LyondellBasell Industries N.V. (LYB) Q4 2019 Earnings Report, Transcript and Summary

Hello and welcome to the LyondellBasell Teleconference. At the request of LyondellBasell, this conference is being recorded for instant replay purposes. Following today's presentation, we will conduct a question-and-answer session. [Operator Instructions] I’d now like to turn the conference over to Mr. David Kinney, Director of Investor Relations. Sir, you may begin.

Thank you, Britany. Hello and welcome to LyondellBasell’s fourth quarter 2019 teleconference. I'm joined today by Bob Patel, our Chief Executive Officer; and Mike McMurray, our Chief Financial Officer. Before we begin the business discussion, I would like to point out that a slide presentation of the company's today’s call is available on our website at www.lyondellbasell.com. Today, we will be discussing our business results while making references to some forward-looking statements, and non-GAAP financial measures. We believe the forward-looking statements are based on 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 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.lyondellbasell.com/investorrelations. Reconciliations of non-GAAP financial measures to GAAP financial measures together with other disclosures including the 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 2:00 PM, Eastern Time today until 11:59 PM, Eastern Time on March 2, by calling 800 759 4057 in the United States; and 402 998 0479, outside the United States. The pass code for both numbers is 1160. 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. With that being said, I would now like to turn call over to Bob.

Thank you, Dave, and good day to all of you who participating around the world. We appreciate you joining us to discuss our fourth quarter and full-year results for 2019. Let's begin with slide 3 and review some highlights. In 2019, LyondellBasell’s businesses extended our outstanding track record of cash generation by delivering $5 billion of cash from operating activities. Over the past six years, our resilient business portfolio has steadily produced $5 billion to $6 billion of cash each year under a variety of oil prices and macroeconomic conditions. Our company's focus on operational excellence cost management and technology-driven growth has proven that we have an advantage across a range of business climates. 2019 earnings were $9.58 per share with $5.7 billion of EBITDA. This represents a decline of approximately 20% and 17%, respectively, relative to the prior year. Despite healthy consumer-driven demand, our profitability was impacted by soft industrial demand has trade uncertainty, regulatory changes and a weak environment for capital investment challenge the automotive industry and other durable goods markets for our products. Our global asset footprint and operational flexibility enabled us to adapt to changes in trade lines by continuing to leverage the advantage of abundant, low-cost natural gas liquids has be stopped for production from both our American operations and our Middle East joint ventures. Our technology business achieved record revenues from licensing plan designs to support growth in China resulting in the most profitable year in company history for this segment. Before we get further into the results, I would like to introduce our Chief Financial Officer and Executive Vice President, Michael McMurray. Michael brings extensive knowledge and perspective to the company after working in finance, Investor Relations, treasury and as a CFO over the course of more than 30 years. I'm looking forward to Michael providing our finance and strategy groups with the leadership and will drive our continued success. Michael, welcome to LyondellBasell.

Thank you for the kind words, Bob. I'm excited to be part of LyondellBasell and your partner in driving our future. In my first several weeks in the company, I'm very impressed with the people and results oriented culture within the company. I look forward to meeting all our stakeholders and the investment community in describing how we will continue our disciplined approach to value driven growth while driving shareholder returns.

Thanks, Michael. Let's turn to slide 4 and review our approach to maximizing the returns from our cash generation. Over the past year, we continue to actively manage our business portfolio with values driven growth investments to develop opportunities around the world. On the US Gulf Coast, we completed construction of our new hyperzone polyethylene plant and increased activity to build our PO/TBA. As hyperzone production ramps up this year and the PO/TBA plant reaches completion next year. Both projects will provide growth in volumes and profitability that will further increase our capacity for cash generation. The box on the right summarizes work to expand our footprint in the rapidly growing Asian market during 2019. We announced that our joint venture in Thailand will begin construction of their fourth polypropylene plant that will re-establish their position as the largest polypropylene producer in Southeast Asia. In September, we signed an MoU with Bora to build an integrated cracker in Northeast China. And in December, announced our intention to expand our existing partnership with Sinopec to build a second propylene oxide and styrene monomer plant also in China. All of these projects leverage LyondellBasell technologies in our core businesses to extend our positions and expand in the world's fastest growing markets. With the disciplined investments, we are achieving growth, while providing substantial returns for shareholders. On Slide 5, you can see that our company has maintained our focus on delivering top quartile safety performance. As we integrated the employees, contractors and assets from the A. Schulman acquisition in 2019, we were able to reduce the injury rate at these facilities by more than 50% relative to the prior year. Our goal remains zero injuries. We're diligently working to ensure all our employees, contractors, assets and the communities in which we operate, finish the day in the same or better condition than when they started. In October 2019, we announced the latest step in our progress to utilize plastic waste in the circular economy. We're building a power plant facility at our research center in Ferrara, Italy to develop our proprietary MoReTec technology to convert mixed plastic waste continue into polymers. As shown on slide 6, MoReTec will use catalyzed hydrolysis to convert plastic wastes into hydrocarbons that can be used as feedstocks to produce new plastics from existing olefins crackers and polymerization plants. We will develop more technology in our pilot facility and optimize a tour to commercial scale. More tech is complimentary to lined up Lyondell the existing mechanically recycled product business that relied upon clean and sorted waste streams. Together with our bio based succulent polymers, our company now has three technologies that are advancing the business of succulent plastics. With that I'll turn the call over to Michael who will lead us through several topics relating to our financial performance.

Thank you, Bob. Let's get on Slide 7 where you can see the trends, our companies EBITDA and EPS over the past three years. 2019 results include a one-time non-cash tax benefit of $85 billion that increased earnings by $0.24 per share. Integration cost related to A. Schulman acquisition impacted full year net income results by $89 million or $0.26 per share and fourth quarter results by $0.29 million or $0.08 per share. As Bob mentioned, our profitability was impacted by challenging market conditions during 2019. Using third quarter 2019 results as a benchmark, our resilience relative to our industry peers during these challenging times is noteworthy. While it appears profitability fell as much as two thirds LyondellBasell’s global business portfolio formed relatively well with approximately two-thirds for asset volume serving non-durable demand from consumer markets. Our businesses are generally well-positioned during industrial downturns. Slide 8 illustrates the consistent and efficient cash flow performance that Bob mentioned earlier. Our businesses have generated $5 billion to $6 billion of cash from operating activities over the past six years. In 2019 87% of our EBITDA translated into cash With approximately $1 billion dedicated to sustaining capital, our free operating cash flow yield remained healthy at 12.5% in 2019. Please turn to Slide 9 and allow me to review our capital allocation strategy. Our approach remains consistent with the policies we have articulated last September at our Investor Day and, frankly, for the past several years. We seek to provide balance between value-driven growth and shareholder returns. We remain committed to a strong and aggressively growing dividend. Our capital expenditures are focused on ensuring our assets maintain their high levels of reliability, as well as sending [ph] profitable growth. With the completion of the Hyperzone in PO/TBA projects, our go-CapEx will taper down. Our cash generation provides flexibility for highly selective value-driven M&A, growth through JVs and opportunistic share repurchases. At the same time, we are mindful about maintaining the appropriate leverage ratios and our commitment to a strong investment-grade balance sheet underlies all of our decisions. Now please turn to Slide 10, where you can see that our businesses generated $1.2 billion of cash with moderate activities during the fourth quarter which contributed to $5 billion of cash generation for the year. Capital expenditures for the fourth quarter were approximately $730 million with roughly 60% invested in profit-generating growth projects and 40% dedicated to sustaining capital. Our investment in growth has increased since the second quarter of 2019, as we completed our Hyperzone polyethylene plant and continued to move our PO/TBA plant construction forward. In the fourth quarter, we paid $351 million in dividends. In 2019, our opportunistic buyback strategy allows us to repurchase 43 million shares for a total of $3.8 billion, together with dividends, returned a total of $5.2 billion to shareholders in 2019. Along with that thought, I would like to compare our capital returns to some of our peers over the prior four quarters. Please turn to Slide 11. The dark blue bars depict dividend yield which was nearly 5% over the trailing 12 months prior to the fourth quarter. Together with share repurchases, our company tops the chart with 20% of total cap returns to shareholders. Before I turn the call over to Bob, let me address some of your annual modeling questions for 2020 on slide 12. Regarding capital expenditures, we are planning to invest approximately $2.4 billion during 2020 to support both our sustaining capital and profit-generating projects. Approximately $1.3 billion is targeted towards profit-generating growth. The majority of this growth investment in 2020 will be dedicated to the construction of the PO/TBA plant in Houston. We continue to expect a meaningful reduction in capital spending in 2022 after the completion of this facility. For 2020, with a fairly typical planned maintenance schedule, activities during the year are expected to impact annual EBITDA by approximately $155 million. Our O&P Americas segment will have a cracker turnaround overlapping the first and second quarters of this year that is expected to impact EBITDA by $25 million and $30 million, respectively. Our O&P EAI segment will have a cracker turnaround in the third and fourth quarters of 2020 that is expected to impact EBITDA by $15 million in each quarter. In our Intermediates & Derivatives segment, we have planned maintenance events that will impact EBITDA by approximately $10 million in each of the first and second quarters and $25 million in each of the third or fourth quarters this year. Our cash interest expense for 2020 is expected to be $420 million which includes capitalized interest of about $120 million. 2020 annual book depreciation and amortization is forecasted to be $1.5 billion. We plan to make regular pension contributions in 2020 that total approximately $120 million and we estimate a pension expense of $100 million. We currently expect a 2020 effective tax rate of approximately 20% for the cash tax rate in the. mid-teens. I will now turn the call back to Bob for a more detailed discussion of our segment results. Bob?

Thank you, Michael. Let's turn to slide 13 which illustrates our quarterly profitability over the last five quarters. EBITDA for the fourth quarter was $1.2 billion. As you have seen, LyondellBasell’s business portfolio typically follows a seasonal trend with peak earnings occurring mid-year. In the absence of external catalysts, that improve order [indiscernible] from our underlying businesses, the pattern seen in 2019 are fairly typical. We have a focused and well balanced portfolio supported by our global footprint, flexibility and reliable operations. These are recurring themes for our company and attributes that we seek to improve upon as we manage the portfolio. Even in the uncertain market conditions, our company continues to demonstrate resilience. We talked last quarter about polyethylene spreads being near 10-year lows. And on slide 14, we've expanded that idea to illustrate the market margins associated with some of our major products. Each market has experienced several cycles over the past 20 years. Most recently, we are faced with slow industrial demand and uncertainty in trade policies. Margins are currently relatively strong for North American polypropylene and for MTBE On the flipside, we're seeing historically weak margins for styrene and Northeast Asia polyethylene. Some of you may be surprised to learn that globally we sell higher volumes of polypropylene and oxyfuels than polyethylene and styrene. These charts illustrate how our portfolio provides balance where our product and trough margins is often offset by another which from margins within the portfolio. With these natural hedges across our global footprint and an innovative technology, cost advantage, operational flexibility and consistent underlying consumer-driven demand, LyondellBasell is well positioned to provide resilient profitability. With the market conditions in line, let's review our fourth quarter segment results starting with our Olefins and Polyolefins Americas segment on slide 15. Fourth quarter 2019 EBITDA was $498 million, $155 million lower than third quarter. Profitability was impacted by reduced polyethylene margin from typical winter seasonality and an increased cost of ethylene production as feedstock costs were higher and propylene price was lower compared to the previous quarter. Olefins results decreased approximately $20 million compared to the third quarter of 2019. Margin contracted on relatively higher natural gas liquid feedstock costs and lower propylene price. Volume increased after the completion of our planned maintenance at our Clinton, Iowa facility during the third quarter. Combined, polyolefin results were approximately $135 million lower than the third, quarter primarily due to a decline in polyethylene spreads over of more than $130 per ton. For the full year, results decreased by $460 million. Olefins results increased as we utilize the high feedstock flexibility across our fleet of six US ethylene crackers to take advantage of low, low cost feedstocks. Combined polyolefins results declined primarily due to the spread decline in polyethylene of approximately $260 per ton. We expect the remainder of the first quarter will follow typical seasonal trends with increasing demand continuing into the second quarter. Now we turn to slide 16 to review the performance of our olefins and polyolefins; Europe, Asia and International segment. During the fourth quarter, EBITDA was $144 million, a decrease of $147 million, compared to the third quarter. Ethylene margin declined as a result of higher feedstock costs and lower propylene price. With typical fourth quarter seasonality pressuring volumes, there was little support to increase polyethylene price. Olefins results decreased approximately $140 million, primarily driven by higher feedstock costs and lower propylene price. Combined polyolefin results decreased approximately $45 million driven by decreased spread in both polyethylene and polypropylene. Full-year EBITDA was $101 million lower than 2018. Results including impact of approximately $55 million due to a decrease in the euro versus the US dollar exchange rate relative to 2018. Olefins results for the full year increased due to lower feedstock costs and improved reliability with planned and unplanned maintenance impacting the fourth quarter of 2018. Combined polyolefin results and joint venture equity income decreased due to lower polyolefin spreads. In Europe, we expect typical seasonal improvements as we progressed through the first and second quarters similar to the amendments. Please turn to Slide 17 and let’s take a look at our Intermediates and Derivatives segment. Fourth quarter EBITDA was $329 million, a decline of $61 million from the third quarter of 2019. Well-supplied markets drove margin decline in most businesses for both propylene oxide and derivatives and intermediate chemicals. Fourth quarter propylene oxide and derivatives results decreased approximately $10 million due to lower margins from our product sales mix. Intermediate chemicals decreased $50 million primarily due to reduced margin oxyfuels and related products results for relatively unchanged with the strongest fourth quarter for the company over the past five years. During 2019 EBITDA declined $454 million compared to the record performance we achieved in 2018. Margin declined in most businesses primarily styrene partially offset by strong improvement in margins for our oxyfuels and related products businesses. Volumes for most businesses also declined due to planned and unplanned maintenance as well as softer market. In January MTBE raw material margins have trended downward but are still relatively strong for this month compared to recent years. As the first quarter progresses we expect well-supplied markets to continue to pressure most of our IND businesses. Recently, we announced our intention to expand our existing partnership with Sinopec to build a second PO SM plant in China. Joint ventures enable us to expand our reach with relatively low capital commitments in attractive markets. The proposed new JV will serve growing demand for both propylene oxide and styrene in China where styrene soaring demand is growing at a reasonable rate. As demand for fuel-based construction materials packaging and furnishings continues to grow we see an opportunity to bring together our leading technology with Sinopec’s and operational capabilities to further serve the Chinese market. The chart on Slide 18 depicts the company's cost leadership in producing propylene oxide from our two co-product technologies. We're building using our cost leading PO/TBA technology on the US Gulf Coast where butane feedstocks are abundant and low price. In China we have selected our PO/SM technology to serve growing propylene oxide and styrene demand. Both of our co-product technologies offer a significant cost advantage over new plants based on alternative technology or aging or chlorohydrin capacity. On slide 19 let's review the results of our Advanced Polymer Solutions segment. Fourth quarter EBITDA was $54 million, a $48 million decline over the third quarter of 2019. Volumes and margins declined as we are seeing continued headwinds from the automotive sector and a seasonal decline in the construction market. Fourth quarter pretax innovation cost were $38 million. Compared with the prior period Compounding & Solutions results declined approximately $35 million due to continued headwinds in the automotive market. Advanced Polymer’s results decreased about $20 million due to lower margin and volume due to a seasonal decline in construction demand. Full-year EBITDA results for the segment were $424 million, a $24-million improvement over 2018. 2019 was the first full year of results with the addition of new product lines from the acquisition of A. Schulman. Pretax integration costs were $116 million in 2019. Volumes declined in legacy LyondellBasell businesses due to decreased automotive and construction demand. Integration activities are on track, and we have captured $130 million in forward annualized run rate synergies as of December 31. We expect higher industrial construction demand, particularly for products from our Advanced Polymers business, as we move through the first quarter toward the arrival of spring. Any improvements in automotive and other industrial markets should benefit our Compounding & Solutions business. Now let's turn to Slide 20 and discuss the performance of our Refining segment. Fourth quarter EBITDA was $22 million, a $28 million improvement versus the third quarter of 2019. Results were driven by an improvement in margin. In the fourth quarter, the Maya 2-1-1 industry benchmark crack spread improved to an average of $19.44 per barrel for the fourth quarter. Additionally, we benefited from relatively strong [indiscernible] prices. Operations were strong for the quarter with an average crude throughput near nameplate production rate at 267,000 barrels per day. Full-year EBITDA was $232 million, lower than 2018. The refinery ran well at an average crude throughput The refinery run well at an average crude throughput of 263,000 barrels per day. This was 32,000 barrels per day higher than prior years due to the completion of planned maintenance in 2018. For the full-year refining margins were impacted by the limited availability of our heavy sour crude oil in the US Gulf Coast as well as lower Maya 2-1-1 spread which declined to $17.58 per barrel. In January, weak command for diesel has driven Gulf Coast ULSD to Brent crack spreads to five-year lows. While we are disappointed by the current market environment, we continue to expect improvement, as the carriage ban on high-sulfur and marine fuels takes effect in March. We are well-positioned to benefit from the new regulation by serving demand for more environmentally friendly Marine fuels from our refinery. Please turn to slide 21 as we review the results of our technology segment. In 2019, our technology segment delivered a record quarter and record annual profitability with our industry-leading polymer production technologies and catalysts. EBITDA was $138 million during the fourth quarter and was $411 million for the full year with a number of significant revenue milestone was reached for our licensing business. We expect lower license income recognition, and therefore, lower profitability in the first quarter following the strong fourth quarter in 2019. Now, on slide 22, I'd like to take this opportunity to reiterate our company's disciplined investment growth strategy that we shared with you during our 2019 Investor Day. We expect the contributions from our growth investments to deliver a $1.3 billion incremental annual EBITDA by 2022. Applying cash yield from EBITDA of about 80% combined with our moderating CapEx requirement of approximately $1.1 billion, we expect an increase in cash flow about $2.1 billion that would double our free cash flow by 2022. Let me summarize the year highlights and outlook with slide 23. In 2019, our resilient portfolio was supported by our abundant low-cost natural gas liquid feedstocks in North America, natural hedges across our global business portfolio and licensing growth in our technology segment. We have generated $5 billion to $6 billion of cash from operating activities for six consecutive years. This consistent and strong cash generation contributed to growth through disciplined profit generating capital investments and provided significant shareholder returns through a growing top quartile dividend and share repurchases. In 2020, we look forward to the additional capacity from our Hyperzone polyethylene plant for O&P Americas segment. We are moving towards the completion of our PO/TBA plant in 2021 to provide further growth for our I&D segment. We're seeing opportunities to drive value by expanding our diverse global business portfolio. We expect to see that these joint venture investments today to reap tangible earnings growth over the years to come. With that said, we're now please take your questions.

Thank you. We will now begin our question-and-answer session. [Operator Instructions] And our first question comes from Matthew Blair from Tudor, Pickering, Holt. Your line is now open.

Hey, good morning, Bob. Maybe you want to start off on refining one of the bright spots in the quarter. Could you talk about whether you were able to run high sulfur for fuel oil as a feed at your Houston refinery? And if so, what kind of volumes and what kind of EBITDA uplift? And if you were not, was the constraint economic or was it equipment-related? Any details on that would be great.

Yeah. Good morning, Matthew. Thanks for your question. On refining, the HSFO, we are able to run supplemental feed typically when we've cut back on crude run rates for a variety of reasons. So we can run between 20,000 and 40000 barrels a day of additional HSFO and I would say in a typical month, maybe that contributes $5 million to $9 million of additional EBITDA. So that gives you a sense for contribution and we did do some of that fact in January because we had some external events that caused some downtime on one of our crude units and some internal issues so we were able to buy some HSFO. The margins were pretty good. So, we do use that as an optimization tool.

Thank you. And our next question comes from Steven Byrne. Your line is now open.

Yes, thank you. What fraction of your polyethylene production is currently exported to China and what other markets will this likely shift to as China becomes more self-sufficient? Are you able to move more of it into Europe and or do you have a concern that others might do this and erode the margins in that region?

Yes, Steve. Good morning. Well first of all, we’ve not exported as much generally as the industry has in years past and 2019 is no different. We did increase exports in 2019 as the year progressed, but we're still well below the industry average. And we're probably at a run rate of around 30% of our polyethylene that's exported. And of that, maybe 5% of it goes to China. And that could move up some next year – this year in 2020, as we start up our Hyperzone plant and balance our system. Your question about self-sufficiency, based on IHS data and our analysis of that data, it seems that China will continue to need large amounts of imports of polyethylene and that short still is incrementally growing over the next decade. Now it's not growing as much as we thought maybe two, three years ago, but there's still a significant short in China on polyethylene.

Thank you. And our next question comes from Kevin McCarthy from Vertical Research Partners. Your line is now open.

Yes. Good morning. Bob, I wondering if you could address the impact of the phase out of single use plastics in China? And also comment on your -- Table 2 of your supplemental information, suggests that high-density polyethylene prices declined, about $110 a ton sequentially in 4Q versus 3Q. It seems to be a little bit more than maybe some of the consultants are indicating and so I was wondering if you could comment on that and whether or not you're seeing discounting? And if so, might that reverse as 2020 progresses. Thank you.

Okay. So, good morning, Kevin. On your question about single-use plastics, I think we’ll have to see how that announcement plays out. Whether it’s in China or Europe or the US, one of the challenges is there aren’t really readily available substitutes for many of the applications for single-use plastics. So, in the near term, Kevin, I don’t expect significant impact on demand over, let’s say, the next three to five years. I think, post five years, I think we'll have to kind of watch and see how recycling shapes up and how chemical recycling develops and the technology develops. But in the near to medium term, I don't expect a lot of impact especially because there aren't really obvious substitutes for those applications. Your question on price from Q4 to Q3, several factors, I think first of all, as I said earlier, as the year progressed, we export more as an industry, and frankly, as a company. And so that mix of domestic versus export probably had some impact. And also, new supply came on. We saw demand actually come off because of destocking and seasonality. So tons of pressure in Q4. We've already seen some of that reverse. For example, posted spot polyethylene prices have already come up $0.03 to $0.04 since early December based on different publications that we follow. So we're already seeing some of that reverse.

Kevin, this is Dave. That table that you're referring to is actually the net transaction price from IHS. It’s not the contract price per se for polyethylene discount.

Thank you. And our next question comes from Jeffrey Zekauskas from JPMorgan. Your line is now open.

Thanks very much. Can you talk about polypropylene demand trends both in the United States and in Europe either sequentially or year over year in the light of the slowing of the economy and difficulties in the auto sector.

Polypropylene demand growth, Jeff, has been similar to polyethylene demand growth. It's been impacted a little bit because of the slowdown in automotive and generally in the industrial sector. Polypropylene as more end uses in those sectors. Would we still see a reasonable – a reasonably good market environment in polypropylene, something that we'll certainly watch as new capacity comes in 2020. But overall, we see polypropylene growth developing reasonably well.

Thank you. And our next question comes from Arun Viswanathan from RBC Capital Markets. Your line is now open.

I just wanted to ask your question on the monomer side. You've often had some profitability from the metastasis unit. Could you size what that's been over the last several years and what your outlook is for both ethylene and propylene monomer profitability over the next couple of years? Thanks.

Yeah. Thanks, Arun. It does move around quite a lot. As you can imagine, depending on poly – sorry, propylene price and the spread between propylene and ethylene. Generally speaking, if in Q4 and you look at all of our major product areas they really declined through the quarter and have reached kind of these tough conditions and propylene is an example of that. So, in Q4 when we had really minimal contribution from our flex unit mainly as a result of lower propylene price. So as that reverses we should see better contribution from ethylene and into propylene. It does this – it moves around quite a lot and it's something that we factor into our optimization because we think about how we deploy the ethylene we produce.

Yeah, Arun, just to give you a sense of scale in 2019 our flex profitability was about half of what it might have been in 2018 and as Bob said in the fourth quarter it was very, very small.

Thank you. And our next question comes from Duffy Fischer from Barclays. Your line is now open.

Just a question sort of around the refinery sort of round IMO 2020. I'm getting a lot of feedback that people are kind of equating that with Y2K. We got all bent out of shape and there's not been much change because of it. Seems like you guys have a little bit different view and maybe it's just delayed so can you kind of walk through how you think IMO 2020 still plays out and then within that context what does that mean structurally for the refinery within Lyondell’s portfolio?

Okay. Yeah. Good morning, Duffy. Thanks for that question. So you will recall in our prior discussions about IMO what we've said is there are two primary benefits from IMO for us. One is that the light heavy differential would get wider which favors our refinery and the distillate spreads would increase because of the value of this sulfur, a bunker fuel. So one of the two have shown some signs of improvement. The light heavy differential is improved by about $3 a barrel over the past 90, 60-90 days or so compared to what we saw most of last year. So we're starting to see a bit of response on that. And you can see it in the numbers, they’re not terrific but they're getting better. On the distillate side, there’s been a couple of factors that have actually kept distillate crack spreads down or they’ve’ actually – they’ve reduced in the last 60 days. One is I think, we probably – we all underestimated the amount of inventory of compliant fuel that was built before year-end. To your point, there was a concern about would there be enough and I think perhaps, there was more than enough. And so there's a bit of overhang, which will be worked through. So I think, I see that as a temporary situation. Secondly, we've had a really mild winter, so distillate values have come down because there hasn't been as much demand for heating. Again, I think a seasonal effect. So to summarize in terms of IMO, I think that the effect will be – it’s somewhat delayed, but we are expecting some improvement in the refinery profitability as a result IMO. Your question about portfolio, again, our focus has been very consistent; run the refinery as well as possible, try to optimize on the product side so that we can maximize value and we're continually focused on that. And we'll see how things play out longer term. Thank you.

Thank you. And our next question comes from Vincent Andrews from Morgan Stanley. Your line is now open

Thank you, and good morning. Bob, I'm wondering if you could talk a little bit about the Asian PE markets. And maybe two things to touch on, one, the margins have been negative there for a while now longer than – if I look back over the last 10 years, usually they don't stay that negative for too long before capacity comes off and they at least go back to zero, and that hasn't happened. And the big thing that looks like it’s happened is that naphtha prices have been very strong certainly in the fourth quarter. Maybe they come off a little bit year-to-date due to the coronavirus, but what is driving the naphtha price versus a relatively flat crude oil price, and why aren't we seeing Asian capacity come off line given the losses?

Yeah. Good morning, Vincent. Really good question, I think, and this is really at the crux of sort of why we think we're reaching trough conditions in polyethylene globally. As you rightly mentioned, margins today appear to be below cash costs. So you would think there would be negative earnings on many of these units, not just the highest cost, but probably deep into the cost curve. I've been following this business for many years, including when I lived in Asia more than 10 years ago. And typically when you fall below 300, it's not just a few marginal crackers but many are underwater. My sense is that typically it takes perhaps a quarter or two of these sorts of conditions for there to be meaningful reduction in output or idling of capacity. We're nearing that stage, in my opinion, and it seems to me that we should see some bounce. And as I said earlier, if you look at -- posted export prices of polyethylene from mid-December to mid-January, they have moved somewhat. So again, I think, these are all signs of trough conditions and there should be some bounce off of these really, really unusual loans.

Thank you. And our next question comes from John Roberts from UBS. Your line is now open.

Thank you. Could you give us an update on the closing of the Bora deal and if this start-up still on schedule?

Yeah, good morning. We're working diligently to move towards definitive agreements. We expect to have those completed within the first half of this year. In terms of the project’s start-up, they're making really great progress. And I would expect that we'll be in the commissioning stage towards the end of this year for that project. I think that's one of the one of the attractiveness to us of this project is that by the time we're in a position to infuse equity into the venture, we'll be within months of start-up. So the timing between our investment and timing of start-up is very short. We derisked quite a lot of that project in our view as a partner.

Thank you. And our next question comes from P.J. Juvekar from Citi. Your line is now open.

Yes, hi. Good morning, Bob. One more question on your Bora project. At your Analyst Day, you mentioned that the cost of building in China is about half of that in the US. Can you comment about time it takes to build in China? I know crews their work 24/7 to build and so, what's your expectation of timing and does that JV give you any special insight into the timing of some of these new crackers that are starting up in China? Thank you.

Good morning, P.J. Indeed, it's one of the sort of attractions to us is that, first of all, that that project is going to produce product for the local market. So, we don't intend to export. I think it’ll give us a really good window into how the market works there as well. And as you said timing and cost of construction. In terms of the cost, they are between half and two thirds that of Gulf Coast builds and also timing very similar somewhere between half and two-thirds of the time that's required to build on the Gulf Coast. And the Bora project is certainly in that range relative to the US cost and timing.

Thank you. And our next question comes from Bob Koort from Goldman Sachs. Your line is now open.

Slide 14 talks about those integrated spreads by competitors because good thing you don't have a lot of crackers but coincides with your promise that they were refining a trough. Just a bit curious how that informs or just no use of capital plans. I mean, clearly your stock is getting punished pretty substantially here. You've got a big dividend that you could reduce those payouts by -- maybe buying some stock back. On the other hand, I would imagine targets are looking quite a bit cheaper. So, could you just maybe refresh us maybe early on in the capital deployment at this stage of the market?

Sure. Thanks, Bob. First of all, on CapEx, you'll recall at that Investor Day, we had a few things we highlighted. First of all, sustaining capital of about $1 billion to $1.1 billion, frankly, we don't plan to change that. We want to make sure that our units are well-maintained and are able to operate when we need them at full rates. And because of our dividend coverage, we don't have to do that. We're in a position where we're able – we have a well-covered dividend without having to take those sorts of steps. Secondly, our CapEx is declining because the Hyperzone project is essentially complete. And so that that capital comes off. So we have somewhere around $300 million to $400 million reduction in CapEx from 2019 to 2020. And then, if you look further out, we'll see another reduction after the PO/TBA project starts up. I think the key for us is to really be thoughtful about how we think through future projects, be very disciplined as we've shown, and I see great opportunity on both sides of the equation to increase cash flow. We see sources of new earnings and we see CapEx declining. That story remains intact as we discussed in Investor Day.

Thank you. And our next question comes from Hassan Ahmed from Olympic Global. Your line is now open.

Bob, just wanted to follow up on you made some comments about what you think the trajectory of polyethylene pricing may be, obviously, keeping in mind some of the negative margin trends in Asia. My question is a bit more specific about the grades. As we see the influx of all of this polyethylene capacity in 2020, 2021, it seems there have been a fairly large divergences between the amount of capacity that's coming on line call it in HDPE and linear low versus not that much capacity coming online in LDPE. So, I mean, you know how are you thinking about that? Should we expect to see sort of divergent pricing patterns between the different grades?

Yes. Good question. And I think first of all within your low density – sorry low density polyethylene supply being less on an absolute basis, the demand growth is also lower for low density polyethylene. So, when I think about high density polyethylene which is the majority of what we produce, we do see that the supply is coming on generally when the demand is there as well. If we see periods of oversupply it's episodic as opposed to structural. So, my sense is that as we work our way through digesting the new supply in 2020 globally then we'll have to see how the timing works out on the future projects. Even in China, some of the projects have been later than they were first announced, so and we're going through startup of our Hyperzone plant right now and if we don't reach full capacity on the first day that we put hydrocarbon in, so these things have a certain ramp up rate, which generally is not reflected in IHS numbers. But I'm somewhat constructive that I think we're – we've reached the bottom and we're bouncing off of the lows in Q4 and we'll see how demand develops here.

And Hassan to your point. I mean the days sales of inventory are reported by ACC has dropped for high density by eight days since December of 2018 to December of 2019. Just shows you that the market is tightening up for high density here in North America.

Thank you. And our next question comes from Michael Sison from Wells Fargo. Your line is now open.

Hey, guys. Bob, when you think about your EBITDA in the fourth quarter, it held up pretty well given difficult environment sort of across the board. So, when you think about 2020 and your portfolio, can you grow EBITDA on 2020? And if you can, where do you think you'll see some of the potential upside?

Yes. Good morning, Mike. Thanks for that question. Indeed, I think we did hold up well. And in our prepared comments, I mentioned that the Oxyfuels business did well. So, first of all, I think the diversity in our portfolio and that some of these products are at different points in their individual cycles that helps in delivering consistent and strong cash flow. But I think through sources of earnings upside, first of all, start-up of our new Hyperzone polyethylene plant, as I said we're in the process of start-up right now. And so, we should have – we hope to have production by month-end. So, once that plant is up and running and as Q2 progresses, we start to produce target grade rate that should start to contribute earnings. Also our APS integration work, the integration of A. Schulman continues. We're doing really well run rate synergies at the end of December, we’re at about $130 million annualized. So, we're doing quite well on that. And we should continue to see benefits. The automotive sector has been really depressed globally. And frankly, that hit our legacy compounding business because it was mostly automotive. Any rebound in automotive is going to help that segment. And in our view, with all of our integration work I think we're laying the groundwork for really capitalizing on small improvements. Furthermore, IMO, I talked about that earlier, while we've been disappointed that we haven't seen some response yet, we do believe we will see it. Into Q2, we should see the benefits of IMO in terms of better cracks and even wider light-heavy differential. So those are some examples of earnings upside, if you will, that don't really rely on polyethylene market getting better per se. And also when you think about cash flow or the lower CapEx this year, should be positive as well.

Thank you. And our next question comes from Frank Mitsch from Fermium Research. Your line is now open.

Good morning. And Michael, nice to meet you at least telephonically, look forward to meeting you in person.

Thank you, Frank.

But Bob, I want to come back to the Sinopec possum JV or the Memorandum of Understanding that you signed last month. You mentioned a little bit about the fact that you're going to be more exposed to styrene in China and have a better prognosis for that business over there. Obviously, this is a business that you have not expressed a lot of positive comments in the past and I'm just curious, has your outlook for styrene overall changed, where do you see it going, is this the first move of others or was this just opportunistic with Sinopec? If you could expand upon that’d be great.

Sure. Good morning, Frank. First of all, that joint venture is more about deal and less about SM. So it's really a driver for us to invest was propylene oxide, we see a growing market there over time. We have a great partner in Sinopec, an existing relationship that we're building upon. They have great operational capability as well as capability to build plants, low cost. So, in styrene, the styrene wasn't the reason we did this, we’re undertaking this project. But on the other hand, we believe that in Asia certainly there's still some growth in styrene and we can place that volume when that plant starts up. So, more about fuel, less about styrene but comfortable that we can place the styrene and have considered in our economics the value of styrene.

Thank you. And our next question comes from David Begleiter from Deutsche Bank. Your line is now open.

Thank you. Good morning. Bob, can you just discuss the prospects or your views on potential US polyethylene price increase in Q1? I know [indiscernible] pick up in March and April but ethane is cheap are you seeing spot export price pick up here. So, what's your confidence in getting up a P price increase in February and March? Thank you.

Good morning, David. First of all as I mentioned earlier, the spot price has moved up post, on a posted basis right? So $0.03 to $0.04 depending on which publication you read. I think that says that if there’s some underpinning for that increase. Secondly inventories as reported by HCC IHS indicate that inventories are low as producer level anecdotally we believe that the converter level, inventories are also low. We should see a seasonal uptick we do every year and I don't see why this year should be any different. And so, some seasonal uptick should help. Lastly, something that perhaps isn't on everyone's radar that the turnaround season is pretty heavy this year. They’re much heavier than last year on crackers in the US so we could see ethylene be tighter in during the turnaround season as a result of the higher level of capacity that's out. So I think all of those things point towards reasonable chances of improvements.

Thank you. And our next question comes from Jonas Oxgaard from Bernstein. Your line is now open.

Thank you. Bob, it sounded like you – you thought that naphtha prices have come back down again in Q2 or so. I was wondering how much of that as an industry view or how much of it is your lined out view? And if it is an industry view, wouldn’t that suggest that the producers in Asia if they all know this would just try to hold on until it crashes instead of shutting down?

Hey Jonas, I think my comment at one of the earlier questions related to I think it was Vincent who asked me about Asian PE margins. My comment was more that those margins should come up from – from sort of below the breakeven point where they are today. I don't know that necessarily that's going to come from naphtha dropping. I mean it could be that price rises and that's why the margins improve. So if I express the view on naphtha that was not intentional. My view was more about the fact that Asian PE naphtha spreads seem – seem untenable based on historic and data. And you know my sense is that those margins need to expand some, so that they’re not cash-negative for a significant part of the industry over there.

Thank you. And our final question comes from John McNulty from BMO Capital Markets. Your line is now open.

Okay, thanks. This is Bhavesh for John. Good morning.

Good morning.

So for your Technology segment, it has had a solid past couple of years. You shed some color for the first quarter. How should we think about the cadence and size of earnings of the full-year? And if you could just help with some of the underlying drivers for the growth you're seeing in catalyst sales, is it more about describing higher market share or is it just linked to growing the growing industry capacity?

Yes, Bhavesh, first of all, in our Technology segment, there are two components, there’s catalyst and then there’s licensing. So the catalyst business is very steady, and as we do these licenses, our catalyst business steadily grows. That part isn’t very volatile and there’s definitely an upward slope in terms of earnings and one that accrues for many years to come. And the licensing side, it’s much more variable. It depends on timing of payments and licenses we win. Your point is correct, and that we’ve been participating in many of these projects that you -- that are announced in China, primarily. But likely, the licensing side of the business will cool off some in 2020. We do expect some lower earnings from that segment. And yet, on the other hand, as the license plants start up, our catalysts turning should steadily increase over time. And that's really a great part of that Technology businesses is that provides stability of cash flow.

All right. So I think that was the last question that we had. So, let me offer a few closing remarks before we sign off. So, our company's proven and continuous focus on operational excellence, cost management and disciplined capital allocation think will serve us really well in this current challenging environment. We anticipate typical seasonal improvements for our businesses as we've progressed through the year, favorable resolution of trade policies and a rebound in industrial demand could potentially provide significant upside for many of our businesses. As I've mentioned several times in the Q&A, IMO 2020 is expected to increase earnings in our refinery. We see increasing polyethylene volumes from our new Hyperzone investment. And I think generally, we're really well poised as a company to deliver and continue our outstanding track record of cash generation in this year to come. So, we thank you for your interest in our company and look forward to updating you in April at the end of the first quarter. Thank you and with that, have a great weekend. We are adjourned.

Thank you for your participation in today's conference. All parties may disconnect at this time.