supply line above the minimum.

In midyear, doesn't the supply line kind of touch the minimum after we get a couple more crackers starting up? And then, in the upper right-hand corner, you've got $0.25 to $0.60 a gallon which is the historical range but I think ethane even at $1 a gallon still, export polyethylene is still breakeven.

So, do you think if we get tighter in mid-2019, we could spike above $0.60?.

Yeah. First of all, I don't know about the $1 analysis. I'll have to get my team to look at that, but depends on oil price and depends on naphtha price. So, there's a lot of factors. It's difficult, as you can imagine, to forecast a spike or to predict.

I mean, I suppose you could see spikes but they're very much just that, they're spikes then they come back down. And I think one thing you've seen over the past few weeks and even years past that this industry and the cracker fleet in the U.S. does exert its flexibility when needed. And we as a company certainly are well positioned to do that.

As I mentioned earlier in response to one of the other questions that we're also increasing our ability to crack Y-grade. So, I think that will be another dimension of flexibility that we'll continue to enhance.

And our two crackers at Channelview and the Corpus Christi cracker are extremely well positioned to be flexible given proximity to Eagle Ford. And then when you think about our Midwest crackers, that's almost 2.5 billion pounds of ethylene that is unaffected by ethane price on the Gulf Coast and enjoys a significant advantage.

So, I think the line sort of touching the blue part or not, we're going to have next year new crackers start up and new fractionation and new pipeline capacity as well. So, the price will be a bit more dynamic next year. But again, I step back and think about the overall supply of ethane and I think it's abundant.

If even a little bit less gets rejected and comes down the pipe to Belvieu, that could change the equation very quickly..

Okay. Thank you..

Thank you..

Thank you. The next question comes from Laurence Alexander with Jefferies. You may go ahead..

Yeah, two quick ones.

Given the discussions – or the way you're seeing the IMO impact play out for the refining industry, would you be open to reconsidering structures for the refining asset or treating it as a noncore asset? And secondly, how do you see Lyondell's role in the micro plastics debate? I mean, do you want to be at the forefront or is it more going to be see how the regulatory landscape shifts and then grow the recycling side of the business accordingly?.

Yeah. So, two very different questions. On the refinery, Laurence, our view hasn't changed. Our focus has been on running the refinery better and better, and I think we've demonstrated now with six quarters of really great operating performance which we expect to continue.

We've been positioning ourselves for IMO by completing our maintenance so that we can run essentially full in 2019 and 2020. And so, I think we're really well positioned to capture value from IMO. And we're not really detracted from that, if you will.

And so, that's going to continue to be our focus and we'll think through how best to capture that value. So, really nothing further to add in terms of the refinery.

In terms of micro plastics, and perhaps if I could broaden that to plastic waste, I think really one of the best ways a company like ours can influence what happens and how we engage is through the various associations around the world like American Chemistry Council, Cefic, and there's a lot of work going on through industry associations to engage in essentially ending plastic waste and thinking though over the long term how we can increase circularity.

So, stay tuned. I think there will be some definitive sort of things that will come out as we go through the next couple of quarters. But I think this is best done from our perspective through the industry associations which we participate in and have leadership positions on in many cases..

Yes. Thank you..

Okay..

Thank you. Our last question comes from Matthew Blair with Tudor, Pickering, Holt. Thank you. You may go ahead..

Hey, Bob. It looks like in Refining, you outperformed some of your Gulf Coast peers in the quarter. You mentioned you saw some benefits from heavy Canadian barrels, which we estimate are approximately 15% to 20% of your crude slate.

Could you talk about any potential efforts to increase WCS runs further whether that be by maybe crude by rail or whether you're looking at additional pipeline commitments on some of these new Canadian pipelines?.

Yeah. So, Matthew, on Canadian crude, we've really maximized what we can do on Canadian crude. Maybe incrementally something around crude by rail, but I would not expect a meaningful change in the amount of Canadian crude we're cracking. And as you I'm sure know, those pipelines are on allocation, so we really can't get more allocation.

But we are maximizing and I think, over time, we hope that that will impact Maya pricing and bring that back into balance..

Sounds good. And then, in I&D, you mentioned the PO results were off $50 million. I think $20 million of that was due to the turnaround.

I guess the remaining $30 million or so, is that due to the market slowing and is that an issue perhaps with just slower demand growth from potentially weaker housing market?.

No, nothing structural there. That's just ebbs and flow of the market. Nothing structural to read into that..

Got it. Thank you..

Okay. All right. Well, thank you..

Well, let me offer a few closing remarks. Thank you for all of your patience as we've run over a little bit. So, as we look ahead from Q4 and into 2019, while we've talked a lot about ethane on this call, and we know it will be dynamic next year, for LyondellBasell, we do see meaningful sources of new earnings from our A.

Schulman acquisition, our new polyethylene plant, step-up in I&D earnings, IMO impacts in the second half of the year. And I think a lot of these sources of earnings growth can offset potential impacts from new PE capacity and ethane. So, we look forward to updating you on that as well as all of our growth initiatives on the next call.

So, thank you very much. Have a great day. And we're adjourned..

That concludes today's conference. Thank you all for participating. You may disconnect at this time..