Celanese Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 10, 2023

There are 17 speakers on the call.

Operator

Greetings, and welcome to the Celanese First Quarter 2023 Earnings Call and Webcast. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. At this time, I'd like to turn the call over to Brandon Iosch, Vice President of Investor Relations.

Operator

Thank you. You may begin.

Speaker 1

Thank you, Daryl. Welcome to the Celanese Corporation Q1 2023 earnings conference call. My name is Brandon Iosch, Vice President of Investor Relations. And with me today on the call are Laurie Reierkirk, Chairman of the Board and Chief Executive Officer and Scott Risigstein, Chief Financial Officer. Celanese distributed its Q1 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 website. 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 press release and prepared comments. Form 8 ks reports containing all of these materials have

Operator

Thank you. We will now be conducting a question and answer The confirmation tone will indicate your line is in the question Our first questions come from the line of Michael Leithead with Barclays. Please proceed with your questions. Great.

Speaker 2

Thanks. Good morning, guys. First question, And Laurie, just high level on the full year EPS guide, you're doing about $4.50 of EPS in the first half, which implies about $7 in the second half. I assume synergies, Clear Lake, a few other things are helping in that back half. So I guess, is there a way to broadly characterize what you're assuming for market demand recovery in the second half versus

Speaker 3

Yes. Thanks for the question, Mike. I mean, you're right. We need about, on average, a lift in Q3 and Q4 from where we were in the first half. And so our focus really is on controllable actions to The extent we can.

Speaker 3

I mean M and M volume recovery, we saw about a 10% lift from Q4 to Q1, a similar lift from Q1 to Q2. We continue to expect Volume recovery in the M and M business as well. Productivity, which is coming in at the top of our range for all of our businesses. Yes. M and M price optimization, synergies, which we'll see building across the quarter.

Speaker 3

We also do expect some improving demand again for in In its entirety, we were up about 10% in the Q1. We'll have some increase again in Q2, but we do expect things get better still in the back Half of the year, as we see kind of the EU and Asia competitive dynamic improving and see the end of destocking in the U. S. And then we should have some tailwinds from raw materials and energy cost moderation, which should help lift margins in all of our Businesses and especially in EM as we see those costs flow through to inventory and start to hit the P and L. Mode.

Speaker 3

I think that's kind of what we're in control of. In terms of where we see the markets going, if we take it first by region, In China, we do expect modest demand improvement in Q2 and into the second half. We do see markets recovering in China, Especially auto. And we continue to see some improvement in utilization in acetyls and hopefully get Coming off the cost curve, especially now as we're going into some turnarounds in Asia, we do see some upward price movement and some margin Expansion in Acetyl. In Europe, we do expect continued modest demand improvement as well.

Speaker 3

We saw that through Q2. We expect that continue at a slow pace into the second half. And then as I said, we would expect as Asia True, we see less imports from Asia into Europe, which should help margins in Europe get back to a better level. And in the U. S, again, we know a lot of people are calling out recession.

Speaker 3

We're not seeing that in our order books. I mean, However, you want to define recession. What we're continuing to see is general recovery across a lot of markets. We still had some destocking in Q2, but we expect that destocking to be mostly over as we go into the second half of the year. And so if you look at end markets, auto has continued to be quite resilient in the EM portfolio that's helping both our legacy mode.

Speaker 3

As well as our M and M businesses. 2023 auto build, we still expect to be up 3% to 4% off 2020 And we're at a run rate right now that already achieved that. And we are seeing our own auto volume recovery at a pace significantly better mode. And really building on the project pipeline and all the work that's been done in the last several years to build that line both for the transition to EV as well as increasing our content per vehicle. We see auto being a fairly robust end market for us this year, even with just a moderate growth in the actual builds themselves.

Speaker 3

I would say the most sluggish sector we still see and have baked into our Forward look is construction. Although we see some modest improvements in Europe and Asia, in Europe mostly on the renovation market As energy efficiency regulations come into effect, we still see it to be quite Slow in the U. S. And in China, where we've not seen any recovery in really commercial construction yet at this time. And then non auto the other non auto durables, I would say, electronics, electrification It's improving.

Speaker 3

There's a lot of need for more electrification around the world. And so we see that as a growing market this year. But in consumer electronics And consumer other consumer appliances, we still see that lagging 2022, especially in the U. S. And then finally, packaging, we do see resilient growth in packaging, especially in the U.

Speaker 3

S. Think about Amazon and everything that's getting Shipped from online shopping and also the push for sustainable packaging solutions, but paints and coatings is a bit slow tied to construction. Motion. So, that's probably a bit more than you were looking for, Mike, but that's a little bit of a summary kind of where we see things going in the second half and the underlying trends that Support our confidence in that $11 to $12 range that we put out for the year.

Operator

Great. That's super helpful. And

Speaker 2

then maybe second, you talked in the prepared commentary, Laurie, a bit about some of the integration actions you're taking in Nylon 66. I was just hoping you could expand a bit about how you're currently thinking about your approach to the 66 value chain and just maybe how Celanese going forward might be Differently than, say, M and M stand alones, nylon polymerization business or just even the legacy Celanese compounding business there? Thank you.

Speaker 3

Yes. So let me talk a little bit about 66 in general, starting with what we're doing immediately around 66. So in the past, Celanese has not been backward integrated in 66. So we were just a purchaser of of nylon polymer, which is great when prices are low, not so great when prices are high. With DuPont, we've We've been able to add the backward integration.

Speaker 3

What we're doing differently is we've been able to secure a different raw material contract And instead of being forced to produce PA66 polymer, we have options. We have flexibility. We have optionality. We can choose To produce backward integrated nylon polymer, when it makes sense, we can make less and buy Nylon Polymers from others, if that makes more sense, we can make less of it. If we see the demand profile not Supporting higher production rates and we can make more of it if we see a sudden resurgence of demand.

Speaker 3

And so that flexibility, which is much more like we run our other Businesses like GUR and Palm and even Acetyl gives us a degree of flexibility and ability to make value across a wide range of market conditions that DuPont really didn't have or really didn't exercise. And so we've already done that. We've gotten most of The Zelanese nylon grades already certified to start with the DuPont polymer. We've been using DuPont polymer out of inventory, raw polymer, Compounding it to make the Celanese branded products and we've been flexing that and to really start managing some of the inventories that had been built last This year for both raw and for finished polymers in the DuPont product line. And so that's a degree of flexibility and a way of running the business, which is different.

Speaker 3

We've also talked about how we're pricing differently, pushing price on more differentiated grades, lowering prices in some case on more Standard grades to really get our inventory in line with the demand profile and therefore the cost profile of our inventory in line with the demand Profile. So that's kind of the immediate things we're doing. As we think about PA66 longer term, and of course, we We spent a lot of time studying this before we went into this deal. We know a lot of people are like, well, PA66 is under hood, that's going to decline. Mode.

Speaker 3

We don't see it that way. I mean, if we look at electric vehicles, as they're coming on the market, we find that the addressable content per vehicle Is almost double compared to what we've traditionally have in ICE. And we think a lot of those new opportunities in Electric vehicles also extend to PA66, as we see performance requirements Increasing for electric vehicles. So longer battery life, higher heat management required, These things are very suited to PA66. So if you think about parts that PA66 is suited for in EVs, mode.

Speaker 3

Things where you replace metal for light weighting when you need the strength of a PA66, things like battery cell frames and in The brackets and the mounts for the electric motors and then things in the electrical system like high voltage connectors. And it's the PA66, the standard grade, but also the high temperature nylon grade, which are particularly Applicable here and which we didn't have in our portfolio prior to the acquisition of M and M. And I would say For our legacy EM business, we're about halfway to capturing the addressable content for EVs. Obviously, the M and M business was not as focused there and so not as far as long, but we are using our project pipeline to also drive These applications of PA66 into EVs now that we have those molecules available to us. And I would think if you think about PA66 beyond electric vehicles, There are huge applications there in electrical and electronics, which was an area that M and M was really underrepresented in Historically.

Speaker 3

So if you think about electrification and the need for not just electrification for vehicles, but for Everything, you think about people wanting to get out of natural gas for homes, but basically the electrification of everything. Mode. All the outlets would say electrification, electricity demand is going to more than double in the next 5 years. So with that comes data management centers, power distribution centers, all of these things require polymer and specifically all of them and can benefit from the availability of PA66. And so we think there's going to be a strong pull through for PA66 As the demand grows, we're building out our electrical infrastructure.

Speaker 3

And again, this is an area Celanese has been in for some years, and now we're able To apply that market knowledge and that end use knowledge to the PA66 profile and pull those volumes through using the project pipeline

Operator

Thank you. Our next question has come from the line of Jeff Zekauskas with JPMorgan. Please proceed with your mode.

Speaker 1

Thanks very much. I think you reduced your earnings per share goal by $1 What was the source of the decrease?

Speaker 3

Jeff, if we look The first half, our first half came in about where we in total, where we expected the first half to come in, with 1Q being up because of some Unanticipated commercial opportunities for spot market volumes as well as some pull forward from the 2nd quarters, especially And auto a few parts for auto and a few, for medical implants. And so since we don't expect those we're not Counting on those unexpected opportunities reoccurring in the second quarter, as second quarter is a little bit lower and we We are seeing the demand in the second quarter not build as quickly as we had thought at this time last quarter. And so that reduction to $11 to 12 Dollars really reflects that slower demand growth that we're seeing across 2nd quarter going into 3rd quarter and just accounting for that in our outlook

Speaker 1

Is it fair to say that as a base case, 2nd quarter volumes and prices or flat sequentially.

Speaker 3

I expect for volumes for Engineered Materials, we should see the volumes mode. Increasing moderately across the second half, especially in M and M as we have Market share recovery and just base business demand increasing in automotive and some of the other end mode. I think for acetyls, we also expect moderate growth into the Q2 as we start seeing more recovery in the end market. Right now for Acetyl pricing is a little challenged, although we are seeing some early green shoots on China asset pricing and margin expansion, it's very new though. So although we've baked what we've seen so far into our projections, we think there's Some more room there, possible upside there.

Speaker 3

And I think for Engineered Materials, we do expect some margin expansion as we go to the second half, Particularly as we see the lower raws and energy costs from the first half pulling through the volume and inventory, which will help with margin expansion in the second half.

Operator

Thank you. Our next questions come from the line of of Ghansham Panjabi with Baird. Please proceed with your questions.

Speaker 4

Thank you. Good morning, everyone. And Laurie, maybe you could just give us a bit more color From the demand spike that you saw in March, maybe stepping back, was there any sort of theme in particular that you can hone in on, Any region in particular that saw that increase? And as you kind of step back, was it more so of a pull forward from 2Q that benefited March, do you think?

Speaker 3

Yes. Gunjan, let me talk about that a little bit. So as we What we saw in March is we saw our book starting to really at the time of the call, we were really seeing Good volume showing up on our books for in our base businesses and that gave us some confidence about second quarter. I think the unanticipated commercial opportunities that we saw though at the end of March, which really got us above our guidance was a number of things. One, there was some unusually high Spot demand at the end of the quarter, so things like palm and nylon, also toe and RDP, so it was across both of our businesses.

Speaker 3

And I think because of our flexibility we have in our supply chain and our operations, we were able to capture a significant share of that unexpected volume That arose at the end of the quarter. I would say that was the majority of that. I think though we also did see accelerated buy In a few products in auto and in medical implants, which is a little unusual because we had expected quite a big headwind from medical implants and in fact had some orders come in. In the case of medical, I think that's probably pull forward from Q2. And in auto, we think it's also some pull forward from Q2 in mode.

Speaker 3

So I think on that one, is it pull forward or is it just quicker demand recovery? Not Not sure yet. That's not clear. But we're kind of characterizing it as pull forward until we see if that's a sustainable trend.

Speaker 4

Got it. And then as it relates to the U. S. And your comments on destocking, just a bit more color there in terms of which particular end markets they assume construction is part of that, but Curious to hear your thoughts. And then just judging by destocking that's occurred in other geographies, including Europe, mode.

Speaker 4

What do you think is a reasonable time line in terms of the destocking event? Is it 2 quarters, 3 quarters? How are you thinking about it now?

Speaker 3

Yes. What I would say, Gautam, is we really saw the end of destocking in Europe and Asia for the most part As we moved into the Q2, what we've really seen destocking continue is in the U. S. And there, auto is pretty robust, I would say, across all of the areas. But I think mode.

Speaker 3

There we see destocking continuing in consumer goods and industrial for the most part. And right now, our projection is, we think that's going to continue through Q2, but be pretty much over as we move into the Q3. That's some of the uplift we expect to see in the second half.

Operator

Thank you. Our next question has come from the line of Michael Sison with Wells Fargo. Please proceed with your questions.

Speaker 5

Hey, good morning. Laurie or maybe Scott, you started the Q1 with negative free cash flow. Can you help us Walk into the $1,400,000,000 you maintained free cash for $1,400,000 How does that sort of unfold? Do we turn positive in 2Q or is it for a second half loaded?

Speaker 6

Yes. I mean, we expect it to be negative just kind of coming off of where Q4 was From a sales perspective, and then kind of when we had the interest payment. So as we walk Into the Q2, you've got higher levels of earnings coming through. We also had really abnormally high CapEx from a cash perspective in the quarter as well as cash taxes being higher. That goes away At a higher level, we're at more normalized levels in the balance of the year.

Speaker 6

With the higher earnings levels coming through Now in the balanced part of the year, we would expect to be able to kind of get up and average much higher levels mode as we go forward. That sequential walk from Q1 into Q2 is about a $700,000,000 lift from where we were in The Q1, when you kind of put all those things together.

Speaker 5

Got it. Okay. And then I think in your prepared remarks, you said that 50 percent of the Q1 EPS came in March. So April is at a buck sorry, I'm sorry, March is at a buck. And then if you think about April, May, June typically is better than March, I think.

Speaker 5

So what happened do you think In terms of deceleration, the April, May June, and I thought maybe that dollar could have sustained throughout the quarter.

Speaker 3

Yes. Again, Mike, I would say a significant portion or a portion, I should say, of that dollar In March really was related to the unanticipated and spot like opportunities we were able to capture in March. And so we've not seen those repeat in April, and we haven't baked them in as repeating later in the quarter, Whereas the base level of earnings has continued to grow will continue to grow moderately across the month. Mode. I think we're just trying to be realistic in terms of what we think is repeatable and what was fortunate.

Speaker 3

Again, we're positioned to take advantage of those spot opportunities if they were to arise again, but we don't want to bake that into our forecast.

Operator

Thank you. Our next questions come from the line of Matthew DeYoe with Bank of America. Please proceed with your questions.

Speaker 7

Good morning. So it looks like you beat your 1Q M and M EBITDA guidance and 2Q is expected to accelerate, but the prepared comments no longer mentioned that lift to like $700,000,000 to $750,000,000 in EBITDA. Are you walking away from that level? What do you kind of expect M and M can deliver this year

Speaker 3

mode. Thanks, Matt. We're really happy with How the integration is going and the value uplift we're starting to see in the M and M assets. Our concern at this point is The fact that second quarter is not accelerating at the pace that we thought across all of our businesses and so we're going into the 2nd half, at a little lower demand rate than we had originally called out last quarter. So that It applies to M and M as well.

Speaker 3

And so what we're really focused on now, so I would say is, if that plays out the way we see now, I would say We're kind of at the lower end of that $700,000,000 to $750,000,000 that we called out. And so what we're really trying to get our teams to focus on is making sure we're delivering Growth, so that as we get towards the end of the year, we are basically on track for an EPS Neutral quarter going into 2020 either sometime in the second half or going into 2023, Which would be at that kind of $200,000,000 EBITDA range, including synergies.

Speaker 7

Thanks. And can you talk a little bit more about the product flow out of China and POM into Europe? PUM is not really a product I have a ton of line of sight into. So maybe kind of do you have an idea of where margins are In Europe now versus China or what the theoretical kind of compression risk looks like for the European business, how far along we are and maybe some of that or closing from European product or Chinese product?

Speaker 3

Sure. It really started back in the Q4 and When we really started seeing really even through Q3 last year, when we really started seeing the very high energy prices in Europe, mode. That raised the price of palm in Europe and provided an arbitrage opportunity for palm coming out of Asia, both China And Korea, out of Asia, into Europe, because demand was very low in Europe. And so that those molecules found a home in Europe Where it could be highly competitive even with the shipping cost to do that to be there. Now obviously, with the COVID resurgent in December mode.

Speaker 3

And going into the Q1, we saw those volumes still flowing in the Q1, even as we started to see energy prices coming down in Europe. But because of the lack of demand in Asia, there was Still an opportunity to move project into Europe. And while we still see volumes moving in the second quarter, We really expect that now demand is coming back up in Asia that those molecules will find a home again in Asia. Prices are down and competitive in Europe with that on a landed basis. And so we should see those prices Stabilizing again in Europe, I think, as we move through this quarter and into the Q3.

Operator

Thank you. Our next question comes from the line of Josh Spector with UBS. Please proceed with your questions.

Speaker 8

Yes, hi, thanks. Two questions and then I'll roll into one here is, you seem to pull a lot of levers to basically keep free cash flow In the range that you provided despite the cut to earnings. Just curious, 1, what levers are left if things don't play out as you see it? And 2, as you look at your guidance, I mean, you're talking about demand improving. I guess does the lower end of your range reflect a scenario where demand doesn't Improve from 2Q levels or would that be another cut that we need to consider?

Speaker 8

Thanks.

Operator

Mode. Yes.

Speaker 3

Let me start with your kind of last question first. I think the lower end is a range that we feel is Achievable even with only really moderate growth. And there are some areas we know, like auto, we feel quite comfortable well continues to grow this year At a very moderate pace because of the pent up demand for auto. So I would say, the on the we feel very confident in On the $11 short of a global recession, on the $11 end of our outlook and our cash flow reflects that. But I mean, if we were to say go into a global recession, we'd see we have a really unexpected downturn here, well beyond anything any of I imagine you right now.

Speaker 3

There are still levers within cash flow and we saw that in 2020 with COVID. So if we really see that kind of scenario develop and our Demand goes down, 1, we'll have more working capital release because the value of inventory goes down. We'll be able to go down to even more minimum inventories. But we would also have Cost savings as we would take steps similar to what we did during COVID to slow production rate, possibly even shut down plants For a period of time, and you have cost saving benefits that come from that. So I mean, I think we feel very Comfortable in our ability to deliver the level of cash flow that we've indicated given the steps that we've already called out.

Speaker 8

Okay, thanks. And just a quick follow-up just on the inventory adjustment in 2Q, kind of thinking along again similar scenarios here is that, Is that something contained within 2Q? Or is that something that drags into the second half? Just what's baked into the outlook there?

Speaker 3

Yes. So we're assuming an inventory a working capital release from inventory of $300,000,000 or more. So So if you think about 2Q, that's the $100,000,000 reduction in working capital and that comes with the 30 to 35 Impact on EBIT. So as we go forward, you would expect to see that same impact continue through the second half as we take other Obviously, different inventory adjustments come at a different EBIT and depending on what pricing is doing, but I would expect to see some impact from inventory as we move through the

Speaker 6

Yes. And Josh, and that's all baked into the guide that we gave.

Operator

Thank you. Our next question comes from the line of Kevin McCarthy with Vertical Research Partners. Please proceed with your questions.

Speaker 9

Good morning. Laurie, would you elaborate on your acetyl outlook in China? If we look at some of the consultant assessments So the acetic acid prices, they really haven't done a whole lot over the last 2 months or so. But in listening to your It sounds like maybe there's some upward tension building there. If that's correct, would you attribute that Some of your competitors' outages over the next month or 2 or do you foresee a more sustained cyclical Uplift as the year plays out?

Speaker 3

Yes. Thanks for the question, Kevin. So, as TILs in 4th quarter was mode. I think we talked about that. I mean, we're really essentially at the cost curve and in some periods of time during the quarter and Q4 and even into Q1, even below the cost curve from time to time.

Speaker 3

So what's happened is if you look at coal pricing in China, coal pricing, while asset pricing has remained at about the Same level for the last several months, we've actually seen coal pricing come down from Q4 to Q1, coal pricing came down about 20%. And so you see some uplift in the actual margin. So now we're still very close to the cost curve in terms of margin, but it stabilized a little bit through Q1. And then some of the turnarounds which we expected to happen in Q1 got pushed to Q2. We're starting to see those turnarounds start.

Speaker 3

And as that takes capacity out of the system, that further tightens the supply demand situation. We see margins slowly creeping up. And just really in the last 5 days, we've started to see a Slow slow increase in acetic acid pricing, which we've baked that into our guidance that small increase that we've seen, but I'd say, it's still early. We need to see if that stays sustained. But we think there is a chance that that is sustained with now the more normal level of outage As we expect going forward, I mean the last 6 months have been remarkably stable in the acetic acid world.

Speaker 3

I mean Not a lot of unplanned downtime, not a lot of increases in demand, not a lot of planned downtime. And I think we're going into a more typical period now where we will have occasional Outages, both planned and unplanned, which will give us periods of market tightness that we'll be able to take advantage of.

Speaker 9

Thank you for that. And then secondly for Scott, can you speak to your debt reduction target for This year, you affirmed your free cash flow or at least endorsed free cash flow

Speaker 10

of $1,400,000,000

Speaker 9

I think that number Excludes the proceeds that you expect from your Mitsui deal, which I understand to be $400,000,000 or more. And so can you put that into context in terms of how you can attack the balance sheet over the next 8 or 9 months here?

Speaker 6

Yes. Thanks, Kevin. If you go back, we had stated a goal of reducing net debt by $1,000,000,000 mode in 2023. With the cash flow that we expect, we'll certainly do that. And then when you Layer in the Mitsui proceeds on top of that, certainly, we'll well exceed that net debt reduction target that we had when we first announced the deal a year ago of $1,000,000,000 So we feel good about where we finished the year from a net debt Effective and then given what Laurie talked about earlier on where we would expect from an earnings Trajectory to exit the year as we drive cleanup of the inventory on the balance sheet and we Expensing much lower cost inventory as we go into the second half and then exit the year.

Speaker 6

We feel good about the earning trajectory We're not sure to get to that 3 times target that we had initially stated by the end of 2020.

Operator

Thank you. Our next questions come from the line of John McNulty with BMO Capital Markets. Please proceed with your questions.

Speaker 11

Hi, good morning. This is Bhavesh Soudhaya for John. I would like to hear your thoughts on the competitive landscape in Europe between your businesses. In your prepared remarks, you mentioned some price concessions you offered there in EM. Any changes to your competitors or perhaps a change in the product mix that is happening there?

Speaker 11

And then on acetyls, not all your competitors have the level of flexibility you mentioned of moving product from Asia. So assuming things are not as rosy As you for your competitors, any changes in market share or capacity there?

Speaker 3

Yes. In terms of the competitive landscape in Europe, I think the real challenge there has been imports From Asia, again reflecting the low demand in Asia and the improved cost division Asia had compared to Europe when they had much higher energy prices. And I should say Europe energy prices have come down significantly, but they are still high relative to the rest of the world. And so again, we see that The situation improving, especially now with increased demand developing in Europe, we really see that having improved Now at the end of the Q1 going into the second quarter and then further improving in the second half of the year. On F Steel's competitiveness, It has been a very stable market, so it's been very competitive as there's and it's also been a period of seasonably low demand for acetyls as well as some of the impacts of China holidays and just lower China demand and the slowdown in the construction Globally and the impact that has on acetyls.

Speaker 3

Again, as we start to see recovery, even slight recovery in Europe and Asia In construction, as we start the normal levels of shutdown, we do see an opportunity there to capture Additional margin in the acetyl space, the ability to Capture additional market share is really based upon our commercial model and the optionality and flexibility we have to Take advantage of when there are spot opportunities by moving molecules around the globe, by flexing up and down our product chain. In Q1, We took advantage of the stronger market for emulsions and RDP further down the chain, which helped boost our profitability in the Q1. As we start to see some movement in the asset price in China, there'll be an opportunity to take advantage of it there. So it really is all around More so than market share, it's more around the flexibility and optionality and the ability to capture in any given market in any given time Any upside potential that exists.

Speaker 11

Got it. And secondly on Lake On clear, Nate, congrats on the commissioning there. You mentioned $100,000,000 worth earnings contribution next year. Is this all incremental to your overall global earnings level? Or will some of it be offset by, say, reduced operating rates somewhere whether that's in China, where you're not in close to your cost though.

Speaker 3

Yes. So the $100,000,000 It is on top of our already kind of $1,300,000,000 level of foundational earnings for Acetyl. So that's raising the total global Still foundational earnings from 1.3 to 1.4. If you think about it, it's really about 50% based on What I call ratable productivity, so things like reduced catalyst costs, reduced energy costs, reduced maintenance costs, etcetera. And then about 50% of it is based on having, kind of built in turnaround and outage coverage in the network by having 2 units at Clear Lake.

Speaker 3

And then obviously, there's additional upside to that if we were to get in a period of higher demand and Higher pricing to basically raise our output from in totality of our Acetyl Chain.

Operator

Thank you. Our next questions come from the line of Frank Reich with Birmingham Research. Please proceed with your question.

Speaker 12

Yes. Good morning. Congratulations on the mechanical completion for the Clear Lake acetic acid facility. I know you gave some Earnings projections for the balance of the year and for next year. I was just curious as to how this is going to impact your Operating rates at some of your other facilities, how should we think about the industry overall and the impact that this may have?

Speaker 3

Yes. So thanks, Frank. We are happy to have the mechanical completion behind us, and we're moving now into the commissioning phase And anticipate production in Q3. Look, at the lower natural gas prices we're seeing, which greatly advantages our location there in Clear Lake, I would anticipate you would see that facility running at higher rates, which could reduce rates because of global demand mode. Reduce our operating rates in China and Singapore as we continue to supply Europe From the U.

Speaker 3

S. And we'll be able to supply Europe even at higher volumes entirely now coming out of the U. S. And it's cost effective to do so. I don't know that you really see opportunistic shipments to Asia, although that's possible in the second The volume of that though is limited.

Speaker 3

I mean, there are other supply constraints around availability of vessels and availability of receiving tankage, etcetera. Mode. But that arbitrage could open up as well. I think what we need to realize is Clear Lake is not only the lowest cost producer of acetic acid Now in the world, and we'll be able to produce a significant volume of it, but it is also the lowest carbon footprint producer of acetic acid in the world. And mode.

Speaker 3

We think that it's going to bring open up a lot of opportunities for Clear Lake. And from the impact on the industry, Clearly, I think it will make some impact in terms of volumes you see moving from Asia to Europe as we'll be able to service volumes in Europe much more cheaply from the U. S.

Speaker 12

Got you. So the intent would be to run that flat out and ramp back some of the operating ramp up some of your other Facilities, where do you think operating rates are in acetic acid as we look at the Q2? And then of course, you guys Recently restarted your Nanjing VAM facility. If you could talk about operating rates in the VAM area as well, that would be helpful.

Speaker 3

Yes. Look, industry operating rates for both globally, for both acetic acid and BAM are still kind of in that 90% range. Mode. Maybe from time to time a bit lower, but are still kind of trending towards that 90% range. It's just been so stable, which is a little bit unusual in this business for the last 6 months that people have gotten comfortable at those operating And demand has been down, again, normal seasonality.

Speaker 3

And so it feels quite comfortable. But at 90%, I mean, we are now positioned to take advantage of really any either planned or unplanned downtime that occur Globally, in either asset or BAM or any of the downstream derivatives, and that's really where we've seen the opportunity in the past is when we start Getting some either regional or short term misallocation between supply and demand.

Operator

Thank you. Our next question comes from the line of Vincent Andrews with Morgan Stanley. Please proceed with your questions.

Speaker 13

Thank you. I wanted to follow-up on that a little bit on the demand side of the equation because one of the issues I've been having in our own F and D models here is trying to Sort of reconcile what I think the underlying demand number is versus what shipments have been to try to account for. Obviously, we had a lot of issues with unplanned outages over the last few years, but we also had very strong building and construction demand in the acetal chain. So How do you reconcile that when you sit here today and think about what the actual underlying instant demand is versus shipments and maybe how much Shipments might have overstated demand in the past and maybe understating demand now in terms of thinking through what operating rates can look like over the next couple of years.

Speaker 3

Yes. Look, it's been a bit of a confusing time, Frank, I would say. Yes. If we look at Q4 last year, when prices were very low, we started seeing demand really coming off, particularly mode. In Asia, although operations were fairly stable, we certainly still saw some mode.

Speaker 3

Moving as people anticipated different things. And as we go forward, we also saw a lot of shipment and people carrying higher inventory Before that, because of all of the supply chain issues that existed around the world and you recall like in the first half of twenty twenty two, VAM and emulsions, I mean, there just wasn't even enough molecules out there to meet the customer demand. And so people were Carrying a lot higher inventories when we saw the reduction in demand through the Q4. We saw people really destocking in the Q4. We called that out at the last earnings call.

Speaker 3

I would say now as we've moved through the Q1 and especially March and beyond, we do see demand recovery coming back for fibers, For other end uses, construction is still, I'd say, the weak spot, although even in like in Asia, we're seeing a little bit of recovery in construction. And in Europe, we're seeing recovery in construction, not so much in newbuilds, But in renovation for energy efficiency, where a lot of our downstream derivatives products go. So we are seeing the demand coming back, Again, with a few exceptions, and so that is starting to bring the volumes up. But we're not really seeing restocking occurring yet as people feel fairly comfortable because we've been in such a stable period mode. And haven't had the supply chain issues, our customers feel fairly confident they can get the materials they want.

Speaker 3

As we see demand continue to increase, I expect we'll see some level of restocking and with that higher demand, we should see some tightening of of pricing and seeing some pricing uplift across all the regions.

Speaker 13

Thanks very much. I'll leave it there.

Operator

Thank you. Our next questions come from the line of Arun Viswanathan with RBC Capital Markets. Please proceed with your questions.

Speaker 14

Great. Thanks for taking my question. I guess the first thing was you noted about $1 Uplift from 2Q into 3Q and 4Q. Would that be split kind of evenly between the 2 I mean, The $2 we split evenly, so you're looking at 3Q, 4Q about equivalently or is 3Q typically seasonally higher? And then relatedly, how much of that dollar uplift, I guess, is under your control?

Speaker 14

I know you feel very comfortable with the $11 level for the full year, but maybe if you could just walk through maybe the walk from $2.50 to 3.50 mode. Now, say how much would be coming from M and M synergies and how much would be coming from volume and how much would be coming from Internal cost reductions or something like that, that would be helpful. Thank you.

Speaker 3

Sure. So I would say, let me again start with Ian. Probably of that dollar uplift, the $0.75 is the bottom end of the range, Which would get us kind of to the $11 We feel very much that's in our control. That's within Our ability to see I mean, again, assuming markets develop moderately in the way that we're calling out now, Combined with the controllable actions, combined with what we've seen with raw materials and energy, those things all continue as we've Called out, then we clearly have a line of sight to that $11 To get to the upper end of the range, which would be more Like $375 a quarter would require some further demand improvement across the end market. And so you're right.

Speaker 3

Usually, in terms of timing, usually Q3 is a bit higher than Q4. I think we don't really have a lot of visibility on that yet, but I would say I actually wouldn't expect them to be that much different this year. Although we Typically get seasonality in Q4, that seasonality is in the Western Hemisphere. Now with the acquisition, we have much more Exposure in Asia, which tends to be very strong in Q4. So I would expect for Engineered Materials, for example, that those would be similar levels In Q3 and Q4, and in fact, if we're in recovery, we've had some very healthy Q4s before when we've been in recovery, As well as we have synergies building throughout the years, so that our highest number for synergy will be in Q4.

Speaker 3

So I right now would say I would expect Q3 and Q4 to be similar, although typically Q3 has been a higher month higher quarter than Q4.

Speaker 14

Great. Thanks. And then just as a follow-up, you're going to be exiting the year theoretically at around $7 second half level of earnings. Mode. So next year and still that would be maybe reflective of just a modest demand environment.

Speaker 14

So Would you expect kind of continued growth as you look into 'twenty four and similar to that second half and growing from there? Mode. Is that a fair starting point? Thank

Speaker 3

you. Yes. Look, I think that's a fair starting point. I mean, obviously, we'll have some quarter to quarter motion because of seasonality and other things. But assuming a steady demand environment, we will continue to get additional benefits from M and M.

Speaker 3

We've historically grown our own engineered materials business in kind of a double digit range year on year, And we will get the further benefits from having Clear Lake online as well as some of the other expansions, Including the integration of Total into Acetyl, which will continue to grow on a year on year basis as we move forward. So I think that's not an unreasonable place to Start when you're thinking about 2024.

Operator

This comes from the line of Pashan Ahmed with of Lebitt Global. Please proceed with your questions.

Speaker 15

Good morning, Laurie and Scott. Question around some of the guided to sort of Self help sort of measures to boost EBITDA. I mean, earlier you were talking about being able to attain around $30,000,000 in 2023 worth of M and M synergies as well as slightly north of $140,000,000 From the Tow business overhaul. So how is that tracking? Are those numbers still sort of attainable, beatable?

Speaker 15

Where do we stand with that?

Speaker 3

Yes. So we had called out before 100 to 135 of M and M synergies. We fully expect to be at The top end of that range. So we are on track for that. In the Q2, we had about $10,000,000 of synergies from M and M.

Speaker 3

There's another $10,000,000 or $20,000,000 that will be added to that in the Q2 and continue to build through the year. So we feel very comfortable in Achieving that $135,000,000 of M and M synergies this year, we feel very comfortable that we have We achieved the uplift from Tow. That was very obvious in the Q1 and we also got an additional $10,000,000 or $20,000,000 of uplift in the Q1 from Tow Spot sales, which was part of our model going forward that we wanted to be able those will be there every quarter, but I think it shows the value of having integrated it mode. Into Asset Hills and running it in a different way gives us more options to capture upside than we've had in the past. So I feel very comfortable with that number on tow.

Speaker 3

I think the other thing is productivity. So we've historically achieved $100,000,000 to $150,000,000 a year Gross productivity, through the Q1, we are on track to achieve at or above that Top into that range on productivity and these are business productivity separate from M and M synergies. So I think when we talk about Self help, we feel like we're really delivering on all of these areas as well as delivering on the volume recovery in M and M, the pricing recovery All those things that we've laid out relative to the deal.

Speaker 15

Fair enough. Very helpful. And as a follow-up, you had a nice sort of bump up in EM Businesses This is EBITDA Margins Q4 to Q1. Around 20 percent EBITDA Margins you guys reported for Q1. And obviously, you gave some near term sort of guidance showing the uplift in EBITDA in that business.

Speaker 15

But from a margin perspective, longer term, as We look at sort of 2024 and beyond, where do you see EM Business sort of EBITDA margins going? Because historically pre M and M, mode. You guys were sort of reporting sort of EBITDA margins well into the sort of low to mid-thirty percent range. I mean, should we eventually expect a sort of move towards those sort of levels of margins?

Speaker 3

Yes. Look, in Q1, the combined Engineered Materials was about 20%. We expect that to move up across the year really as we lift the EBITDA margins on the M and M business. So by the end of the year, I think we should be more around that 23% range for the year. And I fully expect as we continue to grow M and M, as We continue to grow our base business as we continue to high grade the portfolio and realize the value of the synergies that we will move into that More historical level of 25% to 30% EBITDA margin, which is actually about where we've been the last few years.

Operator

Thank you. Our next questions come from the line of Jaydeep Pandya with On Field Research. Please proceed with your questions.

Speaker 10

Thanks. Just want to say, it's very commendable that you guys have loaded the balance sheet with debt and not confer The right issue, but since the deal, the world has changed quite significantly. And you're doing everything you can to sort of right size the business. But just want to understand the legacy EM business, how are you making sure you're not starving this of capital, because there's a lot of focus on M and M. That's my first question.

Speaker 10

The second question is on the competitive landscape in There's a lot of Nylon 6 and C6 polymerization capacity coming in China. So just putting in context of the value chain, Do you actually benefit because the chain is going long in polymerization in China? Or is this going to create headaches on the pricing for you? Thanks a lot.

Speaker 3

Thanks. Look, on the question around legacy EM, I think The thing to realize is that we've really focused in the last 6 months in forming 1 Velynis team. So we have Put an organization in place that brings all of our businesses, including Santoprene together under new business line groups, under the best set of leaders that we could pick out of the combined organization and we've really focused on developing a culture of One Celanese. So we're not looking, although for the benefits of this call, we do talk about how we're doing in each part of the business. We're not running it 2 separate businesses.

Speaker 3

We're running it as one business. We have everybody on the same sales platform. We have everybody in the project mode. We look at our capital processes have been combined. So we look at it in the same way.

Speaker 3

So I don't think we're at any risk of mode. Ignoring one part of the business to the benefit of the other because we really are running it as one business now even though because we currently still have Financial systems until we can integrate the IT systems, we are able to track it separately. But in terms of how we're running it, their Combined sales team, we're approaching customers as one Celanese with a full slate of products. Mode. And if you look at, you may be concerned because of some of the call outs we've done in the reduction of CapEx.

Speaker 3

But really, if you look at that reduction of CapEx, it's really just about reassessing the timing of our projects To really align with the revised demand outlook we have now and also integrating the M and M capacity we have into the We may now have capacity on the ground. We don't need to go build it. So really optimizing the combined capacity we have, which has let us Delay or eliminate some of the projects that we had thought we would need to do to gain capacity. So we haven't really canceled any material projects. We haven't made any significant cuts to our reliability and maintenance and those things that make us a reliable supplier for our customers.

Speaker 3

This is really about optimizing the new footprint and adjusting our CapEx to go with the new demand forecast we have going mode. And then on the question on polymerization of PA66, I mean there is a lot of PA66 capacity coming on in Asia. I think one thing to remember is a very small portion of PA66 production actually goes into engineered materials. The vast majority of it goes into fibers. And so it doesn't all dump into engineered materials.

Speaker 3

I mean, that is really mode. It is though one of the reasons we have been so focused on building optionality into our supply chain A raw material polymer so that we can have a choice in terms of make versus buy, whichever is the most economically attractive. Mode. So why do we have a contract that allows us more flexibility. It's why we're trying to get our inventories Actual level of control is why we're really looking at the totality of our footprint to really be able to take advantage of low PA66 raw material prices, if that's available, or to make it if we see an advantage to continue to produce ourselves.

Speaker 1

Darrell, we'll take one more question, please.

Operator

Thank you. Our next questions come from the line of John Roberts with Credit Suisse. Please proceed with your questions.

Speaker 16

Great. Thank you. You converted M and M over to the Celanese project pipeline and backlog model. How would you characterize their number of new projects versus the legacy selling EzM backlog?

Speaker 3

That's a good question. I'm not Sure. I have a number in front of me. What I'd say is, we've been pleased with Their willingness to use the model, if you will, and their understanding of how this adds value to the new Celanese. And I'd say the projects that are being entered are growing as we move through this transition and people really understand What we're looking for, again, it helps that we have combined everybody into one organization.

Speaker 3

We have one sales team. And so our growth in the project Pipeline is good. We are a little bit separate from that, but we also are finding a lot of interesting things in the M and M, T and I portfolio that we hope to be able to bring to market. And so I think I would just expect to see it accelerate over time As we get everybody fully on board and adjusted to the Celanese way of working.

Speaker 16

And then you've restarted the BAM unit in Germany. If there's a cold winter or some sort of energy supply disruption, Have you made enough changes to keep that plant up in that scenario? Or will you just shut it down again if we get an energy spike?

Speaker 3

So John, I would say, we did it was still economically attractive to run it. Last year when we shut it down, mode. On its own, it would have been economically attractive, but the situation there was the global demand was so low, it was more economically attractive Shut it down and supply material out of the U. S. So it really is a question of total demand profile across the globe.

Speaker 3

It is an attractive unit. Mode. It is cost efficient. It really was related to the high energy prices we saw there. So our intent would be to run it.

Speaker 3

We hope demand We'd keep up with that, but we will always look at our entirety of our portfolio and make decisions about what to run and what not to run based on what's most economically attractive.

Operator

Thank you. There are no further questions at this time. I'd like to hand the call back over to Brandon Ias for any closing remarks.

Speaker 1

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

Operator

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of

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Earnings Conference Call
Celanese Q1 2023
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