The following discussion is based upon the unaudited consolidated historical financial statements of INEOS prepared in accordance with IFRS. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements.
According to the company’s website investor-relations news release on October 27, 2022,
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Overview
Combined Business
We are one of the world’s largest chemical companies as measured by revenue. Our business has highly integrated, world class chemical facilities and production technologies. We have leading global market positions for a majority of our key products and a strong and stable customer base. We operate 33 manufacturing sites in six countries throughout the world. We are led by a highly experienced management team with, on a combined basis, over 100 years of experience in the chemical industry. As of December 31, 2021, our total chemical production capacity was approximately 23,100 kta, of which 55% was in Europe and 45% was in North America.
Results of Operations
Consolidated
The following table sets forth, for the periods indicated, our revenue and expenses and such amounts as a percentage of revenue.
Three-Month Period Ended September 30, 2022, Compared to Three-Month Period Ended September 30, 2021
Revenue. Revenue decreased by €153.0 million, or 3.0%, to €4.996.3 million in the three month period ended September 30, 2022 as compared to €5,149.3 million for the same period in 2021. The decrease in revenues was driven primarily by lower volumes, partially offset by an increase in selling prices in some businesses and the appreciation of the US dollar against the euro. Overall sales volumes for the Group were approximately 6% lower in the three month period ended September 30, 2022 as compared to the same period in 2021. Partially offsetting the decrease in volumes was an increase in selling prices which followed the increase in crude oil prices, which increased to an average of $101/bbl for the three month period ended September 30, 2022 as compared to $73/bbl in the same period in 2021. In addition, the appreciation of the US dollar by approximately 14% against the euro in the three month period ended September 30, 2022 as compared to the same period in 2021, has increased the reported euro results.
Cost of sales. Cost of sales increased by €407.0 million, or 9.9%, to €4,534.1 million in the three month period ended September 30, 2022 as compared to €4,127.1 million for the same period in 2021. The increase in cost of sales was largely due to the increase in crude oil prices, which has meant higher feedstock prices across the Group in the three month period ended September 30, 2022, as compared to the same period in 2021. Energy costs were also notably higher, especially in Europe, in the three month period ended September 30, 2022, as compared to the same period in 2021.
Gross profit. Gross profit decreased by €560.0 million, or 54.8%, to €462.2 million in the three month period ended September 30, 2022 as compared to €1,022.2 million for the same period in 2021. The decrease in profitability was driven by lower margins as well as volumes which were approximately 6% lower in the three month period ended September 30, 2022 as compared to the same period in 2021. In O&P North America margins decreased driven by weaker demand as a result of reduced export opportunities due to the appreciation of the US dollar, along with improved industry supply and weaker demand due to overall economic uncertainty. Olefin markets for O&P Europe saw an increase in margins due to more favourable market conditions in the three month period ended September 30, 2022 as compared to the same period in 2021, however polymer margins were under pressure from increased energy costs. Inventory holding losses within the O&P segments were approximately €125 million in the three month period ended September 30, 2022, as compared to inventory holding gains of €115 million in the same period in 2021, reflecting the decreased raw material costs during the third quarter of 2022 as compared to increased raw material costs during the same quarter in 2021. Chemical Intermediates experienced a decline in profitability in the three month period ended September 30, 2022 as compared to the same period in 2021, largely driven by the Phenol and Nitriles businesses. The Phenol business experienced lower volumes as a result of lower market demand for acetone and phenol, particularly in the European region. The Nitriles business experienced lower margins and volumes in the three month period ended September 30, 2022 as compared to the same period in 2021 due to weakened demand and cheaper Asian competition. Partly offsetting the decrease in gross profitability was the the appreciation of the US dollar by approximately 14% against the euro in the three month period ended June 30, 2022 as compared to the same period in 2021, which has increased the reported euro results.
Distribution costs. Distribution costs decreased by €3.8 million, or 7.2%, to €49.0 million in the three month period ended September 30, 2022 as compared to €52.8 million for the same period in 2021. The small decrease in distribution costs reflected the reduced costs in relation to lower sales volumes in the period.
Administrative expenses. Administrative expenses increased by €5.9 million, or 6.0%, to €104.1 million in the three month period ended September 30, 2022 as compared to €98.2 million for the same period in 2021, mainly as a result of higher research and development costs in the three month period ended September 30, 2022, as compared to the same period in 2021.
Operating profit. Operating profit decreased by €562.1 million, or 64.5%, to €309.1 million in the three month period ended September 30, 2022 as compared to €871.2 million for the same period in 2021.
Share of loss of associates and joint ventures. Share of loss of associates and joint ventures was a loss of €45.2 million in the three month period ended September 30, 2022 as compared to a loss of €4.7 million for the same period in 2021. The share of loss from associates and joint ventures primarily reflected the Group’s share of the results of the Refining joint venture with PetroChina which experienced higher inventory holding losses in the three month period ended September 30, 2022 as compared to the three month period ended September 30, 2021.
Profit on disposal of property, plant and equipment. There was a profit on disposal of property, plant and equipment of €0.1 million in the three month period ended September 30, 2021.
Profit before net finance costs. Profit before net finance costs decreased by €602.7 million, or 69.5% to €263.9 million in the three month period ended September 30, 2022 as compared to €866.6 million for the same period in 2021.
Finance income. Finance income increased by €11.3 million, or 83.7%, to €24.8 million in the three month period ended September 30, 2022 as compared to €13.5 million for the same period in 2021. The income in the three month period ended September 30, 2022 primarily related to interest income from loans to related parties, including INEOS Upstream, and interest received on increased cash balances held by the Group.
Finance costs. Finance costs increased by €40.4 million, or 28.1%, to €183.9 million in the three month period ended September 30, 2022 as compared to €143.5 million for the same period in 2021. The increase in finance costs for the three month period ended September 30, 2022 reflected an increase in net foreign exchange losses partly offset by an increase in net fair value gains on derivatives. The increase in net foreign exchange losses primarily associated with short term intra group funding was a loss of €149.5 million in the three month period ended September 30, 2022 as compared to a loss of €28.1 million in the same period in 2021. In addition there was a net fair value gain on derivatives of €56.9 million in the three month period ended September 30, 2022, as compared to a loss of €40.7 million for the same period in 2021.
Profit before tax. Profit before tax decreased by €631.8 million, or 85.8% to €104.8 million in the three month period ended September 30, 2022, as compared to €736.6 million for the same period in 2021.
Tax charge. Tax charge decreased by €109.4 million, or 89.1%, to €13.3 million in the three month period ended September 30, 2022, as compared to €122.7 million for the same period in 2021 primarily due to the decreased profitability of the Group. After adjusting for the profit from the share of associates and joint ventures, the effective tax rate of approximately 18% reflects the anticipated tax rate for the Group for the full year. The underlying effective tax rate for the three month period ended September 30, 2021 was approximately 16% after adjusting for the loss from the share of associates and joint ventures, which reflected the anticipated tax rate for the full year for 2021. The higher anticipated effective tax rate for the three month period ended September 30, 2022 as compared to the same period in 2021 reflected the increased level of profitability of the Group in countries with higher corporate tax rates.
Profit for the period. Profit for the period decreased by €522.4 million, or 85.1% to €91.5 million in the three month period ended September 30, 2022, as compared to €613.9 million for the same period in 2021.
Business segments
The Group reports under three business segments: O&P North America, O&P Europe and Chemical Intermediates.
The following table provides an overview of the historical revenue and EBITDA before exceptionals of each of the business segments for the periods indicated:
O&P North America
Revenue. Revenue in the O&P North America segment decreased by €180.9 million, or 11.0%, to €1,464.1million in the three month period ended September 30, 2022, as compared to €1,645.0 million for the same period in 2021. The decrease was primarily driven by lower prices in the three month period ended September 30, 2022 as compared to the same period in 2021. The weighted average sales price for the whole business was approximately 18% lower in the three month period ended September 30, 2022 as compared to the same period in 2021, driven lower by weaker demand with the biggest decreases coming from olefins, polypropylene and polyethylene, partly offset by higher pipe prices. Sales volumes were approximately 7% lower in the three month period ended September 30, 2022 as compared to the same period in 2021, driven by lower volumes of olefins and polypropylene sales, partially offset by higher polyethylene and pipe sales. The lower olefin volumes were mainly due to lower ethylene and feedstock sales. Lower volumes of polypropylene were primarily due to decreased volumes at the Carson plant due to a scheduled turnaround. Partly offsetting the decrease, the appreciation of the US dollar by approximately 14% against the euro in the three month period ended September 30, 2022 as compared to the same period in 2021, has increased the reported euro results.
EBITDA before exceptionals. EBITDA before exceptionals in the O&P North America segment decreased by €354.2 million, or 63.1%, to €207.1 million in the three month period ended September 30, 2022 as compared to €561.3 million in the same period in 2021. The decrease in profitability in the three month period ended September 30, 2022 as compared to the same period in 2021 was largely due to lower margins following lower demand and higher inventory holding losses. Polyethylene and polypropylene experienced the biggest decrease in margins following lower demand and further length in domestic supplies; although this was partially offset by higher pipe margins. Sales volumes were approximately 7% lower for the three month period ended September 30, 2022 as compared to the same period in 2021, driven by lower volumes of olefins and polypropylene sales, partially offset by higher polyethylene and pipe sales. Inventory holding losses were approximately €75 million in the three month period ended September 30, 2022, as compared to inventory holding gains of approximately €61 million in the same period in 2021. The decrease in profitability was partly offset by the appreciation of the US dollar by approximately 14% against the euro in the three month period ended September 30, 2022 as compared to the same period in 2021, which has increased the reported euro results.
O&P Europe
Revenue. Revenue in the O&P Europe segment increased by €276.0 million, or 13.3%, to €2,346.4 million in the three month period ended September 30, 2021 as compared to €2,070.4 million for the same period in 2021. The increase in revenues was driven primarily by higher selling prices in the three month period ended September 30, 2022 as compared to the same period in 2021. The increase in selling prices was driven by the general price environment, which was higher in the three month period ended September 30, 2022 as compared to the same period in 2021, as crude oil prices rose to an average of $101/bbl for the three month period ended September 30, 2022 as compared to an average of $73/bbl for the three month period ended September 30, 2021. Naphtha prices increased by approximately 19%, which in turn led to a rise in prices across most product lines. In the olefins business, butadiene and benzene prices experienced the most significant price increases compared to the same period in 2021. The ethylene market experienced prices 22% higher in the three month period ended September 30, 2022 as compared to the same period in 2021. The polymers business also experienced price increases across all product lines in the three month period ended September 30, 2022 as compared to the same period in 2021. Total sales volumes were approximately 4% higher in the three month period ended September 30, 2022 as compared to the same period in 2021. The Trading and Shipping business experienced higher sales volumes in the third quarter of 2022 as compared to the same period in 2021, primarily due to higher ethane, butane and propane sales. Olefin sales volumes were lower in the three month period ended September 30, 2022 as compared to the same period in 2021, due to weakening markets with lower demand caused by inflation as a result of the current energy prices. The ethylene market remained long throughout the quarter, despite crackers being commercially trimmed throughout Europe. Demand was also weaker in the polymers markets during the three month period ended September 30, 2022. Polymer sales volumes were lower in the three month period ended September 30, 2022 as compared to the same period in 2021 due to reduced demand and increased level of imports as compared to the same period in 2021.
EBITDA before exceptionals. EBITDA before exceptionals in the O&P Europe segment decreased by €128.5 million or 46.3% to €149.2 million in the three month period ended September 30, 2022, as compared to €277.7 million in the same period in 2021. The results for the three month period ended September 30, 2022 decreased compared to the same period in 2021, primarily due to increased inventory holding losses and higher fixed costs, partly offset by higher margins. The higher margins were mainly derived from the olefins business, as ethylene margins remained relatively high as a result of continued lower feedstock prices and strong co-product sales. This was partly offset by the polymers business which experienced lower margins in the three month period ended September 30, 2022 as compared to the same period in 2021 as margins came under pressure from higher energy and supply chain costs. Fixed costs rose in the three month period ended September 30, 2022 as compared to the same period in 2021, mainly as a result of the start of the ATEX pipeline in the Trading and Shipping business, along with the entry into service of two new VLEC ships and their associated costs. Inventory holding losses were approximately €50 million in the three month period ended September 30, 2022 as compared to gains of approximately €54 million in the three month period ended September 30, 2021. The higher inventory holding losses in the third quarter of 2022 were driven by a fall in feedstock prices throughout the quarter.
Chemical Intermediates
Revenue. Revenue in the Chemical Intermediates segment increased by €244.4 million, or 10.8%, to €2,508.6 million in the three month period ended September 30, 2022 as compared to €2,264.2 million for the same period in 2021. The Oxide business revenues increased in the three month period ended September 30, 2022 as compared to the same period in 2021 driven by higher prices. The increase in pricing was driven by rising raw material and natural gas prices which were mainly passed on to customers, with ethylene oxide products seeing the largest price increases. Despite geo-political uncertainties and high gas prices in Europe, volumes remained consistent in the three month period ended September 30, 2022 as compared to the same period in 2021. The Oligomers business revenues were higher in the three month period ended September 30, 2022 as compared to the same period in 2021, as a result of higher prices. Regional prices in the quarter moved in line with the underlying raw material prices of ethylene and naphtha. Regional feedstock prices were higher in the three month period ended September 30, 2022 as compared to the same period in 2021 with higher European and US ethylene prices impacting PAO and LAO prices, whilst increased naphtha prices impacted PIB and SO pricing. Sales volumes were higher in the three month period ended September 30, 2022 as compared to the same period in 2021 as higher LAO sales volumes were only partially offset by lower PAO, PIB and SO sales volumes. The increase in LAO sales volumes was primarily seen in the North American and Asian markets and included good co-monomer demand with the business benefitting from additional production volumes from the new LAO facility in Chocolate Bayou, USA. SO sales were lower primarily due to softer demand in the European markets and PAO sales volumes decreased due to a number of issues at several customers. Nitriles revenues decreased in the three month period ended September 30, 2022 as compared to the same period in 2021, driven by lower volumes, partly offset by higher prices. The average acrylonitrile sales price increased by approximately 3% in the three month period ended September 30, 2022 as compared to the same period in 2021, driven by higher ammonia pricing as a result of higher natural gas prices. Acrylonitrile sales volumes decreased in the three month period ended September 30, 2022 as compared to the same period in 2021 due to lower demand as a result of high European and North American cost positions. The Phenol business revenues increased in the three month period ended September 30, 2022 as compared to the same period in 2021, driven primarily by higher prices, partly offset by lower sales volumes. Selling prices moved in line with the underlying raw material prices with acetone and phenol prices moving significantly higher due to increases in propylene and benzene feedstock prices. Sales volumes were lower in the three month period ended September 30, 2022 as compared to the same period in 2021 as a result of lower phenol and acetone sales, partly offset by higher cumene sales. Lower market demand for phenol and acetone led to lower volumes, predominately in the European market.
EBITDA before exceptionals. EBITDA before exceptionals in the Chemical Intermediates segment decreased by €68.0 million, or 30.5%, to €154.6 million in the three month period ended September 30, 2022 as compared to €222.6 million for the same period in 2021. The Oxide business results in the three month period ended September 30, 2022 were slightly lower compared to the same period in 2021, due to a decrease in product margins. The decrease in margins in the three month period ended September 30, 2022 as compared to the same period in 2021 was driven by high energy costs which put some pressure on margins. The Oligomers business profitability increased in the three month period ended September 30, 2022 as compared with the same period in 2021, primarily due to higher margins. Margins were higher in the three month period ended September 30, 2022 compared with the same period in 2021 due to realisations being increased above higher raw material costs. LAO margins were higher in all markets. PAO saw stronger margins in Europe and Asia, partly offset by lower margins in the North American markets. SO margins were reduced by lower margins in the North American region, partly offset by higher margins in the European and Asian markets. The Nitriles business experienced a decrease in profitability in the three month period ended September 30, 2022 as compared to the same period in 2021, driven by lower volumes and lower margins. Acrylonitrile margins were lower as a result of weakened demand and cheaper Asian competition following improved industry supply. The Phenol business profitability decreased in the three month period ended September 30, 2022 as compared to the same period in 2021, largely due to a decrease in volumes, partly offset by higher margins. Margins were higher in the three month period ended September 30, 2022 as compared to the same period in 2021, largely due to the impact of higher phenol margins in the European market as a result of higher benzene price levels, partly offset by higher energy costs. Volumes were lower due to reduced market demand for acetone and phenol, particularly in the European market.
PETER WILLIAMS
Head of Investor Relations
INEOS, 38 Hans Crescent. LONDON SW1X 0LZ
Office: +44 20 3793 8084
Mobile: +44 7810 852 442
