Q2 2022 LyondellBasell Industries NV Earnings Call

Hello, and welcome to the Lyondellbasell teleconference.

The request of blind all to sell 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, Sir you may begin.

Thank you operator before we begin the discussion I would like to point out that a slide presentation accompanies today's call and is available on our website at www Dot Lyondellbasell Dot com Slash Investor Relations.

Today, we will be discussing our business results, while making references to some forward looking statements non-GAAP financial measures.

I believe the forward looking statements are based upon reasonable assumptions on the alternative measures are useful to investors. Nonetheless, the forward looking statements are subject to significant risks and uncertainties. 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.

<unk> web site.

Additional documents on our Investor website provide reconciliations of non-GAAP financial measures to GAAP financial measures together with other disclosures, including the earnings release and our business results discussion.

A recording of this call will be available by telephone beginning at one PM Eastern time today until August 29 by calling 877 600 606 to 853 in the United States and 20161 to 740 <unk> five outside the United States. The access code for both numbers is $103 seven to nine.

909.

Joining today's call will be Peter Vanacker, Lyondellbasell, Chief Executive Officer, our CFO , Michael Mcmurray, Ken Layne, our executive Vice President of Global Olefins, <unk> Polyolefin charcoal, Raymond EVP of intermediates and derivatives and refining and Jim Guilfoyle EVP of advanced polymer solutions and supply chain.

During today's call, we will focus on second quarter results current market dynamics and our near term outlook.

Before turning the call over to Peter I would like to call your attention to the noncash lower of cost or market inventory adjustments or LCM and impairments that we have discussed on past calls.

The adjustments are related to our use of last in first out or LIFO accounting and the volatility in prices for our raw materials and finished goods inventories impairment charges were recognized to write down assets to their estimated fair value.

Dermis includes a noncash impairment of $69 million in the second quarter of 2022 that reflects the exit of our polypropylene business in Australia, and the noncash impairments of $624 million in the fourth quarter of 2021 that reflects our evaluation of strategic options for the Houston refinery comments made on this call will be in <unk>.

Hard to our underlying business results, excluding the impact of impairments and LCM inventory adjustments, but that being said I would now like to turn the call over to Peter Thank you, Dave and welcome to all of you. We appreciate you joining us today as we discuss our second quarter 2022 results.

Let's begin with a short introduction of myself on slide number three.

I'm very grateful to be here on my first earnings call since becoming CEO of laryngeal, Brazil on May 20 <unk>.

<unk> grew up in Belgium, and undertook an indication as a chemical engineer with a specialization in polymer engineering.

During my more than 32 years in the chemical industry.

Had the pleasure of working with Lyondellbasell as it customer supplier and partner.

During my time with buyer, we invested in line dose technology and assets, while forming joint ventures for the production of propylene oxides at.

At trail fun Lyondellbasell was our largest polypropylene supplier.

And at this stage, we partnered with lines of Brazil to achieve the world's first commercial production of polyethylene and polypropylene from the state's sustainable bio based feedstocks.

Since joining the board of directors in February and then starting as CEO in May I had been meeting extensively with stakeholders around the world to learn more about how lyondellbasell has been so successful in creating value.

More importantly, we have been asking ourselves how to best position the company to sustainably capture further value for years to come.

I've always admired line those Brazil's rich legacy of innovation and technology development.

I am pleased to confirm that our commitment and passion for safety and operational excellence are deeply embedded in our culture.

These qualities will serve as well as the work gets underway to advance our capabilities to capture lessons value embedded within the company and establish Lyondellbasell as a leader in serving the world's growing needs for circular and sustainable materials, while reducing.

Our carbon footprint.

As Dave mentioned additional members of our Executive Committee will join our earnings calls starting today.

I believe that it is important for our investors to get to know our excellent leaders at Lyondellbasell better.

And I'm really impressed by this team their market knowledge and leadership and their passion for safety and value creation.

Let's now turn to slide number four to discuss our excellent results during the second quarter.

I am very happy with the outstanding work that lineup, but sales leadership and employees have accomplished this as a great way to start and gives me a lot of confidence for the future.

Our businesses delivered strong earnings and cash generation during the second quarter and driven by record results from our intermediates and derivatives segment and strong refining margins.

<unk> broad portfolio provided clear benefits as revenue grew sequentially by 13%, while margins expanded to support our more than 20% improvement in EBITDA.

Earnings were $5 19 per share.

EBITDA was $2 5 billion, which resulted in $1 $6 billion of cash from operating activities.

Altogether, our company generated an impressive 24% return on invested capital over the last 12 months.

Let's turn to slide number five and review our safety performance.

<unk> commitment to safety leadership is outstanding and well known.

As the CEO I will make sure that safety remains a consistent and unwavering cornerstone of our company's culture.

During my career I have witnessed the companies that are leaders in safety are also best in class in reliability and productivity.

And as a result and value creation.

In 2022, the year to date total recordable incident rate for our global workforce improved by more than 40% to zero point 12.

This represents substantial progress towards our ultimate goal of zero injuries.

I want to commend all of our employees and contractors for their clear commitments to go zero.

On slide number six we highlight some of our recent progress towards our sustainability goals.

<unk> products technologies and solutions provides very important contributions to a more sustainable world.

In addition, we have committed to industry, leading sustainability targets that improve this value.

Over the past few weeks, we signed for renewable power purchase agreements for 380 megawatts of electrical generation capacity in Texas.

These wind and solar projects will be able to supply more than 10% of lyondellbasell global electricity needs and represent meaningful progress towards the company's climate goal to procure a minimum of 50% of our electricity from renewable sources by 2030.

These projects are expected to reduce the company's annual carbon dioxide emissions by approximately 370000 tons and represents the average annual electricity needs from about 100000 U S homes.

In addition to our renewable energy goals Lyondellbasell is growing or protection of plastics utilizing renewable feedstocks under our circle and renew brands last.

Last year, we processed 12000 tons of renewable feedstock in Europe , and we are forecasting to increase this number to 40000 tonnes across both Europe and the United States during 2022.

This material is being run through our existing heated and cracker assets, and Wessling, Germany, and China and a few takes us with the goal to increase scale over the coming years since we see that the demand for these products is growing.

The growth of renewable feedstocks is one part of our broader mission to expand to reach of our sustainable products, including dose sold under the circle and brands.

Since launching our circle and brands in 2019, we have sold over 140000 tons of products based on recycled and renewable feedstock.

This represents more than the amount of polyethylene and polypropylene consumed by the population of Houston in one year.

Lyondellbasell is doing more than simply talking about the circular economy.

We are building real businesses that can help provide a more sustainable future for our customers and society.

Please turn to slide number seven to review our quarterly profitability.

During the second quarter, our business portfolio delivered $2 $5 billion of EBITDA, an improvement of $430 million.

Compared to the prior quarter.

<unk> results reflect how our global business portfolio can serve changing consumer needs.

As in person activities resume in global travel recovers, our oxy fuels and refining businesses are benefiting from increased demand.

Strong north American demand and favorable NAFTA costs supported margins for all of our products in the Americas, and Europe , respectively, while higher ethane and energy costs as well as inflation created headwinds in these regions.

We started to see moderating European demand due to high inflation at the end of the second quarter and continue to pass through elevated energy and feedstock costs in the prices of our products where possible.

During the quarter, China Us zero profit measures and logistics constraints continued to impact both regional and global markets.

We expect progress in China will continue to be challenging over the next few months, but anticipate that demand will recover towards the end of 2022.

Let us turn to slide number eight and review Lyondellbasell earnings polar over the course of the first complete business cycle for our company.

From 2011 to 2019, our portfolio of businesses delivered an average of $6 7 billion of EBITDA.

Favorable markets and our growing asset base delivered $9 2 billion of EBITDA over the last 12 months, an increase of nearly 40% over the prior cycle average.

With the commissioning of our new propylene oxide capacity underway, we expect that lineup ourselves stepped up earnings performance will provide resilience through the next business cycle.

And with that I will turn the call over to Michael first then to each of our business leaders, who will describe our financial and segment results in more detail.

Thank you Peter and good morning, everyone.

Please turn to slide nine and let me begin with describing how the step up in our earnings is leading to increased cash generation from our business.

In the second quarter, Lyondellbasell generated $1 $6 billion of cash from operating activities that contributed towards eight $3 billion in cash from operations over the last 12 months.

During the past four quarters, our team efficiently converted over 90% of our EBITDA into cash.

After accounting for sustaining capital reinvested in the business, we achieved a free operating cash flow yield of 26% relative to our market capitalization over the last 12 months.

Let's continue with slide 10, and review the details of our cash generation and allocation during the second quarter.

The Lyondellbasell team remains focused on extending our disciplined track record of capital allocation to provide for reinvestment in the company and generous returns for our shareholders.

After generating $1 $6 billion in cash from operations during the second quarter, we returned $2 1 billion to shareholders through a $5 20 per share special dividend, a 5% increase to our quarterly dividend that paid another $1 19 per share all while.

Repurchasing $45 million of our shares during the quarter.

We continue to invest in maintenance and growth projects with approximately $530 million in capital expenditures with a large portion funding are nearly completed world scale <unk> plant.

Now I would like to provide an overview of the results for each of our segments on slide 11.

During the second quarter Lyondellbasell business portfolio delivered nearly $2 5 billion of EBITDA.

Our results reflect record profitability in our intermediates and derivatives segment, driven by strong oxy fuels margins, while our refining margins benefited from increased demand for transportation fuels.

Conversely margins in our <unk> businesses encountered headwinds from rising costs for ethane feedstocks and moderating European demand.

One modeling item of note our original full year pension expense guidance of approximately $55 million did not include a second quarter $94 million noncash pension settlement charge that impacted earnings by <unk> 22 per share.

As a result, our 2020 to pension expense is expected to increase to approximately $180 million.

During the third quarter, we anticipate that we will begin recording cost related to our planned exit from our refining business at the end of 2023.

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

Yeah.

Thank you Michael let's forget the individuals' segment discussion on slide 12, with the performance of our olefins <unk> Polyolefin Americas segment.

Second quarter, EBITDA was relatively flat at $905 million.

North American demand for polyolefin continued to be very strong.

Higher costs for ethane and energy pressured olefin margins and offset the benefits of improved polymer prices.

During the third quarter, we expect continued strength in demand for polymers utilized in flexible packaging.

But elevated cost for feedstocks and energy as well as continuing export supply chain constraints and market headwinds are likely to pressure margins.

Now please turn to slide 13 to review the performance of our olefin and Polyolefin Europe Asia and International segment.

Higher ethylene prices and relatively flat feedstock costs resulted in slightly higher second quarter EBIT of $228 million.

Lyondellbasell as volumes declined due to downtime at our French cracker and moderating European demand for polymers in June .

The extended maintenance in France resulted in an impact of $65 million to the segment during the second quarter.

During the third quarter, we expect seasonally slower summer demand and continued higher energy costs associated with tight gas supply, which will pressure European markets.

Also with China demand remained sluggish due to zero COVID-19 measures. The European market is also facing pricing pressure from dislocated middle Eastern and Asian imports.

Towards the end of this year potential benefit from China's reopening could provide tailwind for our businesses.

With that I'll turn the call over to <unk>.

Thank you Ken.

Please turn to slide 14, as we take a look at our intermediates and derivatives segment.

Exceptional OXXO fuel margins resulted in record second quarter segment EBITDA of $675 million.

During the quarter styrene results benefited from tight market supply.

We are beginning to see that softer demand for durable goods is leading to moderation in propylene oxide margins.

In the third quarter, we expect margin compression across most product lines.

Oxo fuel margins are also moderating, but expect it to remain elevated at levels well above historical averages. This set of success of our intermediates and derivatives segment is rooted in the advantage technologies underpinning our propylene oxide business.

On Slide 15, let me highlight the cost advantages of Lyondellbasell propylene oxide production.

The chart on the right depicts the global cost curve for producing propylene oxide by asset.

The lower and asset is positioned on the curve the greater the cost advantage.

As you can see lineup of sales assets that produce propylene oxide with tertiary butyl alcohol co product or on the lowest where most favorable part of the cost curve.

P O TBA assets represent roughly 15% of global capacity and derive their advantage from favorable cost for butane from materials and strong pricing for the clean burning high octane oxy fuel products produced from search or butyl alcohol.

Lined up ourselves plants that produce propylene oxide styrene monomer co products are the next lowest cost technology and represent 35% share of global capacity.

Much of the industry produces propylene oxide using older higher cost technologies, such as the Chlorohydrin process.

With the recent escalation in chlorine prices the cost curve for Chlorohydrin based propylene oxide has only steepened, creating hardships for producers using this technology.

Lined up ourselves advantaged <unk> technology provides an excellent platform to address increasing global demand for propylene oxide and oxy fuels.

And oxide is used in the production of <unk> versus time and materials that saves energy by producing installation and reducing weight and a wide range of applications.

Oxy fuels are clean burning high octane gasoline blending components that increase fuel efficiencies and improve air quality by reducing half harmful emissions.

Let's continue with slide 16, with an update on RFP or TBA project that we are completing here in Houston. This is the largest greenfield investment in Lyondellbasell history, and will deliver much needed capacity to serve growing demand for these products that provide sustainable solutions for our planet.

We are thrilled to have nearly completed construction and we have already begun commissioning the oxy fuels assets depicted in the photo on the right.

The <unk> TBA plant commissioning will begin during the fourth quarter and we expect the integrated facility to start up in first quarter of 2023.

Our ramp up during 2023 will not provide for full year of production, but continue market strength is likely to support stronger margins than the mid cycle economics depicted on this slide with lined up ourselves advantage technology and affordable shale advantage butane feedstocks are new.

<unk>, starting up with the support of favorable markets.

Now, let's turn to slide 17, and discuss the results for our refining segment.

Second quarter, EBITDA was $418 million with improved margins driven by increased demand for gasoline diesel and jet fuel in the second quarter. The Maya 211 spread expanded significantly to about $56 per barrel. We operated the refinery at 94% of capacity with an average crude throughput.

252000 barrels per day.

In the near term the Maya 211 spread is moderating from second quarter levels with.

We plan to run the refinery about 87% of capacity during the third quarter to perform a limited scope cloud maintenance.

With that I will turn the call over to Jim.

Thank you Darko now let's review the results from our advanced polymer solutions segment on slide 18.

Our compounding <unk> solutions business continued to be pressured by the slow recovery in automotive markets.

In the first half of 2022 automotive production was 3% below the same period last year.

Supply chain disruptions and raw material shortages continued to impact the recovery and therefore, our compounding <unk> solutions business.

Industrial construction markets have demonstrated strength as catalog demand and margins supported higher advanced polymer results in our second quarter EBITDA for the segment of $118 million.

We expect similar results for the segment in the third quarter as the gradual recovery in automotive production improves volumes, while rising costs impact margins.

A more significant step up in earnings will be dependent upon stronger automotive production and the resolution of raw material constraints.

And with that I will return the call back to Peter.

Thank you again theme for this impressive quarter.

To close out on our segments lets turn to slide number 19 and discuss the results for our technology business on behalf of Jim Stewart, Our senior Vice President for R&D technology and sustainability.

I have always been highly impressed by the strength of <unk> International innovation and technology capabilities to broad technology portfolio, and our leading market position.

Very clearly innovation is a core part of <unk> DNA.

Second quarter, EBITDA was $112 million supported by strong licensing revenue and record year to date catalyst demand.

While new licensing activity slowed we have noted a recent shift in our licensing demand away from commodity polymers.

Four of our five new licenses. This year were sold in Asia to produce low density polyethylene final acetate co polymers used in solar panels, laminations and encapsulant that support the world's rising demand for renewable energy.

In the third quarter, we expect our licensing revenue on catalyst volumes to moderate this segment is likely to produce results similar to that seen in the first or second quarter of 2021.

Now, let me summarize the second quarter and the outlook for our company with slide number 20.

<unk> second quarter results benefited from a balanced portfolio that captured considerable value with very efficient cash conversion.

Margin expansion, and our oxy fuels and refining businesses and solid demand for our products more than offset higher feedstock and energy costs.

Our management team and board understand and respect the power of this portfolio.

We are unwavering in our disciplined approach to capital allocation and demonstrated our commitment to shareholder returns during the second quarter.

Lyondellbasell is making measurable progress towards our ambitious interim and long term goals for the reduction of our greenhouse gas emissions, while developing sustainable businesses based on our recycled kind of renewable materials.

Our aim is to build upon our initial work scale or reach and establish lyondellbasell as a leader in serving the world's growing needs for circular and sustainable materials, while reducing our carbon footprint.

I began my journey as CEO , we have a commitment to leverage lyondellbasell strengths and capture value from both near term and long term opportunities.

Over the past several months, we have undertaken an in depth examination of our company to identify a north star that will provide clarity and guiding principles for our strategic decisions.

<unk> of our progress on circularity and sustainability.

We are consulting with all stakeholders to ensure we have aligned on a durable and resilient strategy that will serve lyondellbasell wells across a range of scenarios for many years.

Last week, we had a very productive interim review with our board on this topic.

We're planning further alignment during our board meetings in the second half of the year with our work aimed towards communicating or Northstar externally during an investor day in early 2023.

In addition, our second work stream is underway to identify prioritize and execute on value opportunities that exist and liner Brazil's current business structure.

Thus far <unk> has identified a considerable number of opportunities such as creep capacity de bottlenecks automation and energy saving opportunities that can be delivered through modest investments by leveraging <unk> existing strengths.

We believe the value of these projects is considerable and actionable.

I am committed to communicating our initial assessment of this value opportunity in our timeline for realization during our third quarter earnings call.

We look forward to sharing our vision for Lyondellbasell and the additional value we plan to unlock from our company.

We are now pleased to take your questions. Thank you.

Thank you Sir.

Ladies and gentlemen at this time.

<unk> and answer session.

As a reminder, if you have a question. Please press the star followed by the one on your Touchtone phone.

If you'd like to withdraw your question. Please press the star followed by the tail.

We do ask you to please limit to one question.

Our first question comes from the line of Steve Byrne with Bank of America. Please go ahead.

Yes. Thank you I appreciate the slide 15 on your outlook for PEO.

<unk>, maybe you could comment on.

What do you think thats slide or that would have looked like.

Historically, clearly now you have some reasons for it to be shaped like that.

Lower.

Lower butane.

Higher Russell benzene, and certainly higher chlorine, but as part of this just because TVA is so valuable right now and as this is the shape of this your outlook.

Yes, Ben.

In the years to come as that part of your EBITDA forecast.

So hi, thank you for the question.

I think as we looked at this.

<unk>.

You compare it to historical Leverages its actually widen in terms of the differential in terms of our competitive advantage and Thats, primarily driven right now of the value of the core products.

And of course that will fluctuate over the cycle, but fundamentally we see for the next.

Where we are right now.

The coming next two years.

We're in a very very favorable.

Cycle situation than as you drive if you look at energy costs going up that will also favor our technology.

So I think fundamentally.

Where we are and look at it right now I think our technology is very advantaged.

Thank you.

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

Yeah, Hi, Thanks for taking my question I wanted to ask on polypropylene in the U S. It looks like spreads were pretty volatile during the quarter, maybe starting at around 20 pounds of start up near 50 in may and kind of round tripped back down so I'm curious one.

Is that similar to how your earnings progressed through the quarter.

Two what drove that volatility and three what's your outlook over the next couple of quarters in terms of the spreads.

Let me give that question I mean to you Ken you are closer to the business of course.

Sure. Thanks, Peter Thanks, Josh for the question.

Look a lot of the volatility that you've seen in the polypropylene market. This year has been related to a lot of.

Downtime in the industry, particularly in the U S.

Is that a lot of that is behind us inventory levels are.

Frankly in our favor and polypropylene, so I'd say looking forward.

We mentioned.

Softening demand trends that we see around durable applications, we see that in the polypropylene area as well.

But we still see very good demand in packaging. So net net we're going to see some softening some headwinds in polypropylene, but continued <unk>.

Spreads are going to be above historic averages.

Thank you.

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

Thank you could you talk a little bit about naphtha costs in Europe , and in Asia, which during the quarter seem to disconnect from oil. So could you just sort of discuss what you see the outlook is there.

And what impact it will have on your European operations.

And then China.

As you know it as well.

After this.

Decoupling at at the moment.

From what is happening on the oil side.

But I think.

One needs to look at China, and when demand will pick up substantially again in China.

That eventually would reestablish in our opinion.

D.

The relationship between NAFTA and crude oil.

Giving a little bit of further information around China.

And then we have seen a little bit already yields an uptick in demand in China, but it was very modest during the second quarter.

We expect that especially after October there will be quite some incentives coming out as it has been in the past.

So towards the end of the year or beginning of next year, one may expect that demand in China.

With substantially pick up and be back.

Well normal.

Levels of growth that we have seen over the cycle.

Thank you.

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

Peter and congrats on a very solid first quarter as CEO may you have many more.

If I could follow up on Europe , and energy how do you see.

The situation playing out if there is a material natural gas shortage, what would be the impact on lyondell what are the actions.

That you are taking to that.

You would take to possibly mitigate that.

Hmm.

Frank Let me also say I mean, who would admit our cogs oven secreting about an event.

Thank you Bill.

Sure.

Yes of course, I mean, it's clear that in the current situation in Europe .

We're very close to what is happening there. That's what you may expect of course in such a situation that we have an internal crisis management crisis management team.

<unk> been running that we are developing different business continuity plans that we have analyzed our dependency also.

Net gas.

And I must say I mean that.

The integrated crackers that we have they show a low dependency on Nat gas.

Mostly supplied by oil based fuels.

I want to put it in perspective at Windward, where the biggest impact is eventually as in Germany, and Italy, but German revenues for us or based upon last year's revenues about 7% of total revenue in Italy is about 4% of total revenue.

We believe that we.

We can continue to run our crackers in Europe , but.

But we have been doing at an 85 plus percent range.

So from that perspective.

Believed that we if everything runs, let's say in a normal way.

Would be quite robust and continuing over operations.

The independence of the effects the effective.

North stream, one returns I mean back to 40% or would be lower than the 40%.

Thank you.

Our next question comes from the line of John Mcnulty with BMO capital markets. Please go ahead.

Hi, Good morning, Peter This is obviously the die off with Jon.

Cost.

And then Jason you highlighted the impact from Lockdowns in China, and our potential.

Towards the end of the year.

Can you add some color on all the profitability of your Chinese operations.

Appear in the region and then assuming beyond indeed see higher for longer crude price environment. What is the what is the market appetite for higher prices.

Probably required to get to you pay slightly margins Ted Thank you.

Let me take the first question John .

It is clear that China operations, I mean profitability at this point in time is low.

But due to the effects I mean with all the investments that we made in China.

We are.

In the first quartile in terms of delivered costs cash costs. So we have a favorable position.

In China.

But generally spoken I mean.

Profitability is very low.

<unk> said Thats also again like to put it into perspective, I mean, China for us in terms of revenues of total revenues is I'd say a bit lower than 5%.

So I don't want to overemphasize that either.

And then on your second question.

Can you give that to you Ken sure absolutely. So look what we see happening in China in particular is <unk>.

Prices are going to move where we're feedstock go at this point people are cutting back utilization a lot of a lot of the assets are frankly underwater and you're making a decision almost daily about whether to continue to operate or is it better to shut down.

So that's putting a floor under pricing today. So from my perspective, there is nowhere to go but up in China. These days.

There will be a reopening impact the question is always going to be about about when not yes, but like Peter said, we've got very good new assets. Both in <unk>. So we're still confident in the outlook.

At the end of the year.

Thank you. Our next question comes from the line of Kevin Mccarthy with vertical Research partners. Please go ahead.

Yes. Good morning, a question for Ken perhaps I was wondering if you could comment on the U S propylene market it seems to have gotten.

Bit sloppy here in recent months I believe in the U S July contract price declined another four cents.

Earlier this week.

That makes four consecutive monthly declines of 35% negative or so can you can you comment on on both sides supply demand and what you're seeing there and whether we might expect that pattern to reverse in coming months.

Sure Kevin. Thank you for the question, Yes, I do see expect to see that trend in propylene reverse in the U S. In fact, I would I think we're going to see that in August already.

We're starting to see spot prices move up again for propylene and I'll go back to the answer that I gave earlier theres been a lot of downtime for polypropylene assets in the U S and Thats put some linked into the propylene market whats happening now as Youre starting to see those assets run again, and youre going to start to see people.

Refilling inventory levels.

Because of all the downtime that we've had with polypropylene and thats going to start to bring the propylene price back up a little bit here in the in the back half of the year.

Yeah.

Thank you.

Our next question comes from the line of Mike <unk> with Barclays. Please proceed with your question.

Great. Thanks, Good morning, guys.

I think industry consultants are forecasting I don't know about 15 to 20 per pound decline in U S. Polyethylene prices between now and the first quarter I guess do you agree with that assessment and why or why not.

Well, if we take that and then Ken will also further elaborate on your question Mike.

I mean, what we continue to see as very good demand in the marketplace and yes, maybe a little bit of a slowdown like we alluded to in terms of durable goods. But then there are a couple of other points that I want to highlight here as well is if you look in Europe and North America at the average.

Inventory in terms of car builds than we are today substantially.

<unk> actually at the lowest level since the last five years.

And that has not been if you look at.

What the automotive industry has been saying in their quarterly calls, it's not because they have a lack of demand, but it's mainly still because of the supply chain and they are expecting that towards the end of the year.

Lot of these issues will be resolved. So the key question there will be how will that actually then result in restoring inventory levels in that particular industry as one data point.

The other data point is definitely also with regards to Dan Moore.

The feedstock costs.

And feedstock costs have been.

Exceptionally high.

Described during Q2.

But if we look at.

Natural gas towards the end of the year and eventually also the impact on ethane prices.

We tend to believe that that should moderate during the second half of 2022.

And as a results in wholesale.

Habits impact.

On the margins.

Ken.

Do you want to elaborate a little bit further on this yes, I guess the one thing that I'll add is when we look at this we've got a lot of levers that we pull here in terms of managing R. R.

Our margins, we do expect to see energy and feedstock costs continue to be elevated in the back half of the year, but they're going to moderate versus the second quarter.

There'll be things that we're doing around our feed slate our product slate our channel selection market segments, because we still do to Peter's point see strength.

And some of our market segments, and we'll be gearing our portfolio to serve that.

Thank you.

Our next question comes from the line of Michael Sison with Wells Fargo. Please go ahead.

Hey, good morning nice quarter.

I think as you guys know polyethylene demand was fairly resilient during the pandemic up 2% in 2020, and so just curious what you think demand would be for polyethylene. If we are going into a recession.

As we head into 'twenty three.

Yes, Thanks for your comment Michael on the second quarter.

Highly appreciate it.

Definitely I mean.

In terms of demand and Ken has shown and I think it was in the previous quarter also resilient in feed demand is actually even.

If you talk about.

Downturns in the industry, if you call them recession or not.

And this is something that we continue to see as well I mean moving forward, we expect that the demand will continue to be resilient.

And the next in the next quarters, Ken you agree I absolutely agree I think what we've seen in the past is that polyethylene is typically recession resistant.

And even this year with China being down we still expect to see.

Growth in the kind of 2% to 3% range globally. So.

As China comes back I think youre going to see that growth number go up even higher which is what we've seen historically.

Thank you.

Our next question comes from the line of P. J <unk> with Citi. Please go ahead.

Hey, Peter a question on the refining and you announced the refinery shut down.

Way before the actual shutdown.

Refining margins continue to remain high.

Would you be able to delay the refinery shutdown, we're putting in some incremental maintenance capital.

P. J. Thank you for your question.

We've been very clear I mean, the latest by the end of 2023.

We will shut down over refinery.

Houston Nothing has changed in that regard and simply because of a technical reasons.

You need to eventually invest a huge amount of money to keep the refinery.

Operating and definitely.

As I alluded to in my preliminary comments.

Safety has always been.

The most important thing that we're looking at in the company. So.

We will not at the expense of safety.

Keep operating the refinery, which means as a consequence.

One would have to invest a huge amount of money, we've alluded to that $1 billion at least my experience actually telling me that the moment Youll open up the reactor since June you start finding out that actually your 1 billion will not be sufficient and it's going to be substantially higher in terms of the investments.

In the refinery so nothing has changed towards.

What we have communicated before.

Thank you.

Our next question comes from the line of Jeff Zekauskas with Jpmorgan. Please go ahead.

Hi, if I could also follow up on the refinery issues.

Okay.

It's a multipart.

Question.

Okay.

Are you in active negotiations.

To still sell the refinery or are you not in negotiations.

Second.

If you thought the return on capital was adequate.

Would you close it anyway.

Cause of your carbon reduction targets or how do you weigh the carbon reduction targets versus the return on capital.

And thirdly are you are you continually reassessing the return on capital based on your assessment of refining margins or if you already simply made the decision.

Excellent.

Yes. Thank you Jeff for your very good questions and let me go a little bit deeper.

And what actually is.

The attention that we are having with regard to mean to the refinery what are we actually looking at I mean, we have to.

Our refinery.

It's a very nice location that we have we have very good.

Assets also.

The refinery so we're mainly looking at the fact can we do what can we do else I mean with the assets that we have at the refinery.

You are very familiar with the fact that we are making.

Making very good progress on our molecular recycling technology, so the advance recycling technology.

Developments.

And this site could be a very good fits for us to do.

A very large investments nothing has been decided yet acceptances investigation, but we the more we look at it I mean, the more we are inspired by its because we have very good equipment that we eventually could turn use so it could be quite a lot of synergies. So this is the direction of travel Jeff.

With regards to him into the refinery.

Thank you.

Our next question comes from the line of Chris Parkinson with Mizuho. Please go ahead.

Great. Thank you just given all the moving parts in that.

Spread compression across the intermediates drove segment can you just get the intermediate term outlook in terms of spreads.

The various businesses.

Oxy fuels just to give us help us a.

A little bit more perspective heading into 2023. Thank you.

Yes. Thank you Chris I mean, let me first I mean.

Again make a couple of comments on that win win of course, I know lyondellbasell since quite a while and that's clear but also when they started moving in into my my position.

Then what impressed me a lot is the diversity.

Of the different products and solutions that we have in the portfolio and as such I call. It a kind of a natural hedge because.

All the products are not following the same cycle.

And therefore.

Or hedging each other.

So that is quite good I mean to have a portfolio like this.

And it is the best demonstration was of course on the lower earnings during the second quarter as a result out of that.

Now if we go a little bit deeper I mean, we've talked a lot already about polyethylene and polypropylene margins into one so I would put to focus maybe a little bit on the very important oxy fuels business that we have and the contribution of oxy fuels.

As an octane enhancer as you know and then.

Also with regards to positioning in terms of sustainability solution offerings.

Currently if you can give a little bit of an update on the oxy fuels what youll see.

Yes, no. Thank you so even inside of RMB, what we have through the portfolio, it's a very resilient portfolio and Sasha over a cycle.

I don't know followed the same cycle then the oxy fuels.

Really good example of that where we see maybe the gasoline cracks moderating.

But the oxy fuels margins are expected to stay well above the historical averages.

It's the multitude of things that drive some margins there. It's also they're advantaged butane costs that we see helping us.

Looking forward, but then also the very strong demand for octane and.

Basically drives the premium of our box of fuels above gasoline.

That's also been a very strong factor for the excellent results that record earnings that we had for oxy fuels and we think we will remain at an elevated.

Level.

Thank you. Our next question comes from the line of John Roberts with Credit Suisse. Please proceed with your question.

Thank you in the presentation, you talked about continued strength in propylene oxide, but I think the release discuss some slowing in polyurethane markets, which I guess, we would expect with auto and appliances and construction.

As you begin commissioning the new Po plant do you plan to take downtime.

In other plants to kind of keep the market balanced if we are facing a slowdown there.

As part of our startup plan.

We have.

Other outages scheduled for other plants that we have delayed so in terms of managing our supply on the on the appeal.

But we also expect that the plant to.

Ramp up during the year.

And we expect that for next year, we will produce about 50% of the annualized capacity from the plant.

Yes, John .

Startup.

These schedules I mean towards the end of Q1.

2023.

I mean by historical then you gradually move into the.

Nameplate capacity volumes. So therefore, if you average it out.

Over the year 2023, then it would be approximately we expect I mean, 50% of the nameplate capacity.

Thank you.

Our next question comes from the line of Hassan Ahmed with Alembic Global. Please go ahead.

Good morning, guys.

Just wanted to touch on <unk>.

In the press release, you guys I believe said that.

Around 30% of the feedstock slate.

There was non naphtha based so I just wanted to get a better sense of how we should think about the feedstock flexibility you have in your European operations.

Sort of hitting the upper limit when you say that.

30% was non naphtha.

Ken.

I would not say, we're hitting the upper limit there are a lot of things that we can still do on the feed slate as you know naphtha has been favored a lot of that is driven by not only the naphtha price, but also the co product pricing so.

That is a big lever for us not only in Europe , but also in U S markets and we'll continue to find opportunities around the feed slate.

And optimize the portfolio as we go.

Thank you.

Our next question comes from the line of Arun Viswanathan with RBC capital markets. Please go ahead.

Great. Thanks for taking my question.

Peter I, just wanted to drill down a little bit into one P Americas profitability.

Yes, if you look ahead I guess.

Q3 in the back half.

We.

Definitely have some slowing demand.

Consumer retail inventories.

Yes continued high Gamestop.

Do you expect the continued high.

Gamestop.

And I guess support pricing or is.

<unk> weighting to the east.

Maybe we see some margin deterioration as we go through the next couple of quarters.

Yeah. Thanks, Arun, let me take the first part of your question then.

Scan them into further elaborate.

You alluded already a bit towards I mean in terms of demands.

Continue to see I mean demands to be healthy and of course, I mean, we have our portfolio of products that we have.

We can shift more to the consumer.

Driven products packaging, because as said before we expect our packaging will continue to be.

Quite healthy something that we have seen I mean in the past also in.

And don't turn barriers of Av.

The economy or recessions.

With regards to I mean to the feedstocks, we said I mean pressure will continue to be high on the feedstock and on the energy cost level.

Towards the end of the year, we expect a little bit of moderation, but still I mean, the pressure will continue to be hi, Ken.

Yes, I think the only thing that I'll add to that is you do have new supply coming on and that's going to be another headwind for us but.

The good news is that we will start to see some of these supply chain constraints on wind at the back end of the year and Thats going to help.

Open up some channels to market.

We also you had mentioned inventory levels were already seeing downstream consumers start to reduce inventory levels. So that's actually already started taking place and I think one thing we're going to watch very closely obviously is going to be what's happening with the <unk>.

Weather impacts on that because.

There is a.

Sort of a natural tendency tendency in this industry to start to pull the inventory down and this is not necessarily a great time of year to do that but of course, we'll be watching that closely and see how those things develop.

Thank you. Our next question comes from the line of Steve Richardson with Evercore ISI. Please go ahead.

Hello, Hi distance Qishan on for Steve.

On the high end.

I was curious as wondering if scope three emissions standards would disadvantage.

The business long term and also.

With MTBE prices normalizing, what my baseline earnings potential for R&D look like thank you.

Well good question I mean in the <unk> business I mean scope III emission standards. It's clear of course also that even if we have enough clearly made a commitment on scope three that were deeply analyzing.

What are the emissions on scope three that we have.

We are approaching of course also our customers in discussions and reducing their scope three emissions on the products that they are supplying to us so thats, where it can progress.

But it is important that we are looking at it and I'll give you. One example, I mean, we talked about the refinery beforehand.

By shutting down the refinery, we're talking about approximately 44 zero percent of our global scope three footprint.

That would be reduced.

We're talking here about 30 40 million tons per year of scope three emissions that would be reduced by that action.

Looking about the applications not necessarily at this point in time, we see a disadvantage.

Because it is a.

Scope three is something that is extremely difficult for the entire industry I mean to deal with.

There is no clear account.

Counting mechanism amino scope III, so lots of things that may still be.

Worked out through <unk>.

Legislation and how to account for scope three emissions.

So the immediate answer to that is we don't see.

That in terms of demand for those products that that would happen and impact I would say on the contrary because the oxy fuels, if you're talking about the oxy fuels actually make a good contribution in that regard.

Thank you.

Our final question comes from the line of David Begleiter with Deutsche Bank. Please go ahead.

Thank you Peter you mentioned strength in styrene in the quarter, but as expected the weekend going forward, what's your outlook for styrene in the intermediate and longer term.

For you guys.

I'll give that question I'm going to circle.

Yes, Thank you and our second quarter was driven by both strong demand, but also primarily operational issues scheduled and unscheduled outages.

And we see margins probably softening here in third quarter in the second half of the year and I think that there are <unk>.

Both areas, but they're also areas under pressure.

Single use plastics of course being one under pressure, but you also have strong and we've seen double digit growth for.

EPS being used in insulation material.

So I would say that would probably have a moderate outflow concession margins.

The immediate term.

Thank you.

I am showing there are no further questions I will turn it back to Mr. <unk> for closing comments.

Thank you very much I mean for all the very thoughtful questions.

Say as usual.

We look of course forward to sharing more of our plans with you about.

How we outlined our brazilwood events on our strategy and in addition to that also unlock additional value over the coming months.

I expect when we are releasing our third quarter results that were putting a number to the additional value that we believe we can capture and also a timeline to that and then <unk>.

For the beginning of next year to our capital markets day to talk about our strategy.

I wish you all a great weekend and of course stay healthy and stay safe. Thank you very much.

Thank you.

This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.

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