LyondellBasell Industries Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
February 3, 2023

There are 18 speakers on the call.

Operator

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 conference 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 It is available on our website at www.lyondellbasell.com/investorrelations. Today, we will be discussing our business results while making reference to 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, forward looking statements are subject to significant risk and uncertainty.

Speaker 1

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 the 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 March 3rd by calling 877-660-6853

Speaker 2

in the United States and

Speaker 1

201 6,127,415 outside the United States. The access code for both numbers is 1,000,000,000,000,000,000,000 Joining today's call will be Peter Banneker, LyondellBasell's Chief Executive Officer our CFO, Michael McMurray Ken Lane, our Vice President of Global Olefins and Polyolefins Kim Foley, our EVP of Intermediates and Derivatives and Refining and Torkel Reman, our EVP of Advanced Polymer Solutions. During today's call, we will focus on Q4 and full year 2022 results, current market dynamics and our near term outlook. With that being said, I would now like to turn the call over to Peter.

Speaker 3

Thank you, David, and welcome to all of you. We appreciate you joining us today as we discuss Our Q4 and full year 2022 results. Let's begin with our safety results on Slide number 3. LyondellBasell's employees and contractors delivered an outstanding safety performance during 2022. Injury rates at our company have consistently been among the lowest for our industry.

Speaker 3

But last year, we reduced the rate of injuries across our global workforce By roughly 1 half to 0.12 injuries per 200000 hours worked. At our Bayport complex outside of Houston, our team finished 2022 with over 6,000,000 consecutive safe work hours, A new company record. Simply put, a consistent focus on safe work is embedded in our company's DNA and provides a solid foundation for extending that shared focus across other dimensions of the company's culture. Let's now turn to Slide number 4 to discuss our financial results. 2022 was a very challenging year characterized BioWare and Ukraine evolving responses to the COVID pandemic, energy volatility, inflation and rapidly changing monetary policies.

Speaker 3

At LyondellBasell, our portfolio of businesses continued to provide value for our global customers with products and solutions that are essential for modern society. In 2022, LyondellBasell delivered earnings of $12.46 per share with EBITDA of $6,500,000,000 Cash generation was exceptional and resulted in $6,100,000,000 of cash from operations, second only to our 2021 results. We ended the year With $6,000,000,000 of liquidity supported by a strong investment grade balance sheet, return on invested capital was 16%, Far exceeding our cost of capital. In addition to our focus on safety, we are sharpening our strategic focus to maximize value Our customers, shareholders and society under a range of scenarios. On Slide number 5, we outline our progress on delivering value from this strategy over the past year.

Speaker 3

Our leadership in cost management and operational excellence Enable Klein Del Basel to hold fixed costs well below inflation and quickly adjust operating rates in response to evolving market conditions. Our diverse global business portfolio provided outstanding cash generation during a challenging year. And at the same time, we position the portfolio for changing times with decisions to exit refining and sell our Australian polypropylene business. We established a new business unit focused on establishing leadership in providing circular and low carbon solutions for our customers. And we are advancing our supply chains, production capacity and sustainable assets to serve rapidly growing markets for these circular And low carbon products.

Speaker 3

Last quarter, we announced our increased focus on capturing value as we continue to manage costs. We expect our value enhancement program will generate at least $750,000,000 in recurring annual EBITDA by the end of 2025. Our increased focus helped drive 13% point improvement in cash conversion in 2022. That further bolstered our capital structure and supported generous shareholder returns. On Slide number 6, I would like to highlight our recent decisions to accelerate progress on our climate targets and create more value by doing so.

Speaker 3

In order to meet the goals of the Paris Climate Agreement, climate scientists believe that global warming should be limited to no more than 1.5 degrees Celsius above Pre industrial levels. In December, we announced our decision to increase LyondellBasell's 2,030 targets For reducing Scope 1 and Scope 2 emissions to 42% and established a new Scope 3 emission reduction target of 30% relative to 2020 levels. Our targets are now aligned with the science based guidance And the 1.5 degree Celsius scenario. In addition, as we continue to make progress in sourcing favorably priced Renewable electricity, we have increased our 2,030 goal to procure at least 75% of our global power generation needs From renewable and low carbon sources. Earlier this week, we announced our first two renewable power purchase agreements in Europe And 2 additional agreements in the United States.

Speaker 3

Altogether, we now have 8 agreements in place for 9 30 Megawatts Our renewable power capacity, which represents roughly 1 third of our global needs. These agreements will prevent nearly 1,000,000 tonnes of annual greenhouse gas emissions. All of this work supports Our goal to become net 0 in scope 1 and scope 2 emissions by 2,050. At the same time, we continued To build global businesses that will sell at least 2,000,000 tonnes of recycled and renewable based polymers by 2,030. On Slide number 7, let's take a look at how we are building our circle in brands of recycled and renewable based polymers.

Speaker 3

During the Q4, we announced progress in developing 4 new plastic waste sorting and recycling facilities in Houston, Germany, India and China. These facilities provide a strong foundation for a robust global supply chain for plastic waste feedstocks. And with our 3 product platforms, Circle and Recover for mechanical recycling, Circle and Re5 For Advanced Recycling and Circle and Renew for renewable based feedstocks, LyondellBasell will be able to match both feedstocks and products with the highest value solutions for our customers. The combination of our focus, scale, technologies And Global Platforms provides LyondellBasell with powerful advantages to build a world leading circular and low carbon solutions business. Now with that, I will turn the call over to Michael first and then to each of our business leaders, who will describe our financial and Segment's results in more detail.

Speaker 4

Thank you, Peter, and good morning, everyone. Please turn to Slide 8, and let me begin by highlighting our excellent cash generation from our business portfolio during 2022. LyondellBasell generated a total of $6,100,000,000 of cash from operating activities over the past year.

Speaker 3

Our

Speaker 4

cash on hand increased to $2,200,000,000 at the end of the Q4. During 2022, we achieved Cash conversion of 96%, 13 percentage points higher than our 2021 cash conversion. In the Q4, cash conversion reached an outstanding rate of 203%. This efficient and robust cash generation Allow the company to return a total of $3,700,000,000 to LyondellBasell shareholders in 2022. Let's continue with Slide 9 and review the details of our capital allocation over the past year.

Speaker 4

Our approach remains focused on disciplined capital allocation and strong returns for our shareholders. During 2022, cash from operating activities fully funded dividends, share repurchases and capital expenditures. We returned approximately 60% of the cash from operating activities to shareholders. This included $3,200,000,000 And quarterly and special dividends and $420,000,000 in share repurchases. In May, we increased our quarterly dividend By 5%.

Speaker 4

This represents our 12th consecutive year of annual dividend growth. We continue to invest in maintenance and growth projects with $1,900,000,000 in capital expenditures. A significant portion of this capital Funded the final stages of construction for our Wolfscale POTBA plant. Start up activities remain on track for the end of this quarter. Our transformation office is working across our company to rigorously manage and track the progress of our value enhancement program.

Speaker 4

We look forward to sharing the progress of this program at our Capital Markets Day in March. Now, I'd like to provide an overview of the quarterly results For each of our segments on Slide 10. LyondellBasell's business portfolio delivered $865,000,000 of EBITDA During the Q4, our results reflected margins stabilizing at the low levels seen toward the end of the third quarter. Moderating energy and feedstock costs provided modest offsets for compressed margins in our olefins and polyolefins businesses. Overall, O and P demand remains low, particularly in Europe and China.

Speaker 4

Intermediates and derivatives results sequentially declined on lower volumes due to the quarterly timing of oxy fuel vessel shipments. Margins in our oxy fuels and refining businesses remained above historical averages as demand for fuels remained strong due to increasing global mobility. High costs for utilities and raw materials coupled with low seasonal demand negatively impacted our Advanced Polymer Solutions segment. Across the portfolio, a non cash LIFO inventory valuation charge impacted pretax 4th quarter results by approximately $90,000,000 4th quarter LIFO charges were approximately $15,000,000 for O&P Americas segment, dollars 50,000,000 For the O and P EII segment, dollars 25,000,000 each for the intermediates and derivatives in APS segments, $15,000,000 for the Technology segment and a $40,000,000 benefit for the Refining segment. As a reminder, Volatility in natural gas prices impacts our cost for not only gas, but also steam and electricity.

Speaker 4

We estimate that $1 per 1000000 BTU change in the price of natural gas impacts the energy cost of our directly operated assets By approximately $175,000,000 per year across the company, with 80% of this impact in North America and 20% in Europe. These estimates do not include the impact of gas prices on feedstock cost. Before I turn the call over to Ken and then to each of our business leaders, who will describe our results in more detail, let me address some of your annual modeling questions for 2023 on Slide 11. As our new world scale POTBA plant ramps up, we expect to produce and sell about half of the assets nameplate capacity In 2023, we remain confident that our value enhancement program can achieve recurring annual EBITDA About $150,000,000 by the end of 2023 through the execution of about 1,000 projects. In order to achieve this benefit, we expect to incur a similar amount of one time capital and operational cost of about $150,000,000 With the majority of these costs allocated to capital.

Speaker 4

Major planned maintenance for 2023 Include a turnaround at 1 of our Midwest ethylene crackers in the O&P Americas segment, turnarounds at our Acetyls assets and 3 Propylene oxide plant turnarounds within our I and D segment. Based on expected volumes and margins, we estimate that lost production associated with all of this maintenance downtime will impact 2023 EBITDA by approximately $290,000,000 While routine maintenance costs are expensed, maintenance costs arising from turnarounds of major production units are capitalized and included in our capital expenditure forecast. During the Q4, we recognized costs related to the exit from our refining business, Which impacted EBITDA by $73,000,000 As I mentioned last quarter, we expect the business will incur similar EBITDA impacts During each quarter of 2023, we will also recognize about $55,000,000 each quarter for depreciation charges to reflect cost accrued For asset decommissioning that will be incurred after the asset shuts down. We expect that our capital expenditures Will decline by about $300,000,000 to approximately $1,600,000,000 this year with the completion of the POTBA plant And disciplined spend resulting from the current business environment. Approximately $500,000,000 of this CapEx is targeted towards profit generating growth projects With the remaining balance supporting sustaining maintenance, we expect that this year's capital requirements for the value enhancement program will be funded within our $1,600,000,000 CapEx budget.

Speaker 4

Other financial metrics worth noting include net interest expense, depreciation and amortization, pension related estimates And tax rates, we expect 2023 net interest expense will be approximately $405,000,000 Depreciation and amortization charges for 2023 are expected to be $1,400,000,000 which includes the $220,000,000 of additional refinery Depreciation charges related to asset decommissioning. We plan to make regular pension contributions in 2023, totaling about $65,000,000 With approximately $105,000,000 of pension expense for the year, we expect our effective tax rate will be approximately 20% and our cash tax rate Will be lower than our ETR. With that, I'll turn the call over to Ken. Ken?

Speaker 5

Thank you, Michael. Let's begin the segment discussions on Slide 12 with the performance of our Olefins and Polyolefins Americas segment. 4th quarter O&P Americas EBITDA was $359,000,000 Prices and margins stabilized at the low levels we saw at the end of the 3rd quarter. Market demand declined and we also saw customer destocking during the quarter. That combined with new polymer capacity resulted in well supplied markets.

Speaker 5

We operated our assets at approximately 75% of nameplate capacity to match the reduced market demand And manage working capital. During January, we have seen modest improvements in domestic and export demand. Normalization of logistics constraints have facilitated increased export volumes. Also, moderating feedstock and energy costs providing some margin tailwinds. As a result, we expect to operate our O and P Americas asset at an average of approximately 80% during the Q1.

Speaker 5

Looking back at 2022, I want to highlight our progress in developing our Circulon business. We have established projects For plastic waste sorting facilities that will be used to provide feedstock for our Circular Recover and Circular Revive product lines. We are also moving forward at our usage of Olefins feedstocks produced from renewable sources such as used cooking oil. During 2022, we processed 15,000 tons of renewable feedstocks on our Channelview, Texas cracker to produce ethylene, propylene, Ultimately, polyethylene and polypropylene that we sold to customers at premium prices under our Circular Renew brand. Last year, 4 of our U.

Speaker 5

S. Manufacturing sites attained the ISCC plus certification for certain grades of polyethylene and polypropylene. This enables LyondellBasell to offer customers mass valid certificates for these products and serve the market's rapidly growing demand. We are delivering these new Circular Renew products to our customers, improving that polymers can be more sustainable And used in any application where virgin polymer is used. Now please turn to Slide 13 to review the performance of our Olefins and Polyolefins Europe, Asia and International segment.

Speaker 5

In Europe, macroeconomic pressures were exacerbated By high inflation and energy costs that curtailed operations at our customers and pressured consumer demand. LyondellBasell operated our O and P assets at rates of approximately 60% during the Q4. LIFO inventory charges were $50,000,000 during the quarter. All of this combined to result in a 4th quarter EBITDA loss of $152,000,000 European energy costs have considerably moderated in January and demand is showing some signs of improvement Over the extremely low level seen in December, we have completed repairs and restarted our integrated cracker in France at the end of 2022 and expect to operate our European assets at a rate of 80% during the Q1. As in the Americas, we continue to focus on long term strategies to support our circular and low carbon solutions business in Europe and Asia.

Speaker 5

During October, we announced new partnerships for plastic waste sorting facilities in Germany and China and a fully automated mechanical recycling facility in India. These partnerships will allow us to swiftly develop fit for purpose plants in each region to supply feedstocks For our Circulon products and serve the rapidly growing market for Circular Solutions. In November, we announced our decision to move forward with engineering to build our first commercial scale advanced recycling plant in Germany. This plant will utilize LyondellBasell's proprietary MoreTech technology To convert plastic waste from our waste sorting facility into pyrolysis oil that can be used as a feedstock To produce new plastic resins in a circular process. We are moving rapidly to build circular and low carbon solutions for our industry at an unmatched scale.

Speaker 5

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

Speaker 6

Thank you, Ken. Please turn to Slide 14 as we take a look at our Intermediates and Derivatives segment. 4th quarter EBITDA was $291,000,000 styrene margins improved due to lower feedstock costs, Oxyfuel margins remained well above historical 4th quarter averages. Oxyfuel volumes declined As the timing of the vessel sailings resulted in unusually high Q3 volumes, we operated our assets at rates of approximately 75%. Our propylene oxide and styrene joint venture in the Netherlands is expected to restart this month after 3 months of downtime in response to volatile European energy costs and lower demand.

Speaker 6

We look forward to initial volumes from the new POTBA asset in Houston by the end of the quarter. We plan to operate our assets across the IND segment at approximately 80% in the Q1. In January, we are encouraged by unseasonally strong oxyfuel margins with low butane feedstock costs and strong oxyfuel blend premiums. We expect relatively stable margins for the segment for the Q1. We developed multi year maintenance schedules to ensure that our plants can safely and reliably serve our customers.

Speaker 6

As it works out, 2023 will be a heavy year for maintenance across several of our POTBA assets. Maintenance is scheduled for 2 of our 3 POTBA plants at our Bayport, Texas facility in the 2nd and 4th quarters. Our Baatlic POTBA facility in the Netherlands will also undergo maintenance from September through November. We expect the ramp up in volumes of our new plant will be partially offset by lost production from this planned maintenance. Nonetheless, the incremental 2023 PO and TBA volumes should be sufficient to capture typical market growth.

Speaker 6

In 2024, we expect less scheduled maintenance and a full year production from our new assets will provide additional volumes to serve market growth. Now let's turn to Slide 15 and discuss the results of the Refining segment. 4th quarter EBITDA included a LIFO inventory valuation benefit of approximately $40,000,000 Results increased on higher margins and slightly higher volumes following the Q3 planned maintenance, offset by the disruptions of the December freeze. In the Q4, the Maya 2:1:1 spread modestly increased to $48 per barrel, Remaining well above historical averages. Despite unplanned downtime, we operated the refinery at 85% of capacity With an average crude rate of 229,000 barrels per day.

Speaker 6

In January, the Maya 211 spreads Have also been unseasonably strong at more than $50 per barrel, driven by strong discounts for heavy crudes. We expect to operate the refinery at approximately 85% of capacity in the Q1. Finally, I would like to recognize our team at the refinery for finishing the year with 0 recordable injuries in 2022. This is the first time such a record has been achieved in the 104 year history of this facility. Our team is dedicated Safely and reliably operating these assets until we exit the business.

Speaker 6

With that, I will turn it over to Torquil.

Speaker 2

Thank you, Kim. Now let's review the results of our Advanced Polymer Solutions segment on Slide 16. 4th quarter EBITDA declined to $3,000,000 Margins remain pressured by feedstock and energy costs as well as the $25,000,000 non cash LIFO inventory valuation charge. Volumes fell on lower seasonal demand, exacerbated by high power prices that impacted our European customers' businesses. In the Q4, we embarked on a journey to transform the ATS segment.

Speaker 2

Our goal is to sharpen our focus on customer service And product development to maximize value for our customers and for client Del Basel. With increased autonomy and accountability, We are developing a more agile operating model with meaningful regional and segment growth strategies. As part of this transformation, the Catalloy and polybutene businesses will be moved from APS and reintegrated into the OMP segment Beginning January 1, 2023. This move will allow the APS team to sharpen their focus on the compounding business, Distinct from the polymer business of Cataloi and polybutene, which serves our O and P value chain. From a portfolio point of view, we estimate APS will shift approximately $200,000,000 of annual EBITDA between O&P Americas And OMP EAI segments fairly equally.

Speaker 2

We plan to provide additional information regarding the impact of this change in March. I strongly believe that our APS platform has a lot of potential and I look forward to reporting on our team's progress in delivering on this transformation During our Capital Markets Day in March. With that, I will return the call back to Peter.

Speaker 3

Thank you, Torkel, and to the entire LyondellBasell team, Thank you again for all the hard work in delivering strong results during a challenging year. To close out on the segments, let's turn to Slide 17 and discuss the results for our Technology business on behalf of Jim Seward. During the Q4, reduced global polyolefin industry operating rates resulted in lower catalyst volumes. Licensing revenue moderated due to the timing of milestones for revenue recognition. We estimate that the Q1 results for the Technologies segment Will be similar to Q4 2022 as Catalyst volumes improve offset by moderating licensing revenue.

Speaker 3

Our technology team is hard at work advancing engineering on LyondellBasell's first commercial advanced recycling plant. This plant will leverage on proprietary Moritec technology to extract value from post consumer mix plastic waste By closing the loop and producing feedstocks for our Itiline crackers, our technology provides distinct advantages By reducing energy consumption and improving yields through innovative process designs and catalysis. Let me now summarize our results and Q1 outlook with Slide 18. Despite highly challenging markets, Our team is capturing value and moving forward on our strategic priorities. Most importantly, we are sharpening our focus And leveraging the scale of our global portfolio to deliver resilient results.

Speaker 3

We remain focused on LyondellBasell's core values. Last year's outstanding safety performance speaks to the depth with which safety is ingrained in our corporate culture. Our goal is to expand our cultural foundations to encompass a more comprehensive passion for value creation. This week, we welcome Tricia Conley to our Executive Committee as Executive Vice President, People and Culture. Tricia will play a pivotal role in leading LyondellBasell's vision and strategy to enhance the employee experience, Elevate our organizational performance and create the best and most inspiring culture in our industry.

Speaker 3

In 2022, our businesses were pressured by the effects of the war, volatile energy costs, Emergence from the pandemic and monetary policy. We responded by matching our production with changing demand, Leveraging our global business portfolio and maximizing cash generation. Over the past year, our businesses generated over $6,000,000,000 of cash from operations and returned $3,700,000,000 to shareholders in dividends and share repurchases. LyondellBasell's focus and commitment to shareholder returns remains strong. With our newly formed Circular and Low Carbon Solutions business, We're laser focused on meeting the needs of our customers, brand owners and society.

Speaker 3

Our decarbonization goals are now aligned With science based guidance, we have made substantial progress towards our 2,030 goal to procure 75% of our electricity from renewable and low carbon sources. The Circular and Low Carbon Solutions business is well positioned To address the challenges of sustainability and plastic waste, by building an end to end business with robust supply chains, Preparatory technology for transferring materials and our global manufacturing and marketing network, we're confident That we can build a large scale and valuable leadership position in this exciting and expanding market. Now our focus on sustainability is gaining recognition. In December, we were honored to be awarded the EcoVadis Gold Medal For sustainability performance, we have a 91 percentile ranking. The EcoVadis platform is valued By procurement professionals for assisting in the identification and evaluation of sustainable supply solutions.

Speaker 3

We expect modest improvements in the Q1 from moderating energy and feedstock costs, stable demand And the absence of Q4 LIFO charges, normalizing supply chains or enabling improved trade flows from our advantaged feedstock positions in North America and the Middle East. Nonetheless, we will continue to maintain focus and discipline To ensure that operating rates across our global portfolio are matched to market conditions. As the year progresses, we anticipate seasonal demand improvements during the 2nd and third quarter. We're keeping a close eye on China's emergence from COVID and potential benefits from increased economic activity during the second half of twenty twenty three. The most exciting challenge during my first eight months as the CEO of LyondellBasell It's been the process of identifying and building a compelling strategy that generates substantial value For our customers, suppliers, employees, communities and shareholders over the next decade.

Speaker 3

We've shared some initial decisions with you already, but much more is ahead. As you will have recognized, We have not waited until the Capital Markets Day, but started moving ahead with great focus and speed in the right direction. On Slide 19, we ask that you save the date for March 14, when we will share more details on our forward strategy Our Capital Markets Day in New York, and we hope that you can all join us virtually or in person. We are now pleased to take your questions.

Operator

Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. Our first question comes from the line of P. J. Juvekar with Citi.

Operator

Please proceed with your question.

Speaker 7

Yes. Good morning, everyone. Just had a quick question on China reopening. What do you see in terms of Inventory in China at the port and then maybe you can make a comment on your China joint venture with Bora And where are the operating rates there? Thank you.

Speaker 3

Thanks, P. J. This is Peter. Let me take your question First and then eventually Ken can also add something to that. I mean, of course, we talk about China, it's still early stage To say that we see a sustainable recovery, we expect, I mean, that that will take Probably another 3, 4 months until we see that recovery is actually happening.

Speaker 3

So we're still Very modest in our expectations on China, but at least I mean we know that there has been the opening. So the government has changed their way, I mean, how to look at that, at COVID. On Bora, still hanging in there, I would say, not very positive because of the situation and because of Capacity utilization rates locally in the market being at technical minimums. Ken?

Speaker 5

Yes, that's right. We continue to operate the joint venture at technical minimums. We've seen it's been 2 weeks. We're seeing a little bit of Improvement in consumer demand, but it's really far too early to say that that's going to continue. Margins are continuing to be challenged.

Speaker 5

So we're seeing record low spreads there still. So even with that Improvement of demand, it's not translating yet into improved spread. So we're watching that very closely, of course, PJ.

Speaker 3

The situation on PO is not different, I mean, than

Speaker 2

the situation on polyolefins. Correct.

Operator

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

Speaker 8

Yes, thank you. I wanted to just drill into the EAI segment here. Is the EBITDA loss making a result of just the fixed cost absorption of running at 60% or Were cash margins negative in the region in the quarter? And Ken, you mentioned demand improving. Is that sufficient to drive operating rates from 60% to 80%?

Speaker 8

Do you think that Margins will remain stable or do you see risk to that given Others may restart with lower energy costs as well.

Speaker 3

Thank you, Steve. Good question. And the other aspect that I would add, I mean, to what you to your question is, of course, also on the energy costs. As you know, I mean, energy costs have also moderated on a still very high level. Yes, so Factor VIII more expensive versus the United States, but at least, I mean, we're not at that peak anymore, also helped, I mean, by The winter that has been very moderate so far in Europe.

Speaker 3

So I would hand over, I mean,

Speaker 5

to give a bit more

Speaker 3

Color to what is happening in the market to Ken?

Speaker 5

Yes. Thank you. And just To remind you, we did have that LIFO charge in the Q4 of $50,000,000 So but looking at what we see coming out of the Q4, we hit a very Low point there because demand was coming off, energy costs were high, they moderated at the end of the quarter and we're seeing that continue in the Q1. We also had our bear cracker down during the Q4. So that's why our operating rates were lower.

Speaker 5

Those repairs are complete. The Crackers back up. Similar to what we see in China, we're seeing some improvement in consumer demand. But again, I would say it's still early. Let's not Call it a win, yes, but we're definitely seeing some early signs of consumer demand improving there.

Speaker 5

So overall, the margin environment is going to improve mainly because of what Peter had said around the energy costs.

Operator

Thank you. Our next question comes from the line of Christopher Parkinson with Mizuho Securities. Please proceed with your question.

Speaker 9

Great. Thank you

Speaker 10

so much. Could you just just given your outlook on various regional operating rates and what's been happening across NGLs and feedstocks, Could you just give us your latest update on the NGL front and what that just generally means for the progression of integrated PE margins throughout the year? Thank you so much.

Speaker 3

Yes. Thank you, Chris. Ken, do you want to? Sure.

Speaker 5

Yes, I'll take that. Listen, NGL production continues to increase. So we expect that to be a Tailwind, especially for our position here in North America. The oil to gas ratio is going to be continue or continue to be favorable for our portfolio. We We don't see that really changing.

Speaker 5

We do expect that there could be some strengthening in the oil price as we go through the year just as demand potentially comes back with China reopening. So all in all, I would say that the environment today should be better than where we were in the second half of last year Around feedstocks and energy costs for our portfolio.

Speaker 3

I think net cash, I mean, Henry, you have to know what $2.40 That's right. Back to where it

Speaker 5

was in the first half of twenty twenty one.

Operator

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

Speaker 11

Hi, good morning. This is Bhavesh Ladaya for John. You highlighted improving operating rates in North America in the Q1. As we think about 2023, what type of U. S.

Speaker 11

Domestic demand growth do you expect? And then as we think about Like a further recovery in operating rates back to like historical levels, how much of that depends on rising exports And do you think about those logistic constraints out there?

Speaker 3

That's a very broad question, of course. I mean, let me try to Digest or to put it in different buckets here. I mean, needless to say that when we talk about Demand for mature goods with high inflation rates, which are still high, with Interest rates continue to go up with new house builds and houses being sold Still being very at very low pace. It's clear that we expect that the demand for durable goods will continue to Be at least for the foreseeable future depressed. What we have seen on the other hand sides, as we have seen in other Cycles is that demand for non durable goods is relatively stable, Not to say, I mean, in certain areas even strong.

Speaker 3

So that has led to the fact that we have Given this guidance that we say, I mean, we are now operating in the Americas at 80% utilization. And Ken already talked about the European Utilization rates, which are also at 80%. In the IND sector, I mean, you know that we have the start up Of the POTBA plants, as we alluded to and Kim said, starting up at the end of this quarter, Which will add, I mean, a bit more volumes on propylene oxide, but let's not overreact on that either because we have, of course, Our scheduled shutdowns, turnarounds that we have moved to the periods when we are starting up, I mean, the new facility. So We'll be able to grow a bit, but operating assets currently is at 80%, also here a tick higher than it was at the end of last year.

Operator

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

Speaker 12

Thanks very much. Two part question. When you think about the shutdown of your refinery at the end of 2023, Does that mean that there are reduced operating rates in the Q4 of 2023? That is, do you To really prepare to shut it down or you get to the end of the year and you shut it down? The second question is you gave sensitivity To natural gas price changes, you said every dollar per MMBtu is 175,000,000 And you said 20% is in Europe.

Speaker 12

So that's roughly 35,000,000 MMBtus. And the European gas price Today is maybe $17 an MMBtu and last year it averaged 37 So it's down $20 So $20 times 35, dollars 700,000,000 So is that the benefit For 2023, if gas prices in Europe stay where they are relative to last year, have I done the calculation correctly?

Speaker 3

Thank you, Jeff. Very good questions. I mean, talking about the refinery, as we have said, I mean, we want to Shut down the refinery in Houston by the end of 2023, so that has not changed in our opinion. The rationale for that has not changed either. And of course, there is some preparation that needs to be done in order to be hydrocarbon free by the end of the year.

Speaker 3

So Kim, if you want to add something on that question.

Speaker 6

I would just tell the audience that we're working through the detailed plans of how to do that. As you alluded, you can do that with a Slow ramp down or you can do that by just pulling the plug on the 31st of the year and we're working through the different scenarios to make sure that we have the most efficient And effective shutdown and clearing process.

Speaker 3

So your second question, of course, I mean, if you just do the math, Then you may come to that conclusion. But let's not forget that in Europe, our teams have done an excellent job By also increasing prices on one hand side, on the other hand side, also implementing energy surcharges. So you can't actually net that out The way you did, Jeff.

Operator

Thank you. Our next question comes from the line of Frank Mitsch with Fermium Research. Please proceed with your question.

Speaker 13

Yes. Good morning and congrats Michael and David on the Institutional Investor Magazine recognition. Well deserved. Michael, you made good progress on working capital in 2022 and I'm wondering what the expectation It's for 2023. And in terms of uses of cash, there was a breather on buybacks here in the 4th quarter.

Speaker 13

CapEx is coming down in 'twenty three. What are your thoughts in terms of resumption of the buybacks?

Speaker 4

No. So good question. So I think first, I mean, I just I'd point out again that the cash generation in 2022 Was extremely strong, excellent execution by the businesses from a working capital perspective during the year, in the Q4 in particular, Where we freed up about $700,000,000 from a working capital perspective. Also initiatives underway, as part of our Polaris project related to working capital From a longer term perspective as well. Kind of turning to this year and looking forward, I would say that I think 1st and foremost, our capital allocation priorities remain unchanged.

Speaker 4

You all know that we have a reputation for generating strong cash flow and returning significant cash flow to our shareholders and that expectation has not changed. Thinking specifically about 2023, I would point out that CapEx is going to be down materially. So expectations for capital is about $1,600,000,000 It is going to be a tale of 2 halves for this year, With an expectation that the second half gets stronger. As we move here into the Q1, it's my expectation that working capital should be flattish. But as I look towards the balance of the year, I actually hope we consume some working capital with better sales and better pricing.

Speaker 4

And then remember, our growth investments are starting to pay dividends as well, in particular with the start up of POTBA. And so again, as I think about the full year, it's my expectation and I'm looking at Peter and he's nodding at me, but we will continue to return Meaningful cash to shareholders, including growing our recurring dividend.

Operator

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

Speaker 12

Shifting back to polyethylene, could you give us what you anticipate a reasonable range of outcomes is for Chinese polyethylene demand Growth during 2023 and how much of that you think will need to be sourced from the ex China market? And if you also had a view on what their demand growth actually turned out to be in 2022, that would be helpful.

Speaker 3

Yes. Thank you, Vincent. Ken is very close to that. So it's

Speaker 5

Yes. We are very close to that, Vincent. Thank you for the question. Look, our view for the last two years The demand for polyethylene in China has been relatively flat. So when you talk about a range of Outcomes for 2023, if you look historically, after 2 years like that, you would expect to see a significant snapback in growth, But it doesn't mean that that's a guarantee.

Speaker 5

So you could see anything from flat to plus 8%. It's very hard to call. That's why that's one of the markets that we watch very closely just because it is largely the price setter in the market and We'll drive the absorption of all the new capacity that has come on. But we'll watch it Closely and hope to see some more signs of recovery in the near future and more to come.

Operator

Thank you. Our next question comes from the line of Aleksey Yefremov with KeyBanc Capital Markets. Please proceed with your question.

Speaker 14

Thanks. Good morning, everyone. I have a long winded question. So U. S.

Speaker 14

Ethylene Polyethylene capacity has a cost advantage and there's long standing The thesis that due to cost advantage, U. S. Can export to anywhere in the world Almost as much as necessary. It's not what's happening right now, right? You and the rest of the industry Has lower capacity utilization.

Speaker 14

So why is there not an increase in export? Is it not economical? Or are there logistical limitations that don't allow it? And could this change as we go through 2023 such that your utilization rates Go up due to higher exports and there's no imbalance in the domestic market as a result.

Speaker 5

Hi, Alexei. This is Ken. I'll take that question. During the quarter, we actually did see Both as an industry, but as LyondellBasell as well an increase in exports. Some of that was related to Some improvement in demand overseas, some less imports coming into some of the closer markets like South America from other regions, But also the relief of some of the logistics constraints that we were dealing with in the first sort of 3 quarters of the year, It really started to free up in the Q4.

Speaker 5

So I think that you're going to start to see that continue in the Q1 And we'll get back to a more normal level of exports for 2023.

Operator

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

Speaker 5

Good morning. This is Richard on for Mike. Just wanted to touch on the value enhancement program. You've I know we're probably going to get more details on the cattle market stay, but any details Early on in terms of what you've been able to identify, where the buckets of savings are coming from And then also just the cadence of the savings through this year would be great.

Speaker 3

Yes. Thank you, Richard. This is Peter. Good question. The process, I mean, on the value enhancement program is ramping up quite impressively, I must say.

Speaker 3

We've done the major sites in the United States. And since the beginning of the year, I mean, the 2 major sites actually in Germany, We're expanding now also to other sites, as we speak during the next quarters, both in the United States as well as in Europe.

Speaker 2

There are

Speaker 3

more than 3,000 projects that have been identified so far. And it goes, I mean, from areas In the manufacturing side to procurements, to commercial excellence, supply chain management, so it's Very broad portfolio of different projects. We will give a couple of examples during the Capital Markets Day to make it more tangible. Today, we are mainly focusing on projects that have a very fast payback time, Not so much projects that had some increased capacity, which is logical if you look at where the market is, But it is a continuous stage gate process that we have where we continue to prioritize projects based upon the returns and based upon What we are seeing in the marketplace. So stay tuned, I would say, to get more specifics on a couple of examples On the 14th March at the Capital Markets Day.

Operator

Thank you. Our next question comes from the line of Douglas Fisher with Goldman Sachs. Please proceed with your question.

Speaker 15

Yes, good morning. Two quick questions. 1, in the increase in your operating rates across segments, does that contemplate some inventory build for the summer Season or does that also or do you see that as kind of sell through as well for Q1? And then on the polymers For Americas, what does or what's your plan, I guess, for the split between U. S.

Speaker 15

Sold and export this year versus Next year, do you have to increase your export percent meaningfully with the new capacity in North America?

Speaker 3

Yes. Thank you, Duffy. I mean, let me split it up in 2 parts on your working capital question on the inventory question. First of all, Kim will give a bit of an overview on the PO side and then Ken can also talk about the olefins polyolefins.

Speaker 6

Thank you, Peter. So as it relates to the propylene oxide side, yes, we're building a slight bit of working capital as a contingency for the startup. But once the startup is successful, which we have tremendous confidence in, that inventory level will come down and we expect Throughout the year to operate at about 85% capacity based on the modest demand we see in propylene oxide right now.

Speaker 5

Yes. So I'll talk a little bit about OMP and I want to just echo what Michael had said. The teams have done an outstanding job In the Q4, managing our assets to be able to maximize cash flow and really Focus on producing the products that we need to deliver to customers. We'll continue to do that going forward as we see markets improve. We will increase our operating rates to match that.

Speaker 5

And that may end up, as Michael said, with improving markets, increasing our working capital, but that's a good thing because we're going to have a stronger See our working capital, but that's a good thing because we're going to have a stronger business as a result. But I'm just very proud of the team and everything that they did to manage that During the Q4, which was quite a difficult time. To your question around increase in exports, we're going to continue To see an increase in exports, I think, in general from the United States market or from the Gulf Coast market just with all the new capacity coming on. As a company, we have been increasing the portion of exports for us as we ramp up the capacity with the new Hyperzone assets. You're going to continue to see that happen.

Speaker 5

But Clearly, our strategy around channels to market is to find the highest value customers and segments And that tends to be closer to home. So we're always trying to find more business here and we use the exports to really optimize the portfolio. Thank

Operator

you. Our next question comes from the line of Kevin McCarthy with Vertical Research Partners. Please proceed with your question.

Speaker 16

Yes. Good morning. Can you discuss your view of the U. S. Polyethylene contract pricing opportunities?

Speaker 16

Seems as though spot export prices have come up appreciably year to date, while producer inventory has been rationalized to some extent. So perhaps you can talk through what you're seeking currently and your level of confidence that will Turn the corner and start to see contract prices move higher as the Q1 progresses.

Speaker 3

Thank you, Kevin. Well, it's clear that we continue to have price increases out there in the U. S. Market and We're hopeful that these price increases, we see at least that there is a good development in the marketplace.

Speaker 5

Ken? Yes. Look, I'm confident we've seen strength in the export market that we did not see last year. So that's a good indication. And I think I mentioned this on the Q3 earnings call.

Speaker 5

We've sort of seen prices come down To almost parity with export pricing, so as you see exports go up, you should see domestic prices moving up and I'm confident And in the Q1, we're going to see some increases here.

Operator

Thank you. Our next question comes from the line of Josh Spector with UBS. Please proceed with your question.

Speaker 17

Yes, thanks for taking my question. Just on APS, Just curious if you're willing to comment on what the normalized earnings of that residual business is. I mean, if you move $200,000,000 over, I think even looking pre pandemic, Maybe there's $200,000,000 in residual or $250,000,000 in residual. Schulman used to be about $200,000,000 and you've got some synergies on top of that. So

Speaker 3

Yes, definitely very good question, Joss. And This is one of the reasons why we have repositioned this APS business as well, because we are, of course, not happy At all, yes, with the results in the APS business. And yes, there are lots of factors that play a role on Market demand and higher costs that we have seen last year, energy costs, etcetera, and feedstock costs. So therefore, we have decided, I mean, to completely reposition this business and almost like run it As a separate company within LyondellBasell, Norco, you want to add?

Speaker 2

Yes, Peter. First, I just want to say express that I'm excited to have the opportunity to lead the Advanced Polymer Solutions business through the transformation that we're embarking on. And I see a lot of potential in this business and I put it in place a team that I think really can deliver. And the steps that we're taking this catalog and PB1 or Probuphine that we really view as a better fit in the O and P segment. This enables the new what I call the new APS to be very focused on our core value creating model of compounding

Speaker 3

We did well on the

Speaker 2

integration and cost reductions, But our APS business needs a much more customer centric operating model and this is going to be part of the journey that we are now Embarking on it for the transformation. And our focused improvements in customer intimacy, Technical support and service levels, I think will really allow us to fix this business and grow it in a profitable way. And I'm looking forward to share more about this transformation journey at the Capital Markets Day coming up.

Operator

Thank you. Our next question comes from the line of David Begleiter with Deutsche Bank. Please proceed with your question.

Speaker 9

Thank you. Peter, on your Circuland volumes, what are the price premiums you're receiving? Sorry. And what types of margins are you realizing on these circular volumes? Thank you.

Speaker 3

Yes, good question. Of course, As we go into the markets, we have an entire portfolio. So we have the renewable part of the portfolio, we have the circular part of Portfolio, which is either mechanical recycled or advanced recycled. We are in the market, I mean, with the entire family. Yvonne will give More insights in our go to market during the Capital Markets Day, also with our aspirations that we have By having set up this strategic business units, currently this is a market Which is extremely short.

Speaker 3

Demand is substantially higher than the supply in the market. So we're Completely sold out in the products that we have available. The premiums that we are getting Yes, we're quite attractive. Yes. I'm not going to put a number on it As we speak, you've heard numbers, I mean, from other calls.

Speaker 3

And I can say, we are At least on that level. With that said, Yvonne will give more insights on the aspirations that we have during the Capital Markets Day.

Operator

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

Speaker 3

Thank you very much, and thanks again. Very good questions, very thoughtful questions. And once again, I hope that you will join us on March 14, As we will then share how Lion Del Basel will advance on our strategy and unlock substantial value over the coming years. As we have said in the prepared comments for this call, we have not waited until the Capital Markets Day. We have already put a lot of things into action, and the purpose of the Capital Market Day is to go deeper into the more specifics on the different pillars of our new strategy.

Speaker 3

I wish you all a great weekend and as usual stay safe.

Operator

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

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Earnings Conference Call
LyondellBasell Industries Q4 2022
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