Q4 2019 Earnings Call
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 at that time to ask a question. Please press star one on your phone I'd now like to turn the conference over to Mr., David Kenny Director of Investor Relations. Sir you may begin.
Thank you Britney Hello, and welcome to lined up sells fourth quarter 2019 telecom.
I'm joined today by Optel, our Chief Executive Officer, Michael Macquarie, Our Chief Financial Officer.
Before we begin business discussion I would like to point out that a slide presentation that accompanies todays call is available on our website www dot lyondellbasell dot com.
Today, we were discussing our business results, while making references to some forward looking statements non-GAAP financial measures. We believe the forward looking statements are based upon reasonable assumptions on the alternative measures are useful to investors. Nonetheless, a forward looking statements are subject to significant risks and uncertainty. We encourage you to learn more about the factors.
That could lead our actual results to differ by reviewing the cautionary statements in the presentation slides in our regulatory filings, which are available at www Dot Lyondellbasell Dot com Slash Investor relations reconciliations of non-GAAP financial measures to GAAP financial measures together with other disclosures, including the earnings release.
We're also currently available on our website.
Finally, I would like to point out that a recording of this call will be available by telephone beginning at two PM Eastern time today until 11 59 PM Eastern time on March 2nd by calling 870, 594 057 in the United States and four zero to 998 0479 outside the United States Pascal.
Good for both members as one 160.
During today's call, we will focus on the fourth quarter and full year results. The current environment, our near term outlook and provide an update on our growth initiatives.
But that being said I would now like to turn call over to Bob.
Thank you, Dave and good day, all of you participating around the world. We appreciate you joining us to just that's our fourth quarter full year results for 2019.
Let's begin with slide three highlights.
In 2019, Lyondellbasell businesses extended our outstanding track record of cash generation by delivering $5 billion of cash from operating activities.
Over the past six years.
Our resilient business portfolio has steadily produce.
$5 billion to $6 billion of cash each year under a variety of oil prices and macro economic conditions.
Our companies focused on operational excellence cost management and technology driven growth has proven that we have an advantage across a range of business climates.
2019 earnings were $9 in 58 cents per share with $5.7 billion.
This represents a decline of approximately 20% and 17% respectively relative to the prior year.
Despite healthy consumer driven demand our profitability was impacted by soft industrial demand as trade uncertainty regulatory changes and a weak environment capital investment challenge, the automotive industry and other durable goods markets for our products.
Our global asset footprint and operational flexibility enabled us to adapt to changes in trade lanes.
Continuing to leverage the advantage of abundant low cost natural gas liquids has feedstocks for production from both our North American operations, and our Middle East Joint ventures.
Our technology business achieved record revenues from licensing Frac designs.
Support growth in China, resulting in the most profitable year in company history for this segment.
Before we get farther into the results I would like to introduce our new Chief Financial Officer, and Executive Vice President Michael Mcmurray.
Michael brings extensive knowledge and perspective to the company after working in finance.
Mr Relations Treasury and as the CFO over the course of more than 30 years I'm looking forward to Michael providing our finance and strategy groups.
Leadership and will drive our continued success Michael welcome to Lyondellbasell.
Thank you for the kind words, Bob I'm excited to be part of Lyondellbasell, Andrew partner in driving our future.
My first several weeks the company I'm very impressed with the people in results oriented culture within the company.
I look forward to meeting all our stakeholders the investment community and describing how we will continue our disciplined approach to value driven growth, while driving shareholder returns.
Thanks, Michael Let's turn to slide four and review our approach to maximize returns from our cash generation.
Over the past year, we continue to actively manage our business portfolio with value driven growth investments to develop opportunities around the world.
On the U.S. Gulf Coast, we completed construction of our new I presume polyethylene plant.
And increased activity to build our PVA.
Has hypersound production ramps up this year and the PMTA plant reaches completion next year, both projects will provide growth in volumes and profitability that will further increase our capacity from cash generation.
The box on the right summarizes work to expand our footprint in the rapidly growing Asian market during 2019.
We announced that our joint venture in Thailand, well begin construction of the fourth polypropylene plant.
Well, we establish their position as the largest polypropylene producer in southeast Asia.
In September we signed an Mou with BARDA to Bill and integrated crack the northeast.
No.
And in December we announced our intention to expand our existing partnership with Sinopec to build a second propylene oxide in styrene monomer plant also in China.
All of these projects leverage Lyondellbasell technologies in our core businesses to extend our positions and expand in the world's fastest growing markets.
With these disciplined investments, we are achieving growth, while providing substantial returns for shareholders.
On slide five you can see that our company has maintained our focus on delivering top quartile safety performance as we integrated the employees contractors and assets from D.A. Schulman acquisition in 2019.
We were able to reduce the injury rate at these facilities by more than 50% relative to the prior year.
Our goal remains zero injuries were diligently working to ensure all our employees contractors assets and the communities in which we operate.
Good day, and the same or better condition, then when they started.
In October 2019, we announced the latest step progress to utilize plastic waste in the circular economy.
We are building.
A pilot plant facility at our research center on Ferrara, Italy, and develop our proprietary marchex technology to convert mix elastic waist continue polymers.
As shown on slide six bartek will use catalyzed paralysis.
Convert plastic waste into hydrocarbons that can be used as feedstocks to produce new plastics from existing olefins crackers and polymerization fines.
We will develop more technology and our pilot facility and optimizing tour to commercial scale Mark Tech is complementary to lyondellbasell existing mechanically recycle product business that relies upon clean and sorted waste streams.
Together with our bio based circular in polymers. Our company now has three technologies that are advancing the business of circular plastics.
With that I'll turn the call over to Michael who will lead us through several topics related to our financial performance. Thank you Bob.
Let's begin on slide seven where you can see the trend or companies EBITDA and EPS over the past three years.
2019 results include a onetime noncash tax benefit.
Up $85 billion that increased earnings by 24 cents per share.
Integration cost related to the A. Schulman acquisition impact and full year net income results by $89 million or 26 cents per share and fourth quarter results by $29 million or eight cents per share.
As Bob mentioned, our profitability was impacted by challenging market conditions during 2019.
Using third quarter 2019 results as a benchmark our resilience relative to our industry peers. During these challenging times is noteworthy.
While appears profitability fell as much as two thirds lyondellbasell global business portfolio performed relatively well with approximately two thirds of our asset volume serving nondurable demand from consumer markets. Our businesses are generally well positioned our industrial downturns.
Slide eight illustrates the consistent inefficient cash flow performance that Bob mentioned earlier.
Our businesses have generated $5 billion to $6 billion cash from operating activities over the past six years.
In 2019, 87% of our EBITDA translated into cash.
At approximately $1 billion dedicated to sustaining capital our free operating cash flow yield remains healthy at 12.5% in 2019.
Please turn to slide nine and allow me to review our capital allocation strategy.
Our approach remains consistent with the policies, we articulated last September at our Investor day, and frankly for the past several years.
We seek to provide balance between value driven growth and shareholder returns, we remain committed to a strong and progressively growing dividends.
Our capital expenditures are focused on ensuring our assets maintain their high levels reliability as well as Sunday profitable growth.
With the completion of the hyper zone in PEO GBA projects are go Capex will taper down.
Our cash generation provide flexibility for highly selective value driven M&A growth through jvs and opportunistic share repurchases.
At the same time, we're mindful about maintaining appropriate leverage ratios and our commitment to a strong investment grade balance sheet underlies all of our decisions.
Now please turn to slide 10, where you can see that our businesses generated $1.2 billion of cash from operating activities during the fourth quarter, which contributed to $5 billion cash generation for the year.
Capital expenditures for the fourth quarter were approximately $730 million with roughly 60% invested in profit generating growth projects and 40% dedicated to sustaining capital.
Our investment in growth has increased since the second quarter of 2019, as we completed our Hypersound polyethylene plant and continue to move our PEO PTA plant construction forward.
In the fourth quarter, we paid $351 million in dividends in 2019 are opportunistic buyback strategy allowed us to repurchase 43 million shares for a total of $3.8 billion.
Together with dividends returned a total of $5.2 billion to shareholders in 2019.
Along with that thought.
I would like to compare our capital returns to some of our peers over the prior four quarters.
Please turn to slide 11.
The dark blue bars to picked dividend yield, which was nearly 5% over the trailing 12 months prior to the fourth quarter together with share repurchases our company tops The chart with 20% of total cap returns to shareholders.
Before I turn the call over to Bob Let me address some of your annual modeling questions for 2020 on slide 12.
Regarding capital expenditures were planning to invest approximately $2.4 billion during 2020 to support both our sustaining capital and profit generating projects.
Approximately $1.3 billion is targeted towards profit generating growth.
Majority this growth investments in 2020 will be dedicated to the construction of the fuel GBA plant in Houston.
We continue to expect a meaningful reduction in capital spending in 2022 after the completion of this facility.
For 2020 with a fairly typical plant maintenance schedule activities. During the year are expected to impact annual EBITDA by approximately $155 million.
Our OTI Americas segment will have a cracker turnarounds overlapping the first and second quarters of this year that is expected to impact EBITDA by $25 million in $30 million respectively.
Our OTI IAI segment will have a cracker turnarounds in the third and fourth quarters of 2020 that as expected impact EBITDA by $15 million in each quarter.
And our intermediates and derivatives segment, we had planned maintenance events that will impact EBITDA by approximately $10 billion in each of the first and second quarters and $25 million in each of the third and fourth quarters. This year.
Our cash interest expense for 2020 is expected to be $420 million, which includes capitalized interest is about $120 million.
2020 annual book depreciation and amortization is forecasted to be $1.5 billion.
We plan to make regular pension contributions in 2020 that totaled approximately $120 million and we estimate a pension expense of $100 million.
We currently expect a 2020 effective tax rate of approximately 20% with a cash tax rate in the mid teens.
Ill now turn the call back to Bob for more detailed discussion of our segment results Bob.
Thank you, Michael let's turn to slide 13, which illustrates our quarterly profitability over the last five quarters.
EBITDA for the fourth quarter was $1.2 billion as you have seen lyondell puzzles business portfolio typically follows the seasonal trends with peak earnings occurring midyear.
And the absence of external catalyst that improve or do you track from our underlying businesses. The pattern seen in 2019 are fairly typical.
We have a focused and well balanced business portfolio supported by our global footprint feedstock flexibility and reliable operations.
These are recurring themes for our company and attributes that we seek to improve upon as we manage the portfolio.
Even in an uncertain market conditions, our company continues to demonstrate resilience.
We talked last quarter about polyethylene spreads being near 10 year lows and on slide 14, we've expanded that idea to illustrate the market margins associated with some of our major products.
Each market has experienced several cycles over the past 20 years. Most recently, we are faced with slow industrial demand and uncertainty and trade policies margins are currently relatively strong north American polypropylene and for MTV.
On the flip side, we're seeing historically weak margins for styrene and northeast Asia polyethylene.
Some of you may be surprised to learn at globally, we sell higher volumes polypropylene and obviously it feels that polyethylene can styling.
Chart illustrates how our portfolio provides balance where our product in trough margins is often offset by another with strong margins within the portfolio.
These natural hedges across our global footprint cannot innovative technology cost advantage operational flexibility and consistent underlying consumer driven demand.
Lyondellbasell is well positioned to provide resilient profitability.
With the market conditions in mind, Let's review, our fourth quarter segment results, starting with our olefins and Polyolefins Americas segment on slide 15.
Fourth quarter, 2019, EBITDA was $498 million $155 million lower than third quarter.
Profitability was impacted by reduced polyethylene margins from typical winter seasonality and an increased cost of ethylene production as feedstock costs were higher and propylene price was lower compared to the previous quarter.
Opens results decreased approximately $20 million compared to the third quarter 2019.
Margin contracted on relatively higher natural gas liquid feedstock costs and lower propylene price.
Volume increased after the completion of our planned maintenance at our Clinton, Iowa facility during the third quarter.
Combined polyolefin results were approximately $135 million lower ended the third quarter, primarily due to a decline in polyethylene spreads over ethylene of more than $130 per ton.
For the full year results decreased by $460 million.
Olefins results increased as we utilize the high feedstock flexibility across our fleet of six us ethylene crackers to take advantage of low low cost feedstocks.
Combined Polyolefins results declined primarily due to a spread decline in polyethylene of approximately $260 per tonne.
We expect the remainder of the first quarter will follow typical seasonal trends, but increasing demand continuing into the second quarter.
Now please turn to slide 16 to review the performance of our Olefins and Polyolefins Europe Asia and international segments.
During the fourth quarter, EBITDA was $144 million, a decrease of $147 million compared to the third quarter.
Ethylene margin declined as a result of higher feedstock costs, and lower propylene price, which typically fourth quarter seasonality pressuring volume there was little support to increase polyethylene price olefins results decreased approximately $140 million, primarily driven by higher feedstock costs.
And lower propylene price combined polyolefin results decreased approximately $45 million driven by decreased pride in both polyethylene and polypropylene.
Full year, EBITDA was $101 million lower than 2018.
Results included and impact of approximately $55 million due to a decrease in the euro versus the U.S. dollar exchange rate relative to 2018.
Olefins results for the full year increased due to lower feedstock costs and improved reliability with planned and unplanned maintenance impacting the fourth quarter of 2018.
Combined polyolefin results and joint venture equity income decreased due to lower polyolefins spreads.
In Europe, we expect typical seasonal improvements as we progressed through the first and second quarters similar to the Americans.
Please turn to slide 17, let's take a look at our intermediates and derivatives segment's.
Fourth quarter, EBITDA was $329 million, a decline of $61 million from the third quarter 2019.
Well supplied markets drove margin declines in most businesses for both propylene oxide and derivatives and intermediate chemicals.
Fourth quarter propylene oxide in derivatives results decreased approximately $10 million due to lower margins from our product sales mix.
Intermediate chemicals decreased $50 million, primarily due to reduced margins.
Oxyfuels and related products results were relatively unchanged with the strongest fourth quarter for the company over the past five years.
During 2019, EBITDA declined $454 million compared to the record performance we achieved in 2018.
Margin declined in most businesses, primarily styrene, partially offset by a strong improvement in margins for our oxyfuels and related products businesses.
Volumes for most businesses also declined due to planned and unplanned maintenance as well as a softer mark.
In January MTV raw material margins have trended downward, but are still relatively strong for this month compared to recent years.
As the first quarter progresses, we inspect well supplied markets to continue to pressure most of our R&D businesses.
Recently, we announced our intention to expand our existing partnership with Sinopec to build a second Pos and plant in China.
Joint ventures enable us to expand our reach with relatively low capital commitments in attractive markets. The proposed new JV will serve growing demand for both propylene oxide and styrene in China, where styrene demand is growing at a reasonable rate.
As demand for PEO based construction materials packaging and furnishings continues to grow we see an opportunity to bring together, our leading technology, which sinopec operational capabilities to further serve the Chinese market.
The chart on Slide 18 depicts the company's cost leadership in producing propylene oxide from our two co product technologies.
We are building.
Using our cost leading LTB eight technology on the us Gulf Coast, where butane feedstocks are abundant and low priced in China. We have selected our pls m. technology to serve growing propylene oxide and styrene demand.
Both of our co product technologies offers significant cost advantage over new plans based on alternative technology or aging or hydro capacity.
On Slide 19, let's review the results of our advanced polymer solutions segment.
Fourth quarter, EBITDA was $54 million 48 million dollar decline over the third quarter 2019.
Volumes and margins declined as we are seeing continued headwinds from the automotive sector had a seasonal decline in the construction markets.
Order pre tax integration costs were $38 million.
Compared with the prior period compounding solutions results declined approximately $35 million due to continued headwinds in the automotive market.
Advance polymers results decreased about $20 million due to lower margins and volumes due to a seasonal decline in construction demand.
Full year EBITDA results for the segment were $424 million.
24 million dollar improvement over 2018.
2019 was the first full year results with the addition of new product lines from the acquisition relational.
Pre tax integration costs were $116 million in 2019.
Volumes declined in legacy Lyondellbasell businesses due to decreased automotive and construction demand.
Integration activities are on track and we have captured $130 million in forward annualized run rate synergies as of December 30 Onest.
We expect higher industrial construction demand, particularly for products from our advance polymers business as we move through the first quarter toward the arrival of spring.
Any improvements in automotive and other industrial markets should benefit our compounding in solutions business.
Now, let's turn to slide 20, and discuss the performance of our refining segment.
Fourth quarter, EBITDA was $22 million, a 28 million dollar improvement versus the third quarter 2019.
Results were driven by an improvement in margin.
In the fourth quarter, the Maya 211 industry benchmark crack spreads improve to an average of $19.44 per barrel for the fourth quarter.
Additionally, we benefited from relatively strong NASA and coke prices operations were strong for the quarter with an average crude throughput near nameplate production rate at 267000 barrels per day.
Full year, EBITDA was $232 million lower than 2018.
The refinery ran well at an average crude throughput of 263000 barrels per day. This was 32000 barrels per day higher than prior years due to the completion or planned maintenance in 2018.
For the full year refining margins were impacted by limited availability or powers.
Heavy sour crude oil in the us Gulf coast, as well as lower Maya 211 spreads which declined to $17.58 per barrel.
In January weak demand for diesel as driven Gulf coast QST to Brent crack spreads two to five year lows.
While we are disappointed by the current market environment. We continue to expect improvement has the carriage band on high sulfur Marine fuels takes effect in March.
We are well positioned to benefit from the new regulation by serving demand for a more environmentally friendly marine fuels from our refinery.
Please turn to slide 21, as we review the results of our technology segment.
In 2019, our technology segment delivered a record quarter and record annual profitability with our industry, leading polymer production technologies and catalysts.
EBITDA was $138 million during the fourth quarter, Ken was $411 million for the full year with a number of significant revenue milestones reached for our licensing business.
We expect lower licensing income recognition and therefore lower profitability in the first quarter following the strong fourth quarter 2019.
Now on slide 22, I'd like to take this opportunity to reiterate our company's disciplined investment growth strategy that we shared with you during our 2019 Investor day.
We expect the contributions from our growth investments to deliver a $1.3 billion of incremental annual EBITDA by 2022.
Applying you cash yield from EBITDA of about 80%.
Combined with our moderating capex requirement of approximately $1.1 billion, we expect an increase in free cash flow is about $2.1 billion that would double our free cash flow by Twentytwenty too.
Let me summarize the eurs highlights and outlook, which slide 23.
In 2019, our resilient portfolio was supported by abundant low cost natural gas liquid feedstocks in North America.
Natural hedges across our global business portfolio and licensing growth in our technology segment.
We have generated $5 billion to $6 billion of cash from operating activities for six consecutive years.
Just consistent and strong cash generation contributor to growth through disciplined profit generating capital investments and provided significant shareholder returns through a growing top cortile dividends and share repurchases.
In 2020, we look forward to the additional capacity from our hyper zone polyethylene plant for our own Dms segment.
We are moving towards the completion of our PVA plant in 2021 to provide further growth for our high Andy segment were seizing opportunities to drive value by expanding our diverse global business portfolio.
We expect this ease of these joint venture investments today to read tangible earnings growth over the years to come.
With that said we're now please take your questions.
Thank you we will now begin our question and answer session.
Good question. Please press star one on your phone.
If you need to withdraw your question. Please press star to please be advised.
Those are limited to one question per caller.
Okay.
One moment as we wait for our first question.
And our first question comes from Matthew Blair from Tudor Pickering Holt. Your line is now open.
Hey, good morning, Bob.
Maybe one to start off on on refining you know one of the.
Bright spots in the quarter could you talk about whether you're you were able to run.
Hi steel for fuel as a feed at your Houston refinery and if so what kind of what kind of volumes and what kind of EBITDA uplift and if you are not was a constraint economic or was the equipment related any details and that would be great.
Good morning, Matthew Thanks for your question.
On refining VHS EFO right, we are able to run supplemental feed typically typically when we've cut back on crude run rates.
For a variety of reasons. So we can run between 20 and 40000 barrels a day of additional.
Hi, guys have FFO and I would say in a typical month, maybe that contributes $5 million to $9 million of additional EBITDA.
So that gives you a sense for.
Contribution and we did do some of that in fact in January.
Because we had some.
Some external events that cost some downtime on one of our crude units and some internal issues. So we were able to buy some HFO.
The margins were pretty good so we do use that as an optimization tool.
Thank you and our next question comes from Stephens. Your line is now open.
Yes. Thank you.
What fraction of your polyethylene production is currently exported to China.
And what other markets was this likely shift too.
Turning to becomes more so self sufficient or are you able to move more of it into Europe and or do have a concern that others might do this and erode.
The margins in that region.
Yes, Steve good morning.
First of all we know we we've not export it as much generally or the industry as in years past and.
19 is no different we did increase exports and 19 as the year progress, but we're still well below industry average, we're we're probably at a run rate of around 30% of our polyethylene Thats xplornet.
And of that.
Maybe 5% of it goes to China.
And.
That could move up some next year. This year in 2020, as we start up our I presume plant and and balance our system.
Your question about self sufficiency.
Based on Hs data and our analysis of that data it seems that.
China will continue to need large amounts of imports of polyethylene and that chart still is incrementally growing.
Over the next decade now it's not growing as much as that we thought maybe two three years ago, but there's still a significant short in China on polyethylene.
Thank you and our next question comes from Kevin Mccarthy from vertical Research partners. Your line is now open.
Yes, good morning.
Bob I was wondering if you could address the impact.
The phase out of single use plastics in China and also comment on your table two of your supplemental information suggest that high density polyethylene prices declined about $110 a ton sequentially in fourq versus threeq seems to be a little bit more.
More than maybe some of the consultants are indicating and so just wondering if you'd comment on that.
And whether or not you're seeing on discounting and if so might that reverse as 2020 progress. Thank you.
Okay. So good morning, Kevin on your question about single use plastics.
And I think we'll have to see how that announcement plays out.
Whether it's in China, or Europe, or the you asked one of the challenges is there there aren't really ready readily available substitutes for many of the applications for single use plastic so in the near term Kevin I don't expect significant impact on demand over let's say the next three to five years I think.
Post five years, I think we'll have to kind of watch and see how how recycling shapes up.
And how.
Chemical recycling develop so and the technology develops but in and then maybe near to medium term I don't expect a lot of impact.
Especially because there aren't really.
Via substitutes for those applications.
Question on price from Q4 to Q3 several factors Inc. first of all.
As I said earlier as the year progressed, we export it more as an industry and frankly as a company and so that that's net mix of domestic versus export.
Probably had some impact.
And and also new supply came on we saw demand actually come off because of Destocking in seasonality. So you know tons of pressure in in Q4, we've already seen some of that reverse for example.
Posted spot polyethylene prices have already come up.
Three to four cents since early December based on different publications and we follow.
So we're already seeing some of that reverse.
Kevin This is Dave that table that you're referring to is actually the net transaction price for mining Chason snapped.
The contract price per se for polyethylene.
Discount.
Thank you and our next question comes from Jeff Zekauskas from JP Morgan. Your line is now open.
Thanks very much.
Can you talk about polypropylene demand trends, both in the United States and in Europe, either sequentially or year over year in the light at the slowing of the economy and difficulties in the auto sector.
Up polypropylene demand growth, Jeff has been keep similar to polyethylene demand growth since then.
Impacted a little bit because of the.
Slowdown in automotive.
And generally in the industrial sector polypropylene as more and uses in those sectors.
We still see a reason reasonably good market environment in polypropylene.
Something that will certainly watch as new capacity comes in in 2020.
But but overall, we see polypropylene growth developing reasonably well.
Thank you.
And our next question comes from a room. This we'll now open from RBC capital markets. Your line is now open.
Great. Thanks, good morning.
Just wanted to ask your question on the other monomer side.
You know.
You know you've often had some profitability from the metastasis units.
Could you size, what that's been over the last several years and what your outlook is for both ethylene and propylene Monro profitability over the next couple of years. Thanks.
Yes, thanks or is it does move around quite a lot as you can imagine depending on poly, sorry, propylene price and.
The spread between propylene and ethylene.
Generally speaking if you look at Q4.
And you look at all of our major product areas.
It really decline through the quarter and have reached kind of these crop conditions and propylene as soon as a as an example of that so in Q4, when we had really minimal contribution from from our flex unit.
As a result from lower propylene price.
So as that reverses, we should see better contribution.
From from ethylene intend to propylene and does it moves around quite a lot and it's something that we factor into our optimization as we think about.
How we deploy the ethylene we produce.
Yeah room, just to give you a sense of scale in 2019, a flex profitability was about half of what it might have been in 2018 and as Bob said in the fourth quarter was very very small.
Thank you and our next question comes from Duffy Fischer from Barclays. Your line is now open.
Yeah, Good morning, guys.
Just a question.
Sort of around the refinery sort of run IMO 2020, I'm getting a lot of feedback that people are kind of equating that with why two k.. We've got all banner shape and there's not been much change because of it seems like you guys have a little bit different view and maybe it's just delayed. So can you kind of walk through how you think IMO 2020 still plays out and then within that.
Context, what does that mean structurally for the refinery within line Dell's portfolio.
Okay. Good morning, Duffy. Thanks for that question, so you'll recall in our prior discussions about IMO well. We've said is there are two primary benefits from IMO for for US one is that the light heavy differential would would get wider which favors our refinery and that disciplined spreads would increase because.
As of the value of this most are so for a bunker fuel. So one of the to have shown some signs of improvement the light heavy differentials has improved by about $3 a barrel.
Over over the past 90, 60, 90 days or so compared to what we saw most of last year. So we're starting to see a bit of response on that and you can see it in their numbers.
Terrific, but they're they're getting better.
On the disciplined side, it's been a couple of factors that have actually kept distillate.
Crack spreads down or actually they've reduced in the last 60 days.
One is I think we probably we all underestimated the amount of inventory of compliant fuel that was built before year end.
To your point there was concern about would there be enough and I think perhaps there was more than enough and so there's a bit of overhang, which will be work through so I think I see that as a temporary situation.
Secondly, we've had a really mild winter so so distillate values have come down.
Because there hasn't been as much demand for heating.
Again, I think a seasonal effect so.
To summarize in terms of Iman IMO.
I think that.
The effect will be somewhat delayed, but we are expecting some improvement in the refinery profitability as a result of IMO.
No question about portfolio.
And our focus has been very consistent run the refinery as well as possible.
Try to optimize on the product side, so that we can maximize value and we'll continue only focused on that.
And we'll see how things play out longer term.
Thank you.
Thank you and our next question comes from Vincent Andrews from Morgan Stanley. Your line is now open.
Thank you and good morning, Bob I'm wondering if you could talk a little bit about the the Asian markets and maybe maybe two things to touch on one the margins have been negative there for a while now longer than you know if I look back over the last 10 years, usually they'll stay that negative for too long before capacity comes off in the at least go back to zero and that hasn't happened in the big thing.
Looks like as happened is it naphtha prices have been very strong.
Finally in the fourth quarter, maybe that come off a little bit year to date, the corona virus, but what is driving the naphtha price versus relatively flat crude oil price and why arent, we seeing Asian capacity come offline given given the losses.
Yeah, Good morning Vincent.
Really good question I think and this is really at the crux of sort of why we think we're reaching trough conditions in polyethylene globally.
As you rightly mentioned margins today appeared to be.
And below.
Cash costs so.
Hey, you you would think there'll be negative earnings on many of these units not just the highest cost would probably deepen the cost curve.
I've been following this business for many years, including when I lived in Asia more than 10 years ago and typically when you fall below 300, its not just a few marginal crackers, but many are underwater.
But my sense is that typically it takes.
Perhaps a quarter or to these sorts of conditions for there to be meaningful reduction in output or idling of capacity, we're hearing that stage in my opinion.
And and it seems to me that and that we should see some bounce.
As I said earlier, if you look at posted export prices in polyethylene from mid December to mid January they have moved.
Somewhat so.
So again I think you know these are all signs of trough conditions and and there should be some bounce off of these really really unusual lows.
Thank you and our next question comes from Shawn Roberts from you.
Your line is now open.
Thank you could you give us an update on the closing of the board deal is the startup still on schedule.
Hi, Good morning, we're working diligently to move towards definitive agreements.
We expect to have those completed within the first half of this year.
In terms of the project start up they're making really great progress.
And I would expect at well be in the commissioning stage towards the end of this year.
For that project I think that's one of the one of the attractiveness to us.
This project is that.
By the time.
Well, we whereas we're in a position to infuse equity into the venture.
We'll be within months some start up so the timing between our investment and timing of startup is very short, which de risks quite a lot that project in our view as a partner.
Thank you and our next question comes from P.J. Juvekar from C.
Line is now open.
Yes, Hi, good morning, Bob one more question on your board on project.
And is there you mentioned that the cost of building in China is about half of that into you us.
Can you comment about timing take stability in China, I know crews had worked 24 seven to build.
And so.
What's your expectation of timing and does that JV give you any especially the insight.
To the timing of all this new crackers that have been are starting up in China. Thank you.
Good morning PJ.
Indeed that you know, it's one of the one of the a sort of attractions to US is that first of all that that project is going to produce product for the local market. So we don't intend to export having it will give us a really good window into how the market works there as well as you said timing and costs.
Cost of construction in terms of the costs. They are between half and two thirds that have a Gulf coast builds.
And also timing very similar to.
Tween happened two thirds of the time, that's required to build on the Gulf Coast.
So no end to end the borrow project and certainly a in that range relative to the U.S. costing and timing.
Thank you and our next question comes from Bob Court from Goldman Sachs. Your line is now open.
Thanks, Good morning about.
Hey, good morning.
Slide 14.
There was integrated spreads competitors.
Good thing you don't ever let him ethics.
Coincides with your comment that Midwest, finding a trough.
Serious held that informs your adjusts Williams capital plans, we clearly are stuff.
Okay.
Substantially here, you've got a big dividends.
It reduce those payouts might make some stock back together and I would imagine targets.
So.
Just maybe refresh us.
Yes.
At this stage.
Sure. Thanks, Bob.
First of all on Capex, you'll recall that in Investor day, we we added.
A few things we highlighted first of all.
Sustaining capital of about $1.1 billion to $1.1 billion.
Finally, we don't plan to change that we want to make we want to make sure that our units are well maintained and are able to operate when when we need them at full rates and because of our dividend coverage, we don't have to do that.
We're in a position, where we're able to we have a well cover dividend without having to take those sorts of stamps secondly, our capex is declining because the hyper his own project is essentially complete.
And or so that that capital comes off.
So we have somewhere around three to 400 million dollar reduction in Capex from from 2019 to 2020 minutes. It look further out we'll see another reduction after the PEO GBA projects start so.
The key for US is to really be thoughtful about how we think through future projects.
B B b very disciplined as we've shown.
And and I see.
Great opportunity on both sides of the equation to increase cash flow, we see sources of new earnings and leasing capex declining that that story remains intact as we discussed at Investor day.
Thank you and our next question comes from Hassan.
From a Olympic Global your line is now open.
Wonderful.
Turning.
But just wanted to follow up on you made some comments about what do you think the trajectory of polyethylene pricing, maybe you know obviously keeping in mind.
Some of the negative margin trends in Asia. My question is a bit more specific about the grades you know as we see the influx or one of this polyethylene capacity you know in Twentytwenty 21. It seems there you know city larger divergences between the amount of capacity, that's coming online goal it didnt HDD and India.
Hello. This is not that much capacity coming online in L.D. be so I mean, you know how are you thinking about that.
Should we expect to see sort of divergent.
Pricing buttons are between the different grades.
Yes, good question and you know I think.
First of all within your Logans, sorry, low density polyethylene supply being less on an absolute basis. The demand growth is also lower for low density polyethylene. So when I think about a high density polyethylene, which is the majority of what we produce we do see.
That the supply is coming on generally when the demand demand is there as well if we see periods of oversupply, it's episodic as opposed to structural.
So so my sense is that we'll work our way through digesting the new supply in 2020 globally.
Then we'll have to see how the timing works out on the future projects or even in China. Some on the projects have been later than they were.
First announced so.
And now we're going through startup of our I presume I'm right now and in it we don't reach full capacity on on the first data, we put hydrocarbon and so these things have a certain ramp up rate, which generally is not reflected NHS numbers.
But I'm.
I'm somewhat constructive, but I think we're we've reached bottom.
And we're bouncing off the lows in Q4, and we'll see how demand develops here.
And that's onto your point I mean, they days sales of inventory a reported by HCC is dropped for high density by eight days since December 2018 to December 2019th just shows you that the market is tightening up for high intensity here in North America.
Thank you and our next question comes from Mike. This on from Wells Fargo. Your line is now open.
Hey, guys.
The Bob when you think about EBIT your EBIT done in the fourth quarter, you know it held up pretty well given.
Difficult environment sort of across the board so.
When you think about 2020.
And your portfolio what they can you grow EBITDA on 2020, and if he can where do you think you'll see some of the.
Until upside.
Yes, good morning, Mike Thanks for that question.
Indeed, I think we did hold up well and you know in our prepared comments I mentioned that.
The Oxyfuels business did well so.
First of all I think the diversity in our portfolio.
And and that.
Some of these products are different points and their individual cycles that helps and delivering consistent and strong cash flow, but I think through sources of earnings upside first of all startup of our new hyper zone polyethylene plant.
As I said, we're we're in the process of start up right now.
And so we should have a we hope to have production by by month and so once that plant is up and running and no. As this Q2 progresses, we restart to produce the target greatwhite that should start to contribute earnings and also are you asking integration work days.
Integration of A. Schulman continues we're doing really well.
Run rate synergies at the end of December worried about 130 million annualized so we're doing quite well on that and we should continue to see benefits.
Automotive sector has been really depressed globally.
Frankly that hit our legacy compounding business because it was mostly automotive.
Any rebound in automotive is going to help that segment and our view.
With all of our integration work I think we're laying the groundwork for really capitalizing on small improvements.
Furthermore, IMO I've talked about that earlier.
While we're we've been disappointed that we haven't seen some response yet we do believe we will see here as as a as Q2 into Q2, we should see and the benefits of IMO in terms of better distillate cracks.
And even wider light heavy differential so those are some examples of our of earnings upside. If you will that don't really rely on polyethylene market getting better per se and also when you think about cash flow or the lower capex. This year should should be positive as well.
Thank you and our next question comes from Frank Mitsch come from him Research. Your line is now open.
Good morning, and Michael Nice to to meet you at least Telephonically look forward to meeting you when person.
Thank you Graham.
Bob I want to come back to the to the Sinopec Possum JV or the memorandum of understanding that you did you signed last month, you mentioned a little bit about.
The fact that you're going to be more exposed to styrene in China and have a better prognosis for that business over there. Obviously this is a business that you have not expressed a lot of positive comments in the past and I'm. Just curious how has your outlook for styrene overall changed.
Where where do you see it going is this the first move others or was this just opportunistic with with Sinopec. If you could expand upon that that'd be great.
Sure Good morning, Frank.
First of all you know that ER beds joint venture is more about PEO and less about asking them. So it's really the driver for us to invest was.
Propylene oxide, we see a growing market there overtime, we have a great partner and sinopec and existing relationship we're building upon.
They have great operational capability as well as.
Capability to build plants low cost. So you know in styrene. The styrene wasn't the reason we did this who were undertaking this project, but on the other hand, we believe that in Asia, certainly there's still some growth in styrene and we can place that volume when that starts up so.
No more about PEO less about styrene, but a comfortable that we can place the styrene and have considered in our economics the value of sorry.
Thank you and our next question comes from David Begleiter from Deutsche Bank. Your line is now open.
Thank you good morning.
Just discuss the prospects are your views on potential U.S. polyethylene price increase in Q1, I know outages pick up in March and April but ethane is cheap are you seeing spot export price pick up here. So what's your confidence and getting a bumpy price increase in February March. Thank you.
Hi, Good morning, David HM.
First of all as I mentioned earlier the spot price has moved up post and posted basis right. So.
Three to four cents, depending on which publication you read I think that says that if there's some underpinning.
For that increase secondly, inventories as reported by HCC H S indicate that inventories are low.
Producer level anecdotally, we believe that the converter level.
Inventories are also low we should see a seasonal uptick we do every year I don't see right. This year should be any different.
And so.
Some seasonal uptick should help lastly, something that perhaps isn't I mean everyone's radar that the turnaround season is pretty heavy this year.
There are much heavier than last year on crackers in the U.S.. So we could see ethylene.
B b tighter in during the turnaround season as a result of a a higher level of capacity that's out so I think all of those things.
Point towards reasonable chances of of improvements.
Thank you and our next question comes from Jonas.
Scott from Bernstein. Your line is now open.
Well thank you.
Well I.
Sounds like you and your thoughts that NAFTA prices will come back down again in Q2, or so I was wondering hum how much of that as an industry view or or how much of it just youre lined out view and if it isn't industry view, what does that suggest that the producers in Asia.
If they all know this would just try to hold on until its crashes instead of shutting down.
<unk>.
Yeah, John It's I think my comment on one of the earlier questions related to I think it was Vincent you asked me about Asian PE margins.
My comment was more of that those margins should come up.
From from sort of below the breakeven point what are they are today.
I don't know that necessarily that's going to come from Napa dropping I think you could be that the price rises and that's why the margins improved so if I expressed the view on that there was an intentional.
My My view is more about the fact that agent PV NAFTA spreads senior seem untenable based on historic of data.
And you know my sense is that those margins he to expand some so that they're not.
Cash negative for a significant part of the industry over there.
Thank you and I final question comes from John Mcnulty from BMO capital markets. Your line is now open.
Thanks. This is the mix for John Good morning.
Morning.
So.
No technology segment. It has had a solid past couple of views you shed some color for the fullest Gordon.
Should we think about the cadence and size of earnings for the full year and if you could just help.
The underlying drivers for the growth youre seeing in catalyst.
Moreover, describing higher market share or is it just linked to Italy, the going into two capacity.
Yes, I was shot you know first of all in our technology segment. There are two components. There's catalyst and then there's licensing so the catalyst business is very steady and as we do these licenses our catalyst business steadily grows that part isn't very volatile and there's definitely an upward slope in terms of earnings and.
And one that accrues for many years I'm a licensing side. It is much more variable it depends on timing of payments and I mean licenses we win.
Your point is is correct in that we've been participating and in many of these projects that you better announced and.
In China, primarily but likely the licensing side of the business well cool off some in 2020, we do expect somewhat lower earnings from that segment on yet on the other and as a the license plant start up our catalyst earnings should steadily increase overtime.
And that's really a great part of that technology businesses that provides stability of cash flow.
All right. So I think that wasn't the last question that we had so <unk>, let me offer a few closing remarks before we sign off.
So no our company's proven and continuous focus on operational excellence cost management and disciplined capital allocation think will serve us really well in this current challenging environment.
We anticipate typical seasonal improvements for our businesses as we progressed through the year.
Favorable resolution of trade policies, and a rebound in industrial Daimler and demand could potentially provide significant upside for many of our businesses as I've mentioned several times in the queue in a IMO 2020 is expected to increase earnings at our refinery.
We see increasing polyethylene volumes from our new Hypersound investment.
Generally we're really well poised.
As a company to deliver.
And and continue our outstanding track record of cash generation.
In this year to come so we thank you for your interest in our company and look forward to updating you in April at the end of the first quarter. Thank you and with that I have a great weekend, where adjourned.
Thank you for your participation in today's conference all parties may disconnect at this time.