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 I'd now like to turn the conference over to Mr. David Kinney, director of investor relations. Sir, you may begin.
Thank you, Jacqueline. Hello, and welcome to LyondellBasell's fourth quarter 2018 teleconference. I am joined today by Bob Patel, our Chief Executive Officer and Thomas Aperture, our Chief Financial Officer. Before we begin the business discussion, I would like to point out that a slide presentation accompanies today's call and is available on our website at www.lyondellbasell.com. I would also like for you to note that statements made in this call relating to matters that are not historical facts forward looking statements.
These forward looking statements are based upon assumptions of management, which are believed to be reasonable at the time made and are subject to significant risks and uncertainties. Actual results could differ materially from those forward looking statements. For more detailed information about the factors that could cause our actual results to differ, please refer to the cautionary statements in the presentation slides and our financial reports, which are available at www.lyondellbasell.com slash investor relations. Reconciliations of non GAAP financial measures to GAAP financial measures together with any other applicable disclosures including the earnings release are currently available on our website at www.liondoublesupplyondoublesl.com. Finally, I would like to point out that a recording of this call will be available by telephone beginning at 1:30 PM EST today.
Until 1 59 AM Eastern time on April 2nd by calling 866-444-9039 in the United States and 203 369-1136 outside the United States. The pass code for both numbers is 6482. During today's call, we will focus on the 4th 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 the
call over to Bob.
All right. Thank you, Dave. Good day to all of you participating around the world, and thank you for joining our 2018 year end earnings call. Let's begin with Slide 3 and review the highlights for 2018 and our progress in advancing our value driven growth strategy. Record setting earnings in our intermediate and derivatives and technology segments, partially offset declines, primarily in our Olefins and Polyolefins, Europe, Asia, and International segment.
To provide $4,700,000,000 of net income $6,900,000,000 of EBITDA for the year. Increased cash generation helped to fund growth investments
while we improved our free cash flow yield
by over 200 basis points and posted a strong 27 The acquisition of a Schulman in August made LyondellBasell, the world's largest plastics compounding company. In conjunction with this acquisition, We launched our Advanced Polymer Solutions business segment to provide focus and visibility for this new global platform and quickly went to work on integration that achieved an annualized synergy run rate of $47,000,000 by the end of the year. Progress continues, and we remain confident that we will meet or exceed our target to capture $150,000,000 from valuation related synergies within 2 years of the closing date. In March, we launched an innovative Plastics Recycling joint venture with Suez. That provides a meaningful and sustainable solution for plastic waste We are pleased with initial market demand for these premium recycled plastics and continue to optimize the operational and commercial performance of the business growth projects during 2018 with our new Hyperzone HDPE plant scheduled for startup in the third quarter of this year and construction of the world's largest POTBA plant on track for completion in the latter part of 2021.
These projects not only increase our production capacity, but also represent milestones for the commercialization of proprietary technologies such as our new Hyperzone process for polyethylene and the latest developments from our advantaged propylene oxide co product technology. We continue to actively manage our business portfolio with several small acquisitions and divestitures around the world while we evaluate unistically repurchase 19,200,000 shares of LyondellBasell's stock and return over $3,400,000,000 to shareholders in the form of dividends and share repurchases. In 2018, our company continued to deliver on our promise of value driven growth through a balanced strategy of operational excellence, profitable organic expansions, accretive M and A, and significant shareholder returns. Please turn to slide 4, where I'm proud to report that LyondellBasell's employees and contractors finished the year with a significant 14% improvement in our safety performance. During 2018, our injury rate was challenged by the need to improve upon the safety performance at the facilities we acquired from a Schulman.
We are diligently working to ensure all of our employees, contractors, assets, and communities in which we operate. Finish the day in the same or better condition than they were at the start of the day. Our goal remains 0 incidents or injuries every day of the year. Let's turn to Slide 5 and review some of the detail behind our fourth quarter and annual results. Diluted earnings were $1.79 per share for the quarter and we earned $12.01 during the full year.
As shown in the chart on the left, after excluding significant noncash tax benefit in 20172018, earnings per share increased by approximately 10% in 2018. For the fourth quarter of 2018, we incurred $20,000,000 of integration costs related to the Schulman acquisition, that impacted quarterly earnings by $0.04 per share. Transaction and integration costs impacted the full year results by $0.14 per share. In addition to typical 4th quarter seasonal headwinds seen in our industry, Our business was challenged by the substantial 40% fall in the price of crude oil that began in early October. Customers often delay orders and destock inventories during periods of declining oil prices, in expectations of lower petrochemical and plastics prices.
Volumes declined in nearly every business across our six segments during the fourth quarter. As crude prices rebounded in late December, January, our order volumes have improved. We've seen European and Asian industrial demand impacted by disproved disruptions in the automotive sector arising from issues with Chinese consumer lending, new vehicle testing standards in Europe and trade uncertainties. We believe that global consumer demand remains strong and we will be closely watching trends in Asia after the Lunar New Year holidays in early February. During our 3rd quarter earnings call, I outlined 3 major planned maintenance outages that were estimated to impact 4th quarter earnings by a total of $95,000,000.
Extended maintenance, low Rhine River water levels, and feedstock supply disruptions, at one of our suppliers increased the 4th quarter impact to our O and P key AI segment by approximately $110,000,000. Additionally, results were impacted by approximately $20,000,000 by unplanned events our intermediates and derivatives and refining segments. Altogether, planned and unplanned downtime impacted our 4th quarter earnings by approximately $225,000,000. We do not expect such high levels of maintenance over the coming months. During the first half of twenty nineteen, our only planned maintenance is scheduled for the first quarter in our O and P Americas segment We expect that first quarter downtime will impact earnings for the whole company by approximately $60,000,000 to $70,000,000.
And now Thomas will provide more detail on our financial highlights for the fourth quarter and the year.
Thank you, Bob, and good day to all of you. Please turn to Slide 6. Portfolio demonstrated remarkable resilience to changing market environments. Our intermediate and derivatives segment profitability improved by approximately 35% and for the first time, exceeding $2,000,000,000 in EBITDA. Our Technology Group granted 16 licenses for new polyolefin plants designs that helped improve segment EBITDA by 47%.
As seen in the chart, these improvements helped to offset declines in O and P EII. The profitability offsets provided by the geographic and product diversity of our business portfolio is a recurring theme for LyondellBasell and an attribute that we seek to maintain, manage and extend as we consider strategic options for the company. In Olefins and polyolefinsamericas, high industry margins for polyethylene, helped to offset the majority of the decline in olefin margins. Our business continues to benefit from strong demand and advantaged shale based feedstocks that enabled us to retain 95% of our prior year profitability for the segment. The results for our new Advanced Polymer Solutions segment includes contributions from the A.
Schulman acquisition beginning in late August 2018. Our progress towards our goal of $150,000,000 in Genesis is on schedule, and will become more apparent during 2019. Our Houston refinery run very well during 2018 and we completed all major scheduled maintenance for the next 2 years. We expect refining market conditions to rebalance during first half of twenty nineteen and look forward to strong refinery runs that will capture expected benefits of new sulfur regulations for marine fuels in late 2019 2020. Now please turn to Slide 7, where you can see that our businesses generated $1,300,000,000 of cash from operating activities during the fourth quarter, which contributed to $5,500,000,000 of cash generation for the year.
During the quarter, investment in capital expenditures increased to approximately $700,000,000 as we ramped up construction of our POTDA plant and continue to move our Hyperzone plant forward towards start up. As the stock market entered the correction during the fourth quarter, we significantly increased our share repurchases in response to lower share prices. In the fourth quarter, we repurchased 11,500,000 shares, the most in any quarter since 2016. We returned $1,400,000,000 to shareholders in dividends and share purchases during the fourth quarter. In 2018, our opportunistic buyback strategy allowed us to repurchase 8% more shares that would have occurred if we deployed the same amount of cash in equal amounts every trading day of the year.
The quarter closed with over $1,800,000,000 of cash and liquid investment on the balance sheet. We approximately With approximately $2,500,000,000 of unused and available credit facilities, we completed the quarter with a total liquidity in excess of $4,000,000,000. Turning to Slide 8, let's review our capital deployment over the past 6 years. The light blue bars depict our cash generation from operating activities, which has ranged between 4.8 to $6,000,000,000 since 2013. The stacked bars on the right depict our uses of cash ranked in order of priority.
Our highest priorities represented by the dark blue on the bottom, our progressively growing dividend. During 2018, we increased our dividend by 11%. This strong increase reflected an improved out in reflected an improved outlook after we updated our views on tax reform and the petrochemical industry. We have a top quartile dividend that is currently yielding approximately 4.6% return. Our next priority is maintenance happy to support the safety and reliability of our operations.
Going forward, this baseline investment is approximately $1,100,000,000 per year. The remainder of the orange bar is allocated to profit generating capital investment to support growth projects. We estimate this investment will increase to $1,700,000,000 in 2019. The gray bars reflect our share repurchases. We have returned over $18,000,000,000 in share repurchases since the inception of the program, Our buybacks add up to over 280,000,000 shares or 36 percent of the shares that were outstanding in 2013 at the inception of the program.
Opportunistic share repurchase will continue to be a component of our capital deployment. The green bar represents last year's A Schumann transaction our first significant acquisition. We continue to maintain a conservative balance sheet that provides optionality to pursue value creating opportunities, and we will continuously reevaluate the relative merits of organic projects grows to M And A and share repurchases to optimize returns for our investors. Now please Turn to Slide 9, where I would like to address some of your annual modeling questions for 2019. Regarding capital, we are currently planning to invest approximately $2,800,000,000 during 2019 to support both our base maintenance and growth programs.
Approximately 60% is targeted towards profit generating growth, The majority of this growth investment in 2019 will be dedicated to the new POTBA plant. Although not all plans are finalized, we estimate capital spending will average $2,800,000,000 annually through 2021. For 2019, we have a fairly typical plant maintenance schedule, activities during the year will impact annual EBITDA by approximately $160 to $200,000,000. In addition to the first quarter, plant maintenance in O And P Americas mentioned by Bob, the segment will also have a cracker turnaround in the third quarter that is expected to impact EBITDA by approximately $70,000,000 to $80,000,000. In our intermediate and derivatives segment, we have planned maintenance event that will impact EBITDA by approximately $30,000,000 to $40,000,000 in each of the 3rd fourth quarter.
Our net cash interest expense for 2019 is expected to be approximately
$400,000,000.
2019 annual book depreciation and amortization should be approximately $1,300,000,000. We plan to make regular pension contribution in 2019 that totaled to $110,000,000 and we estimate the pension expense of approximately $90,000,000. We currently expect the 2019 effective tax rate of approximately 20% and that our cash tax rate will be slightly lower than the effective tax rate. I will now turn the call back to Bob for a more detailed discussion of our segment results. Thank you.
Thank you Thomas. Let's turn to Slide 10 and review our segment results. In our Olefins and Polyolefins Americas segment, 4th quarter EBITDA was 631,000,000 a $73,000,000 decrease versus the 3rd quarter. For the full year, segment EBITDA was approximately $2,800,000,000. Relative to the third quarter 2018, Olefins results improved by approximately $70,000,000 due to higher ethylene prices and declining Gulf Coast ethane costs.
Our cracker operating rates averaged 93% during the 4th quarter, exceeding the average industry performance of 87%. Approximately 80 80 percent of our ethylene production was from ethane and 94% came from NGLs. Polyolefin results were approximately $115,000,000 lower than the prior period, primarily due to a $0.04 per pound decline in polyethylene spread over ethylene. For the full year, results decreased by $137,000,000, Open results declined by approximately $445,000,000, primarily due to a $0.06 per pound reduction in ethylene price. Spread improvements in polyethylene and polypropylene of $0.07 per pound and $0.03 per pound, respectively, drove an approximately $360,000,000 improvement in polyolefins to mostly offset the declines in olefins.
IHS is currently forecasting relatively stable polyethylene chain margins for the first quarter. We are optimistic that 2019 will offer earnings growth for the segment as the pace of pace of polyethylene capacity additions slows. While global demand growth remains steady. Please turn to Slide 11 as we review the performance of our olefins and polyolefins Europe, Asia and International segment. During the 4th quarter, EBITDA was $127,000,000, or $135,000,000 lower than the third quarter.
For the full year, EBITDA was $1,200,000,000. We continue to optimize our portfolio in the fourth quarter by divesting a carbon black subsidiary in France. This benefited the quarter by $36,000,000. Compared to the 3rd quarter, Olefins results decreased by approximately $75,000,000 primarily driven by decline in volume. Combined polyolefin results decreased approximately $35,000,000 driven by decreased margins.
Equity income decreased by $43,000,000, primarily due to planned maintenance and our Polish Korean and Saudi joint ventures. Full year EBITDA results were $764,000,000 lower than 2017. 2017 benefited from a gain of a $108,000,000 on the sale of our interest in GEO cell. 2018 results included the benefit from the sale of our Carbon Black subsidiary and a favorable impact of approximately $95,000,000 due to an increase in the euro versus the US dollar exchange rate relative to 2017. Olefin results for the full year decreased approximately $370,000,000 compared to 2017.
Increased feedstock costs during most of the year resulted in margin declines, while planned and unplanned maintenance and low Rine River levels resulted in a volume decrease of approximately 10%. Combined polyolefin's results decreased approximately $345,000,000 due to $0.03 per pound and $0.02 per pound lower spreads. In polyethylene and polypropylene, respectively. Joint venture equity income decreased by $46,000,000 primarily due to lower polyolefin spreads. In January, demand is improving, following the typical seasonal declines and destocking the 4th quarter.
On Slide 12, let's take a look at our Intermediates And Derivatives segment. 4th quarter EBITDA was $379,000,000, a decline of $125,000,000 from the prior quarter. For the full year, the segment generated over $2,000,000,000, setting an annual record and improving over the prior year by $521,000,000. 4th quarter PO and derivatives results decreased by approximately $10,000,000 when compared with the prior period, primarily due to lower volumes, partially offset by higher margins. Intermediate chemicals decreased $65,000,000 primarily due to reduced styrene and exotils margins.
Hoxyfuels and related products results decreased approximately $40,000,000, driven by margin declines due to higher ethanol pricing relative to crude oil and a volume decline due to planned maintenance. During 2018, the $521,000,000 improvement in EBITDA was largely driven by margin improvements across all products due to tight market conditions and improved contracting strategies. We're very proud of the team's accomplishments in 2018, and we expect continued benefits from this work in future years. While IHS is forecasting some moderation in methanol pricing for the first quarter, we should see improved PO and derivatives volumes for the segment due to the completion of the planned maintenance at our Bayport, Texas facility during the fourth quarter. Slide 13 charts the full year results from business improvements we discussed during our 2nd quarter earnings call.
You might recall that while the majority of the increased profitability was attributable to tight market conditions and reduced maintenance downtime at our facilities, we also described LyondellBasell's improved contracting strategies and reliability as sources of durable improvements that should persist beyond 2018. Historically, our intermediate and derivative segment generated relatively consistent EBITDA that averaged approximately $1,500,000,000 per year. We believe our new midpoint in typical markets will be approximately $1,700,000,000, While the strong market seen in 2018 may moderate, we do not believe these improved margins will fully revert in 2019. In addition, we've not stopped pursuing self help within this business. This year, we expect IND contracting improvements to provide an additional $100,000,000 of annual EBITDA for the segment starting in mid 2019.
On Slide 14, let's review the results of our Advanced Polymer Solutions segment. 4th quarter EBITDA was $86,000,000, a $16,000,000 improvement over the prior period. For the full year, EBITDA was $400,000,000, 4th quarter transaction and integration costs were $20,000,000. Compounding and solutions roughly $15,000,000 over the 3rd quarter as we realized a full quarter of contribution from the addition of Ace Schulman product lines. This was partially offset by volume and margin declines in polypropylene compounds.
Advanced Polymers results decreased approximately $15,000,000 due to lower margins and volumes. Full year EBITDA results for this segment for $38,000,000 lower than 2017. Transaction and integration costs related to the acquisition impacted the segment by $69,000,000 in 20.18. Compounding and Solutions results improved approximately $15,000,000 with higher volumes from new product lines, partially offset by lower volume and margin in polypropylene compounds. Advanced Polymers results increased approximately $15,000,000 due to higher volumes.
Integration activities are well underway and we have captured $47,000,000 in forward annualized run rate synergies as of December 31st. We expect to see continued improvement in this segment as we begin 2019 with the return of hydro seasonal volumes and our continued focus on capturing value from integration activities. Turning to Slide 15, let's discuss the performance of our Refining segment. 4th quarter EBITDA was negative $84,000,000, a $168,000,000 decline from the third quarter. For the full year, EBITDA was $167,000,000 or a $10,000,000 improvement over 2017.
Planned maintenance on 1 of our 2 crude and coker trains was completed in November. As a result, the average crude throughput was 184,000 barrels per day or 48,000 barrels per day less than the third quarter. With this work behind us, the refineries prepare to run full rates for the next 2 years and benefit from expected market opportunities. In the fourth quarter, the Maya 211 crack spread declined significantly, averaging less than $11 per barrel for the 1st quarter and only $9.57 during November. Over the previous 12 years, the Maya 211 has been below $10 for only 1 month in December of 2011.
The average over this time period is more than $22 per barrel. Spreads are improving as Pemex adjusts a monthly k factor of the Maya crude oil price formula to ensure that Mexican crude remains competitively priced for the US Gulf Coast refining market. For the full year, refining margins increased when compared with 2017 due to discounted Canadian food pricing and improved fluid catalytic factor conversion rates. Pre throughput was 231,000 barrels per day in 2018, slightly lower than 2017. Accent our recent plan maintenance, throughput would have averaged 256,000 barrels per day for the full year.
I'd like to congratulate our refinery team for their diligent work and dedication to improve our refinery reliability. With our planned maintenance completed, we look forward to stronger contributions from our refinery in 2019 as we continue to benefit from improved reliability and an increased Maya 211 crack spread. I would now like to turn to slide 16 and speak with you about a topic of growing global concern. The management of plastic waste. I think most of you are well aware of how billions of people benefit from advances in plastic.
In fact, our products are well aligned with the United Nations' sustainable development goals such as a reducing hunger and food spoilage with durable packaging. Delivering safe drinking water with plastic pipes and reducing energy consumption with innovative materials. However, we now face the growing problem of what to of what to do with the plastic once it has served its initial purpose. The concern over plastic waste management is leading governments and consumers to consider bans on plastic straws and bags. But these products make up only a small fraction of the plastic waste that ends up in our oceans.
Some suggest that we should replace all plastics with alternative materials, but most alternatives bring higher overall environmental and economic costs. On Slide 17, I'm very proud to highlight an alliance formed by LyondellBasell along with more than 25 of our industry peers and collect and recycle plastics. Together, we have committed over $1,000,000,000 with the goal of investing $1,500,000,000 over the next 5 years in collaborative partnerships to advance meaningful solutions that eliminate plastic waste in our environment. The alliance's approach is based on 4 pillars: infrastructure that stops plastic waste from entering the environment innovation in materials, technologies and business models that increase the value of plastic waste, engagement with partners in government, business and consumers to enable solutions and meaningful projects to clean up plastic waste that has already escaped into our environment. New infrastructure to prevent and clean up plastic waste is especially important in emerging economies where collection practices often lagged the developed world.
Once plastic is collected and appropriately sorted, the waste become a valuable feedstock for technologies that create versatile new materials from these post used plastics. LyondellBasell's QCP recycling joint venture with Suez is an example of an innovative business model that embraces this vision or Circular Plastics Economy. Education and engagement with governments, businesses and communities is critical to the success of these initiatives. The collaborative work of our alliance will be more powerful and efficient than fragmented efforts by each member company working alone. A survey shows that 10 Rivers transport more than 90% of the of the river based plastics to the ocean, and more than 50% of land based plastic waste leakage comes from only 5 countries.
There will be a focus on developing solutions that stop this leakage at their sources and clean up areas with existing plastic waste by recognizing the value of reusing plastic. While we certainly have an immense challenge ahead of us, I'm confident that our alliance will find meaningful solutions to help end plastic waste and create a sustainable future for our industry, and our planet. Now let's turn to Slide 18 and discuss the outlook for 2019. Ethylene feedstocks were volatile during the second half of twenty eighteen with US Gulf Coast ethane prices spiking up in September and then reverting in November. As we discussed during our third quarter earnings call, LyondellBasell and optionality across our US assets with ethylene production from both low cost Midwest ethane, and feedstock flexibility in our Gulf Coast crackers.
NGL prices are likely to show some volatility during 2019 with increased demand from the remaining new ethylene crackers likely to arrive ahead of planned NGL pipeline and fractionation capacity additions. We expect that this pattern of prolonged startups for ethylene crackers along with NGL supply additions will smooth the path forward, towards forecast for a return to plentiful each stock availability within the next year. We're encouraged by forecast for polyethylene demand growth to continue with long term historical ranges of 4% to 5%. Over the past 3 years, capacity additions have surpassed demand and moderated operating rig with less global capacity scheduled to start up during 2019 2020, we believe that LyondellBasell's new Hyperzone H CPE capacity will find favorable markets as we ramp up during the second half of this year. Turning to Slide 19, let me summarize the year's highlights.
In 2018, our strong earnings were supported by record annual EBITDA in our Intermediates And Derivatives And Technology segments. We'll continue to benefit from some of the improvements from both segments through contracting changes in IND and licensing growth in technology. Our company generated approximately $5,500,000,000 of cash operating activities. This strong cash generation contributed to growth through profit generating capital investments and the acquisition of A. Schulman.
Furthermore, we continue to provide significant shareholder returns through a growing top quartile dividend and $1,900,000,000 in share repurchases. By completing the acquisition of Ace Schulman, we have created the world's largest Plastics compounding business, and we are well underway with integration activities that are capturing significant synergies in our new Advanced Polymer Solutions segment. Our strong cash flows and healthy balance sheet leave us well positioned to take advantage of additional value creating inorganic opportunities. In 2018, we advanced on the construction of our Hyperzone polyethylene plant and we look forward to the added profitability will contribute to our O And P Americas segment, following the startup in the third quarter. Flatost, we also began construction of our POTBA plant that will start up in 2021, providing further earnings growth for our IND segment.
We move forward on sustainable solutions for our company by formally forming quality Circular polymers our premium plastics recycling joint venture with SUEZ. And in collaboration with our industry leaders, we formed the Alliance and Plastic Waste to generate sustainable global solutions for plastic waste that will benefit our industry and the environment. Going into 2019, We look forward to increased production and availability of shale based feedstocks in a moderation in the pace of capacity additions that should provide a favorable environment for our new HDPE capacity and allow us to maximize value from our diverse global business portfolio. With that said, we'll now
Our first question comes from Duffy Fischer. Your line is open.
Yes, good morning, folks. First question, IHS is calling last year, polyethylene demand up about 7%, which is pretty meaningfully higher than, say, the 20 year run rate. 1, would you agree with that? And 2, where was that extra demand coming from? What caused that to accelerating your mind?
So, definitely, we, we, in fact, did see that, especially in the 1st 3, 3 quarters of the year. Quite a bit of it was in, in the pipe and packaging segment of the business. So not only here in the U. S, but, more exports as well, which drove global demand growth.
Okay. And then on the supply side, again, several of the global consultants now have lists that would have in excess of 20 new naphtha plants coming online in China, you know, and they kind of call it 2021 and beyond. Obviously, you guys got some insight into that with your licensing business. How should we think about with the knowledge base you have kind of across that space? What will that wave look like know, obviously, it's not gonna be that many, but is it 10, is it 15?
How many in that mid twenties period should we think about naphtha crackers in China?
Yes, Duffy. As we have our discussion, we don't see that magnitude in that time frame. A lot of them are under consideration, but I would say time timeline is, is much later than what's described. And so, you know, we'll we'll look for those updates as those projects, reach final investment decisions, but we expect that, those will go forward further in terms of timing
Great. Thank you, guys.
Thank you.
Thank you. Our next question comes from David Begleiter. Your line is open.
Thank you. Good morning.
Alright. Bob, just on, on Braskem, is there
a point where you need
to make a decision either way and just move forward? I just have been sorry, say, dragging on for quite a while here?
Yeah. Well, David, you know, we've, it's it's a very as I've talked about in the past, it's a very complex transaction. And in terms of the timeline, part of the protracted timeline has been the pause because of the change in government. And and given sort of the shareholder ownership that that you all know about Braskem. So, so I can tell you that, you know, we've completed very high quality due diligence.
We have a few follow-up items, but I think as we sit here today, we better understand issues and and and value creation drivers. We have been in discussions with relevant stakeholders, including Auto Rush, We don't know whether these discussions will lead to an agreement. Well, and I can tell you, we'd only move forward at the right price and if we believe the transaction creates significant value for all of our stakeholders.
Very helpful. And just one last thing, Bob, on OMP America's EBITDA in 2019, I think you said you think you can grow this business in 'nineteen versus 'eighteen. Could you provide a little more color on that thought process given, again, some new capacity coming on stream and lower polyethylene prices in in Q4?
Yeah, I think, you know, a lot of that, David, is, the Hyperzone plant, our new polyethylene capacity coming online. You'll recall today, ethylene margins are have been have been very thin. And so to the extent that we can integrate downstream and capture more of the ethane to polyethylene chain margin, that will that will contribute and it's a world scale plant. So, it'll it'll make a in terms of the owing BMS as profitability.
Thank you. Our next question comes from Vincent Andrews. Your line is open.
Thank you. Bob, are you looking at your table too, with the volume that you sold, obviously, in polyethylene
in the U S, it
was the lowest number on that page. And I'm assuming the same is true in any of the other products around the world.
So are you carrying
a lot of inventory into 2019?
And, you know, assuming you run it, you know, usual production rate, should we should 2019 be a a a much bigger volume year, on an organic basis?
Yeah. So in terms of inventory, no, we're not carrying it unusually high amounts of inventory across our entire system. So, you know, I I think, there's some inventory build for a turnaround that we're expecting here in the US of our largest polyethylene plant. It's a £2,000,000,000 per year of, polyethylene plant that we will have a turnaround in in, in Q1. Otherwise, inventories we don't see as being high across the system and frankly, downstream because the destocking happened.
We think that inventories are quite moderate or kind of the low average downstream as well.
Okay. And it's a
go ahead.
When you look at the inventory difference year over year on a cash basis, it's about a $90,000,000 change versus 2017. So really small.
Okay.
And in the in the I and D business, you know, one of the bright spots in 2018 was the acetyls chain and the spot margins,
if you look at those
or if you come in considerably, since the third quarter of 2018. What are your expectations for those margins can get back to in 2019?
Well, that's, I mean, it's difficult to predict where where they'll go, but, but you've seen the potential in 'eighteen. And, the question has been, has been, you know, fairly significant. So we'll have to see how that develops. I think when you think about our IND business, the the the methanol, the acetyls, and the styrene margins tend to be the most dynamic part of the portfolio. But as I mentioned in my prepared remarks, underlying all of that, we have more, contracting improvements that will accrue to the earnings of IND starting about midyear.
So you know, I think we've reset sort of the base in IMV from 1.5to1.7. And if styrene and methanol markets turn out to be directionally what they were in 'eighteen, then we should have another very strong year in 'nin'D.
Thank you. Our next question comes from Aleksey Yefremov. Your line is open sir.
Thank you. Good morning, everyone. You indicated one of the slides where you're, you expect TOTBA, earnings to be based on the average for 2014, 2018 margins, or where are the margins today relative to that historical average?
Yeah, I don't know where the margins are today versus the historical average, but we tend to take periods of time when we communicate because, you know, if we take narrower time frames, the price margins can be much higher or lower. So, you know, we're very constructive about the market. And if you think about TBA and specifically MTBE last year, especially in the second half, gasoline demand and gasoline margins were quite low. So we think, you know, some improvement in that in addition to lower butane prices, which we saw during the winter, we think those bode very well for the MTBE part of our IND business.
Thank you, Bob. And you spent some time on recycling. How strong is the business case for some capital deployment and to recycling today? And also, do you see sort of some some threat to plastics demand in the near term and over the next 12 24 months, especially in Europe, from government policies here?
Well, so, 1st of all, Dion, what we've learned from QCP joint venture is that, collection and segregation are very important. And in the past, what has what is a old recycling business is, is that the input is very mixed. And so I think that's what's differential about our our joint venture with Suez as we get relatively segregated polyolefin waste that is further segregated in our venture and then watch and then recycled. In terms of impact on demand, I think it'll take a bit of time for the infrastructure to get in place and and and to be built out. So, in the near term, we don't we don't expect meaning the next 2, 3, 4 years, and we don't expect meaningful impact.
And we'll just have to watch and see the pace of, infrastructure growth In terms of Europe, I can tell you that even in recent meetings with, that my team has had with, with, with leadership in Brussels, the focus is more on the circular economy rather than diselection or plastics. And and that was again reaffirmed in recent discussions. So we think that our, approach with the QCP venture is very well placed. And and the idea for us is to now build out that platform throughout Europe. And and, we're focused on doing that.
Thank you.
Thank you. Our next question comes from Robert Koort. Your line is open.
Good morning. This is Dylan Campbell on for Bob. Quick question. One of your competitors is pushing a price increase for or they work for January, and they are for February for polyethylene, in the Americas. I guess, what is Landau's expectation for the first quarter here for polyethylene pricing given that at least one consultant is saying that inventory levels are at the highest level in maybe a decade.
Well, you know, 1st of all, I don't I don't wanna comment on direction of prices here on the call, but I can tell you that, you know, as we look at January, we are seeing in the US more return to more normal demand. And we expect as February, March, in April, you know, progress, seasonally, we tend to see an uptick in, in demand because of packaging and so on. And what we hear from our customers is that that seasonal uptick in demand should be expected. And if you think about downstream inventories, because of the destocking that 3rd with the reducing or oil price, we think downstream inventories are quite lean. So when you look at inventory, you really have to look at the inventories in the chain rather than just in one part of the chain.
And so I think all this will normalize in our sense is if you step back and look at operating rates, globally, they still look to be among the highest we've seen in polyethylene in the past 4 years. So I think the setup is very constructive for the entire year, given that demand typically grows, in the 1st 2 or 3 quarters of the year. And, and and, so, you know, I mean, I I I think operating rates are are high and that points to a very constructive market.
Got it. Thank you. And I guess a quick clarification question. You guys mentioned polyethylene to ethylene spreads declined 4¢ per pound, sequentially quarter over quarter. But I guess if I looked in your your data supplement, polyethylene prices declined by only 1 to 2¢ per pound and afternoon was fairly flat quarter over quarter.
I guess, was Findell selling a a bigger discount versus the market, or Can you just help working through that math?
Sure. So that you're referring to the polyethylene, definitely in margin for us and The way we transfer ethylene price internally is it's a spot. It's a blend of contract and spot. And you'll note that in Q4, we saw a rising spot price of ethylene. So, so really there was more margin in olefins and and a little bit less than polyethylene.
It, does it's not a reflection on the revenue of polyethylene. Got it. Thank you.
Thank you. Our next question comes from Arun Viswanathan. Your line is open sir.
Hi guys. Thanks for taking my question. So first off, just wanted to ask about, kind of the level of earnings here. We kinda deteriorated pretty, pretty substantially in q 4 to, 1213. I guess, we saw, like, a 1415 in Q4 of 'sixteen.
I guess, what gives you guys the confidence in the snapback in Q3 through Q4 And I guess I'm just curious on Europe and refining as well. You know, feedstocks have come down in Europe. Is there a possibility that you could see some recovery there or would be of pricing be challenged, to take in a lower feedstock environment like that? Thanks.
First of all, so if you think about Q4, there were kind of 3 big drivers that we think are, are kind of one offs. First of all, we talked about the environment of, declining crude oil price and, and the related destocking and how price moves in that kind of environment. A 40% decline in 1 quarter is really enormous. And and that's largely played out and oil prices rebounded. So we think that's constructive as we look at, first half of nineteen.
In terms of, Europe and EAI, just from 1, one cracker turnaround that extended past our planned window, and and the Rhine River and some, so we had one of our suppliers of feedstock had a disruption. That all, we think impacted earnings by about $100,000,000 in Q4, largely behind us. Rhine River is back to normal levels. Our cracker is, you know, expected to be for most of the quarter at full rates. So, so, you know, $100,000,000 we think is really isolated to q 4.
And then in refining, we're sitting here with Maya 2 11 spreads that are the lowest we've seen since the 08 time frame. And what's driven that is, a few factors. First of all, You will recall that, the k the so called k factor is what determines the delta between Mexican Crude and light Crude, if you will. That K factor has been slow to adjust. So the light heavy differential has, has been almost 0, of late.
So we think that'll revert. We're already seeing some correction to the k factor And, we expect more to come, and, and, you know, the long gasoline market that I described, which may persist. I don't know But I do think the light heavy differential and in particular, how Maya is priced, we should see improvement as the quarter progresses. So So largely the maintenance impacts in Europe were isolated to one unit and they're kind of behind us.
Great. Thanks. And as a follow-up, maybe, could you, I don't know what you could say on this, but maybe if you could just explain, maybe some from a high level, some of the strategic benefits, you know, in a potential Braskem deal, Would it allow you to, you know, reduce your, your long ethylene position, and, and, it obviously will grow and probably propylene. But and then also how do you feel about, the vinyls chain and participating there? Is that something that is, would be considered core to you guys?
Thanks.
Yeah. So in terms of strategic merits, I mean, I think, you know, in, first of all, when you think about Brazil, the outlook for Brazil continues to improve and, and the expectations are, are positive under under the new, government. So and it's an economy. If you look at the IMF reports, it's one of the few in the world that's expected to grow at reasonably good rates. We think Longer term, the economy there holds good potential.
It's an area where we don't have much of a position. So it makes us even more of a global producer and seller of polyolefins. In the in the case of the US and and Europe, there's there's in part a consolidation opportunity and, and also, you know, a lot of our technology is deployed within, within Braskems. So, you know, those are just a few of the merits, strategic merits of a transaction like that. As I mentioned earlier, you know, it's got to be at the right price and it has to be significantly value creating for our shareholders.
Thank you. Our next question comes from PJ Juvekar. Your line is open.
Yes. Hi. Good morning, Bob.
Good morning.
You know, on refining, you didn't mention IMO 2020. And, you know, we're hearing some mixed reviews about benefit of IMO 2020 to GRMs. I was wondering if you could comment on that.
Well, thank you for asking that. I was hoping somebody would ask me so I could work into, my commentary. I mean, I think, you know, PJ, IMO, we still see meaningful impact, especially because we have such a heavy crude processing refinery. Yes, recent press suggests that maybe some of the impact will be muted we actually think if we look at forward curves, now perhaps the the expectations have corrected to the low side Whereas perhaps at the end of last year, there was a little bit more enthusiasm. We do continue to believe that there will be a positive impact from IMO starting in late Q3 into Q4 as the inventory is rotated into the lower sulfur and diesel and that's deployed.
You know, across the network around the world. And then 2020, we do expect some, some meaningful impact from from IMO 2020. So, look, the thing we can control is we've got to operate well, and I think we've positioned ourselves by completing all of our maintenance to to run at full rates and capture whatever opportunity lies ahead. But I continue to think that there will be a meaningful benefit and late this year into 2020. Great.
Thank you.
And secondly, I'm glad to see you're taking the lead on plastic recycling issue. I think, you know, the industry needed to do something there. I guess when you look at plastic recycling, the issue has been the economics of recycling, and recycling never made any money in developed markets like the U. S. Maybe it makes money in in emerging markets because of cheaper labor.
But can you talk about the economics of that and how do you work that into the solution?
Well, I think, P. J, first of all, I appreciate the recognition in terms of, the momentum around around the alliance and so on. And it's, you know, credit goes to a lot of companies who have been, really, a catalyst for, for getting this going. In terms of the economics of recycling, as I mentioned earlier, really better collection and segregation of the source is is critical to the economics and then and then building up scale and doing the recycling closer to where the waste is collected. Because it's adding costs by moving waste around the world, detracts from the economics.
So I can tell you that's what we're focused on. So with with the QCP venture in in, in Europe. And we believe it's a model that can be replicated. Certainly within Europe, And as we develop that further, we'll think about other jurisdictions around the world.
Thank you.
All right. Thank you.
If we could limit, to one question, we still have eight folks in the queue. I do want to take up your your lunch hour there today. Thanks.
Our next question comes from Jonas Oxgaard. Your line is open.
Good morning.
Good morning, Bob.
If we're sticking to the to the plastic waste here, you have a slide there. 17, we show 4 different pillars. Can can you talk a little bit about how do you actually intend to, or how does the Alliance intend to invest here? Are they giving grants to companies, universities, is that you're expected to do it in house? And can you give us
a little bit of a, of a
breakdown on on how much do you think gonna be focused on each of the 4 pillars?
Well, so that the in terms of the allocation, there will be we'll move in parallel and on Paul 4. There's not waiting more strongly towards one or the other. But, if you were to go to the website, inplasticwaste.org, you can see the initial actions the alliance will take, which we're back backing and supporting a an effort through a company called Renewology, that is converting waste plastic into fuel. There's a, a, a fun called Circulate Capital that's funding, initiatives around the world that directionally end plastic waste. So Jonas, I'd encourage you to look at that.
And and that's that's gonna be we we wanna move on all four fronts. We do believe that we've got to slow down and stop what's entering the environment. We need to address what's already in the environment and, education and innovation are going to be what's going to make this, more sort of structural and sustainable part in the front. Over the long period of time.
Okay. Thank you.
Our next question comes from John Roberts. Your line is open.
Thank you. Slide 18 talks about the expected volatility in ethane, which I assume is even after the Sasol cracker has been pushed out to the back end of this year. Do you think the industry needs to do additional here in the short term to maybe pulling forward some downtime to ease up on the ethane pressures that might cause another spike.
So, John, some of the news around the the delays, it's quite fresh, and we've not included that in our in our analysis here, But, but, indeed, you're right that, whatever it certainly says that, there are some incremental delays in some of the new crackers coming So, you know, our view is that in a lower oil price environment like we have, and you'll recall last year, we said that more, more of the GLs that are coming from the Permian contained more butane and propane, as ethane was rejected, which caused kind of this run up in ethane all of this is to say that alternative feedstocks like propane butane liquids will be very competitive at lower oil price more propane and butane available, especially after we get through the winter season, and export capacity in the near term is is we don't know of any really big new capacity coming for propane. So I think that in the environment that we're in, you you could you could say that, the volatility should be less, if at all, especially with the delays. So and you saw some evidence of that in Q4 when oil price dropped, you actually saw propane and butane become a lot cheaper and they were very competitive as feedstocks.
Our next question comes from Kevin McCarthy. Your line is open.
Yes. Good morning. Bob, I was wondering if you could elaborate on your outlook for olefins and polyolefins EAI. If we look back to the prior oil collapse in late 2014, that segment really enjoyed, a nice year in 20 up nearly $450,000,000. And listening to you today, it doesn't sound as though, you're as constructive, on that segment relative to the Americas, for example, notwithstanding some of the one timers, Rhine River, etcetera.
So would you compare and contrast the current environment versus, what we saw in the following oil collapse or the pre previous one? Sorry.
Right. So, you know, Kevin, in, in, the Q4, we had a, we we had a significant set in in prices. And I think that's because of all price declining. That's occurred, and and my team tells me that, January orders look very good in Europe, so we've seen demand come back. And so I'm I'm actually quite constructive about the supplydemand balance in Europe.
So, and I think, there will be some impetus to improve profitability as the year goes on. Again, if you step back and you look at global operating rates rising this year and now that supply chains have reset because of the declining oil price. We're coming into a seasonally strong period this is a all of this is a set up for improving profitability as we work through the first half of the year. And I think EAI should benefit from the higher global operating rates and, and and the, oil price correction behind us. So I I I'm I'm actually quite positive about EAI.
Our next question comes from Frank Mitsch. Your line is open.
Hey. Good. Good morning. And, Bob, I, I guess I now have to start, watching your interaction at industry events with Frank Bozich. Hey.
You've said, you said earlier that you're closely watching Asia post Chinese New it starts in less than a week. And I'm curious as
to what your best guess is as
to what we'll see particularly with respect to the automotive markets, obviously, very important for polypropylene What are your what are your expectations, you know, that that we're going to see in in in a few weeks' time there?
Well, I think ultimately we'll see what happens in about 10 days or 14 days. But I think, Frank, given that we've been through a pretty big destocking cycle, And, my view at least on the packaging and the non durable side is that, you know, demand is growing and and and all of sort of the demographic factors that we've discussed in the past, they're still in place. In terms of automotive, I think credit is loosening over there and, and the middle class is growing. So it seems to me that, demand for automobiles should, should be constructive, barring some some event that none of us can predict. So I'm I'm I'm quite, optimistic and hopeful about, what we'll see post Chinese unit.
Thank you. And our next question comes from Hassan Ahmed. Your line is open.
I've got a question on, the U. S. Ethylene market. You know, as we took a look at, 18, Obviously, there was extreme volatility. I'd actually even call it a fairly sloppy market.
You know, beyond, obviously, oil doing what it did, I think one of the main reasons was obviously a mismatch between ethylene capacity coming online, derivatives, not sort of following suit immediately. It seems now that, as we look at 'nineteen, both ethylene and derisk capacity seems to be coming online in lockstep. So so is it fair to assume that, you know, the ethylene market in the US should not actually see the sort of volatility you saw last year?
Indeed. I mean, I think, Hassan, the volatility could come from from the degree of reliability we see in, in the various crackers and, and as new very large world scale units come online, can imagine if 13,000,000,000 pound cracker comes offline that that could cause, a significant change in in a supply demand balance The other thing that I think we'll have to watch is the timing of derivative expansions versus cracker expansions. If derivative expansions come sooner that could actually cause more firmness in the ethylene market. I think the opposite is unlikely. With anything, derivatives could come a little bit earlier, especially in 1 or 2 projects that are more integrated, in terms of their, their, their setup.
It's not just polyethylene. It's glycols. It's alpha wolfens, a lot of other ethylene consumers as well.
Thank you. Our next question comes from Jeff Zekauskas. Your line is open.
Thanks very much. Oils rebounded since the beginning of the year from roughly 50 to 60 in Brent's terms. But propylene really hasn't moved in the United States.
You know, maybe polymer grade is still a
little bit under 40¢, and it's come down from 60. Can you talk about some of the dynamics that have pushed propylene down? What are your expectations for it this year? And are you surprised that it hasn't moved?
Well, I think, Jeff, as we see more PDH capacity coming to the market, it'll probably reduce the volatility of propylene because now you have a bigger base that generally runs and is not dependent on on, feedstock flexibility, right? So, that's been part of the source of, propylene price volatility is when feedstocks change, In the past, it had a big impact on the amount of propylene volume that was available. But now as the base of PDH capacity grows, it'll probably act to stabilize and maybe reduce some of the volatility.
Thank you. Our next question comes from Steve Byrne.
Hi. Thanks. This is Ian Bennett on for Steve. The past couple of quarters as Lyondell's EBITDA has been declining, your net debt has been increasing to buy back more stock. And I think that sends a strong message about your view of the longer term trajectory of the earnings and value of this business.
If EBITDA were to continue to decline how willing are you to continue to increase net debt to buy back stock? And does that affect your ability at all to to pursue Braskem?
Thomas will take that question.
No, thank you Ian for the question. So I think, if you look, so first of all, we talk a significant advantage of, attractive share prices, especially in the fourth quarter. We have always said that we are, you know, we are buying back our own share opportunistically. I think it's when you ask your question, it's important to note that the, we obviously increase net debt. You're absolutely right.
But the main reason to increase net debt or the reason is actually the Schulman acquisition So if you look at cash flow from operating activity with $5,500,000,000 for the year, we have CapEx of 2.1 dividend and share buybacks of 3.1 and so forth. The share for the share buyback program, we actually did what we always said. We are using excess cash flow to buy back our own shares. Now we are at the point where we have to make decisions as the share price stays to actually raise debt in order to, replenish our debt portfolio, which we have used the cash to, to, for the acquisition of Schulman. So we have sufficient funds, as I said, the liquidity is above 4,000,000,000 we have sufficient funds to pursue our growth initiatives as well as to continue with our share buybacks opportunistically.
And, again, you know, if you if you think step back and strategically look at what we've been doing, we've been looking to create shareholder value by pulling a number of levers. We had meaningful organic growth in 2018 inorganic growth with the Shulman acquisition, and we bought back a meaningful number of our shares. So I think you ought to look look for that to continue because this is a company that has many levers and and we'll look for the one that creates the most value as we think about deploying
And our last question comes from Matthew Blair. Your line is open.
Hey, good morning, Bob. So last quarter enterprise announced a couple of new PDH plants. We're wondering if you can say whether you're a customer here and how might this affect your potential polypropylene and I guess potential PDH plant as well?
Yes. So with all the other initiatives we've had going on, we've, we've, we've kind of, with the PP plan, we're still considering it. And, and certainly, the the buy versus build scenario on propylene is one that we're contemplating today. And and you know, from your conference, I know Jim very well, and I spent some time with him. So, you know, that that's that's an option depending on the economics of of buy versus bill.
We'll continue to evaluate that.
Thank you. And we have no other questions at this time.
Okay. Great. Well, let me offer a few closing remarks, if I may. So, you know, after a challenging fourth quarter where typical seasonality was exacerbated, we're surveyated by declines in crude oil. We're looking forward to rebounding demand from restocking of supply chains In 2019, we'll continue to accrue synergies in our APS segment from the Schulman acquisition, We look forward to growth from our new Hyperzone production, anticipate an improving refining market.
With a lighter planned maintenance schedule in 2019, We're really well prepared to maximize production to meet the needs of growing markets. And our global business portfolio provides resilience We're well positioned to pursue any other value creating opportunities. So thank you for your interest, and we look forward to updating you in April. On our first quarter results.
Thank you for your participation in today's conference. You may now disconnect at this time. Have a wonderful day.