Earnings Call Transcript - LYB Q1 2026

Operator, Operator

Hello, and welcome to the LyondellBasell teleconference. At the request of LyondellBasell, this conference is being recorded for instant replay purposes. The operator will now provide instructions. I would now like to turn the call over to Mr. David Kinney, Head of Investor Relations. Sir, you may begin.

David Kinney, Head of Investor Relations

Thank you, operator, and welcome everyone to today's call. Before we begin the discussion, I would like to point out that a slide presentation accompanies the call and is available on our website at investors.lyondellbasell.com. Today, we will be discussing our first quarter results, while making reference to some forward-looking statements and non-GAAP financial measures. We believe the forward-looking statements are based upon reasonable assumptions and the alternative measures are useful to investors. Nonetheless, the forward-looking statements are subject to significant risk and uncertainty. We encourage you to learn more about the factors that could lead our actual results to differ by reviewing the cautionary statements in the presentation slides and our regulatory filings, which are also available on our Investor Relations website. Comments made on this call will be in regard to our underlying business results using non-GAAP financial measures, such as EBITDA and earnings per share, excluding identified items. Additional documents on our Investor website provide reconciliations of non-GAAP financial measures to GAAP financial measures, together with other disclosures, including the earnings release and our business results discussion. A recording of this call will be available by telephone beginning at 1 p.m. Eastern Time today until May 31 by calling (877) 660-6853 in the United States and (201) 612-7415 outside the United States. The access code for both numbers is 13746217. Joining today's call will be Peter Vanacker, LyondellBasell's Chief Executive Officer; our CFO, Agustin Izquierdo; Kim Foley, our Executive Vice President of Global Olefins and Polyolefins; Aaron Ledet, our EVP of Intermediates and Derivatives; and Torkel Rhenman, our EVP of Advanced Polymer Solutions. With that being said, I would now like to turn the call over to Peter.

Peter Z. Vanacker, Chief Executive Officer

Thank you all for joining today's call as we discuss our first quarter results, and thank you, Dave. As some of you know, Dave Kinney is retiring after a decade leading Investor Relations and nearly 35 years with the company. I am sure you will all join me in congratulating Dave for his significant contributions to the company and wishing him well in retirement. Succeeding Dave is David Dennison, who brings nearly 30 years of industry experience to the role across planning, commercial and strategic functions, including most recently in the Circular & Low Carbon Solutions business. I am confident you will find David to be another great partner as our new Head of Investor Relations. Before we turn to our performance, I want to acknowledge the human impact of the tragic ongoing situation in the Middle East. The suffering and trauma of war is catastrophic for all involved, and our thoughts are with those affected. Our first priority is the continued safety of our people, and we have already executed on protocols to protect our employees and contractors in the region. This situation in the Middle East has materially disrupted global energy and petrochemicals markets. We expect the impacts will extend beyond the end of the year with much of the world's petrochemical capacity constrained or shut down. LYB's U.S. and European production capacity is a critical resource for filling the global gap in supply for our essential products. Supported by our operational excellence and the work from our value enhancement program, we are increasing production to meet this demand. At the same time, we remain focused on executing our strategy. Our portfolio transformation has reached another significant milestone with the sale of four European assets. While increased cash generation and profitability will improve our credit metrics, we are maintaining our discipline on capital expenditures. And we are undertaking deliberate actions to further streamline our fixed costs and underpin our ability to generate attractive value during both cyclical highs and lows. With that being said, let's take a moment to review LYB's safety performance with Slide #3. Safety remains foundational to how we operate. Our year-to-date total recordable incident rate of 0.13 is among the best in our sector and reflects the commitment of our employees and contractors. Turning to Slide 4. The Middle East conflict and its unprecedented effects on energy prices and global logistics has shifted the paradigm for petrochemicals. At the high end of the cost curve, naphtha-based producers in China and Southeast Asia have faced sharply higher costs driven by the compound impact of higher crude prices, the loss of sanctioned crude discounts and weak co-product values. In addition, pre-conflict, approximately half of Asia's imported crude came from the Middle East. The war has impacted security of supply for Asian crude and petrochemical feedstocks, leading to lower production and a substantial reduction of exports from the region. At the low end of the cost curve, U.S. ethane economics have improved, strengthening the cost advantage of LYB's U.S. Gulf Coast assets with low-cost raw materials and increased production to serve increased global demand. In Europe, higher prices are now offsetting higher energy and feedstock costs as imports from the Middle East and China decline. And while this chart focuses on ethylene, we find similar dynamics in play across nearly all LYB products. Clearly, we are operating in a dynamic environment where dramatic changes are possible within short time periods. Our global operational and marketing network has already yielded valuable insights, which have enabled us to rapidly adapt to the changing environment. These insights inform our position that the impacts from the war will be long-lasting. We believe the geopolitical risk premium for crude oil will persist even after a resolution to the current conflict, and discounts for sanctioned crude are unlikely to return. Both of these impacts should durably steepen the global cost curve relative to pre-war conditions. Across feedstocks and petrochemicals, physical damage from the war and accelerated shutdowns will require time and resources to repair. And some older, smaller and less economical plants under evaluation for potential rationalization may not restart at all. This could provide a lasting benefit to supply and demand balances. Of course, we are mindful of the potential for second order impacts like demand destruction for discretionary spending, especially if oil prices remain at recent highs. But we remain confident that our cost-advantaged asset base and deliberate execution will enable LYB to continue to generate value through the cycle. Now let's turn to Slide 5 as we discuss the tangible steps we are taking to execute on our strategy to build a more resilient LYB. Over the past 3 years, we have executed on significant portfolio transformation. This included ceasing refining operations, closing our Dutch PO joint venture, divesting our EO&D business and the ongoing transformation of our APS portfolio. And as we announced this morning, we reached another significant milestone in our portfolio transformation by completing the sale of four European assets. This transaction sharpens the focus of our capital allocation towards strategic assets that advance long-term value creation for LYB. We extend our gratitude to our friends and colleagues that helped accomplish this transaction. We are particularly thankful for those who are transferring to the new organization for their contributions, professionalism and resilience throughout the process. As they transition to a stand-alone business, we wish them and the new company success in the next chapter ahead. We continue to benefit from our team's vigorous work on the cash improvement plan. We are making progress toward our target of $500 million of incremental cash flow this year, which will bring the cumulative total since 2025 to $1.3 billion. We remain focused on disciplined management of trade working capital, which despite higher volumes and prices was $450 million lower on March 31 than a year prior. We are also continuing to streamline the organization, including our Executive Committee. The effects will flow through the organization over the coming months to create further efficiencies. First quarter fixed costs across the company are already under $50 million lower than first quarter of 2025, including closure costs. And since the end of 2024, we have reduced headcount by approximately 3,000 positions or 15% through the combination of fixed cost reductions and portfolio management, including the sale of our European assets announced earlier this morning. Our initiatives are yielding results and more improvement is underway. Even with our sharp focus on capital discipline, we remain poised to realize future value creation. We're operating our Channelview PO/TBA plant above benchmark rates and modest investment in Hyperzone reliability and acetyls debottlenecks will deliver incremental value. Construction on MoReTec-1 continues as planned and is expected to ramp up towards the end of 2027. Together, we expect these future growth projects will increase our EBITDA by approximately $400 million. In addition, VEP continues to drive down our costs and increase our reliability and productivity. Now let's turn to Slide 6 as we discuss our financial performance. During the first quarter, earnings were $0.49 per diluted share with EBITDA of $615 million. EBITDA improved by nearly 50%, supported by both typical seasonal trends and a significant improvement in market conditions during March. Cash and liquidity remained robust with balances of $2.6 billion and $7.3 billion, respectively, at quarter end. I will now hand over to Agustin to discuss our financial performance in more detail. Agustin?

Agustin Izquierdo, Chief Financial Officer

Thank you, Peter, and good morning, everyone. Let me begin with Slide 7 as we outline our cash generation. Over the past 12 months, LyondellBasell converted EBITDA into cash at a rate of 111%, well above our long-term target of 80%. This performance reflects our laser focus on optimizing working capital and benefited from the timing of tax payments. In the second quarter, we expect higher prices and operating rates will result in an intentional build of working capital to capture market opportunities. As Peter mentioned, in the first quarter, our cash balance was $2.6 billion, and our available liquidity remains robust at $7.3 billion. Now let's turn to Slide 8 and review the details of our first quarter capital allocation. We consumed $269 million of cash in operating activities. This was expected and consistent with normal patterns for the first quarter. It also reflects the very low inventory levels we accomplished at the end of 2025 and our intentions to profitably capture higher prices and increase demand from the market in 2026. During the quarter, we funded $269 million of capital investments. We took proactive steps during the first quarter to protect our investment-grade balance sheet. Our Board approved a 50% reduction in our quarterly dividend to rebalance our capital allocation and improve financial flexibility. As a result, we returned $224 million to shareholders through dividends in the first quarter. With the change in outlook for 2026, we currently expect both our effective and cash tax rates for the year will range between 15% to 20%. Despite the highly fluid macro environment, our capital allocation priorities remain consistent. We are committed to our investment-grade balance sheet as the foundation of our disciplined capital allocation framework. With the sale of four European assets, we have reached a milestone in our portfolio transformation. And while we have several attractive projects ready for investment, we will only move forward when the balance sheet and outlook is more secure. Regardless of the more favorable outlook for 2026, our near-term focus will remain on continuing to invest in safe and reliable operations to execute our cash improvement plan, to strengthen our investment-grade balance sheet and repay the 2026 and 2027 debt maturities we prefunded in 2025. Now let's turn to Slide 9, and I'll provide a brief overview of our segment results. Our business portfolio generated $615 million of EBITDA during the first quarter. Profitability improved across most businesses, led by stronger polyolefin margins and volumes, partially offset by reduced technology licensing activity. With that, I will turn the call over to Kim.

Kimberly Foley, Executive Vice President, Global Olefins and Polyolefins

Thank you, Agustin. Let's turn to Slide 10 to discuss the performance of Olefins and Polyolefins-Americas segment. During the first quarter, O&P-Americas EBITDA was $327 million, double the prior quarter. In polyethylene, integrated margins improved due to favorable feedstock costs and successful contract price increases for polyethylene in both January and March. In March, export prices for polyethylene significantly increased as global production was impacted by the Middle East conflict. These benefits were partially offset by the impacts of winter storm Fern and the higher gas prices earlier in the quarter. Our first quarter operating rate for the segment was approximately 85% with our crackers running at approximately 95%. During the first quarter, North American polyethylene sales for the industry increased by 6.5% year-over-year, while inventories fell by 7.6%. March domestic and overall sales volumes for North American polyethylene industry were the strongest since 2020. In the second quarter, we expect higher margins and volumes given the global supply tightness. Our order books are strong with April orders for polyethylene 20% above pre-war averages. We have announced substantial price increases to capture this momentum, including a cumulative $0.50 per pound in polyethylene across April and May in addition to the gains realized in the first quarter and $0.10 per pound polypropylene spread increases in both months. With ongoing supply constraints, North America is positioned to move from net importer to net exporter to meet stable global demand for polypropylene. We are focused on maximizing operating rates to meet the gap in global supply and expect 90% utilization of our nameplate capacity across the segment during the second quarter. The hard work in our value enhancement program and cash improvement plan is starting to add value through higher productivity and reliability at lower costs. Moving on to Slide 11. Earlier, Peter showed the dramatic impact of the ongoing war in Iran on the ethylene cost curve. And here, we outlined the direct and indirect effects of the war on the production of ethylene, polyethylene and polypropylene. In the Middle East, production has faced three principal challenges during the conflict. First, some plants have been hit directly, immediately impacting production with time to repair and restart unclear. Secondly, feedstock availability has been challenged, impacting plant operating rates or ability to operate at all. And thirdly, for plants where the normal route to market included passage through the Strait of Hormuz prior to the conflict, these plants have faced logistical bottlenecks resulting in the increased cost and time to market and in some cases, reduced operating rates. Production in Asia has been primarily impacted by reduced feedstock availability. In China, which sources as much as 50% of its crude and substantial share of its naphtha from the Middle East, we hear the government has instructed refiners to prioritize limited feedstock availability towards the production of transportation fuels instead of chemicals. Ethylene cracker operating rates have steadily declined over the course of the conflict. Overall, this has meant that more than 20% of the global capacity for ethylene, polyethylene and polypropylene is currently impacted by the ongoing conflict as shown in the red bars on the chart. This dwarfs the expected capacity additions this year and takes each of these markets from oversupplied to tight. These production impacts have led to higher prices to incentivize additional production from regions with stable supply, principally North America and Europe. LYB's portfolio is optimally positioned to take advantage of these commercial opportunities with 90% of our PE capacity and 70% of our PP capacity within North America and Europe. Lastly, I wanted to highlight that although the outlook is more positive than we expected earlier in the year, we remain mindful of the second order effects of higher prices. A structurally short market is usually resolved through demand destruction, which we see no evidence of currently or higher production. History has shown packaging demand remains robust in such scenarios. Demand for durable goods has already been consistently at a low level since 2022, and prices are still well below peak levels in 2021. We remain watchful and we will adapt to how the market develops. We are confident that our actions to grow and upgrade the core, which has driven significant portfolio transformation, will continue to generate value in a range of macroeconomic scenarios. With that, let's turn to Slide 12 as we review the results of the Olefins and Polyolefins-Europe, Asia, International segment. We reduced our first quarter EBITDA loss to $6 million, driven by higher volumes, improved reliability and lower fixed costs. While higher raw material prices pressured cracker margins during the first quarter, product pricing began to catch up during March and higher volumes and improved utilization rates are improving our fixed cost coverage. Our Middle East joint ventures operated largely as planned during the quarter. While the region represents a relatively small portion of our global capacity, these cost-advantaged assets remain an important part of our portfolio over the long term. After the end of the quarter, LYB reached an important milestone in our portfolio transformation with the completion of the sale of four European assets. We are now better positioned with increased resilience and greater flexibility to capture market upside by leveraging a greater proportion of low-cost capacity. Looking ahead to the second quarter, polymer margins are improving as our team passes through higher costs for energy and raw materials. Feedstock costs are likely to remain dynamic as the market adapts to the ongoing conflict. We are seeing improved regional demand in Europe due to lower imports from the Middle East and China. We are increasing our operating rates to approximately 80% across the segment during the second quarter. And with that, I'll turn the call over to Aaron.

Aaron Ledet, Executive Vice President, Intermediates and Derivatives

Thank you, Kim. Please turn to Slide 13 as we look at the Intermediates and Derivatives segment. In the first quarter, segment EBITDA sequentially increased to $224 million, driven by stronger volumes supported by improving market conditions, partially offset by unplanned downtime at our La Porte and Bayport facilities in Houston. Margins strengthened in propylene oxide with improved adders and increased demand for glycols into deicers. In oxyfuels, results declined during the quarter to reflect typically low winter seasonal demand and margins. Margin pressures for oxyfuels were compounded by higher butane costs in Europe with improving oxyfuels prices amid Middle East tensions providing only a partial offset towards the end of the quarter. Unplanned downtime at our Bayport PO/TBA asset beginning in March reduced EBITDA by approximately $40 million in the quarter. Crude oil remains the single largest variable affecting oxyfuel margins. As a rule of thumb, a $1 change in crude oil prices translates to roughly a $20 million annualized impact on oxyfuel earnings, assuming full production and all other factors remain constant. Historically, oxyfuel margins in the U.S. and Europe have been comparable. However, this year, we are seeing a divergence. In the U.S., butane and methanol prices have increased far less than crude. In Europe, butane prices are near record highs relative to crude, compressing margins. Additionally, the outage at our Bayport PO/TBA facility has temporarily limited our ability to fully capture the favorable U.S. market environment. In acetyls, we saw improved seasonal demand as we move through the quarter. However, this improvement was more than offset by unplanned downtime due to a delayed restart of the La Porte acetyls assets following winter storm Fern. Despite this, the methanol business continued to run throughout the quarter, providing a stable earnings contribution that underscores our benefits from the integration across the I&D portfolio. Overall, underlying demand trends and market fundamentals continue to improve, positioning the segment for favorable performance during the second quarter. In oxyfuels, we expect meaningful margin improvement in the second quarter from stronger seasonal demand and reduced supply from the Middle East and China. The Bayport PO/TBA asset is expected to restart toward the end of the second quarter with an estimated earnings impact of approximately $25 million per week while down. Taken together, these elements position us well for improved oxyfuels margins in the coming quarters. In acetyls, volumes and margins are expected to improve following the La Porte asset restart, supported by seasonal demand recovery and tight global supply. Across the segment, we are targeting approximately 75% operating rates during the second quarter. I will now turn the call over to Torkel.

Torkel Rhenman, Executive Vice President, Advanced Polymer Solutions

Thank you, Aaron. Please turn to Slide 14 as we review results for the Advanced Polymer Solutions segment. First quarter EBITDA was $58 million. APS volumes increased across most business, driven by typical seasonal demand. Our customer focus continues to deliver tangible results, contributing to volume momentum. Margins declined given rising raw material costs following the start of the Middle East conflict. Looking ahead, we expect soft near-term demand in automotive and other durable goods markets. We expect higher costs for raw materials, energy and logistics to persist, and we are proactively passing these higher costs along our value chain. Nonetheless, we expect contractual limits on pricing velocity will pressure margins over the near term. Despite the changes in macro environment, we continue to transform our APS segment to a customer-centric growth business. Our focus on customer centricity, cost, productivity and portfolio changes over the past couple of years has contributed to the continued earnings improvement as seen by the 55% increase in EBITDA in 2025 and now a 26% improvement year-over-year for the first quarter. We are confident the work we are doing will profitably transform the APS business and enable us to achieve our long-term goals. With that, I will return the call to Peter.

Peter Z. Vanacker, Chief Executive Officer

Thank you, Torkel. Please turn to Slide 15, and I will discuss the results for the Technology segment. First quarter EBITDA of $18 million was lower than our prior guidance due to declining licensing activity with slower global polyolefins capacity growth and lower catalyst sales volumes following shipping constraints associated with the Middle East war. We expect improved results in the second quarter as revenue from timing of shipments are recognized and licensing revenue milestones increase. As a result, we estimate that the second quarter Technology segment results will be only slightly lower than our fourth quarter 2025 results. Let me share our views on our key regional and product markets on Slide 16. Ongoing supply disruptions across multiple value chains were tightening availability and supporting improved pricing and margins. These dynamics are favoring regions with stable access to energy, raw materials and logistics, where LYB and other producers are being called on to fill the gap in global supply. In North America, pricing initiatives are supported by improving seasonal demand, increased emphasis on security of supply and rapidly rising export prices with margins reinforced by the U.S. cost advantage. In Europe, higher costs are being offset by higher product prices, supported by increased demand for local production as imports from the Middle East and Asia decline. With fewer imports entering the region, profitability is improving. In Asia, feedstock disruptions continue to constrain supply, forcing lower operating rates. While capacity additions in China persist, prolonged shutdowns and technical issues with restarts could accelerate capacity rationalization across the region. Within packaging markets, demand remains resilient, supported by essential needs for food, health care and nondurable consumer goods. Demand in building and construction remains muted amid broader macro uncertainty. Inflationary pressures from the war are likely to delay potential benefits from lower interest rates and the inevitable recovery in durable goods demand. In automotive, global production is expected to decline slightly year-over-year with additional risk tied to the ongoing Middle East war only offset by modest growth in South Asia and South America. Finally, in oxyfuels, geopolitical volatility is driving price and margin upside in the U.S. As we conclude today's call, I would like to acknowledge that throughout the first quarter, our team continued to make smart decisions to successfully navigate a rapidly changing environment. We maximize commercial opportunities with discipline, agility and a clear vision to position LYB as the leader in our industry and deliver lasting value for all our stakeholders. Now with that, we're pleased to take your questions.

Operator, Operator

Our first question comes from the line of David Begleiter with Deutsche Bank.

David Begleiter, Analyst

Peter, the consultants have a pretty sharp erosion of polyethylene price increases in the back half of the year. I suspect you differ with that forecast. Can you talk to why you think they were probably being too bearish on PE prices in the back half of the year?

Peter Z. Vanacker, Chief Executive Officer

Thank you, David. Good question to start with. I think four weeks ago, nobody expected or predicted that we would get a $0.30 per pound price increase for polyethylene and a $0.07 per pound spread increase for polypropylene. I continue to be a bit skeptical about those bearish outlooks. If you look at our view, and we said it in the prepared remarks, we see that this disruption is not to be measured in quarters. It's probably going to be multiple quarters, definitely not months. It's a very large shock that we are experiencing. It's very global. It's driven by both asset impacts and logistics. These things normalize very slowly. Preference, as we hear, will be given first to supply for transportation fuels and fertilizers, and how fast that actually moves to petrochemicals remains to be seen. Our continued view is that there will be a sustained geopolitical risk premium that will continue to steepen the cost curve. Even after a resolution, the market may retain a higher risk premium for crude. A steeper global cost curve can persist relative to pre-war conditions. Physical damage is not something that can be recovered very quickly, so restart timing is uncertain. Rerouting logistics is likely to be unstable for an extended period; a common view is more like nine to twelve months before stabilizing. In addition, some outages may become permanent or accelerate rationalization. With regards to more specific polyethylene pricing, I'll hand over to Kim.

Kimberly Foley, Executive Vice President, Global Olefins and Polyolefins

Thanks Peter. I think the other thing to remind everybody is we confirmed the $0.30 in April and we've got $0.20 out there in May. If you think about history and you look back at peak pricing in 2021, those prices were still $0.10 to $0.15 per pound higher. That pricing did flow through the economy then and it can again as we go forward. Without any correction to the supply-demand imbalance, it's not clear why pricing would go down. So I politely disagree with the consultants.

Operator, Operator

Our next question comes from the line of Patrick Cunningham with Citi.

Patrick Cunningham, Analyst

Maybe just on I&D. I guess if you could walk through any of the structural changes you've seen from a cost curve and supply and demand standpoint given the conflict? And then just related, if the conflict persists and the Bayport turnaround does wrap up, where would you anticipate operating rates and margins to trend in the back half?

Aaron Ledet, Executive Vice President, Intermediates and Derivatives

Yes. Thank you for the question. Generally, we have pricing power across the board in almost all of our products. For example, methanol pricing has doubled in the last three months from about $300 a ton to $600 a ton across regions. When you take that through the acetyls chain, we've seen acid pricing up 50% over that same time frame and VAM pricing up 100% over that same period. So we've got pricing power across the board from an acetyls perspective. The cost curve in acetyls is relatively flat for both acid and VAM. But when you look at our methanol cost curve, U.S. natural gas pricing is the lowest across all regions, so we are advantaged. In the PO business, both of our technologies were in the first quartile of the cost curve when we ran the analysis last month, which is an advantaged position. As I said in my prepared remarks, we currently plan to run our capacities at about 75% utilization in the second quarter, largely due to the unplanned downtime in Bayport. As that site gets back up and running towards the end of the quarter, we expect to run closer to full rates.

Peter Z. Vanacker, Chief Executive Officer

I visited Bayport about ten days ago. People are working diligently across multiple work streams to get the site back up and running by the end of Q2.

Aaron Ledet, Executive Vice President, Intermediates and Derivatives

That's correct.

Operator, Operator

Our next question comes from the line of Duffy Fischer with Goldman Sachs.

Duffy Fischer, Analyst

Two questions maybe on O&P Americas. So if the situation in the Middle East persists, it seems like we're consuming more molecules every day than we're producing today. What happens if we have to try to price polyethylene to destroy demand? I don't think we've ever done that. How high do you think that needs to go to balance supply/demand? And then the second one is, other than the starting point was lower for polypropylene versus polyethylene, how are you seeing those two chains play out relative to each other? Is one benefiting from this more than the other?

Peter Z. Vanacker, Chief Executive Officer

Duffy, good question. On polyethylene and demand destruction, remember the vast majority of polyethylene goes into consumables, particularly packaging. In market environments like the pandemic and during the 2008–2009 financial crisis, consumption patterns changed—people consumed more at home, which increased packaging demand. So a recession does not necessarily lead to polyethylene demand destruction. Polyethylene remains the lowest cost and most efficient alternative for packaging and similar applications. Other materials also get more expensive in the current environment, which supports polyethylene demand. I'll hand over to Kim for more specifics.

Kimberly Foley, Executive Vice President, Global Olefins and Polyolefins

I've observed at least three to four years of tempered durable demand, which means some pent-up demand for durables exists. You saw pricing levels pull through for polyethylene in 2021. Regarding polypropylene, its price today is about $0.60 per pound lower than in 2021, so there is pricing power there. We are well positioned to capitalize on that. On the polypropylene side, production from the Middle East and LPG feed to PDH units in Asia are heavily impacted—probably 70% plus of that market is affected right now. So polypropylene could be a significant upside as this situation continues.

Peter Z. Vanacker, Chief Executive Officer

I've also noted changes in consumer behavior in Europe—people are making different travel and spending decisions, similar to what we saw in 2021. All these elements should be considered when assessing demand dynamics.

Operator, Operator

Our next question comes from the line of Jeff Zekauskas with JPMorgan.

Jeff Zekauskas, Analyst

The export price of polyethylene is maybe $1,640 a ton and the price of polyethylene in Asia is maybe $1,285 a ton, so at least from our point of view Asia is lower by $350 a ton. Why is that? And naphtha values in Asia have really jumped from about $600 a ton to $1,100 a ton, but we really haven't seen that kind of raw material inflation echoed or covered in the polyethylene prices. Can you give us an idea of what's going on?

Kimberly Foley, Executive Vice President, Global Olefins and Polyolefins

Jeff, there are a few components. In China, there was a significant crude inventory buffer pre-war—estimates range from four to six months, so they are still running on crude purchased at pre-war discounts. Many of their sites are integrated refineries processing crude to naphtha to crackers to polyethylene, so that inventory takes time to deplete. They also have coal-to-olefins production (CTO), which sets a price floor in China because coal prices haven't changed significantly, similar to North American ethane. When the war first broke out, China increased its pricing and then held or decreased prices as they depleted their inventories and sold into Southeast Asia. Their buying behaviors and inventory positions differ from the rest of the world, so their pricing dynamics are not directly comparable to what we see in North America or Europe, and they are not exporting to the regions where we primarily compete.

Peter Z. Vanacker, Chief Executive Officer

To add conceptually, we've seen reduced demand for new licensing and project sanctioning in China and changes in priorities. Even projects approved under prior plans are being reconsidered and may be delayed to 2028–2029. That reduces near-term investments and explains lower licensing activity. At current price levels, many operations in China still run at technical minimums, while some nonintegrated players have idled. For polypropylene, the situation is even tighter because many PDH/PP plants in Asia are affected.

Kimberly Foley, Executive Vice President, Global Olefins and Polyolefins

Correct.

Operator, Operator

Our next question comes from the line of Vincent Andrews with Morgan Stanley.

Vincent Andrews, Analyst

First of all, congratulations to Dave Kinney on a great run. Best wishes in your retirement. If I could ask you, Peter, on EAI. You're bringing operating rates up, which I assume means you're expecting profits. And then you've sold the assets and that's going to improve the cost structure. So what level of profitability and you can give us a wide range, would you expect for the second quarter as you see markets improve, your production levels come up, maybe you're selling out of some inventory as well? So how should we be thinking about EAI in 2Q and maybe 3Q to the extent you can comment that far?

Peter Z. Vanacker, Chief Executive Officer

Thanks, Vincent, and thanks for your good wishes to Dave. On EAI, we closed the sale of four assets early this morning. Historically, that portion of the business was small or even negative in 2025 and in Q1. Strategically, this transaction helps us increase mid-cycle EBITDA margins by focusing capital on higher-return assets. Previously, our historic mid-cycle EBITDA margin for LYB was around 18%; with our portfolio moves we've improved that to above 21% by focusing on more profitable assets. This transaction reduces the scope of Velogy for LYB, lowering annual CapEx by about EUR 110 million for those assets and reducing fixed costs directly related to that scope by about EUR 400 million per year. If margins continue to improve in Europe, there is also an earn-out potential of about EUR 100 million. We will continue to have a differentiated European portfolio with meaningful ethylene and polyethylene capacity and polypropylene presence, and we also have investments in Saudi Arabia on the West Coast in our polypropylene joint venture, where we continue to work on the second phase to expand capacity. Moving forward, with a different portfolio and our MoReTec investments, we should be able over time to achieve attractive mid-cycle margins in Europe without diluting overall margins.

Kimberly Foley, Executive Vice President, Global Olefins and Polyolefins

A couple of quick comments: Europe typically imports about 25% of its polymers. With disruptions through the Strait of Hormuz, those imports have declined, making supply/demand tighter and giving pricing power on the polymer side. The wildcard is feedstock prices. For example, some assets are smaller and non-integrated, and their economics depend on monomer availability at an affordable price to run. We continue to see positive momentum. As a rule of thumb, a $100 per ton movement is roughly $280 million annualized.

Operator, Operator

Our next question comes from the line of John Roberts with Mizuho Securities.

John Roberts, Analyst

In the APS segment, how long do you think it will take to get your pricing to get spreads back with the underlying polyolefin cost increases that are being passed through there? And will the tightness in the polyolefins market at all tighten the engineered plastics industry as well?

Torkel Rhenman, Executive Vice President, Advanced Polymer Solutions

For the non-contracted business, we have aggressively moved prices and we see good acceptance because the whole market is moving up. The contracted side has delays, with some contracts monthly and some quarterly, and it is mostly the quarterly contracts where there is a lag. In our segment, market demand is surprisingly strong, with particular strength in packaging and durable goods in the Americas and Europe. Customers are seeing reduced imports of finished goods from Asia, which is supporting demand for locally made products such as films and packaging, and that's benefiting our customers and our business. We'll monitor how long it lasts, but at present it's a positive sign for our segment.

Operator, Operator

Our next question comes from the line of Kevin McCarthy with Vertical Research Partners.

Kevin McCarthy, Analyst

I'd echo my congratulations to Mr. Kinney. My question relates to O&P-Americas. If we look back at history, that business earned quarterly EBITDA between $1.5 billion and $1.6 billion at the last peak in the middle quarters of 2021. Is that sort of level, in your mind, realistic or unrealistic in today's environment if the conflict were to persist? Maybe you could compare and contrast what you're seeing today versus what you saw back then.

Peter Z. Vanacker, Chief Executive Officer

Kevin, good question. Kim noted that we have settlements and price increases—$0.30 per pound in April and additional increases expected. Today, polyethylene pricing is only about $0.10 to $0.15 per pound below 2021 peak levels, so with continued price momentum we could reach or exceed 2021 levels. That's just pricing; margins are also impacted by feedstock spreads. Ethane is currently cheaper than late last year and early this year, which improves spreads. Given the current dynamics, it's possible to approach or exceed 2021 levels, particularly if the conflict persists and supply remains constrained. Kim, anything to add?

Kimberly Foley, Executive Vice President, Global Olefins and Polyolefins

Yes. Looking at North American polyethylene margins, we believe mid-cycle margins will be strong in the second quarter. Comparing 2021 mid-cycle margins to current conditions, it's reasonable to expect similar outcomes in the near term. For polypropylene, prices were significantly higher in 2021—about $0.60 per pound higher—so if polypropylene tightens, that could add further upside, though it may not move as quickly as polyethylene.

Operator, Operator

Our next question comes from the line of Frank Mitsch with Fermium Research.

Frank Mitsch, Analyst

I need to come clean, Mr. Kinney. On the PPG call, I told Vince on the occasion of his retirement that he was the best IR ever. But to be frank, it was always you. So best wishes, my friend. Aaron, I want to come back on the I&D operating rates for the second quarter. You said 75% given the outages that you have. But you said that you're going to end it at 95% to 100% when you get everything back up and running. So is that sort of the run rate that we should be expecting in the third quarter as you see into the future? And then also for the first quarter, I think you guys guided to 85% operating rate in I&D. And I was curious as to what that actually came in at given the outages.

Aaron Ledet, Executive Vice President, Intermediates and Derivatives

Thanks for the question, Frank. I have to be careful with exact commitments, but anything available to us, we're going to run. We still have limitations at La Porte in the acid unit that prevent a full immediate return to 100%, but once Bayport is back up and running we will run everything we can at full capacity. We will run at benchmark rates across the board. I wouldn't put a strict 95% to 100% figure as a guaranteed run rate, but the goal is to run available capacity at benchmark performance.

Operator, Operator

Our next question comes from the line of Mike Sison with Wells Fargo.

Michael Sison, Analyst

In terms of polypropylene, you've talked about it a couple of times. Margins have been low for the last couple of years. Can that product line turn positive? You used to generate a good amount of EBITDA for polypropylene. How do you think that shapes up this year if the pricing outlook holds?

Peter Z. Vanacker, Chief Executive Officer

There is substantial upside on the polypropylene side—the sleeping giant, as we've called it. Market dynamics have changed: the cash cost curves historically were flat across regions, but now the U.S. has a clear advantage, and there's global demand for exports because of lost propane feedstock to Asian polypropylene producers. That uplifts margins in export markets and provides significant upside for our polypropylene assets.

Kimberly Foley, Executive Vice President, Global Olefins and Polyolefins

We've been operating polypropylene in Europe and the U.S. around 70% to 75% for the last two years. So there's a 15% to 20% opportunity to increase operating rates, in addition to spread improvements. The longer the situation persists, the better the outlook for polypropylene.

Peter Z. Vanacker, Chief Executive Officer

Approximately 70% of supply is impacted by disruptions through the Strait of Hormuz when considering direct and indirect effects.

Operator, Operator

Our next question comes from the line of Josh Spector with UBS.

Joshua Spector, Analyst

I just wanted to ask a comment about licensing revenue and technology. I know you've been at a low level for some time here, and you've highlighted there's been little activity in terms of looking at new projects, but your near-term outlook comment says that you expect that to increase. So is that a lag of just some existing discussions coming to fruition? Or are you seeing actually more interest in certain of the product chains about adding more capacity now?

Peter Z. Vanacker, Chief Executive Officer

Josh, it's primarily a timing lag. We're seeing some milestones being achieved that will be recognized in Q2, which is why we expect Q2 to be better than Q1. The broader trend of lower licensing demand persists: projects that were progressing have been put into reserved status or delayed, and the investment cycle for new capacity will be pushed out. So while Q2 will see some improvement from timing, we are not seeing a broad resurgence of new project sanctioning today; that would unfold over the next few years.

Operator, Operator

Ladies and gentlemen, that concludes our time allowed for questions. I'll turn the floor back to Mr. Vanacker for any final comments.

Peter Z. Vanacker, Chief Executive Officer

Thank you again for all the thoughtful questions. The events of the past two months have transformed the global cost curve for petrochemicals and created a massive gap in supply for LYB's essential products. While we all look forward to peace and the normalization of traffic through the Strait of Hormuz, the economic and logistical impacts of this conflict will persist many quarters beyond the eventual end of the disruption. At LYB, we're ramping up our cost-advantaged U.S. capacity to address the global supply gap for both domestic and export customers. In Europe, we're passing through higher costs for energy and raw materials so that local production can once again profitably serve local customer needs. And our global polypropylene capacity, as we alluded to before, the sleeping giant within LYB is increasingly needed to serve global demand. You can be confident LYB will remain focused on our strategic priorities and long-term value creation in this dynamic environment. We hope you all have a great weekend. Stay well and stay safe. Thank you.

Operator, Operator

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