TELUS Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2023

There are 19 speakers on the call.

Operator

Hello, and welcome to the Celanese Q3 2023 Earnings Call and Webcast. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Brandon Iosch, Investor Relations. Please go ahead.

Speaker 1

Thanks, Kevin. Welcome to the Celanese Corporation's Q3 2023 earnings conference call. My name is Brandon Iyoche, Vice President, Investor Relations. And with me today on the call are Laurie Reierkirk, Chairman of the Board and Chief Executive Officer and Scott Richardson, Chief Financial Officer. Celanese distributed its 3rd quarter earnings release via Business Wire and posted prepared comments on our Investor Relations website yesterday afternoon.

Speaker 1

As a reminder, we'll discuss non GAAP financial measures today. You can find definitions of these measures as well as reconciliations to the comparable GAAP measures on our Web Today's presentation will also include forward looking statements. Please review the cautionary language regarding forward looking statements, which can be found at the end of both the Form 8 ks reports containing all of these materials have also been submitted to the SEC. Before opening it up for your questions, let me turn it over to Lori to provide a few introductory comments.

Speaker 2

Thanks, Brandon. So we've done and announced a lot recently. So I just wanted to take a minute or 2 to emphasize again exactly what we are all working so hard to achieve at Celanese. I can confidently say that at no point in our history has there been a greater opportunity for Celanese to deliver significant earnings growth as in the next few years. In the Acetyl Chain, we continue to enhance our earnings power and optionality with projects like the acetic acid expansion at Clear Lake and the methanol expansion also at Clear Lake, which will dramatically strengthen our sustainable product offerings.

Speaker 2

Of course, in Engineering Materials, we continue to integrate and energize the M and M acquisition, which transforms EM into the preeminent global specialty materials provider. This important and valuable work has been made more challenging in the demand backdrop that remains exceptionally weak and volatile. Our visibility into future macro conditions is limited. Regardless, our teams have worked tremendously hard to deliver 3 consecutive quarters of earnings growth since closing the M and M acquisition and to position us to meaningfully exceed our full year objective to reduce net debt by $1,000,000,000 in 2023. The work has not been easy, and I sincerely thank each of our employees for their individual contributions and dedication.

Speaker 2

Quite frankly, while the work is moving forward at pace, the macro environment has temporarily masked some of the underlying financial benefit of our actions to strengthen our business. But we remain resolute in continuing to take decisive and controllable actions. Our most recent actions, including the announced changes to our leadership team and manufacturing footprint, are evidence of our ongoing commitment to drive Earnings growth and execute against our deleveraging plan. The purpose behind the changes I've made in our executive leadership team is to enhance the alignment of our individual strength and experience to accelerate and deliver on the many value enhancing opportunities before us. Scott, Chuck and Ashley are exceptionally well prepared for their new roles, and I am confident these changes will immediately enhance the value we drive as a collective leadership team.

Speaker 2

I speak for our leadership team and broader Celanese in saying we are fully engaged and committed to delivering on the opportunities before us. With that, Kevin, let me turn it back over to you to open it up for questions.

Operator

Certainly. We will now be conducting a question and answer session. Our first question is coming from Mike Leithead from Barclays. Your line is now live.

Speaker 3

Great. Thanks. Good morning and congrats This is Scott, Chuck and Ashley on the new roles. Laurie, I wanted to start on Engineered Materials pricing. I think in the prepared remarks, You made a comment that pressure has widened throughout the year, but nothing indicates it's structural.

Speaker 3

So can you maybe just Talk a bit more about your confidence here or maybe what you've seen in previous down cycles, versus now. Just what gives you the confidence in making that comment?

Speaker 2

Yes. If I think about pricing, and again, I'll split it into 2. What we've really seen is pretty good Price stability and differentiated products. What we've seen in them is more of the volume impact there associated with Consumer durable, consumer electronics, there we've just seen a pretty significant volume decline as we've seen consumer demand Come off this year as people have shifted their spending to more services and experiences. Where we've really seen the price pressure It's for more standard grade materials, where we're seeing quite a bit of length in the industry in terms of supply, Softer demand and everyone having to take price action to come down.

Speaker 2

What I would say is, one of the reasons we're taking the steps as we've announced around is really to better position our supply with the current demand scenario by shutting down some of our Higher cost operating capacity, filling those customer needs with lower cost capacity we already have or even purchases if that's lower. And then in the future, as we see demand start to come back to what I would consider a more normalized level, we should be able to provide that demand from other assets That we already have in our network and through no and low cost debottlenecks. So again, I think we're in a kind of unique position structurally, with very little out of China, a very soft, soft environment in Europe and feel confident in time it will come up. I mean, auto is a great example. Auto has been very Solid this year, we expect that to continue.

Speaker 2

Medical has been solid. So I think we really are just seeing a reflection of consumer preference and consumer spending, which We believe it's temporary and off the highs that we saw in 2021.

Speaker 3

Great. Thank you. And then a question for Scott maybe on free cash flow. I think in Laurie's 24 outlook, she laid out in the prepared remarks maybe $300,000,000 or $400,000,000 of earnings improvement next year. You guys are probably getting a similar type amount of working capital benefit this year.

Speaker 3

So as we think about free cash generation next year is relatively Flat year on year a good starting point today or is there further working capital or other cash benefits you think you can get next year?

Speaker 4

Yes. Thanks, Mike. We're going to work to ensure that as we see earnings growth that we put that as much To the bottom line of free cash flow is possible. We've called out CapEx being $100,000,000 lighter next year as well. I think the variable will be working capital and it depends upon kind of what happens with raw material pricing as well as depending on kind of where sales are and what happens with the accounts receivable line.

Speaker 4

But we're going to do everything we can to continue to bring inventory down next Here, there could be an opportunity for further reduction depending on what happens with demand as well as in the raw material landscape.

Speaker 5

Great. Thank you.

Operator

Thank you. Next question is coming from Jeff Zekauskas from JPMorgan. Your line is now live.

Speaker 6

Thanks very much. I think Eastman's filter toe profits are up, I don't know, dollars 225,000,000 through the 9 months. There was no mention of Filter Tow in your remarks. How is that business doing and how is it affecting the Acetyl Chain earnings?

Speaker 2

Jeff, as you know, we are running that as an end to end chain now. We're treating TOE as we do other downstream derivatives. What I would say is we're seeing similar impacts in tow. Now we are seeing in the second half a reset of contract pricing, which is bringing those margins down slightly from the first half, but that was anticipated with the way the contracts are set up. But I would say, we're still on track To exceed the $245,000,000 that we set out earlier this year as our target for Till.

Speaker 6

You're closing your German nylon facility. Is that About 15% of your nameplate capacity in nylon and what utilization rate are you running at

Speaker 2

generally. Yes. So, in terms of actually is one of the 4 plants that we have for nylon and Right at 25% of our total capacity. I don't have the overall total utilization numbers in front of us, but I would characterize this, Jess, as much like we've done with Palm and other assets where we've really worked on concentrating our footprint, Taking out either underutilized or less profitable assets in order to shift volume into lower cost, more profitable assets, Getting more flexibility in our networks in terms of purchasing either of polymer For raw materials, depending on where we produce, that's what we're trying to build here with the Unterope shutdown is We knew going into the deal that we believe that DuPont had excess capacity. Now that we've had some time to look at it, we believe shutting down the Intrep is the best way To really adjust our cost basis on nylon while still maintaining compounding in Europe, which is necessary for our customers.

Speaker 2

But I would say this is very consistent with what you've seen us done over the last 10 or so years in Celanese where we've probably shut down Over 15 facilities in the last 10 years as we've implemented these models.

Speaker 7

Great. Thank you so much.

Operator

Thank you. Next question today is coming from Mike Sison from Wells Fargo. Your line is now live.

Speaker 2

Hey, good morning.

Speaker 8

I've been told I need to do more math these days. So if I add up sort of your bridges that you gave for dollars or better. Is that the right math? And then can you help us on what or how to frame up volume and inflation or deflation upside for 2024?

Speaker 2

Yes, Mike, we laid out the various bucket, so I think you can do the math. I mean, just to reiterate, we do expect to get more than $150,000,000 in additional M and M synergy. With some of the acceleration of the manufacturing footprint optimization, hopefully, we can exceed that amount as well since we didn't have all of that baked in. We should get another $100,000,000 once we get clear like acetic acid started up. Debt service goes down by about $50,000,000 We'll have less inventory reduction next year, so less margin impact from that.

Speaker 2

And then I think as you're saying, the biggest issue there is really going to be what is the benefit we see for flushing through higher cost inventory. And this could be a very big number. It will depend on what happens with raws. As you know, we're in quite a volatile raw material environment right now. And then what happens with demand going forward.

Speaker 2

If demand stays low, then I think these are the things we're focused on These are what we can control. If demand goes up, obviously, we'll get more margin, but we will also probably see some increase again in working capital. So I would just say there's still a lot of volatility and uncertainty around next year, and that's why we're just really focusing on Those big buckets that we outlined that are in our control.

Speaker 8

Got it. And then when you think about 2024, what do you think could happen to China auto and some of your end markets? Any initial thoughts when you talk to customers of what the demand environment could be next year?

Speaker 2

Yes. Again, if you could tell me what December is going to look like, maybe I'd be better at thinking about 2024. I mean, things are very uncertain and volatile at this point, I would say on auto, consistent with the forecast you're seeing on auto build, we expect to see The moderate growth in auto really across all sectors, a couple percent, and our growth should Track that. We expect medical continue to be strong. I would say, based on conversations with customers, I would expect some moderate growth across next year as we start to see some demand coming back.

Speaker 2

But I would also say the timing of when that STARS and the pace at which that happens is very uncertain. So certainly a lot less Conviction at this point on next year than we might usually have at this point given the volatility we're seeing.

Speaker 8

Got it. And congrats everybody. Thank you.

Speaker 9

Thanks. Thanks, Mike.

Operator

Thank you. Next question today is coming from Josh Spector from UBS. Your line is now live.

Speaker 10

Yes. Hi. Thanks for taking my question. So I wanted to follow-up on the price cost or like the inventory, Lower cost inventory that can flow through. I guess, Laurie, you sound a bit more uncertain on that, but it still could be large.

Speaker 10

I guess if you look at where pricing Or do you need pricing to move up from here? Just wondering around the kind of moving parts there. Thanks.

Speaker 2

No. Look, I think at the pricing we're seeing now, we are starting to see some pull through of that lower cost inventory, and we see that Has a moderate impact on our quarter on quarter growth. So I think even at these pricing, we would expect to continue to see some portion of that pull through. Obviously, if it's our pricing increase, that would help more, but we also have to consider what the price of raws going in and we are seeing some upward pressure on raw materials this But look, I would say, in all cases, we expect some impact from that flushing through of higher cost inventory. It's just the magnitude will depend on raws as well as future pricing.

Speaker 10

Okay. Yes, I guess just maybe to pin it that when you talk about it being the biggest bridge item, If pricing stays where it is, is that a true statement or does that come down?

Speaker 2

I would say if pricing and raw stay where they are, that would still be a true statement.

Operator

Thank you. Next question today is coming from Vincent Andrews from Morgan Stanley. Your line is now live.

Speaker 4

Thank you and good morning

Speaker 11

to all and congratulations Those with no with new role, excuse me.

Speaker 3

I just wanted to ask a couple of things. 1, in ASATILs In the Q3, there clearly was a benefit despite a bunch of headwinds from outages in Asia. So I'm wondering if you have any way of sort of sizing that in the Q3 and what you anticipate in the Q4. It seems like there's some comments that you're still going to have Some higher pricing flowing through in the Q4, and I'm just wondering if that's just sort of a delay of inventory flowing through or what? And then secondly, on the tax rate, I understand why it's lower this year and that it was originally contemplated in the lower guidance.

Speaker 3

But if If the demand environment is going to stay not all that different from where it is today, at least through the first half of next year, does that mean you have a lower than normal tax rate next year as well? Thanks.

Speaker 2

Yes, Vincent. Let me see if I can answer that. What I would say is we did see a positive influence from the higher Asia pricing that we saw as a result of supply outages in the Q3, most of those occurred in the last impacts of the Contract pricing reduction that we had called out and the turnaround impact that we DAW? What I would say is going into the Q4 now, we're really we've seen that price drop back to closer to the cost curve, maybe slightly above it. So we've kind of lost that benefit in China.

Speaker 2

We will see a little bit of benefit, although significantly less of that in the Western Hemisphere in the 4th quarter Because typically Western Hemisphere pricing lags by about a quarter. So we'll see some benefit, but not to the same extent that we saw the benefit in the 3rd quarter.

Speaker 4

And then on the tax rate, Vincent, a lot's just going to depend upon the geographic mix of earnings. If things stay exactly as they are this year, Then certainly we could be at lower levels. If we see things normalize back to kind of what I would say is the normal mix of geographic Demand, then we'd be back more next year in that kind of 12% range.

Speaker 3

Thanks very much.

Operator

Thank you. Next question today is coming from David Begleiter from Deutsche Bank. Your line is now live.

Speaker 9

Thank you and good morning and first congratulations to Scott, Chuck and Ashley. Laurie and Scott, just on EM Pricing is up about 38% in 2021, 2022, should be down this year maybe around 8%. If we could go back to pre-twenty one cost levels, do we retain some portion of this price increase? And if so, why is that the case?

Speaker 2

That seems like a very long time ago, Dave. What I would say is the good news is we are Seeing volumes come back. And so in some areas, like medical, like auto, we're kind of back to 2019 levels. I think so pricing similar or margin is probably similar. Again, consumer demand, durable goods, electronic, very, very soft.

Speaker 2

Pricing for differentiated grades, okay. I think that's something that we can keep. I think with the Kind of the current low demand and therefore the long supply for some of those standard grades, we're going to see need See some more demand before we can get the pricing back up to those kind of levels.

Speaker 4

Yes. David, I would just add, I think given some of the structural Changes that we're making, we do think we should be able to hold that price as we get back to kind of normalized raws. And I think Yes. One of the things we've talked about is now with the Engineered Materials business and the Appetitels business being about the same size. As we see in more normalized demand environments, the raw material landscape moves up and down, We should see some counter movement in margins in EM versus acetyl.

Speaker 4

So overall, it should kind of fundamentally lower earnings volatility for The enterprise as a whole, once we get back into kind of normalized conditions.

Speaker 9

Very good. And just on Clear Lake, the asset expansion for next year, how should you think about the ramp up to the $100,000,000 of normalized annualized earnings, should be half of that next year in that range or something more or less?

Speaker 2

Yes. Look, we the Clear Lake asset expansion will start up within the Q1. And so I would expect that Ramp up to start kind of immediately after the start up.

Speaker 8

Thank you.

Operator

Thank you. Next question today is coming from Kevin McCarthy from Vertical Research Partners. Your line is now live.

Speaker 12

Good morning. Laurie, I think in your prepared remarks, it mentioned that you ceased production at certain engineered facilities in Brazil, Argentina and Germany beyond the nylon shutdown that you discussed previously. Can you just put that into context for us? I wasn't entirely clear on whether these are temporary idlings or more permanent structural changes, maybe you could talk through kind of where you are in that asset rationalization process today?

Speaker 2

Yes. I would say for the majority of the ones that we've named, so the ones in Argentina, Brazil And Europe, these are more permanent shutdowns. Now we are taking temporary actions in things like BAM in Frankfurt and others, we're really we're using that as flex capacity to meet the current demands in the network, which is lower than normal, but where we We will need that capacity when we come up again. But the ones we've announced recently, I would consider those structural changes to really Redefine where we are on the cost curve by taking out our highest cost producers.

Speaker 12

Okay, that's helpful. And then I wanted to follow-up on synergies. Can you tell us what the synergy related benefit was in 3Q and what you're expecting in 4Q? And then when we look at the Targeted tailwind of $150,000,000 next year, would you describe that as ratable or ramping throughout the course of 'twenty four?

Speaker 2

Yes. So Q3 was actually a little bit lower than we anticipated because some of our I would say at the lower end of the kind of 10 to 15 Sequential uplift we had expected on synergies because with our volumes a little bit lower, some of our synergies are volume related. Again, we expect though a small synergy sequential synergy increase in the 4th quarter. But the real synergies will start to come in After we do the completion of our cutover to SAP next year in the Q1 and after we take some of the shutdowns that we announced, For example, the shutdowns and new growth that will happen in January February. So the synergies will definitely ramp across 2024, but I would say starting more in the second quarter into the second quarter and through the end of the year.

Speaker 4

Yes. Kevin, in the Q3, synergies were around $30,000,000 in total, which was incrementally up about $10,000,000 $11,000,000 off of Q2.

Speaker 12

Got it. Thank you so much.

Operator

Thank you. Next question today is coming from Hassan Ahmed from Alembic Global. Your line is now live.

Speaker 13

Good morning, Laurie. Laurie, in your prepared remarks, you guys talked about maximizing the make versus buy flexibility. I mean, to me, the legacy sort of Celanese portfolio, you had pretty much optimized that side of things. So, is it Fair to assume that a lot of this sort of optimization work will be on the EM side of it. So that's part one of the question.

Speaker 13

And the second part is that it seems that right now there is a fair bit of idling or permanent shuttering going on. Could this also mean in the future some greenfield build outs happening as well?

Speaker 2

Yes. Thanks for the question, Sung. So what I would say is, we're really focused on building in flexibility across all of our products. And so we're not just looking at make versus buy flexibility, but we're also looking at sourcing flexibility for raw materials, regional flexibility, Flexibility in contract commitment, much as we did with tow, more multi sourcing versus single sourcing. Specifically for PA66, yes, we want the flexibility to make versus buy, especially in this low demand period where we can often buy cheaper than we can make in Europe in particular because of higher energy costs and higher fixed costs, higher raws there.

Speaker 2

But I would say this has been Consistent theme in Celanese and one we're just now applying to the heritage M and M portfolio. So I think but I would say we've also applied this and asked TILs with some of our contracting around raw materials and others. I mean, it is the way we continue to Deliver value uplift year on year even without a large amount of volume growth. So I think we expect that to continue. And I think as a result of that, you will continue to see some footprint optimization continuing over the next few years.

Speaker 2

And I would say in terms of greenfield, I wouldn't anticipate anytime in the next many years a lot of greenfield Bill, I think what you'll continue to see us take advantage of the footprint we have and the opportunity to do no and low cost debottlenecks Around the world, much like the Clear Lake expansion, where we're basically doubling the size of our unit for $400,000,000 So we think we have a lot of opportunity already on the ground to significantly expand our footprint without major investment.

Speaker 13

Very fair. And just switching gears a little bit. Look, I completely sort of understand that visibility is Extremely low right now. But just thinking beyond sort of the near term, I mean with some sort of historical context as well. I mean this de Talk has been unprecedented both in terms of absolute volume declines as well as the ongoing duration of it.

Speaker 13

So just As you sort of sit there and look at the legacy Celanese portfolio as well as the history of living through these destocks With the acquired businesses, I mean, what could a potential eventual restock look like?

Speaker 2

Yes. Look, at some point, I think there will be some restocking. When that I would say highly uncertain. Right now, we're just happy to see people starting to return to normal order patterns in some Polymers in particular, I think at Stills we're seeing more. I think I would think about restocking as being a few percent.

Speaker 2

But again, I think that could be spread across a pretty significant period as I think people will be nervous To rapidly restock after what we've been through the last year.

Speaker 13

Very helpful, Laurie. Thank you so much.

Operator

Thank you. Next question is coming from Aleksey Yefremov from KeyBanc Capital Markets. Your line is now live.

Speaker 14

Thanks and good morning everyone. I wanted to Turn to the M and M synergies in your 2024 bridge. The $150,000,000 improvement, does it depend on Volume improvement or demand improvement or is it independent of it?

Speaker 2

So the $150,000,000 what I would say is, look, initially, I would say there was some volume improvement in that because some of the synergies are volume related. I think that's why you see us continuing to accelerate some of our manufacturing footprint work To better align current demand with our supply, and we will get synergies from there. So I would say, We are fully committed to delivering well over the $150,000,000 this year. The blend may be slightly different than we had set out, say, a year at the time of the deal, but we think we have sufficient activities underway to deliver that.

Speaker 14

Thanks, Laurie. And then staying with EM, you just announced shutdown of some assets. Have you seen the industry and your peers either idle or announced permanent shutdowns in any significant polymer chains?

Speaker 2

Yes. I think if we look at the industry, probably specifically, PA66 is where we've seen the most activity. We have seen some additional capacity being built out in Asia, Particularly in China for nylon polymer, which has increased market length in a period of lower demand. And therefore, we've had some increased competition, depressed pricing. You've seen all those impacts.

Speaker 2

I think what you see though is much like our shutdown, we start to see other 3 participants take action. So we've seen a nylon intermediate producer announce the shutdown of 1 of their largest assets here in the last month, Which represents about 10% of the intermediate production. So I think you see the intermediate using this as an opportunity to take out some of the legacy Higher cost assets in different parts of the world that have become quite high cost, and work towards rebalancing. Again, when demand returns, I I think we'll be in a much better position, but I do think you've seen a number of commercial actions going on across the industry to address it.

Speaker 14

Thanks, Laurie.

Operator

Thank you. Next question is coming from Frank Mitsch from Fermium Research. Your line is now live.

Speaker 15

Good morning and let me also offer my congrats. Maybe if I could ask the destock question a little differently. You mentioned in the release, the prepared remarks that the you're seeing it end here in the Q4 in the Americas And Asia though will continue in Europe. What gives you the confidence that we're going to be finally done in the Americas and Asia and such that 2024, we're going to see underlying demand growth in those regions?

Speaker 2

Yes. I think our confidence really comes from, obviously, Conversations with our distributors and our direct customers as well, but also just the buying patterns we're seeing in the U. S. I mean, we don't have a lot of visibility into future purchasing because what we're finding is, when now, especially in the Americas, when people want to buy, They want it now, which suggests to us that they are fully destocked because they don't have inventory in their chain that they can pull on. And I think in the U.

Speaker 2

S. At least, we're starting to see some recovery, especially in those areas that have been weak, like consumer durables and electronics, To maybe more normal demand patterns. So I think it's the customer buying patterns that I would trigger off of to say We feel pretty confident that we're at the end of destocking in the U. S. I would say less so in China.

Speaker 2

China, I would describe as Consumer demand in China for China, has come back to, I would say, near normal level. But obviously, China Export volumes are still very weak, which is a significant portion of the China demand. And then in Europe, I would just say, outside of auto, we really just Don't see any improvement in Europe as I think consumer confidence remains very low in light of the war in the Ukraine and higher energy prices and inflation. We're just not seeing that, that behavior starts to pick up in Europe yet.

Speaker 15

Got you. That's very helpful. And then The early look at 2024 suggests that there's a bunch of one time cost actions that you took in 'twenty three that will not be repeated, so that should set up an easier comp. I'm just curious if you could kind of quantify or provide an order of magnitude of that and perhaps If plant turnarounds also play a role in some expectations for 2024 to be better than 2023, any color there would be very helpful.

Speaker 2

Yes. I think we had called out a couple of quarters ago $60,000,000 to $80,000,000 of one time actions that we were taking this year To really offset some of the softness we were seeing still in the second quarter. And we're achieving those across 3rd quarter and Q4. What I would say is those are really related to actions we've taken to idle lines, to cut costs out of facilities that aren't running full. If demand does not pick up, obviously, we will continue to realize those benefits next year as well.

Speaker 2

If demand picks up, we will be more than happy to spend that money again in order to capture the margin that will come from the increased demand. So I don't see that as a big factor either way in our bridge from 2023 to 2024 because we'll either get it in earnings or we'll continue to see it as cost savings.

Speaker 4

Yes, Frank, and I would say our focus is really on now actioning other things that are going to be more permanent in nature, given some of the things we called out In the prepared comments, so we can make kind of more sustainable cost reductions and really lower the overall fixed cost base of the company. And that then gives us an ability to withstand lower demand environment in the future and get much greater leverage on the fixed costs that we

Speaker 15

have. Great, great. Thanks so much.

Operator

Thank you. Next question is coming from Arun Viswanathan from RBC Capital Markets. Your line is now live. Great.

Speaker 8

Thanks for

Speaker 5

taking my questions. Congrats everyone on the new roles as well. So I'm just looking at the bridge for 2024 and again, But if we think about Q3 EBITDA around 625 and Q4 Looking a little bit similar from your segment commentary makeup. You're exiting the year at maybe like $2,500,000,000 run rate. You have maybe $100,000,000 coming from the AC uplift and then $150,000,000 from incremental synergies and then maybe a couple of other items including the lack of an inventory hit.

Speaker 5

So that puts us at maybe $2,800,000,000 or between $2,800,000,000 $3,000,000,000 Are we thinking about that correctly as far as EBITDA goes and is volume the main driver that would push you above that range?

Speaker 2

Yes. Again, we've called out what those factors are. I would say, the big unknown at this point remains demand and pricing, particularly raw material pricing, which as we've seen this year can cause quite a lot of volatility. Hopefully, we'll be able to better guidance next quarter.

Speaker 5

Okay. I appreciate that. And maybe I can just ask one on the balance sheet. So obviously, a lot of progress there as well, restructuring the debt profile and re domiciling. Do you expect any other further opportunities there?

Speaker 5

And I guess could you just reiterate what your target leverage level is maybe as you exit 24?

Speaker 4

Yes, Arun, I mean our focus right now is continued to accelerate cash generation and aggressively repay debt. We have obviously moved the maturities out since we last talked a quarter ago. But certainly now our Focus is on bringing down overall net debt. We're going to be focused on repatriating cash and using that cash to Reduce debt and then with

Operator

the cash

Speaker 4

generation, we should next year between repatriation, cash gen, we should be able to reduce debt by almost $2,000,000,000 net debt reduction, certainly well north of $1,000,000,000 So I think From that standpoint, that's where the focus is today. We don't have a need really to adjust maturities or refinance. Certainly, if markets change, we'll be opportunistic around that. But we're going to continue to focus on every single quarter down and bringing our leverage levels down with a target to get to 3x as quickly as possible. Great.

Speaker 4

Thanks.

Operator

Thank you. Next question is coming from Laurence Alexander from Jefferies. Your line is now live.

Speaker 6

Good morning. Just when you speak about kind of the improving the productivity in the asset yields through Shrinking capacity and I guess also it's parts of VM. If you think about the next 3, 4 years, if there is no significant surge in demand, How much of your capacity could be optimized or rationalized through Shifting through process improvements at your larger facilities and debottlenecking and upgrading the network. In other words, how far are we in this upgrading process? And at what point would you need to start considering just sort of new greenfield projects?

Speaker 2

Yes. Let me take them as 2 separate. I would say on Acetyls, we have done a lot of work over many years now located regionally. And our activities, including the big expansion include Lake, but we've also had many, many small expansions in many of our downstream derivatives to basically keep us at the same or greater volumes and certainly much higher margins as a result. I would say we've also done that work in the Heritage EM portfolio over the last, call it, 10 years as we adopted the new models and the project pipeline model now taking the M and M portfolio and applying that same mindset to that.

Speaker 2

So I don't really have a number yet what that means in terms of Capacity that we would take out. Again, I don't really see any time in the near to medium future Any need for Greenfield because we have sufficient capacity even with some of the strategic shutdowns in our existing network and we have a team that's Absolutely good at finding low and no cost debottlenecks to our existing assets to add very efficiently and inexpensively additional capacity.

Operator

Thank you. Thank you. Our next question today is coming from Salvator Tiano from Bank of America. Your line is now live.

Speaker 16

Yes. Thank you. Firstly, I want to ask a little bit, as you said, The shutdowns in Engineered Materials are a big part of the $150,000,000 synergies. I'm just wondering, were these actions In your original plans when you acquired the DuPont assets or were they more, I guess, in response to recent market conditions? And I guess, if the latter, why won't the

Speaker 2

Yes, great question. Look, we knew at the Time of the acquisition or we believed at the time of the acquisition that DuPont had more than sufficient capacity to meet normal demand Conditions and requirements and we assume that some would be more efficient or less efficient than others. We just didn't know which assets those would be. So we've needed this time we've had since the acquisition to really look at how all of these plants are operating, what their cost Structures look like and where the most opportunities are to really fine tune our footprint, to build in the most flexibility, the most Synergy, the lowest cost footprint, like I said, much as we've done with Celanese over the last 10 years. So the actions you're seeing us taking now is really Pressing that overcapacity now that we've been able to identify where that is.

Speaker 2

Some of the temporary shutdowns and line shut Down and things were taken are more in response to the near term demand environment, leaving us flexibility for the future. But the things like Zentrope and Argentina and those that we've announced, I'd say are more permanent in

Speaker 16

nature. Okay, perfect. And I Regarding what's the demand distraction, destocking, etcetera. But I think that what makes, I guess, your outlook will be different than most of the comments that have been brought So far is that you made the comment, if I understood correctly, you expect a more muted destocking in Q4 than normal, whereas I would say the vast majority of your competitors expect the same, if not a more intense destocking quarter. Why do we differ versus, I guess, most of the other chemical companies here?

Speaker 2

Yes. I mean, I can't really comment on what anybody else believes is going to happen. As I called out earlier, we base our views on What we're hearing from our customers, what we're hearing from our distributors, the customer order patterns that we're seeing and our experience with those order patterns. Certainly, it helps that half of our volume in Engineered Material is going into automotive, and we expect automotive to be quite Solid across Q3 to Q4. So we're really just dealing with the other portions of our demand when we're looking at what is the impact for the Q4.

Speaker 2

So again, I can't really say why we'd be different, but certainly our share of auto may be one of those impacts.

Speaker 16

Perfect. Thank you very much.

Operator

Thank you. Next question today is coming from Andrew Keches from Barclays, your line is now live.

Speaker 17

Yes, thanks. Just to clarify the comment earlier on the debt repayment. So it sounds like you said cash flow Will be used to handle the maturities now that you've re profiled. But that excess cash you're running, can you just remind us where your operating needs and can you get all the way down there in 2024?

Speaker 4

Yes. Thanks, Andrew. Cash balance is A little north of $1,300,000,000 right now and we'll be repatriating that cash now in the coming months. And then once we get integrated on

Operator

one system, which we expect to

Speaker 4

happen in the early part of next year, then we'll Which we expect to happen in the early part of next year, then we'll be able to start moving that cash balance Down to where we think we can minimum needs would be right around $500,000,000 So we definitely are confident that we'll be able to get to that 500,000,000 The level during 2024.

Speaker 17

Okay, great. And then I just didn't catch the answer on the leverage metric. I know you said 3 times in the past. Are you putting a horizon or a timeline on that at this point?

Speaker 4

No, I mean, look, we had originally targeted the end of 2024 and we're going to do everything we can to get close to that. And last Cost reduction plans, which is another reason why we continue to take aggressive action on getting controllable earnings improvement from cost reduction. And then where the macro and the demand plans that we have. The other things that teams are doing largely in Engineered is really working the revenue synergy side of things. And the revenue synergy side of bringing M and M into our project pipeline model, You will start to yield opportunities and then close wins as we get further into 2024.

Speaker 4

So The pace and speed at which we're able to execute on those plans will certainly help us accelerate that deleveraging plan.

Speaker 8

That's great. Thank you.

Operator

Thank you. Next question is coming from Patrick Cunningham from Citi. Your line is now live. Hi, good morning.

Speaker 18

Thanks for taking my question. How are you thinking about potential portfolio actions, let's say, if demand does not get better from here? Is there anything that maybe stands out as separable or where you can structure a similar deal as the Food Ingredients JV?

Speaker 2

Yes. Yes. I think as we've called out in past calls, we are going to continue to be opportunistic and disciplined in our approach to Divestment. We continue to look at a number of assets from both the heritage Selling these as well as the M and M portfolio as possible divestiture target. But we really need to understand what The future potential of those assets are and what the value to us is and then identify other parties that will value them more than we value them.

Speaker 2

I would say we continue to look for opportunities, but we will be selective about what we do, so it doesn't impact long term growth As well as making sure we get fair value for it.

Speaker 18

Got it. And then just on the EcoCC brand with products Containing recycled CO2, what sort of relative premiums do you expect to achieve? And would you be fulfilling incremental demand there? Or is that more of just No optionality with the rest of the portfolio.

Speaker 2

Look, I think you've said it best in terms of optionality. We actually started that project Just on credit and it was justified based just on additional methanol for use in Clear Lake. And really the cost advantage of make versus buy for methanol on an average basis. So that was the justification for the project. Since the time we started the project, obviously, markets have continued to develop for more sustainable products, for Lower carbon footprint products, and we do believe for certain that there will be a premium that will be available for more Sustainable products, I would think not so much.

Speaker 2

I don't anticipate we will be in the biomethanol market. Our intent is to take that methanol And further convert it into lower carbon downstream derivatives. So I think lower carbon acetic acid, lower Carbon BAM, lower carbon BAE, lower carbon palm and other polymers. And that's really where we think the advantage is as End users will see more value in being able to have low carbon. So think of it simply as being able to, through this project, Put CO2 in the paint on your wall that would otherwise be vintage to the atmosphere.

Speaker 2

I mean, that's where we see the premium coming is from people who want to have that impact on their environmental footprint.

Speaker 18

Great. Very helpful.

Operator

Thank you. Next question is coming from Jadeep Tundayya from

Speaker 7

The first question is really on the nylon chain. There is a lot of upstream capacity in monomers and polymers coming in Asia. So could you just tell us like maybe on a fundamental basis, how do you add value in your nylon sort of portfolio? And in the long run, why would you actually want to be More in the polymerization, why wouldn't you want to be more downstream asset light, use this capacity that is coming in Asia And create more product differentiation. That's my first question.

Speaker 7

And then on the Acetyl side, there is capacity again coming in China. Some of the plants have been late this year and ramping into next year. So how do you see demand supply balance in acid and WAM next year? Thanks a lot.

Speaker 2

Thanks for the question. As I said earlier, we do see the polymerization capacity and some intermediate capacity coming on stream in China. We have seen some other industry shutdowns pounding a lot of our PA66 goes into highly differentiated products where we are the sole suppliers. And we see a lot of future potential for PA66 6 in EVs, for example. Uniquely to EVs lately, we've had applications for battery cell planes, Frames and in place, high voltage connector, brackets and mounts for electric motors.

Speaker 2

So we see the EVs continuing to extend to the extent that we see Some moderation in EV production, we think that will be in favor of hybrids, and hybrids have even more PA66 content. Partly driven by EVs, but also driven by the electrification of everything. And there will be a strong pull on PA66 for that in building out electrical structure, but again, these don't tend to be standard grade materials. These tend to be highly differentiated. They need fire retardants.

Speaker 2

They need all sorts of different things. And that's where we really see the value being added is in the differentiation achieved through compounding. And look, we always want the flexibility to make versus buy because we do see these markets swing because of outages and other things going on. So this is really about building more optionality into this chain in a way that M and M Didn't have because they got a very cumbersome take or pay. They had a lot of overcapacity.

Speaker 2

They had single sourcing. We have been systematically resolving these issues so that we will have a flexible and highly optional PA66 chain where we think we can achieve significant value uplift.

Speaker 1

Kevin, we'll take the next question as our last one, please.

Operator

Certainly. Our final question today is coming from John Roberts from Mizuho. Your line is now live.

Speaker 11

Thanks and congrats to all as well. After the start up of Clear Lake BAM in early 2024, do you have the option of permanently closing the VAM unit in Frankfurt or do you need to maintain some optionality and flexibility by only doing temporary closures? And Excluding any one time upfront costs, is there a significant cost difference between a permanent closure in operating Frankfurt in the stop and start mode?

Speaker 4

Yes, John, we're building a new acetic acid plant in Clear Lake, not a BAM unit. So we did the expansion in Clear Lake and BAM a number of years ago. So we feel really good about our current network in them.

Speaker 11

And do you think the prolonged Delrin divestment process contributed to some of the in the Engineered Materials market?

Speaker 2

Yes, I hard to say, but I don't we haven't really seen That's been an impact at all in terms of impacting the palm market.

Speaker 11

Thank you.

Operator

Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to Brandon for any further or closing comments.

Speaker 1

Thank you, Kevin. We'd like to thank everyone for listening in today. As always, we're around for any follow-up questions that you have. Kevin, please go ahead and close-up the call.

Operator

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.

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TELUS Q3 2023
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