LyondellBasell Industries NV (NYSE:LYB ) Q2 2022 Earnings Conference Call July 29, 2022 11:00 AM ET

David Kinney - Head, IR

Peter Vanacker - CEO & Executive Director

Michael McMurray - EVP & CFO

Kenneth Lane - EVP, Global Olefins & Polyolefins

Torkel Rhenman - EVP, Global Intermediates, Derivatives & Refining

James Guilfoyle - EVP, Advanced Polymer Solutions & Global Supply Chain

Stephen Byrne - Bank of America Merrill Lynch

Vincent Andrews - Morgan Stanley

Frank Mitsch - Fermium Research

John Roberts - Crédit Suisse

Kevin McCarthy - Vertical Research Partners

Bhavesh Lodaya - BMO Capital Markets

Christopher Parkinson - Mizuho Securities

Hassan Ahmed - Alembic Global Advisors

Michael Leithead - Barclays Bank

Jeffrey Zekauskas - JPMorgan Chase & Co.

David Begleiter - Deutsche Bank

Arun Viswanathan - RBC Capital Markets

Michael Sison - Wells Fargo Securities

Hello, and welcome to the LyondellBasell Teleconference. At the request of LyondellBasell, this conference is being recorded for instant replay purposes. [Operator Instructions]. 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 is available on our website at www.lyondellbasell.com/investorrelations.

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 could lead our actual results to differ by reviewing the cautionary statements in the presentation slides and our regulatory filings, which are also available on our Investor Relations website.

Additional documents on our Investor website provide reconciliations of non-GAAP financial measures to GAAP financial measures, together with other disclosures, including the earnings release and our business results discussion. A recording of this call will be available by telephone beginning at 1:00 p.m. Eastern time today until August 29 by calling (877) 660-6853 in the United States and 201-612-7415 outside the United States. The access code for both numbers is 13729909.

Joining today's call will be Peter Vanacker, LyondellBasell's Chief Executive Officer; our CFO, Michael McMurray; Ken Lane, our Executive Vice President of Global Olefins and Polyolefins; Torkel Rhenman, EVP of Intermediates and Derivatives and Refining; and Jim Guilfoyle, EVP of Advanced Polymer Solutions and Supply Chain. During today's call, we will focus on second quarter results, current market dynamics and our near-term outlook.

Before turning the call over to Peter, I would like to call your attention to the noncash lower of cost or market inventory adjustments, or LCM, and impairments that we have discussed on past calls. LCM adjustments are related to our use of last in first out or LIFO accounting and the volatility in prices for our raw materials and finished goods inventories. Impairment charges were recognized to write down assets to their estimated fair value. Impairments include the noncash impairment of $69 million in the second quarter of 2022 that reflects the exit of our polypropylene business in Australia and the noncash impairment of $624 million in the fourth quarter of 2021 and that reflects our evaluation of strategic options for the Houston refinery.

Comments made on this call will be in regard to our underlying business results, excluding the impacts of impairments and LCM inventory adjustments. With that being said, I would now like to turn the call over to Peter.

Thank you, Dave, and welcome to all of you. We appreciate you joining us today as we discuss our second quarter 2022 results. Let's begin with a short introduction of myself on Slide #3.

I'm very grateful to be here on my first earnings call since becoming CEO of LyondellBasell on May 23. I grew up in Belgium and undertook an education as a chemical engineer with a specialization in polymer engineering. During my more than 32 years in the chemical industry, I have had the pleasure of working with LyondellBasell as a customer, a supplier and a partner. During my time with Bayer, we invested in Lyondell's technology and assets while forming joint ventures for the production of propylene oxide. At Treofan, LyondellBasell was our largest polypropylene supplier. And at Neste, we partnered with LyondellBasell to achieve the world's first commercial production of polyethylene and polypropylene from Neste's sustainable bio-based feedstocks. Since joining the Board of Directors in February and then starting as CEO in May, I have been meeting extensively with stakeholders around the world to learn more about how LyondellBasell has been so successful in creating value.

More importantly, we have been asking ourselves how to best position the company to sustainably capture further value for years to come. I've always admired LyondellBasell's rich legacy of innovation and technology development. And I am pleased to confirm that our commitment and passion for safety and operational excellence or deeply embedded in our culture. These qualities will serve as well as work gets underway to advance our capabilities to capture latent value embedded within the company and establish LyondellBasell as a leader in serving the world's growing needs for circular and sustainable materials, while reducing our carbon footprint.

As Dave mentioned, additional members of our executive committee will join our earnings calls starting today. I believe that it is important for our investors to get to know our excellent leaders at LyondellBasell better. And I'm really impressed by this team, their market knowledge and leadership and their passion for safety and value creation.

Let's now turn to Slide #4 to discuss our excellent results during the second quarter. I am very happy with the outstanding work that LyondellBasell's leadership and employees have accomplished. This is a great way to start and gives me a lot of confidence for the future. Our businesses delivered strong earnings and cash generation during the second quarter and driven by record results from our Intermediates and Derivatives segment and strong refining margins.

LyondellBasell's broad portfolio provided clear benefits as revenue grew sequentially by 13% while margins expanded to support a more than 20% improvement in EBITDA. Earnings were $5.19 per share and EBITDA was $2.5 billion, which resulted in $1.6 billion of cash from operating activities. Altogether, our company generated an impressive 24% return on invested capital over the last 12 months.

Let's turn to Slide #5 and review our safety performance. LyondellBasell's commitment to safety leadership is outstanding and well known. As the CEO, I will make sure that safety remains a consistent and unwavering cornerstone of our company's culture. During my career, I have witnessed that companies that are leaders in safety are also best-in-class in reliability and productivity, and as a result, in value creation.

In 2022, the year-to-date total recordable incident rate for our global workforce improved by more than 40% to 0.12. This represents substantial progress towards our ultimate goal of zero injuries. I want to commend all of our employees and contractors for their clear commitments to goal zero.

On Slide #6, we highlight some of our recent progress towards our sustainability goals. LyondellBasell's products, technologies and solutions provides very important contributions to a more sustainable world. In addition, we have committed to industry-leading sustainability targets that improve this value. Over the past few weeks, we signed 4 renewable power purchase agreements for 380 megawatts of electrical generation capacity in Texas. These wind and solar projects will be able to supply more than 10% of LyondellBasell's global electricity needs and represents meaningful progress towards the company's climate goal to procure a minimum of 50% of our electricity from renewable sources by 2030.

These projects are expected to reduce the company's annual carbon dioxide emissions by approximately 370,000 tonnes and represents the average annual electricity needs from about 100,000 U.S. homes.

In addition to our renewable energy goals, LyondellBasell is growing our production of plastics utilizing renewable feedstocks under our CirculenRenew brands. Last year, we processed 12,000 tons of renewable feedstock in Europe, and we are forecasting to increase this number to 40,000 tonnes across both Europe and the United States during 2022. This material is being run through our existing ethylene cracker assets in Westling, Germany and Channelview, Texas with the goal to increase scale over the coming years since we see that the demand for these products is growing.

The growth of renewable feedstocks is one part of our broader mission to expand the reach of our sustainable products, including those sold under the Circulen brands. Since launching our Circulen brands in 2019, we have sold over 140,000 tonnes of products based on recycled and renewable feedstock. This represents more than the amount of polyethylene and polypropylene consumed by the population of Houston in 1 year. LyondellBasell is doing more than simply talking about the circular economy. We are building real businesses that can help provide a more sustainable future for our customers and society.

Please turn to Slide #7 to review our quarterly profitability. During the second quarter, our business portfolio delivered $2.5 billion of EBITDA, an improvement of $430 million compared to the prior quarter. LyondellBasell results reflect how our global business portfolio can serve changing consumer needs. As in-person activities resume and global travel recovers, our oxyfuels and refining businesses are benefiting from increased demand. Strong North American demand and favorable naphtha costs supported margins for our products in the Americas and Europe, respectively, while higher ethane and energy costs as well as inflation created headwinds in these regions.

We started to see moderating European demand due to high inflation at the end of the second quarter and continue to pass through elevated energy and feedstock costs in the prices of our products where possible. During the quarter, China's zero COVID measures and logistics constraints continued to impact both regional and global markets. We expect progress in China will continue to be challenging over the next few months, but anticipate that demand will recover towards the end of 2022.

Let us turn to Slide #8 and review LyondellBasell's earnings power over the course of the first complete business cycle for our company. From 2011 to 2019, our portfolio of businesses delivered an average of $6.7 billion of EBITDA. Favorable markets and our growing asset base delivered $9.2 billion of EBITDA over the last 12 months, an increase of nearly 40% over the prior cycle average. With the commissioning of our new propylene oxide capacity underway, we expect that LyondellBasell's stepped up earnings performance will provide resilience through the next business cycle. And with that, I will turn the call over to Michael first, then to each of our business leaders who will describe our financial and segment results in more detail.

Thank you, Peter, and good morning, everyone. Please turn to Slide 9, and let me begin with describing how the step-up in our earnings is leading to increased cash generation from our business. In the second quarter, LyondellBasell generated $1.6 billion of cash from operating activities that contributed towards $8.3 billion in cash from operations over the last 12 months.

During the past 4 quarters, our team efficiently converted over 90% of our EBITDA into cash. After accounting for sustaining capital reinvested in the business, we achieved a free operating cash flow yield of 26% relative to our market capitalization over the last 12 months. Let's continue with Slide 10 and review the details of our cash generation and allocation during the second quarter. The LyondellBasell team remains focused on extending our disciplined track record of capital allocation to provide for reinvestment in the company and generous returns for our shareholders.

After generating $1.6 billion in cash from operations during the second quarter, we returned $2.1 billion to shareholders through a $5.20 per share special dividend, a 5% increase to our quarterly dividend that paid another $1.19 per share, all while repurchasing 45 million of our shares during the quarter.

We continue to invest in maintenance and growth projects with approximately $530 million in capital expenditures with a large portion funding our nearly completed world-scale PO/TBA plant. Now I'd like to provide an overview of the results for each of our segments on Slide 11.

During the second quarter, LyondellBasell's business portfolio delivered nearly $2.5 billion of EBITDA. Our results reflect record profitability in our Intermediates and Derivatives segment, driven by strong oxyfuels margins while our refining margins benefited from increased demand for transportation fuels. Conversely, margins in our O&P businesses encountered headwinds from rising costs for ethane feedstocks and moderating European demand.

One modeling item of note. Our original full year pension expense guidance of approximately $55 million did not include a second quarter $94 million noncash pension settlement charge that impacted earnings by $0.22 per share. As a result, our 2022 pension expense is expected to increase to approximately $180 million.

During the third quarter, we anticipate that we will begin recording costs related to our planned exit from our refining business at the end of 2023. With that, I'll turn the call over to Ken.

Thank you, Michael. Let's begin the individual segment discussions on Slide 12 with the performance of our Olefins and Polyolefins Americas segment. Second quarter EBITDA was relatively flat at $905 million. North American demand for polyolefins continue to be very strong. Higher costs for ethane and energy pressured olefin margins and offset the benefits of improved polymer prices. During the third quarter, we expect continued strength in demand for polymers utilized in flexible packaging. But elevated costs for feedstocks and energy as well as continuing export supply chain constraints and market headwinds are likely to pressure margins.

Now please turn to Slide 13 to review the performance of our Olefins and Polyolefins Europe, Asia and International segment. Higher ethylene prices and relatively flat feedstock costs resulted in slightly higher second quarter EBITDA of $228 million. LyondellBasell's volumes declined due to downtime at our French cracker and moderating European demand for polymers in June. The extended maintenance in France resulted in an impact of $65 million to the segment during the second quarter.

During the third quarter, we expect seasonally slower summer demand and continued higher energy costs associated with tight gas supply, which will pressure European markets. Also, with China demand remaining sluggish due to zero COVID measures, the European market is also facing pricing pressure from dislocated Middle Eastern and Asian imports. Toward the end of this year, potential benefits from China's reopening could provide tailwinds for our businesses. With that, I'll turn the call over to Torkel.

Thank you, Ken. Please turn to Slide 14 as we take a look at our Intermediates and Derivatives segment. Exceptional oxyfuel margins resulted in record second quarter segment EBITDA of $675 million. During the quarter, styrene results benefited from tight market supply. We are beginning to see that softer demand for durable goods is leading to moderation in propylene oxide margins.

In the third quarter, we expect margin compression across most product lines. Oxyfuel margins are also moderating but expected to remain elevated at levels well above historical averages. The steady success of our Intermediates and Derivatives segments is rooted in the Advantage Technologies, underpinning our propylene oxide business.

On Slide 15, let me highlight the cost advantages of LyondellBasell's propylene oxide production. The chart on the right depicts the global cost curve for producing propylene oxide by asset. The lower an asset is positioned on the curve, the greater the cost advantage. As you can see, LyondellBasell's assets that produce propylene oxide with a tertiary butyl alcohol co-product are on the lowest or most favorable part of the cost curve. PO/TBA assets represent roughly 15% of global capacity and derive their advantage from favorable costs for butane raw materials and strong pricing for the clean burning high-octane oxyfuel products produced from tertiary butyl alcohol. LyondellBasell's plants that produce propylene oxide with the styrene monomer co-products are the next lowest cost technology and represent 35% share of global capacity.

Much of the industry produces propylene oxide using older, higher-cost technologies such as the chlorohydrin process. With the recent escalation in chlorine prices, the cost curve for chlorohydrin-based propylene oxide has only steepened, creating hardships for producers using this technology. LyondellBasell's advantage PO/TBA technology provides an excellent platform to address increasing global demand for propylene oxide and oxyfuels. Propylene oxide is used in the production of polyurethanes, first-time materials that saves energy by producing insulation and reducing weight in a wide range of applications.

Oxyfuels are clean-burning, high-oxygen gasoline blending components that increase fuel efficiencies and improves air quality by reducing harmful emissions.

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

We are thrilled to have nearly completed construction and we have already begun commissioning the oxyfuel assets, depicted in the photo on the right. The PO/TBA plant commissioning will begin during the fourth quarter, and we expect the integrated facility to start up in first quarter of 2023.

Our ramp-up during 2023 will not provide for full year of production but continued market strength is likely to support stronger margins than the mid-cycle economics depicted on this line. With LyondellBasell's sells advantaged technology and affordable shale advantage butane feedstocks are new capacity starting up with the support of favorable markets.

Now let's turn to Slide 17 and discuss the results for our Refining segment. Second quarter EBITDA was $418 million, with improved margins driven by increased demand for gasoline, diesel and jet fuel. In the second quarter, the Maya 2-1-1 spread expanded significantly to about $56 per barrel. We operated the refinery at 94% of capacity with an average crude throughput of 252,000 barrels per day. In the near term, the Maya 2-1-1 spread is moderating from second quarter levels. We plan to run the refinery about 87% of capacity during the third quarter to perform a limited scope of planned maintenance. With that, I will turn the call over to Jim.

Thank you, Torkel. Now let's review the results from our Advanced Polymer Solutions segment on Slide 18. Our Compounding and solutions business continued to be pressured by the slow recovery in automotive markets. In the first half of 2022, automotive production was 3% below the same period last year. Supply chain disruptions and raw material shortages continue to impact the recovery and therefore, our compounding and solutions business. Industrial construction markets have demonstrated strength as catalloy demand and margins supported higher advanced polymer results and a second quarter EBITDA for the segment of $118 million.

We expect similar results for the segment in the third quarter as the gradual recovery in automotive production improves volumes while rising costs impact margins. A more significant step-up in earnings will be dependent upon stronger automotive production and the resolution of raw material constraints. And with that, I will return the call back to Peter.

Thank you again, team, for this impressive quarter. The closeouts on our segments, let's turn to Slide #19, and discuss the results for our technology business on behalf of Jim Seward, our Senior Vice President for R&D, Technology and Sustainability. I have always been highly impressed by the strength of LyondellBasell's international innovation and technology capabilities, the broad technology portfolio and our leading market position. Very clearly, innovation is a core part of LyondellBasell's DNA.

Second quarter EBITDA was $112 million, supported by strong licensing revenue and record year-to-date catalyst demand. While new licensing activities slowed we have noted a recent shift in our licensing demand away from commodity polymers. 4 of our 5 new licenses this year were sold in Asia to produce low-density polyethylene vinyl acetate copolymers used in solar panel laminations and encapsulants that support the world's rising demand for renewable energy.

In the third quarter, we expect our licensing revenue and catalyst volumes to moderate. This segment is likely to produce results similar to that seen in the first or second quarter of 2021. Now let me summarize the second quarter and the outlook for our company with Slide #20.

LyondellBasell's second quarter results benefited from a balanced portfolio that captured considerable value with very efficient cash conversion. Margin expansion in our oxyfuels and refining businesses and solid demand for our products more than offset higher feedstock and energy costs. Our management team and Board understands and respects the power of this portfolio. We are unwavering and our disciplined approach to capital allocation and demonstrated our commitment to shareholder returns during the second quarter.

LyondellBasell is making measurable progress towards our ambitious interim and long-term goals for the reduction of our greenhouse gas emissions while developing sustainable businesses based on recycled and renewable materials. Our aim is to build upon our initial work, scale or reach and establish LyondellBasell as a leader in serving the world's growing needs for circular and sustainable materials while reducing our carbon footprint.

I began my journey as CEO with a commitment to leverage LyondellBasell's strengths and capture value from both near-term and long-term opportunities. Over the past several months, we have undertaken an in-depth examination of our company to identify a north star that will provide clarity and guiding principles for our strategic decisions. including our progress on circularity and sustainability.

We are consulting with all stakeholders to ensure we have aligned on a durable and resilient strategy that will serve LyondellBasell well across a range of scenarios for many years. Last week, we had a very productive interim review with our board on this topic. We're planning further alignment during our Board meetings in the second half of the year with our work aimed towards communicating or our north star externally during an Investor Day in early 2023.

In addition, the second work stream is underway to identify, prioritize and execute on value opportunities that exist in LyondellBasell's current business structure. Thus far,our work has identified a considerable number of opportunities such as creep capacity, debottlenecks, automation and energy saving opportunities that can be delivered through modest investments by leveraging LyondellBasell's existing strengths.

We believe the value of these projects is considerable and actionable. I am committed to communicating our initial assessment of this value opportunity and our time line for realization during our third quarter earnings call. We look forward to sharing our vision for LyondellBasell and the additional value we plan to unlock from our company. We are now pleased to take your questions. Thank you.

[Operator Instructions]. Our first question comes from the line of Steve Byrne with Bank of America.

Yes. I appreciate the Slide 15 on your outlook for PO. And Torkel, maybe you could comment on what do you think that slide or that chart would have looked like historically, clearly, now you have some reasons for it to be shaped like that with lower butane and higher benzene and certainly higher chlorine, but is part of this just because TVA is so valuable right now? And is the shape of this year outlook in the years to come? Is that part of your EBITDA forecast?

So thank you for the question. I think as we looked at this, we've -- and if you compare it to historical averages, it's actually widened in terms of the differential in terms of our competitive advantage. And that's primarily driven right now the value of the core products. And of course, that will fluctuate over the cycle.

But fundamentally, we see for the next -- where we are right now and in the coming next 2 years, we are in a very favorable cycle situation. Then as you drive -- if you look at energy costs going up, that will also favor our technology. So I think fundamentally, where we are and look at it right now, I think our technology is very advantaged.

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

I wanted to ask on polypropylene in the U.S. It looks like spreads were pretty volatile during the quarter, maybe starting at around $0.20 a pound to start up near $0.50 in May and kind of round tripped back down. So I'm curious, one, is that similar to how your earnings progressed through the quarter?Two, what drove that volatility? And three, what's your outlook for the next couple of quarters in terms of the spreads.

Let me give that question, I mean, to you, Ken, you're close to that business, of course.

Sure. Thanks, Peter. Thanks, Josh, for the question. Look, a lot of the volatility that you've seen in the polypropylene market this year has been related to a lot of downtime in the industry, particularly in the U.S. I think that a lot of that is behind us. Inventory levels are, frankly, in our favor in polypropylene.

So I'd say, looking forward, we mentioned some softening demand trends that we see around durable applications. We see that in the polypropylene area as well, but we still see very good demand in packaging. So net-net,we're going to see some softening, some headwinds in polypropylene, but continued spreads that are going to be above historic averages.

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

Could you talk a little bit about naphtha costs in Europe and in Asia, which during the quarter seem to disconnect from oil? So could you just sort of discuss what you see the outlook is there and what impact it will have on your European operations?

Yes. Thank you, Vincent. A very good question on naphta and especially what is happening in Europe and in China. As you noticed well, I mean, naphtha is decoupling at the moment from what is happening on the oil side. But I think one needs to look at China and when demand will pick up substantially again in China, and that eventually would reestablish, in our opinion, the relationship between naphtha and crude oil.

Giving a little bit of further information, I mean, around China, then we have seen a little bit already or an uptick in demand in China, but it was very modest during the second quarter. We expect that, especially after October, there will be quite some incentives coming out as it has been in the past. So towards the end of the year, beginning of next year, one may expect that demand in China would substantially pick up and be back on normal levels of growth that we have seen over the cycle.

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

Congrats, Peter, on a very solid first quarter as CEO. May you have many more. If I could follow up on Europe and energy. How do you see the situation playing out if there is a material natural gas shortage, what would be the impact on Lyondell? What are the actions that you're taking to -- that you would take to possibly mitigate that?

Frank, let me also say, I mean, [Foreign Language] Yes. Of course, I mean, it's in the current situation in Europe. We are very close in to what is happening there. That's what you may expect, of course, in such a situation that we have an internal crisis management team up and running that we are developing different business continuity plans that we have analyzed I mean our dependency also on nat gas.

And I must say, I mean, that the integrated crackers that we have, they show a low dependency on nat gas, mostly supplied by oil-based fuels. I want to put it in perspective as where the biggest impact is eventually is in Germany and Italy, but German revenues for us are based upon last year's revenue, about 7% of total revenue and Italy is about 4% of total revenue.

We believe that we can continue to run our crackers in Europe, but we have been doing at an 85-plus percent range. So from that perspective, believe that we -- if everything runs, let's say, in a normal way, we would be quite robust in continuing our operations independent of the fact the effective North Stream One returns, so back to 40% or would be lower than the 40%.

Our next question comes from the line of John McNulty with BMO Capital Markets.

Peter, this is Bhavesh Lodaya for John. Across the press release and your presentation, you highlighted the impact from lockdowns in China and a potential reversal towards the end of the year. Can you add some color around the profitability of your Chinese operations and your peers in the region?

And then assuming we are in this, say, higher for longer crude price environment, what is the market appetite for higher prices, which is probably required to get to your historical margins there?

Let me take them in the first question, John. It's clear, I mean that China operations, I mean, profitability at this point in time is low. But due to the fact, I mean, with our investments that we made in China that we are in the first quartile in terms of delivered costs, cash costs. So we have a favorable position in China. But generally spoken, I mean, the profitability is very low.

Having said that, also, again, I'd like to put it into perspective. I mean, China for us in terms of revenues or total revenues is let's say, a bit lower than 5%. So I don't want to overemphasize that either. Then on your second question can I give that to you, Ken?

Sure. Absolutely. So look, what we see happening in China in particular, is prices are going to move where feedstock go at this point. People are cutting back utilization. A lot of the assets are, frankly, underwater, and you're making a decision almost daily about whether to continue to operate or is it better to shut down. So that's putting a floor under pricing today. So from my perspective, there's nowhere to go but up in China these days.

There will be a reopening impact. The question is always going to be about when, not if. But like Peter said, we've got very good new assets, both in O&P and I&D. So we're still confident in the outlook beyond the end of the year.

Our next question comes from the line of Kevin McCarthy with Vertical Research Partners.

A question for Ken perhaps. I was wondering if you could comment on the U.S. propylene market. It seems to have gotten a bit sloppy here in recent months. I believe the U.S. July contract price declined another $0.04 earlier this week, and it makes 4 consecutive monthly declines of 35% negative or so. Can you comment on both sides, supply/demand, what you're seeing there and whether we might expect that pattern to reverse in coming months?

Sure, Kevin. Thank you for the question. Yes, I do see -- expect to see that trend in propylene reverse in the U.S. In fact, I would -- I think we're going to see that in August already. We're starting to see spot prices move up again for propylene. And I'll go back to the answer that I gave earlier. There's been a lot of downtime for polypropylene assets in the U.S., and that's put some link into the propylene market.

What's happening now is you're starting to see those assets run again, and you're going to start to see people refilling inventory levels because of all the downtime that we've had with polypropylene and that's going to start to bring the propylene price back up a little bit here in the back half of the year.

Our next question comes from the line of Mike Leithead with Barclays.

I think industry consultants are forecasting, I don't know, about $0.15 to $0.20 a pound decline in U.S. polyethylene prices between now and the first quarter. I guess, do you agree with that assessment? And why or why not?

Well, I'll take that, and then Ken will also further elaborate on your question, Mike. I mean what we continue to see is very good demand, I mean, in the marketplace. And yes, maybe a little bit of slowdown like we alluded to in terms of durable goods. But then there are a couple of other points that I want to highlight here as well is, if you look in Europe and in North America at the average inventory in terms of car builds, then we are today, substantially below -- actually at the lowest level since the last 5 years.

And that has not been -- if you look at what the automotive industry has been saying in their quarterly calls, it's not because they have a lack of demand, but it's mainly still because of the supply chain, and they are expecting that towards the end of the year a lot of these issues will be resolved. So the key question there will be, how will that actually then result in restoring inventory levels in that particular industry as 1 data point.

The other data point is definitely also with regards to the more the feedstock costs and feedstock costs have been exceptionally high, I would describe them, I mean, during Q2. But if we look at natural gas towards the end of the year and eventually also the impact on ethane prices, we tend to believe, I mean that, that should moderate, I mean, during the second half of 2022.And as a result and also have its impact on the margins. Ken, do you want to elaborate a little bit further on this?

Yes. I guess the one thing that I'll add is when we look at this, we've got a lot of levers that we pull here in terms of managing our margins. We do expect to see energy and feedstock costs continue to be elevated in the back half of the year, but they're going to moderate versus the second quarter.

There will be things that we're doing around our feed slate, our product slate, our channel selection market segments because we still do, to Peter's point, see strength in some of our market segments. And we'll be gearing our portfolio to serve that.

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

Nice quarter. I think as you guys know, polyethylene demand was fairly resilient during the pandemic, up 2% in 2020. And so just curious, what you think demand would be for polyethylene if we are or going into a recession as we head into '23?

Yes. Thanks for your comment, Michael, on the second quarter. Highly appreciated. Definitely, I mean, on -- in terms of PE demand, Ken has shown -- I think it was in the previous quarter, also how resilient I mean, PE demand is actually even if you talk about downturns in the industry, if you call them recession or not. And this is something that we continue to see as well. I mean moving forward that we expect that PE demand will continue to be resilient in the next quarters. Ken, do you agree?

I absolutely agree. I think what we've seen in the past is that polyethylene is typically recession-resistant. And even this year, with China being down, we still expect to see growth in the kind of 2% to 3% range globally. So -- as China comes back, I think you're going to see that growth number go up even higher, which is what we've seen historically.

Thank you. Our next question comes from the line of P.J. Juvekar with Citi.

Peter, a question on refining. You announced the refinery shutdown way before the actual shutdown? And if refining margins continue to remain high, would you be able to delay the refinery shutdown by putting in some incremental maintenance capital?

Well, P.J., thank you for your question. We've been very clear. I mean, the latest, I mean, by the end of we will shut down our refinery in Houston. Nothing has changed in that regard. It's simply because of the technical reasons. -- you need to eventually invest a huge amount of money to keep the refinery operating. And definitely, as I alluded to in my preliminary comments, safety has always been -- the most important thing that we are looking at in the company. So we will not, at the expense of safety, keep operating, I mean, the refinery, which means as a consequence, one would have to invest a huge amount of money. We've alluded to that above $1 billion, at least.

My experience is actually telling me that the moment you open up or react on, you willstart finding out that actually your $1 billion will not be sufficient, and it's going to be substantially higher in terms of the investments in the refinery. So nothing has changed towards what we have communicated before.

Our next question comes from the line of Jeff Zekauskas with JPMorgan.

If I could also follow up on the refinery issues.It's a multipart question. Are you in active negotiations to still sell the refinery? Or are you not in negotiations? Second, if you thought the return on capital was adequate, would you close it anyway because of your carbon reduction targets? Or how do you weigh the carbon reduction targets versus the return on capital? And thirdly, are you continually reassessing the return on capital based on your assessment of refining margins? Or have you already simply made the decision to exit?

Yes. Thank you, Jeff. I mean, for your very good questions. And let me go a little bit deeper. And what actually is the attention that we are having with regard I mean to the refinery, what are we actually looking at? I mean with the refinery I mean it's a very nice location that we have. We have very good assets also at the refinery.

So we're mainly looking at the fact, can we do -- what can we do else, I mean, with the assets that we have at the refinery? You're very familiar with the fact that we are making very good progress on our molecular recycling technology. So the advanced recycling technology development. And this site could be a very good fit for us to do very large investments. Nothing has been decided yet. As said, this is investigation, but we -- the more we look at it, I mean, the more we are inspired coming by it because we have very good equipment that we eventually could then use. So there could be quite a lot of synergies. So this is the direction of travel, Jeff, with regards, I mean, to the refinery.

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

Just given all the moving parts and spread compression across the intermediate and segment, -- can you just give the intermediate-term outlook in terms of spreads of the various businesses in there, including Oxyfuels, just to give us help us a little bit more perspective heading into 2023?

Yes. Thank you, Chris. I mean, let me first, I mean, again, make a couple of comments on that. When -- of course, I know LyondellBasell for quite a while, that's clear. But also when I started moving into my position,then what impressed me a lot is the diversity of the different products and solutions that we have in the portfolio. And as such, I call it a kind of a natural hedge because -- all the products are not following the same cycle and therefore, are hedging each other. So that is quite good, I mean, to have a portfolio like that.

And the best demonstration was, of course, on our earnings, I mean, during the second quarter as a result out of that. Now if we go a little bit deeper, I mean, we've talked a lot already about polyethylene and polypropylene and margins and so on. So I would put the focus maybe a little bit on the very important oxyfuels business that we have and the contribution of oxyfuels as an octane enhancer as you know. And then also with regards to positioning in terms of sustainability solution offerings. So Torkel if you can give a little bit of an update on the oxyfuels, what you see.

Yes. No, thank you. So even instead of I&D, what we have through the portfolio, it's a very resilient portfolio in terms of over a cycle that they don't all follow the same cycle. And the oxyfuels is a really good example of that, where we see maybe the gasoline cracks moderatingbut the oxyfuels margins are expected to stay well above the historical averages. And it's the multitude of things that drives the margins there. It's also the advantaged butane cost that we see helping us looking forward, but then also the very strong demand for octane and that basically drives the premium of our oxyfuels above gasoline.

And that's also been a very strong factor for the excellent results, the record earnings that we had for Oxyfuels, and we think will remain at an elevated level?

Our next question comes from the line of John Roberts with Credit Suisse.

In the presentation, you talked about continued strength in propylene oxide, but I think the release discussed some slowing in polyurethane markets, which I guess we'd expect with auto and appliances and construction. As you begin commissioning the new PO plant, do you plan to take downtime in other plants to kind of keep the market balanced if we are facing a slowdown there?

As part of our start-up plan,we have other outages scheduled for other plants that we have delayed, so in terms of managing our supply on the PO. But we also expect that the plan to ramp up during the year. And we expect that for next year, we will produce about 50% of the annualized capacity from the plant.

John I mean start-up is scheduled, I mean, towards the end of Q1 2023. And as said, I mean, by Torkel, you gradually move into the name paid capacity volumes. So therefore, if you average it out over the year 2023, then it would be approximately we expect, I mean, 50% of the nameplate capacity.

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

I just wanted to touch on O&P-EAI. In the press release, you guys, I believe, said that around 30% of the sort of feedstock slate out there was non-naphtha-based. So I just wanted to get a better sense of how we should think about the feedstock flexibility you have in your European operations. Are you sort of hitting the upper limit when you say that 30% was non-naptha?

I would not say we're hitting the upper limit. There are a lot of things that we can still do on the feed slate. As you know, naphtha has been favored. A lot of that is driven by not only the naphtha price, but also the co-product pricing. So that is a big lever for us, not only in Europe but also in U.S. markets, and we'll continue to find opportunities around the feed slate and optimize the portfolio as we go.

Our next question comes from the line of Arun Viswanathan with RBC Capital Markets.

Great. I just wanted to drill down a little bit into O&P-Americas profitability. If you look ahead, I guess, into Q3 and the back half, we potentially have some slowing demand high consumer retail inventories and continued high feedstock. Do you expect the continued high feedstock slate to resist and I guess, support pricing? Or is the demand waiting to the that maybe we see some margin deterioration as we go through the next couple of quarters?

Yes. Thanks, Arun. Let me take the first part of your question, then I will ask Ken, I mean, to further elaborate. You alluded already a bit to it. I mean in terms of demand, we continue to see, I mean, demand to be healthy. And of course, I mean, with our portfolio of products that we have, we can shift, I mean, more, I mean, to the consumer driven products packaging because as I said before, we expect that packaging will continue to be quite healthy, something that we have seen, I mean, in the past also in downturn period of the economy or recessions.

With regards, I mean, to the feedstocks, we said, I mean, pressure will continue to be high on the feedstock and on the energy cost level. Towards the end of the year, we expect a little bit of moderation, but still, I mean, the pressure will continue to be high. Ken?

Yes. I think the only thing that I'll add to that is you do have new supply coming on, and that's going to be another headwind for us. But the good news is that we'll start to see some of these supply chain constraints unwind at the back end of the year, and that's going to help open up some channels to market. We also -- you had mentioned inventory levels. We're already seeing downstream consumers start to reduce inventory levels. So that -- that's actually already started taking place.

And I think one thing we're going to watch very closely, obviously, is going to be what's happening with the weather impacts on that becausethere is a sort of a natural tendency in this industry to start to pull the inventories down, and this is not necessarily a great time of year to do that. But of course, we'll be watching that closely and see how those things develop.

Our next question comes from the line of Steve Richardson with Evercore ISI.

This is Kishan on for Steve. Just a question on IND. I'm just curious, I was wondering if Scope 3 emission standards would disadvantage the business long term? And then also with MTD prices normalizing, what might baseline earnings potential for I&D look like?

Well, good question. I mean, in the I&D business, I mean, Scope 3 emission standards. It's clear, of course, also that even if we have not clearly made a commitment on Scope 3, that we are deeply analyzing what are the emissions on Scope 3 that we have, we are approaching, of course, also our customers in discussions in reducing their Scope 3 emissions on the products that they are supplying to us. So that's work in progress.

But it is important, I mean, we are looking at it. And I'll give you one example. I mean we talked about the refinery beforehand. By shutting down the refinery, we're talking about approximately 40% of our global Scope 3 footprint that would be reduced. So we're talking here about 30 million, 40 million tonnes per year of scope 3 emissions that would be reduced just by that action. Talking about the applications, not necessarily at this point in time, we see a disadvantage because it is a -- Scope 3 is something that is extremely difficult, I mean, for the entire industry, I mean, to deal with. There is no clear accounting mechanism I mean for Scope 3. So lots of things that need to still be worked out, I mean, through legislation and how to account, I mean, for Scope 3 emissions. So immediate answer to that is we don't see that in terms of demand for those products that, that would have an impact, I would say, on the contrary, because the oxyfuels, if you talk about top fuels actually make a good contribution in that regard.

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

Peter, you mentioned strength in styrene in the quarter, but it is expected to weaken going forward. What's your outlook for styrene in the intermediate and longer term for you guys?

Give that question into Torkel.

Yes. Thank you. I think second quarter was driven by both strong demand but also primarily operational issues, scheduled and unscheduled outages, and we see margins probably softening here in third quarter and the second half of the year. And I think that there are growth areas, but there are also areas under pressure. Single-use plastics, of course, being one under pressure, but you also have strong and we've seen double-digit growth for EPS being used in insulation material -- so I would say that we probably have a moderate outlook in terms of margins in the immediate term.

I am showing that there are no further questions. I will turn it back to Mr. Vanacker for closing comments.

Yes. Thank you very much, I mean, for all the very thoughtful questions. I would say, as usual. And we look, of course, forward to sharing more of our plans with you about how we outlined of Brazil with advance on our strategy. And in addition to that, we also unlock additional value over the coming months. As said, you may expect when we are releasing our third quarter results that we are putting a number to the additional value that we believe we can capture and also a time line to that. And then invite you for the beginning of next year to a Capital Markets Day to talk about our strategy.

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

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