Q3 2022 LyondellBasell Industries NV Earnings Call
Okay.
Hello, and welcome to the Lyondellbasell teleconference.
Request of Lyondellbasell. This conference is being recorded for instant replay purposes. Following today's presentation, we will conduct a question and answer session.
I'd now like to turn the conference over to Mr. David Kinney head of Investor Relations, Sir you may begin.
Okay.
Thank you Melissa 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 reference to some forward looking statements and non-GAAP financial measures. We believe the forward looking.
Payments are based upon reasonable assumptions and 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 website.
Comments made on this call will be in regard to our underlying business results using non-GAAP financial measures such as EBITDA and earnings per share excluding identified items additional documentation on our investor website provides reconciliations of non-GAAP financial measures to GAAP financial measures together with other disclosures, including the earnings release and our business results discuss.
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A recording of this call will be available by telephone beginning at one P. M. Eastern time today until November 28 by calling 870 76606853 in the United States and 20161 to 70 415 outside the United States. The access code for both numbers is 1373 to one four.
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Joining today's call will be Peter Vanacker Windup cells, Chief Executive Officer, our CFO , Michael Mcmurray, Ken Layne, our executive Vice President of Global Olefins, <unk> Polyolefin, Kim <unk>, our EVP of intermediates and derivatives and refining and charcoal renmin, our EVP of advanced polymer solutions.
During today's call, we will focus on third quarter results current market dynamics, and our near term outlook, 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 return towards our 2022 results.
Again with our safety results on slide number three.
Our team continues to deliver outstanding safety performance in 2022.
In Brazil, the year to date incident rate for employees and contractors is 0.1 to roughly half the rate seen in recent years.
Safety is a core value at our company and will continue to receive the utmost attention.
The focus on commitments or metrics reflect will remain a cornerstone of our company's culture and a key enabler of our future success.
Let's now turn to slide number four to discuss <unk> financial results.
During the third quarter as you would expect our team remains very focused on cash generation, while navigating the well known very challenging environments.
Lined up but those business portfolio faced headwinds from rising costs and weaker demand at the same time.
Earnings were $1.96 per share EBITDA was $1 2 billion. Nonetheless, we delivered an impressive $1 $4 billion of cash from operating activities.
By the end of the quarter, we increased our balance of cash and short term investments to $1 5 billion.
That's $5 $3 billion of total available liquidity.
The strength of our balance sheet and our disciplined approach to capital allocation enables us to confidently move forward with our strategy, while continuing to provide attractive and strong returns to shareholders through all stages of the business cycle.
Despite significant headwinds our company generated a 19% return on invested capital over the past 12 months.
On slide number five we highlight some of lines out of Brazil, its existing and emerging sources of advantage for generating differential value and high returns over a range of market conditions.
Our company is widely recognized for our deep commitment to safe operations cost management and operational excellence. These values are part of our DNA.
<unk> global portfolio of businesses benefit from both geographic and end market diversity.
Leading positions in diverse diverse markets balanced portfolio and reduce risks from market concentration.
Last quarter I mentioned the work that is underway to identify a north star that provides clarity and guiding principles for our strategic decisions.
Some of the early decisions from this work added to our capability and resiliency for generating value and high returns.
Market leadership, and circular and low carbon solutions has quickly emerged as an essential parts of our password forwards.
We believe circular in low carbon solutions will provide advantage and there are a wide range of economic scenarios. We will talk about this more in a few moments.
And intense and consistent focus on people and culture is a key enabler for driving differential value.
On October one we implemented a new organizational structure that will improve agility and accountability across our company.
One example is our decision to align strategy and execution by moving the global responsibility for manufacturing under this strategic business unit leaders.
Strategic business unit leaders will have the ability to run their businesses based upon the required value propositions and business models.
We also launched customer and commercial excellence initiatives to elevate our levels of service quality and innovation.
It was the right organizational structure and improved customer focus our company will have even more capacity to capture a differential value.
After a very comprehensive diagnostic face a well structured value enhancement program targeting $750 million in recurring annual EBITDA improvements has been launched and will describe this program in more detail shortly.
Wendy's portfolio vintages are combined with our track record of efficient cash conversion.
Our investment grade balance sheet, and our secure steadily growing dividend I think you will agree that lyondellbasell is the winning formula for generating high returns and differential value for our investors and there are a wide range of economic scenarios.
On slide number six I would like to share more detail on one of the decisions that quickly emerged from our strategy work the creation of our new circular in low carbon solutions business unit.
In my view circular and renewable solutions businesses require a differentiated business model and a more intrapreneur your mindset to succeed.
We're setting up our new circular and low carbon solutions business unit with this in mind.
This business unit is led by Ivan are funded plan and is accountable for building scalable technologies and profitable businesses to serve rapidly growing customer demand for our circular and low carbon solutions.
Since we launched the circle and brands in 2019, we sold products with more than 150000 tons of recycled and renewable content.
Our current goal is to sell at least 2 million tons per year of these products by 2030 with all of our new business unit, leading the way.
For perspective, 2 million tons represents about 20% of our 2021 global sales of polyethylene and polypropylene.
And just the past few weeks, we have announced or participation in several agreements related to the new capacity or circle and low carbon solutions business in several regions.
We are partnering on plastic waste sorting facilities in Houston, and Germany, the sorting plants will convert local plastic wastes into usable feedstocks for mechanical and or advanced recycling.
In Germany, we expect the facility will provide a material amount of the feedstock required for our first advanced recycling plants using lyondellbasell is appropriate to read marine technology.
In India, we are forming a joint venture for a fully automated 60000 tons per year mechanical recycling facility.
And in China, we are developing another joint venture to mechanically recycled post consumer waste in the Guangdong Province.
I am confident that these and future actions when accelerates, our circular and low carbon solutions offering to position lyondellbasell as the preferred supplier for our customers and brand owners seeking to lower the greenhouse gas impact of their business and increasing the circular content of their products.
Our recently announced collaboration with Abbvie, Kita, Chevron and Juniper on a U S Gulf coast low carbon hydrogen and ammonia project is but one additional example of our progress.
We're quickly and methodically building a robust supply chain to support the attractive growth opportunities for our circle and low carbon solutions business.
Let's turn to slide number seven and discuss the launch of our value enhancement program.
Lyondellbasell has a well earned reputation as a cost leader in our industry.
But after 12 years with a singular focus on managing cost a significant number of untapped value opportunities have accumulated we belief this untapped value can be unlocked with modest incremental investments and resources.
Our value enhancement program utilizes a proven stage gate methodology to identify implement and track progress on hundreds of initiatives across the company.
Over to thousands of ideas have been generated and we have validated more than 1500 initiatives to date.
But we're just getting started.
We organize value opportunities into three categories manufacturing and operational excellence.
Procurement and supply chain and commercial excellence, we have confidence that our value enhancement program is capable of achieving an estimated $750 million.
Of annual recurring EBITDA improvements by the end of 2025.
And we have a continuous evergreen process in place, we look forward to a regularly extending our goals.
We will keep you apprised of our progress and look forward to sharing more details on this program during our upcoming capital markets day in March.
Before I turn the call over to Michael I would like to describe the new organizational responsibilities for the business leaders on this call.
Joining us on the call today is Ken 40, who assumed responsibility for the intermediates and derivatives and refining segments from Toric Orin ma'am.
Kitten began her career with our company more than 30 years ago as a chemical engineer and has served in a broad range of leadership roles spanning manufacturing strategic planning finance and supply chain.
She is a proven leader with a deep knowledge of our company and the value of the voice on our Executive Committee.
Darker renmin is now in charge of our advanced polymer solutions segment in order to be a market leader, our Aps business requires a customer service focus that is differential for most of <unk> other businesses.
Darko will develop the appropriate culture and service model to maximize the full value potential of our Aps business.
Marcos prior experience as a CEO at other companies will serve us well in this role.
Ken Layne will continue to have responsibility for our two olefins <unk> polyolefin segments.
And Jim Guilfoyle, who formerly led Aps is relocating to a record time and reporting to Ken as the leader for the O N P business in Europe Africa, the Middle East and India.
With that I will turn the call over to Michael first and then to each of our business leaders, who will describe our financial and segment results in more detail.
Thank you Peter and good morning, everyone.
Please turn to slide eight and let me begin by describing how we are extending our track record of robust cash generation.
In the third quarter, Lyondellbasell generated $1 $4 billion of cash from operating activities that contribute toward a total of $7.6 billion over the last 12 months.
Our cash on hand increased to $1 $5 billion at the end of the third quarter.
During the past four quarters, our team efficiently converted 100% of EBITDA into cash.
This efficient and robust cash generation provided further return of $4 billion to lyondellbasell shareholders over the last 12 months.
Let's continue with slide nine and review the details of our cash generation and allocation during the third quarter.
The wind up sell team remains focused on disciplined capital allocation provide strong returns for our shareholders.
During the third quarter, we returned $400 million to our shareholders through our quarterly dividend and an additional $160 million through share repurchases.
We continue to invest in maintenance and growth projects with $440 million in capital expenditures a significant portion of this capital funded the final stages of construction for a world scale P. O TBA plant that remains on track for startup in the first quarter 2023.
My finance and strategy teams are partnering with our strategic business unit leaders to rigorously track the ongoing progress from our value enhancement program. We look forward to regular reporting on our value capture beginning in 2023.
Now I'd like to provide an overview of the results for each of our segments on slide 10.
Lyondellbasell business portfolio delivered $1 2 billion of EBITDA during the third quarter.
Our results reflect margin compression across all segments due to rising costs and weaker global demand are.
Our olefins <unk> polyolefin businesses faced persistently high and volatile energy costs, coupled with lower demand, particularly in Europe and China.
While our oxy fuel business and refining segment continued to earn margins above historical averages and demand for fuels remained strong results were sequentially lower following peak margins in the second quarter of 2022.
Higher costs for energy raw materials labor and transportation negatively impacted our advanced polymer solutions segment.
Across our European assets September year to date energy costs are $1.8 billion higher than the same period in 2020.
During the quarter, we recognized 84 million in costs related to the exit from our refining business, we expect to incur a similar amount for the final exit costs during each of the next five quarters.
With that I'll turn the call over to Ken.
Thank you Michael.
Let's forget in the segment discussions on slide 11, with the performance of our olefins <unk> Polyolefin Americas segment.
Third quarter O N P America's EBIT decreased to $559 million.
America, the combination of customer Destocking and expectations of additional supply from new assets resulted in lower product prices.
During the fourth quarter, we expect lower seasonal demand and further capacity additions will keep markets well supplied.
Margin pressures could be offset by moderating feedstocks and energy costs.
Also with lower demand, we expect continued easing of logistical constraints.
Lyondellbasell will continue to reduce operating rates to match lower demand and manage our inventories.
We expect to operate our O N P Americas assets at a rate of approximately 75% in the fourth quarter.
While market conditions remain challenging we continue to proactively advance our long term strategy, we recently announced a new partnership with cyclical and Exxonmobil to build a 150000 ton plastic waste sorting facility in Houston.
The odd recycling, we announced our participation in an industry consortium to evaluate a low carbon hydrogen production facility along the U S Gulf Coast.
We are moving quickly and decisively to increase circularity and reduce our carbon footprint.
Now please turn to slide 12 to review the performance of our Olefins <unk> Polyolefin, Europe Asia and International segment.
European markets were severely pressured by tight gas supplies and higher energy costs that reduced demand from both plastic converters and downstream consumers flying.
Lyondellbasell European volumes declined due to extended downtime at our ethylene cracker in France and planned maintenance at our cracker in Germany.
All of this combined to result in a third quarter EBIT loss of $83 million.
During the fourth quarter, we expect high and volatile energy costs will persist.
In addition, slower seasonal demand is likely to add further pressure on European markets.
Our O N P. Europe businesses have responded to escalating energy prices by reflecting these cost and product pricing with energy surcharges.
This year, we introduced variable formulas for these surcharges to account for energy volatility and ensure fairness and our pricing.
Also in response to lower demand and margins, we plan to operate our European assets at approximately 60% of capacity during the fourth quarter as.
As previously announced we have postponed the restart of our integrated Olympias site in France until early 2023.
As in the Americas, we continue to focus on long term strategies in support of our circular and low carbon business.
In October we announced new partnerships for plastic waste sorting facilities in Germany, and China, and a fully automated mechanical recycling facility in India.
These partnerships allow us to swiftly develop fit for purpose facilities in each region, while addressing rapidly rising global demand for circular and renewable solutions.
Finally, I want to express how excited I am about the opportunities with the value enhancement program that Peter mentioned.
Across the board, we see ideas being generated through improved value capture in manufacturing procurement and serving our customers more efficiently.
With that I'll turn the call over to Kim.
Thank you Ken and thank you Peter for your kind remarks, beginning of the call.
Please turn to slide 13, as we look at the intermediates and derivatives segment.
Following a record second quarter EBIT for the segment declined in third quarter of $360 million.
Styrene margins deteriorated to a loss, it's mark as supply improved following second quarter industry outages.
Mexico margins declined relative to the second quarter, but remain above historical averages.
Propylene oxide margins continued to moderate on softer demand for durable goods.
In the fourth quarter, lower benzene and ethylene raw material costs are expected to improve styrene margins and bring the styrene business closer to breakeven.
As we expect lower seasonal demand.
Lead to further margin compression across most of the remaining R&D product lines.
Despite the improving outlook for styrene, we have decided to idle production at our Dutch propylene oxide and styrene monomer joint venture during the months November and December due to the high energy costs and weaker European demand.
Overall, we expect to run our global R&D assets at approximately 70% capacity during the fourth quarter. We remain on track to start up our new P. O TBA plant in Houston during the first quarter of 2023.
Lastly, as we have completed the validation steps for the <unk> portion or the value enhancement program and we look forward to the implementation plans to be done by year end.
Now, let's turn to slide 14, and discuss the results and they are finding segment.
The third quarter EBITDA decreased to $190 million on moderating margins following an extraordinarily strong second quarter demand for refined products.
In the third quarter, the Maya 211 spread declined to about $47, a barrel, but remains well above historical averages.
Due to planned maintenance, we operated the refinery at 80% of capacity with an average crude rate of 215000 barrels per day.
In the near term, we expect continued strength in the Maya 211 spread driven by a tight market and strong demand.
We plan to run the refinery above 90% capacity during the fourth quarter.
The successful completion of the planned maintenance during the third quarter demonstrates our commitment to safely operate these assets with high reliability until we exit the refining business at the end of 2023.
With that I will turn the call over to <unk>.
Thank you Kim I'm extremely excited to be joining the advanced polymer solutions team with integration now complete I look forward to increasing our agility speed and customer focus to maximize the value of this business.
Now, let's review the third quarter results on slide 15.
Third quarter, EBITDA was $66 million margins in the compounding <unk> solutions business and the advanced polymers business, where both pressured by higher feedstock and energy costs.
Volumes for Academy roofing polymers decreased due to unplanned downtime at one or a major customers.
We expect similar results from this segment during the fourth quarter with a small volume improvement from increased automotive production in.
In my initial meetings with our Aps customers witnessed the considerable and growing demand for circular and low carbon solutions.
The E. P. S business provides a natural extension of the value chain for Lyondellbasell sustainable solutions and our team is actively addressing these opportunities.
As Peter mentioned, we believe that our Aps platform has a lot of potential with our team will have some autonomy to instill a more customer centric business model. We will also be highly accountable for delivering value from our initiatives.
With that I will return the call back to Peter.
To close out our segments lets turn to slide 16, and discuss the results for our technology business on behalf of Jim Stewart.
Third quarter, EBITDA declined by $20 million to $92 million due to lower catalyst demand.
In the fourth quarter, we expect our licensing revenue will moderate and catalyst volumes will decrease due to lower demands on a weaker macroeconomic outlook, we estimate that fourth quarter results for the technology segment will be roughly half of quarterly results seen thus far in 2022.
After a slow beginning to 2022 lower licensing business signed six new agreements during the third quarter to provide polyolefin process technologies for five projects in Asia and one in Europe .
Over the history of our company Lyondellbasell has sold more than 300 polyolefin licenses around the world and we continue to be a leader in this space.
As indicated by our activity to secure plastic waste feedstock in Germany, we're making good progress on developing our more advanced recycling technology.
And during my recent visit to our Technology Center in Italy, I was impressed by the rich legacy of innovation at Lyondellbasell and the creative work underway to launch this exciting technology.
We hope to provide you with further updates in our reach an initial investment decision for a commercial scale plant in the fourth quarter.
Now, let me summarize our third quarter and the outlook the outlook for our company with slide 17.
Despite very challenging markets our team is delivering results.
Our goal is to capture value and move forward on strategic priorities under a variety of economic conditions.
We remain focused on line there, Brazil core values the outstanding safety performance from our team is just one indicator of the passion and commitment that I see across our workforce.
Our OSP businesses are under pressure from weaker demand, new supply and higher energy costs.
Our diverse business portfolio often provides balance.
In the third quarter, our oxy fuels and refining businesses provided offsets with margins that remained well above historical averages.
With over $550 million in dividends and share repurchases during the third quarter, our commitment to shareholder returns remains strong.
Lightened up a Zen is focused on serving growing customer demands for our circle and products.
Nice differential needs of these businesses and are rapidly moving to enter multiple partnerships to secure the plastic waste feedstocks required to advance the leading position of our circle and low carbon solutions business.
Looking ahead to the fourth quarter, we anticipate seasonally weaker demand and volatile energy costs with further pressure fourth quarter margins.
In response, we are proactively lowering operating rates to match reduced demand or our business leaders are optimizing working capital and further strengthening our balance sheet flexibility.
We will remain watchful for market improvements in China <unk>.
Longer economic activity could help drive recovery in global markets during 2023.
I hope that you can sense, our excitement around the initial progress towards developing a northstar two guidelines <unk> strategic initiatives.
During the quarter, we launched the new organizational structure and established a circular and low carbon solutions business units.
We are building the structures and leadership that will enable lyondellbasell to quickly advance on our initial strategies with new business models that address our customers' needs.
We're also highly energized around the prospects of unlocking the opportunities identified by owner value enhancement program.
We have put into place the required infrastructure and management expertise to organize support and track our progress.
We aim to leverage lineup, but sales core competencies and target value opportunities totaling $760 million in annual recurring EBITDA by the end of 2025.
In closing, we look forward to sharing more details over the coming months and at our capital markets Day in New York next March that should clarify your understanding of Lyondellbasell is forward strategy.
We're now pleased to take your questions.
Thank you, Sir ladies and gentlemen at this time, we'll begin the question and answer session.
A reminder, if you have a question. Please press the star followed by the one on your Touchtone phone.
I would like to withdraw your question. Please press the star followed by the Q, We do ask that you limit to one question.
Our first question comes from the line of Steve Byrne from Bank of America. Please proceed with your question.
Yeah.
Alright, thank I'd like to dig in first with Europe .
Your your TBA plant that you're talking about starting up in the first quarter, how would you assess that.
The.
Supply and demand fundamentals of Apio TBA right now given given you're right. You've got some idle capacity are you are you potentially considering a delay on that start and maybe longer term do you do you have a view on.
On how that the competitive landscape and a P O TBA is going to be.
Given your competitor probably is pretty high on the cost curve with the cost of chlorine. These days do you see potentially.
Rationally rationing of capacity down the road.
Okay.
Thank you Steve Good question Peter here.
No delay in the start up on the TBA plants as.
As we have alluded to in the Q.
Q2 results.
We are quite favorable.
And our costs on the TBA sites due to the world scale plants very well integrated so we believe that independent of what is happening in the marketplace that we are.
We're very well positioned to start up that plant and therefore no changes.
Thank you. Our next question comes from the line of P. J <unk> with Citi. Please proceed with your question.
Yes, hi, good morning, just a couple of related questions on your circular economy.
And when you look at Seneca.
And what kind of return on capital are you targeting any can you talk a little bit about your contracting structure that will ensure your return on capital.
And then secondly on de Carbonization, you have this joint venture with allocates Chevron in unit four.
I guess with the passing of the Iot and the new 45 Q credits, how do you think about the hard to abate sectors like ethylene.
And any update on your cracker electrification related to that thank you.
Thank you P J very good questions as usual.
On the circular economy and you know we are at the very early stage in this here, but just coming back I mean from the.
The K fair in Dusseldorf, you know does this organized every three years.
Wasn't an amazing positiveness.
Arounds renewable and circular solutions.
Both of them from the brand owner site is less.
From the companies that we're actually producing the packaging.
So we noticed that their visit at quite some.
Demand to accelerate.
The amount of volumes that are being brought into the marketplace and as a consequence of course.
Leanness to pay that.
That is there across the value chain.
So that gives us.
The commitments that we are as you have seen during the last couple of weeks with the creation of their strategic business unit that we are accelerating because we see this as a value proposition which is quite attractive.
And then the second question on the I R E.
I'll give that question to you can.
Yeah, sure Hi, Hi, P. J. Thank you for the question.
What we've commented before has not changed in terms of our targets looking out to 'twenty 30, we're making very good progress on reaching that 30% reduction that we put out there when you start talking about some of the other options around C. O two reduction like electrification or carbon sequestration certainly.
Things like you know the.
The tax benefits that you see coming out of the I R. A four C. O. Two sequestration is going to help but we're going to look at all of those options in our portfolio and as you can imagine every site is a little bit different it depends on the location of the site and what infrastructure is available around it and we're going to keep exploring those.
In the coming months and.
We'll be able to share more about that later, but right now it's really more in the exploratory phase and assessing what the potential is for these technologies today.
Thank you. Our next question comes from the line.
I just want a phone with RBC capital markets. Please proceed with your question.
Great. Thanks for taking my question good morning.
I guess I just wanted to get your perspective on.
How the next couple of years could shake out I know, it's still early but you have provided some discrete items here, including the 750 by 2025. So if you consider that Q3 EBITDA around 1 billion won.
There's some uplift as you go through seasonality into Q2, and Q3 of next year and then you layer in the TBA.
You know gains as well as extra EBITDA from Hypersound in some of your other projects.
What would you say is kind of the new <unk>.
Cross level of EBITDA.
Would we be mistaken if we were to annualize that.
You know that one two to five and then maybe move up into the $6 billion range just given some of your investments.
Investments as a trough level.
Fair assumption.
And let me take that question Peter here speaking.
As you alluded to the mid cycle earnings.
We talked about in the Paas was increasing from $6 $5 billion to $8 billion and you mentioned a couple of these elements that are <unk>.
Breach that one 5 billion.
One being to whom and acquisition.
Our joint venture that we have in China.
The joint venture with solid in Louisiana.
The Hyatt pursuing investments are over.
Uh huh.
Joint venture as well as the CEO TBA. So you may know hats on top of that our commitment to increase value.
The bottom line by $750 million on a run rate by the end of 2025, so that means that if you look at the year 2026.
We expect to capture that food fleet at $750 million.
And of course, we.
We are still in progress of developing our north star strategy.
So more on that to come then with a capital markets day.
In March I mean next year, and if we find other opportunities to create value.
In case that question comes up.
By experience by launching dis.
Value enhancement projects.
In the first year, one may expect that about what 20% of that can be captured on a run rate basis by the end of that first year. So this is not something that is then completely backend it's.
Towards 2025 due to the fact that we already have the teams in place.
We have the transformation office in place.
Value capturing the sequencing of the different topics.
<unk> immediately.
Yeah.
Thank you. Our next question comes from the line of Josh Spector with UBS. Please proceed with your question.
Yeah, Hi, Thanks for taking my question.
On your European assets within ODP. So I mean, we're taking action today and you've continued to take bore you addressed some of the lower profitability I guess, if we think about this energy environment persisting or next year plus or are there. Other actions that you would take to optimize your asset base or are there and I guess, where are you kind of in the line of thinking.
<unk>, a long along making changes further changes to the region.
We thank you for your question and its needless to say that of course or a crisis management team.
That has been up and running.
Already since quite some months.
Even before.
Joining the company.
So we continue to monitor very intensively what is happening in the marketplace.
We alluded to in the call to the actions that we had undertaken.
So the bear tracker in France will not start up.
Prior to the end of this year, but.
Needless to say that we are monitoring that situation in the market place.
Every week to them defined.
So then they find what the right time will be to start up the cracker.
In addition to that we currently have a scheduled shutdown ongoing in the smallest of the steam crackers in Germany, so called for the steam Cracker.
We expect that to start up on time.
And there we would not take any action to delay the startup.
And then what.
<unk>.
Kim alluded to is that the joint venture assets that we have in Rotterdam.
That has been idled for the time being and then of course also there we will evaluate how the market is developing especially on the styrene monomer sites because.
Because we hear of course also in the markets that on purpose styrene monomer predictions.
Haven't been idled or multiples or even question that will they be profitable.
And B startup it started up again.
Thank you. Our next question comes from the line of Justin.
J P. Morgan. Please proceed with your question.
Sure.
Thanks very much.
I have a question for Ken Layne.
China is being China purchases oil at a discount to the Brent price.
From from Russia.
Does that purchasing that discounted purchasing provide a cushion to Chinese petrochemical margins or does it not influence Chinese petrochemical portion.
And can you sort of characterize the state of the Chinese polyethylene market. These days.
Sure Jeff Thanks for the question good to hear from you.
So we've done a lot of investigation into that as you can imagine because what we're seeing in the China market.
At historically low spreads there and a lot of that is driven by the new capacity coming on but.
Our view is a lot of that oil is actually going into the state owned refiners and not being passed on to to the market in terms of lower priced feedstocks for for the polymers, what's happening in China is really more related just to the higher capacity and the lower demand that we're seeing there so.
That is that is going to be the larger driver.
<unk>, even mid term, what we really want to see is the growth come back in the China market, which we've not seen as of yet and you may recall going back to.
The even the first quarter earnings call, we were talking about expecting to see some recovery in demand in China.
Already after Chinese new year, and that just has not materialized. So.
Once we see that and that demand starts to absorb all of the new capacity that I think youre going to start to see a return to a more normal level of spreads in China.
Thank you. Our next question comes from the line I would like to thank you for.
He came from Keybanc capital markets. Please proceed with your question.
Yes.
Thanks, Good morning, everyone.
We saw energy prices in Europe come down quite a bit in recent weeks.
Could you attempt to sort of provide mark to market, how much better your profits would be in <unk>.
And perhaps in IMD.
If these energy prices kind of stayed the same all other factors were.
<unk> locked in place as well.
We want to make comments first you can flip on this.
I Love.
My view is that we're seeing some moderating and the headwinds around the energy costs and feedstock costs in Europe and that.
That could be short lived if we have a cold winter that we might see that reverse but.
Longer term, obviously, one of the things that we're going to be looking at or are ways to improve the competitiveness of our assets. What can we do to to make the flexibility of our feed slates and and the energy consumption that we have in those assets or competitive and frankly some of that is going to be related to.
C O two reduction targets because bill.
Believe it or not that is a way that we will improve competitiveness is by finding.
Lower C O two energy by making the assets more efficient and improving our cost position. So a lot of things are going to happen over time here and.
We are currently very focused on what's happening in the short term.
The adult don't let that.
Make you think that we're not thinking longer term about how we position ourselves more competitively in the region.
I know that to be put in perspective of course, I mean year to date European energy cost for US were one $8 billion higher compared to 2020 in the same period.
And then Peter you willing to maybe make some comments from an enterprise perspective to help to help the analysts and investors kind of think sequentially.
Well I mean.
<unk> lagged down substantially.
In August versus July was pretty dramatic.
And those reasons were highlighted in our release today and then September deteriorated further and as we look forward to October it should be a bit better than September and as you pointed out we are seeing some relief in both feedstocks and energy costs and I would say broadly it feels like we're kind of finding maybe a bottom but to be <unk>.
Clear Q4 will be sequentially lower than Q3, we're facing into persistent inflation.
Cost energy weaker seasonal demand and we're missing fixed cost absorption with all the idled and curtailed assets, which are heavier alert heavier curtailed in Q4, So again and we're also experiencing the full effect of lower prices from the third quarter. So again dramatic dropoff from July to August So we will be sequentially down.
Thank you. Our next question comes from the line of Vincent Andrews.
With Morgan Stanley . Please proceed with your question.
Thank you could you speak a little bit more in more detail about the program to get up to 750 million and maybe an area I would appreciate some focus on is what are the things that youre doing that are taking until 2025.
To see the EBIT show up in your results and if you could also comment on what if any cash costs are associated with going after the 750 <unk>. Thank you.
Yeah, Thanks, Vince since a very good question.
Let me do one step back I mean, we have set up this transformation office.
And organized.
Large number of bottom up workshops.
Across the different functions, so the commercial functions supply chain functions procurement functions.
Also very important.
And over.
U S largest manufacturing sites.
And out of that came DS.
Around 2000.
Our Ids.
Early stage projects.
So we have not yet covered to European region.
And we have not yet covered the smaller sites.
But we see already that we.
We get lots of ideas on how to create value in a lot of these ids do not materially demur.
Demand higher opex for higher Capex. So these are the ones that of course.
We will focus upon and they can be of course, it's a very broad range now so it is a balance energy management.
It is about.
Creep capacities.
If we don't need to creep capacity because of the market situation diesel not be to projects that we will do first they will then come later.
It is very very broad range of projects that we have here.
In terms of covering.
The entire portfolio.
<unk> will provide more details on that when we talk on the capital markets day.
Because we will have progressed more as well.
Seth we are now into phase of prioritization.
So what out of those two toes into Ids.
Do we actually want to implement do make sense in the current markets environments.
So then we go to the so called stage number four.
And then make it.
The people available to capture dose opportunities.
Next year, we will start doing the analysis also in European site as sites. So we will start with the largest sites and then also move to the smaller sites. So that should normally also at in the confidence.
That we can at least capture $750 million.
By the end of 2025 on a run rate basis.
Thank you. Our next question comes from the line of David Begleiter with Deutsche Bank. Please proceed with your question.
Thank you good morning, Peter and Ken can you discuss the outlook for the U S polyethylene market in the context of the new capacity coming on from both shell and be part of the next few months here. Thank you.
Yeah.
Ken.
Yeah David.
The outlook some of that volume is already on the market. They have been doing some pre marketing for quite a while now so obviously going back to what I had said earlier just around China, what what's going to be very meaningful as a overall for the market supply demand is going to be the return to growth in the market and.
These assets like any youre going to get absorbed I'm sure, they're very competitive assets based on the.
The feedstock.
Situation in the U S. So.
There will be a period of time, now where we're going to have to to weather that and absorb that in the market.
The way that I think about it is the where we exited Q3 is where I expect us to be in Q4. So.
Like Michael had referred to earlier things really dropped off in the middle of Q3, and we've kind of leveled off in that range. So what we're doing now is taking actions that we can control to improve our cash flow and to be able to meet demand without.
Without being cash suboptimal here.
Thank you. Our next question comes from the line of Mike.
Wells Fargo. Please proceed with your question.
Hey, guys good morning.
Most folks are looking for some degree of a recession next year. So I'm just curious.
When do you think about the <unk>.
Third quarter into fourth quarter.
And you annualize that why wouldn't that be sort of at a trough.
Potential for lying down heading into 'twenty three and then.
What needs to happen for that first half of 'twenty three to be better than the second half of 'twenty two.
It's a very good question of course, and we've alluded to that and Ken made comments as well as in this call.
Very important is to look at China.
What will happen in China, how will demands be encouraged in China.
That's a big question Mark I mean, you know that.
China normally imported about 40% of their needs.
And in polyethylene.
So at this point in time.
<unk>.
In China, and therefore, the materials not flowing into China either.
So that's an important element to look at then of course, I mean, what about the cost situation.
You've alluded to that is also on the call already energy costs.
On the other end sites electricity costs of course included in that.
And Ken anything you want to add.
I think I think you've hit it.
It's going to be getting more growth back in the market and seeing some of the headwinds around feedstocks and energy come off which right now is hard to predict.
Now what we have seen also in the past if you just look at the history then.
Markets have relatively quickly recovered.
Well that doesn't mean I'm, not saying that we have seen the trough.
Going back to Michael's comments before.
But.
How long can it stay like this.
The question that we're all looking at.
Thank you. Our next question comes from the line of Kevin Mccarthy with vertical Research partners. Please proceed with your question.
Yes. Good morning, everyone. I was wondering if you could speak to.
Your inventory levels are internally as well as your perception of inventory downstream among your customers. The reason I ask is you've put forth. Some very low operating rates for the fourth quarter. If I look at the inventory on your balance sheet, it's up but it's not up dramatically, maybe three or four person.
<unk> year over year.
And so I'm just looking for some context do you think these low operating rates will serve to rightsize inventory by yearend or or might it take longer than that how would you frame that issue.
Yes. Thanks for your question, Kevin maybe I'll start by.
Saying that.
Or teams have done an excellent work.
In focusing on cash management.
And you'll see that from the results.
And that of course includes.
One insights payables and receivables, but also we have dealt with our own inventory levels as you recognized as well.
Now when we look at the downstream and it depends of course, a little bit from market to market, but normally in the business.
We don't have.
A lot of inventory.
In the pipeline and the channel.
And Ken allow me to say that what we have seen is that the inventory levels also in the polyolefin side. They have reduced during the third quarter. Yeah. That's right I mean, yeah, we certainly we've adjusted.
And what you've seen even with the.
The adjustment to the utilization rates that we've communicated is we're adjusting the utilization rate to match, what we see with our demand and it will continue.
I need to do that in the fourth quarter.
Thank you. Our next question comes from the line of Michael ahead with Barclays. Please proceed with your question.
Great. Thanks, Good morning, guys.
Just two around capital uses and returns first I wanted to re ask part of Vincent's question I'll, just see if you could give us at least a rough patch.
And the figure for the $750 million EBITDA value enhanced program and second on circular in low carbon solutions I assume this is going to be big focus area in March but could you just give us a rough sense of the capital you intend to spend annually on this area.
He sort of commensurate type EBITDA or return on capital or return hurdles, we should expect there.
Thank you for your question Mike.
I mean of course clearly.
As we have.
<unk> talked in the past our capital allocation strategy has not changed.
You'll remember that I said also looking at.
Our capex investments around $2 billion.
111, 2 billion and sustaining capex and the rest coming in growth Capex.
If you look know what 2023.
We are of course, reflecting upon what is happening in the marketplace. So.
You may not expect to see that number of 2 billion it will be quite lower.
So therefore, you will not really see an uptick because of our value enhancement program.
In terms of Capex, if you look at it in the overall capex that we have invested in our business.
That said I mean, the number for next year that will be lower and then of course as you rollout these programs likely value enhancement program.
They don't have a beginning and an end, yes, they become part of the DNA in the company.
As continuous improvement so at the beginning of course in the first years.
They will be more no hanging foods, how we operate.
Happily in Opex and Capex.
So you won't see it so to say in the overall numbers and then when we start talking about 'twenty six 'twenty seven.
Probably I mean, you're talking about debottlenecking activities and so one but then every project on its own will have to have its own merits and we will reflect on every project on the IRR. So it will be of course a.
It it.
It must be a value enhancement program or project that we have that is not dilutive for the company in terms of.
Or or or return on capital.
And the return profile of these projects is generally very hot.
Yeah.
Thank you. Our next question comes from the line of John Roberts with Credit Suisse. Please proceed with your question.
Morning. This is Matt Skowronski on for John specifically in O N. P. AI you noted you plan to run the crackers in Europe slightly lower quarter over quarter, but are there any other expenses to consider either that you incurred in <unk> or will incur in <unk>. When we're trying to bridge the quarter over quarter profitability in the cycle.
<unk>.
Yeah, you know that we have always been extremely focused on cost so cost discipline.
Even when I joined Lyondellbasell I was.
Amazed I mean, how deep it is embedded in the DNA.
Yeah, we have not announced no certain number in terms of cost preservation cost reduction remain sure that I mean this.
<unk> continues to be managed on.
On a daily basis.
So where we can actually reduce.
Costs, but not at the expense of our value enhancement program.
Michael maybe I'll reinforce a couple of things. So I mean, no doubt the current environment has implications for our spending plans. Both this year and next year and then as you as you would expect we are taking appropriate actions in particular in Europe and as Peter said our value enhancement program will also help.
So it's incremental but interestingly. It's also sustainable and then we have a great team and we've demonstrated our ability to navigate difficult environments like in 2020, where we covered our full dividend and capital program with cash from operations, we already operate lean, which gives us an advantage versus others.
And as Peter also said that said.
Our view on safety and reliability is steadfast we don't want to destroy long term value put our assets in apparel. So again, we're confident in our ability to manage and actually come out stronger on the other side.
Thank you. Our next question comes from the line of Frank Mitsch with Fermium Research. Please proceed with your question.
Thank you and I wanted to offer my congratulations to Kim.
I believe we met Kim a few years ago on a channel view.
<unk> tour and that's part of R&D.
You indicated that youre going to run in the fourth quarter at 75% operating rate I was wondering what that was in the third quarter I don't believe I saw that and then also.
That 75% operating rate in the fourth quarter. There are a few different segments within <unk> is there any.
Gary that is going to be particularly higher or lower than that 75% average.
Thank you Frank and yes, I remember our visit to the candle facility quite well hope to see you again as we start up the new P. O. TBA plant later next year early next year I should say.
As it relates to your question the operating rates in the third quarter were about 75%. So we're basically.
Steady or equivalent quarter on quarter.
Some of the differences as far as what we're operating is around my comments that I made earlier in the presentation. So we'll be idling that P. O 11 are the propylene oxide styrene monomer plant in Masbate.
And the way that we will what we will do with that is we will have the opportunity to.
Help improve the styrene supply demand.
As well as Ryan R. P M TBA plants at higher capacity.
Thank you, ladies and gentlemen, we have come to the end of our time allowed for questions I'll turn the floor back to Mr. <unk> for any final comments.
Okay. Thank you everybody and thank you for joining.
So all you are as usual very thoughtful questions.
Look forward to sharing more of our clients on how lyondellbasell will advance in our strategy and unlock additional value over the coming months I wish you all a great weekend stay safe and looking forward to meeting you again soon.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.