LyondellBasell Industries

Hello and welcome to the Lyondell Bissell teleconference. At the request of Lyondell Bissell, this conference is being recorded for instant replay purposes. Following today's presentation, we will conduct a question and answer session. At that time, to ask a question, please press 1 on your touchtone phone. I'd now like to turn the conference over to Mr. David Kinney, Director of Investor Relations. Sir, you may begin.

Thank you, Operator. Hello and welcome to Linedale-Pasell's fourth quarter 2020 teleconference. I am joined today by Bob Patel, our Chief Executive Officer, and Michael McMurray, our Chief Financial Officer. Before we begin the business discussion, I would like to point out that a slide presentation accompanies today's call and is available on our website at www.linedalepassel.com. Today we will be discussing our business results while making reference to some forward-looking statements and non-GAAP financial measures. We believe the forward-looking statements are based upon reasonable assumptions and alternative measures are useful to investors. Nonetheless, the forward-looking statements are subject to significant risk and uncertainty.

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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 available at www.lyondellpassell.com slash investor relations. Reconciliations of non-GAAP financial measures to GAAP financial measures, together with other disclosures, including earnings release, are also currently available on our website. Finally, I would like to point out that a recording of this call will be available by telephone beginning at 1 PM Eastern time today until February 28 by calling 800-846-0305 in the United States and 402-998-0543 outside the United States. The passcode for both numbers is 6541. During today's call, we will focus on the fourth quarter and full year results, the current environment, our near-term outlook, and provide an update on our growth initiatives. Before turning the call over to Bob, I would like to call your attention to the non-cash, lower of cost, or market inventory adjustments, or LCM, that we have discussed on past calls. These adjustments are related to our use of last-in, first-out LIFO accounting and the recent volatility in prices for our raw material and finished goods inventories. During the fourth quarter, we recognized pre-tax LCM benefits totaling $147 million, compared to LCM charges of $163 million during the first nine months of 2020. During the third quarter, we recognized a non-cash impairment charge of $582 million related to our Houston refinery. Comments made on the call will be in regard to our underlying business results, excluding the impacts of the refinery impairment and the LCM inventory adjustments. With that being said, I would now like to turn the call over to Bob.

Thank you, Dave, and good day to all of you participating around the world. We appreciate you joining us to discuss our fourth quarter and full year results for 2020. Let's turn to slide three. 2020 was unlike anything we have ever seen or experienced. Oil price volatility, a global pandemic, and an associated recession. To call this year unprecedented would be an understatement. So before we get into the results today, I want to take a few minutes to provide some context around our approach to navigating the past year, because I think it speaks well to who we are as a company and the character and talent of our team. Early in the year, as it became clear that the virus was becoming more widespread, our leadership team established three guiding principles for the short term. Number one, protect our employees and communities. Two, keep our commitments to our investors. Take actions to strengthen the company for the future.

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In past earnings calls, I've talked about some attributes of our culture, operational and commercial excellence. cost management, and capital discipline. These qualities served us particularly well during 2020 as we bolstered liquidity by rapidly accessing capital markets, minimizing working capital, and efficiently generating cash. Importantly, we honored our commitment to an investment grade credit rating and continued to fund dividends and capital investments with cash from operations. As we review our results today, I hope the outcome of these priorities and the benefits of this culture will be clear. Beyond the strategy itself, I also wanted to take a moment to acknowledge our global team that delivered our results. These individuals, both those who were able to work remotely and those who continue to work on the front lines at our manufacturing sites, form a strong and nimble team. They have my sincere and deepest gratitude. If the pandemic reinforced anything, it is the value of our products and industry in serving modern society's needs. Knowing that the materials produced by our plants go into end products like face masks, and COVID-19 test kits, our team took immediate action to ensure our manufacturing sites would continue to supply our customers while prioritizing the safety of our workforce. I'm very proud to say that not only did we continue to operate reliably, but to date, there have been no cases of workplace virus transmission among our employees. The last topic I'd like to highlight before we get into the specifics of our results was how our team not only managed through the immediate challenges, but how we also remained focused on our future. During the year, we advanced our growth agenda through the formation of JVs in China, and here on the U.S. Gulf Coast that provided immediate benefits to earnings. We also made meaningful progress on our ESG strategy, especially in the areas of eliminating plastic waste and enhancing our efforts in the areas of diversity, equity, and inclusion. Our company believes these initiatives are critical for our future, and despite the challenges, we maintained our focus on making meaningful progress throughout the year. Taken together, I hope these examples tell the story of a strong, nimble, and focused company that is building a bright future for our employees, our customers, and our shareholders. Let's turn to slide four and review some of last year's highlights. 2020 earnings were $5.61 per share with $3.9 billion of EBITDA. This represents a decline of 42% and 32%, respectively, relative to the prior year. Economists believe that global GDP fell by approximately 4% in 2020, more than double the decline during the financial crisis in 2009. Considering the severe decline in economic activity during the past year, Llandell Bazell's results proved to be relatively resilient. Our performance was supported by strong and consistent consumer demand for many of our products, some industry supply constraints, and the recovery in demand for durable goods during the second half of the year. Our refining and oxy fuels and related products businesses suffered from the unprecedented decline in demand for transportation fuels that began during March due to the pandemic. We efficiently converted EBITDA into cash from operating activities that fully covered both dividends and our capital investments during 2020. Through rapid access to debt capital markets and aggressive working capital management, we ended the year with over $5 billion in available liquidity. Our strong balance sheet served us well by allowing the company to advance on our growth strategies during this challenging environment. In September, we formed a new integrated olefin and polyolefin joint venture in China And only a few short months later, we formed a second joint venture comprised of newly built integrated polyethylene assets in Louisiana. Both joint ventures provided immediate benefits to our fourth quarter profitability. Despite the challenges of the pandemic, we continue to advance on our substantive and ambitious goals to develop more circular and sustainable business models for our products. that we outlined in our most recent sustainability report. In December, our QCP joint venture in Europe completed an acquisition that increased their polyolefin recycling capacity to 55,000 tons. Our actions during 2020 are prime examples of our strategy to identify, develop, and capture opportunities through business cycles that should provide significant upside as market conditions continue to improve. On slide five, you can see that the challenges of the past year did not diminish our relentless focus on pursuing goal zero safety performance. If anything, our employees exhibited an increased sense of ownership for ensuring workplace safety and hygiene to enable a slight improvement upon our 2019 metrics. I'm particularly thankful for the progress exhibited by the employees who joined Lyondell Bazell when we acquired Kay Shulman in 2018. Prior to the acquisition, the recordable injury rate at these facilities was 1.54 per 200,000 hours worked, more than three times the scale of this chart Following the acquisition, our new employees quickly adopted Lyondell Bazell's safety focus and injury rates were reduced by more than 50% for 2018 and 2019. In 2020, the injury rate for these facilities was 0.35 and in the top quartile for our industry. We will work diligently for further improvements in our safety performance to ensure all our employees, contractors, and the communities in which we operate finish the day in the same or better condition than when they started. In December, we announced the latest step in our progress to increase utilization of plastic waste as a feedstock to create a more circular economy. Please turn to slide six. As I mentioned, our QCP joint venture with Suez acquired Tivaco in Belgium in December. This acquisition increased the JV's recycling capacity to approximately 55,000 tons per year. More importantly, the acquisition expands QCP's geographic footprint to increase our capability to produce premium circular polymers for the local market using locally sourced plastic waste. With the increased range of end-use applications from Tivaco's existing product line, QCP will be better poised to serve brand owners in achieving their ambitious goals for increased utilization of circular polymers in packaging and other products. The acquisition represents another step in advancing Lyondell Bazell's goal to annually produce and market over 2 million tons of recycled and renewable-based polymers by 2030. With that said, I'll turn the call over to Michael who will lead us through several topics related to our financial results.

Thank you, Bob, and good morning, everyone. Please turn to slide seven and let me begin by highlighting our track record of improving cash conversion. The benefits of efficient cash conversion become more apparent during periods of economic downturns when liquidity provides a defense against risk from volatility and uncertainty. Over the past year, Lion DelBizel converted 88% of our EBITDA into $3.4 billion of cash from operating activities. As a result of the challenging market dynamics in 2020, our business teams took aggressive actions in managing inventories to drive free cash flow and maximize liquidity to release more than $300 million of cash from working capital. We are pleased to report that, despite the downturn, we've fully funded $1.4 billion in dividends and our $1.9 billion capital investment program through cash generated from operating activities in 2020. The $4.20 per share of dividends paid by our company during the year extends Linedale Bizelle's track record of consistently paying and increasing our base dividend over the past 10 years. Let's continue with slide eight and review further details of our cash generation and deployment throughout the year. As you can see, We increased the amount of cash in our balance sheet by approximately $1.4 billion during 2020 to end the year with $2.5 billion in cash and liquid investments. Cash from operations fully funded a small amount of share repurchases in the first quarter of 2020, as well as the full year's dividends and capital expenditures. In 2020, we accessed very attractive debt capital markets to extend maturities of existing debt, fund acquisitions, and bolster liquidity. These borrowings increased gross debt by $3.9 billion relative to the prior year. A portion of the new bonds funded the $470 million equity contribution for our joint venture with Borath in China and the $2 billion acquisition of our 50% share of the Louisiana integrated polyethylene joint venture with Zasol. We incurred about $70 million in pre-tax costs due to our fourth quarter refinancing activities. We ended the year with $5.2 billion of cash and available liquidity that enabled us to reduce the balance of our term loan by $500 million in January of 2021. We will continue to prioritize deleveraging over the course of this year, which should allow us to further strengthen our investment grade balance sheet. Before I turn the call over to Bob, let me address some of your annual modeling questions for 2021. On slide nine. We are planning to invest approximately $2 billion in capital expenditures during 2021. Approximately $1 billion is targeted towards profit-generating growth projects with a balance supporting sustaining maintenance. The majority of the 2021 growth investment is planned for the construction of the POTBA plant in Houston. Work on the POTBA project ramped up during the fourth quarter after slowing down earlier last year to ensure worksite safety and preserve liquidity during the pandemic. We expect a similar level of capital expenditures for 2022, followed by a modest reduction in 2023 upon completion of the POTBA facility. We have a relatively light planned maintenance schedule for 2021, with only one major cracker turnaround planned in Europe, as well as a few turnarounds in our intermediates and derivatives segment. Based on expected volumes and margins, we estimate that lost production associated with this maintenance downtime will impact 2021 EBITDA by approximately $170 million. While routine maintenance costs are expensed, maintenance costs arising from turnarounds of major production units are capitalized and included in our capital expenditure forecast. The European cracker turnaround will occur in the third and fourth quarters of 2021 and is expected to impact O&P EAI quarterly EBITDA by $10 million and $15 million, respectively. Plan maintenance in our intermediates and derivatives segment is expected to impact EBITDA by approximately $20 million, $60 million, $35 million, and $30 million in the first through fourth quarters, respectively. We expect 2021 net interest expense to be approximately $430 million after netting capitalized interest of about $90 million. 2021 book depreciation and amortization is forecast to be approximately $1.4 billion. We plan to make regular pension contributions in 2021 totaling approximately $100 million with a similar amount of pension expense for the year. We currently expect our 2021 effective tax rate to be approximately 17%. We expect our cash tax rate will be lower than our ETR due to an anticipated cash refund but uncertainties around the timing of that refund do not allow us to provide a reliable estimate. With that, I'll turn the call over to Bob for a more detailed discussion of our segment results. Bob? Thank you, Michael.

Let's turn to slide 10, which illustrates our quarterly profitability over the past five quarters. Unlike a typical year where Lyondell Bizell's business portfolio would follow a seasonal trend with peak earnings occurring mid-year, The patterns seen in 2020 are reversed with higher profitability in the first and fourth quarters. The rebound in profitability since the second quarter has been remarkable as the global economy proceeds on a path to recovery. EBITDA in the final quarter of 2020 was $1.3 billion, the highest for any fourth quarter since 2017, and more than $375 million higher than the prior quarter. The trajectory supports our belief that pandemic-driven reductions in demand for our products bottom during the second quarter. Our olefins and polyolefins segments serve strong consumer-driven demand for packaging and non-durable products throughout the year, while our intermediates and derivatives and advanced polymer solution segments benefited from improving industrial sector demand for durable goods during the second half of the year. We have only seen modest recovery in the demand for transportation fuels. Our refinery and oxy fuels and related products businesses continue to experience headwinds from excess capacity and slack demand due to persistently low global mobility. While we would naturally prefer to see strength in all of the markets we serve, the geographic and end market diversity of our product portfolio continues to provide offsets that help to dampen business cycles. Let's turn to slide 11 and look at the latest thoughts from consultants on the global polyethylene business cycle. Industry consultants have forecasted that capacity additions, especially in China, could outpace global demand over the next four years. These predictions seem reminiscent of forecasts from consulting reports published in 2016, depicted by the dotted blue line, which predicted global operating rates would dip due to the capacity additions on the U.S. Gulf Coast from 2017 through 2018. The actual operating rate depicted by the solid line demonstrates that press releases announcing capacity additions often have ambitious timelines and typical delays in construction and commissioning can allow consistent demand growth to absorb capacity additions with less impact on operating rates and margins than predicted. In addition to delays in capacity additions, we believe recent forecasts underestimate growth in demand. Early in the pandemic, many predicted declines in PV demand for 2020. By the middle of the year, forecasts improved to flat demand. Most consultants now believe that global PV demand grew by approximately 4% in 2020, similar to growth rates seen consistently over the past 30 years. Adjusting these forecasts to 4% demand growth for both 2020 and 2021 results in a predicted operating rate depicted in the dotted gray line.

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If 2021 follows patterns seen after prior recessions and demand growth rebounds to levels higher than 4%, then operating rates would accordingly move upward. A rebounding economy that increases 2021 global polyethylene demand by 7% followed by reversion to consultant forecasts of 4% growth thereafter would generate the robust operating rate forecast depicted by the dotted orange line. In summary, we believe the next wave of capacity additions will result in operating rates within the boundaries of a balanced market. The next wave of capacity additions will undoubtedly occur, but we believe that typical project delays, a few project cancellations, and perhaps increased demand from a recovering economy could contribute to a more orderly absorption of the new capacity by the global market. Let's review the fourth quarter results for each of our segments. As mentioned, my discussion will describe our underlying business results, excluding the non-cash impacts of LCM inventory changes and the impairment of the Houston refinery. I will begin with our olefins and polyolefins America segment on slide 12. Fourth quarter 2020 EBITDA was $722 million, $318 million higher than the third quarter. Margins improved on higher pricing driven by higher demand for both olefins and polyolefins. Olefins results increased $185 million compared to the third quarter of 2020. Margin improved on higher ethylene and propylene pricing. Volume increased with improved demand. Combined polyolefin results were approximately $65 million higher than third quarter, primarily due to an increase in polyethylene and polypropylene spreads over monomer. For the full year, results decreased by $514 million. Margins declined for both olefins and polyolefins, driven by lower prices for olefin coproducts and polyethylene, despite lower feedstock costs. Lifestyle changes associated with the pandemic drove increases in demand for non-durable packaging and consumer goods, providing strength in the polyethylene market and increased volumes for ethylene and polyethylene. Based on strong February orders, increasing seasonal demand, and tight industry supply, we expect robust margins to continue into the first quarter. Now please turn to slide 13 to review the performance of our olefins and polyolefins Europe, Asia, and international segment. During the fourth quarter, EBITDA was $251 million, an increase of $120 million compared to the third quarter. Improving demand for polyolefins and a full quarter of contribution from our BORA joint venture increased both polyolefin volumes and equity income. Olefins results were relatively unchanged with lower margins due to increased maintenance expense, partially offset by increased volume. Combined polyolefin results increased more than $20 million driven by higher demand and volumes from our Borah joint venture. Equity income increased about $60 million, with more than half of that improvement arising from Borah. Full-year EBITDA was $236 million lower than 2019. Margins declined in both olefins and polyolefins due to lower polyolefin and ethylene prices outpacing lower feedstock costs. Polyolefin demand remained relatively stable with increased sales from the startup of our BORA joint venture during the fourth quarter. In Europe, we expect typical seasonal improvements as we progress through the first half of the year. Please turn to slide 14. Let's take a look at our intermediates and derivatives segment. Fourth quarter EBITDA was $196 million, a decline of $49 million from the third quarter 2020. Compressed margins for oxyfuels and related products driven by weaker gasoline demand and prices muted the margin improvement in our propylene oxide and derivatives business. Fourth quarter propylene oxide and derivatives results increased approximately $25 million due to significantly higher Asia propylene oxide pricing driven by strong demand and tight market supplies. Intermediate chemicals results were relatively unchanged. Oxyfuels and related products results decreased by approximately $10 million as small volume improvements or more than offset by margin declines due to continued low gasoline prices and higher butane peak stop costs. During 2020, HIPAADA declined $714 million compared to 2019. Margin declined in most businesses, primarily in the oxyfuels and related products and intermediate chemicals businesses. Volumes for most businesses also declined due to lower demand, partially offset by increased Asia demand for our propylene oxide and derivatives products. In the first quarter of 2021, we expect margins to be relatively flat as market tightness in Asia is alleviated by higher industry supply. Our volumes will be impacted during the first quarter due to planned maintenance at our channel view propylene oxide and styrene monomer unit. Now let's move forward and review the results of our advanced polymer solution segment on slide 15. Fourth quarter EBITDA was $106 million, a $9 million increase over the third quarter of 2020. Volumes increased with improved demand in the automotive sector, partially offset by lower margins. Results for both compounding and solutions and advanced polymer businesses were relatively unchanged. Within our compounding and solutions business, volumes increased as automotive manufacturers ramped up production. Margins declined as a result of product prices lagging price increases for propylene pitch stocks. Full-year EBITDA for the segment was $381 million, a $51 million decline over 2019. Compared to the prior period, results benefited from an $80 million reduction in integration costs. Volumes declined with significantly lower automotive, appliance, and construction demand, partially offset by higher margins as a result of product mix. We expect continued recovery in industrial durable goods demand, particularly for products from our advanced polymers business during the spring.

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At our investor day in 2019, we announced an increased target of $200 million of synergies from the A. Shulman acquisition. We have successfully implemented our synergy plan, and we are beginning to capture... an annual run rate of more than $200 million, which will become increasingly visible with volume recovery in the advanced polymer solutions segment. Now let's dig a little deeper on how the recovery in durable goods demand is playing out in the polypropylene and compounds markets for our company on slide 16. China's rapid response to control COVID transmission and stimulate industrial production resulted in strong demand growth despite the pandemic. Automotive production in China was up 6% in the fourth quarter compared to the same quarter last year, and China polypropylene demand for the full year 2020 increased by 10% over 2019. The strength in durable goods markets is also evident in Landell Wiesel's metrics. Our polypropylene inventory levels hit all-time lows in both North America and Europe on strong market demand. In North America, construction activities increased in the fourth quarter, with a 5% year-over-year increase in demand for single-ply thermoplastic roofing materials that utilize our catalog advanced polymers. Looking at our own order books for polypropylene compounds, engineered plastics, and catalog within the APS segment, a nice V-shaped recovery is shown in the chart where the forecast for January suggests a first quarter that is nearly the same level seen in the first quarter of 2019. Tight markets, low inventory, and strong orders indicate that markets for polypropylene-based durable goods are showing strength going into the first quarter 2021. The increased demand for our polypropylene compounds, engineered plastics, and catalog products should benefit the APS segment in 2021. Now let's turn to slide 17 and discuss the results of our refining segment. Fourth quarter EBITDA was negative $74 million, a $47 million improvement versus the third quarter 2020. As I discussed earlier, this excludes the impact of both LCM and impairment of the Houston refinery in the third quarter. Results for the fourth quarter were driven by an improvement in margins due to lower fixed costs and improved margin capture. Improvements in the Maya 211 Industry Benchmark X-Brand were more than offset by increased costs for renewable identification number credits, or RINs. Similar to the prior period, we operated the refinery at about 80% of nameplate crude capacity to match reduced demand with an average crude throughput of 214,000 barrels per day. Full-year EBITDA was negative $289 million, $224 million lower than 2019. Refining margins were compressed due to pandemic-driven reductions in demand for gasoline and jet fuel. The Maya 211 spread was at an historically low point during the year, an average $12.63 per barrel. 2020 crude throughput was limited to an average of 223 thousand barrels per day as we actively managed operations to match the reduced market demand. Refining margins are expected to move sideways until demand for gasoline and jet fuel improves. We plan to continue operating the refinery at about 80% of nameplate crude capacity during the first quarter. We remain diligent with efforts to reduce expenses and minimize losses at our Houston refinery and will continue to evaluate production decisions as the market evolves. Please turn to slide 18 as we review the results for our technology segment. EBITDA was $45 million during the fourth quarter and was $324 million for the full year. Fourth quarter technology profitability declined due to a lower number of licensing revenue recognition milestones. Catalyst margins increased due to inventory mix improvements fully offset by a decrease in volumes as customers manage year-end inventories. Based on the timing of anticipated licensing milestones and improving catalyst demand, we expect the first quarter technology business profitability to improve to a similar level as in the first quarter of 2019. Please turn to slide 19 for a refreshed view of our value-driven growth investments. Our company is executing on a clear, and straightforward strategy to increase free cash flow by harvesting new sources of EBITDA generation while moderating our capital expenditure budget to $2 billion or less for each of the next three years. The formula is simple. More EBITDA and moderating capital expenditures should improve free cash flow at any point in business cycles. Let me summarize the years, highlights, and outlook with slide 20. During 2020, Lyondell Vazell remained true to our strategy of capturing value and delivering resilient results at all points in the cycle. We delivered on our commitments to investors, served our customers, and supported our employees while moving forward on sustainability initiatives. By maximizing cash generation and prioritizing liquidity, we maintained our investment grade rating and extended the continuity of our dividend. Demand for consumer-driven goods remains strong, and durable goods markets are rebounding with increased industrial activity. As global mobility improves, we expect that demand and margin for fuels from our refinery and oxyfuels and related product businesses will follow. Over the past several years, Lyondell Bizelle has captured opportunities through disciplined and profitable growth investments, whether building, acquiring, or partnering on assets, our company focused on leveraging our technology, building on our advantages, and increasing our earnings capacity. Our path is clear. Lyondell Wiesel will remain focused on meeting our commitments and pursuing a disciplined financial strategy. With robust cash generation and ample liquidity, we plan to continue strengthening our balance sheet and optimizing our portfolio during 2021. We look forward to sharing our progress toward developing more circular business models for our industry and creating a more supportive culture for our workforce that will allow all of us to continue delivering sustainable results for years to come. In summary, our strategy has served us well, and now Rheindell Bizell is poised to emerge from this pandemic with more earnings power and free cash flow potential. We are now pleased to take your questions.

Hello, Amanda, are you on mute?

Can you hear me, sir?

Yes, we can.

Again, if you'd like to ask your question, please press star 1. Our first question comes from Steve Bryan. Your line is open.

Yes, thank you. On the topic of sustainability, I'm curious to hear your estimate of the fraction of your... Can you hear me okay?

Yes, yes, go ahead. There's a bit of background noise. Amanda, perhaps it's on your side. Go ahead, Steve.

Okay. What fraction of your polyethylene volumes are sold into end markets where customers are asking for some type of a sustainable product? I'm curious to hear your view whether this is a push by your initiatives or is this being pulled by the end market customers that you're selling into. And of that fraction, How would you split it into the three buckets that you're working in? You have the mechanical recycling initiative, you know, JV with Suez. You have the pyrolysis molecular recycling project. And then you also have the bio-based feedstock project with Neste. Which of those three do you think are, you know, really driving this, or do you think those end market customers are really above the line?

Thank you, Steve. Well, good morning. First of all, in terms of how much of our polyethylene demand or customers are asking for sustainable products, I mean, if you think about our sales of polyethylene, more than half of it goes into packaging, whether it's flexible or blow molded bottles or those sorts of things. I think it's safe to say more than a half, probably close to two-thirds over time will want to have sustainable products as part of the mix that we sell them. In terms of their preference for food packaging, clearly the molecular recycling would be the most desirable because essentially what we're doing is we're creating new feedstock and producing FDA-approved resin. So our molecular recycling will be the most important development as we look at the next five to seven years. But I think mechanical recycling will continue to play a role, and that's where we're capturing the near-term opportunities. And as you know, we have a molecular recycling pilot plant that we've built in Italy. We're working. I had a review with my R&D team, in fact, this week, and they're working diligently to perfect the technology and get to semi-works as soon as possible.

Thank you.

Our next question comes from Bob Cort. Your line is open.

Bob Cort, your line is open.

Thanks very much. Bob, I was hoping you could give us an update on how the commercialization of your two new GAVs is progressing and maybe some milestones there.

Yeah, so good morning, Bob. Things are going very well. So I'll start with Bora. We have staffed up on the marketing side, both sales and customer service. We have a full-fledged organization, local leadership in China, ramping up our marketing efforts to sell more directly rather than through trading activities. So we're selling 100% of the polymer output over there in Borough, and things are going quite well. I'll tell you, it's increased our visibility on the market and demand trends, and so all the things we thought would occur when we had a bigger presence, we're starting to see that. SASLJV, we're operating the facility as part of the agreement. We have the site manager is a Lyondell Bazell employee. He was a site manager of one of our sites here in Houston. The marketing of the products is just part of our usual marketing that we do on other polyethylene grades that we're already producing. So my sense is that the integration has been very seamless and both JVs are really now part of the system.

Thank you. Our next question comes from Arun Viswanathan. Your line is open.

Great. Thanks for taking my question. Good morning. I guess I just wanted to get your thoughts on, again, the polyethylene market as well as the polypropylene market. So polyethylene, I guess, conditions have definitely held up a lot better than what a lot of us have thought. And now with the durables market kind of recovering, I guess, do you expect maybe a little bit of give back in Q2 as operating rates pick up and we see a little bit more supply come into the market? Or do you expect kind of price resilience? And then in polypropylene, maybe similar questions. We've seen a real surge in monomer. And so how does that kind of translate to your outlook for polymer pricing and margins downstream? Thanks.

Good morning, Erwin. Both are very tight, so let me talk about polyethylene first. Speaking for ourselves, inventory is still very low. In fact, we're looking for opportunities to build back some inventory, but because demand is so strong, we're not able to do that. On the pricing front, January price increase, you know, discussions are essentially finished and, you know, the implementation of the increase is going to occur. The next increase for February is on the table, and likely there will be very good discussion about that as well. You know, if you think about markets being tight in January, typically as we go into the spring, we see a seasonal uptick in demand. And so I think that, you know, supply-demand fundamentals are going to remain tight through the first half of the year for polyethylene. Similarly, as you said, propylene prices run up quite a lot, but inventories are still low. We're struggling to build inventory because demand is so good. And as you said about durables, probably applies more to polypropylene. As the economic recovery really takes hold in Europe and U.S., I think we're going to see probably more pull from durable goods and uses. So we're quite constructive about both, frankly. It looks tight through the first half of the year. And the other thing I would add is there's quite a bit of downtime on a planned downtime in the industry for crackers. So that's going to keep monomer prices probably high through the first half of the year. There's also a very large PDH turnaround here on the Gulf Coast. So that'll keep propylene pretty snug through May, I would imagine.

Thank you. Our next question comes from Vincent Andrews. Your line is open.

Thank you. Hi, everyone. Bob, maybe just to follow up on the polyethylene demand, you know, in one of the slides, the capacity utilization slide, you put the scenario out there where demand could grow 7% in 2021. And I'm just wondering if you could bridge us between the sort of 4% expectation and what would get it up to 7%. And within that, you know, as a follow-up to one of your earlier comments on sort of expecting the normal seasonal improvement in demand in the second and third quarter, Does the COVID environment minimize that at all with everybody at home and what have you, or do you think we'll still see the same seasonality in demand? Thanks.

Sure, Vincent. So, first of all, what we were trying to illustrate with that chart is that it won't take much for the operating rates to just go flat from here, 3% additional demand in one year. Now, typically, in recovery years, we've seen demand growth above trendline. in the first year or even two post-recessions. To your question about how do you bridge the four to the seven, first of all, in polyethylene, you know, here in the U.S., the pipe market has been very, very weak. And if there's an infrastructure bill, as oil and gas starts to come back a bit, I think that could help demand growth here in the U.S. And likely, if there's infrastructure spending in Europe and China, I mean, you could really see that market contribute to bridging the 4 to 7. The other is there's still enough durable goods content or industrial demand for, for example, like industrial bulk containers. As industrial activity picks up, I think we'll see recovery or, you know, higher demand rates for polyethylene. So I don't think it would take much to get to the 7 percent. And when you factor that in, it looks like operating rates could stay elevated over the next few years.

Thank you. Our next question comes from Mike Sisson. Your line is open.

Hey, guys. Nice end of the year. You know, Bob, sounds like Shulman worked out really well, I guess similar to our Browns. Hopefully you enjoyed the season. But are there any other opportunities for ball-tawn acquisitions? Your balance sheet is in good shape. maybe to add to that advanced material segment.

Yeah, so we are pleased with how the APS segment has really evolved. What I'm most pleased about is that the integration is essentially complete. And so now as we face into recovering markets, the increasing volume should increase earning. those synergies go straight to the bottom line, and that's really ahead of us. So the best is still in front of us for APS, hopefully the same for our Browns. In terms of bolt-on acquisitions, I mean, you know, we're out, now that the platform is essentially set, it would be very natural if we could find opportunities to bolt on and add to the segments that are most attractive to us. So we're keeping a watchful eye for that, and we'll keep you updated. But given, you know, the kind of acquisitions that are possible, the size will be very modest, and it will be more about just roll-ups.

Thank you. Our next question comes from Kevin McCarthy. Your line is open.

Yes, good morning. Bob, with regard to propylene, the three explanations that we often hear, for supply constraints are low refinery operating rates, PDH outages, and a light feedstock mix yielding diminished quantities of propylene coproduct. Can you speak to those and your view of the sustainability of this tightness in propylene monomer? It's not often we see prices rise 22 cents a pound over a two-month period, and so I'm just curious to hear your view on that.

Yeah, Kevin, it's kind of reminiscent of like 10 years ago when we used to see a lot more volatility. And generally when propylene gets close to being sold out, any outage causes these kinds of bursts in price. I would add a fourth item to your list, which is very robust demand for the derivatives of propylene. Not just polypropylene, but the other propylene derivatives, you know, cumine and derivatives and so on. So we've really had a strong pull from all propylene derivatives, which has helped. I think until the PDH outages or turnarounds are behind us, I think we're going to have tightness in propylene. The other thing is propane is very far out today as an economic feedstock. So maybe if propane cracking returns in the summer when propane gets cheaper, you could see a little bit more propylene supply come. But my sense is that we have a pretty tight propylene market probably through May.

Thank you. Our next question comes from . Your line is open.

Thanks very much. Bob, I was wondering if you could discuss business conditions in olefins and polyolefins in Europe and maybe compare them to what they were like in 2019. What is it about the European market going into 2021 that seems to be so strong? And do you see it as sustainably strong?

Sure. Great question. So you've probably read, Jeff, that there have been higher incidents of COVID in Europe, lockdowns in various countries, but we've not seen significant impact on demand for polyolefins. So polyolefins demand has been still very resilient. If you look at EAI across the board, and of course, you know, a lot of that's Europe, if you think about our volume, if you compare Q121, how our book is building, compared to Q119, we expect that ethylene is going to be up about 15%. from Q119 to Q121, polyethylene up 17%, polypropylene up 12%, Q119 to Q121. So it really points to very resilient demand. And as you look forward into the turnaround season, very heavy turnaround season also in Europe. In fact, in April, about 13% of the ethylene capacity is expected to be offline on a planned basis. So, you know, I mean, I think we could see tightness through a good bit of the first half of the year based on demand hanging in there even when there's spike of COVID rates in various countries. And as the vaccine is distributed, I would think all of that will settle down in the demand growth we should see year over year.

Thank you. Our next question comes from Duffy Fisher. Your line is open.

Yes. Good morning, guys. First question just around polyethylene capacity globally. So how much effective new polyethylene capacity do you think ran in 2020 versus 19? And then does that number get bigger or smaller on your numbers as we go into 2020? And then the second one is with Shell's Pennsylvania plant, when that comes on, just because of its geographic advantage to some customers, do you think that will be more disruptive than an average plant that would start up in the Gulf Coast?

Yeah, so Duffy, your first question, 2020 was a pretty heavy year for startups. So including, you know, our new HyperZone polyethylene plant here in La Porte. I think 21... at least based on the schedules that we've seen that are publicly available, 21 should be lighter, and then in 22 we'll see more expansions come through. And that's what's reflected in that supply-demand graph on page 11 of our earnings materials or our slides. So, I mean, I think, again, if you go back to what we talked about in the prepared materials, if we have recovery kind of growth in 21, at 7% or something, I think we essentially can absorb what's coming globally. Your question about the shell plant that will start up in Pennsylvania, yeah, I mean, certainly, you know, there will be temporary dislocation. They'll have to, they'll find their way into the market. They'll export some product. But much like when, for example, Sasol started up, you know, it was for a quarter or a month or two, when these large plants start up. But eventually, as long as kind of the overall demand is such that the supply is needed, it tends to find its way to where demand is. So I don't expect a massive disruption, but I would imagine we'll see some bumps when they do start up.

Thank you. Our next question comes from Hasan Hamed. Your line is open.

Morning, Bob. Good morning. Bob, question around two commodities. You know, one on ethylene. You know, as you take a look at the cost curve right now, who do you think is setting the ethylene price? You know, and only reason I ask that is that obviously we've seen a major escalation in the price of Chinese coal. So that's one part. And the other questions around styrene, you know, it seems Q4 volumes are very strong. You know, what are you guys seeing in the near term as far as the styrene market goes as well?

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Okay. So first of all, your question about the price setter, you're right, the coal price has gone up quite a lot. So I would say CTO and MTO are probably setting the price. It's quite close. And given the high level of demand, for ethylene derivatives, some MTO-based ethylene is still needed in China. So I would say those are the price setters. And your second question about styrene, we've already seen styrene come back off again. So we had a really nice period in November, early December, but styrene has come back off. I think the way to think about styrene is when all the units are running, the margins will be pretty weak in styrene. I think when there are outages, we could see some improvement, but we're not expecting a lot in terms of contribution from styrene in 2021.

Thank you. Our next question comes from PJ Jovakar. Your line is open.

Hey, good morning, Bob. Good morning, PJ.

Bob, this strong pricing in polyethylene in December, January, and February, three sort of unseasonal months, Is that driven by global inventory build if underlying demand is flat sequentially from 3Q to 4Q? And if it is that inventory build, you know, usually converters try to buy ahead of these price increases. So I guess my question is, are they trying to scramble to buy right now? And if they buy too much, do we end up with too much inventory in second half? Thank you.

Yeah, good question. I mean, it is, the price strength has been somewhat unusual. But I think the supply side should be looked at carefully. You know, with the hurricanes that came through the U.S., there were some unplanned outages in Europe. There was just enough to really firm up the market. Speaking for ourselves, we can barely keep up with orders, let alone allow any kind of pre-buy. So, you know, our team, is essentially under pretty strict instructions to not allow pre-buy because we simply don't have the inventory to do it. We're just trying to meet the demand for customers. And many customers are saying, hey, if you're three days late, we're going to run out of product. So I think we find ourselves in a really tight environment. And I think if there's some softness, let's say in February, I can tell you for us, we're going to take the opportunity to selectively build back inventory and get ready for the spring season, which we expect to be robust like usual.

Thank you. Our next question comes from David Begleiter. Your line is open.

Thank you. Bob, how are you thinking about refining an oxy-fueled profitability as the world gets back to normal? And 22, if it is a normal year, how do you think about the return to earnings of those two businesses?

Yeah, I mean, you know, we're looking forward to when both are contributing again. It's been, as you know, a pretty challenging period. In Oxifuel, we've not had trouble moving the volume. It's just the margins have been essentially zero. So, you know, part of what I think how you should think about Lyondell Bazell is that that recovery and the related earnings are still in front of us. So as driving recovers, we don't even need air travel to recover back to the original or pre-COVID levels. If driving recovers with vaccinations and more domestic travel, we could really see both refining and healthy fuels contribute in the second half. And I think that's part of the earnings growth story as vaccinations become more common.

Thank you. Our next question comes from Jonas Oxgaard. Your line is open.

Good morning and thank you. uh wondering about your feed slate um propane spiked and the relative profitability seems to have flipped very rapidly so question is what does that do to your q1 margins and how is your feed slate evolving here yes good question um so we're really minimizing propane if it's cracking any at all um we have kind of what we call a barbell feed slate today it's ethane and it's liquids

So, you know, gas oil, naphtha still look decent and so we're either in ethane or we're at the other end of the spectrum and both are profitable given where propylene is and butadiene, you know, it's come off a little bit but still hanging in there.

Thank you. Our next question comes from . Your line is open.

Thank you. Good morning, Bob. So I've noticed typically U.S. exports about half of produced polyethylene. When global freight rates went up, it didn't seem to hurt U.S. polyethylene supply demand dynamics, but only helped it. Could you explain why?

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Well, so first of all, I mean, I think you have to look at overall demand globally. And if the demand is such that the supply is needed, we find ways to get to meet the demand. So you may be referring a little bit to the container dislocations and so on. For us, we've not really been impacted by that much. We have long-term contracts. We've been able to continue our exports primarily down to Latin America and Mexico, but also to Asia. So our exports have been uninterrupted and not really impacted by the spot freight rates or container rates. So we continue this business as usual for us.

Thank you. Our next question comes from Frank Mitch. Your line is open.

Yes, good morning slash afternoon. Bob, I wanted to come back to the polyethylene slide 11. You know, I mentioned that 2020 global demand growth was 4%. You guys sold 8% as I do the math. uh, between the U S and Europe. So if you could talk about your operating rate, I mean, obviously some of that is a hyperzone capacity that was added, but I was wondering what, you know, where your, uh, operating rates were. Um, and if you could say that relative to the industry average in the sector, and as I'm looking at this chart, is this factoring in any delays whatsoever in terms of Chinese capacity, or are you factoring in, you know, what the press releases have said there?

Yeah. So good morning, Frank, or good afternoon. So operating rates in the second half of the year for us in polyethylene were essentially unconstrained. We ran as much as we could. We had some unplanned downtime in Europe and the US, but we've essentially been running full since about July, August timeframe. And we expect to do that for the foreseeable future. And yes, the volume growth was related to hyperzone operating for part of the year. Your question about the supply side on that chart on page 11, we have not put any delays in for Chinese capacity. So it's essentially we're assuming it's going to come on as advertised in IHS. It's really that's to illustrate the impact of 7% growth versus 4% growth. how close we are to really having absorbing all of the capacity that's in front of us if we just have one year of more typical economic recovery type growth of 7%.

Thank you. And as a reminder, if you'd like to ask a question, please press star 1. Our next question comes from John Roberts. Your line is open.

Thank you. You indicated that the balance sheet focus was going to be on debt reduction. Would it be helpful to your credit metrics if the SAS All option came earlier to you and you get full access to the cash flow there? Or would it be better if that comes later, given you've got to focus on getting your debt down right now?

Yeah, John, I mean, I think, you know, clearly our focus is to get the debt down now. I don't think that option is going to come sooner. So I think it's a very low probability. Given kind of the earnings profile, I think we could manage, but I don't think that's a plausible scenario. So our focus in terms of capital allocation is debt reduction first and foremost, modest increases in the dividend, and then perhaps buybacks, but those are pretty far away, I think.

Thank you. Our next question comes from Matthew Blair. Your line is open.

Hey, good morning. Bob, could you talk about your net long ethylene position in the U.S.? Are you able to capitalize on this recent spike up in spot ethylene? And then also, have you started to export ethylene, just given the startup of some new export facilities?

Yeah, so Matthew, our SASOL acquisition has been fortunate with the timing because ethylene values have gone up and we've increased our merchant position as a result of acquiring half of that facility. We are not exporting, but we have benefited from the increase in spot price. First and foremost, as you know, as the spot price moves, it impacts the contract negotiations. The contract price has been moving up. Most of our formulas have spot contract blends, so we benefit that way. And some of, quite a bit of the SASOL volume does have spot sales in it. So we've been able to capitalize on this improvement in ethylene margins that I think will probably be persistent through most of the first half of the year because of this very high unplanned turnaround schedule starting in March.

Thank you. And our last question comes from . Your line is open.

Hi, good afternoon, Bob. This is Bhavesh Sadaya for John. When we look at the volume recovery for polypropylene, we are back to a close to pre-pandemic levels. However, we are obviously still going to see demand recovery from some of the key autos, commercial construction, some of those end markets. So how much of the pre-pandemic base demand has now recovered and then how much of new permanent ongoing demand was created by the pandemic itself? Thank you.

Yeah, great question. So I'm going to give you statistics for the first part of your question, and then I'll talk kind of qualitatively about the second half. So if you look at our polypropylene volume, I'll tell you how Q121 we think is shaping up compared to Q119. In the U.S., we're likely up 14% from Q119 to Q121, and in EAI, up 12%. Another sort of data point is that polypropylene demand in China grew about 10% from 2019 to 20. Now, your second question about pandemic-related, certainly the masks and the medical gowns and all of that has been a pretty important driver. And frankly, I think even after vaccinations are more widespread, use of masks will still be pretty, I think, for most of this year and maybe even into next year. So I don't have a number for you on what percent of the growth was accounted for by the mass, but if I were to estimate, maybe 1 to 2 percent of the growth is related to the mass of the 14 percent that I mentioned for the Americas polypropylene growth. All right, so I think that was our last question. I'd like to just offer a few closing remarks before I let you all go. Thank you for hanging in there. So, first of all, you know, with the completion of 2020, you've seen a resilient performance from our company through the first significant downturn since our emergence back in 2010. Our fourth quarter results have given you a preview of our increased earnings power. Going into 2021, we have more assets, strong order books, tight markets, and rising economic activity. all of which should provide confidence for continuing improvement into the first quarter. While much of our industry is scheduling high levels of second quarter maintenance, Lyondell Bazell's planned downtime for 2021 is relatively light. Our assets are ready to capture improving seasonal demand. Refining and oxy fuels businesses are poised to benefit from increased mobility during the second half of the year. I think all of this positions us well to increase cash flow and continue to strengthen our balance sheet as we work our way through 2021. So thank you for your interest in our company and we look forward to updating you in about 90 days. Have a great weekend.

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