Celanese Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
October 21, 2021

There are 16 speakers on the call.

Operator

Hello, and welcome to the Celanese Q3 2021 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. It's now my pleasure to turn the over to Brandon Iosch, Vice President, Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, Kevin. Welcome to the Celanese Corporation's 3rd quarter 2021 earnings conference My name is Brandon Iosch, Vice President of Investor Relations. With me today on the call are Laurie Reierkirk, Chairman of the Board and Chief Executive Officer and Scott Richardson, Chief Financial Officer. Celanese Corporation distributed its 3rd quarter earnings release via Business Wire and posted prepared comments about the quarter on our Investor Relations website yesterday afternoon. As a reminder, We will discuss non GAAP financial measures today.

Speaker 1

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 the press release as well as prepared comments. Form 8 ks reports containing all of these materials have also been submitted to the SEC. Because we published our prepared comments yesterday, we'll go ahead and open the line for your questions.

Speaker 1

Kevin, please go ahead and open the line.

Operator

Thank you. We'll now be conducting a question and answer session. Our first question today is coming from Vincent Andrews from Morgan Stanley. Your line is now live.

Speaker 2

Thank you and good morning everyone. Just in Engineered Materials, you only had a modest volume hit sequentially despite obviously the auto Got more challenging, in the quarter and you found other high value places to put that volume. So I guess as we think about 20222023 and that auto volume comes back, presumably You're not going to

Speaker 3

I guess my question is,

Speaker 2

is that incremental on top of where you've already put this other volume or do you anticipate shifting some of that

Speaker 4

3, auto builds were down pretty significantly globally, like 12% down from the prior quarter. And certainly, that had some impact on us. What I would say is though it had less impact on us Just given the nature of where we are, I mean, if we really look at our Q3 volumes, they were down into auto only about 1%. And there's a couple of reasons for that. One is, if you look at we have shifted our portfolio more to electric Vehicles electric vehicles are actually up about 35% year on year in terms of builds and we expect that to continue into next year.

Speaker 4

And because we have so much more exposure now to electric vehicles, so think about lithium ion battery separator film, which has grown 40% year on year. Even though only about 10% to 15% of our portfolio now goes to electric vehicles, That still went a long way in kind of negating the impact we saw from the overall So what I would say is, yes, while we did shift some volume out of auto, we also have the shift within auto, which allowed us Really get through the quarter with very little volume loss into end markets. And we did see some more shift into other Applications like industrial and electrical, which were strong during the quarter, but I would say actually more of the shift was probably within auto Into the EV, which is consistent with the strategy that we laid out at the end of 2019.

Speaker 5

Yes. And we wouldn't expect to give that volume up as auto recovers in 2022 and 2023. So we think about the auto recovery kind of being on top of that.

Speaker 4

Yes. And then if you think where that volume is going to come from because we did run pretty full In Q3, but we did lose about 8 kt of production in Q3 due to the unavailability of raw materials, Be that resin or glass fiber or flame retardant. So as we as those issues resolve themselves hopefully through the end of the year and into next year, That's the additional volume that we'll be able to put into both auto and our other end use applications.

Speaker 2

Great. And then if I could just ask on the $100,000,000 With 50 in EM and 50 in AC, how does that trend in your sort of 2022 and 2023 assumptions, does that Are you assuming that that sort of normalizes and you get it back? Or you're just sort of assuming it stays the same?

Speaker 4

Yes. I think just as we assume product Prices and EBIT margins are going to normalize as we move through Q2022, so Probably towards the in the second half of twenty twenty two, and we're assuming normalized prices in 2023. We also assume that those inflationary pressures In energy and in raw materials, we'll also normalize in that time. So think about it as margins normalizing through the second half of twenty 22 and being normalized for 2023.

Speaker 5

Okay. Makes sense. Thank you very much.

Speaker 4

Yes.

Operator

Thank you. Our next question today is coming from John Roberts from UBS. Your line is now live.

Speaker 6

Thank you. Do you or your syngas supplier in Nanjing need to make structural changes to avoid the energy curtailments in the future?

Speaker 4

Yes. Look, I mean, I think it's an interesting question. I mean, it's hard to know what structural changes you would make, simply because the entire Economy of China is based on coal gasification. So we don't really know what to expect in terms of energy curtailments in the future. What I would say is, look, we have seen this happen in China from time to time as a result of their Blue Sky initiatives, whether it's for the Olympics or some other thing.

Speaker 4

And so we're not going to speculate on what's driving this energy curtailment. But while we expect some of the curtailments To be moderate, in the Q4, we don't really know what to expect yet for next year. So I think it's a little early to address this. What I would say is we are a little different Some of our competition in China, just in terms of what else our syngas Provider does. So, they have some choices that they can make about where the syngas go, whether it comes So whether it goes into olefins and frankly, right now economically, it makes more sense for it to come to us.

Speaker 6

And then back on the Engineered Plastics question, it takes a while to get specked into new applications. So I That rapid pivot to make up the lost auto volume that was existing applications that you've had that just surged?

Speaker 4

Yes. Look, we're seeing strong demand across all sectors of engineered materials. So I would say any volume we can make, We can sell to an existing customer for an existing application. That said, in the Q3, we had 815 project wins. We continue to grow quarter on quarter in terms of the number of projects wins we have and the value of those projects wins in Q3 was up 11% versus The prior year.

Speaker 4

So we are getting new projects all the time. They tend to be higher margin projects that we're able to close and they're higher volume projects. So if you look at that going forward, it just said, our ability to shift between areas as we're essentially in a sold Position will continue to be where we can continue to ship volumes into high margin products.

Speaker 5

Yes, John, If you recall, a couple of years ago when Laurie came in, one of the first things we did was do a robust strategy refresh. And what came out of that was the High growth program focus that Tom Kelly and the Engineered Materials team talked about at our Investor Day. And so A lot of that effort around 5 gs, electric vehicles, medical, etcetera, was started 2 years ago, and we're really starting See the pipeline pay off from that here now a couple of years into that work. And so I would say it's there is always some short Term stuff, but a lot of this is things we've now been working for a couple of years.

Speaker 6

Thank you.

Operator

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

Speaker 7

Thanks very much. Our average acetic acid prices in China and Europe and average VAM prices in China and Europe Likely to be higher in the 4th quarter than they were in the 3rd or comparable?

Speaker 4

Yes. It's a great question, Jeff. We hope we can answer that. As we look towards the Q4 for pricing, I think, we did see Q3 moderate from Q2, I mean, down about 15% in China. Similarly though, we saw Western Hemisphere prices for acetic acid go up 15%.

Speaker 4

So I think right now, dollars per ton price, so that's a little above Q3, but I do expect it's going to continue to moderate over the quarter. So I guess on average, our best view at this point is probably Q4 will look similar to Q3 in terms of averages For acetic acid, I think BAM is a little trickier. We have seen a surge in BAM pricing Following the energy curtailment as not just our VAM capacity, which was shut down for a few weeks, but others' VAM capacity We're shut down because these are more highly energy intensive processes in the acetyl chain. So we have seen more loss of AM capacity in China, with the higher raw materials, we've seen some of that capacity slow to come back or additional capacity stay down. So van prices remain quite high.

Speaker 4

I mean record levels well over $2,000 a ton. And I think we're not Seeing any fall off in demand for VAM and for downstream VAM derivatives, just because there are Such low inventories as you may be hearing from others on their calls in the chain. So I would expect VAM pricing to it's quite high in Q3, but I would expect that to stay at that level or possibly even a little stronger as we go into Q4, which would offset any further softening we see

Speaker 7

So there have been all kinds of outages in 2021 from weather and then we had outages in China or curtailments in China. Have all of these different events Led you to have a different view of where acetic acid and VAM pricing might be at the end of next year. That is, Have they structurally changed the way that you expect the industry to evolve? And then secondly, With all of the outages that you've had this year, how much more, acetal volume can you produce next

Speaker 4

Yes. So how the outages Affected my view of the industry. I think the answer is no. What continues to change is The supply demand balance gets tighter and tighter and we've been calling that out for a few years. I mean every year demand goes up 600 KT and so that's like one plant every year and nobody's been building plants.

Speaker 4

So we're steadily now in that utilization kind of mid-80s to 90s, which means instantaneous utilization when you account for turnaround and On planned downtimes and everything is in that high 90s mid-90s to 100%. And that's going to continue. So it is that Structural change in the industry, which affects where I think we'll settle I don't think we're going to settle Acetic acid price is down in the $300 range where we used to see it settled. I think it is going to be higher than that because structurally, It's just a much tighter industry. And I think what you see is the outages really reinforce that point because we very rapidly see the run up in pricing anytime there's the slightest bubble.

Speaker 4

So I think it's not the outages that have changed my view. It's I think the outages Reinforce our view that structurally this is a tightening market that is going to enjoy good margins for some period of time. And we've talked about it other quarters as there's not we had a little bit of capacity come on in China this year with YYI, Guangxi, we have ARC capacity coming on in 2023, which of course we will Run to meet the market demand, and have a lot of flexibility to take it up and down depending on what's going on with the market. But there's nothing else currently being built. And so and yet demand is going to continue to grow.

Speaker 4

So it is going to settle Higher, but I think it's really the overlying structure versus, say, the outages. So what does that mean in terms of Availability, I mean, yes, we were down this year for the freeze event. And of course, we had some supplier issues for some time Following the freeze event, other than that actually our units run very reliably this year. I do think as we move in Future years, we will be back at a normal pattern of turnaround. So while I think there's some incremental capacity available to us next year, I wouldn't say it's Probably really significant from a volume standpoint.

Speaker 7

Okay, great. Thank you so much, Laurie.

Operator

Thank you. Our next question is coming from Duffy Fischer from Barclays. Your line is now live.

Speaker 8

Yes, good morning. Maybe a little bit to follow on the last And also tying into several of your big customers on the coating side have actually called out emulsions It's being problematic from a pricing and sourcing standpoint. So when you look at how tight you see things over the next couple of years, when you look at the size of Those customers, should we expect some meaningful sized new announcements over the next year, Either on VAM, where you would maybe ship in acetic acid or would there be anybody that would look at doing kind of a integrated acetic

Speaker 4

It's an interesting question, Duffy. I mean, let me kind of take the last part. I really wouldn't expect anybody to do an acetic acid to VAM to VAE, kind of new build. I just don't think economically, I mean, that probably just the acetic acid part of that is probably at least a $2,000,000,000 investment. And then you add on the VAM and VAE, you might even double that depending on the size of the facility.

Speaker 4

So I think that's a pretty big List for just about anybody, not to mention the space, the infrastructure, the permitting and everything. I mean, this is a 5 to 7 year prospect if someone were to start now. So that's the ways out there. So I'm not worried about that. Like I said, we have 1,300,000 tons coming on in 2020 3, which is basically the equivalent of 2 world scale plants for acetic acid.

Speaker 4

And you'll recall we've announced a series of SPAM and VAE expansions globally around the world trying to meet what we do see as this Continuing strong demand. I mean, part of the problem right now, of course, is with the freeze, with other outages, Things have gotten behind. At one point, as people restock, the world will normalize again. As we see acetic acid prices Come down that will lead eventually to lower van prices and lower VAE prices. Energy is a big factor.

Speaker 4

So I mean, I think it's going to normalize even short A lot of new capacity being added, but we do see the need for more capacity to come online, which is a need we think we're best Position to me given our great technology, our lower energy efficient technology and our integration, not just within our plants, but also our networks globally that allow us to really optimize and provide secure supply to our customers around the globe.

Speaker 8

Great. Thank you. And then maybe just a second one on the $15 for next year. Can you walk us through, are there any meaningful changes That would be in that number, cash flow that would get spent on the buyback, maybe a change in the tax rate. I'm just trying to understand kind of like what's the base for that $15 for next year other than where spreads go?

Speaker 4

Yes. Let me just kind of walk through it and come in some of the things we're Assuming in that number. So what we said is an adjusted EPS next year of at least $15 That is based on, I believe, our Acetyls business will have an EBIT between $1,200,000,000 $1,400,000,000 As I said a little earlier in the call, that assumes we see relatively strong pricing we're expecting in the 4th quarter continuing Into the first half of the year, where you are in that range indicates where it might the different places we think it might start to moderate, whether it's a little Before the Q3, whether it's into the Q3, we do though expect to see moderation to Normalized pricing sometime mid year. And I said similar volumes to what we did this year because we think with turnaround normalized levels of And everything, I just assume kind of similar volume. For EM, we are expecting $700,000,000 to $800,000,000 of EBIT.

Speaker 4

That does include Santoprene. It does include the organic growth both from our Project model and our growth models, but also the Bishop GUR expansion. But I would say it's also dampened a bit by our expectation that auto builds will not So we're expecting auto builds at the same level we're seeing auto builds in 2021. And that affects Our normal materials into auto, and but it also will affect Sandiprene, because it is 65% Into auto. And then in tow, we expect it to be pretty consistent with this year, because we expect it to continue to be challenged by acetic acid I've seen at least in the first half of the year and also by energy pricing.

Speaker 4

I will say if you add all those up, you might come up with a number slightly over 15. So what you should be aware of is we do expect BU other to go up, as we expect less pension income next year with maybe a in the market, which will then raise our BU other. So if you look at that in terms of free cash flow, I mean, free cash flow, we're basically saying even with a lower expectation on EBIT earnings, driven primarily by moderation in asset yields, We do expect about the same level of free cash flow. So lower earnings, but we do would then get that working capital normalization That shows up as free cash flow on our books, if we see the moderation in Asset Hill. And we do expect slightly higher CapEx.

Speaker 4

We're still thinking CapEx around $600,000,000 next year, but we won't have the EU payment. So kind of look at all that, that washes out to basically free Cash flow in the same level we expect to see this year.

Speaker 8

Great. Thank you.

Operator

Thank you. Our next question is coming from Hassan Ahmed from Alembic Global. Your line is now live.

Speaker 9

Good morning, Laurie. Laurie, as I take a look at your sort of prepared remarks and the guidance you gave for the Acetyl Chain, You're looking for sustainably sort of over $1,000,000,000 in 'twenty two and 'twenty three EBIT You cited rightly so a bunch of different reasons why you feel that's doable. One of them was the sort of Uplift in the cost curves. So just wanted to sort of get your thoughts around what's going on over there. Obviously, I see what's happening with the raw material side of And you cited sort of escalation in pricing for catalysts and the like as well.

Speaker 9

So just on a relative basis, I'm trying to get a better sense How much how we should think about your cost advantage relative to competitors Improving in this sort of new raw materialcatalyst cost world?

Speaker 4

Yes. I think I'll just back up a little bit, Hassane. If you look at like a decade ago, our foundational earnings for We're in that $300,000,000 to $400,000,000 And then if you go as recently as even last year, We were saying we think our foundational earnings are around $800,000,000 and that was based on continued rationalization of our footprint, Expansion activities we had done, work we had done to improve the productivity of our sites, whether it be energy efficiency or Catalyst recovery systems and things that lowered our cost of production. And now we're saying we think that base level is Greater than $1,000,000,000 And so it's really the same thing. I mean, it is productivity.

Speaker 4

It is energy efficiency. But it also is this market dynamic that I was talking about. I mean, if you go back a decade, we had really over built in China. We, but Industry had overbuilt in China and we were at low utilizations, I mean mid-60s going to mid-70s. Now we're at much Higher level of utilization with no new capacity other than our own on the horizon and maybe a few other little things around the globe.

Speaker 4

And so we are just in a much Tighter area of supply demand, which we expect will continue for the next 5 to 7 years unless someone else builds new capacity, but It will take them that long. And that's really why we're saying that foundational early, we've seen kind of a lowest we think we will achieve in any given time Is now at about that $1,000,000,000 level. Now obviously, that could change if we had a global economic recession or something. I mean, but I'm just saying in normal conditions, we think that's the floor. And I think that's I think it's really demonstrate also the power of the model that we've developed over these last 10 years where we are able to as we did in the Q3, we had a 15% decline In the price of acetic acid in China, but we were able to recover that with the price in the Western Hemisphere because we still had tightness In the Western Hemisphere.

Speaker 4

And we had 8% less earnings from asset globally in the 3rd Quarter than we did in Q2, but we were able to recover that in margins for BAM and VAE and other downstream derivatives because and having that flexibility to shift geographically and having that ability to flex In the chain is what gives us confidence that unlike many of our competitors who don't have that flexibility, we will be able to deliver $1,000,000,000 of foundational earnings going forward.

Speaker 9

That's very helpful, Laurie, very helpful. And as a follow-up, again reverting back to your Your commentary about relatively tepid long term sort of supply growth, I found Super interesting. Particularly as you sort of talked about China, I would love for you to dig a bit deeper into that. I mean, you are talking about how The whole sort of capital cost advantage in China has dwindled. The whole permitting process is far more complex.

Speaker 9

I mean, to me that sounds super bullish, not just for the acetyl chain, but for commodity chemicals in general.

Speaker 4

No, I think that's right. I mean, look, we're not that many years ago, we would have said there was a large advantage to building in China just from a speed of build And a cost of build, as China has developed, as they've developed a stronger working class, I would say that, that advantage doesn't exist anymore, not in the same way. Now look, we're still bullish on China. We still You know bullish about our operations there, but that advantage of being in China Just from just as a place to be because of lower cost materials doesn't really exist anymore. Now there are other reasons to be in China like we are, which is making things in China for the China market, which continues to be a great market.

Speaker 4

But Making things in China for export, not so attractive anymore. And I think that's true for other commodities as well and for other regions of the world as well. And I think Also with the supply chain issues that we've all experienced this year, I think our strategy of making locally for local demand And has proven to be a good one and probably one we'll see others start to follow as well.

Speaker 9

Very helpful, Laurie. Thank you so much.

Operator

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

Speaker 10

Hey, good morning. Nice quarter again. In terms of your commentary on the cost curve for the acetyl chain, Where are we now in terms of the advantages? Is the rest of the world 3, 4 times more expensive or higher? Just curious How that has changed relative to the footprint you have in the States?

Speaker 4

Yes. Look, still, although we see increases gas in the United States, the acetyls produced in the United States, especially for us at Clear Lake With our technology, with the economy of scale, it's still very much on the lower end of the cost curve, and I would say quite significantly. China coal had gotten more expensive even than Singapore for a while because Singapore was oil based. But coal has gone up, oil has gone up. So I would say what we've seen is while the entirety of the cost curve has gone up, It hasn't really changed the dynamic about the very large advantage that we have in the Gulf Coast of the U.

Speaker 4

S. Versus the rest of the world.

Speaker 10

Got it. And then for your outlook for 2022 and EM, I think you commented organic growth of mid to high single digits in 2022 and maybe in 2023. That assumes auto Doesn't grow in 2022 and then in 2023, do you think auto grows and that growth rate is higher? Yes.

Speaker 4

I think on a simplistic level, yes. I mean, I think, look, we have growth in 2022, just not in auto. We have growth in medical. We have growth And electrical, but I mean, we also do expect to have some lingering impacts of the shortages of resins, glass And flame retardants as we go into 2022. So I would expect a higher level of growth in 2023 Based on the regrowth in auto and hopefully the full resolution of all those supply chain issues.

Speaker 10

Great. Thank you.

Speaker 4

Thanks Mike.

Operator

Thank you. Next question today is coming from Ghansham Panjabi from Baird. Your line is now live.

Speaker 11

Thank you. Good morning, everybody. I guess, Laurie, relative to your outlook for the AC segment from 3 months ago, Is it purely the curtailments in China and the impact on pricing that is driving the upgraded view on 4Q EBIT? Or is there anything else as it relates to demand or mix or even higher cost. And then related to that, just your thoughts on how you see curtailments playing out for 4Q specifically and the risk on the Q1 as well?

Speaker 4

Yes. Look, we have baked in already for Q4, so let me start there. I mean, look, we're seeing very modest Curtailments in 4th Q, I mean the difference is in 3rd Q, it had all happened in about 15 days. And in the 4th quarter, The provinces know the number. They've been able to optimize more.

Speaker 4

And so we're seeing only really modest curtailments in 4th quarter. And it's a period typically where we have seasonality and we weren't expecting much this year. But I would say that's fully baked into our 4th quarter. But clearly those curtailments and the impacts they're having on others, as well as the curtailments we had in the 3rd quarter has Changed our view of how long this pricing situation is going to last. People are not going to be able to rebuild inventories now in the 4th quarter.

Speaker 4

And so I think it just pushes that higher range of pricing further into 2022 as we do fully expect people Once prices start to moderate, even at what are still fairly high prices, they will want to rebuild inventory, especially because we're already Be going into the next construction season at the end of 1Q. So I think that really accounts for the change in our outlook for 2022 is just this continued level of higher pricing, higher margins for Acetyl extending longer into the year now than what we thought a quarter ago.

Speaker 11

Got it. And the thesis points you sorry. I was going to say that the thesis points you laid out in your prepared comments, specific to China and the capacity additions and the unlikely Nature of that just based on the world having changed over the past decade, along with the economics, does that also impact On the same basis, your own supply chain and your own access to material, etcetera, how are you sort of thinking about that risk aspect?

Speaker 4

Yes. Like I said, we've had I mean, we've had some issues around materials for additives and that applies Powders and things as well, things you never even hear about or think about. But I would say, in a major way, we make 35% to 40% of our own CEO. We start very far up in the value chain And we go very far to the end. So again, I think what we're seeing now in raw material, I mean, why it certainly has impacted us, I think we've also had more ability to deal with it because we have more choices in the chain where we can make decisions that Ultimately, help maintain or even in some cases improve our margins relative to others.

Speaker 11

Thanks so much.

Operator

Thank you.

Speaker 9

Our next

Operator

question today is coming from P. J. Juvekar from Citi. Your line is now live.

Speaker 12

Yes. Hi, good morning, Laurie. Couple of things on your acetyls James commentary that sort of piqued my interest. First, you talk about catalyst cost going up due to precious metals pricing. How big is the catalyst cost?

Speaker 12

And is it just the raw material inflation issue with precious metals? Or is there a availability issue of catalyst? And the second question there, you talk about the capital advantage to build capacity in China versus U. S. Is now negligible, Which is very interesting because steel costs are same everywhere and they always had cheap labor And China was exporting deflation all these years.

Speaker 12

Do you think that's behind us? Or is it permanent?

Speaker 3

Thank you.

Speaker 4

Yes. So let me talk about catalyst costs first. I mean, we haven't really shared the numbers, but Earlier in the year, let's go back to like Q1, Q2, we actually saw cost for Some catalysts we use, raw precious metal, zinc rhodium, zinc platinum, zinc these sorts of things. We actually saw it increase by 10 times versus what we had had in previous year. Now a lot of these same materials go into other applications, they They go into catalytic converters.

Speaker 4

And back when auto was really picking up, we really saw a lot of competition for that limited supply of precious metals. Interestingly enough with not surprisingly also with In auto build, not so many catalytic converters being built, we've actually seen some moderation back to maybe now only 5 times what it is. So I would say precious metals are still open, but we have seen some moderation. And I think the volatility we're seeing in pricing there is just Typical of the volatility we're seeing around the world where a lot of pent up demand, people really wanting to produce, but a lot of, I would say almost worsening issues around supply chain logistics and other and everything else, which is keeping all of these markets quite Volatile. But I would say volatile at a much higher level than we enjoyed, say, just even 2 years ago.

Speaker 1

Okay.

Speaker 12

Then on the steel side, but

Speaker 4

the Yes. It feels like you're right. Steel kind of costs the same around the world. I mean, it used to be an advantage in China, Probably due to some government support, I think that's a lot of that is gone now. So I think cost of materials in China It's really not that much less labor, not necessarily versus the U.

Speaker 4

S, but versus maybe other parts of Asia. The labor has more normalized. I mean, I think labor is still a bit more expensive in the U. S, but you also get More productivity in the U. S.

Speaker 4

So I'm just saying that the difference in whereas it used to almost be a 2 to 1 advantage Is there still a 10% advantage? Maybe. But it's not as large as it used to be. And that's really what I was referring to in my previous comments. But again, it still makes sense to build in China if you're building for materials that are going to be consumed in China, Because you get around any tariff issues or any trade word issues, transportation, logistics issues.

Speaker 4

So it can still make sense to build in China. I'm just saying you're not We would not see the advantage of building in China for something we're going to export to some other part of the region or some other part of the world.

Speaker 12

Right, right. With the demographics in China, do you expect sort of these labor costs rising that will continue in the future?

Speaker 4

Look, I think as the war for talent continues in all parts of the world now, I expect we are in for a period of inflating labor costs really in every region of the world.

Speaker 12

Great, great. Thank you for that color. Thank you.

Speaker 4

Thank you.

Operator

Thank you. Next question today is coming from Bob Koort from Goldman Sachs. Your line is now live.

Speaker 13

Thanks so much. Good morning. Laurie, you mentioned you thought maybe autos would be flat. Is that an industry comment or Because your easy mix is getting richer, you can still grow. And what's the latest on the medical stuff?

Speaker 13

I know during the peak of COVID, you had some Diminished demand because of deferral of elective procedures, how is that end market trending at the moment?

Speaker 4

Yes. Look, I would say, we expect auto builds to be flat year on year, if you look at the industry and globally. Now I think that changes region to region. I think Asia is doing a bit better. I think Europe is doing a bit worse.

Speaker 4

I think the U. S. Is in between there. I think that's pretty consistent though with an industry view on auto builds. I think while we all hope the chip shortage was going to improve, I think now every most things you read by knowledgeable people say it's probably the end of next year before that starts to improve.

Speaker 4

So our expectation is auto builds will continue to be flat year on year. Our own What that means for Celanese though, maybe I should call that out because I think it's important is actually we expect our auto volumes to be up 15% next year versus where they were this year. Just really as driven by the mix that we have, again, the higher exposure We have an EVs than we used to have. EVs have a higher kilogram per vehicle. The presence we have in lithium ion battery separator films enhanced by the expansion and Bishop that will finish here at the end of the year.

Speaker 4

So again, industry wide, we expect Flat auto build, we expect though our volume into auto to continue to grow by 15% next year. And I think your last Question, Bob, but I had a little problem hearing it. I think it was really around elective procedures and medical for medical and what we're seeing there. Yes. So what I would say is on medical, elective procedures have been flat this year.

Speaker 4

We kept calling out. We expected them to increase. We also didn't expect the delta variant. And so what we've really seen is they're still flat. We're seeing a little bit of pickup in some regions, but I would say nothing of significant, in terms of our orthopedic side of the medical business.

Speaker 4

What I will say though is we have seen a notable pickup in our business for other medical And it's really on the back of our focus we put on this and our strategy in 2019, trying to expand our presence in other Parts of medical and pharma, and we did see an increase in that in 3rd quarter, which is really what helped kind of keep our mix, pretty steady versus Q2. And just as an example of the kind of projects that we're bringing in now in medical outside of orthopedic, We've actually just closed the deal to provide palm into dry Powder inhaler for a company in India. So this is for an inhaler, uses dry powder, uses our palm. This is a high value application With pretty good not just good margins, but good volume going forward. So and that's really where we're starting to see more growth, higher margin Things like inhalers, things like wearable diabetes devices, obviously still continuing to grow our vital dose Long dose delivery platform, I mean, we are seeing really good growth in these segments and expect that to continue into next year and beyond.

Speaker 13

Perfect. Thanks so much.

Operator

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

Speaker 14

Thank you. Good morning. Laurie, going back to your cost curve comments in China, how much of this change you think is permanent? Is any of the 20 odd plants

Speaker 4

Well, I mean, this is my personal belief. I mean, I think the advantage to build in China Has disappeared and I think that's probably permanent. I think it's like we see generally As developing economies get more developed and get and strive to get a bigger middle class, strive to increase wages, strive Improve the quality of life for people in that company, they do lose their cost advantage over time. Now they've gained in productivity. So I don't think it's that it's going to switch.

Speaker 4

I don't think it's going to get cheaper to build in other parts of the world. But I don't think China is ever going to go To being the super low cost producer, that at once wasn't that's not necessarily a bad thing, right? We see China also moving Create more high value materials, more things in China to meet the growing demand of the population in China. So I just don't think they'll always be the huge Low cost exporter that they weren't for, but we've seen many economies go through that, right? And so who knows what the next economy will be.

Speaker 4

But there's still the 2nd largest economy in the world. So there's no doubt China will remain a very important part of the world balance and certainly the Chemical and polymer world balance, in terms of where things come from.

Speaker 5

Yes, David. And I think if you really looked at Technology difference that we've talked about for a long period of time on just the straight variable cost, the advantage that we have is still there. And with some of the challenges we In coal and just fundamental usage of coal and that being more and more restricted over time in China, those plants operate at a slightly lower level. Laurie talked about Catalyst. Catalyst usage of these disadvantaged technologies It's higher than what ours is.

Speaker 5

So we're seeing the cost increase. They're seeing the cost increase at a greater rate. And so that should hopefully and that's kind of why we signaled As we work our way into 2022 is we do think that there is some changes here that we do believe are sustainable when then you layer on the fact that you that Supply to manualizations are getting into the 90% range.

Speaker 14

On the back half of the year due to the cost you mentioned, you mentioned there should be similar pressures next year. Do we return back to Maybe in 2023 prior levels of earnings once these costs normalize?

Speaker 5

David, we lost about half your question. Do you mind re asking that for us?

Speaker 14

Sorry, on that Satel, you've had a step down earnings here in the back half of the year due to inflation. Yves, I guess you've highlighted additional these pressures Continuing into next year, would you expect to return to normalized levels of tow earnings perhaps in 2023?

Speaker 4

Yes. Look, I think that's a very reasonable assumption. I mean, the real issues other than the issue we had with losing Belarus Volumes, this quarter, but we'll place those volumes into other applications next quarter. The things really driving the lower level of CO margin is acetic acid pricing, Is natural gas pricing. So as we get to 2023, just as we expect normalization For acetic acid, we would expect normalization in pricing and we would expect to see margins for TOE come up to the level we've seen.

Speaker 4

As well, of course, that will give us 2 years to pass through pricing actions on multiyear contracts.

Speaker 14

Thank you.

Operator

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

Speaker 15

Yes. Good morning. Laurie, I had a few related questions on natural gas. I think you made the point in your prepared remarks Due to low levels of inventory, the costs are flowing through maybe a little bit faster than would otherwise be the case. And so With regard to your 4Q earnings guidance, do you think that natural gas or energy inflation will be Net positive, negative or neutral?

Speaker 15

And then the second part would be related to recovery of those costs. I think you mentioned that you're implementing surcharges. So perhaps you could comment on where you're doing that, if it's Europe or other places and which products?

Speaker 4

Yes. So if we look at natural gas, I mean, obviously, natural gas is an issue in the U. S. Where we purchased about Gas is an issue in the U. S.

Speaker 4

Where we purchased about 55,000,000 BTUs annually. But it's also a real issue in Europe where we don't necessarily purchase As much natural gas directly, but we certainly see it as a factor in many of our raw material costs as well as a factor in our Steam and other things that we purchased from others. And so it has been a significant factor this year. It's 3rd quarter, a step up from 2nd quarter. In 4th quarter, we do expect to see another, 25% increase in the U.

Speaker 4

S. And nearly doubling of natural gas prices in the EU. So this will be a significant for us in the Q4. Now with the surcharges, with other things, we do expect we'll be able to recover Some of that, I think though, we will see, for example, in EM, another $20,000,000 increase With the surcharge, we're recovering some, but it means we're probably just going to be flat to Q3 to Q4. Not every contract can we put a surcharge on, not Every molecule will have a surcharge.

Speaker 4

Some contracts are fixed for a short period of time. So we won't be able to recover everything, but we do think we'll be able to We mitigate the impact of the increase from Q3 to Q4. If we stay in the winter months next year, we'd expect Q1 to be kind of the same level of pricing we see And in the Q4, but again, we'll have been able to pass more of those costs on. So we should see a bit of help as we move into next year as it comes to the impact of natural gas pricing on our overall margins.

Speaker 15

I see. That's helpful. And then secondly, if I may, I wanted to ask about the 8 kilotons of Production lost in the EM segment. You commented on availability issues around glass fiber, flame retardants, resins. So I wonder if you could kind of talk through those and are they getting any better or worse as far as you can tell in the Q4 and beyond, what's your outlook there in terms of ability to produce?

Speaker 4

Yes. Look, Unfortunately, I think it's going to be similar in the Q4. We don't really see an improvement. I mean, fast fiber demand has And the ability of the providers to respond to that, especially post freeze, it's just hard to Get them back on and get the production up. So I don't really see probably an improvement in glass fiber in the Q4.

Speaker 4

We do expect to start seeing some improvement next Dear, similarly flame retardants, I mean, that one's a little even more complicated because pretty much All of the yellow phosphorus that's used to make flame retardants comes out of Yunnan province in China, which was curtailed as part of the energy curtailments in Q3 and will probably be impacted in the Q4. So that situation is not going to get better, probably again this year. Hopefully, we'll get better next year. But there right now it's just a single source of this raw material and it happens To be in China. So we need a bit more time to understand what the energy curtailments are going to mean going forward to really know when that issue is going to resolve it.

Speaker 4

And resins, I would say, are mostly resolved at this point in time. I don't expect resin availability to be as much of an issue in the Q4 and certainly not as we move into

Operator

Our next question is coming from Matthew Diouf from BLA. Your line is now live.

Speaker 3

Thanks. I don't Expect you to comment on market rumors, but there was one earlier this summer about More or less the ceramics for medical and industrial products companies. And without talking about that one more specifically, I guess, can you help us Frame out the scope at which you're looking through valuation M and A and kind of what would fit into the model and what wouldn't fit because it seems like The search is fairly wide, I guess, if that's we can start there.

Speaker 4

Yes. Look, I think as it comes to M and A, whatever you're hearing, I would assume we're looking at everything. Anything that is related To end markets that we currently serve, anything that's related to resins that we currently produce or might want to or polymers that we might want to produce, I would just assume if there's a rumor, if something if you see something, we're probably looking at it. Now that said, we look at everything with a lot of discipline And we look at it through the lens that we laid out at Investor Day. So we look at we really focus on Can we achieve synergies with it?

Speaker 4

What do we think is our unique ability to get value creation from it? So is it something that we can provide Our business model, our project pipelines, our growth models too, all of those criteria, Where do we think it is on the value chain? We look at but we look at everything. We choose very few things to pursue. And so maybe I just stop at What I will say though is we think we have a lot of managerial and financial bandwidth in order to complete Transactions of any size, or multiple transactions of a smaller size.

Speaker 4

So at the Time of the Investor Day, we said we outlined about a $6,000,000,000 of having $6,000,000,000 available On our balance sheet, in order to do M and A, I will tell you even with the expected close of Saniprin here in December, we still think we have about $6,000,000,000 available to us on our balance sheet because of our higher earnings that we've had this year and what that's meant in terms of cash generation And where our balance sheet is at. So I mean, assume we look at everything, assume we continue to look at it through the criteria we laid out in Investor Day And know that we have a very large pot of money ready to go when we find the right opportunity and we have a management team that's ready to both negotiate and integrate.

Speaker 3

That's helpful. Thanks. The other one to talk about a little bit on the EM side was the nat gas costs. I guess I was a little surprised that downstream ops would have that much directly to nat gas. Is that just a reflection of like European energy costs moving up?

Speaker 3

Or is there some is nat gas more directly a feedstock To or is it just the acetic pass through, I guess, I'm just wondering?

Speaker 4

Well, I mean, if you think about it, in the U. S, Just about everything is a derivative of natural gas. So even in the U. S, we've seen almost a doubling of natural gas costs from, say, Last year to this year, to the current price this year. But if you think about CO, if you think about methanol, I mean, in the U.

Speaker 4

S. These are all natural gas Derivatives. So there is a kind of direct correlation to raw material feedstock. Having natural gas though For Astell from an energy standpoint like boiler, this is very small because actually acetic acid is Exothermic is heat integrated with others downstream. So not kind of the inverse of what you think.

Speaker 4

It is a big deal for raw materials. We tend to be able to pass that through, Not since such a big deal in terms of direct cost of energy, in our U. S. Operations. In Europe, Again, more EM exposure.

Speaker 4

Most EM tends to be lower energy intensity. So think Compounding really doesn't require much energy, but something like palm requires a lot of energy. So you think about palm, right? You have to heat it, you have Crystallize it, you have to dry it. It's that takes a lot of energy.

Speaker 4

So there we really do see the direct impact of natural gas, which is Almost doubled from Q3 to what we expect in the Q4 and it's kind of 4 times what it was in the Q3 or in the Q2. There you see a very direct relationship and one that's a little harder to pass through because it really has to do with Steam costs and electricity costs and all those sort of things.

Speaker 3

Understood. Thank you.

Operator

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

Speaker 13

Hey, good morning and congrats on the results, just curious with the step down that we're seeing in the acetate tow market, can you comment on where you feel that fits Within the Celanese portfolio.

Speaker 4

Yes, Frank. I mean, as you know, we constantly look at everything in our portfolio and look at where we think the long term trends And how what does that mean for long term margin results and the fit in our portfolio? What I would say on toe and similar to my previous comments is, it's the step down we're seeing right now is we think uniquely We tie to the price of acetic acid and energy prices around the globe. And Clearly, the biggest piece of that being energy prices in Europe and for our La Noche plant. So we do believe that we'll see a normalization of pricing both Raw materials and energy.

Speaker 4

And with that, we expect to continue to enjoy high margins In tow, but like all of our portfolio, we'll continue to watch that and make strategic decisions accordingly as we move through the next few years.

Speaker 5

Yes. And Frank, I mean, I think it's important to remember, I mean, this is still between both the base business and the dividends that come out of the JV. This generates a lot of cash And that cash can then be deployed for higher growth applications. So we saw last year the importance of having this business when we The downturn, very solid results, very solid cash flow generation. And yes, we're seeing some near term compression.

Speaker 5

But as Laurie said, we do expect some level of normalization.

Speaker 13

That's very helpful. And just a clarification, in terms of your energy costs year over year, just reading through the prepared remarks, so it's $20,000,000 negative impact in Q3 and an additional $20,000,000 negative in Q4. So we should assume like year over year, higher energy is going to cost you $40,000,000 Is that correct?

Speaker 4

Yes. Look, that's for EM. I would say we've also seen The impact of those higher energy impacts on raw material and that's probably closer to $250,000,000 year on year. But we've been able to offset all of that except anticipate offsetting all of that except about $20,000,000 Through pricing initiative and other initiatives.

Speaker 13

Got you. Very helpful. Thank you.

Speaker 1

Kevin, let's make the next question or last one please.

Operator

Certainly. Our final question today is coming from Laurence Alexander from Jefferies. Your line is now live.

Speaker 6

Good morning. Two quick ones then. Can you touch on, given the improved structural outlook for acetyls, Why not pull forward CapEx to sort of fill in the pipeline, the industry pipeline in 2026 to 2028? And on carbon pricing, as to the extent that carbon prices move higher, Are your EM customers giving you any sense of how that factors into pricing for your products? Are you seeing any kind of favorable mix shifts or negative from that?

Speaker 6

And similarly within acetyls, is there Is there a certain level of carbon prices where some of the acetyl chain becomes disadvantaged relative to substitutes?

Speaker 4

Yes. Look, I think in response to your first question, not just for acetyl, but for EM, we We continue to look at our ability to pull forward all of our projects, because my margins are high in the field and we believe that that structural demand is there. Similarly, in EM, we can sell everything we can make right now. So and we expect that to continue as the desire for high quality, Unique products like we make continues to grow. So we actually look at we constantly have been looking at how do we pull all of these up.

Speaker 4

The limitations are really the actual time it just takes to do a project between permitting, which unfortunately has been slowed down in most parts of the world The COVID, all the way to just the ability to get raw materials and we talked a little bit about Steel, concrete, everything, there's so much demand right now for construction projects that we're finding it difficult to pull our projects up But we'll continue to look at that and we'll continue to update you as we move through the year. And then on your second question, What I would say is for most of the high value products that we produce in EM, And what we find is that is not impacting the desire by customers to take products. So I think in the inflationary environment, we're all experiencing on everything, People understand, they may not like it, but they understand why we're having to push through these price increases Cover raw materials and energy, and have again have not seen any loss of volume due to pricing. I would say the same thing really in asset and downstream as steel chain derivatives. The demand for construction products and packaging and all these things that Astell is going to It's only increasing and even at the higher prices.

Speaker 4

I mean people maybe have been a bit slower to refill inventory at these prices, but there's no Any way available to refill inventory. So again, we've not our customers would take more at these prices if we could produce more.

Operator

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

Speaker 1

Thanks, Kevin. I'd like to thank everyone for listening in today. As always, we're available after the call if you have any further questions. 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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Earnings Conference Call
Celanese Q3 2021
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