Celanese Q3 2022 Earnings Call Transcript

Quartr
Provided by Quartr
November 4, 2022

There are 9 speakers on the call.

Operator

Thanks, and welcome to the Celanese Corporation Third Quarter 2022 Earnings Call and Webcast. At this time, all participants are in a listen only mode. A question and answer session will follow the formal remarks. As a reminder, this conference is being recorded. I would now like to turn the call over to Brandon Nayoche, Vice President of Investor Relations.

Operator

Thank you. You may begin.

Speaker 1

Thank you, Daryl. Welcome to the Celanese Corporation's 3rd quarter 2022 earnings conference call. 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 Web 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 the 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 directly for your questions.

Speaker 1

Daryl, please go ahead and open the line for questions.

Operator

Thank you. We will now be conducting a question and answer session.

Speaker 1

The confirmation

Operator

from the line of Josh Spector with UBS. Please proceed with your questions. Yes. Hi. Thanks for taking my question.

Operator

I guess now that you've owned the M and M For a few days here, wondering if you can give us some context on the performance this year from an EBITDA perspective. Also maybe some historical context given DuPont's embedded some corporate and it's not the full segment, how has that performed? And then also when you look at next year, You gave the comments of $800,000,000 to that business pre synergies. What are the major lifts that it takes to get there from the current run Thanks.

Speaker 2

Thanks for the question, Josh. That's actually a lot of questions. So let me see if I can Navigate all that. So, on 3rd quarter performance, I mean DuPont will be reporting shortly. Obviously, what they report not Apples to apples necessarily because it does include Delrin as well.

Speaker 2

But I think it's fair to say in Q3, much like the first two quarters, M and M is not performing in line with our expectations of the business or even in line with how they performed in 2021. And I think you saw that in the numbers we called out for Q4. And I think if you think about Q4, I mean Q4 is typically a Low quarter for us as well. We do get seasonality in the Q4. We expect DuPont to see the same seasonality.

Speaker 2

I think we see some of the concerns we've had on DuPont's performance continuing with the M and M asset in the Q4 as well. So again, it's only been 3 days, but I would say, as we've gotten to get a clearer view Of M and M's performance, I think there's a couple reasons we see for their underperformance this year. Overall, poor demand backdrop in Asia and Europe, Not dissimilar, I think, in Europe from what we've seen, but I think we've had a little bit more upside in Asia on autos than they have seen. Competitive dynamics that is really impacting more of the standard business, of which we believe they've had a bit more than versus the differentiated business. And I would say also insufficient commercial flexibility to really pivot and respond to the market And the need to do different things in the market maybe as quickly as we have.

Speaker 2

I think also their current contract We're sourcing for nylon has been a bit challenging in this economic environment. And I think it boils down to there's really been margin compression that occurred, Especially in the nylon area and surprisingly in some cases they have it's not that they haven't raised price, it's actually the fact They didn't adjust price downward, stay competitive and they've lost volume. They've also had some pretty significant foreign Currency headwinds, which are different than we've experienced due to the fact that, therefore, in current, they're a bit more exposed than we are with the way they write their contract. So if we think about moving forward now into the rest of the Q4 that we've closed and moving into next year, I'll talk a little bit about how we'll address each of these. So on the foreign currency headwind, that's an impact of almost Over $20,000,000 for us alone in November December on the M and M asset.

Speaker 2

And so I think we really we're looking at how do we Our commercial practices to address the sales currency exposures. So what's denominated in local currency and what's in U. S. Dollars. We also can use some of our debt to look at converting more of our U.

Speaker 2

S. Dollar debt to lower rate currencies like the euro or the yuan or the yen, which will help us lower our borrowing rate. So we'll help the overall financial condition of the company. I think when we look at key raw materials and the purchasing requirement, we will be able to exercise Some of the flexibility we have within Celanese to really utilize some of the M and M Polymer capacity. So if you think about it, M and M has a fairly large take or pay contract currently for raw materials for nylon.

Speaker 2

And so they've been producing a lot of material, but they've been building inventory. We can actually start buying that using that inventory, using that production for Celanese, which will be net net better for both companies together. I think also remember, we called out at the time of the deal, there's Actually, the contract for RAS has been renegotiated and a new contract will come in place at the 1st of 2023. This new Contract has less take or pay requirement. So that will give us more flexibility and optionality going forward.

Speaker 2

So let us I think about it as it will really let us start It's one element of starting to run this larger nylon portfolio in a more integrated, Flexible commercially agile way much like the transition we went through with palm a few years ago, much like the transition we went through with acetyl Some year before that. On the volume side, I think we have a lot of opportunities between M and M and the heritage selling these assets To really deploy our combined commercial team to cross sell not just nylon, but other products, including other selling these products. So as we've gotten to really look at where all of our products are going, there's only about a 20% overlap in terms of the companies that are buying from us. So that was a really large For us to go into the companies that each other has been in and really start cross selling the entire portfolio versus just what we had traditionally. Pricing, again, margin compression I think there's some opportunity in pricing to do it in a more differentiated way.

Speaker 2

So if you really look, our Analysis so far is M and M took a fairly common response on pricing to everything, Whereas we like to look at it in a couple of different tranches. So for really differentiated product, We will always push pricing because we have the opportunity to do that. For more standard grade products, there may be places where you in fact have to reduce pricing in the current environment in order to maintain the same volume. And I think for us and then cross selling is another opportunity, but I think for us Really, instead of having one rule about we want to maximize margin percent or we want to maximize revenue or maximize volume, For us, it is always looking at value. How do we maximize the margin dollars being achieved from the products that we have out there?

Speaker 2

And then finally, I don't know this is one answer. Finally, on inventory, M and M has built A pretty large excess of finished goods in inventory over 2022, as they've seen some drop off Market share and as they continue to produce because of their raw material contract, that is burdening our November December EBITDA As we start trying to take measures to get that inventory more in line, but longer term, it will allow us to manage our inventory levels, again, more like palm, so that our pricing and our cost becomes more contemporary with each other. So we don't see as much Kind of disconnect between costs and pricing as we go forward. So again, we'll take these actions now. We've already started all of that.

Speaker 2

But it will take some time, I'd say, to get the business performing to our expectations. So if we look at next year, if we look at the, I'd say, dollars 800,000,000 of EBITDA that we aspire to for next year and that we're really pushing the team to achieve on the M and M assets. I mean, it is a big lift. I mean, it's coming from about We think it's going to be around $500,000,000 this year for the M and M assets in EBITDA to $800,000,000 that looks really big. I would remind you though that with the Cell and Museum portfolio, we went from 5.71 last year in 2021 To 800 this year.

Speaker 2

So it's not that much bigger than we've already demonstrated that we know how to do. And we already have a lot of And how we're going to do that, we're going to be helped by 4% higher auto builds next year. I think that's Pretty consistently called out by everyone. And we've already been pre qualifying the M and M Nylon into Our applications are heritage selling these applications, so we have a great start on that. Tom has already been meeting with all of the business teams in M and M To really do the deep dive, so we really can understand the nature of underperformance, what the opportunities are for next year.

Speaker 2

So I'd say we're off to a very strong Yes, dollars 800 is a lift, but again, not unachievable given our demonstrated performance in our own portfolio.

Operator

Very helpful. Thank you. Thank you. Our next question comes from the line of David Begleiter with Deutsche Trubank, please proceed with your questions.

Speaker 1

Thank you. Laurie, Q4 EPS is analyzing at roughly $7 per share. Could you and Scott help us bridge us to the $14 upper end of the range for next year?

Speaker 2

Yes. I mean, again, I don't think you can look at Q4 and multiply that times 4 and get to a number for next year in terms of EBIT. Q4, we are seeing a lot of headwinds, a lot of challenges In Q4, again, because of the really slump we've seen in China with paintings, coatings and with the ongoing COVID-nineteen lockdown, the situation in Europe where we've also seen the drop there. The U. S.

Speaker 2

Has held up pretty well. But I think in some of the destocking that we've seen, especially in Acetyl and the fact that Acetyl is basically bumping and bouncing around its cost curve. These are conditions that we don't believe can last forever. So while we think Q1 may be challenging, We do see line of sight would be somewhat better than Q4 again because we have a lot of things coming in with M and M that we're having to manage In the Q4. But I think by Q1, we start to see realization of some of the synergies.

Speaker 2

We'll have had a chance To start making some of the moves I just talked about. And then we really do expect the second half of the year to be back around In that $13 to $14 range. And again, a big portion of that is a list I just described on M and M, but we have continued growth In our own Engineered Materials business, in addition to the 4% higher auto build, we will see a GUR list next year. GUR is sold out For EVs, lithium ion battery separator film, that demand is only going up. So that will allow us to raise margins in GUR LTP margins are also going up next year as we see high demand in the 5 gs application.

Speaker 2

Next year, we'll get the full benefit from Santoprene and And Santoprene, we do expect it to be back to the levels we had called out at the time of the deal in terms of returns on Santoprene and then medical, which we saw this quarter return to pre COVID levels. We are predicting continued growth in medical, both In terms of orthopedics, but also in terms of the other applications like vital dose And medical devices. So we see a lot of growth opportunities next year in the M and M portfolio, in our heritage Celanese portfolio And we do see strengthening across the opportunity to strengthen across the acetyl chain as we move on through the year. I would also say we will have a good uplift next year in our tow earnings. As we talked about last quarter, we have been doing a lot To really restructure our acetate tow business, we're starting to run it more like we do a derivative of the acetyl And much like we saw when we started doing that with BAM and emulsion, that allows us to build in more optionality And more flexibility, which will increase our earnings.

Speaker 2

Historically, we've run that tow business really focused on customer value, Quality and reliability of supply, when China went independent, that reliability of supply became less important To our customers, because there was an overhang in other regions, now that it's tightened up again, we're at kind of 90% utilization in tow outside of China. And so that with the raw material and the energy volatility has given us an opportunity now to really go in, put in new contract Structures that allow us to better accommodate changes in raw material and energy pricing really enhance the business models in tow, Take some cost out of tow by integrating it into the acetic acid team and while still maintaining that reliability of supply and that Strong customer focus as we've had. So the result is we will be seeing much improved profitability in 2023 along with Greatly improved flexibility.

Speaker 1

And do you have a forecast for tone this year and early look at the improved profitability?

Speaker 2

No. What I would say is, if you look at what we called out for tow in 2023 in the Investor Day, we will be at or

Speaker 1

Very good. Thank you very much.

Operator

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

Speaker 3

Thank you. Good morning, everyone. I guess first off, Laurie, just in your prepared comments, you were talking about inventory destocking. And is it as simple as we just went from a world of Just too little to too much very quickly. And so that's what exaggerating some of the weakness that you're seeing.

Speaker 3

And then related to that, can you just give us a timeline into Your visibility that this will last through the Q1, if not longer?

Speaker 2

Yes. Look, Gunjan, thanks for the question. I think You have it exactly right. I mean, I think we went from everybody being worried about not being able to get molecules and Kind of buying whatever they could get their hands on to all of a sudden all the production issues were resolved, demand started going down and people realize There was availability and they have high cost inventory in 10 gauge. They want to bring that down before the end of the year and they That the molecules will be there.

Speaker 2

Just like when we see prices rising, people start buying because they think it will be more expensive tomorrow. Right now, they see price Falling so they quit buying because they think it will be cheaper tomorrow. But I think a few things behind you, why we've gotten into this. I mean, we are seeing improved logistics. We are seeing improvement in port congestion and the ability to move Materials around the globe, we are seeing improved product availability.

Speaker 2

There's been less outages and disruptions in the last Order than we've been having over the previous few years. We are seeing a weaker demand outlook, both again because of paints and coatings, which I talked about Specifically in Europe and China, but also just some seasonality that we see in this area. And again, falling prices, I think, is a big effect on people's mental view of what they think. So I do think this Likely to extend into Q1 2023. Typically, when we see this flip is as we get through Chinese New Year, then we start to see Demand coming up again and we start to see activities coming up again.

Speaker 2

And then as you get warming in the Western Hemisphere, you start So that's why I feel pretty confident saying, we expect to see this start to turn the other direction sometime after the Q1.

Speaker 4

Yes. The one area where we don't see a lot of excess inventory Ghansham is in automotive. And I think that's an area we're focused very We don't have that value chain that's full. So we're not seeing big destocking. We're seeing some level of seasonality here in the Q4 that's more Like normal, but we do expect the fact that auto has been at relatively low levels from a build standpoint the last 2 years, That's to kind of hold flat or slightly increase as we're working our way into next year.

Speaker 4

So that's an area that we feel good about that we're not going to see major weakness as we work our way into the first half of next year.

Speaker 3

Okay. Thanks for that. And then maybe for you, Scott, on the $1,000,000,000 plus of discretionary free cash flow that You've targeted for 2023. What are the levers you can pull to deliver on that number in the scenario that the weakness you're anticipating through 1Q pushes a bit Longer to the middle of the year? Thanks.

Speaker 4

Yes. I think as we've scenario planned that out Ghansham, we feel very confident in our ability to get That level under a variety of different outcomes that could be there. And a lot of that is the working capital build that we've had over the last 18 months has been fairly sizable. We've seen a similar build in the M and M business. And therefore, If we were to see a deeper decline in the first half of next year, there would likely be a much Heavier collection of that working capital.

Speaker 4

So we feel very strong about that. We continue to analyze. I think we've talked on these in the past about quarterly review of capital and looking at what our businesses need both in the near term and long term To better match that capital spend, we brought that capital down on a combined basis already, expecting around $600,000,000 of capital next We lowered the capital this year down to $550,000,000 And so those are levers that we'll continue to evaluate depending on where the demand Landscape is. Thanks, Scott.

Operator

Thank you. Our next questions come from the line of Jeff Zekauskas with JPMorgan. Please proceed with your questions. Thanks very much. You gave an idea of Acetic acid prices in China has been close to $400 a tonne.

Operator

Can you give us some reference prices and trends in VAM

Speaker 2

Yes. I think that's one of the big differences we saw And Q3, Jeff, as we saw VAM in China, which had still been running quite attractively, I'd Say, kind of $1400, dollars 1500 really come down to about $1,000 a tonne by the end of the third quarter, which is we believe Percentage of our emulsions go into Paints and Coatings. I mean to give you an idea, we saw about a 15% to 20% drop And emulsion demand globally in the Q3. In the Europe, I think we're also starting to see some compression in the margins for Asset and BAM, I don't have the exact number for BAM right now in Europe on the tip of my tongue. But in Europe, I mean, In the U.

Speaker 2

S, it's holding up a bit better, although we start to see some softening there. Again, I think the softening outside of China It's more on destocking necessarily than absolute demand. But in China, Which I think is the easiest reference price. We see VAM coming down to about $1,000 per tonne, which again is probably right at the cost curve for VAM in China.

Operator

And then just a follow-up, I think in Scott's script, he said that He's confident in paying down debt in 'twenty three across a wide variety of macro scenarios. And then you said that in the most Challenging one, you have a detailed playbook. Can you give us an idea what the detailed playbook is and what a most Challenging scenario would be like.

Speaker 4

Yes, Jeff, I think there are 2 times, I think over the past 15 or so years where we've had to really pull back hard with a heavy focus on near term cash. And I think that was coming out of the economic crisis 2,008, 2009 and then again in the early days of COVID in 2020. And that really focuses around cash Collection and harvesting of cash, which as I mentioned before, we feel very Comfortable with as we work our way into the 1st part of next year. And then it's a heavy focus on capital and what capital needs. Our manufacturing teams have done a great job being able to flex as needed, even on large capital projects.

Speaker 4

If you recall, We paused the Clear Lake Acetic asset expansion back in 2020. And then we're able to utilize that Time to lower the overall cost of that project, but significantly reduce the capital and we were able to bring our CapEx spend, Which was expected to be north of $500,000,000 in 2020, down to around $300,000,000 And so we are in Process, as I mentioned earlier, of looking at where those levers are for 2023, both across Our legacy portfolio as well as the M and M CapEx spend, so that we can focus really around near term productivity As well as cost reduction and if there are projects that can be paused,

Operator

we will do that. Great. Thank you so much. Thank you. Our next questions come from the line of Vincent Andrews with Morgan Stanley.

Operator

Please proceed with your questions.

Speaker 1

Thank you and good morning everyone. Laurie, I think in the script you said the $13 to $14 plus of EPS Next year, did not assume a recession because you're not seeing that in your order book. Can you give us a sense of what a recessionary The range for 2023 would be if we do indeed go into recession, is it $12 to $14, $10 to $12 What would you think on a high level?

Speaker 2

Yes. Look Vincent, I don't really have a number for that. I think if we just look at Current demand conditions and especially at auto, I think everybody is pretty consistent in thinking Auto is continuing to go up next year. I don't find that surprising. That's consistent with what we're hearing from customers.

Speaker 2

I mean, we've had 3 years of very low auto production. We think there's still a lot of pent up demand. We think supply will continue to be the determining factor for auto. So supply of Yes, and other materials is what will be the determining factor. Now, obviously, as interest rates go up, there may be some regions where That has some impact.

Speaker 2

But quite frankly, we think auto, which especially with M and M is now a significant part of our portfolio again, is really an And so I think in that way, if we do go into recession, I mean, it's a little bit different this time in that Usually in a recession, I mean a couple of things, usually in a recession you see energy starts to come down and then prices In this case, energy is staying up because of geopolitical concerns. So that's a little bit different. We're seeing full employment, Especially here in the U. S, which is why I think we're not seeing some of the impact in the U. S, because although people are being hit by inflation, it's There is full employment, so it doesn't feel as hard as most recessions where you see a lot of layoffs and people without jobs.

Speaker 2

And then I think the third thing is auto. I mean, auto is usually one of the leading indicators of a recession and a drop in demand for autos. And in fact, we see it going the other way in this recession. So we haven't really modeled what I would call a recessionary Scenario and because we just don't see it happening even if technically, mathematically it's calculated as recession, we

Speaker 4

The other thing I would add to that, Vincent, is with the synergies that we have, we've already increased our synergy number for year 1, Expect to have between $135,000,000 of full Achieve synergies next year. And if we see continued demand decline in non auto segments, then we'll look for ways at which to flex And accelerate further synergies. So we do feel very confident of being able to get to that range that we put in the prepared

Speaker 1

Okay. And as a follow-up, the prepared comments had a discussion on what you've already done with the plant footprint, particularly in the Acetyl chain With some reductions, but how are you thinking about how you're going to run the chain in 2023? And I guess in particular, how is the Clear Lake expansion Coming and how could that play a role in 2023?

Speaker 2

Yes. So I think if we look at this year, We have already reduced our rates in the acetyl chain in China and in Singapore, Down to 50% or 70% of our capacity. And we did that because we see demand. We don't want to build a lot of inventory. We've seen demand come off.

Speaker 2

So we've already taken that step. In some areas, we've gone down to as little as 30% Of operating capacity like in emulsions where we've seen the big drop there. So, I think we've been really proactive in managing our response. That's obviously a cost savings, but we're really focused on aligning our actions with the customer demand. Similarly, in Frankfurt, given the high cost, Energy costs in Frankfurt and the softening demand in Europe, we've reduced our palm rates at Frankfurt, Again, to align our demand with our the customer demand with our own production.

Speaker 2

And we've made the decision for the BAM plant in Frank, to go ahead and keep that unit down until we see demand coming back. I mean, the good news is all of these steps were taken. This is still economic capacity. We would still make money if we ran it, but we just don't see enough demand. So we can optimize our chain better by moving molecules around the Globe and using lower cost capacity, particularly in the U.

Speaker 2

S. Gulf Coast to meet some of these global demands now that we have less global demand. And You're going to continue to see actions like that as we go into 2023. What I would say is, look, BAM is ready in Frankfort when we You know, start to see this come back hopefully by the end of the Q1, we'll be able to start that unit up. Everything else is just a matter of Lifting the rate, so that's a day's decision to do it.

Speaker 2

So that's easy. And on Clear Lake, What I would say about Clear Lake is we are on track to mechanically complete and start up the unit in the first half. We intend to do so. Again, the justification for that project was productivity. We called out about $100,000,000 a year in productivity.

Speaker 2

So even if we see no need to run additional capacity in the Gulf Coast, we will run that unit for productivity and get the 100,000,000 Savings, run rate savings, I should say. The 1st year will obviously be that much, but run that unit for productivity. And then we have the option if we see something similar happen as we saw happen in 2021 where we see a run up in demand or if there are operating issues around the globe, We can start running that unit at higher rates and get even additional margin from that.

Speaker 5

Thanks so much.

Operator

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

Speaker 6

Yes. Good morning. Laurie, can you speak to a bridge between the rough run rate of $500,000,000 that you for M and M this year to the target of $800,000,000 that you have for 2023. I appreciate that you've owned it just a few days and I imagine it's difficult. But in formulating that $800,000,000 number, What are you baking in for things like price cost spread or normalization of volumes or perhaps The cross selling or other company specific actions that you mentioned, any broad strokes Related color there, I think will be really helpful.

Speaker 2

Yes. Look, I don't have a bridge. As you said, we've Only only 3 days. So we're still working on what are we learning, what can we immediately go do about it. So we're really been focused on Not worrying so much about what happened in the past, but okay, how can we do this differently in the future?

Speaker 2

But I would say it's really more based on our own Experience of what levers to pull. I mean, there's some things like foreign currency, that was about $20,000,000 in November, December That we think we can go rectify maybe not November, December, but in next year. And so you annualize that, that I don't know, I just make up a number here. So that's $50,000,000 or something. And then if you look at volume, they've lost about 15% Market share, if we can through pricing and through cross selling recover that, that's a fairly large number.

Speaker 2

Remember, The DuPont number in 2021 for EBITDA was 7.50 something like that in the 700. So just recovering the volume that they had sold and taking care of some of the other factors that didn't exist in 'twenty one like the currency, I think pretty quickly gets us back to 800. So those are the things that we're focused on. And then as Scott said, we will start to see some synergies As early as January 1, we will have some synergies from office closures where we have overlapping office sites like Seoul and Singapore and others. So, there are synergies that will come in there as well.

Speaker 2

I mean, obviously, we'll account for those separately. But I think and then we have a new raw material contract that will come into play in January, Which will give us flexibility, which will also be a source of value for us. So I wish I could give you a better bridge. We just don't have it to that level of detail yet because at this We're really trying to identify what's the 10 levers to go pull, let's get those in actions and then we'll quantify them all. But again, just based on our own experience, based on where DuPont Was in 2021, we feel this is a lift we can make to get to 800 if we get the organization really focused on it and really pushing towards it.

Speaker 6

Fair enough. And I appreciate the color there. My second question is more in the spirit of clarification and maybe housekeeping for Scott. What is the amount of transaction related amortization that's embedded in the incremental D and A of $350,000,000 that you referenced. And moving forward, would you intend to include that or exclude that From your adjusted EPS in 2023?

Speaker 4

Yes. So of that $3.50 Kevin, the best way to think about right now is About a third of that would be base business depreciation and then 2 thirds amortization. And that's an estimate right now. We'll be working through that here In the Q4 and we would not be adjusting that out of our adjustment. So we'll include that.

Speaker 4

We will Certainly provide color as to what that amount is, but we don't plan to adjust it out. Okay.

Speaker 5

Excellent. Thank you.

Operator

Thank you. Our next questions come from the line of Mike Leithead with Barclays.

Speaker 1

Great. Thanks. Good morning, guys. First, just two quick ones on acetyls. First, the sequential decline in EBIT per Acetyl Chain in 4Q, obviously prices are down, volumes are down.

Speaker 1

But can you just help us with if in 4Q there's any sort of one timey Either fixed cost absorption hit as you're running your assets lower or high cost inputs running through that shouldn't carry forward into 2023? And second, you mentioned industry margins being unsustainably low. I guess, when you look at previous times kind of we've gone through this in the industry, what's Sort of the usual time before that resolves itself or you see supply demand start to balance itself out?

Speaker 2

Yes. There's really no, I'd say one time thing. I mean, we've just seen deterioration Through Q3, in terms of pricing and in terms of demand, again, specifically China, Europe, less so in the U. S, Especially as I called out that drop in emulsions demand now that is like 15% to 20% down globally versus where we've been. So, I could only describe the 4th quarter conditions as now kind of sub foundational.

Speaker 2

Again, we think partly mostly it's seasonal. We think it's destocking. There is an end to destocking because people so I don't think it can get Much worse, let's be honest. And one of the reasons is when we see it in our order books, I mean, orders have stabilized again now At this lower level, but they stabilized again. And so that's why we're saying, what we think this continued through the Q1 and then as we move back into the construction season, Hopefully, we see some movement in China and COVID, but we've said that before.

Speaker 2

And as maybe people gain more confidence in Europe and again construction season comes We do expect towards the end of the Q1 to start seeing recovery into more of a foundational level.

Speaker 1

Great. That's helpful. And then second for Scott, I just want to dig in on the M and M currency exposure issue. I Obviously, you have pretty good visibility into the M and M country mix ahead of flow. So was it a net hedging issue at M and M or a mismatch of sales in COGS Currency, just trying to get a sense of what was different when you got under the hood there?

Speaker 4

Yes. I think, We expect the annual impact this year to be about $100,000,000 which is not unlike the impact that we have In totality at Celanese today. And so it's a little higher weighting than what we see in our base Engineered Materials business. And I would kind of chalk it up to 2 things. 1, a lot more costs in dollars in terms of what moves through.

Speaker 4

And then more sales in local currencies whereas Celanese typically would sell in some of those countries On a dollar basis. So those are the 2 things we're looking at from a business risk perspective Of where we can make changes and where we can combine the power of the kind of In country businesses that we have going forward. And I would also say there are certain things that At the enterprise level, we can do to help mitigate that. Laurie alluded to some of those earlier. And we'll be looking at that As well and hopefully we should get some run rate benefit in the early part of next year from those

Operator

actions. Great.

Speaker 1

Thank you.

Operator

Thank you. Our next question comes from the line of Mike Sison with Wells Fargo. Please proceed with your question.

Speaker 2

Hey, good morning. In terms

Operator

of your outlook for 2023, does that assume the normal foundational Adjusted EBIT for the Aeskyl chain, is that I think it's $1,000,000,000 to $1,100,000,000 range?

Speaker 2

Yes. Mike, obviously, we were a little hesitant to even give 'twenty three guidance. But So what I would say is, so for 2023, if we think on the low end What we're thinking of for Acetyl, I would say, we're assuming Q1 is sub foundational And then recovery. So, if you think about that, Q2 is probably foundational, Q3, Q4. Let me just talk about foundational a little bit and what that means.

Speaker 2

So, we always meant foundational was meant to capture The low end of the typical range, we didn't really capture recessionary conditions. As I said, we're kind of seeing that in Astice Hill. And so again, we believe Q4 this year and early 2023 will be sub foundational. And then we have some seasonality in the Q4. So again, it's for a year average.

Speaker 2

But I think if you analyze Even Q4 what we're calling out for Asset Hills, that's $900,000,000 and that's sub foundational. So I think if you look at What does foundational really mean? It's probably more in the 1.1 to 1.2 area with 1.2 being after we finish the Clear Lake expansion. So just for some clarity. So I would say next year is kind of On average for the year at that foundational level or a little bit lower at the lower end, as we all know this market can be very quickly if we have Industry outages or anything else that causes, because we are still at pretty high utilization in the acetyl chain.

Speaker 2

So but that's how we're thinking about next year and how we're thinking about it relative to foundational earnings.

Operator

Got it. And the base Adjusted EBIT I'm sorry, the base Engineered Materials business, the 2022, you're close to the $800,000,000 adjusted EBIT. And I think you Mentioned you felt there to be some growth. And maybe just maybe talk about what type of growth and where you'll see it from? And if you have any specifics, great.

Speaker 2

Yes. So, the growth that we're expecting there is double digit. I would say It's the things I called out earlier, Mike. I mean, it's the growth in auto, it's the margin lift in GUR due to It's getting the full value from Santa Pre now that we've had the opportunity to take pricing actions and other actions to get Santa And getting the full value of Keptco for the year as well as kind of double digit growth that we've been seeing in medical. So, I'd say those are the biggest factors driving that double digit growth in margins for the heritage selling Great.

Speaker 2

Thank you.

Operator

Thank you. Our next question comes from the line

Speaker 1

For Scott, when you look to better match the interest lines and the debt to kind of counter the FX impacts, I guess, can you speak to at least based on current rates, what that might mean for your interest expenses? Does it send it up a bit? Does it send it down? I guess, how should we be thinking about that?

Speaker 4

Well, I think in those currencies where we have exposure of any size, I think we would it would lower the overall interest expense. However, John, we're going to be careful with when we do that. Obviously, those currencies have depreciated pretty substantially this year. And so there's a balance between interest expense versus then depending on when you move that over, do you end up having Ultimately, more leverage is that currency move. So we're going to be balanced in how we look at that, but we do see some opportunity as we get into next Here to help with some of that business exposure.

Speaker 1

Got it. Fair enough. And then on the M and M front, in terms of the it sounds like they've been really running pretty hard just because they It kind of had to do with take or pay and what have you. I guess, can you quantify what the inventory build is versus What you view is normal and how much we could see in terms of working capital release just out of that asset alone?

Speaker 2

Yes. I don't know that we have those numbers. And again, we're going to be taking some steps in the 4th quarter That will continue into next year to use DuPont materials to pre place our own purchases of polymer and different I don't think we have a really firm number on

Speaker 4

that yet. Yes, John, normal is different as we go forward because you're putting these two portfolios together. And so we're looking at what is the optimal mix. It's going to be different by region as well depending on where our business Has historically been from mainly a nylon standpoint, but we're really looking at how we can leverage the power really of both portfolios that we're bringing together right now.

Speaker 1

Fair point. Makes sense. Thanks very much for the color.

Speaker 4

Thanks, John.

Operator

Thank you. Our next questions come from the line of P. J. Juvekar with Citi. Please proceed with your questions.

Speaker 5

Yes. Thank you, Lori and Scott. You talked about asset yields and you always do a great job In managing the situation globally through utilization of different plants, I have a question on the Frankfurt plant. It's your highest cost. Do you think there is a chance that it stranded asset.

Speaker 5

And what kind of headwinds do you expect in Europe given your large footprint there in Europe as well as in Germany?

Speaker 2

P. J, just a clarification. You're talking about the Frankfurt VAM plant or palm plant?

Speaker 5

VAM plan, sorry.

Speaker 2

VAM. Okay. Thank you. I just wanted to be clear if I answered the right question. Look, we have 5 VAM assets Globally, historically, Frankfort has not been our highest plant cost plant.

Speaker 2

So let me just be clear on that. And even today, we could run it and it could run at At a profit, but it's just volume we can get somewhere else more cheaply right now because of the very high prices that we have been seeing In terms of European Energy and that's quite frankly when it gets cold, we expect to see those prices again. So I don't really see Possibility of it becoming a stranded asset. I mean, it's only been about 3 months ago, we were running every single plant we had all And still not able to meet the demand. So I do think demand is going to come back and I think we will need all the plants we have and Frankfurt BAM has Always been a very profitable plant.

Speaker 2

This is just a unique situation with the European energy prices we're seeing coupled with the fairly rapid drop in demand that we've Because of other the geopolitical factors, the China COVID and then mineralization kind of all coming together at the same So I don't really see any possibility that becomes a stranded asset.

Speaker 4

Yes. P. J, I would just add that this theme of the Power of our network is very important, whether it's VAM, whether it's acetic acid, whether it's palm. And now as we bring M and M in, nylon, PBT, etcetera. We have created, we believe a lot of value over time by flexing these networks and having those assets in Europe are great assets.

Speaker 4

And so Bringing that concept and leveraging that as we bring these portfolios together with M and M is something that we're going to be working hard here in the Quarter to see how we want to operate as we get into next year for that business as well.

Speaker 5

Okay. And then secondly, You mentioned you made a lot of comments on M and M and we appreciate that. One of the things you say in your prepared comments is that, That business had lagged in pricing since 2021. So maybe is there a one time step up in pricing that maybe we have Under appreciated.

Speaker 2

Yes. Look, I think, I talked a little bit about this earlier. I think Their total pricing hasn't necessarily lagged. I think it's really distinguishing between the differentiated Business where you had room to move pricing and the more standard business where in fact we've seen a lot of Price pressures from competitors were in fact maybe it would have been better to take down pricing and not lose so much market share. So I think it's just a more fine tuned approach to pricing that we want to take.

Speaker 2

I wouldn't necessarily say it just means prices will go up. It will really be about Trying to maximize the margin dollar contribution versus any other signal.

Speaker 5

Great. Thank you.

Operator

Thank you. Our next question is coming from the line of Hassan Ahmed with Alembic Global, please proceed with your question.

Speaker 7

Good morning, Laurie and Scott. I'm just trying to Sort of get a better sense, I know it was asked earlier of what you actually feel trough EBITDA would be? I mean, I know that The guidance that you guys gave for Q4, obviously, a seasonally weak quarter. So obviously, Q4, One can sort of extrapolate that. To me, it just seems like Q3 was the worst of everything, right?

Speaker 7

I mean, you had destocking, Hi, sort of energy prices, be it in Europe and the like, acetic prices coming down as hard as they did. So, I mean, is it fair to assume that the $600,000,000 and change $1,000,000 in quarterly EBITDA that you guys generated in Q3 is Possibly the right run rate annualized number to think about in terms of trough EBITDA?

Speaker 2

Sorry, Hassan. I'm just trying to understand your question better. The $600,000,000 change in EBITDA for Acetyl?

Speaker 7

No, just I mean as overall as a company, what do you think your trough EBITDA number would be?

Speaker 4

I mean, I'll be honest with you Hassane. I mean, we really look at each environment differently. I mean, Troughs, recessions, etcetera, I mean, it's hard to put labels on different things. I mean, at the end of the day, I think the what We stated we're pushing towards to get to for next year just given the current condition would suggest that somewhere in that Q3 range It's probably somewhere close to that. But I think a lot every situation is different.

Speaker 4

It's really about making sure that we are managing Business on a daily basis to maximize earnings and maximize cash flow and value creation.

Speaker 7

Fair enough. Fair enough. And now just moving on from that, more specific on the Thank you, Jane. You talked about pricing being around $400 a ton, hitting sort of The cost curve side of things and the like, so two things. 1 is, are you in the industry seeing sort of shutdowns at these levels.

Speaker 7

That's the first part of it. The second part of it is that in your prepared remarks, you obviously talked about Operating rates for you guys in China and Singapore being 50% to 70%, the Emulsions business reducing the tons sold by 15% and the like, Yet your volumes sequentially were only down 4%. So just trying to reconcile that as well. So 2 parts, 1, Shut down and to why your volumes weren't weaker than what your commentary suggested?

Speaker 2

Yes. So I would say, we saw the decline through the quarter. So the start of the quarter was actually At a much higher pricing, the average price for 3rd quarter the average, if ISA's China asset for 3rd quarter was Around 4:30 and now we're down around 400. So we've continued to see pricing decline. So I'd say, the start of the quarter was stronger than we Started to see a pretty rapid and I think that's why you didn't see the volume drop so much.

Speaker 2

The actions we've taken to really cut our rates have happened here At the very end of the quarter and going into October, so I probably wasn't clear on that. And so I think that's why you don't see it As much in the volume. But again, around $400,000,000 To your first Question though, I would say we have seen others take actions to slow down as we have, but not yet to shut down. But given that this gets pricing, I mean, we are still the most economic producer of ethaneic acid in China. We know this is at the Cost curve, so we know others are struggling.

Speaker 2

I think given if this goes on longer, you may see people continue to slow down rates Or shut down even if only temporarily.

Speaker 7

Very helpful. Thank you so much.

Operator

Thank you. Our next question comes from the line of Matthew Blair with TPH. Please proceed with your questions.

Speaker 1

Hey, Laurie, you mentioned that in autos your build rates are outpacing industry averages, Especially in North America and Europe, could you talk about your total autos build rate and how that compares to global averages And overall the reception that you're getting with EV penetration?

Speaker 2

I think so on autos, I think IHS thought we're at 6% Growth rate, we have seen we think it's a little bit less than that. But I think we have outpaced auto bill pretty significantly across all of our businesses. I'm trying to remember the number off the top of my head, but let me answer the EV question first. So EV, we're about For the legacy EM business, we're more than 10% of our volume into auto goes into EV. And obviously from a value standpoint, it's much higher than that because you tend to be high end applications.

Speaker 2

The majority of that is lithium ion You compare that for the industry, EVs make up about 8.5% of the fleet of the build today. So even just in the EV space, we're several percent Higher than the rest of the industry. And then and as I said, everywhere else, we see that we continue to Outpaced the industry. So industry growth rates just giving so Europe was down in the 3rd quarter. North America was up a bit.

Speaker 2

We were a bit better in both of those than the industry. And in Asia, I think maybe to give you an idea, Asia saw strong industry growth, about 21% in Asia, 30% in China. And with the additional volume from KEPCO, the growth in EB, the Project pipeline, the DOR expansion, stuff we've done on Asia localization, we were up Well, really 27% globally, a lot of that in Asia and all of our regions were up about 20% versus last year. And again, we think that's on chip availability, but it also shows the strength of our project pipeline and our portfolio and the fact that we tend to be Stronger NEV and stronger into high end applications, which have not been as challenged as maybe some of the other models.

Speaker 1

Sounds good. I'll leave it there. Thank you. Daryl, we'll go ahead and make the next question or last one, please.

Operator

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

Speaker 3

Good morning, everyone.

Speaker 8

As we look at the cadence for M and M of next year, you'd kind of mentioned a fairly sharp inventory correction that's Working through the pipe, do you expect that will continue into next year? And I guess how much of this $800,000,000 do you think will come from second half earnings versus first half earnings, if we try to think about the arc for

Speaker 7

that business.

Speaker 2

Yes. I think, look, just Given the time it takes we start actions immediately. These are already started. And but all of these things take some time. And so I would definitely expect the Heritage M and M business earnings to be more heavily back end loaded in the year Then in the 1st part of the year, just to give us time to kind of work through the changes we need to do, get all of the commercial team coming From M and M on to the pipeline model, which will be happening here across the Q1, definitely more of a 2nd half load than first half.

Speaker 4

Yes. And the inventory pulled down likely more first half, Matthew, as we work to get that material into The legacy Celanese assets.

Speaker 8

Understood. And I guess if I could just squeeze one more in. In the past, you talked about rationalizing foreign capacity on the start up of Clear Lake, but that talk kind of waned and I wasn't sure if that was because the macro was better Or you had rewritten some of the raw material contracts in Singapore. So I guess with the macro where it is, Should we think about rationalizing forward capacity is still on the table? And if it's not, are the productivity savings of the $100,000,000 still reasonable if the macro

Speaker 2

Yes. Let me start with the last question first. The productivity of $100,000,000 is still stable even in the softer macro. It was really based on running 2 units not quite as full. It had catalyst savings and other things in it.

Speaker 2

So That continues to exist. We didn't need any growth and we will always run Clear Lake more full due to the raw material advantages So I don't think the project credits associated with the Clear Lake expansion are not at risk again because they were based On productivity, as I said earlier, if we see an upswing in the market and we can run it even fuller, that's Actually additional credit that we'll get at that time. And in terms of the global footprint and we talked about this, gosh, probably over a year ago or We've really with the change in the contract, we've gotten those Singapore utilities, other contracts that we have in China. We like having That optionality to move things around depending on what's going on to accommodate for when we have turnarounds and those sorts of things by shifting Production to other parts of the world that has more than paid off for us. And so we like having that optionality in our footprint.

Speaker 2

So I wouldn't expect any major changes in that going forward.

Speaker 4

All right. Thank you for that. Thank you. We have reached the end

Operator

of our question and answer session. I would now like to turn the call back over to Brandon Iyach for any closing comments.

Speaker 1

Thank you, Darryl. We'd like to thank everybody for listening in today as always for a round if you have any follow-up questions. Darryl, please go ahead and close out the call.

Operator

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

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Earnings Conference Call
Celanese Q3 2022
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