LyondellBasell Industries

Hello, and welcome to the Lionel Bissell teleconference. At the request of Lionel Bissell, this conference is being recorded for instant replay purposes. Following today's presentation, we will conduct a question and answer session. I would now like to turn the conference over to Mr. David Kinney, Head of Investor Relations. Sir, you may begin.

Thank you, Operator. Before we begin the discussion, I would like to point out that a slide presentation accompanies today's call and is available on our website at www.LyondellBassell.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 statements are based upon reasonable assumptions and the alternative measures are useful to investors. Nonetheless, the forward-looking statements are subject to significant risk and uncertainty. We encourage you to learn more about the factors that can lead our actual results to differ by reviewing the cautionary statements in the presentation slides and our regulatory filings, which are also available on our investor relations website. Comments made on this call will be in regard to our underlying business results using non-GAAP financial measures such as EBITDA and earnings per share excluding identified items. Additional documents on our investor website provide reconciliations of the non-GAAP financial measures to GAAP financial measures, together with other disclosures, including the earnings release and our business results discussion. A recording of this call will be available by telephone beginning at 1 p.m. Eastern time today until March 3rd by calling 877-660-6853 in the United States and 201-612-7415 outside the United States. The access code for both numbers is 137-342-90. Joining today's call will be Peter Banneker, Lyon Delta Cells Chief Executive Officer, our CFO, Michael McMurray, Ken Lane, our Executive Vice President of Global Olefins and Polyolefins, Kim Foley, our EVP of Intermediates and Derivatives in Refining, and Torkel Renman, our EVP of Advanced Polymer Solutions. During today's call, we will focus on fourth quarter and full year 2022 results, current market dynamics, and our near-term outlook. With that being said, I would now like to turn the call over to Peter.

Thank you, David, and welcome to all of you. We appreciate you joining us today as we discuss our fourth quarter and full year 2022 results. Let's begin with our safety results on slide number three. Reiner Basel's employees and contractors delivered an outstanding safety performance during 2022. Injury rates at our company have consistently been among the lowest for our industry. But last year, we reduced the rate of injuries across our global workforce by roughly 1.5 to 0.12 injuries per 200,000 hours worked. At our Bayport complex outside of Houston, our team finished 2022 with over 6 million consecutive safe work hours, a new company record. Simply put, a consistent focus on safe work is embedded in our company's DNA and provides a solid foundation for extending that shared focus across other dimensions of the company's culture. Let's now turn to slide number four to discuss our financial results. 2022 was a very challenging year characterized by a war in Ukraine, evolving responses to the COVID pandemic, energy volatility, inflation, and rapidly changing monetary policies. At Lionel Basel, our portfolio of businesses continued to provide value for our global customers with products and solutions that are essential for modern society. In 2022, Linder Basel delivered earnings of $12.46 per share with EBITDA of $6.5 billion. Cash generation was exceptional and resulted in $6.1 billion of cash from operations, second only to our 2021 results. We ended the year with $6 billion of liquidity supported by a strong investment grade balance sheet. Return on invested capital was 16%, far exceeding our cost of capital. In addition to our focus on safety, we're sharpening our strategic focus to maximize value for our customers, shareholders, and society under a range of scenarios. On slide number five, we outline our progress on delivering value from this strategy over the past year. Our leadership in cost management and operational excellence enabled Linder Basel to hold fixed costs well below inflation and quickly adjust operating rates in response to evolving market conditions. Our diverse global business portfolio provided outstanding cash generation during a challenging year. And at the same time, we positioned the portfolio for changing times with decisions to exit refining and sell our Australian polypropylene business. We established a new business unit focused on establishing leadership in providing circular and low-carbon solutions for our customers. And we are advancing our supply chains, production capacity, and sustainable assets to serve rapidly growing markets for these circular and low-carbon products. Last quarter, we announced our increased focus on capturing value as we continue to manage costs. We expect our value enhancement program will generate at least $750 million in recurring annual EBITDA by the end of 2025. Our increased focus helped drive a 13% point improvement in cash conversion in 2022. that further bolstered our capital structure and supported generous shareholder returns. On slide number six, I would like to highlight our recent decisions to accelerate progress on our climate targets and create more value by doing so. In order to meet the goals of the Paris Climate Agreement, climate scientists believe that global warming should be limited to no more than 1.5 degrees Celsius above pre-industrial levels. In December, we announced our decision to increase Lionel Bazel's 2030 targets for reducing Scope 1 and Scope 2 emissions to 42% and established a new Scope 3 emission reduction target of 30% relative to 2020 levels. Our targets are now aligned with the science-based guidance and the 1.5 degrees Celsius scenario. In addition, as we continue to make progress in sourcing favorably priced renewable electricity, we have increased our 2030 goal to procure at least 75% of our global power generation needs from renewable and low-carbon sources. Earlier this week, we announced our first two renewable power purchase agreements in Europe and two additional agreements in the United States, all together We now have eight agreements in place for 930 megawatts of renewable power capacity, which represents roughly one-third of our global needs. These agreements will prevent nearly 1 million tons of annual greenhouse gas emissions. All of this work supports our goal to become net zero in scope one and scope two emissions by 2050. At the same time, we continued to build global businesses that will sell at least 2 million tons of recycled and renewable-based polymers by 2030. On slide number seven, let's take a look at how we are building our circle and brands of recycled and renewable-based polymers. During the fourth quarter, we announced progress in developing four new plastic waste sorting and recycling facilities in Houston, Germany, India, and China. These facilities provide a strong foundation for a robust global supply chain for plastic waste feedstocks. And with our three product platforms, Circle and Recover for mechanical recycling, Circle and Revive for advanced recycling, and Circle and Renew for renewable-based feedstocks, Linder Basel will be able to match both feedstocks and products with the highest value solutions for all customers. The combination of our focus, scale, technologies, and global platforms provides Lionel Basel with powerful advantages to build a world-leading circular and low-carbon solutions business. Now, with that, I will turn the call over to Michael first, and then to each of our business leaders who will describe our financial and segment results in more detail.

Thank you, Peter, and good morning, everyone. Please turn to slide 8 and let me begin by highlighting our excellent cash generation from our business portfolio during 2022. Weindel-Bazell generated a total of $6.1 billion of cash from operating activities over the past year. Our cash on hand increased to $2.2 billion at the end of the fourth quarter. During 2022, we achieved cash conversion of 96%. 13 percentage points higher than our 2021 cash conversion. In the fourth quarter, cash conversion reached an outstanding rate of 203%. This efficient and robust cash generation allowed the company to return a total of $3.7 billion to Line Del Bazel shareholders in 2022. Let's continue with slide nine and review the details of our capital allocation over the past year. Our approach remains focused on disciplined capital allocation and strong returns for our shareholders. During 2022, cash from operating activities fully funded dividends, share repurchases, and capital expenditures. We returned approximately 60% of the cash from operating activities to shareholders. This included $3.2 billion in quarterly and special dividends and $420 million in share repurchases. In May, we increased our quarterly dividend by 5%. This represents our 12th consecutive year of annual dividend growth. We continue to invest in maintenance and growth projects with $1.9 billion in capital expenditures. A significant portion of this capital funded the final stages of construction for our world-scale POTBA plan. Startup activities remain on track for the end of this quarter. Our transformation office is working across our company to rigorously manage and track the progress of our value enhancement program. We look forward to sharing the progress of this program at our Capital Markets Day in March. Now I'd like to provide an overview of the quarterly results for each of our segments on slide 10. Blind Elbezel's business portfolio delivered $865 million of EBITDA during the fourth quarter. Our results reflected margins stabilizing at the low levels seen toward the end of the third quarter. Moderating energy and feedstock costs provided modest offsets for compressed margins in our olefins and polyolefins businesses. Overall, O&P demand remained low, particularly in Europe and China. Intermediates and derivatives results sequentially declined on lower volumes due to the quarterly timing of oxyfuel vessel shipments. Margins in our oxyfuels and refining businesses remained above historical averages as demand for fuels remained strong due to increasing global mobility. High cost for utilities and raw materials coupled with low seasonal demand negatively impacted our advanced polymer solution segment. Across the portfolio, a non-cash LIFO inventory valuation charge impacted pre-tax fourth quarter results by approximately $90 million. Fourth quarter LIFO charges were approximately $15 million for O&P America segment, $50 million for the O&P EII segment, $25 million each for the intermediates and derivatives in APS segments, $15 million for the technology segment, and a $40 million benefit for the refining segment. As a reminder, volatility in natural gas prices impacts our cost for not only gas but also steam and electricity. We estimate that a dollar per million BTU change in the price of natural gas impacts the energy cost of our directly operated assets by approximately $175 million per year across the company, with 80% of this impact in North America and 20% in Europe. These estimates do not include the impact of gas prices on feedstock cost. Before I turn the call over to Ken and then to each of our business leaders who will describe our segment results in more detail, let me address some of your annual modeling questions for 2023 on slide 11. As our new world-scale POTBA plant ramps up, we expect to produce and sell about half of the asset's nameplate capacity in 2023. we remain confident that our value enhancement program can achieve recurring annual EBITDA of $150 million by the end of 2023 through the execution of about 1,000 projects. In order to achieve this benefit, we expect to incur a similar amount of one-time capital and operational costs of about $150 million, with the majority of these costs allocated to capital. Major planned maintenance for 2023 include a turnaround at one of our Midwest ethylene crackers in the O&P America segment, turnarounds at our Acetyls assets, and three propylene oxide plant turnarounds within our I&D segment. Based on expected volumes and margins, we estimate that lost production associated with all of this maintenance downtime will impact 2023 EBITDA by approximately $290 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. During the fourth quarter, we recognized costs related to the exit from our refining business, which impacted EBITDA by $73 million. As I mentioned last quarter, we expect the business will incur similar EBITDA impacts during each quarter of 2023. We will also recognize about $55 million each quarter for depreciation charges to reflect cost accrued for asset decommissioning that will be incurred after the asset shuts down. We expect that our capital expenditures will decline by about $300 million to approximately $1.6 billion this year with the completion of the POTBA plan and disciplined spend resulting from the current business environment. Approximately $500 million of this CapEx is targeted towards profit-generating growth projects with a remaining balance supporting sustaining maintenance. We expect that this year's capital requirements for the Value Enhancement Program will be funded within our $1.6 billion CapEx budget. Other financial metrics worth noting include net interest expense, depreciation and amortization, pension-related estimates, and tax rates. We expect 2023 net interest expense will be approximately $405 million. Depreciation and amortization charges for 2023 are expected to be $1.4 billion, which includes the $220 million of additional refinery depreciation charges related to asset decommissioning. We plan to make regular pension contributions in 2023, totaling about $65 million with approximately $105 million of pension expense for the year. We expect our effective tax rate will be approximately 20%, and our cash tax rate will be lower than our ETR. With that, I'll turn the call over to Ken. Ken? Thank you, Michael.

Let's begin the segment discussions on slide 12 with the performance of our Oliphants and Polyoliphants Americas segment. Fourth quarter O&P Americas EBITDA was $359 million. Prices and margins stabilized at the low levels we saw at the end of the third quarter. Market demand declined, and we also saw customers restocking during the quarter. That, combined with new polymer capacity, resulted in well-supplied markets. We operated our assets at approximately 75% of nameplate capacity to match the reduced market demand and manage working capital. During January, we have seen modest improvements in domestic and export demand. Normalization of logistics constraints have facilitated increased export volumes. Also, moderating feedstock and energy costs are providing some margin tailwinds. As a result, we expect to operate our O&P Americas asset at an average of approximately 80% during the first quarter. Looking back at 2022, I want to highlight our progress in developing our circling business. We have established projects for plastic waste sorting facilities that will be used to provide feedstock for our circular recover and circular revive product lines. We are also moving forward in our usage of olefins feedstocks produced from renewable sources, such as used cooking oil. During 2022, we processed 15,000 tons of renewable feedstocks at our Channelview, Texas, cracker to produce ethylene, propylene, and ultimately polyethylene and polypropylene that we sold to customers at premium prices under our Circular Renew brand. Last year, four of our U.S. manufacturing sites attained the ISCC Plus certification for certain grades of polyethylene and polypropylene. This enables Lionel Mazel to offer customers mass-balanced certificates for these products and serve the market's rapidly growing demand. We are delivering these new circular and renewed products to our customers and proving that polymers can be more sustainable and used in any application where virgin polymer is used. Now, please turn to slide 13 to review the performance of our olefins and polyolefins Europe, Asia, and international segment. In Europe, macroeconomic pressures were exacerbated by high inflation and energy costs that curtailed operations at our customers and pressured consumer demand. Lionel Bezal operated our O&P assets at rates of approximately 60% during the fourth quarter. LIFO inventory charges were $50 million during the quarter. All of this combined to result in a fourth quarter EBITDA loss of $152 million. European energy costs have considerably moderated in January, and demand is showing some signs of improvement over the extremely low-level scene in December. We have completed repairs and restarted our integrated cracker in France at the end of 2022 and expect to operate our European assets at a rate of 80% during the first quarter. As in the Americas, we continue to focus on long-term strategies to support our circular and low-carbon solutions business in Europe and Asia. During October, we announced new partnerships for plastic waste sorting facilities in Germany and China and a fully automated mechanical recycling facility in India. These partnerships will allow us to swiftly develop fit-for-purpose plants in each region to supply feedstocks for our circular products and serve the rapidly growing market for circular solutions. In November, we announced our decision to move forward with engineering to build our first commercial-scale advanced recycling plant in Germany. This plant will utilize Lionel Bezel's proprietary MORTEC technology to convert plastic waste from our waste sorting facility into pyrolysis oil that can be used as a feedstock to produce new plastic resins in a circular process. We are moving rapidly to build circular and low-carbon solutions for our industry at an unmatched scale. With that, I will turn the call over to Kim.

Thank you, Ken. Please turn to slide 14 as we take a look at our intermediates and derivatives segment. Fourth quarter EBITDA was $291 million. Starry margins improved due to lower feedstock costs. Oxyfuel margins remained well above historical fourth quarter averages. Oxyfuel volumes declined as the timing of the vessel sailings resulted in unusually high third quarter volumes. We operated our assets at rates of approximately 75%. Our propylene oxide and styrene joint venture in the Netherlands is expected to restart this month after three months of downtime in response to volatile European energy costs and lower demand. We look forward to initial volumes from the new POTBA asset in Houston by the end of the quarter. We plan to operate our assets across the IND segment at approximately 80% in the first quarter. In January, we are encouraged by unseasonally strong oxy fuel margins with low butane feedstock costs and strong oxy fuel blend premiums. We expect relatively stable margins for the segment for the first quarter. We develop multi-year maintenance schedules to ensure that our plants can safely and reliably serve our customers. As it works out, 2023 will be a heavy year for maintenance across several of our POTBA assets. Maintenance is scheduled for two of our three POTBA plants at our Bayport, Texas facility in the second and fourth quarters. Our Botlik POTBA facility in the Netherlands will also undergo maintenance from September through November. We expect the ramp up in volumes of our new plant will be partially offset by lost production from this planned maintenance. Nonetheless, the incremental 2023 PO and TVA volumes should be sufficient to capture typical market growth. In 2024, we expect less scheduled maintenance and a full year of production from our new assets will provide additional volumes to serve market growth. Now let's turn to slide 15 and discuss the results of the refining segment. Fourth quarter EBITDA included a LIFO inventory valuation benefit of approximately $40 million. Results increased on higher margins and slightly higher volumes following the third quarter planned maintenance, offset by the disruptions of the December freeze. In the fourth quarter, the Maya 2-1-1 spread modestly increased to $48 per barrel remaining well above historical averages. Despite unplanned downtime, we operated the refinery at 85% of capacity with an average crude rate of 229,000 barrels per day. In January, the Maya 211 spreads have also been unseasonally strong at more than $50 per barrel, driven by strong discounts for heavy crudes. We expect to operate the refinery at approximately 85% of capacity in the first quarter. Finally, I would like to recognize our team at the refinery for finishing the year with zero recordable injuries in 2022. This is the first time such a record has been achieved in the 104-year history of this facility. Our team is dedicated to safely and reliably operating these assets until we exit the business. With that, I will turn it over to Torkel.

Thank you, Kim. Now, let's review the results of our advanced polymer solution segment on slide 16. Fourth quarter EBITDA declined to $3 million. Bargains remained pressured by feedstock and energy costs, as well as the $25 million non-cash LIFO inventory valuation charge. Volumes fell on lower seasonal demand exacerbated by high power prices that impacted our European customers' businesses. In the fourth quarter, we embarked on a journey to transform the APS segment. Our goal is to sharpen our focus on customer service and product development to maximize value for our customers and for Lionel Basel. With increased autonomy and accountability, we are developing a more agile operating model with meaningful regional and segment growth strategies. As part of this transformation, the Cataloy and Polybutene businesses will be moved from APS and reintegrated into the OMP segment beginning January 1st, 2023. This move will allow the APS team to sharpen their focus on the compounding business, distinct from the polymer business of catalog and polybutene, which serves our OMP value chain. From a portfolio point of view, we estimate APS will shift approximately $200 million of annual EBITDA between O&P Americas and O&P EAI segments fairly equally. We plan to provide additional information regarding the impact of this change in March. I strongly believe that our APS platform has a lot of potential, and I look forward to reporting on our team's progress in delivering on this transformation during our capital markets day in March. With that, I will return the call back to Peter.

Thank you, Torkel. And to the entire Lionel Basel team, thank you again for all the hard work in delivering strong results during a challenging year. To close out on the segments, let's turn to slide 17 and discuss the results for our technology business on behalf of Jim Stewart. During the fourth quarter, reduced global polyolefin industry operating rates resulted in lower catalyst volumes, licensing revenue moderated due to the timing of milestones for revenue recognition. We estimate that the first quarter results for the technology segment will be similar to fourth quarter 2022, as catalyst volumes improve, offset by moderating licensing revenue. Our technology team is hard at work advancing engineering on Linder Basel's first commercial advanced recycling plant. This plant will leverage on proprietary Moritech technology to extract value from post-consumer mixed plastic waste by closing the loop and producing feedstocks for our Italian crackers. Our technology provides distinct advantages by reducing energy consumption and improving yields through innovative process designs and catalysis. Let me now summarize our results and first quarter outlook with slide 18. Despite highly challenging markets, our team is capturing value and moving forward on our strategic priorities. Most importantly, we are sharpening our focus and leveraging the scale of our global portfolio to deliver resilient results. We remain focused on Lionel Bazel's core values. Last year's outstanding safety performance speaks to the depth with which safety is ingrained in our corporate culture. Our goal is to expand our cultural foundations to encompass a more comprehensive passion for value creation. This week, we welcomed Tricia Connolly to our Executive Committee as Executive Vice President, People and Culture. Tricia will play a pivotal role in leading Leyndel Bazel's vision and strategy to enhance the employee experience elevate our organizational performance, and create the best and most inspiring culture in our industry. In 2022, our businesses were pressured by the effects of the war, volatile energy costs, emergence from the pandemic, and monetary policy. We responded by matching our production with changing demands, leveraging our global business portfolio, and maximizing cash generation. Over the past year, our businesses generated over $6 billion of cash from operations and returned $3.7 billion to shareholders in dividends and share repurchases. Leinder Basel's focus and commitment to shareholder returns remains strong. With our newly formed circular and low-carbon solutions business, we're laser-focused on meeting the needs of our customers, brand owners, and society. Our decarbonization goals are now aligned with science-based guidance, and we have made substantial progress towards our 2030 goal to procure 75% of our electricity from renewable and low carbon sources. The circular and low carbon solutions business is well positioned to address the challenges of sustainability and plastic waste. by building an end-to-end business with robust supply chains, proprietary technology for transferring materials, and our global manufacturing and marketing network, we're confident that we can build a large-scale and valuable leadership position in this exciting and expanding market. And our focus on sustainability is gaining recognition In December, we were honored to be awarded the Ecovadis Gold Medal for sustainability performance with a 91st percentile ranking. The Ecovadis platform is valued by procurement professionals for assisting in the identification and evaluation of sustainable supply solutions. modest improvements in the first quarter from moderating energy and feedstock costs, stable demand, and the absence of fourth quarter LIFO charges, normalizing supply chains, or enabling improved trade flows from over-advantaged feedstock positions in North America and the Middle East. Nonetheless, we will continue to maintain focus and discipline to ensure that operating rates across our global portfolio are matched to market conditions. As the year progresses, we anticipate seasonal demand improvements during the second and third quarter. We're keeping a close eye on China's emergence from COVID and potential benefits from increased economic activity during the second half of 2023. The most exciting challenge during my first eight months as the CEO of Lionel Basel has been the process of identifying and building a compelling strategy that generates substantial value for our customers, suppliers, employees, communities, and shareholders over the next decade. We've shared some initial decisions with you already, but much more is ahead. As you will have recognized, we have not waited until the Capital Markets Day, but started moving ahead with great focus and speed in the right direction. On slide 19, we ask that you save the date for March 14th, when we will share more details on our forward strategy at our Capital Markets Day in New York. And we hope that you can all join us virtually or in person. We are now pleased to take your questions.

Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. As a reminder, if you have a question, please press the star followed by the one on your touchtone phone. If you would like to withdraw your question, please press the star followed by the two. We do ask you to limit to one question. Our first question comes from the line of PJ Judekar with Citi. Please proceed with your question.

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

Thanks, PJ. This is Peter. Let me take your question, I mean, first, and then eventually Ken can also add something to that. I mean, of course, we talk about China. It's still early stage to say that we see a sustainable recovery. We expect, I mean, that that will take probably another three, four months until we see that recovery is actually happening. So we're still very modest in our expectations on China. But at least, I mean, we know that there has been the opening. So the government has changed their way, I mean, how to look at that, at COVID. On Bora, still hanging in there, I would say. Not very positive because of the situation and because of capacity utilization rates locally in the market being at technical minimums. Ken?

Yeah, that's right. We continue to operate the joint venture at technical minimums. We've seen it's been two weeks. We're seeing a little bit of improvement in consumer demand, but it's really far too early to say that that's going to continue. Margins are continuing to be challenged, so we're seeing record low spreads there still. So even with that improvement of demand, it's not translating yet into improved spread. So we're watching that very closely, of course, PJ.

And the situation on PO is not different, I mean, than the situation on volume offense.

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

Yeah, thank you. Wanted to just drill into the EAI segment here. Is the EBITDA loss making a result of just the fixed cost absorption of running at 60% or were cash margins negative in the region in the quarter? And Ken, you mentioned demand improving. Is that sufficient to drive operating rates from 60 to 80%? Do you think that, you know, margins will remain stable or do you see risk to that given others may restart with lower, you know, lower energy costs as well?

Thank you, Steve. Good question. And the other aspect that I would add, I mean, to your question is, of course, also on the energy costs. As you know, I mean, energy costs have also moderated on a still very high level. It's still a factor eight more expensive versus the United States. But at least, I mean, we're not at that peak anymore. Also helped, I mean, by the winter that has been very moderate so far in Europe. So I would hand over, I mean, to give a bit more to what is happening in the market to Ken.

Yes, thank you. And just to remind you, we did have that LIFO charge in the fourth quarter of $50 million. But looking at what we see coming out of the fourth quarter, we hit a very low point there because demand was coming off, energy costs were high. They moderated at the end of the quarter, and we're seeing that continue in the first quarter. We also had our bear cracker down during the fourth quarter. So that's why our operating rates were lower. Those repairs are complete. The cracker is back up. Similar to what we see in China, we're seeing some improvement in consumer demand. But again, I would say it's still early. Let's not call it a win yet, but we're definitely seeing some early signs of consumer demand improving there. So, overall, the margin environment is going to improve mainly because of what Peter had said around the energy costs.

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

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

Yeah, thank you, Chris. Ben, do you want to?

Sure. Yeah, I'll take that. Listen, NGL production continues to increase, so we expect that to be a tailwind, especially for our position here in North America. The oil to gas ratio is going to continue to be favorable for our portfolio. We don't see that really changing. You know, we do expect that there could be some strengthening in the oil price as we go through the year, just as demand potentially comes back with China reopening. So, all in all, I would say that, you know, the environment today should be better than where we were in the second half of last year around feedstocks and energy costs for our portfolio. Okay.

I think net gas, I mean, Henry, you have to know what, $240?

That's right. Back to where it was in the first half of 2021. Thank you.

Our next question comes from . From BMO Capital Markets. Please proceed with your question.

Hi, good morning. This is for John. You highlighted improving operating rates in North America in the first quarter. As we think about 2023, what type of U.S. domestic demand growth do you expect? And then as we think about like a further recovery in operating rates back to like historical levels, how much of that depends on rising exports and reducing some of those logistic constraints out there?

It's a very broad question, of course. I mean, let me try to digest how to put it in different buckets here. I mean, needless to say that when we talk about demand for mature goods with high inflation rates, which are still high, with interest rates that continue to go up, with new house builds and houses being sold still being at very low pace. It's clear that we expect that the demand for durable goods will continue to be, at least for the foreseeable future, depressed. What we have seen on the other hand side, as we have seen in other cycles, is that demand for non-durable goods is relatively stable. Not to say, I mean, in certain areas, even strong. So, that has led to the fact that we have given this guidance that we say, I mean, we are now operating in the Americas at 80% utilization. And Ken already talked about the European utilization rates, which is also at 80%. In the IND sector, I mean, you know that we have the startup of the POTBA plants, as we alluded to, and Kim said, starting up at the end of this quarter, which will add, I mean, a bit more volumes of propylene oxide. But let's not overreact on that either, because we have, of course, our scheduled shutdowns, turnarounds that we have moved to the period when we are starting up, I mean, the new facility. So, we'll be able to grow a bit, but operating assets currently is at 80% also here, a tick higher than it was at the end of last year.

Thank you. Our next question comes from . Please proceed with your question.

Thanks very much. Two-part question. When you think about the shutdown of your refinery at the end of 2023, does that mean that there are reduced operating rates in the fourth quarter of 2023? That is, do you have to really prepare to shut it down or you get to the end of the year and you shut it down? Second question is you gave sensitivity to to natural gas price changes. You said every dollar per mm BTU is 175 million. And you said 20% is in Europe. So that's roughly 35 million mm BTUs. And the European gas price today is maybe $17 in mm BTU. And last year, it averaged 37. So it's down $20. So $20 times 35 700 million. So is that the benefit for 2023 if gas prices in Europe stay where they are relative to last year? Have I done the calculation correctly?

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

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

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

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

Yes. Good morning, and congrats, Michael and David, on the Institutional Investor Magazine recognition. Well deserved. Michael, you made good progress on working capital in 2022, and I'm wondering what the expectation is for 2023. And in terms of uses of cash, you know, there was a breather on buybacks here in the fourth quarter. CapEx is coming down in 23. What are your thoughts in terms of a resumption of the buybacks?

No, so good question. So I think first, I mean, I just – I point out again that the cash generation in 2022 was extremely strong. Excellent execution by the businesses from a working capital perspective during the year, in the fourth quarter in particular, where we freed up about $700 million from a working capital perspective. Also, initiatives underway as part of our Polaris project related to working capital from a longer-term perspective as well. You know, kind of turning to this year and looking forward, you know, I would say that I think first and foremost our cap allocation priorities remain unchanged. You all know that we have a reputation for generating strong cash flow and returning significant cash flow to our shareholders, and that expectation has not changed. You know, thinking specifically about 2023, I would point out that CapEx is going to be down materially, so expectations for capital is about $1.6 billion. It is going to be a tale of two halves for this year with an expectation that the second half gets stronger. As we move here into the first quarter, it's my expectation that working capital should be flattish, but as I look towards the balance of the year, I actually hope we consume some working capital with better sales and better pricing. And then remember our growth investments are starting to pay dividends as well, in particular with the startup of POTBA. And so again, as I think about the full year, it's my expectation and I'm looking at Peter and he's nodding at me, but we will continue to return meaningful cash to shareholders including growing our recurring dividend.

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

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

Yes, thank you, Vincent.

Ken, is there any clues for that?

Yes, we are very close to that, Vincent. Thank you for the question. Look, our view for the last two years is that demand for polyethylene in China has been relatively flat. So when you talk about a range of Outcomes for 2023, if you look historically, after two years like that, you would expect to see a significant snapback in growth, but it doesn't mean that that's a guarantee. So you could see anything from flat to plus 8%. It's very hard to call. That's why that's one of the markets that we watch very closely, just because it is largely the price that are in the market and will drive the absorption of all the new capacity that has come on. But we'll watch it closely and hope to see some more signs of recovery in the near future and more to come.

Thank you. Our next question comes from the line of Alexa Yesimov with Cuban Capital Markets. Please proceed with your question.

Thanks. Good morning, everyone. I have a long-winded question. So U.S. polyethylene capacity has a cost advantage, and, you know, there's longstanding, you know, thesis that due to cost advantage, U.S. can export to anywhere in the world, you know, almost as much as necessary. It's not what's happening right now, right? You and the rest of the industry are as lower capacity utilization. So why is there not an increase in export? Is it not economical or are there logistical limitations that don't allow it? And could this change as we go through 2023 such that your utilization rates go up due to higher exports and there's no imbalance in the domestic market as a result?

Hi, Alexi. This is Ken. I'll take that question. During the quarter, we actually did see both as an industry, but as Llandell-Bazell as well, an increase in exports. Some of that was related to some improvement in demand overseas, some less imports coming into some of the closer markets like South America from other regions, but also the relief of some of the logistics constraints that we were dealing with in the first quarter. sort of three quarters of the year, they really started to free up in the fourth quarter. So I think that you're going to start to see that continue in the first quarter and we'll get back to a more normal level of exports for 2023. Thank you.

Our next question comes from the line. It's Mike Sisson with Wells Fargo. Please proceed with your question.

Good morning. This is Richard on for Mike. Just wanted to Touch on the value enhancement program, you've identified 150 million in cost savings for 2023. I know we're probably gonna get more details on the cattle market today, but any details early on in terms of what you've been able to identify, where the buckets of savings are coming from, and then also just the cadence of the savings through this year would be great.

Yeah, thank you, Richard. This is Peter. Good question. The process, I mean, on the value enhancement program is ramping up quite impressively, I must say. We've done the major sites in the United States, and since the beginning of the year, I mean, the two major sites actually in Germany. We're expanding now also to other sites as we speak during the next quarters, both in the United States as well as in Europe. There are more than 3,000 projects that have been identified so far. And it goes, I mean, from areas in the manufacturing side to procurement to commercial excellence, supply chain management. So it's a very broad portfolio of different projects. We will give a couple of examples during the capital market day to make it more tangible. Today we are mainly focusing on projects that, uh have a very fast payback time um not so much projects that add an increased capacity which is logical if you look at where the market is but it is a continuous stage case process that we have where we continue to prioritize projects based upon the returns and based upon what we are seeing in the marketplace so Stay tuned, I would say, to get more specifics on a couple of examples on the 14th of March at the Capital Market State.

Thank you. Our next question comes from . Please proceed with your question.

Yes, good morning. Two quick questions. In the increase in your operating rates across segments, does that contemplate some inventory build for the summer season, or do you see that as kind of sell-through as well for Q1? And then on the polymers for Americas, what's your plan, I guess, for the split between U.S. sold and export this year versus next year? Do you have to increase your export percent meaningfully with the new capacity in North America?

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

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

Yes, so I'll talk a little bit about O&P, and I want to just echo what Michael had said. The teams have done an outstanding job in the fourth quarter managing demand our assets to be able to maximize cash flow and really focus on producing the products that we need to deliver to customers. We'll continue to do that going forward as we see markets improve. We will increase our operating rates to match that. And, you know, that may end up, as Michael said, with improving markets, increasing our working capital. But that's a good thing because we're going to have a stronger business as a result. But I'm just very proud of the team and everything that they did to manage that during the fourth quarter, which was quite a difficult time. To your question around increase in exports, you know, we're going to continue to see an increase in exports, I think, in general from the United States market or from the Gulf Coast market just with all the new capacity coming on. As a company, we have been increasing the portion of exports for us as we ramp up the capacity with the new hyperzone assets. You're going to continue to see that happen, but clearly our strategy around channels to market is to, you know, find the highest value customers and segments, and that tends to be closer to home. So we're always trying to find more business here, and we use the exports to really optimize the portfolio.

Thank you. Our next question comes from London. Kevin McCarthy with Vertical Research Partners. Please proceed with your question.

Yes, good morning. Can you discuss your view of the U.S. polyethylene contract pricing opportunities? It seems as though spot export prices have come up appreciably year to date while producer inventory has been rationalized to some extent. So perhaps you can talk through what you're seeking currently and your level of confidence that will turn the corner and start to see contract prices move higher as the first quarter progresses.

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

Ken? Yes, look, I'm confident. You know, we've seen strength in the export market that we did not see last year. So that's a good indication. And I think I mentioned this on the third quarter earnings call. You know, we've sort of seen prices come down. to almost parity with export pricing. So as you see exports go up, you should see domestic prices moving up. And I'm confident that in the first quarter, we're going to see some increases here.

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

Yeah, thanks for taking my question. Just on APS, I'd just be curious if you'd be willing to comment on what the normalized earnings of that residual business is. I mean, if you move $200 million over, I think even looking pre-pandemic, maybe there's $200 million in residual or $250 million in residual. Shulman used to be about $200, and you've got some synergies on top of that. So, curious if you could give us some color there. Thanks.

Yeah, definitely. Very good question, Joss. And This is one of the reasons why we have repositioned this APS business as well because we are, of course, not happy at all with the results in the APS business. And, yes, there are lots of factors that play a role on market demand and higher costs that we have seen last year, energy costs, et cetera, and feedstock costs. So, therefore, we have decided, I mean, to completely reposition this business and almost like run it as a separate company within La Indoor Basel. Perkel, you want to add?

Yeah, Peter. First, I just want to say and express that I'm excited to have the opportunity to lead the advanced bottom of solution business through the transformation that we're embarking on. And I see a lot of potential in this business. And I put in place a team that I think really can deliver. And, you know, the steps that we're taking, this, you know, Cataloy and PB1 are probably a team that we really view as has a better fit in the O&P segment. This enables the new, what I call the new APS, to be very focused on our core value-creating model of compounding and customer solutions for brand owners and OEMs. We did well on the integration and cost reductions, but our APS business needs a much more customer-centric operating model, and this is going to be part of the journey that we are now embarking on for the transformation. And our focused improvements in customer intimacy, technical support, and service levels I think will really allow us to fix this business and grow it in a profitable way. And I'm looking forward to share more about this transformation journey at the Capital Markets Day coming up.

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

Thank you. Peter, on your circulant volumes, what other price premiums you're receiving and what types of margins are you realizing on these circulant volumes? Thank you.

Yeah, good question, of course. As we go into the markets with an entire portfolio, so we have the renewable part of the portfolio, we have the circular part of the portfolio, which is either mechanical recycled or advanced recycled. We are in the market, I mean, with the entire family. Yvonne will give more insights in our go-to market during the capital market day. also with all aspirations that we have by having set up this strategic business unit. Currently, this is a market which is extremely short. Demand is substantially higher than the supply in the market, so we're completely sold out in the products that we have available. The premiums that we are getting are quite attractive. I'm not going to put a number on it as we speak. You've heard numbers, I mean, from other calls. And I can say we are at least on that level. But as I said, Yvonne will give more insights on the aspirations that we have during the capital markets day.

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

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

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