LyondellBasell Industries Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 2, 2024

There are 12 speakers on the call.

Operator

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 would now like to turn the call over to Mr. David Kinney, Head of Investor Relations.

Operator

Sir, you may begin.

Speaker 1

Thank you, operator. Before we begin the 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/investorrelations. Today, we will be discussing our business results while making reference to some forward looking statements and non GAAP financial measures. We believe the forward looking statements are based upon reasonable assumptions and the alternative measures are useful to investors. Nonetheless, the forward looking statements are subject 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.

Speaker 1

Comments made on this call will be in regard 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 our non GAAP financial measures to GAAP financial measures, together with other closures, including the earnings release and our business results discussion. A recording of this call will be available by beginning at 1 pm Eastern Time today until March 2 by calling 877-660-6853 in the United States and 201-612-7415 outside the United States. The access code for both numbers is 137 4,256. Joining today's call will be Peter Vanneker, lined up the sales Chief Executive Officer Our CFO, Michael McMurray Ken Lane, our Executive Vice President of Global Olefins and Polyolefins Kim Foley, our EVP of Intermediates and Derivatives and Refining and Torickel Remman, our EVP of Advanced Polymer Solutions.

Speaker 1

During today's call, we will focus on Q4 and full year 2023 results, including an update on LYB's strategic progress. We will also discuss current market dynamics and our near term outlook. With that being said, I would now like to turn the call over to Peter.

Speaker 2

Thank you, Dave, and welcome to all of you. We appreciate you joining us today as we discuss our Q4 and full year 2023 results. Let's begin, as we always do, with our safety results on Slide 3. During 2023, Our employees and contractors demonstrated their commitment to outstanding safety performance. LYB's total recordable injury rate was 0.14, which is approximately 20% lower than the average of the prior 3 years.

Speaker 2

I want to congratulate our APS segment, where injuries were 38% lower than 2022, a significant improvement historical levels. We always use safety performance as a leading indicator of operational excellence and business performance. But there is no greater value than seeing every member of our team return home to their families every day in the same health as Wendy began to work their working day. Let's now turn to Slide 4 to discuss our financial results. 2023 was another challenging year for petrochemicals.

Speaker 2

While energy prices moderated In an environment of geopolitical unrest, markets were extremely cautious due to uncertainty about inflation and the potential for a more pronounced downturn in economic activity. Reported GDP growth in U. S. And China improved Relative to 2022, the growth in petrochemicals was far below norms for our industry. Against that backdrop, LYB delivered earnings of $8.65 per share, with an EBITDA of $5,200,000,000 Cash generation was exceptional and resulted in $4,900,000,000 of cash from operations.

Speaker 2

We have a highly efficient cash conversion ratio of 98%. We ended the year with $7,600,000,000 of liquidity supported by a strong investment grade balance sheet. And we exceeded our cost of capital with an 11% return on invested capital. In March of last year, we successfully launched our new strategy at our Capital Markets Day in New York. Now let's turn to Slide 5 and briefly review this strategy.

Speaker 2

Our goal was to create focus, clarity and alignment about the direction Leindeer Basel would be moving over the next 5 years and provide a clear vision of what the company would look like in 2027. Our strategy is built around 3 pillars: growing and upgrading the core, building a profitable circular and low carbon solutions business and stepping up performance and culture. In growing and upgrading the core, we are investing in businesses that fit with our competitive advantages and long term strategy. Our Circular and Low Carbon Solutions business is driving leadership in circularity and addressing the massive demand for these products from our customers and society. In the 3rd pillar, we are transforming the culture of LYB to embed a more comprehensive view of value creation, while continuing to recognize that stringent cost management is vital in our industry.

Speaker 2

On Slide 6, we highlight our progress on our strategy in 2023 and the work underway over the next few years towards our 2027 goals. In just 10 months since launching our strategy last March, LyondellBasell has unlocked nearly onethree of the $3,000,000,000 of incremental normalized EBITDA that we are targeting for 2027. The successful start up of the POTBA plant this year is a major step forward in growing and upgrading our core by adding approximately $450,000,000 to our normalized EBITDA. And I'm very pleased to report that our value enhancement program is far exceeding our initial expectations. In 2023, the VEP achieved a year end run rate of more than $400,000,000 of mid cycle recurring annual EBITDA improvements.

Speaker 2

And Michael will share more details on the progress of the VEP in a few moments. As shown on the slide, we have numerous work streams underway to build towards our strategic goals of $2,000,000,000 of incremental normalized EBITDA by 2025 and a total of $3,000,000,000 by 2027. With the announced sale of the ethylene oxide and derivatives business to INEOS for $700,000,000 we are redirecting resources away from non core businesses. The deal we announced in January to acquire 35 percent of Nat Pet in Saudi Arabia for approximately $500,000,000 is just one example of how we are growing our core cost advantaged olefins and polyolefins businesses. We're making great strides in building strong foundations for our Circular and Low Carbon Solutions business.

Speaker 2

In 2023, we took a final investment decision for our 1st tranche of advanced recycling capacity in Germany, using our proprietary catalytic Moritec technology. And we are building partnerships to source waste plastic to supply our app in Germany, while also securing waste plastic in Houston to supply our next investment in advanced recycling capacity. And the VEP program is not a one time initiative. Michael will describe our increased targets for 2024 and beyond. While we have a lot of work ahead of us, I want to congratulate our team on the substantial progress we achieved on our strategic journey in 2023, ensuring a robust platform for longer term value creation and positive leverage to any market turnarounds.

Speaker 2

On Slide 7, let's take a look at the steps ahead to deliver on our goals. We will continue to grow and upgrade our core businesses by focusing on advantaged feedstocks in growing markets where LYB can build or extend our leading market position. Our new joint venture in Saudi Arabia is one example of how we will do this. As we add new positions, We will continue to review our portfolio for businesses and assets that are not aligned with our long term strategy. The divestiture of EO and Derivatives business, the sale of our Australian polypropylene business, The shutdown of a polypropylene line in Italy and the exit of the refining business are all examples of how we are sharpening the focus of our business portfolio.

Speaker 2

The rapid progress of the LYB Value Enhancement Program also contributes to our growth through low cost capacity debottlenecks and productivity improvements. We're making good progress on building the foundations for our Circular and Low Carbon Solutions business As we work towards our goal of $500,000,000 of incremental EBITDA by 2027 $1,000,000,000 by 2,030. And our VEP is not only delivering growth and productivity. The VEP also supports The 3rd pillar of our strategy to step up performance and culture by instilling a value based mindset across the company. We have numerous initiatives to improve margins through customer and commercial excellence embedded in the VEP.

Speaker 2

And our work to transform our Advanced Polymer Solutions business is also an important part of our work to step up performance and culture. All of our progress is supported by our foundations of efficient cash generation, disciplined capital allocation and our investment grade balance sheet. We're leveraging partnerships where it fits to achieve growth with capital efficiency, and we're pursuing a very value focused investment program. And we remain steadfast in our support for a secure, competitive and growing dividend as part of our commitment to competitive shareholder returns. And now, I will turn the call over to Michael to discuss the details of our financial progress.

Speaker 3

Thank you, Peter, and good morning, everyone. Please turn to Slide 8, And let's take a look at the progress of our value enhancement program. As Peter mentioned, LYB's value enhancement program far exceeded Our initial expectations in 2023. When we launched the program, we thought we could achieve a 2023 year end run rate of $150,000,000 of mid cycle recurring annual EBITDA improvement. With high engagement and rapid execution, Our team achieved a run rate of more than $400,000,000 by year end 2023.

Speaker 3

We have a strong management system in place for our VEP program. Our team has screened more than 13,000 ideas and more than 1900 of these ideas have advanced to the execution ready stage of our process. By the end of 2023, we executed on approximately 450 of these initiatives. Our system is robust and disciplined, and our internal external auditors have validated our processes. We currently believe this effort will add a total of $600,000,000 of recurring annual EBITDA by the end of 2024 and up to $1,000,000,000 by the end of 2025.

Speaker 3

This is a significant increase from our initial target of $750,000,000 that we announced last March, driven by the enthusiastic buying of our colleagues and the tangible results that we have delivered so far. The LYB Value Enhancement Program is providing meaningful contributions to our strategic financial goals and will continue to do so as we move forward. On Slide 9, let me share more details about the progress on our BEP program during 2023. Our targets for the program are described as year end run rates relative to 2021 volumes and using average margins from 2017 to 2019, a time period that provides a good approximation of mid cycle margins. Through more than 4.50 initiatives, we generated over $300,000,000 of VEP EBITDA from the program based on 2023 margins.

Speaker 3

This reflects the net recurring improvements throughout the year relative to 2021 volume, product mix and cost. Now let me highlight a few of the initiatives from last year. At our Lake Charles integrated polyethylene joint venture, we automated controls for a water treatment unit that reduced manual operations and water consumption. With a small investment, we were able to reduce LYB's share of cost by $800,000 annually. In our Oxyfuels business, our cost advantaged U.

Speaker 3

S. Production is exported in vessels to markets around the world. We worked with 1 of our terminal providers to encourage their investment in a vapor recovery system that allowed LYB to double vessel loading rates reduce demerge cost and vape permissions for a net recurring benefit of $1,000,000 per year By investing resources to learn more about the needs of our customers, our Polymer product development team allocated resources For new products to serve demanding applications and wire and cable sheathing for subsea infrastructure markets, this initiative improved recurring profitability by at least $300,000 per year. We hope these examples provide you with some insight into the hundreds of small initiatives that we have that we expect to add up to $1,000,000,000 of mid cycle recurring annual EBITDA to LYB's run rate by the end of 2025. Please turn to Slide 10, and let me begin by highlighting the outstanding cash generation from our business portfolio during 2023.

Speaker 3

LYB generated a total $4,900,000,000 of cash from operating activities over the past year. Cash on hand increased to $3,400,000,000 At the end of the Q4, during 2023, we achieved cash conversion of 98%, well above our long term target of 80%. Our cash conversion was bolstered by working capital reduction of approximately $700,000,000 during the Q4. The majority of the working capital benefit was from lower receivables and inventories. We expect our working capital needs will increase during the Q1.

Speaker 3

Our efficient cash generation allowed the company to return more than $1,800,000,000 to LyondellBasell shareholders in 2023. This represents 53% of our $3,400,000,000

Speaker 4

of free cash flow for

Speaker 3

the year. Let's continue with Slide 11 and review the details of our capital allocation over the past year. As Peter mentioned, we are committed to disciplined capital allocation as we execute our strategy and maintain our robust investment grade balance sheet. During 2023, cash from operating activities Fully funded $1,600,000,000 in dividends, dollars 210,000,000 in share repurchases and our capital investment program. In May, we increased our quarterly dividend by 5%, marking the 13th consecutive year of annual dividend growth.

Speaker 3

This year, we invested $1,500,000,000 in capital expenditures. We reached an important milestone with the successful startup of our new POTBA asset in 2023. With the completion of this world scale project, our future capital expenditures We'll be increasingly focused on a portfolio of smaller projects to advance our strategy. This includes investments in small profit generating projects, integrated hubs for Circular Solutions and hundreds of initiatives within the Value Enhancement Program. We ended the year With $3,400,000,000 of cash and short term investments and $7,600,000,000 of cash and available liquidity, In line with our strategic focus on leadership and sustainability, we issued our inaugural Green Bond for $500,000,000 LYB's robust balance sheet positions us well to move forward on our long term strategy during the year ahead.

Speaker 3

One last comment. We added over $1,000,000,000 of cash to our balance sheet in 2023 as a result of strong execution amid challenging market conditions. As a result, we are carrying about 2 times our stated minimum of $1,500,000,000 We have built a bit more cash because of the challenging market conditions and uncertain economic outlook that we have been navigating. That said, Our capital allocation priorities remain unchanged, and we remain committed to returning 70% of our free cash flow to shareholders over the long term. Now I would like to provide an overview of the quarterly results for each of our segments on Page 12.

Speaker 3

LYB's business portfolio delivered $910,000,000 of EBITDA during the Q4. Our lower results reflect a significant decline in gasoline crack spreads and seasonally lower demand during the Q4. Lower gasoline crack spreads negatively impacted our refining results. Oxyfuels in the intermediates and drips segment and the value of co product fuels in Olefins and Polyolefins Americas. During the quarter, lower ethane and energy cost And increased polyethylene exports benefited our O&P Americas business.

Speaker 3

Overall, olefins and polyolefins demand remained soft, particularly in Europe, where utilization rates remained low. Lower demand and higher raw material costs negatively impacted our Advanced Polymer Solutions segment. Across the portfolio, a non cash LIFO inventory valuation charge decreased pretax 4th quarter results by approximately $55,000,000 As a reminder, the LIFO impact reflects changes in inventory valuation over the full year and it's not necessarily limited to 4th quarter valuations. Before we discuss our segment Results in detail, let me discuss our capital expenditure plans for 2024. We expect that our CapEx will be approximately $2,100,000,000 this year, a $600,000,000 increase compared to 2023.

Speaker 3

Our capital plan includes approximately $800,000,000 For profit generating growth projects and $1,300,000,000 of sustaining investment to keep our assets running safely and reliably. The increased profit generating capital includes investments to grow our circular and low carbon solutions business as well as investments to lower the carbon footprint of our existing asset base, particularly in Europe. Funding required to drive our value enhancement program is included in our CapEx plan. We expect our 2024 effective tax rate will be approximately 20% and our cash tax rate will be a few percentage points higher. In the appendix of this slide deck, we have provided additional 2024 modeling information, including impacts from major plant maintenance, costs associated with the exit from our refining business and other useful financial metrics.

Speaker 3

With that, I'll turn the call over to Ken. Ken?

Speaker 4

Thank you, Michael. Let's begin the segment discussions on Slide 13 with the performance of our Olefins and Polyolefins Americas segment. 4th quarter EBITDA was $604,000,000 During the quarter, a significant decrease in co product values negatively impacted olefins margins. Polyolefin prices were stable domestically, while a very strong volume led to some lower pricing in our overall portfolio. Strong demand from export markets continues to drive increased polyethylene volumes

Speaker 3

And we

Speaker 4

didn't see the typical seasonal slowdown. We operated our assets at approximately 85% of nameplate capacity To match market demand and continued to actively manage working capital. 4th quarter EBITDA included a LIFO valuation benefit of approximately $75,000,000 During the Q1, We expect polyethylene prices to remain firm with modest improvements in domestic demand and ongoing strength in export markets. We anticipate ethane and energy costs will remain favorable for our assets in the region, providing some margin tailwinds. Overall, we expect to operate our O&P Americas assets at an average of approximately 80% during the Q1, slightly lower than Q4 2023 due to planned maintenance.

Speaker 4

In December, we signed 2 new renewable power purchase agreements. With these agreements, we've achieved almost 90% of our goal to procure at least 50% of our global power from renewable sources by 2,030. In total, we have 12 agreements in place, representing more than 1.3 gigawatts of renewable power capacity. As we mentioned last quarter, we announced our investment in Cyclix, a joint venture with Agilex and ExxonMobil. This partnership is focused on increasing plastic waste, recycling infrastructure to improve circularity.

Speaker 4

In December, Cyclics announced the final investment decision to build the 1st Cyclics Circularity Center in Houston. The circularity center will focus on increasing plastic waste recycling options through better sourcing and sorting of plastic waste. The facility will have the capacity to produce more than 130,000 tons of plastic feedstock per year for advanced and mechanical recycling and is expected to start up in 2025. Now please turn to Slide 14 to review the performance of our Olefins and Polyolefins Europe, Asia and International segment. During the quarter, European markets remained weak with softer seasonal demand and lower consumer confidence.

Speaker 4

Polymer prices were modestly higher with an improved sales mix and stable naphtha feedstock costs. Due to the low demand, We operated our assets at rates of approximately 65% during the quarter. The combined impact of the weak demand and low rates led to a 4th quarter EBITDA loss of $87,000,000 As we move into 2024, we expect weak European demand will persist with ongoing consumer uncertainty. Nonetheless, we are seeing modest improvements in orders as some customers begin to restock and seek local supply as imports moving through the Red Sea are disrupted. We expect to operate our European assets at a rate of 75% during the Q1.

Speaker 4

Demand in China remains muted as customers manage inventories with the approach of the Lunar New Year amid a slow economic environment. As Peter mentioned earlier, we are making great progress on our to grow and upgrade our core businesses. Our recent announcement to acquire a 35% share of NatTAT reflects our focus on assets that have long term advantage. But we're also moving away from the assets that can't deliver long term competitiveness As demonstrated by last year's decision to close one of our 2 polypropylene assets in Brindisi, Italy. We are also making good progress with building our circular and low carbon business.

Speaker 4

During the Q4, we made the final investment decision to build our 1st commercial catalytic advanced recycling plant at our Wesseling, Germany site. With an estimated capacity of 50,000 tons per year, this plant will utilize our differential Moretec advanced recycling technology. And just like in Houston, we are collaborating with partners to secure plastic waste feedstock in Germany. In December, we acquired a minority share of SourceOne Plastics, a plastic waste sourcing company in Germany. Source 1 will provide the majority of the process plastic waste feedstock to our new Moortech asset.

Speaker 4

Our integrated hub model, we are establishing an integrated circular value chain at scale. Now please turn Slide 15 and let's take a closer look at our new Nat Pet joint venture. A few weeks ago, we announced our agreement to acquire a 35% share of National Petrochemical Industrial Company or Nat Pet from Alujan Corporation in Yanbu, Saudi Arabia. The joint venture is a great example of how we are growing our core businesses with advantaged assets by leveraging LYB's leading technology and global market Today, Nat Pet consists of 400,000 tons of propane dehydrogenation or PDH capacity that converts cost advantaged Saudi propane into propylene monomer to feed a 400,000 ton polypropylene unit Utilizing LYB's proprietary SPHERIPAL technology. The assets have been operational since 2,009 and generated an annual average of US155 $1,000,000 in EBITDA over the 5 years from 2018 to 2022.

Speaker 4

Nat Pet's PP products serve a diverse range of customers across global markets. As part of the transaction, LYB will leverage our global marketing network sell a majority of the product on behalf of Nat Pet creating a new revenue stream for LYB. Nat Pet's assets are 1st quartile have the advantage of sourcing local Saudi propane feedstock at a discount to global prices. Also, our investment in Nat Pet provides a platform for continued growth. In 2022, BAT Pet was awarded a new feedstock allocation that could support additional capacity.

Speaker 4

The partners are evaluating a second PDH and PP asset on the site that would benefit from meaningful synergies. Previously, Allogene selected LYB Spherozone polypropylene technology for the potential expansion. The high performance polypropylene solutions enabled by terry SpheroZone Technology provides the potential to expand Nat Pet's production into new applications and markets. We expect our investment in Nat Pet will exceed our 12% target for unlevered internal rates of return. Additional capacity could provide even higher returns.

Speaker 4

We expect the transaction will close in the first half of twenty twenty four following regulatory approvals and other customary closing conditions. With that, I will turn the call over to Kim.

Speaker 5

Thank you, Ken. Please turn to slide 16 as we take a look at our Intermediates and Derivatives segment. 4th quarter EBITDA was $265,000,000 Oxyfuel margins declined due to a significant decrease in gasoline CAC spreads as well as an increased supply of oxyfuels after industry downtime during the Q3. Styrene margins were pressured due to higher benzene feedstock Costs, LIFO inventory charges were approximately $95,000,000 In the 4th quarter, we recognized an impairment of $192,000,000 related to our POSN joint venture in the Netherlands. We operated our assets at a rate of approximately 70% during Q4

Speaker 2

due

Speaker 5

to low demand as well as planned and unplanned downtime across most businesses. As we begin the Q1, Oxyfuel margins remained similar to 4th quarter levels. We anticipate higher volumes across the segment After downtime in the Q4 and plan to operate across the IND segment at approximately 75% in the Q1. These operating rates reflect the impact of the recent winter freeze event resulting in unplanned downtime at our U. S.

Speaker 5

Gulf Coast assets. In December, we announced an agreement to divest our ethylene oxide and derivative business to INEOS for $700,000,000 As Peter mentioned earlier, we are taking decisive actions to grow and upgrade the businesses and assets that align with our long term strategy, while exiting businesses where LYB does not have a path to a leading position. We expect the transaction will close in the quarter following regulatory approvals and other closing conditions. Please note that the agreed transaction price is pretax and that these assets are heavily depreciated. Now let's turn to Slide 17 and discuss the results of the Refining segment.

Speaker 5

4th quarter EBITDA was $51,000,000 including charges of $40,000,000 of LIFO inventory valuation. Refining margins compressed due to lower gasoline crack spreads. During the quarter, we operated the refinery at 85% due to planned and unplanned downtime with an average crude rate of 230,000 barrels per day. In the near term, we expect gasoline crack spreads will improve offset by lower distillate cracks. We plan to operate the refinery at approximately 80% of capacity in the Q1, including a planned coker outage with an estimated EBITDA impact of $50,000,000 Our team remains highly focused on safe and reliable operations as we continue to run our refining assets through no later than the end of the Q1 of 2025.

Speaker 5

With that, I will turn the call over to Torkel.

Speaker 6

Thank you, Kim. Now let's review the results of our Advanced Polymer Solutions segment on Slide 18. 4th quarter EBITDA declined to $12,000,000 Margins were pressured by higher raw material cost and volumes decreased due to seasonally lower 4th quarter demand with a slowdown in December due to customer outages. Life Inventory Valuations benefits were $10,000,000 Looking ahead, we see signs of market recovery and expect modest demand improvement in the Q1. This year, we continued our transformation journey with Advanced Polymer Solutions.

Speaker 6

APS results in 2023 were lower than 2022 and not reflective of our financial expectations for this business. Success with APS customers is largely based on project by project qualification. Today's underperformance is indicative of our low success rate in gaining new qualifications during prior quarters. However, our laser focus on our customers is gaining momentum. We have seen a step up in our recent our customer satisfaction.

Speaker 6

With an organization that is focused and accountable, we're making steady progress as we rebuild our project growth funnel. Our growth pipeline is already delivering. During the Q4 of 2023, volumes improved by 2.5% over the prior year. I want to congratulate the APS team for achieving record safety performance in 2023. I truly believe our customer focus as measured by our recent customer satisfaction survey, our progress In refilling our growth funnel and our superior safety results reflect our attention to detail that provides a leading indicator for operational performance and eventual financial results.

Speaker 6

With that, I will return the call back to Peter.

Speaker 2

Thanks, Dortel. I would like to thank the entire Leindel Basel team for delivering such resilient results during a very challenging year. To close out on the segments, let's turn to Slide 19 and discuss the results for our Technology business on behalf of Jim Stewart. During the Q4, licensing revenue moderated after exceptionally strong results in the 3rd quarter due to the timing of licensing milestones. Nonetheless, EBITDA for the segment exceeded The Q4 of the prior year.

Speaker 2

4th quarter Catalyst volumes were higher than any quarter since the Q3 of 2022. 1st quarter results for the Technology segments are expected to improve due to increased licensing revenue and a further rise in catalyst volumes compared to the Q4 of 2023. As Ken mentioned earlier, we will utilize our proprietary Moritec technology as we build our first commercial scale advanced recycling plant in Germany. I'm very proud of the work our R and D team embarked on years ago to develop this differential and advantage technology from lab to commercial scale. Let me now summarize our outlook with Slide 20.

Speaker 2

As we begin 2024, majority of our businesses are continuing to face the slow demand seen in the Q4 of 2023, But we are seeing a few early signs of improvements. Our North American O and P business is seeing modest demand improvements. In Europe, Order trends are improving from a very low level as our O and P customers begin to pursue modest restocking. For the year, we expect normal seasonal demands improvements to begin near the end of the Q1 and continue through the summer. As we progress through the second half of the year, we expect demand to benefit from moderating interest rates and reduced inflation.

Speaker 2

Durable goods are a critical market for LYB's products. Demand for durable goods lagged the economy during 2022 2023 as markets digested the extraordinary high levels of consumer activity that prevailed during pandemic era stimulus. We expect that moderating interest rates, reduced inflation and infrastructure related stimulus spending We'll begin to support the gradual return to healthier demand for durable goods during the second half of this year. China is the largest market for Chemicals, exceeding North America and Europe combined. And we continue to watch closely for targeted stimulus and other measures that could drive improved economic growth in China.

Speaker 2

In the meantime, LYB will continue to advance on our strategic goals. We are actively managing our portfolio to grow and upgrade our core businesses. You will continue to see actions supporting the growth of regional hubs that will serve as the engines for our profitable Circular and Low Carbon Solutions business. And our work to embed value creation into our corporate culture will continue to deliver results through our value enhancement program. We're now pleased to take your questions.

Operator

With Evercore ISI. Please proceed with your question.

Speaker 7

Hi, thank you. Peter, I was wondering if you could just Dig in a little bit on the expectations for the second half and maybe just a little bit more on the O and P businesses. What kind of recovery are you kind of underwriting in your outlook? And how do you think that plays out? And Any guidepost beyond the statements on durables we should be thinking about as the year progresses?

Speaker 2

Thank you, Stephen. As usual, very good question from your side. To start with, as we alluded to, I mean, we're still, I mean, a bit prudent on the guidance for Q1. But when we are looking at the second half of this year, a couple of things that I want to point to. This has been the longest downturn that we have seen as far as I can look back in our history.

Speaker 2

So one would expect, I mean, that there will be, If you look at inflation rates going down, interest rates going down, more consumer confidence In Europe, maybe also in China, that demand would go up. So from a demand side, One would expect that demand would go up. And that covers not only the O and P business, but also if you look at durable goods especially, As we all know, I mean, demand has been very low last year in durable goods, which of course has a lot to do with very high interest rates and therefore consumer behavior. So also here, you would expect, I mean, that durable goods demand would go up, I mean, especially in the second half of this year. United States, as you know, has been quite robust.

Speaker 2

I mean, we have been able to navigate. You see robust margins also on the polyethylene side. And also here, as you know, I mean, inflation rates are going down. You see already a little bit of indications there is more house builds, houses that are being sold, and that, of course, has a direct impact then on demand for durable goods.

Operator

Thank you. Our next question comes from the line of Steve Byrne with Bank of America. Please proceed with your question. Mr. Byrne, your line is live.

Speaker 8

Sorry about that. It seems like you're seeing roughly yes, pardon me, I was on mute. Sorry about that. Just regarding this Nat Pet joint venture, it seems like it's roughly 10 times EBITDA. Is that roughly right?

Speaker 8

And do you see potential for this investment to generate a higher EBITDA down the road? And I Just wondering the basis for that investment given it seems like polypropylene is a bit oversupplied. And I guess my other question on it would be, What are the contract terms for the propane that you get from Saudi? Any risk that price could get escalated down the road?

Speaker 2

Thank you, Steve. Also good question on net pads. First of all, I mean, we're very pleased that we were able to sign this deal that has been Work of a core team in our company, where I was personally, of course, deeply involved during quite An important period of time to come to this conclusion. When you look at the amount of money that we paid and Ken alluded to that in his remarks. Then one cannot just look at the EBITDA, mid cycle EBITDA, the €150,000,000 for the entire company.

Speaker 2

But what you don't see and what needs to take into consideration is the fact that we are the path to market. So we are generating value for the company that comes out of selling the products outside of Saudi Arabia to our other markets. And therefore, also strategically very important because we have a very sustainable Low cost feedstock basis that we have negotiated, that is included in the deal so that we are better positioned in polypropylene to go to certain markets where maybe today we don't have the best position. And here, Let's not forget that we did close one line at our Brandisi asset in Italy as well. In addition to that, as we alluded to, we have the income streams generated out of our license agreements.

Speaker 2

We have the opportunity to continue to invest with the second line next the existing lines to capture synergies there. And that's why Ken alluded to the fact that with the current deal, we are an IRR, which is above 12%. But then as we do the 2nd step, then we would be higher I would say, I mean, quite higher than 12% IRR. Now the final investment decision gets, but it is also part of the considerations in doing that first step.

Speaker 3

Hey, Stephen, the multiples, probably close to 9 versus 10 just for clarity.

Speaker 2

Without taking into consideration, I mean, marketing fees, etcetera, etcetera.

Operator

Thank you. Our next question comes from the line of Patrick Cunningham with Citi. Please proceed with your question.

Speaker 9

Hi, good morning. Maybe within the $800,000,000 in growth CapEx allocated for this year, How much of that is directly related to circular and low carbon solutions? And beyond that, what should we expect in terms of inorganic growth and additional investments in that space for 2024?

Speaker 2

I will Just referring to the Capital Markets Day, we said about 15% over the cycle. Michael, you want to add something to that, I mean, for next year?

Speaker 3

Yes. I mean, what I'd say is that the guidance that we gave at Capital Markets Day for CapEx remains intact. As a reminder, we said over the period $23,000,000 to $25,000,000 on average, we'd spend $2,000,000,000 We guided to $2,100,000,000 today. And as Peter said, the expectation for the CLCS, our circularity business, it's about 15% to 20% over the period. Now specifically around inorganic growth, I'd probably say a couple of things.

Speaker 3

I think at our Capital Markets Day, we were clear that we hope to get some M and A done over the next few years. Think we were pretty clear of the criteria that we shared in regards to growing and upgrading the core. I think the Sasol joint venture, Our new POTBA facility, the circularity investments that we've made and the refining exit are all great examples. And then our recent announcement of our EO and DX, it is another great example. And quite frankly, it was a great valuation with the best owner mindset.

Speaker 3

We also shared our approach to growth through M and As and joint ventures at our Capital Markets Day. And I think with our DAPT acquisition, we're off to a great start and this clearly fits the framework which we shared back in March. And then it also has a great opportunity for future attractive growth. And then finally, at our March Capital Markets Day, we shared our goal of getting to $10,000,000,000 of EBITDA normalized EBITDA in 2027, which assumed we would deploy roughly The remaining 30% of our free cash flow that we haven't returned to investors to fund our future M and A ambitions. But I want to be clear about a couple of things.

Speaker 3

Our commitments to investors remain steadfast and our capital allocation principles and priorities remain unchanged. We will be disciplined acquirers. We will not burn your cash. We will not build a lazy balance sheet. And if we can't find compelling transactions, we'll give back more

Operator

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

Speaker 10

Thank you. Good morning. Peter, just in IND, how much of the PO TBA plant contributed in 2023? Do you think mid cycle earnings power here is still with the new TBA plant above $2,000,000,000 And when do you think you'll start achieving a run rating at that mid cycle earnings level. Thank you.

Speaker 2

Happy birthday, Dave. Yes, happy birthday, Dave. Heard that you have your birthday today.

Speaker 10

Thank you very much.

Speaker 2

Yes. Good question. I mean, if I take one step back On the I and D business in Q4, maybe a couple of numbers and stay with me. So €265,000,000 excluding identified items is the EBITDA that we generated in Q4. But one needs to take into consideration, of course, that we had a heavy LIFO impact of €95,000,000 So if I add, I mean, the LIFO impact of €95,000,000 then actually the underlying results were €360,000,000 For Q4, comparing to Q4 2022, which was €291,000,000,000 So a quite underlying performance, good quarter in I and D.

Speaker 2

And I did not even take into consideration the fact that we had scheduled turnarounds In Bottlake as well as in Bayport, so we alluded to that, I mean, in our guidance at the time when we released the Q3 results of an impact of about $120,000,000 So underlying quite a good quarter in I and D. And of course, part of that was also due to the fact that we very successfully started up our POTBA plant. The new PEO TBA plant, we alluded to mid cycle margins, €450,000,000 We said last year In year 1, so that means 2023, we would run at a minimum of 50% nameplate capacity. We overachieved that target. We ramped at approximately a little bit more than 60%, I would say.

Speaker 2

And then also when we look at this year, we will continue to ramp up, but we will do it in a very disciplined way, reflecting on on market demand for propylene oxide and oxyfuels, but one may see further progress, I would say, probably going to 70%, maybe exceeding 70% capacity utilization. And then when we move into 2025, That's where one would see the full benefit of the POTBA plant, but in terms of capacity utilization.

Operator

Thank you. Our next question comes from the line of Vincent Andrews with Morgan Stanley. Please proceed with your question.

Speaker 1

Thank you very much. Just on the value enhancement program, I'm just trying to understand the impact to 'twenty three and 'twenty four A bit better. If we just sort of kind of look at a ratio of sort of what that to 2019, EBITDA was at Lyondell then versus what it was in 2023. If we apply that to the VEP numbers, would that be about right in terms of what you enjoyed from it in 'twenty three and what you expect in 'twenty four?

Speaker 3

Yes. What I'd say, I mean, hopefully, you heard my prepared remarks, Vincent. So the benefit, the actual benefit in our P and L for 2023 was approximately $300,000,000 And then we guided for 2024 for an exit run rate of $600,000,000 Now if you try to draw a line from 23 to 25, it looks like that kind of the pace of change slows a bit. But keep in mind that Last year, we focused on low hanging fruit, things that didn't require investment and that we could execute upon very quickly. So we're in Kind of building up our projects again as we sit in this year, but we have high, high confidence in the outlook that we gave up to $1,000,000,000 in 2025.

Speaker 3

And again, dollars 300,000,000 of P and L benefit in 'twenty three. Actual.

Operator

Thank you. Our next question comes from the line of Michael Sison with Wells Fargo. Please proceed with your question.

Speaker 11

Hey, cheers. In terms of 2024, a lot of chemical companies who reported thus far has sort of said their earnings could recover or be better in 'twenty four versus 'twenty three. It sounds like your first half is going to be a little bit challenged with demand being weaker and the second half being a little bit better. So when you sort of total up potentially what you see in 2024, Should earnings be up, flat or down or just maybe directionally for the full year, how do you think about the setup for earnings?

Speaker 2

Well, Michael, I think you said it yourself. I mean, Q1, still modest. Q2 seasonal demands, I mean, picking up. And then what I said at the beginning also, second half of the year, We see we expect at least, I mean, that we will see interest rates going down, demand for durable goods, I mean, going up, some recovery in Europe, some recovery in China. So as a consequence, if you add it all up, We'd expect that earnings are going to be better than last year.

Speaker 3

But mostly in the second half?

Speaker 2

To be clear.

Operator

Thank you. Our next question comes from the line of Arun Viswanathan with RBC Capital Markets. Please proceed with your question. I'm sorry, we'll go on to our next question Comes from the line of Kevin McCarthy with Vertical Research Partners. Please proceed with your question.

Speaker 4

Yes. Good morning and thank you. In 2024, would you expect your regional mix of earnings to differ materially from 2023. Part of the reason I ask is it looks like you're guiding to a tax rate of 20% and often regional mix is the reason behind that, but perhaps there are other reasons you might call out. Maybe you could just kind of Talk through the dynamics there would be helpful.

Speaker 3

Yes. Hey, I'm happy to talk through it. So Yes, I mean, the ETR we guided to of 20% is up roughly 1 percentage point versus What was in 2023? So not a huge story. There's a few give and takes.

Speaker 3

Now we did guide our cash tax rate to be up A couple of percentage points versus last year and also our ETR from 2023. And that's largely driven by a decrease in U. S. Tax depreciation and also the gain on the sale of our EOD business.

Operator

Our next question comes from the line of John Roberts with Mizuho. Please proceed with your question.

Speaker 1

Thank you. Could we get an update on your China operations both in PO Styrene and your polyolefins JVs?

Speaker 2

Yes, John, I mean, and welcome back. Let me give that question, I mean, to Ken, given the opportunity.

Speaker 4

Yes, sure. I'll take the question For O and P and then maybe Kim you can comment on IND, but for O and P we continue to operate the joint venture at technical minimums. The focus really is on finding better product mix and customer mix in region. Our focus when we entered that joint venture was to build out an increased presence in the domestic market because we do market the high density polyethylene and polypropylene from the asset. The team did a great job with that last year.

Speaker 4

So earnings of course are still very challenged in China. If you look at Average margins, they're still slightly negative, which we're seeing that in our asset. Even with a new world scale asset, It still is a very challenging market and we expect to start to see some improvement in that in the second half of the year. But so far, demand has been, I'd say modestly improving, but haven't seen really an improvement in margins yet. Kim?

Speaker 5

I would say as it relates to the joint ventures we have on the propylene oxide side. We ran both of those JVs above 95% operating rates last year, excluding a turnaround, which was significantly higher than other PO plants in that region. As Ken alluded to, the margins were rather thin. We saw high raw material costs and we also saw high utilities. But as we've mentioned before, these are the best technologies that we have in the region.

Speaker 5

They are very cost competitive. They sit on integrated sites owned by a very good operator with expertise in both of these technologies. And we think as we go forward, we have huge potential here.

Speaker 2

And may I add, I mean, to that also, you probably noticed Some news flow around China phasing out chlorine based oxide capacity in China that would be phased out, I mean, over time, which also It fits, I mean, for us, very well together with our global strategy, the successful start up of our POTBA plant And now we are running this business successfully under Kim's leadership from a global basis.

Operator

Thank you. Our next question comes from the line of Mike Leithead with Barclays. Please proceed with your question.

Speaker 9

Great. Thank you. Good morning, guys. I wanted to ask around O and P EAI. EBITDA has been below breakeven, I think, 4 of the last six quarters and I appreciate demand isn't great across most markets, but it just seems like there's been a bit of a shift here versus the profitability in the past decade.

Speaker 9

So we need to take a bigger restructuring overhaul to make this business profitable again? Do we need to wait for the world to get better? I mean, just how are you approaching that business here in 2024?

Speaker 2

Yes. Thank you, Mike. A very good question. And you've seen from our actions already last year that we are turning around, I mean, every stone. We did shut down then one line in Brindisi, which is an important capacity.

Speaker 2

We've seen that has been a couple of other announcements in the marketplace in terms of consolidations. We continue to look, of course, at the entire portfolio. That's what you would expect us to do. But having said that, if I also reflect back on Q4, I mean, the big picture on Q4 for the company for us was towards the end of the year, we wanted to also optimize our cash flow and working capital, and we freed up about $700,000,000 in working capital in that Q4. So and as a consequence, of course, also, Ken steered his business towards Lower than what we have originally guided to, 75% of capacity utilization was the guidance.

Speaker 2

We reduced at really, I mean, surprisingly low levels, 65% of our capacity utilization, again, in the context Hope also, with the current market environment, optimizing our working capital. Ken, anything you want to add?

Speaker 4

That's it. I mean, that just impacted the P and L with the absorption of the fixed costs that go along with that. But we pulled hard on the working capital lever and we're going to continue to stay on maximizing cash flow, the challenging environment.

Speaker 2

Yes. And we see the future also in Europe. I mean, you see also that regulation is progressing in terms of Renewable and Circular Solutions, which is actually also what we are focusing upon, I mean, with Quite a lot of activities in terms of building up our Cologne HAP, HAP2, I mean, the final investment decision for our Moritec 1 facility, but lots of joint ventures and feedstock corporations that we have built up in the meantime. So that's in Europe, I continue to believe that these circular and renewable solutions, they demand, I mean, local supply chains. So therefore, it will be very important to have such a leading position in the local market with the access to brand owners or EPS business, Access to OEMs as well.

Operator

Thank you. Our next question comes from the line of John McNulty with BMO Capital Markets.

Speaker 1

Just a follow-up on the Nat Pet joint venture. I guess, Can you help us to understand in terms of the ability to upscale that with the additional allocation, is it similar in scale or size, would it be kind of the 400 kta? And also when you think about the timing of financial investment decision and also how the capital gets allocated? Is it going to be proportional Is it the same kind of 35%, 65% or is there some different variation to that? Can you help us to think about those?

Speaker 2

Yes, the current capacity, as you rightfully said, is around, I mean, 400 kt. So with the other technology that Ken referred to, I mean, we would be able, I mean, to scale up to a total capacity of 1,000,000 tonnes. Again, we have 35% of the joint venture. So that 35% is valid, I mean, for the current capacity, but would then also be valid, I mean, for future capacity if we take a final investment decision. And some more information that you want to share?

Speaker 2

Yes.

Speaker 4

I'll just add that part of the synergy that you had talked about before is That region is short of propylene and so we're going to have additional propylene capacity with this expansion, which is one of the synergies around potentially executing that. But It will be financed by the joint venture and yes, it will be proportionate for the shareholders, but we don't expect to be putting cash in. That's going to be something financed by the joint venture.

Operator

Thank you. Our final question this morning comes from the line of Matthew Blair with Tudor, Pickering, Holt. Please proceed with your question.

Speaker 8

Good morning. Looking at the 70% payout target versus free cash flow, Just in the context of increasing CapEx, when you're considering these payout targets, why is the denominator free cash and not more of like a cash from operations. Don't you need to balance these returns on the growth investments against returning cash to investors?

Speaker 3

Not sure I fully understand your question, It's pretty typical when you're giving payout targets to give it on the free cash flow line versus operating cash flow.

Speaker 2

And then we also at the Capital Markets Day guided towards, I mean, that what is the CapEx level that we are investing? So sustainable CapEx around, I mean, that SEK 1,200,000,000, SEK 1,300,000,000 a year. And then the growth CapEx, we also said we're going to be pretty much in the range of our historic spending, somewhere between €2,000,000,000 and €3,000,000,000 on a yearly basis, depending on how these projects come. So think that helps you. I mean to do the back of the envelope calculation, whatever cash flow number you take.

Operator

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

Speaker 2

Okay. Thank you again for all the excellent questions. And of course, I also want to thank our global team for delivering outstanding value and maximizing cash conversion during these challenging times. We look forward to sharing more updates over the coming months We have further progressed on our long term strategy. We wish you all a great weekend and stay well, stay safe.

Speaker 2

Thank you.

Operator

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

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Earnings Conference Call
LyondellBasell Industries Q4 2023
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